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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
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Commission File Number 333-40067
PLIANT CORPORATION
(Exact Name of the Registrant as Specified in its Charter)
Utah 87-0496065
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1475 Woodfield Road, Suite 700
Schaumburg, IL 60173
(847) 969-3300
(Address of principal executive offices and telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES [ ] NO [X]
At March 28, 2003 there were 576,878 outstanding shares of the Registrant's
common stock. As of June 28, 2002, 67,601, or approximately 12%, of the
outstanding shares of the Registrant's common stock were held by persons other
than affiliates of the Registrant. There is no established trading market for
the Registrant's common stock and, therefore, the aggregate market value of
shares held by non-affiliates cannot be determined by reference to recent sales
or bid and asked prices.
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This report contains certain forward-looking statements that involve
risks and uncertainties, including statements about our plans, objectives,
goals, strategies and financial performance. Our actual results could differ
materially from the results anticipated in these forward-looking statements.
Some of the factors that could negatively affect our performance are discussed
in Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Cautionary Statement for Forward-Looking Information" and
elsewhere in this report.
PART I
ITEM 1. BUSINESS
General
Pliant Corporation ("Pliant," the "Company," "we" or "us"), with 2002
revenues of approximately $879 million, is one of North America's leading
manufacturers of value-added films and flexible packaging for food, personal
care, medical, agricultural and industrial applications. We offer some of the
most diverse product lines in the film industry and have achieved leading
positions in many of these product lines. We operate 26 manufacturing and
research and development facilities worldwide and we currently have
approximately 1.0 billion pounds of annual production capacity.
We were founded in 1992. We have combined strategic acquisitions,
internal growth, product innovation and operational improvements to grow our
business from net sales of $310.8 million in 1996 to $879.2 million in 2002. We
have acquired and integrated numerous strategic film and flexible packaging
operations since 1992.
Recapitalization
On May 31, 2000, we consummated a recapitalization pursuant to an
agreement dated March 31, 2000 among us, our then existing stockholders and an
affiliate of J.P. Morgan Partners, LLC, whereby the affiliate acquired majority
control of our common stock. The total consideration paid in the
recapitalization was approximately $1.1 billion, including transaction costs.
Pursuant to the recapitalization agreement:
o we redeemed all of the shares of our common stock held by Jon
M. Huntsman, our founder, then majority stockholder and then
Chairman of the Board;
o an affiliate of J.P. Morgan Partners, LLC purchased
approximately one-half of the shares of our common stock held
collectively by The Christena Karen H. Durham Trust and by
members of our current and former senior management;
o an affiliate of J.P. Morgan Partners, LLC and certain other
institutional investors purchased shares of common stock
directly from us;
o the trust and the management investors at that time retained
or "rolled-over" approximately one-half of the shares of our
common stock collectively owned by them prior to the
recapitalization; and
o we issued to an affiliate of J.P. Morgan Partners, LLC and to
certain other institutional investors a new series of senior
cumulative exchangeable redeemable preferred stock and
detachable warrants for our common stock.
In connection with the recapitalization, we restructured our
indebtedness. We refinanced all amounts outstanding under our then existing
credit facility and replaced it with amended and restated secured credit
facilities.
Controlling Shareholders
J.P. Morgan Partners (BHCA), L.P. and/or affiliates own approximately
55% of our outstanding common stock, 75% of our preferred stock warrants to
purchase common stock and 59% of our outstanding preferred stock, subject to
certain preemptive rights with respect to 10,000 shares of preferred stock
issued on March 25, 2003. J.P. Morgan Partners, LLC serves as investment advisor
to J.P. Morgan Partners (BHCA), L.P. J.P. Morgan Partners, LLC is the private
equity group of J.P. Morgan Chase & Co., which is one of the largest financial
holding companies in the United States. J.P. Morgan Partners, LLC is a global
private equity organization, with over $11 billion under management. Through its
affiliates, J.P. Morgan Partners, LLC is a leading provider of equity capital
for middle market buyouts, growth equity and venture capital.
Recent Acquisitions
In August 2002, we purchased substantially all of the assets and
assumed certain liabilities of the business of Roll-O-Sheets Canada Limited. The
Roll-O-Sheets business consists of one plant in Barrie, Canada engaged in the
conversion and sale of PVC and
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polyethylene film for the food industry. In addition, the business includes the
distribution of purchased polyester film and polypropylene food trays and other
food service products.
In May 2002, we acquired substantially all of the assets and assumed
certain liabilities of Decora Industries, Inc. and its operating subsidiary,
Decora Incorporated (collectively, "Decora"), a New York based manufacturer and
marketer of adhesive and non-adhesive decorative and surface coverings,
including plastic films and other consumer products sold under the Con-Tact(R)
brand name. The initial purchase price was approximately $18 million. The assets
purchased consisted of one plant in Fort Edward, New York, and related equipment
used by Decora primarily to print, laminate and convert films into adhesive
shelf liner. In addition, we accrued certain liabilities related to acquisition
costs and expenses related to the relocation of the production facility,
including severance payments to terminated employees. The final purchase price
after adjustments totaled $23.2 million
In July 2001, we acquired 100% of the outstanding stock of Uniplast
Holdings, Inc., a manufacturer of multi-layer packaging films, industrial films
and cast-embossed films, with operations in the United States and Canada, for an
initial purchase price of approximately $56.0 million in cash and equity. In
addition, we accrued certain liabilities related to acquisition costs and
expenses related to the relocation of the production facility including
severance payments to terminated employees. The final purchase price after
adjustments totaled $59.3 million.
Industry Overview
We manufacture and sell a variety of plastic films and flexible
packaging products. Flexible packaging is the largest end market for plastic
films. The plastic film industry serves a variety of flexible packaging markets,
as well as secondary packaging and non-packaging end use markets, including
pharmaceutical, medical, personal care, household, industrial and agricultural
film markets. According to the Flexible Packaging Association, the North
American market for flexible packaging was approximately $20.4 billion in 2002
and has grown at a compound annual growth rate, or CAGR, of approximately 3.9%
from 1992 to 2002. Many of our plastic films are flexible packaging products as
defined by the Flexible Packaging Association. However, the flexible packaging
market, as defined by the Flexible Packaging Association, does not include
certain of the products we sell, such as agricultural films, and includes
certain products we do not sell, such as wax papers and aluminum foils. We
believe, however, that trends affecting the flexible packaging industry also
affect the markets for many of our other products.
Flexible packaging is used to package a variety of products,
particularly food, which accounts for approximately half of all flexible
packaging shipments. Recent advancements in film extrusion and resin technology
have produced new, sophisticated films that are thinner and stronger and have
better barrier and sealant properties than other materials or predecessor films.
These technological advances have facilitated the replacement of many
traditional forms of rigid packaging with film-based, flexible packaging that is
lighter, is lower in cost and has enhanced performance characteristics. For
example, in consumer applications, stand-up pouches that use plastic films are
now often used instead of paperboard boxes, glass jars and metal cans. In
industrial markets, stretch and shrink films are often used instead of
corrugated boxes and metal strapping to unitize, bundle and protect items during
shipping and storage.
All industry data presented in this report are for the year ended
December 31, 2002. Unless otherwise indicated, the market share and industry
data used throughout this report were obtained primarily from internal company
surveys and management estimates based on these surveys and our management's
knowledge of the industry. We have not independently verified any of the data
from third-party sources. Similarly, internal company surveys and management
estimates, while we believe them to be reliable, have not been verified by any
independent sources. While we are not aware of any misstatements regarding our
industry data presented herein, our estimates involve risks and uncertainties
and are subject to change based on various factors, including those discussed in
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Cautionary Statement for Forward-Looking Information" in this
report. Some of the industry data presented in this report were obtained from
the Flexible Packaging Association. Jack E. Knott II, our Chief Executive
Officer, is chairman of the Flexible Packaging Association.
Products, Markets and Customers
Our products are sold into numerous markets for a variety of end uses.
Our operations consist of three operating segments: Pliant U.S., Pliant
International and Pliant Solutions. Operating segments are components of our
business for which separate financial information is available that is evaluated
regularly by our chief operating decision maker in deciding how to allocate
resources and in assessing performance. In previous reporting periods, we had
three operating segments classified by our primary product types. During the
third quarter of 2002, we reorganized our operations under our three current
operating segments. Segment information in this report with respect to 2001 and
2000 has been restated for comparative purposes. For more information on our
operating segments and geographic information, see Note 14 to the consolidated
financial statements included elsewhere in this report.
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Pliant U.S.
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Our Pliant U.S. segment manufactures and sells films and other flexible
packaging products primarily in the United States. Our Pliant U.S. segment
accounted for 84.5%, 87.6% and 89.3% of our net sales in 2002, 2001 and 2000,
respectively. The principal products of our Pliant U.S. segment include personal
care and medical films, converter films, printed products, barrier films,
agricultural films, stretch films and PVC films.
Personal Care and Medical Films. We are a leading producer of personal
care films used in disposable diapers, feminine care products and adult
incontinence products. Personal care films must meet diverse and highly
technical specifications. We are also a specialized manufacturer of medical
films. Our medical films are used in disposable surgical drapes and gowns. We
also produce protective packaging for medical supplies, such as disposable
syringes and intravenous fluid bags. In addition, our products include packaging
for disposable medical devices.
Converter Films. We are North America's largest producer of converter
films. Converter films are sold to converters of flexible packaging who laminate
them to foil, paper or other films, and/or print them, and ultimately fabricate
them into the final flexible packaging product. Our converter films are a key
component in a wide variety of flexible packaging products. Generally, our
converter films add value by providing the final packaging product with specific
performance characteristics.
Printed Products. Our printed products include printed rollstock, bags
and sheets used to package food and consumer goods. Printed bags or rollstock
are sold to bakeries, fresh and frozen food processors, manufacturers of
personal care products, textile manufacturers and other dry goods processors. We
are the leading manufacturer of films used for frozen foods packaging in North
America. In addition, we are the second largest manufacturer of films for the
bread and bakery goods market in North America.
Barrier Films. We manufacture a variety of barrier films, primarily for
food packaging. We are North America's second largest producer of films for
cookie, cracker and cereal box liners. We are also a leading manufacturer of
barrier films for liners in multi-wall pet food bags, frozen baked goods and dry
mix packaging.
Agricultural Films. We are a leading manufacturer of polyethylene mulch
films that are sold to fruit and vegetable growers and to nursery operators. Our
mulch films are used extensively in North America and Latin America. Commercial
growers of crops like peppers, tomatoes, cucumbers and strawberries are the
primary consumers of our mulch films. We are one of North America's two largest
producers of mulch films.
Stretch Films. Our stretch films are used to bundle, unitize and
protect palletized loads during shipping and storage. Stretch films continue to
replace more traditional packaging, such as corrugated boxes and metal
strapping, because of stretch films' lower cost, higher strength, and ease of
use. We are North America's fourth largest producer of stretch films.
PVC Films. Our PVC films are used by supermarkets, delicatessens and
restaurants to wrap meat, cheese and produce. PVC films are preferred in these
applications because of their clarity, elasticity and cling. We also produce PVC
films for laundry and dry cleaning bags. Finally, we produce PVC films that are
repackaged by us and other companies in smaller cutterbox rolls for sale in
retail markets in North America, Latin America and Asia. We are the second
largest producer of PVC films in North America.
The following table presents the net sales, excluding intercompany
sales, contributed by the primary divisions in our Pliant U.S. segment. The
Industrial Films division includes our stretch films and PVC films product
categories. The Specialty Films division includes the majority of the sales from
our personal care and medical films categories, as well as the sales from our
agricultural films category and sales from our facility in Newport News,
Virginia, which conducts a majority of our research and development. The
Converter Films division consists of our converter films product category and
some sales from our personal care and medical films product categories. The
Printed and Barrier Films division includes our barrier films as well as our
printed products categories.
Net sales, excluding intercompany sales (dollars in millions):
2002 2001 2000
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Industrial Films............................ $ 158.7 $ 161.5 $ 145.9
Specialty Films............................. 156.0 158.7 188.7
Converter Films............................. 220.9 210.6 197.8
Printed and Barrier Films................... 207.0 205.3 220.8
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Total Pliant U.S. $ 742.6 $ 736.1 $ 753.2
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Pliant International
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Our Pliant International segment manufactures and sells films and other
flexible packaging products. We have manufacturing operations located in
Australia, Brazil, Canada, Germany and Mexico. These operations service
Australia, Southeast Asia, Latin America, Canada, Europe and Mexico. In
addition, our operation in Mexico provides the film for our Pliant Solutions
segment. Our Pliant International segment accounted for 12.3%, 12.4% and 10.7%
of our net sales in 2002, 2001 and 2000, respectively. The principal products of
our Pliant International segment vary depending on the particular country or
region.
Mexico
Our facility in Mexico produces a variety of films and flexible
packaging products. These products are sold primarily in Mexico, although we
have a few customers in other Latin American countries. Our facility in Mexico
manufactures personal care films, printed products and barrier films. We also
sell stretch films and PVC films manufactured by our U.S. plants in Mexico and
the Latin America region.
Personal Care Films. We are a leading supplier of personal care films
in Mexico. We produce both printed and unprinted films for use in disposable
diapers, feminine care products and adult incontinence products.
Printed Products. Our facility in Mexico produces printed rollstock,
bags and sheets used to package food and consumer products.
Barrier Films. We manufacture co-extruded barrier films in our Mexico
facility. These films are used for cookie, cracker and cereal box liners.
Stretch and Shrink Films. We are a leading supplier of stretch and
shrink films in Mexico. Stretch films are used to bundle, unitize and protect
palletized loads during shipment and storage. These stretch films are
manufactured by our U.S. plants. Shrink film is produced in our Mexican
operations as well as our U.S. plants for sale into this region.
PVC Films. We also sell PVC films in Mexico. Like our stretch films,
our PVC films are manufactured by our U.S. plants and shipped to customers in
Mexico.
Germany
Our facility in Germany produces PVC films primarily for sale
throughout Europe. We are a leading producer of PVC films in Europe, where our
films are sold primarily to supermarkets and processors of red meat and poultry.
In Southern Europe, we also sell our PVC films to produce suppliers.
Australia
Our facility in Australia produces PVC films primarily for sale in
Australia, New Zealand and Southeast Asia. In this region, we sell our PVC films
primarily to supermarkets, delicatessens and restaurants to wrap meat, cheese
and produce. We also sell PVC films to converters that rewind and slit the PVC
films for use in retail cutter boxes.
Canada
We are a leading supplier of converter films in Canada. We manufacture
converter films at both our Canadian facilities and our U.S. facilities for sale
in Canada. In Canada, we sell our converter films primarily to converters of
flexible packaging, distributors and end users.
Pliant Solutions
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Our Pliant Solutions segment consists primarily of the consumer
products business we acquired from Decora in May 2002. Net sales of the Pliant
Solutions segment since the acquisition date accounted for 3.2% of our net sales
in 2002. Our Pliant Solutions segment manufactures and markets decorative and
surface coverings, including self-adhesive and non-adhesive coverings, primarily
in the United States and Canada. We market these consumer products primarily
under the Con-Tact(R) brand name, which is considered to be the most recognized
brand of consumer decorative and surface coverings.
Decorative and surface coverings are manufactured through the
conversion of various films into consumer packaged goods. These products are
sold by retailers to consumers for a wide range of applications, including
shelf-lining, decorative accenting, glass covering, surface repair, resurfacing
and arts and crafts projects. Product lines currently marketed by our Pliant
Solutions segment
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under the Con-Tact(R) brand name include multipurpose decorative coverings,
Shelf Liner(TM), Grip Liner(TM) and glass coverings. Consumers purchase these
products based upon their ease of application, design, durability and price.
We believe we are the largest provider of decorative and surface
coverings in the United States, which we attribute to the strength of our
Con-Tact(R) brand name. In North America, we sell our Con-Tact(R) brand products
primarily to retailers, including mass merchants, home centers, specialty
stores, grocery stores, and drug stores.
Sales and Marketing
Because of our broad range of product offerings and customers, our
sales and marketing efforts are generally specific to a particular product,
customer or geographic region. We market in various ways, depending on both the
customer and the product. However, most of our salespeople are dedicated to a
specific product line and sometimes to specific customers.
The majority of our films are sold by our own direct sales force. These
salespeople are supported by customer service and technical specialists assigned
to each salesperson, and in some cases, to specific customers. In addition,
certain of our personal care and barrier films, and all of our agricultural
films are sold through brokers in the United States. Most of our printed
products are sold domestically through brokers. National grocery chains and some
smaller customer accounts are serviced by our own direct sales force.
Our stretch films and PVC films are generally sold to distributors,
although we also sell stretch films directly to large national accounts. We have
an independent contract sales force that sells our stretch films to national and
regional distributors. Our PVC films are sold by our own sales force to regional
and national distributors, directly to national grocery chains, and directly to
converters, who repackage the film into cutterbox rolls for sale in retail
markets.
No single customer accounted for more than 10% of our net sales for the
year ended December 31, 2002.
Manufacturing
Over the past three years, excluding acquisitions, we have invested a
total of $171.3 million to expand, upgrade and maintain our asset base and
information systems. With 26 plants, we are often able to allocate lines to
specific products. Our multiple manufacturing sites and varied production
capabilities also allow us to offer multiple plant service to our national
customers. Generally, our manufacturing plants operate 24 hours a day, seven
days a week.
We manufacture our film products using both blown and cast extrusion
processes. In each process, thermoplastic resin pellets are combined with other
resins, plasticizers or modifiers in a controlled, high-temperature, pressurized
process to create films with specific performance characteristics. Blown film is
produced by extruding molten resin through a circular die and chilled air ring
to form a bubble. In the cast film process, molten resin is extruded through a
horizontal die onto a chill roll, where the film is quickly cooled. These two
basic film manufacturing processes produce films with uniquely different
performance characteristics. Cast films are generally clearer, softer and more
uniform in thickness. Blown films offer enhanced physical properties, such as
increased tear and puncture resistance and better barrier protection.
We also produce a significant amount of printed films and bags. We
employ both flexographic and rotogravure printing equipment in our printing
operations.
Technology and Research and Development
We believe our technology base and research and development support
provide critical support to our business and customers. Our research and
development group provides the latest resin and extrusion technology to our
manufacturing facilities and allows us to test new resins and process
technologies. Our technical center in Newport News, Virginia has a pilot plant
that allows the technical center to run commercial "scale-ups" for new products.
We are able to use our broad product offerings and technology to transfer
technological innovations from one market to another.
Our technical representatives often work with customers to help them
develop new, more competitive products. This allows us to enhance our
relationships with these customers by providing the technical service needed to
support commercialization of new products and by helping them to improve
operational efficiency and quality throughout a product's life cycle.
We spent $8.1 million, $9.8 million and $8.6 million on research and
development in 2002, 2001 and 2000, respectively, before giving effect to
revenues from pilot plant sales.
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Intellectual Property Rights
Patents, trademarks and licenses are significant to our business. We
have patent protection on many of our products and processes, and we regularly
apply for new patents on significant product and process developments. We have
registered trademarks on many of our products. We also rely on unpatented
proprietary know-how, continuing technological innovation and other trade
secrets to develop and maintain our competitive position. In addition to our own
patents, trade secrets and proprietary know-how, we license from third parties
the right to use some of their intellectual property. Although we constantly
seek to protect our patents, trademarks and other intellectual property, there
can be no assurance that our precautions will provide meaningful protection
against competitors or that the value of our trademarks will not be diluted.
Raw Materials
Polyethylene, PVC, polypropylene and other resins and additives
constitute the major raw materials for our products. We purchase most of our
resin from major oil companies and petrochemical companies in North America. For
the year ended December 31, 2002, resin costs comprised approximately 62% of our
total manufacturing costs. The price of resins is a function of, among other
things, manufacturing capacity, demand, and the price of crude oil and natural
gas feedstocks. Resin shortages or significant increases in the price of resin
could have a significant adverse effect on our business.
We are currently experiencing a period of extreme uncertainty with
respect to resin supplies and prices. High crude oil and natural gas pricing,
resulting in part from harsh winter weather conditions in the eastern United
States and uncertainties regarding the situation with Iraq, have had a
significant impact on the price and supply of resins. Many major suppliers of
resin have announced price increases to cover their increases in feedstock
costs. While the prices of our products generally fluctuate with the price of
resins, certain of our customers have contracts that limit our ability to pass
the full cost of higher resin pricing through to our customers immediately.
Further, competitive conditions in our industry may make it difficult for us to
sufficiently increase our selling prices for all customers to reflect the full
impact of increases in raw material costs. If this period of high resin pricing
continues, we may be unable to pass on the entire effect of the price increases
to our customers, which would adversely affect our profitability and working
capital. In addition, further increases in crude oil and natural gas prices
could make it difficult for us to obtain an adequate supply of resin from
manufacturers affected by these factors.
Employees
As of February 28, 2003, we had approximately 3,250 employees, of which
approximately 1,000 employees were subject to a total of 12 collective
bargaining agreements that expire on various dates between February 19, 2004 and
March 7, 2007. We consider our current relations with our employees to be good.
However, if major work disruptions were to occur, our business could be
adversely affected.
Environmental Matters
Our operations are subject to environmental laws in the United States
and abroad, including those described below. Our capital and operating budgets
include costs and expenses associated with complying with these laws, including
the acquisition, maintenance and repair of pollution control equipment, and
routine measures to prevent, contain and clean up spills of materials that occur
in the ordinary course of our business. In addition, our production facilities
require environmental permits that are subject to revocation, modification and
renewal. We believe that we are in substantial compliance with environmental
laws and our environmental permit requirements, and that the costs and expenses
associated with such compliance are not material to our business. However,
additional operating costs and capital expenditures could be incurred if, for
example, additional or more stringent requirements relevant to our operations
are promulgated.
From time to time, contaminants from current or historical operations
have been detected at some of our present and former sites, principally in
connection with the removal or closure of underground storage tanks. The cost to
remediate these sites has not been material, and we are not currently aware that
any of our facility locations have material outstanding claims or obligations
relating to contamination issues.
Competition
The markets in which we operate are highly competitive on the basis of
service, product quality, product innovation and price. Small and medium-sized
manufacturers that compete primarily in regional markets service a large portion
of the film and flexible packaging market, and there are relatively few large
national manufacturers. In addition to competition from many smaller
competitors, we face strong competition from a number of large film and flexible
packaging companies. Some of our competitors are substantially larger, are more
diversified, and have greater resources than we have, and, therefore, may have
certain competitive advantages.
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Available Information
We file annual, quarterly and current reports and other information
with the Securities and Exchange Commission (the "SEC" or the "Commission"). You
can inspect and copy these materials at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. Copies of these materials can also
be obtained by mail at prescribed rates from the SEC's Public Reference Room at
the above address. You can obtain information about the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The address of the
SEC's Internet site is http://www.sec.gov.
We maintain an Internet web site at http://www.pliantcorp.com. We do
not currently make our annual, quarterly and current reports available on or
through our web site. We do not have publicly traded stock, and copies of our
reports are mailed to holders of our outstanding debt securities under the terms
of our indentures. In addition, we believe virtually all of our investors and
potential investors in our debt securities have access to our reports through
the SEC's web site or commercial services. Therefore, we do not believe it is
necessary to make our reports available through our web site. We also provide
electronic or paper copies of our filings free of charge upon request.
7
ITEM 2. PROPERTIES
Our principal executive offices are located at 1475 Woodfield Road,
Suite 700, Schaumburg, Illinois 60173. We own most of the improved real property
and other assets used in our operations. We lease all or part of seven of the
sites at which we have manufacturing operations. We also lease warehouse and
office space at various locations. We consider the condition of our plants,
warehouses and other properties and the other assets owned or leased by us to be
generally good.
In an effort to maximize the efficiency of our facilities, we closed
and disposed of a number of facilities in 2000, 2001 and 2002, including certain
facilities acquired in connection with recent acquisitions. Production from
these facilities was moved in large part to plants that were not operating at
capacity. During 2000, we closed a facility in Dallas, Texas. In 2001, we closed
a facility in Birmingham, Alabama, two facilities in Palmer, Massachusetts, a
facility in Columbus, Indiana and a part of our facility in Toronto, Canada.
During 2002, we commenced a process to consolidate our two plants in Mexico. In
addition, during the fourth quarter of 2002 we substantially completed the
closure of our facility in Merced, California and a portion of our plant in
Shelbyville, Indiana. The remaining portion of the Shelbyville, Indiana plant
continues to operate as part of the Alliant joint venture. Alliant is a joint
venture between us and Supreme Plastics Ltd., a company based in the United
Kingdom. Alliant manufactures and sells recloseable zipper products. We have
also commenced the process of closing a facility in Fort Edward, New York, which
was acquired as part of the Decora acquisition, and have moved the production to
our facilities in Mexico and Danville, Kentucky.
We have an annual film production capacity of approximately one billion
pounds. Our principal manufacturing plants are listed below. Unless otherwise
indicated, we own each of these properties.
Location Products
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Pliant U.S.
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Barrie, Canada* PVC and polyethylene films
Bloomington, Indiana* Barrier and custom films
Burrillville, Rhode Island Converter films
Calhoun, Georgia PVC films
Chippewa Falls, Wisconsin Converter and personal care films
Dalton, Georgia Converter, barrier and custom films
Danville, Kentucky Stretch and converter films
Deerfield, Massachusetts Converter films
Harrington, Delaware Personal care, medical and converter films
Kent, Washington Printed bags and rollstock
Langley, British Columbia* Printed bags and rollstock
Lewisburg, Tennessee Stretch films
Macedon, New York+ Personal care films, printed bags and rollstock
McAlester, Oklahoma Personal care, medical and converter films
Newport News, Virginia Research facility and pilot plant
Odon, Indiana* Barrier and custom films
Shelbyville, Indiana Reclosable zipper products
Toronto, Canada PVC films
Washington, Georgia Personal care, medical and agricultural films
Pliant International
--------------------
Mexico City, Mexico* Barrier and personal care films, printed bags and rollstock
Orillia, Canada (two plants) Converter films
Phillipsburg, Germany PVC films
Porte Allegra, Brazil Personal care bags
Preston, Australia* PVC films
Pliant Solutions
----------------
Danville, Kentucky* Packaging and distribution
- -------------------------
* Indicates a leased building.
+ Indicates a building that is approximately 95% owned and 5% leased.
8
ITEM 3. LEGAL PROCEEDINGS
On November 19, 2001, S.C. Johnson & Son, Inc. and S.C. Johnson Home
Storage, Inc. (collectively, "S.C. Johnson") filed a complaint against us in the
U.S. District Court for the District of Michigan, Northern Division (Case No.
01-CV-10343-BC). The complaint alleges misappropriation of proprietary trade
secret information relating to certain componentry used in the manufacture of
reclosable "slider" bags. We counterclaimed alleging that S.C. Johnson
misappropriated certain of our trade secrets relating to the extrusion of flange
zipper and unitizing robotics. Both the S.C. Johnson complaint and our
counterclaim seek damages and injunctive and declaratory relief. Discovery in
this proceeding is currently set to close on April 30, 2003. We intend to resist
S.C. Johnson's claims and to pursue our counterclaim vigorously. We do not
believe this proceeding will have a material adverse affect on our financial
condition or results of operations.
We are involved in other litigation matters from time to time in the
ordinary course of our business. In our opinion, none of such litigation is
material to our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of security holders during the
fourth quarter of 2002.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information, Holders and Dividends
At March 28, 2003, we had 576,878 shares of common stock outstanding
and there were 37 holders of record of our common stock. There is no established
trading market for our common stock.
We have not declared or paid any cash dividends on our common stock
during the last two years and do not anticipate paying any cash dividends in the
foreseeable future. The indentures governing our outstanding debt securities
contain certain restrictions on the payment of cash dividends with respect to
our common stock, and our credit facilities also restrict such payments. In
addition, the terms of our outstanding Series A Preferred Stock restrict the
payment of cash dividends with respect to our common stock unless all accrued
dividends on the Series A Preferred Stock have been paid.
Recent Sales of Unregistered Securities
During the year ended December 31, 2002, we issued options to purchase
20,425 shares of our common stock to some of our officers and other employees
pursuant to our 2000 stock incentive plan. We issued these options in exchange
for services at an exercise price of $483.13 per share. We believe that the
issuance of these options was exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof or Regulation D thereunder
because this issuance did not involve a public offering or sale. No
underwriters, brokers or finders were involved in this transaction.
10
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been summarized from our
consolidated financial statements and are qualified in their entirety by
reference to, and should be read in conjunction with, such consolidated
financial statements and the notes thereto included elsewhere in this report and
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Years Ended December 31,
--------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(Dollars in Millions)
Statement of Operations Data:
Net sales ............................................................ $ 879.2 $ 840.4 $ 843.8 $ 813.7 $ 681.1
Cost of sales ........................................................ 714.5 665.1 696.7 655.7 561.6
-------- -------- -------- -------- --------
Gross profit ......................................................... 164.7 175.3 147.1 158.0 119.5
Total operating expenses(1) .......................................... 136.6 101.1 132.7 82.0 70.1
-------- -------- -------- -------- --------
Operating income ..................................................... 28.1 74.2 14.4 76.0 49.4
Interest expense ..................................................... (75.3) (76.0) (68.5) (44.0) (37.5)
Other income (expense), net .......................................... 2.3 6.5 0.3 0.4 (0.8)
-------- -------- -------- -------- --------
Income (loss) before income taxes, discontinued operations and
extraordinary item ................................................ (44.9) 4.7 (53.8) 32.4 11.1
Income tax expense (benefit) ......................................... (1.5) 6.8 (14.3) 14.1 8.6
-------- -------- -------- -------- --------
Income (loss) before discontinued operations and extraordinary item .. (43.4) (2.1) (39.5) 18.3 2.5
Income from discontinued operations(2) ............................... -- -- -- -- 0.6
Gain on sale of discontinued operations(2) ........................... -- -- -- -- 5.2
Extraordinary item(3) ................................................ -- -- (11.3) -- --
-------- -------- -------- -------- --------
Net income (loss) .................................................... $ (43.4) $ (2.1) $ (50.8) $ 18.3 $ 8.3
======== ======== ======== ======== ========
Other Financial Data:
Adjusted EBITDA(4) ................................................... $ 121.6 141.8 $ 107.6 $ 113.9 $ 81.5
Cash flows from operating activities ................................. 43.6 30.3 60.3 51.4 45.5
Cash flows from investing activities ................................. (55.2) (87.3) (65.6) (46.0) (314.8)
Cash flows from financing activities ................................. 12.4 55.0 0.3 (16.7) 275.9
Depreciation and amortization ........................................ 46.9 47.0 39.5 35.0 27.1
Restructuring and other costs(1) ..................................... 43.1 (4.6) 19.4 2.5 4.9
Non-cash stock-based compensation expense ............................ -- 7.0 2.6 0.8 --
Capital expenditures ................................................. 49.2 56.4 65.6 35.7 52.1
Ratio of earnings to fixed charges(5) ................................ -- 1.1x -- 1.7x 1.3x
Balance Sheet Data (at period end):
Cash and cash equivalents ............................................ $ 1.6 $ 4.8 $ 3.1 $ 9.1 $ 19.2
Working capital ...................................................... 45.8 58.4 57.6 103.8 93.4
Total assets ......................................................... 853.2 851.7 785.0 769.0 734.3
Total debt ........................................................... 736.4 713.3 687.4 510.4 524.9
Total liabilities .................................................... 960.1 903.0 885.9 675.4 662.5
Redeemable preferred stock(6) ........................................ 150.8 126.1 88.7 -- --
Redeemable common stock .............................................. 13.0 16.8 16.5 2.9 1.2
Stockholders' equity (deficit) ....................................... (270.9) (194.5) (206.0) 90.7 70.6
(1) Total operating expenses for 2002 include $43.1 million of
restructuring and other costs, including $19.2 million related to the
closure of our plant in Merced, California, a portion of our plant in
Shelbyville, Indiana, a part of our plant in Toronto, Canada, one of
our plants in Mexico, and our Fort Edward, New York facility (acquired
as part of the Decora acquisition). In addition, these costs reflect
$7.9 million for the costs of relocating several of our production
lines related to plant closures and costs associated with production
rationalizations at several plants. Total operating expenses for 2002
also include $7.4 million related to severance costs, including
benefits for several company-wide workforce reduction programs that
were completed in 2002. A $8.6 million charge for the impairment of
goodwill on our Pliant International segment is also reflected in total
operating expenses for 2002.
Total operating expenses for 2001 include $7.0 million of non-cash
stock-based compensation expense, $3.0 million of restructuring and
other costs, $4.0 million for expenses related to the relocation of our
corporate headquarters, $6.0 million of fees and expenses relating to
our supply chain cost initiative, and a $3.0 million increase in
depreciation expenses relating primarily to the purchase of a new
computer system. In addition, total operating expenses for 2001
includes a credit for $7.6 million related to the reversal of the
previously accrued charge for the closure of our Harrington plant. In
2001, we decided not to proceed with our previously announced closure
of our Harrington plant. Total operating expenses for 2000 include
$10.8 million of costs related to the recapitalization and related
transactions, $10.8 million of fees and expenses relating to our supply
chain cost initiative, $19.4 million of restructuring and other costs,
$7.1 million of costs related to the relocation of our corporate
headquarters and a reduction in force, and $2.6 million of non-cash
stock-based compensation expense.
11
(2) In 1998, we sold our entire interest in our foam products operations,
which were operated exclusively in Europe. The financial position and
results of operations of this separate business segment are reflected
as discontinued operations for the applicable years presented.
(3) In 2000, we refinanced most of our long-term debt and recorded an
extraordinary loss to write-off unamortized deferred debt issuance
costs. In addition, during 2000, we recorded an extraordinary loss
related to our tender offer for our 9 1/8% senior subordinated notes
due 2007.
(4) Adjusted EBITDA reflects income before discontinued operations,
extraordinary items, interest expense, income taxes, depreciation,
amortization, restructuring and other costs, all non-cash charges and
certain other adjustments defined by our credit agreement. We believe
that adjusted EBITDA information enhances an investor's understanding
of a company's ability to satisfy principal and interest obligations
with respect to its indebtedness and to utilize cash for other
purposes. In addition, EBITDA is used as a measure in our indentures
and credit agreement in determining our compliance with certain
covenants. However, the EBITDA as defined in the indentures for debt
incurrence purposes and consolidated EBITDA as defined in the credit
agreement for covenant compliance purposes are computed with additional
adjustments not reflected in the adjusted EBITDA presented in the
table. These additional adjustments consist primarily of
pre-acquisition earnings of acquisitions and related synergistic cost
savings. Adjusted EBITDA does not represent and should not be
considered as an alternative to net income or cash flows from operating
activities as determined by U.S. generally accepted accounting
principles and may not be comparable to other similarly titled measures
of other companies. In addition, there may be contractual, legal,
economic or other reasons which may prevent us from satisfying
principal and interest obligations with respect to our indebtedness and
may require us to allocate funds for other purposes. A reconciliation
of adjusted EBITDA to net income as set forth in our consolidated
statements of operations is as follows (dollars in millions):
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Net income (loss) .......................... $(43.4) $ (2.1) $(50.8) $ 18.3 $ 8.3
Adjustments:
Extraordinary item ......................... -- -- 11.3 -- --
Gain on sale of discontinued operations .... -- -- -- -- (5.2)
Income from discontinued operations ........ -- -- -- -- (0.6)
Income tax expense (benefit) ............... (1.5) 6.8 (14.3) 14.1 8.6
Interest expense ........................... 75.3 76.0 68.5 44.0 37.5
Depreciation and amortization .............. 46.9 47.0 39.5 35.0 27.1
Restructuring and other costs .............. 43.1 (4.6) 19.4 2.5 4.9
Other non-cash charges and net adjustments
for certain unusual items .................. 1.2 18.7* 34.0* -- 0.9
------ ------ ------ ------ ------
Adjusted EBITDA ............................ $121.6 $141.8 $107.6 $113.9 $ 81.5
====== ====== ====== ====== ======
* See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year ended December 31, 2001 Compared with the
Year Ended December 31, 2000 - Operating expenses before restructuring
and other costs" for a discussion of unusual items in 2001 and 2000.
(5) For purposes of this ratio, earnings consist of income before income
taxes plus fixed charges. Fixed charges consist of (i) interest,
whether expensed or capitalized, (ii) amortization of debt issuance
costs and (iii) an allocation of one-third of the rental expense from
operating leases, which we consider to be a reasonable approximation of
the interest factor of operating lease payments. In 2002 and 2000,
earnings were insufficient to cover fixed charges by approximately
$44.9 million and $53.8 million, respectively.
(6) The amount presented for 2002 includes proceeds of $131.0 million from
the issuance of preferred stock in 2000 and 2001, plus the accrued and
unpaid dividends of $49.6 million, less the unamortized discount due to
detachable preferred stock warrants and unamortized issuance costs
totaling $29.8 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this section is to discuss and analyze our consolidated
financial condition, liquidity and capital resources and results of operations.
This analysis should be read in conjunction with the consolidated financial
statements and notes which appear elsewhere in this report. This section
contains certain "forward-looking statements" within the meaning of federal
securities laws that involve risks and uncertainties, including statements
regarding our plans, objectives, goals, strategies and financial performance.
Our actual results could differ materially from the results anticipated in these
forward-looking statements as a result of factors set forth under "--Cautionary
Statement for Forward-Looking Information" below and elsewhere in this report.
General
We derive our revenues, earnings and cash flows from the sale of film
and flexible packaging products throughout the world. We manufacture these
products at 26 facilities located in North America, Latin America, Europe and
Australia. Our net sales have
12
grown primarily as a result of strategic acquisitions made over the past several
years, increased levels of production at acquired facilities, return on capital
expenditures and the overall growth in the market for film and flexible
packaging products. In addition, as discussed below under "Recent Acquisitions,"
we recently acquired a consumer products business that manufactures and sells
products under the Con-Tact(R) brand name.
Acquisitions in 2002 and 2001
In August 2002, we purchased substantially all of the assets and
assumed certain liabilities of the business of Roll-O-Sheets Canada Limited
("Roll-O-Sheets"). The Roll-O-Sheets business consists of one plant in Barrie,
Canada engaged in the conversion and sale of PVC and polyethylene film for the
food industry. In addition, the business includes the distribution of purchased
polyester film, polypropylene food trays and other food service products.
In May 2002, we acquired substantially all of the assets and assumed
certain liabilities of Decora Industries, Inc. and its operating subsidiary,
Decora Incorporated (collectively, "Decora"), a New York based manufacturer and
reseller of printed, plastic films, including plastic films and other consumer
products sold under the Con-Tact(R) brand name. Our purchase of Decora's assets
was approved by the United States Bankruptcy Court. The initial purchase price
was approximately $18 million. The purchase price was negotiated with the
creditors committee and was paid in cash using borrowings from our existing
revolving credit facility. The assets purchased consisted of one plant in Fort
Edward, New York, and related equipment used by Decora primarily to print,
laminate and convert films into adhesive shelf liner. We have commenced the
process of closing the Decora plant in Fort Edward, New York and have moved the
production to our facilities in Mexico and Danville, Kentucky. The final
purchase price after adjustments totaled $23.2 million.
In July 2001, we acquired 100% of the outstanding stock of Uniplast
Holdings, Inc. ("Uniplast"), a manufacturer of multi-layer packaging films,
industrial films and cast-embossed films, with operations in the United States
and Canada, for an initial purchase price of approximately $56.0 million in cash
and equity. In connection with the acquisition of Uniplast, we announced a plan
to close three of Uniplast's six plants, move certain purchased assets to other
locations and terminate certain of the sales, administration and technical
employees of Uniplast. All three of these plants were closed in 2001 and sold in
the first six months of 2002. The final purchase price after adjustments totaled
$59.3 million.
We expect to continue to make acquisitions as opportunities arise
within the constraints of our credit facilities, as amended. However, we cannot
make an acquisition under the terms of our amended credit facilities unless our
leverage ratio will be equal to or less than 4.0 to 1.0 after the acquisition is
completed.
Critical Accounting Policies
In the ordinary course of business, we make a number of estimates and
assumptions relating to the reporting of results of operations and financial
position in the preparation of financial statements in conformity with generally
accepted accounting principles. Actual results could differ significantly from
those estimates under different assumptions and conditions. We believe the
following discussion addresses our most critical accounting policies. These
policies require management to exercise judgments that are often difficult,
subjective and complex due to the necessity of estimating the effect of matters
that are inherently uncertain.
Revenue Recognition. Sales revenue is recognized when title transfers,
the risks and rewards of ownership have been transferred to the customer, the
price is fixed and determinable and collection of the related receivable is
probable, which is generally at the time of shipment.
We have several rebate programs with certain of our customers and a
cash discount program on accounts receivable. These costs are estimated at the
time of sale and are reported as a reduction to sales revenue. Periodic
adjustments are made as a part of our ongoing evaluation of all receivable
related allowances.
Accounts Receivable. We evaluate accounts receivable on a quarterly
basis and review any significant customers with delinquent balances to determine
future collectibility. We base our determinations on legal issues (such as
bankruptcy status), past history, current financial and credit agency reports,
and the experience of the credit representatives. We reserve accounts that we
deem to be uncollectible in the quarter in which we make the determination. We
maintain additional reserves based on our historical bad debt experience.
Although there is a greater risk of uncollectibility in an economic downturn, we
believe, based on past history and proven credit policies, that the net accounts
receivable as of December 31, 2002 are of good quality.
Goodwill and Other Identifiable Intangible Assets. Goodwill associated
with the excess purchase price over the fair value of assets acquired is
currently not amortized. We have determined that certain of our trademarks have
indefinite lives, and thus they are not amortized. This is in accordance with
Statements of Financial Accounting Standards No. 142 effective for fiscal years
beginning after December 15, 2001. Goodwill and trademarks are currently tested
annually for impairment or more frequently if circumstances indicate that they
may be impaired. Other identifiable intangible assets, such as customer lists,
and other intangible assets are
13
currently amortized on the straight-line method over their estimated useful
lives. These assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may be less than the
undiscounted cash flows.
Retirement Plans. We value retirement plan assets and liabilities based
on assumptions and actuarial valuations. Assumptions for the retirement plans
are subject to the occurrence of future events, which are out of our control and
could differ materially from the amounts currently reported.
Insurance. Our insurance for worker's compensation and employee-related
health care benefits are covered using high deductible insurance policies. A
third-party administrator is used to process such claims. We require all
worker's compensation claims to be reported within 24 hours. As a result, we
accrue our worker's compensation liability based upon the claim reserves
established by the third-party administrator each month. Our employee health
insurance benefit liability is based on our historical claims experience rate.
Our earnings would be impacted to the extent actual claims vary from historical
experience. We review our accruals associated with the exposure to these
liabilities for adequacy at the end of each reporting period.
Deferred Taxes. We record deferred tax assets and liabilities for the
differences in the carrying amounts of assets and liabilities for financial and
tax reporting purposes. Deferred tax assets include amounts for net operating
loss, foreign tax credit and alternative minimum tax credit carryforwards.
Valuation allowances are recorded for amounts that management believes are not
recoverable in future periods.
Results of Operations
The following table sets forth net sales, expenses, and operating
income, and such amounts as a percentage of net sales, for the years ended
December 31, 2002, 2001 and 2000.
Year Ended December 31,
-------------------------------------------------------
2002 2001 2000
--------------- ---------------- ---------------
(dollars in millions)
Net sales ......................... $879.2 100.0% $840.4 100.0% $843.8 100.0%
Cost of sales ..................... 714.5 81.3 665.1 79.2 696.7 82.6
------ ------ ------ ------ ------ ------
Gross profit ...................... 164.7 18.7 175.3 20.8 147.1 17.4
Operating expenses before
restructuring and other costs .. 93.5 10.6 105.7 12.6 113.3 13.4
Restructuring and other costs ..... 43.1 4.9 (4.6) (0.6) 19.4 2.3
------ ------ ------ ------ ------ ------
Total operating expenses .......... 136.6 15.5 101.1 12.0 132.7 15.7
------ ------ ------ ------ ------ ------
Operating income .................. $ 28.1 3.2% $ 74.2 8.8% $ 14.4 1.7%
====== ====== ====== ====== ====== ======
Year Ended December 31, 2002 Compared with the Year Ended December 31, 2001
Net sales. Net sales increased by $38.8 million, or 4.6%, to $879.2
million for 2002 from $840.4 million for 2001. An increase in sales volume of
7.2% was partially offset by a decrease in selling prices of 2.4 cents per
pound, or 2.4%. See "Operating Segment Review" below for a detailed discussion
of sales volumes and selling prices by segment and division.
Gross profit. Gross profit decreased by $10.6 million, or 6.0%, to
$164.7 million for 2002 from $175.3 million for 2001. This decrease was
primarily due to lower margins, partially offset by the effect of higher sales
volumes. See "Operating Segment Review" below for a detailed discussion of the
margin variances by segment.
Operating expenses before restructuring and other costs. Operating
expenses before restructuring and other costs decreased $12.2 million, or 11.5%,
to $93.5 million for 2002 from $105.7 million for 2001. This decrease was due
primarily to stock based compensation expenses of $7.0 million in 2001, and
reductions in operating expenses due to cost reduction programs implemented in
2002. In addition, expenses for 2001 included $6.0 million related to fees and
expenses incurred in connection with a company-wide supply chain cost
initiative. These decreases were partially offset by additional selling and
general expenses of $5.9 million related to the Decora acquisition (the Pliant
Solutions segment) and a $2.6 million charge for bad debts in 2002.
Restructuring and other costs. Restructuring and other costs increased
to $43.1 million for 2002 from a credit of $4.6 million in 2001. Restructuring
and other costs for 2002 reflect approximately $13.2 million related to the
partial closure of our Shelbyville, Indiana facility (including non-cash charges
of $12.2 million related to impaired assets), $3.7 million related to the
closure of our Merced, California facility (including non-cash charges of $0.7
million related to impaired assets), $3.9 million related to costs associated
with moving production lines purchased in the Uniplast acquisition,
approximately $7.4 million related to severance costs related to several
company-wide workforce reduction programs implemented in 2002, approximately
$2.3 million related to costs
14
associated with moving production equipment from our Fort Edward, New York
facility to our Mexico facility (including the costs associated with the closure
of the Fort Edward plant acquired in the Decora acquisition), a non-cash charge
of $1.0 million related to the impairment of certain manufacturing assets in our
U.S. plants, a non-cash charge of $8.6 million related to the impairment of
goodwill in our International segment and approximately $3.0 million related to
other costs associated with re-alignment of production resources at several
other plants. See Note 4 to the consolidated financial statements included
elsewhere in this report.
Due to our decision not to proceed with the previously announced
closure of our Harrington plant, approximately $7.6 million of the costs accrued
for plant closures in 2000 was credited to plant closing costs in 2001. This
credit was partially offset by $3.0 million of plant closing costs incurred
during the fourth quarter of 2001, related primarily to the relocation of
production lines as a result of the Uniplast acquisition.
Operating income. Operating income decreased $46.1 million, or 62.1%,
to $28.1 million for 2002 from $74.2 million for 2001 for the reasons discussed
above.
Interest expense. Interest expense decreased $0.7 million, or 1%, to
$75.3 million for 2002 from $76.0 million for 2001. The decrease in interest
expense, which resulted from lower outstanding term loans, due to repayments,
and lower interest rates
applicable to our term debt and revolving credit facilities, due to a decrease
in LIBOR, was partially offset by higher interest costs from the issuance of an
additional $100 million of subordinated debt in April 2002.
Other income (expense). Other income decreased $4.2 million to $2.3
million in 2002 from $6.5 million for 2001. The decrease reflects an amount of
other income for the 2001 period that was primarily due to the proceeds and
assets received from a settlement with a potential customer in the second
quarter of 2001.
Income tax expense (benefit). In 2002 our income tax benefit was $1.5
million, compared to an income tax expense of $6.8 million in 2001. These
amounts represent effective tax rates of 3.3% and 143.8% for the years ended
December 31, 2002 and 2001, respectively. The fluctuation in income tax expense
(benefit) relates primarily to the fluctuation in our income (loss) before
income taxes for the years presented. The fluctuation in the effective tax rate
is principally the result of foreign tax rate differences, the provision for
valuation allowances and the amortization of goodwill in 2001. These differences
increase the effective tax rate in years in which we have pretax profit and
decrease our effective tax rate in years in which we have pretax loss. Pretax
loss in 2002 was $44.9 million as compared to pretax income of $4.7 million in
2001. As of December 31, 2002, our deferred tax assets totaled approximately
$79.1 million, of which $46.2 million related to net operating loss
carryforwards. Our deferred tax liabilities totaled approximately $84.0 million.
Due to uncertainty regarding the timing of the future reversals of existing
deferred tax liabilities we have recorded a valuation allowance of approximately
$3.8 million to offset the deferred tax asset relating to the net operating loss
carryforwards. Due to uncertainty regarding the realization of our foreign tax
credit carryforwards, we have recorded a valuation allowance of approximately
$7.0 million to offset all of our foreign tax credit carryforwards.
Year Ended December 31, 2001 Compared with the Year Ended December 31, 2000
Net sales. Net sales decreased by $3.4 million, or 0.4%, to $840.4
million for 2001 from $843.8 million for 2000. A decrease in selling prices of
6.0 cents per pound, or 5.9%, was partially offset by an increase in sales
volume of 5.8%. See "Operating Segment Review" below for a detailed discussion
of sales volumes and selling prices by segment and division.
Gross profit. Gross profit increased by $28.2 million, or 19.2%, to
$175.3 million for 2001 from $147.1 million for 2000. This increase was
primarily due to the effect of higher sales volumes and improved margins. See
"Operating Segment Review" below for a detailed discussion of the margin
variances by segment.
Operating expenses before restructuring and other costs. Operating
expenses before restructuring and other costs decreased $7.6 million, or 6.7%,
to $105.7 million for 2001 from $113.3 million for 2000. As a percentage of
sales, our operating expenses were relatively high in both periods due to
several unusual items in 2001 and 2000.
The unusual items in 2001 included:
o $7.0 million of non-cash stock compensation costs;
o $4.0 million related to the relocation of our corporate offices
from Salt Lake City, Utah to Schaumburg, Illinois;
o $6.0 million related to fees and expenses incurred in connection
with a company-wide supply chain cost initiative; and
o $3.0 million increase in depreciation expenses due primarily to
new computer systems.
The unusual items in 2000 included:
o $10.8 million of costs related to the recapitalization;
15
o $10.8 million related to fees and expenses incurred in connection
with a company-wide supply chain cost initiative;
o $7.1 million related to a company-wide work force reduction
program; and
o $2.6 million of non-cash stock compensation costs.
Restructuring and other costs. Restructuring and other costs for 2001
consisted of a credit of $4.6 million as compared to restructuring and other
expenses of $19.4 million in 2000. Due to our decision not to proceed with the
previously announced closure of our Harrington plant, approximately $7.6 million
of the costs accrued for plant closures in 2000 were credited to plant closing
costs in 2001. This credit was partially offset by $3.0 million of plant closing
costs incurred during the fourth quarter of 2001, related primarily to the
relocation of production lines as a result of the Uniplast acquisition. The
restructuring and other costs for 2000 included costs related to the closure of
our facilities in Birmingham, Alabama and Dallas, Texas. In addition, the
restructuring and other costs for 2000 included costs for the expected closure
of our Harrington facility.
Operating income. Operating income increased $59.8 million to $74.2
million for 2001 from $14.4 million for 2000 for the reasons discussed above.
Interest expense. Interest expense increased by $7.5 million, or 11%,
to $76.0 million for 2001 from $68.5 million for 2000. This increase was
principally a result of the recapitalization in May 2000. The increased interest
expense attributable to increased borrowings was partially offset by a reduction
in LIBOR, which decreased the variable interest rate on our term debt.
Income tax expense (benefit). In 2001, our income tax expense was $6.8
million, compared to an income tax benefit of $14.2 million in 2000. These
amounts represent effective tax rates of 143.8% and 26.5% for the years ended
December 31, 2001 and 2000, respectively. The fluctuation in income tax expense
(benefit) relates primarily to the fluctuation in our income (loss) before
income taxes for the years presented. The fluctuation in the effective tax rate
is principally the result of foreign tax rate differences and amortization of
goodwill, which are relatively fixed and therefore have a greater impact on the
effective rate in years in which our pre-tax income or loss is relatively low.
Pretax income in 2001 was $4.7 million as compared to a pre-tax loss of $53.8
million in 2000. As of December 31, 2001, our deferred tax assets totaled
approximately $46.0 million of which $30.6 million related to net operating loss
carryforwards. Our deferred tax liabilities totaled $69.6 million. Due to
uncertainty regarding the realization of our foreign tax credit carryforwards,
we have recorded a valuation allowance of approximately $1.9 million to offset
all of our foreign tax credit carryforwards.
Operating Segment Review
General
Operating segments are our components for which separate financial
information is available that is evaluated regularly by our chief operating
decision maker in deciding how to allocate resources and in assessing
performance. We evaluate the performance of our operating segments based on net
sales (excluding intercompany sales) and segment profit. The segment profit
reflects income before discontinued operations, extraordinary items, interest
expense, income taxes, depreciation, amortization, restructuring and other
costs, all non-cash charges and certain other adjustments defined by our credit
agreement. For more information on our operating segments, including a
reconciliation of segment profit to net income, see Note 14 to the consolidated
financial statements included elsewhere in this report. The total of the segment
profit amounts presented in this section for our three operating segments and
unallocated corporate expenses equals the consolidated adjusted EBITDA disclosed
in Item 6, "Selected Financial Data."
In previous reporting periods we had three reporting segments
classified by product types: Specialty Films, Design Products and Industrial
Films. During the third quarter of 2002, we reorganized our operations under
three new operating segments: Pliant U.S., Pliant International and Pliant
Solutions. Segment information below with respect to 2001 and 2000 has been
restated for comparative purposes.
16
Summary of segment information (in millions of dollars):
Unallocated
Pliant Pliant Pliant Corporate
U.S. International Solutions Expenses Total
-------- ------------- --------- -------- --------
Year ended December 31, 2002
----------------------------
Net sales $ 742.6 $ 108.3 $ 28.3 $ -- $ 879.2
-------- -------- -------- -------- --------
Segment profit 118.0 15.6 2.7 (14.7) 121.6
-------- -------- -------- -------- --------
Total assets 659.8 104.0 27.6 61.8 $ 853.2
-------- -------- -------- -------- --------
Year ended December 31, 2001
----------------------------
Net sales $ 736.1 $ 104.3 -- $ -- $ 840.4
-------- -------- -------- -------- --------
Segment profit 136.5 19.4 -- (14.1) 141.8
-------- -------- -------- -------- --------
Total assets 685.0 113.4 -- 53.3 851.7
-------- -------- -------- -------- --------
Year ended December 31, 2000
----------------------------
Net sales $ 753.2 $ 90.6 -- $ -- $ 843.8
-------- -------- -------- -------- --------
Segment profit 110.4 17.1 -- (19.9) 107.6
-------- -------- -------- -------- --------
Total assets 626.6 90.6 -- 67.8 785.0
-------- -------- -------- -------- --------
Year Ended December 31, 2002 Compared with the Year Ended December 31, 2001
Pliant U.S.
- -----------
Net sales. The net sales of our Pliant U.S. segment increased $6.5
million, or 0.9%, to $742.6 million for 2002 from $736.1 million for 2001. This
increase was primarily due to a 4.9% increase in our sales volumes, partially
offset by a decrease in our average selling prices of 3.9 cents per pound, or
3.8%. The increase in sales volumes is discussed for each Pliant U.S. division,
below, and the decrease in our average selling prices is discussed under
"Segment profit," below.
Net sales in our Industrial Films division decreased $2.8 million, or
1.8%, to $158.7 million for 2002 from $161.5 million for 2001. This decrease was
principally due to a decrease in our average selling prices of 5.2 cents per
pound, or 6.8%, partially offset by a 5.4% increase in sales volumes. The
increase in sales volume was primarily the result of incremental sales from new
stretch film production lines at our Lewisburg plant. Net sales in our Specialty
Films division decreased $2.8 million, or 1.7%, to $155.9 million for 2002 from
$158.7 million for 2001. This decrease was principally due to a decrease in our
average selling prices of 4.3 cents per pound, or 4.0%, partially offset by a
0.3% increase in sales volumes. Net sales in our Converter Films division
increased $10.4 million, or 4.9%, to $221.0 million for 2002 from $210.6 million
for 2001. This increase was principally due to an increase in our sales volumes
of 6.0%, primarily as a result of the Uniplast acquisition in July 2001,
partially offset by a decrease in our average selling prices of 1.4 cents per
pound, or 1.5%. Net sales in our Printed and Barrier Films division increased
$1.7 million, or 0.8%, to $207.0 million for 2002 from $205.3 million for 2001.
This increase was principally due to an increase in our sales volumes of 7.1%,
primarily due to incremental sales from a new printing press, partially offset
by a decrease in our average selling prices of 8.9 cents per pound, or 5.9%.
Segment profit. The Pliant U.S. segment profit decreased $18.5 million,
or 13.6%, to $118.0 million for 2002 from $136.5 million for 2001, primarily due
to a decrease in gross margins. The decrease in gross margins was principally a
result of lower selling prices, partially offset by the effect of the increase
in sales volumes discussed above.
Our average raw material costs for 2002 as a whole were comparable to
average raw material costs in 2001. However, there was a significant fluctuation
in raw material costs during the two year period. Raw material costs were
relatively high at the beginning of 2001 and declined throughout 2001 and the
first quarter of 2002. Raw material costs sharply increased throughout the
second and third quarters of 2002. As raw material costs declined in 2001, our
average selling prices also declined to reflect lower raw material costs
partially offset by a lag of contractual selling prices. As raw material costs
began to sharply increase, lagging contractual prices and a competitive pricing
environment resulted in a compression between our average selling prices and
average raw material costs. The lagging contractual prices were the result of
specific agreements with certain customers that in some cases delayed the
implementation of price increases and decreases as raw material costs changed.
As a result of these factors, our average selling prices continued to remain low
during the second half of 2002 while our average raw material costs increased. A
change in our sales mix toward lower margin products, in part resulting from the
slowdown in the economy, also contributed to a decrease in our average selling
prices. Segment profit was also adversely affected by a $2.6 million charge
related to bad debts.
17
Segment total assets. The Pliant U.S. segment total assets decreased
$25.2 million, or 3.7%, to $659.8 million as of December 31, 2002 from $685.0
million as of December 31, 2001. The decrease was due primarily to decreases in
accounts receivable and property, plant and equipment of $8.2 million and $18.4
million, respectively, and a $2.0 million writedown of intangible assets,
partially offset by an increase in inventory levels of $3.6 million. Property
plant and equipment decreased primarily due to a sale and leaseback transaction
of $17.1 million, and $26.4 million of depreciation expense, partially offset by
capital expenditures of $28.5 million.
Pliant International
- --------------------
Net sales. The net sales of our Pliant International segment increased
$4.0 million, or 3.8%, to $108.3 million for 2002 from $104.3 million for 2001.
This increase was principally due to a 13.9% increase in our sales volume,
primarily due to the Uniplast acquisition in July 2001, partially offset by a
decrease in our average selling prices of 9 cents per pound, or 8.9%. Among
other factors, our average selling prices were adversely affected by a reduction
in sales of our higher value personal care film sold in Mexico and Argentina,
each of which has experienced economic turmoil.
Segment profit. The Pliant International segment profit decreased $3.8
million, or 19.6%, to $15.6 million for 2002 from $19.4 million for 2001. The
decrease was due principally to lower gross margins as a result of lower selling
prices as discussed above.
Segment total assets. The Pliant International segment total assets
decreased $9.4 million, or 8.3%, to $104.0 million as of December 31, 2002, from
$113.4 million as of December 31, 2001. This decrease was due principally to a
goodwill writedown of $8.6 million. Capital expenditures of $9.0 million were
partially offset by depreciation expense of $6.2 million.
Pliant Solutions
- ----------------
Our Pliant Solutions segment was created in 2002 following the Decora
acquisition. Therefore, a discussion of results of operations or total assets
for this segment as compared to 2001 is not presented.
Pliant Solutions had net sales of $28.3 million and segment profit of
$2.7 million from the date of acquisition in May 2002 to December 31, 2002.
Pliant Solutions had segment total assets of $27.6 million as of December 31,
2002.
Unallocated Corporate Expenses
- ------------------------------
Unallocated corporate expenses increased $0.6 million, or 4.3%, to
$14.7 million for 2002 from $14.1 million for 2001.
Year Ended December 31, 2001 Compared with the Year Ended December 31, 2000
Pliant U.S.
- -----------
Net sales. The net sales of our Pliant U.S. segment decreased $17.1
million, or 2.3%, to $736.1 million for 2001 from $753.2 million for 2000. This
decrease was primarily due to a decrease in our average selling prices of 5.5
cents per pound, or 5.1%, partially offset by an increase in our sales volumes
of 3%. The increase in sales volumes is discussed for each Pliant U.S. division,
below, and the decrease in our average selling prices is discussed under
"Segment profit," below.
Net sales in our Industrial Films division increased $15.6 million, or
10.7%, to $161.5 million for 2001 from $145.9 million for 2000. This increase
was principally due to a 16.9% increase in sales volumes partially offset by a
decrease in our average selling prices of 4.2 cents per pound, or 5.3%. The
increase in sales volume was primarily the result of increased sales of stretch
film. Net sales in our Specialty Films division decreased $30.0 million, or
15.9%, to $158.7 million for 2001 from $188.7 million for 2000. This decrease
was principally due to a decrease in sales volumes of 14.7% and a decrease in
our average selling prices of 2.5 cents per pound, or 2.3%. The sales volumes
decreased due to a significant reduction in sales at our Harrington plant, which
was downsized in 2001, and a reduction in sales volume at our Washington plant
due to a decrease in sales of our personal care films. Net sales in our
Converter Films division increased $12.8 million, or 6.4%, to $210.6 million for
2001 from $197.8 million for 2000. This increase was principally due to an
increase in our sales volumes of 10.6%, primarily as a result of the Uniplast
acquisition in July 2001, partially offset by a decrease in our average selling
prices of 3.7 cents per pound, or 3.7%. Net sales in our Printed and Barrier
Films division decreased $15.5 million, or 7.0%, to $205.3 million for 2001 from
$220.8 million for 2000. This decrease was principally due to a decrease in
sales volumes of 5.7% due to the closure of our Birmingham, Alabama plant,
substantial downsizing of our Shelbyville, Indiana plant and a decrease in our
average selling prices of 2.2 cents per pound, or 1.4%.
Segment profit. The Pliant U.S. segment profit increased $26.1 million,
or 23.6%, to $136.5 million for 2001 from $110.4 million for 2000. The increase
was primarily due to the increase in sales volumes, discussed above, and an
increase in gross margins. The increase in gross margins was principally a
result of lower raw material prices that were only partially offset by lower
selling prices during 2001.
18
Segment total assets. The Pliant U.S. segment total assets increased
$58.4 million, or 9.3%, to $685.0 million as of December 31, 2001 from $626.6
million as of December 31, 2000. The increase was primarily due to an increase
in property plant and equipment as a result of the Uniplast acquisition of $19.9
million, capital expenses of $48.5 million, and increase in goodwill of $14.2
million, principally due to the Uniplast acquisition. The increase in segment
total assets was partially offset by depreciation and amortization expense of
$26.0 million.
Pliant International
- --------------------
Net sales. The net sales of our Pliant International segment increased
$13.7 million, or 15.1%, to $104.3 million for 2001 from $90.6 million for 2000.
This increase was principally due to a 31.2% increase in our sales volume,
primarily due to the Uniplast acquisition in July 2001, partially offset by a
decrease in our average selling prices of 14.2 cents per pound, or 12.2%. Our
average selling prices decreased due to a change in sales mix.
Segment profit. The Pliant International segment profit increased $2.3
million, or 13.5%, to $19.4 million for 2001 from $17.1 million for 2000. The
increase was due principally to the effect of higher sales volume discussed
above, partially offset by lower gross margins as a result of lower selling
prices discussed above.
Segment total assets. The Pliant International segment total assets
increased $22.8 million, or 25.2%, to $113.4 million as of December 31, 2001,
from $90.6 million as of December 31, 2000, primarily due to the acquisition of
Uniplast, partially offset by depreciation expenses.
Pliant Solutions
- ----------------
Our Pliant Solutions segment was created in 2002 following the Decora
acquisition. Therefore, a discussion of results of operations or total assets
for this segment is not presented.
Unallocated Corporate Expenses
- ------------------------------
Unallocated corporate expenses decreased $5.8 million, or 29.1%, to
$14.1 million for 2001 from $19.9 million for 2000. Unallocated corporate
expenses were relatively high in both periods due to several unusual items in
2001 and 2000. For a discussion of these items see "Year Ended December 31, 2000
Compared with the Year Ended December 31, 2000-Operating expenses before
restructuring and other costs."
Liquidity and Capital Resources
Our principal sources of funds are cash generated by our operations and
borrowings under our credit facilities. In addition, we have raised funds
through the issuance of our senior subordinated notes and the sale of shares of
our preferred stock.
Credit facilities
As amended, our credit facilities consist of:
o tranche A term loans in an aggregate principal amount of
$117.9 million outstanding as of December 31, 2002;
o Mexico term loans in an aggregate principal amount of $24.8
million outstanding as of December 31, 2002;
o tranche B term loans in an aggregate principal amount of
$251.9 million outstanding as of December 31, 2002; and
o revolving credit facility in an aggregate principal amount
of up to $100 million.
o Up to $30.0 million (plus an additional amount up to
$40.0 million to support certain borrowings by our
principal Mexican subsidiary) of the revolving credit
facility is available in the form of letters of credit.
The interest rates under the revolving credit facility, the tranche A
facility and the Mexico facility are, at our option, Adjusted LIBOR or ABR, plus
a spread determined by reference to our leverage ratio. In accordance with the
March 24, 2003 amendment to our credit facilities described below, the spread
will not exceed 4.0% for Adjusted LIBOR or 3.0% for ABR. Adjusted LIBOR is the
London inter-bank offered rate adjusted for statutory reserves. ABR is the
alternate base rate, which is the higher of the lender's prime rate or the
federal funds effective rate plus 1/2 of 1%. The interest rates under the
tranche B facility are, at our option, Adjusted LIBOR or ABR, plus a spread
determined by reference to our leverage ratio. As amended, our credit facilities
provide that the spread will not exceed 4.75% for Adjusted LIBOR or 3.75% for
ABR. We may elect interest periods of one, two, three or six months for Adjusted
LIBOR borrowings. The calculation of interest is on the basis of actual days
elapsed in a year of 360 days (or 365 or 366 days, as the case may be, in the
case of ABR loans based on the Prime Rate) and interest is payable at the end of
each interest period and, in any event, at least every three months.
19
Compliance with financial covenants
Our credit facilities require us to maintain certain key financial
ratios on a quarterly basis. These key ratios include a leverage ratio and an
interest coverage ratio. Effective March 24, 2003, we entered into an amendment
(the "Amendment") of our credit facilities to, among other things, permit us to
issue up to $50 million of our common stock, qualified preferred stock, warrants
to acquire our common stock or qualified preferred stock, or any combination of
our common stock, qualified preferred stock or warrants, or other capital
contributions with respect to our common stock or qualified preferred stock. The
Amendment also adjusted certain financial covenants, including the leverage and
interest coverage ratios. As a condition to the effectiveness of the Amendment,
we agreed to issue 10,000 shares of our Series A preferred stock and warrants to
purchase 43,962 shares of our common stock to J.P. Morgan Partners (BHCA), L.P.
("J.P. Morgan Partners"), and J.P. Morgan Partners agreed to purchase such
shares and warrants for $10 million. We completed this sale on March 25, 2003.
All of the proceeds of this sale were used to reduce our term debt. In addition,
the Amendment allows us to issue an additional $40 million of equity securities
between March 25, 2003 and March 31, 2005 in order to obtain cash to reduce the
revolving borrowings and/or term borrowings under our credit facilities. J.P.
Morgan Partners is required to purchase up to $25 million of such additional
equity securities to the extent necessary to enable us to meet our leverage
ratio or the target senior debt leverage ratio specified in the Amendment at the
end of any calendar quarter or fiscal year ending on or before December 31,
2004. Any such additional issuance of Series A preferred stock to J.P. Morgan
Partners will also include warrants to purchase 4.3962 shares of our common
stock for every $1,000 face amount of preferred stock issued. Our obligations to
issue, and J.P. Morgan Partners' obligation to purchase such equity securities
are set forth in a Securities Purchase Agreement dated as of March 25, 2003.
Generally, if we are required to issue any portion of such $25 million of equity
securities under the Amendment with respect to any fiscal quarter in 2003, we
must use 50% of the net proceeds from the issuance of any such equity securities
to reduce our revolving borrowings, and 50% to reduce our term borrowings. If we
are required to issue any such equity securities under the Amendment with
respect to any fiscal quarter in 2004, we must use 100% of the net proceeds to
reduce our term borrowings. The issuance of the remaining $15 million of equity
securities is voluntary on our part, and neither J.P. Morgan Partners nor any
other person is required to purchase such equity securities. We incurred an
amendment fee of $2.2 million in connection with the amendment. We also incurred
approximately $0.5 million of legal and administrative expenses in connection
with negotiating the Amendment and the issuance of 10,000 shares of Series A
preferred stock.
Based on our current earnings forecast, our cash flow forecast and the
proceeds received from the sale of $10 million of Series A preferred stock, as
described above, we believe that we will comply with the covenants contained in
our credit facilities, as amended, during 2003. Further, J.P. Morgan Partners'
commitment to purchase additional equity securities will allow us to raise up to
$25 million of additional funds to the extent necessary to enable us to comply
with the financial covenants if we do not meet our earnings and cash flow
forecast. However, if our actual earnings and cash flow are significantly below
expectations and we are unable to raise enough funds to maintain compliance with
the financial covenants through the sale of equity securities to J.P. Morgan
Partners, we may not be able to comply with our financial covenants. Absent a
waiver or further amendment of our credit facilities, the failure to comply with
our financial covenants would cause us to be in default under our credit
facilities. Any such default would have a material adverse effect on our
liquidity and financial condition.
We are required to make annual mandatory prepayments of the term loans
under the credit facilities within 90 days following the end of each year in an
amount equal to the amount by which 100% of excess cash flow for such year (or
50% of excess cash flow if our leverage ratio at the end of such year is less
than or equal to 4.0 to 1.0) exceeds the aggregate amount of voluntary
prepayments made since the last excess cash flow payment, subject to certain
adjustments. In addition, the term loan facilities are subject to mandatory
prepayments in an amount equal to (a) 100% of the net cash proceeds of equity
and debt issuances by us or any of our subsidiaries, and (b) 100% of the net
cash proceeds of asset sales or other dispositions of property by us or any of
our subsidiaries, in each case subject to certain exceptions.
Senior subordinated notes
In 2000, we issued $220 million aggregate principal amount of 13%
Senior Subordinated Notes due 2010. In 2002, we issued an additional $100
million of 13% Senior Subordinated Notes due 2010. The Notes mature on June 1,
2010, and interest on the Notes is payable on June 1 and December 1 of each
year. The Notes are subordinated to all of our existing and future senior debt,
rank equally with any future senior subordinated debt, and rank senior to any
future subordinated debt. The Notes are guaranteed by some of our subsidiaries.
The Notes are unsecured. Prior to June 1, 2003, we may, on one or more
occasions, redeem up to a maximum of 35% of the original aggregate principal
amount of the Notes with the net cash proceeds of one or more equity offerings
by us at a redemption price equal to 113% of the principal amount thereof, plus
accrued and unpaid interest. Otherwise, we may not redeem the Notes prior to
June 1, 2005. On or after that date, we may redeem the Notes, in whole or in
part, at a redemption price (expressed as percentages of principal amount),
(plus accrued and unpaid interest) multiplied by the following percentages:
106.5% if redeemed prior to June 1, 2006; 104.333% if redeemed prior to June 1,
2007; 102.167% if redeemed prior to June 1, 2008.
20
Preferred stock
We have approximately $141 million of Series A Cumulative Exchangeable
Redeemable Preferred Stock outstanding. The Series A preferred stock accrues
dividends at the rate of 14% per annum; however, our board of directors has
never declared or paid any dividends on the Series A preferred stock. Unpaid
dividends accumulate and are added to the liquidation amount of the Series A
preferred stock. After May 31, 2005 the annual dividend rate increases to 16%
unless we pay dividends in cash. The dividend rate also increases to 16% if we
fail to comply with certain of our obligations or upon certain events of
bankruptcy. The Series A Preferred Stock is mandatorily redeemable on May 31,
2011. See Note 10 to the consolidated financial statements included elsewhere in
this report.
Net cash provided by operating activities
Net cash provided by operating activities was $43.6 million for the
year ended December 31, 2002, an increase of $13.3 million, or 43.9%, from $30.3
million in 2001. The increase was primarily due to changes in working capital
items, changes in restructuring and other costs and changes in operating
earnings.
Net cash used in investing activities
Net cash used in investing activities was $55.2 million for the year
ended December 31, 2002, compared to $87.3 million for the same period in 2001.
Capital expenditures were $49.2 million and $56.4 million for the years ended
December 31, 2002 and 2001, respectively. Capital expenditures in both periods
were primarily for major expansion projects in all of our product lines, costs
for upgrading our information systems, and for company-wide maintenance
projects. We received $17.1 million and $7.9 million as part of sale-leaseback
transactions of newly-acquired machinery and equipment in 2002 and 2001,
respectively. In addition, we invested $23.2 million in the Decora acquisition
and made additional adjustments to the Uniplast acquisition in 2002 and invested
$38.8 million in cash in the Uniplast acquisition in 2001.
Net cash provided by financing activities
Net cash provided by financing activities was $12.4 million in 2002, as
compared with $55.0 million in 2001. The 2002 activity represents principally
the net proceeds from the issuance of $100 million of 13% Senior Subordinated
Notes due 2010, partially offset by repayments of term debt and revolving debt
under our credit facilities. The activity in 2001 represents the proceeds of
$31.0 million from the issuance of shares of preferred stock and preferred stock
warrants used to fund the Uniplast acquisition and scheduled repayments of term
debt, net of borrowings and repayments under our revolving credit facility.
Liquidity
As of December 31, 2002, we had approximately $45.8 million of working
capital. As of December 31, 2002, we had approximately $67.6 million available
for borrowings under our $100.0 million revolving credit facility, with
outstanding borrowings of approximately $28.4 million and approximately $4.0
million of letters of credit issued under our revolving credit facility. Our
outstanding borrowings under our revolving credit facility fluctuate
significantly during each quarter as a result of the timing of payments for raw
materials, capital and interest, as well as the timing of customer collections.
The outstanding balance of our revolving credit facility had a peak balance of
$78.7 during the year ended December 31, 2002. As of December 31, 2002, the debt
under our credit facilities and our senior subordinated notes bore interest at a
weighted average rate of 9.5%, including the effect of interest rate derivative
agreements.
As of December 31, 2002, we had approximately $1.6 million in cash and
cash equivalents, of which the majority was held by our foreign subsidiaries.
High effective repatriation tax rates may limit our ability to access cash and
cash equivalents generated by our foreign operations for use in our U.S.
operations, including to pay principal, premium, if any, and interest on the
Notes and the credit facilities.
We expect that our total capital expenditures will be approximately $20
to $30 million in each of 2003 and 2004. These expenditures will consist
primarily of ongoing maintenance capital expenditures.
The following table sets forth our total contractual cash obligations
as of December 31, 2002 after giving effect to the Amendment and the issuance of
10,000 shares of Series A preferred stock on March 25, 2003 (in thousands):
21
Payments Due by Period
---------------------------------------------------------
Less
Contractual Cash Obligations than After 5
Total 1 year 1-3 years 4-5 years years
--------- --------- --------- --------- ---------
Long-term debt (including capital lease obligations) $ 744,693 $ 14,745 $ 104,202 $ 177,338 $ 448,408
Operating leases 69,307 13,595 23,146 17,404 15,162
Redeemable preferred stock 160,816 -- -- -- 160,816
--------- --------- --------- --------- ---------
Total contractual cash obligations $ 974,816 $ 28,340 $ 127,348 $ 194,742 $ 624,386
The credit facilities and the indentures relating to the Notes impose
certain restrictions on us, including restrictions on our ability to incur
indebtedness, pay dividends, make investments, grant liens, sell our assets and
engage in certain other activities. In addition, the credit facilities require
us to maintain certain financial ratios.
The interest expense and scheduled principal payments on our borrowings
affect our future liquidity requirements. We expect that cash flows from
operating activities and available borrowings under our revolving credit
facility of $100 million will provide sufficient cash flow to operate our
business, to make expected capital expenditures and to meet foreseeable
liquidity requirements. In addition, we have a commitment from J.P. Morgan
Partners to purchase up to an additional $25 million of equity securities if
necessary to maintain our financial covenants under our credit facilities.
However, any proceeds from the issuance of any such equity securities must be
used to repay amounts outstanding under our credit facilities as described
above.
Changes in raw material costs can significantly affect the amount of
cash provided by our operating activities, which can affect our liquidity
requirements. We are currently experiencing a period of extreme uncertainty with
respect to resin supplies and prices. High crude oil and natural gas pricing,
resulting in part from harsh winter weather conditions in the eastern United
States and uncertainties regarding the situation with Iraq, have had a
significant impact on the price and supply of resins. Many major suppliers of
resin have announced price increases to cover their increases in feedstock
costs. While the prices of our products generally fluctuate with the prices of
resins, certain of our customers have contracts that limit our ability to pass
the full cost of higher resin pricing through to our customers immediately.
Further, competitive conditions in our industry may make it difficult for us to
sufficiently increase our selling prices for all customers to reflect the full
impact of increases in raw material costs. If this period of high resin pricing
continues, we may be unable to pass on the entire effect of the price increases
to our customers, which would adversely affect our profitability and working
capital. In addition, further increases in crude oil and natural gas prices
could make it difficult for us to obtain an adequate supply of resin from
manufacturers affected by these factors.
If (a) we are not able to increase prices to cover historical and
future raw materials cost increases, (b) we are unable to obtain adequate supply
of resin, (c) volume growth does not continue as expected, or (d) we experience
any significant negative effects to our business, we may not have sufficient
cash flow to operate our business, make expected capital expenditures or meet
foreseeable liquidity requirements. Any such event would have a material adverse
effect on our liquidity and financial condition.
Other Developments
On June 10, 2002, we entered into a separation agreement with Richard
P. Durham, our former Chairman and Chief Executive Officer. As of the date of
the separation agreement, Mr. Durham owned 28,289 shares of common stock, 12,083
performance vested shares, 2,417 time vested shares, warrants to purchase
1,250.48 shares of common stock and 1,232 shares of preferred stock of Pliant.
All of Mr. Durham's time vested shares and 2,416 of Mr. Durham's performance
vested shares had vested as of the date of the separation agreement. Pursuant to
the separation agreement, Mr. Durham agreed to convert an outstanding promissory
note issued as payment for a portion of his shares into two promissory notes.
The first note (the "Vested Secured Note"), in the principal amount of
$2,430,798, relates to Mr. Durham's time vested shares and the vested portion of
his performance vested shares. The second note (the "Non-Vested Secured Note"),
in the principal amount of $4,862,099, related to the 9,667 performance vested
shares which had not vested as of the date of the separation agreement. In
addition to these notes, Mr. Durham had an additional outstanding promissory
note (the "Additional Note"), with a principal amount of $1,637,974, relating to
a portion of the shares of common stock held by Mr. Durham. In accordance with
the separation agreement, we repurchased and canceled Mr. Durham's 9,667
unvested shares in exchange for cancellation of the Non-Vested Secured Note on
October 3, 2002.
The separation agreement preserved a put option established by Mr.
Durham's employment agreement with respect to his shares. For purposes of this
put option, the separation agreement provides that the price per share to be
paid by us is $483.13 with respect to common stock, $483.13 less any exercise
price with respect to warrants, and the liquidation preference with respect to
preferred stock. On July 9, 2002, Mr. Durham exercised his put option with
respect to 28,289 shares of common stock, 1,232 shares of preferred stock and
warrants to purchase 1,250.48 shares of common stock. Mr. Durham's put option is
subject to any financing or other restrictive covenants to which we are subject
at the time of the proposed repurchase. Restrictive covenants under our credit
facilities limit the number of shares we can currently repurchase from Mr.
Durham. On October 3, 2002, as permitted by the covenants contained in our
credit facilities, we purchased 8,204 shares from Mr. Durham for a purchase
price of $3,963,599 less the
22
outstanding amount of the Additional Note, which was cancelled. In December 2002
we purchased an additional 1,885 shares of common stock from Mr. Durham for an
aggregate purchase price of approximately $910,700. As of December 31, 2002, our
total remaining purchase obligation to Mr. Durham was approximately $10,623,097,
excluding accrued preferred dividends. We are limited to a maximum purchase from
Mr. Durham of $5,000,000 of shares in 2003, which purchase may only be made if
we meet certain leverage ratios. In connection with Mr. Durham's resignation as
Chairman and Chief Executive Officer, Jack E. Knott II was appointed our Chief
Executive Officer. Mr. Timothy J. Walsh, a director since May 31, 2000, and a
Partner of J.P. Morgan Partners, LLC, was appointed as the non-executive
Chairman of the Board of Directors. Mr. Durham continues to serve as a member of
our Board of Directors as a designee of The Christena Karen H. Durham Trust,
which holds 158,917 shares, or approximately 27.5%, of our outstanding common
stock.
During 2001, we completed the transition of our corporate headquarters
from Salt Lake City, Utah to Schaumburg, Illinois, and we made certain changes
in our management. During the first quarter of 2001, we incurred non-cash
stock-based compensation expense of approximately $7.0 million as a result of
certain modifications to our senior management employment arrangements with two
executive officers.
Cautionary Statement for Forward-Looking Information
Certain information set forth in this report contains "forward-looking
statements" within the meaning of federal securities laws. Forward-looking
statements include statements concerning our plans, objectives, goals,
strategies, future events, future revenues or performance, capital expenditures,
financing needs, plans or intentions relating to acquisitions, business trends,
and other information that is not historical information. When used in this
report, the words "estimates," "expects," "anticipates," "forecasts," "plans,"
"intends," "believes" and variations of such words or similar expressions are
intended to identify forward-looking statements. We may also make additional
forward-looking statements from time to time. All such subsequent
forward-looking statements, whether written or oral, by us or on our behalf, are
also expressly qualified by these cautionary statements.
All forward-looking statements, including, without limitation,
management's examination of historical operating trends, are based upon our
current expectations and various assumptions. Our expectations, beliefs and
projections are expressed in good faith and we believe there is a reasonable
basis for them. But, there can be no assurance that management's expectations,
beliefs and projections will result or be achieved. All forward-looking
statements apply only as of the date made. We undertake no obligation to
publicly update or revise forward-looking statements which may be made to
reflect events or circumstances after the date made or to reflect the occurrence
of unanticipated events.
There are a number of risks and uncertainties that could cause our
actual results to differ materially from the forward-looking statements
contained in or contemplated by this report. The following risks and
uncertainties, together with those discussed in our Registration Statement on
Form S-4 (file no. 333-86532), as amended, which was declared effective by the
Securities and Exchange Commission on April 25, 2002, are among the factors that
could cause our actual results to differ materially from the forward-looking
statements. There may be other factors, including those discussed elsewhere in
this report, that may cause our actual results to differ materially from the
forward-looking statements. Any forward-looking statements should be considered
in light of these factors.
Substantial Leverage
We are highly leveraged, which means that we have a large amount of
indebtedness relative to our stockholders' deficit. We are highly leveraged
particularly in comparison to some of our competitors. Our high degree of
leverage may materially limit or impair our ability to obtain additional
financing in the future for working capital, capital expenditures, product
development, debt service requirements, acquisitions and general corporate or
other purposes. In addition, a substantial portion of our cash flows from
operations must be dedicated to the payment of principal and interest on our
indebtedness, and is not available for other purposes, including our operations,
capital expenditures and future business opportunities. Certain of our
borrowings, including borrowings under our credit facilities, are at variable
rates of interest, exposing us to the risk of increased interest rates. Our
leveraged position and the covenants contained in our debt instruments may also
limit our flexibility to adjust to changing market conditions and limit our
ability to withstand competitive pressures, thus putting us at a competitive
disadvantage. We may be vulnerable in a downturn in general economic conditions
or in our business or be unable to carry out capital spending that is important
to our growth and productivity improvement programs.
Ability to Service Indebtedness
Our estimated annual debt service in 2003 is approximately $90.2
million, consisting of $3.9 million of scheduled mandatory principal payments,
$10.0 million of voluntary principal payments as required by our March 24, 2003
amendment to our credit facilities and approximately $76.3 million of interest
payments.
Our ability to make scheduled payments or to refinance our debt
obligations depends on our financial and operating performance, which is subject
to prevailing economic and competitive conditions and to certain financial,
business and other factors
23
beyond our control. These factors include fluctuations in interest rates,
unscheduled plant shutdowns, increased operating costs, raw material and product
prices and regulatory developments. We cannot assure you that we will maintain a
level of cash flows from operating activities sufficient to permit us to pay the
principal, premium, if any, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our
debt service obligations, we may be forced to reduce or delay capital
expenditures, sell assets, seek additional capital or restructure or refinance
our indebtedness. We cannot assure you that any such alternative measures would
be successful or would permit us to meet our scheduled debt service obligations.
In the absence of such operating results and resources, we could face
substantial liquidity problems and might be required to dispose of material
assets or operations to meet our debt service and other obligations. Our credit
facilities and indentures restrict our ability to dispose of assets and use the
proceeds from the disposition. We may not be able to consummate those
dispositions or to obtain the proceeds which we could realize from them, and
these proceeds may not be adequate to meet any debt service obligations then
due.
Interest Rate Increases
Certain of our borrowings, including borrowings under our credit
facilities, are at variable rates of interest and expose us to interest rate
risk. If interest rates increase, our debt service obligations on the variable
rate indebtedness would increase even though the amount borrowed remained the
same, and our net income would decrease. An increase of 1.0% in the interest
rates payable on our variable rate indebtedness would increase our 2003
estimated annual debt service requirements by approximately $2.2 million, after
accounting for the effect of our interest rate hedge agreement. Accordingly, an
increase in interest rates from current levels could cause our annual debt
service obligations to increase significantly.
Default on Obligations
If we are unable to generate sufficient cash flow and are otherwise
unable to obtain funds necessary to meet required payments of principal,
premium, if any, and interest on our indebtedness, or if we otherwise fail to
comply with the various covenants, including financial and operating covenants,
in the instruments governing our indebtedness (including covenants in our
indentures and credit facilities), we could be in default under the terms of the
agreements governing such indebtedness, including our indentures and credit
facilities. In the event of such default, the holders of such indebtedness could
elect to declare all the funds borrowed thereunder to be due and payable,
together with accrued and unpaid interest, the lenders under the credit
facilities could elect to terminate their commitments thereunder, cease making
further loans and institute foreclosure proceedings against our assets, and we
could be forced into bankruptcy or liquidation. For the third quarter ended
September 30, 2000, we entered into an amendment to our credit facilities to
avoid being in default under our leverage ratio covenant. Effective April 2,
2002, we entered into an amendment to our credit facilities which, among other
changes, further revised our leverage ratio financial covenant. Effective
September 30, 2002, we entered into an amendment to our credit facilities which,
among other changes, further revised our leverage ratio financial covenant.
Effective March 24, 2003, we entered into another amendment to our credit
facilities, which further adjusted the leverage and interest coverage ratios,
required us to issue $10 million of equity securities and use the proceeds to
reduce our term debt and required us to obtain a commitment for the purchase of
up to $25 million of additional equity securities to the extent necessary to
enable us to comply with our financial covenants at the end of any calendar
quarter or fiscal year ending on or before December 31, 2004. If our operating
performance declines, we may, in the future, need to obtain waivers from the
required lenders under our credit facilities to avoid being in default. If we
breach our covenants under the credit facilities and seek a waiver, we may not
be able to obtain a waiver from the required lenders. If this occurs, we would
be in default under the credit facilities and the lenders could exercise their
rights, as described above, and we could be forced into bankruptcy or
liquidation.
Exposure to Fluctuations in Resin Prices and Dependence on Resin
Supplies
We use large quantities of polyethylene, PVC, polypropylene and other
resins in manufacturing our products. For the year ended December 31, 2002,
resin costs comprised approximately 62% of our total manufacturing costs.
Significant increases in the price of resins would increase our costs, reduce
our operating margins and impair our ability to service our debt unless we were
able to pass all of the increase on to our customers. The price of resins is a
function of, among other things, manufacturing capacity, demand, and the price
of crude oil and natural gas feedstocks. Since the resins used by us are derived
from petroleum and natural gas, the instability in the world markets for
petroleum and natural gas could adversely affect the prices of our raw materials
and their general availability. We may not be able to pass such increased costs
on to customers. In addition, we rely on certain key suppliers of resin for most
of our resin supply. Some of this resin has characteristics proprietary to the
supplier. The loss of a key source of supply, our inability to obtain resin with
desired proprietary characteristics, or a delay in shipments could adversely
affect our revenues and profitability and force us to purchase resin in the open
market at higher prices. We may not be able to make such open market purchases
at prices that would allow us to remain competitive.
We are currently experiencing a period of extreme uncertainty with
respect to resin supplies and prices. High crude oil and natural gas pricing,
resulting in part from harsh winter weather conditions in the eastern United
States and uncertainties regarding the situation with Iraq, have had a
significant impact on the price and supply of resins. Many major suppliers of
resin have announced price increases to cover their increases in feedstock
costs. While the prices of our products generally fluctuate with the price of
resins,
24
certain of our customers have contracts that limit our ability to pass the full
cost of higher resin pricing through to our customers immediately. Further,
competitive conditions in our industry may make it difficult for us to
sufficiently increase our selling prices for all customers to reflect the full
impact of increases in raw material costs. If this period of high resin pricing
continues, we may be unable to pass on the entire effect of these price
increases to our customers, which would adversely affect our profitability and
working capital. In addition, further increases in crude oil and natural gas
prices could make it difficult for us to obtain an adequate supply of resin from
manufacturers affected by these factors.
Competition
The markets in which we operate are highly competitive on the basis of
service, product quality, product innovation and price. Small and medium-sized
manufacturers that compete primarily in regional markets service a large portion
of the film and flexible packaging market, and there are relatively few large
national manufacturers. In addition to competition from many smaller
competitors, we face strong competition from a number of large film and flexible
packaging companies. Some of our competitors are substantially larger, are more
diversified, and have greater resources than we have, and, therefore, may have
certain competitive advantages.
Customer Relationships
We are dependent upon a limited number of large customers with
substantial purchasing power for a significant percentage of our sales. No
single customer accounted for more than 10% of our net sales for the year ended
December 31, 2002. Several of our largest customers satisfy some of their film
requirements by manufacturing film themselves. The loss of one or more major
customers, or a material reduction in sales to these customers as a result of
competition from other film manufacturers, insourcing of film requirements or
other factors, would have a material adverse effect on our results of operations
and on our ability to service our indebtedness.
Risks Associated with Intellectual Property Rights
We rely on patents, trademarks and licenses to protect our intellectual
property, which is significant to our business. We also rely on unpatented
proprietary know-how, continuing technological innovation and other trade
secrets to develop and maintain our competitive position. We routinely seek to
protect our patents, trademarks and other intellectual property, but our
precautions may not provide meaningful protection against competitors or protect
the value of our trademarks. In addition to our own patents, trade secrets and
proprietary know-how, we license from third parties the right to use some of
their intellectual property. We routinely enter into confidentiality agreements
to protect our trade secrets and proprietary know-how. However, these agreements
may be breached, and may not provide meaningful protection or may not contain
adequate remedies for us if they are breached.
Risks Associated with Future Acquisitions
We have completed a number of acquisitions, and subject to the
constraints of our credit facilities, we expect to continue to make acquisitions
as opportunities arise. There can be no assurance that our efforts to integrate
any businesses acquired in the future will result in increased profits.
Difficulties encountered in any transition and integration process for newly
acquired companies could cause revenues to decrease, operating costs to increase
or reduce cash flows, which in turn could adversely affect our ability to
service our indebtedness.
Risks Associated with International Operations
We operate facilities and sell products in several countries outside
the United States. Our operations outside the United States include plants and
sales offices in Mexico, Canada, Germany, Australia and Brazil. As a result, we
are subject to risks associated with selling and operating in foreign countries.
These risks include devaluations and fluctuations in currency exchange rates,
unstable political conditions, imposition of limitations on conversion of
foreign currencies into U.S. dollars and remittance of dividends and other
payments by foreign subsidiaries. The imposition or increase of withholding and
other taxes on remittances and other payments by foreign subsidiaries,
hyperinflation in certain foreign countries, and restrictions on investments and
other restrictions by foreign governments could also have a negative effect on
our business and profitability.
Risks Associated with Labor Relations
Although we consider our current relations with our employees to be
good, if major work disruptions were to occur, our business could be adversely
affected by, for instance, a loss of revenues, increased costs or reduced
profitability. As of February 28, 2003, we had approximately 3,250 employees, of
which approximately 1,000 employees were subject to a total of 12 collective
bargaining agreements that expire on various dates between February 19, 2004 and
March 7, 2007. We have had one labor strike in the United States in our history,
which occurred at our Chippewa Falls, Wisconsin plant in March 2000 and lasted
approximately two weeks. In October 2001, we entered into a five year agreement
with the union representing the approximately 150 employees at our
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Chippewa Falls, Wisconsin manufacturing plant. We also had a temporary work
stoppage at our Australia facility in 2001 that lasted approximately 30 days.
Risks Associated with Environmental Matters
Complying with existing and future environmental laws and regulations
that affect our business could impose material costs and liabilities on us. Our
manufacturing operations are subject to certain federal, state, local and
foreign laws, regulations, rules and ordinances relating to pollution, the
protection of the environment and the generation, storage, handling,
transportation, treatment, disposal and remediation of hazardous substances and
waste materials. In the ordinary course of business, we are subject to periodic
environmental inspections and monitoring by governmental enforcement
authorities. We could incur substantial costs, including fines and civil or
criminal sanctions, as a result of actual or alleged violations of environmental
laws. In addition, our production facilities require environmental permits that
are subject to revocation, modification and renewal. Violations of environmental
permits can also result in substantial fines and civil or criminal sanctions. We
believe we are in substantial compliance with applicable environmental laws and
environmental permits, and we perform periodic audits to monitor compliance. The
ultimate costs under environmental laws and the timing of such costs, however,
are difficult to predict and potentially significant expenditures could be
required in order to comply with environmental laws that may be adopted or
imposed in the future.
Other Uncertainties
In addition to the factors described above, we face a number of
uncertainties, including: (1) general economic and business conditions,
particularly a continuing economic downturn; (2) industry trends; (3) changes in
demand for our products; (4) potential legislation and regulatory changes; (5)
new technologies; (6) changes in distribution channels or competitive conditions
in the markets or countries where we operate; and (7) changes in our business
strategy or development plans.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various interest rate and resin price risks that
arise in the normal course of business. We enter into interest rate collar and
swap agreements to manage interest rate market risks and commodity collar
agreements to manage resin market risks. However, significant increases in
interest rates or the price of resins could adversely affect our operating
margins, results of operations and ability to service our indebtedness.
We finance our operations with borrowings comprised primarily of
variable rate indebtedness. Market risk arises from changes in interest rates.
An increase of 1% in interest rates payable on our variable rate indebtedness
would increase our annual interest expense by approximately $2.2 million. We
have six interest rate derivative agreements with financial institutions that
would reduce the impact of changes in interest rates on our floating-rate,
long-term debt. These agreements include interest rate cap agreements, interest
rate swap agreements and an interest rate collar agreement. These agreements
have a notional amount of $358.0 million and expire from December 31, 2003
through January 18, 2005. See Note 6 to the consolidated financial statements.
Our raw material costs are comprised primarily of resins. Our resin
costs comprised approximately 62% of our total manufacturing costs in 2002.
Market risk arises from changes in resin costs. Although the average selling
prices of our products generally increase or decrease as the cost of resins
increases or decreases, the impact of a change in resin prices is more
immediately reflected in our raw material costs than in our selling prices. From
time to time we enter into commodity collar agreements to manage resin market
risks. At December 31, 2002, we did not have any commodity collar agreements
outstanding.
Fluctuations in exchange rates may also adversely affect our financial
results. The functional currencies for our foreign subsidiaries are the local
currency. As a result, certain of our assets and liabilities, including certain
bank accounts, accounts receivable and accounts payable, exist in non U.S.
dollar-denominated currencies, which are sensitive to foreign currency exchange
rate fluctuations.
We enter into certain transactions denominated in foreign currencies
but, because of the relatively small size of each individual currency exposure,
we do not employ hedging techniques designed to mitigate foreign currency
exposures. Gains and losses from these transactions as of December 31, 2002 have
been immaterial and are reflected in the results of operations.
We are exposed to credit losses in the event of nonperformance by the
counterparty to a financial instrument to which we are a party. We anticipate,
however, that each of the counterparties to the financial instruments to which
we are a party will be able to fully satisfy its obligations under the contract.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data required by this Item 8 are
set forth at the pages indicated in Item 15(a) below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Effective as of May 6, 2002, we dismissed Arthur Andersen LLP as our
independent accountant. Effective as of May 6, 2002, we engaged Ernst & Young
LLP as our independent accountant. The information required by Item 304 of
Regulation S-K was previously reported in our Current Report on Form 8-K filed
on May 8, 2002.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information about our executive officers and directors is
presented in the table below. Pursuant to the stockholders' agreement among us,
the holders of our common stock and the holders of warrants to purchase our
common stock, our board of directors currently consists of seven members, four
of whom are designated by our institutional common stockholders and
warrantholders, two of whom are designated by the The Christena Karen H. Durham
Trust, or the Trust, and one of whom is appointed by our board of directors and
must be a member of our senior management.
Name Age Position
- ---- --- --------
Jack E. Knott II................ 48 Chief Executive Officer and Director
Brian E. Johnson................ 47 Executive Vice President and Chief Financial Officer
Stanley B. Bikulege............. 39 Executive Vice President and President, Pliant U.S.
Elise H. Scroggs................ 41 Executive Vice President and President, Pliant International
Len Azzaro...................... 53 Executive Vice President and President, Flexible Packaging
Douglas W. Bengtson............. 55 Executive Vice President, Procurement and Strategic Sourcing
Ronald A. Artzer................ 59 Senior Vice President and President, Pliant Solutions Corporation
Timothy J. Walsh ............... 39 Chairman of the Board and Director
Richard P. Durham............... 38 Director
Donald J. Hofmann, Jr........... 45 Director
John M. B. O'Connor............. 48 Director
Edward A. Lapekas............... 59 Director
Albert (Pat) MacMillan.......... 59 Director
Jack E. Knott II became our Chief Executive Officer in June 2002 and
was our President from March 2001 through June 2002. Mr. Knott also served as
our Chief Operating Officer from September 1, 1997 through June 2002. From
September 1997 through March 2001, Mr. Knott also served as an Executive Vice
President. Prior to joining us, Mr. Knott was a member of the board of directors
of Rexene Corporation and held the position of Executive Vice President of
Rexene Corporation and President of Rexene Products. Mr. Knott served in various
capacities at Rexene from 1985 to 1997, including Executive Vice President and
President, Rexene Products, and Executive Vice President and President of CT
Film, a division of Rexene Corporation. Prior to joining Rexene Corporation, Mr.
Knott worked for American National Can. Mr. Knott received a B.S. degree in
Chemical Engineering and an M.B.A. degree from the University of Wisconsin. Mr.
Knott is currently chairman of the Flexible Packaging Association. Pursuant to
the stockholders' agreement, Mr. Knott is the board of directors' appointee to
the board from our senior management.
Brian E. Johnson became our Executive Vice President and Chief
Financial Officer on July 17, 2001. Mr. Johnson joined Pliant in April 2001 as
Senior Vice President and Chief Financial Officer. Prior to joining us, Mr.
Johnson was Vice President and Chief Financial Officer of Geneer Corporation.
His former positions include Executive Vice President at Lawson Mardon Packaging
and Vice President and General Manager of Sengewald USA Inc. Mr. Johnson
received a B.S. degree in Finance from the University of Illinois, and an M.B.A.
degree from the Kellogg School of Management at Northwestern University.
Stanley B. Bikulege became Executive Vice President and President,
Pliant U.S. in June 2002. Mr. Bikulege served as Executive Vice President
Operations from July 2001 through June 2002. Mr. Bikulege's prior positions with
Pliant include Senior Vice President and General Manager, Industrial Films
Division; Vice President, Stretch Films; General Manager-Castflex; Managing
Director-Europe; Managing Director PVC Films-Europe; Director of Manufacturing;
and Plant Manager. Prior to joining us in 1992, Mr. Bikulege held numerous
positions in Goodyear Tire and Rubber Company's Films Division. Mr. Bikulege
received a B.S. degree in Chemical Engineering from Youngstown State University
and an M.B.A. degree from Georgia State University.
Elise H. Scroggs became Executive Vice President and President, Pliant
International in June 2002. Ms. Scroggs served as Senior Vice President of
International Operations from December 2001 through June 2002. Ms. Scroggs'
prior positions with Pliant include numerous management positions overseeing
transportation, customer service, purchasing, operations and administration.
28
Prior to joining us in 1997, Ms. Scroggs held sales management positions with
Rexene Corporation. Ms. Scroggs received a B.Sc. degree in Textile Chemistry
from Auburn University.
Len Azzaro became Executive Vice President and President, Flexible
Packaging on February 3, 2003. Prior to joining Pliant, Mr. Azzaro spent 30
years in global sales, marketing and general management at Dow Chemical. Most
recently he served as leader of Dow's global polyethylene business. Mr. Azzaro
holds a B.S. degree from Youngstown State and an M.B.A. degree from the Kellogg
School of Management at Northwestern University.
Douglas W. Bengtson became our Executive Vice President, Procurement
and Strategic Sourcing in June 2002. Mr. Bengtson served as Executive Vice
President of Sales from July 2001 through June 2002. Mr. Bengtson joined Pliant
in September 1997 as Senior Vice President and General Manager, Performance
Films Division. Prior to joining us, Mr. Bengtson was Vice President of Sales
and Marketing for Food Packaging at American National Can. His former positions
include Vice President, Sales and Marketing at CT Film, a division of Rexene
Corporation, and Vice President, Sales and Marketing, of the Polymer division of
Rexene Corporation. Mr. Bengtson received a B.S. degree in Business/Marketing
from Colorado State University.
Ronald A. Artzer became President of Pliant Solutions in June 2002
following Pliant's acquisition of Decora Industries, Inc. and Decora
Incorporated. Mr. Artzer was a director of Decora Industries, from May 1994
through May 2002, and an officer of Decora from February 2000 through May 2002.
Prior to joining Decora, Mr. Artzer was involved as a co-founder in a privately
held marketing communication and sampling company. From 1994 to1997, he was the
President and Chief Executive Officer of SOPAKCO Foods, Inc., a privately held
processor of shelf-stabilized food for the U.S. government, the foodservice
industry and the food store market. Mr. Artzer was President and Chief Executive
Officer of Design Foods, a $200 million division of Sara Lee Corporation, from
1991 to 1994. Prior to joining Sara Lee, Mr. Artzer held executive positions
with First Brands Corporation, as President of STP Consumer Services, Carson
Pirie Scott & Company, as President of their restaurant division, Sambo's
Restaurants, Inc., as Senior Vice President, Marketing and Restaurant
Development, and Pepsi Cola Company, as Vice President of Sales, Foodservice
Division. Mr. Artzer graduated from Regis University with a B.S. degree in
Business Administration.
Timothy J. Walsh became one of our directors on May 31, 2000 and the
chairman of the board of directors in June 2002. Mr. Walsh is an executive
officer of JPMP Capital Corp., which is the general partner of JPMP Master Fund
Manager, L.P., which is the general partner of J.P. Morgan Partners (BHCA),
L.P., which is a principal stockholder of the Company. Since 1999, Mr. Walsh has
been a Partner of J.P. Morgan Partners, LLC (formerly, Chase Capital Partners),
a global private equity organization with approximately $11.7 billion of direct
private equity under management. J.P. Morgan Partners, LLC provides equity
capital for middle market buyouts, growth equity and venture capital. From 1993
to 1999, Mr. Walsh held various positions with J.P. Morgan Partners, LLC in
Europe and North America. Prior to 1993, he was a Vice President of J.P. Morgan
Chase & Co. (formerly, The Chase Manhattan Corporation). Mr. Walsh is also a
director of Better Minerals & Aggregates Company, Klockner Pentaplast S.A. and
Metokote Corporation. Mr. Walsh received a B.S. degree from Trinity College and
an M.B.A. degree from the University of Chicago. Pursuant to the stockholders'
agreement, Mr. Walsh is one of the designees to the board by our institutional
common stockholders and warrantholders.
Richard P. Durham became one of our directors on May 31, 2000. Mr.
Durham also served as our President, from March 1997 through March 2001, and as
our Chief Executive Officer, from March 1997 through June 2002. He was also the
chairman of our board of directors from May 31, 2000 to June 2002. Mr. Durham
has been with various Huntsman Corporation affiliates since 1987. Prior to
becoming our President, Mr. Durham served as Co-President and Chief Financial
Officer of Huntsman Corporation. Mr. Durham is also a director of Huntsman
Corporation. Mr. Durham is a graduate of The Wharton School of Business at the
University of Pennsylvania. Pursuant to the stockholders' agreement, Mr. Durham
is one of the Trust's designees to the board.
Donald J. Hofmann, Jr. became one of our directors on May 31, 2000.
Since January 2003, Mr. Hofmann has been a Senior Advisor of J.P. Morgan
Partners, LLC (formerly, Chase Capital Partners), a global private equity
organization with approximately $11.7 billion of direct private equity under
management. J.P. Morgan Partners, LLC provides equity capital for middle market
buyouts, growth equity and venture capital. From 1992 until January 2003, Mr.
Hofmann was a partner of J.P. Morgan Partners, LLC. Mr. Hofmann is also a
director of Advanced Accessory Systems, LLC. Mr. Hofmann received a B.A. degree
from Hofstra University and an M.B.A. degree from the Harvard Business School.
Pursuant to the stockholders' agreement, Mr. Hofmann is one of the designees to
the board by our institutional common stockholders and warrantholders.
John M. B. O'Connor became one of our directors on May 31, 2000. Mr.
O'Connor is an executive officer of JPMP Capital Corp., which is the general
partner of JPMP Master Fund Manager, L.P., which is the general partner of J.P.
Morgan Partners (BHCA), L.P., which is a principal stockholder of the Company.
Mr. O'Connor joined J.P. Morgan Partners, LLC (formerly, Chase Capital Partners)
in 1995 and is an Executive Partner. J.P. Morgan Partners, LLC is a global
private equity organization with approximately $11.7 billion of direct private
equity under management. J.P. Morgan Partners, LLC provides equity capital for
middle market buyouts, growth equity and venture capital. From 1993 to 1999, Mr.
O'Connor held various positions with J.P. Morgan Partners, LLC in Europe and
North America. Mr. O'Connor is also on the Board of TK Aluminum Ltd.,
AdvisorTech Corporation, FHC Value Options. Mr. O'Connor is an appointee of New
York City's Mayor Bloomberg to the Board of the Center for Animal Care and
Control, a
29
Director of The Fund for the City of New York and a Director of the American
Society for the Prevention of Cruelty to Animals ("ASPCA"). Mr. O'Connor
received his B.A. degree from Tulane University and an M.B.A. degree from the
Columbia University Graduate School of Business. Pursuant to the stockholders'
agreement, Mr. O'Connor is one of the designees to the board by our
institutional common stockholders and warrantholders.
Edward A. Lapekas became one of our directors on December 19, 2001.
Since November 2002, Mr. Lapekas has served as Chairman and Chief Executive
Officer of NEXPAK, a media packaging company. Prior to that, Mr. Lapekas was
Executive Chairman of Packtion Corporation, an e-commerce venture, from October
2000 until June 2001. From May 1996 until July 2000, Mr. Lapekas was employed by
American National Can Group, Inc., last serving as Chairman and Chief Executive
officer. Prior to that, Mr. Lapekas served as Deputy Chairman and Chief
Operating Officer of Schmalbach-Lubeca AG. From 1971 until 1991, Mr. Lapekas was
employed by Continental Can Company, where he served in various strategy,
planning, operating and marketing capacities. Mr. Lapekas is also a director of
Silgan Corp. He received a B.A. degree from Albion College and an M.B.A. degree
from Wayne State University. Pursuant to the stockholders' agreement, Mr.
Lapekas is one of the Trust's designees to the board.
Albert (Pat) MacMillan became one of our directors on December 19,
2001. Mr. MacMillan is the founder and CEO of Team Resources, a consulting firm
with offices in the United States, Venezuela, Peru, Chile, and Mexico. Founded
in 1980, Team Resources provides client services in the areas of strategy,
building team-based organizations, and designing leadership development
strategies. He also serves on the Board of Directors for Unum/Provident and the
Metokote Corporation, as well as several foundations and non-profit
organizations. He received a B.A. degree in Business and an M.B.A. degree from
the University of Washington. Pursuant to the stockholders' agreement, Mr.
MacMillan is one of the designees to the board by our institutional common
stockholders and warrantholders.
30
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table sets forth information about
compensation earned in the fiscal years ended December 31, 2002, 2001 and 2000
by each person serving as chief executive officer during 2002 and the five other
most highly compensated executive officers of Pliant (as of the end of the last
fiscal year) (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
Annual Compensation(1) Long Term Compensation(2)
----------------------- --------------------------
Securities
Underlying LTIP All Other
Salary Bonus Options/SARs Payouts Compensation
Name And Principal Position Year ($) ($) (#) ($) ($)
- --------------------------- ------ --------- --------- ------------ ---------- ------------
Jack E. Knott II..................................... 2002 375,000 163,659 -- -- 5,700(3)
Chief Executive Officer 2001 337,500 163,428 -- -- 5,100(4)
2000 316,667 104,274 -- -- 1,037,271(5)
Richard P. Durham.................................... 2002 250,000 185,800 -- -- 270,708(6)
Chairman and Chief Executive Officer 2001 500,000 381,024 -- -- 5,100(4)
Until June 10, 2002(12) 2000 500,000 245,568 -- -- 136,350(7)
Brian E. Johnson..................................... 2002 265,200 41,928 -- -- 5,700(3)
Executive Vice President 2001 179,333 44,370 5,000 -- 5,100(4)
And Chief Financial Officer(13) 2000 -- -- -- -- --
Stanley B. Bikulege.................................. 2002 247,083 47,093 2,720 -- 5,700(3)
Executive Vice President, President, Pliant USA 2001 203,125 66,245 250 -- 56,931(8)
2000 182,250 60,304 1,030 298,521 52,600(9)
Elise H. Scroggs..................................... 2002 205,417 32,972 2,200 -- 5,700(3)
Executive Vice President, President, 2001 151,917 46,207 425 -- 3,184(10)
Pliant International 2000 115,916 15,984 375 62,394 35,100(11)
Douglas W. Bengtson.................................. 2002 222,500 35,147 720 -- 5,700(3)
Executive Vice President, 2001 204,583 66,245 250 -- 5,100(4)
Procurement and Strategic Sourcing 2000 190,000 121,293 1,030 517,122 52,600(9)
Ronald A. Artzer..................................... 2002 223,846 39,216 1,500 - 5,700(3)
Senior Vice President, President, 2001 -- -- -- - --
Pliant Solutions Corporation(14) 2000 -- -- -- - --
- ---------------------
(1) Perquisites and other personal benefits, securities or property, in the
aggregate, are less than either $50,000 or 10% of the total annual salary
and bonus reported for the applicable Named Executive Officer.
(2) At December 31, 2002, the number of shares of restricted stock held by
Messrs. Durham and Knott were 4,833 and 7,750, respectively. The value of
such shares of restricted stock at December 31, 2002 has not been reported
as compensation because it did not exceed the consideration paid by the
applicable Named Executive Officer.
(3) Consists of $5,700 for employer's 401(k) contributions.
(4) Consists of $5,100 for employer's 401(k) contributions.
(5) Consists of (a) $836,785 gross-up payment of taxes payable for the exercise
of options in connection with the recapitalization, (b) relocation expense
reimbursement of $114,136, (c) a $81,250 retention bonus and (d) employer's
401(k) contributions of $5,100.
(6) Consists of (a) a $250,008 severance payment, (b) a $15,000 director's fee
for the period subsequent to Mr. Durham's resignation as Chief Executive
Officer and (c) $5,700 for employer's 401(k) contributions.
(7) Consists of (a) a $125,000 retention bonus, (b) employer's 401(k)
contributions of $5,100 and (c) a $6,250 director's fee.
(8) Consists of employer's 401(k) contributions of $5,100 and relocation
expense reimbursement of $51,831.
(9) Consists of a $47,500 retention bonus and employer's 401(k) contributions
of $5,100.
(10) Consists of $3,184 for employer's 401(k) contributions.
(11) Consists of (a) a $30,000 retention bonus and (b) employer's 401(k)
contributions of $5,100.
(12) Mr. Durham resigned as Chairman and Chief Executive Officer on June 10,
2002 and Jack E. Knott II was appointed Chief Executive Officer.
31
(13) Mr. Johnson joined Pliant in April 2001.
(14) Mr. Artzer joined Pliant in May 2002.
Stock Options and Restricted Stock
Pursuant to the recapitalization, options covering a total of 8,902
common shares were rolled over from a previous plan. In addition, we adopted our
2000 Stock Incentive Plan. The 2000 plan became effective as of the consummation
of the recapitalization and authorizes grants of nonqualified stock options or
restricted stock to employees, officers, directors, managers or advisors of
Pliant or any of its subsidiaries. As amended, a total of 65,600 shares are
authorized for issuance under the 2000 plan. As of December 31, 2002, we had
outstanding grants of restricted stock covering 13,208 shares of common stock
and options to acquire 42,440 shares of common stock under the 2000 plan. Shares
of restricted stock that are forfeited, and unissued shares reserved for
issuance pursuant to options that terminate, expire or are canceled without
having been fully exercised, become available to be issued pursuant to new
grants under the 2000 Plan.
In August 2002, we adopted our 2002 Stock Incentive Plan. The 2002 plan
authorizes grants of incentive stock options, nonqualified stock options and
stock bonuses, as well as the sale of shares of common stock, to our employees,
officers, directors and consultants of Pliant or any of its subsidiaries. A
total of 4,793 shares are authorized for issuance under the 2002 plan. As of
December 31, 2002, no options or shares had been granted or sold under the 2002
plan.
The following table provides information related to options to purchase
shares of our common stock granted to the Named Executive Officers during the
last fiscal year pursuant to the 2000 Plan. We have never granted any
freestanding stock appreciation rights.
Option/SAR Grants in Last Fiscal Year
Potential Realizable
Value at Assumed
Individual Grants Annual Rates of
Stock Price
Appreciation for
Option Terms (1)(3)(4)
- ------------------------------------------------------------------------------------- --------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price(1) Expiration
Name Granted (#) Fiscal Year ($/Sh) Date(2) 5%($) 10%($)
- ---- ----------- ----------- ------------- ---------- ---------- ----------
Stanley B. Bikulege 1,720 8% $483.13 5/31/12 522,601 1,324,37
1,000 5% $483.13 11/25/12 303,838 769,985
Elise H. Scroggs 1,200 6% $483.13 5/31/12 364,605 923,982
1,000 5% $483.13 11/25/12 303,838 769,985
Ronald A. Artzer 500 2% $483.13 5/31/12 151,919 384,992
1,000 5% $483.13 11/1/12 303,838 769,985
Douglas W. Bengtson 720 4% $483.13 5/31/12 218,763 554,389
- --------------------
(1) The exercise price was greater than or equal to fair market value on date
of grant. There is no established trading market for our common stock
and, therefore, the aggregate market value of our shares cannot be
determined by reference to recent sales or bid and asked prices. The fair
market value was assumed to be equal to the price per share paid in the
recapitalization.
(2) Subject to earlier termination under certain circumstances.
(3) Potential realizable value is calculated based on an assumption that the
price of our common stock appreciates at the annual rates shown (5% and
10%), compounded annually, from the date of grant of the option until the
end of the option term. The value is net of the exercise price but is not
adjusted for the taxes that would be due upon exercise. The 5% and 10%
assumed rates of appreciation are mandated by the rules of the Securities
and Exchange Commission and do not represent our estimate or projection
of future stock values. Actual gains, if any, upon future exercise of any
of these options will depend upon the actual value of our common stock.
(4) All of the options granted to the Named Executive Officers during 2002
are subject to vesting requirements. All of the options granted to each
Named Executive Officer vest in increments upon the achievement of a
specified market value of equity applicable to such increment. Such
market value of equity is determined pursuant to a formula based upon our
adjusted earnings.
32
The following table provides information as to the options held by each
of the Named Executive Officers at the end of 2002. There is no established
trading market for our common stock and, therefore, the aggregate market value
of our shares cannot be determined by reference to recent sales or bid and asked
prices. The value of unexercised in-the-money options was assumed to be equal to
the price per share paid in the recapitalization ($483.13 per share). None of
the Named Executive Officers exercised any options during the last fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Value Of Unexercised
Shares Number Of Securities Underlying In-The-Money Options/SARs At
Acquired On Value Unexercised Options/SARs At FY-End FY-End ($)
Name Exercised Realized (#) Exercisable/Unexercisable Exercisable/Unexercisable
---- --------- -------- ---------------------------------- ----------------------------
Jack E. Knott II -- -- 8,902/0 $ 3,410,623/0
Brian E. Johnson -- -- 1,000/4,000 0/0
Stanley B. Bikulege -- -- 393/3,607 0/0
Elise H. Scroggs -- -- 210/2,790 0/0
Ronald A. Artzer -- -- 0/1,500 0/0
Douglas W. Bengtson -- -- 393/1,607 0/0
The options or restricted common stock granted prior to January 1, 2001
pursuant to the 2000 plan, as amended, provide for vesting as follows: (1)
one-sixth are "time-vested" options or shares, which vested on January 1, 2001,
so long as the recipient was still our employee on such date, and (2) the
remainder are "performance vested" options or shares, which vest in increments
upon the achievement of performance targets as follows: (a) vesting in full, if
100% or more of the applicable performance target is achieved as of the end of
any calendar quarter during the option term and (b) partial vesting if more than
90% of the applicable performance target is achieved as of the end of any
calendar quarter during the option term. Moreover, all performance vested
options or shares not previously vested in accordance with the preceding
sentence will vest automatically in full on December 31, 2009 so long as the
recipient is still our employee on such date. Options granted pursuant to the
2000 plan subsequent to January 1, 2001 vest similarly, except that all of the
options are "performance vested" options, which vest in increments upon the
achievement of performance targets.
Pension Plans
The following table shows the estimated annual benefits payable under
our tax-qualified defined benefit pension plan in specified final average
earnings and years of service classifications.
Pliant Corporation Pension Plan Table
Years of Benefit Service at Retirement
-----------------------------------------------------------------------------
Final Average Compensation 10 15 20 25 30 35 40
-------------------------- ------- ------- ------- ------- ------- ------- -------
$100,000 $16,000 $24,000 $32,000 $40,000 $48,000 $56,000 $64,000
125,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000
150,000 24,000 36,000 48,000 60,000 72,000 84,000 96,000
175,000 28,000 42,000 56,000 70,000 84,000 98,000 112,000
200,000 32,000 48,000 64,000 80,000 96,000 112,000 128,000
Our current pension plan benefit is based on the following formula:
1.6% of final average compensation multiplied by years of credited service,
minus 1.5% of estimated Social Security benefits multiplied by years of credited
service (with a maximum of 50% of Social Security benefits). Final average
compensation is based on the highest average of three consecutive years of
compensation. In certain circumstances, covered compensation for purposes of the
pension plan includes compensation earned with our former affiliates. The Named
Executive Officers (excluding Ronald A. Artzer) were participants in the pension
plan in 2002. The final average compensation for purposes of the pension plan in
2002 for each of the Named Executive Officers is $200,000, which is the maximum
that can be considered for the 2002 plan year under federal regulations. Federal
regulations also provide that the maximum annual benefit paid from a qualified
defined benefit plan cannot exceed $160,000 as of January 1, 2002. Benefits are
calculated on a straight life annuity basis. The benefit amounts under the
pension plan are offset for Social Security as described above.
33
The number of completed years of credited service as of December 31,
2002 under our pension plan for the Named Executive Officers participating in
the plan were as follows:
Name Years of Credited Service
---- -------------------------
Richard P. Durham(1)................. 17
Jack E. Knott II(1).................. 17
Brian E. Johnson..................... 1
Stanley B. Bikulege.................. 10
Douglas W. Bengtson(2)............... 5
Elise H. Scroggs..................... 9
- ------------------
(1) The years of credited service under the pension plan include 12 years of
service credited with the predecessor to Pliant for Mr. Durham and 12
years of service credited with affiliates of Pliant for Mr. Knott. The
benefit calculation upon retirement under our pension plan is calculated
by multiplying years of credited service by a fraction representing that
part of total credited service for which services were provided to us.
(2) In addition to the 5 years of credited service with Pliant, Mr. Bengtson
has a frozen benefit as a result of his service with Rexene Corporation,
which was purchased by the predecessor to Huntsman Packaging and Pliant.
By agreement, Mr. Bengtson will be provided a pay update on the
calculation of the Rexene formula. This payment is a non-qualified
payment which will be paid out of our general assets as a lump sum.
Employment Agreements
On May 31, 2000, we entered into a five-year employment agreement with
Jack E. Knott II, our Chief Executive Officer. The employment agreement provides
for the payment of a base salary, plus a bonus, at least four weeks paid
vacation per year, participation in our leased car program and participation in
our other employee benefit programs, including our management incentive program,
and include non-disclosure of confidential information provisions and a
non-compete provision for one year following termination of employment with us
(unless termination is due to the term expiring). Mr. Knott agreed in his
employment agreement that any inventions, improvements, technical or software
developments, trademarks, patents and similar information relating to us or our
business, products or services conceived, developed or made by him while
employed by us belong to us. In addition, if Mr. Knott's employment with us
terminates for any reason, we will have the right under the employment agreement
to repurchase the shares of our common stock owned by him at a purchase price
equal to their fair market value. Similarly, we will also be required to
repurchase all of the shares of common stock owned by Mr. Knott at his option if
his employment is terminated because of death, disability, retirement or
resignation for good reason, so long as we are permitted to do so at the time
under the covenants contained in our financing agreements.
We also entered into a five-year employment agreement with Richard P.
Durham, our former Chief Executive Officer, on May 31, 2000. The terms of Mr.
Durham's employment agreement were substantially similar to Mr. Knott's
employment agreement. On February 1, 2001, however, we amended the employment
agreement with Mr. Durham to, among other things, specify the duties he would
perform as our Chairman and Chief Executive Officer and eliminate our right to
repurchase his shares upon termination of employment. We also agreed to
repurchase all of the shares of common stock owned by Mr. Durham at his option
if Mr. Durham's employment with us was terminated without cause. In addition,
pursuant to the employment agreement amendment, we agreed to modify the terms of
Mr. Durham's secured and unsecured notes with us.
On June 10, 2002, we entered into a separation agreement with Richard
P. Durham. As of the date of the separation agreement, Mr. Durham owned 28,289
shares of common stock, 12,083 performance vested shares, 2,417 time vested
shares, warrants to purchase 1,250.48 shares of common stock and 1,232 shares of
preferred stock of Pliant. All of Mr. Durham's time vested shares and 2,416 of
Mr. Durham's performance vested shares had vested as of the date of the
separation agreement. Pursuant to the separation agreement, Mr. Durham agreed to
convert an outstanding promissory note issued as payment for a portion of his
shares into two promissory notes. The first note (the "Vested Secured Note"), in
the principal amount of $2,430,798, relates to Mr. Durham's time vested shares
and the vested portion of his performance vested shares. The second note (the
"Non-Vested Secured Note"), in the principal amount of $4,862,099, related to
the 9,667 performance vested shares which had not vested as of the date of the
separation agreement. In addition to these notes, Mr. Durham had an additional
outstanding promissory note (the "Additional Note"), with a principal amount of
$1,637,974, relating to a portion of the shares of common stock held by Mr.
Durham. In accordance with the separation agreement, we repurchased and canceled
Mr. Durham's 9,667 unvested shares in exchange for cancellation of the
Non-Vested Secured Note on October 3, 2002.
The separation agreement preserved a put option established by Mr.
Durham's employment agreement with respect to his shares. For purposes of this
put option, the separation agreement provides that the price per share to be
paid by us is $483.13 with respect to common stock, $483.13 less any exercise
price with respect to warrants, and the liquidation preference with respect to
preferred stock. On July 9, 2002, Mr. Durham exercised his put option with
respect to 28,289 shares of common stock, 1,232 shares
34
of preferred stock and warrants to purchase 1,250.48 shares of common stock. Mr.
Durham's put option is subject to any financing or other restrictive covenants
to which we are subject at the time of the proposed repurchase. Restrictive
covenants under our credit facilities limit the number of shares we can
currently repurchase from Mr. Durham. On October 3, 2002, as permitted by the
covenants contained in our credit facilities, we purchased 8,204 shares from Mr.
Durham for a purchase price of $3,963,599 less the outstanding amount of the
Additional Note, which was cancelled. In December 2002 we purchased an
additional 1,885 shares of common stock from Mr. Durham for an aggregate
purchase price of approximately $910,700. As of December 31, 2002, our total
remaining purchase obligation to Mr. Durham was approximately $10,623,097,
excluding accrued preferred dividends. We are limited to a maximum purchase from
Mr. Durham of $5,000,000 of shares in 2003, which purchase may only be made if
we meet certain leverage ratios. In connection with Mr. Durham's resignation as
Chairman and Chief Executive Officer, Jack E. Knott II was appointed our Chief
Executive Officer. Mr. Timothy J. Walsh, a director since May 31, 2000, and a
Partner of J.P. Morgan Partners, LLC, was appointed as the non-executive
Chairman of the Board of Directors. Mr. Durham continues to serve as a member of
our Board of Directors as a designee of The Christena Karen H. Durham Trust,
which holds 158,917 shares, or approximately 27.5%, of our outstanding common
stock.
On March 30, 2001, we entered into a five year employment agreement
with Brian E. Johnson, our Executive Vice President and Chief Financial Officer.
The employment agreement provides for the payment of a base salary, a grant of a
stock option to purchase 5,000 shares of our common stock, at least three weeks
paid vacation per year, participation in our leased car program, payment of Mr.
Johnson's present country club membership dues and participation in our other
employee benefit programs, including our management incentive program, and
includes non-disclosure of confidential information provisions and a non-compete
provision for one year following termination of employment with us (unless
termination is due to the term expiring). Mr. Johnson has agreed in his
employment agreement that any inventions, improvements, technical or software
developments, trademarks, patents and similar information relating to us or our
business, products or services conceived, developed or made by such executive
officer while employed by us belong to us. If Mr. Johnson's employment is
terminated without cause or he resigns for good reason, he will be entitled to
receive severance payments and continue to participate in our medical and dental
plans for one year. In addition, if Mr. Johnson's employment with us terminates
for any reason, we will have the right under the employment agreement to
repurchase the shares of our common stock owned by him at a purchase price equal
to their fair market value. Similarly, we will also be required to repurchase
all of the shares of common stock owned by Mr. Johnson at his option if his
employment is terminated because of death, disability, retirement or resignation
for good reason, so long as we are permitted to do so at the time under the
covenants contained in our financing agreements.
Committees of the Board of Directors
Our board of directors has an executive committee, a compensation
committee, an audit committee and an environmental health and safety committee.
The executive committee is able to exercise all of the authority of the board of
directors to the maximum extent permitted by Utah law and our charter and
bylaws. The members of the executive committee are Richard P. Durham, Jack E.
Knott II and Timothy J. Walsh. The compensation committee evaluates our
compensation policies, determines compensation for our executive officers and
administers our stock option plans. The members of the compensation committee
are Richard P. Durham, Albert (Pat) MacMillan and Timothy J. Walsh. The audit
committee maintains oversight responsibilities with respect to our accounting,
auditing, financial reporting and internal control processes generally. The
members of the audit committee are John M. B. O'Connor and Edward A. Lapekas.
The environmental health and safety committee maintains oversight
responsibilities with respect to environmental health and safety matters,
including environmental internal controls and legal and regulatory compliance.
The members of the environmental health and safety committee are Jack E. Knott
II, Donald J. Hofmann, Jr. and Edward A. Lapekas.
Compensation Committee Interlocks and Insider Participation
During 2002, Richard P. Durham, Albert (Pat) MacMillan and Timothy J.
Walsh served as members of our compensation committee. Mr. Walsh is an executive
officer of JPMP Capital Corp., which is the general partner of JPMP Master Fund
Manager, L.P., which is the general partner of J.P. Morgan Partners (BHCA),
L.P., which is a principal stockholder of the Company. Mr. Walsh is also a
partner of J.P. Morgan Partners, LLC, which serves as investment advisor to J.P.
Morgan Partners (BHCA), L.P., and a limited partner of JPMP Master Fund Manager,
L.P. During 2002, none of our executive officers served as a member of the
compensation committee (or other board committee performing equivalent functions
or, in the absence of any such committee, the entire board of directors) or as a
director of another entity, one of whose executive officers served as a member
of our compensation committee or as one of our directors.
Compensation of Directors
Each director who is not an employee of Pliant or a partner or senior
advisor of J.P. Morgan Partners, LLC is entitled to receive an annual fee of
$30,000, plus $10,000 per year per committee. Currently there are three
directors of Pliant who receive director fees.
35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information with respect to the
ownership of our common stock as of March 28, 2003 by
o each person known to own beneficially more than 5% of our common
stock,
o each of our directors,
o each of our Named Executive Officers, and
o all of our executive officers and directors as a group.
The amounts set forth in the table and footnotes below do not include
shares of restricted common stock issued under the 2000 plan that remain subject
to performance vesting requirements that have not been met as of March 28, 2003.
Notwithstanding the beneficial ownership of common stock presented
below, the stockholders' agreement governs the stockholders' exercise of their
voting rights with respect to election of directors and certain other material
events. The parties to the stockholders' agreement have agreed to vote their
shares to elect the board of directors as set forth therein. See "Certain
Relationships and Related Transactions."
The amounts and percentages of shares beneficially owned are reported
on the basis of SEC regulations governing the determination of beneficial
ownership of securities. Under SEC rules, a person is deemed to be a "beneficial
owner" of a security if that person has or shares voting power or investment
power, which includes the power to dispose of or to direct the disposition of
such security. A person is also deemed to be a beneficial owner of any
securities of which that person has a right to acquire beneficial ownership
within 60 days. Securities that can be so acquired are deemed to be outstanding
for purposes of computing such person's ownership percentage, but not for
purposes of computing any other person's percentage. Under these rules, more
than one person may be deemed to be a beneficial owner of the same securities
and a person may be deemed to be a beneficial owner of securities as to which
such person has no economic interest.
Except as otherwise indicated in these footnotes, each of the
beneficial owners listed has, to our knowledge, sole voting and investment power
with respect to the indicated shares of common stock.
Number of Shares
of Common Stock Percent
Name Of Beneficial Owner Beneficially Owned of Class
- ------------------------ ------------------ --------
J.P. Morgan Partners (BHCA), L.P.(1).................................... 406,191 61.0%
The Christena Karen H. Durham Trust(2).................................. 158,917 27.6%
Perry Acquisition Partners L.P.(3)..................................... 34,527 5.9%
Richard P. Durham (4)................................................... 24,283 4.2%
Jack E. Knott II(5)..................................................... 11,717 2.0%
Donald J. Hofmann, Jr.(6)............................................... -- *
Timothy J. Walsh(6)..................................................... -- *
John M. B. O'Connor(6)................................................. -- *
Edward A. Lapekas....................................................... 207 *
Albert (Pat) MacMillan.................................................. -- *
Brian E. Johnson........................................................ 1,018 *
Stanley B. Bikulege..................................................... 609 *
Elise H. Scroggs........................................................ 318 *
Ronald A. Artzer........................................................ -- *
Douglas W. Bengtson..................................................... 646 *
All directors and executive officers as a group (13 persons)............ 38,798 6.6%
- ---------------------------
* Less than 1%.
(1) The address of J.P. Morgan Partners (BHCA), L.P. is 1221 Avenue of the
Americas, New York, New York 10020. Includes (i) 317,306 shares of common
stock held by Southwest Industrial Films, LLC, which is controlled by
J.P. Morgan Partners (BHCA), L.P., as managing member, (ii) 43,962 shares
of common stock which are issuable upon exercise of preferred stock
warrants held by J.P. Morgan (BHCA), L.P., (iii) 44,816 shares of common
stock which are issuable upon exercise of preferred stock warrants held
by Flexible Films, LLC, which is controlled by J.P. Morgan Partners
(BHCA) L.P. and (iv) 107 shares of common stock which are issuable upon
exercise of the 1,264 note warrants held by Southwest Industrial Films,
LLC, which is controlled by J.P. Morgan Partners (BHCA), L.P., as
managing member.
36
(2) The address of The Christena Karen H. Durham Trust is c/o Wells Fargo
Bank, Private Client Services, MAC S4733-025, 3800 Howard Hughes Parkway,
Second Floor, Las Vegas, Nevada 89109. The Trust was established for the
benefit of Christena H. Durham and her children. Christena H. Durham is
the wife of Richard P. Durham. Richard P. Durham disclaims beneficial
ownership of the shares of common stock owned by the Trust.
(3) The address of Perry Acquisition Partners-2, L.P. is 599 Lexington Avenue
, New York, New York 10022. Includes 4,060 shares of common stock which
are issuable upon exercise of preferred stock warrants held by an
affiliate.
(4) Includes 1,250 shares of common stock issuable upon exercise of preferred
stock warrants.
(5) Includes 8,902 shares of common stock issuable upon exercise of 1998
options that are immediately exercisable. Does not include 5,167 shares
of restricted common stock issued under the 2000 plan that do not vest
until the performance conditions discussed under Item 11, "Executive
Compensation--Stock Options and Restricted Stock" are met.
(6) Each of Messrs. Hofmann, Walsh and O'Connor may be deemed the beneficial
owner of the shares of common stock and preferred stock warrants owned by
Southwest Industrial Films, LLC and Flexible Films, LLC, respectively,
due to their positions with affiliates of J.P. Morgan Partners (BHCA),
L.P., which controls both Southwest Industrial Films, LLC and Flexible
Films, LLC, as their managing member.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information relating to our equity
compensation plans as of December 31, 2002. Our equity securities are closely
held and are not publicly traded. In addition, as required by our stockholders'
agreement, a majority of our board of directors has been appointed by our
institutional common stockholders and warrant holders, including our controlling
shareholder. Therefore, our board of directors approves our equity compensation
plans without obtaining approval directly from our shareholders.
Equity Compensation Plan Information
- ---------------------------------------------------------------------------------------------------------------------
Number of securities to be Number of securities
issued upon Weighted-average exercise remaining available for
exercise of outstanding price of outstanding future issuance under
options, warrants and options, warrants and equity compensation plans
rights rights (excluding securities
Plan category reflected in column (a))
- ---------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- ---------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security
holders -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security
holders 64,550 (1) $430.29 9,952
- ---------------------------------------------------------------------------------------------------------------------
Total 64,550 $430.29 9,952
- ---------------------------------------------------------------------------------------------------------------------
(1) Includes 13,208 shares of restricted stock issued under the 2000 Stock
Incentive Plan.
The equity compensation plans not approved by security holders include
our 2000 Stock Incentive Plan and 2002 Stock Incentive Plan. The material
features of these plans are described under Item 11, "Executive
Compensation--Stock Options and Restricted Stock" and in Note 11 to our
consolidated financial statements.
37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Huntsman Corporation
Prior to the recapitalization and related transactions, we were party
to a services agreement with Huntsman Corporation, our former affiliate,
pursuant to which Huntsman Corporation provided us with most of our insurance
coverage, administered our employee benefit plans, rented to us corporate
headquarters space and provided other services to us. Under that services
agreement, we paid Huntsman Corporation $1.2 million in 2000. In addition to the
amount paid for services provided under the services agreement, we also
reimbursed Huntsman Corporation for insurance premiums and certain other
expenses incurred on our behalf. Following the recapitalization and related
transactions, all of the services provided under the services agreement were
discontinued.
Transactions with Management
Prior to the recapitalization, we sold shares of Class C common stock
to certain members of management for cash. We also issued shares of Class C
common stock to certain members of our senior management in exchange for
promissory notes. Approximately one-half of these shares were purchased and
approximately one-half were "rolled over" as common stock in the
recapitalization. In connection with the recapitalization, we issued additional
shares of restricted stock to each of our executive officers serving at that
time in exchange for promissory notes. The original promissory notes of our
executive officers were amended during 2000 and 2001 in connection with the
recapitalization, certain severance arrangements and other events relating to
the transition to a new management team. The terms of these promissory notes and
the related transactions are described below for each person who served as an
executive officer during 2000, 2001 or 2002.
Jack E. Knott II
In connection with our May 31, 2000 recapitalization, we issued 1,292
time-vested shares and 6,458 performance-vested shares to Mr. Knott in exchange
for a promissory note of $3,744,260. Interest on Mr. Knott's promissory note
accrued at the rate of 7% per annum through December 31, 2000. On April 21,
2001, we amended the terms of Mr. Knott's promissory note so that no interest
would accrue after December 31, 2000 and our sole recourse against Mr. Knott
with respect to his obligations under the promissory note would be the 7,750
shares of restricted stock pledged as collateral. Unless satisfied by returning
the restricted stock to us, the interest accrued on Mr. Knott's promissory note
through December 31, 2000, in the amount of $216,140, is payable in three annual
installments of $72,047, beginning May 31, 2006, and the principal balance of
$3,744,260 is payable on May 31, 2008.
Richard P. Durham
Mr. Durham served as our Chairman and Chief Executive Officer until
June 2002. Prior to his resignation, we issued common stock to Mr. Durham in
exchange for promissory notes on three separate occasions. In connection with
our split-off from Huntsman Corporation in 1997, we issued 5,000 shares of our
Class A common stock and 2,000 shares of our Class B common stock to Mr. Durham
in exchange for a $700,000 promissory note which bore interest at the rate of 7%
per annum. This note was repaid in full by Mr. Durham during 2001. On February
22, 1999, we sold 15,734 shares of Class C common stock to Mr. Durham in
exchange for a $1,573,400 promissory note. On May 31, 2000, we also issued 2,417
time-vested shares and 12,083 performance-vested shares in exchange for a
$7,005,389 promissory note. In connection with an amendment to Mr. Durham's
employment agreement in February 2001, we amended the $1,573,400 promissory note
and the $7,005,389 promissory note, which originally bore interest at the rate
of 7% per annum, to provide that no interest would accrue on these notes after
December 31, 2000. We also amended the $1,573,400 promissory note to provide
that our sole recourse against Mr. Durham with respect to the obligation under
this promissory note would be the 14,500 shares of restricted stock pledged as
collateral. At the time of Mr. Durham's resignation, the balances of his two
outstanding promissory notes, including accrued interest, were $7,292,897 and
$1,637,974.
On June 10, 2002, we entered into a separation agreement with Mr.
Durham. As of the date of the separation agreement, Mr. Durham owned 28,289
shares of common stock, 12,083 performance vested shares, 2,417 time vested
shares, warrants to purchase 1,250.48 shares of common stock and 1,232 shares of
preferred stock of Pliant. All of Mr. Durham's time vested shares and 2,416 of
Mr. Durham's performance vested shares had vested as of the date of the
separation agreement. Pursuant to the separation agreement, Mr. Durham agreed to
convert the outstanding promissory note issued as payment for his time-vested
and performance vested shares into two promissory notes. The first note (the
"Vested Secured Note"), in the principal amount of $2,430,798, related to Mr.
Durham's time vested shares and the vested portion of his performance vested
shares. The second note (the "Non-Vested Secured Note"), in the principal amount
of $4,862,099, related to the 9,667 performance vested shares which had not
vested as of the date of the separation agreement. Mr. Durham's other note (the
"Additional Note") with an outstanding balance of $1,637,974 was not amended by
the separation agreement. In accordance with the separation agreement, we
repurchased and canceled Mr. Durham's 9,667 unvested shares in exchange for
cancellation of the Non-Vested Secured Note on October 3, 2002.
The separation agreement preserved a put option established by Mr.
Durham's employment agreement with respect to his shares. For purposes of this
put option, the separation agreement provides that the price per share to be
paid by Pliant is $483.13 with
38
respect to common stock, $483.13 less any exercise price with respect to
warrants, and the liquidation preference with respect to preferred stock. On
July 9, 2002, Mr. Durham exercised his put option with respect to 28,289 shares
of common stock, 1,232 shares of preferred stock and warrants to purchase
1,250.48 shares of common stock. Mr. Durham's put option is subject to any
financing or other restrictive covenants to which we are subject at the time of
the proposed repurchase. Restrictive covenants under our credit facilities limit
the number of shares we can currently repurchase from Mr. Durham. On October 3,
2002, as permitted by the covenants contained in our credit facilities, we
purchased 8,204 shares from Mr. Durham for a purchase price of $3,963,599 less
the outstanding amount of the Additional Note, which was cancelled. In December
2002, we purchased an additional 1,885 shares of common stock from Mr. Durham
for an aggregate purchase price of approximately $910,700. As of December 31,
2002, our total remaining purchase obligation to Mr. Durham was approximately
$10,623,097, excluding accrued preferred dividends. We are limited to a maximum
purchase from Mr. Durham $5,000,000 for shares in 2003, which purchase may only
be made if we meet certain leverage ratios. The principal balance of Mr.
Durham's Vested Secured Note, which is still outstanding, is payable on May 31,
2008.
Scott K. Sorensen
Mr. Sorensen served as our Executive Vice President and Chief Financial
Officer until February 2001. Prior to his resignation, we issued common stock to
Mr. Sorensen in exchange for promissory notes on two separate occasions. On
February 22, 1999, we sold 7,867 shares of Class C common stock to Mr. Sorensen
in exchange for a $786,700 promissory note. On May 31, 2000, we also issued
1,125 time-vested shares and 5,625 performance-vested shares in exchange for a
$3,261,129 promissory note. Each of Mr. Sorensen's promissory notes originally
bore interest at the rate of 7% per annum. As part of our severance arrangements
with Mr. Sorensen in February 2001, we cancelled all interest, in the amount of
approximately $132,000, accrued under Mr. Sorensen's $3,261,129 promissory note.
We also redeemed all 6,750 of Mr. Sorensen's time-vested and performance-vested
shares in exchange for cancellation of this promissory note. In addition, we
amended Mr. Sorensen's $786,700 promissory note to provide that no interest
would accrue after February 28, 2001. As of December 31, 2002, the amount
outstanding under Mr. Sorensen's remaining promissory note, including accrued
interest, was $896,838. This amount is payable in three annual installments
beginning on May 31, 2006.
Ronald G. Moffitt
Mr. Moffitt served as our Senior Vice President and General Counsel
until February 2001. Prior to his resignation, we issued common stock to Mr.
Moffitt in exchange for promissory notes on two separate occasions. On February
22, 1999, we sold 2,622 shares of Class C common stock to Mr. Moffitt in
exchange for a $262,200 promissory note. On May 31, 2000, we also issued 625
time-vested shares and 3,125 performance-vested shares in exchange for a
$1,811,739 promissory note. Each of Mr. Moffitt's promissory notes originally
bore interest at the rate of 7% per annum. As part of our severance arrangements
with Mr. Moffitt in February 2001, we cancelled all interest, in the amount of
approximately $85,500, accrued under Mr. Moffitt's $1,811,739 promissory note.
We also redeemed all 3,125 of Mr. Moffitt's performance-vested shares for an
aggregate purchase price of $1,509,781, which was set-off against this
promissory note. In addition, we amended Mr. Moffitt's $262,200 promissory note
to provide that no interest would accrue after February 28, 2001. As of December
31, 2002, the amounts outstanding under Mr. Moffitt's two promissory notes,
including accrued interest, were $301,956 and $275,877. Each of these amounts is
payable in three annual installments beginning on May 31, 2006.
Transactions Between Pliant and New Stockholders
Common Stock Registration Rights Agreement
Pursuant to a registration rights agreement entered into on May 31,
2000, as amended, we granted to our institutional common stockholders and
warrantholders certain "demand" and "piggyback" registration rights for the
registration under the Securities Act of the shares of common stock owned by
them. Under the registration rights agreement, upon request of holders holding
in excess of 50% of the shares of common stock held by our institutional
investors and their transferees and affiliates (the "Requisite Investor
Stockholders"), we are required to use our best efforts to register the shares.
The Requisite Investor Stockholders will be entitled to request two demand
registrations. Also, if we are not a public company or sold to a third party
prior to May 31, 2005, the Trust and its transferees and affiliates will be
entitled to request one demand registration. Further, at any time 60 days after
our initial public offering, holders holding in excess of 60% of the shares of
common stock underlying the preferred stock warrants and holders holding in
excess of 60% of the shares of common stock underlying the note warrants will
each be entitled to exercise one demand registration. At any time after we have
qualified for use of Form S-3, all parties to the registration rights agreement
will have the right to request that we effect a registration under the
Securities Act of their shares of common stock, subject to customary "blackout"
and "cutback" provisions. The stockholders and holders of the preferred stock
warrants and note warrants party to the registration rights agreement also may
request that we use our best efforts to register shares of common stock held by
them in other registrations initiated by us on our own behalf or on behalf of
any other stockholder. We must pay all reasonable out-of-pocket costs and
expenses, other than underwriting discounts and commissions, of any registration
under the registration rights agreement. The registration rights agreement also
contains customary provisions with respect to registration procedures,
underwritten offerings and
39
indemnification and contribution rights in connection with the registration of
common stock on behalf of the stockholders, holders of the preferred stock
warrants and holders of the note warrants party to the registration rights
agreement.
The above summary of certain provisions of the registration rights
agreement does not purport to be complete and is qualified in its entirety by
reference to all of the provisions of the registration rights agreement, a copy
of which has been incorporated by reference as an exhibit to this report.
The Stockholders' Agreement
The stockholders' agreement entered into on May 31, 2000, as amended,
governs the exercise of voting rights by our stockholders, including holders of
our preferred stock warrants who exercise their warrants for common stock, with
respect to the election of directors and certain other material events. The
parties to the stockholders' agreement agreed initially to vote their shares of
common stock to elect (i) four directors designated by the Requisite Investor
Stockholders, (ii) two directors designated by the Trust and (iii) one director
appointed by our board of directors, who must be a member of our senior
management. At the request of the Requisite Investor Stockholders, the size of
our board of directors may be increased from seven to nine. If so increased, one
of the two additional directors will be designated by the Requisite Investor
Stockholders and the other will be our chief executive officer.
The provisions of the stockholders' agreement also govern:
o restrictions on the transfer of shares of common stock and the
preferred stock warrants;
o preemptive rights for holders of our common stock and
preferred stock warrants to purchase certain equity securities
to be issued by us in the amounts required to maintain their
percentage ownership;
o stockholder or company rights of first refusal to purchase
certain shares of our common stock to be sold by other
stockholders;
o agreement by stockholders and holders of the preferred stock
warrants to consent to the sale of all of, or a controlling
interest in, us to a third party, if such sale is approved by
our board of directors, and to sell their shares of common
stock and preferred stock warrants if so required;
o rights of stockholders and holders of the preferred stock
warrants to participate in certain sales of the shares of our
common stock by other stockholders; and
o rights of holders of our common stock and preferred stock
warrants to receive certain financial and other information.
The above summary of certain provisions of the stockholders' agreement,
as amended, does not purport to be complete and is qualified in its entirety by
reference to all of the provisions of the stockholders' agreement, a copy of
which has been incorporated by reference as an exhibit to this report.
Credit Facilities and Note Offerings
JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank) is the
syndication agent, and its affiliate, J.P. Morgan Chase & Co. (formerly The
Chase Manhattan Corporation), is a lender under our credit facilities. JPMorgan
Chase Bank and J.P. Morgan Chase & Co. receive customary fees under the credit
facilities for acting in such capacities. As part of the recapitalization and
related transactions in 2000, we paid fees of approximately $6.5 million to The
Chase Manhattan Bank and J.P. Morgan Chase & Co. pursuant to our credit
facilities.
J.P. Morgan Securities Inc. was one of the initial purchasers in our
May 2000 offering of 13% Senior Subordinated Notes due 2010 and was also the
dealer manager for the debt tender offer and consent solicitation relating to
our 9 1/8% senior subordinated notes due 2007. J.P. Morgan Securities Inc.
received fees of approximately $8.7 million for acting in such capacities. J.P.
Morgan Securities Inc. was also one of the initial purchasers in our April 2002
offering of 13% Senior Subordinated Notes due 2010 and received fees of
approximately $1.9 million for acting in such capacity. We used approximately
$93.3 million of the net proceeds from the April 2002 offering to repay
indebtedness under our credit facilities. In addition, when we amended our
credit facilities, we paid fees of approximately $0.6 million in September 2000,
approximately $0.5 million in July 2001, approximately $0.6 million in April
2002, approximately $0.6 million in October 2002 and approximately $0.5 million
in March 2003, to JPMorgan Chase Bank and J.P. Morgan Chase & Co.
Each of JPMorgan Chase Bank, J.P. Morgan Chase & Co. and J.P. Morgan
Securities Inc. are affiliates of Southwest Industrial Films, LLC, which owns
approximately 55% of our outstanding common stock and currently has the right
under the
40
stockholders' agreement to appoint four of our directors, and of Flexible Films,
LLC, which, together with affiliates, owns approximately 59% of our outstanding
preferred stock, subject to certain preemptive rights with respect to 10,000
shares of preferred stock issued on March 25, 2003. Southwest Industrial Films,
LLC and Flexible Films, LLC are subsidiaries of J.P. Morgan Partners (BHCA),
L.P. During 2002, Donald J. Hofmann, Jr., Timothy J. Walsh and John M.B.
O'Connor, who serve as our directors, were partners of J.P. Morgan Partners,
LLC, which serves as investment advisor to J.P. Morgan Partners (BHCA), L.P. and
JPMP Capital Corp. JPMP Capital Corp. is a subsidiary of J.P. Morgan Chase & Co.
and is the general partner JPMP Master Fund Manager, L.P., which is the general
partner of J.P. Morgan Partners (BHCA), L.P. Messrs. Walsh and O'Connor are
executive officers of JPMP Capital Corp. and limited partners of JPMP Master
Fund Manager, L.P.
41
ITEM 14. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our filings under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the periods specified in the rules and forms of the Securities and
Exchange Commission. This information is accumulated and communicated to our
management, including our principal executive officer and our principal
financial officer, as appropriate, to allow timely decisions regarding required
disclosure. Our management, including our principal executive officer and our
principal financial officer, recognizes that any set of controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures within 90 days
of the filing date of this report. Based on this evaluation, our principal
executive officer and principal financial officer concluded that our disclosure
controls and procedures are effective in alerting them on a timely basis to
material information required to be disclosed in our periodic filings.
Changes in Internal Controls
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation referenced in the foregoing paragraph.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Pliant Corporation and Subsidiaries Financial Statements:
Index to Financial Statements and Financial Statement Schedule F-1
Report of Independent Public Accountants F-2
Report of Independent Public Accountants F-3
Consolidated Balance Sheets as of December 31, 2002 and 2001 F-4
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 F-5
Consolidated Statements of Stockholders' Equity (Deficit) for
the years ended December 31, 2002, 2001 and 2000 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 F-8
Notes to Consolidated Financial Statements F-10
(a)(2) Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts S-1
The remaining schedules set forth in Regulation S-X have not
been included because they are not applicable to our business.
(a)(3) The following exhibits are filed herewith or incorporated by
reference:
2.1 Recapitalization Agreement, dated as of March 31, 2000 (the
"Recapitalization Agreement"), among Pliant Corporation, Chase
Domestic Investments, L.L.C., Richard P. Durham as Representative,
and the shareholders of Pliant Corporation signatory thereto
(incorporated by reference to Exhibit 2.1 to the Current Report on
Form 8-K filed by Pliant Corporation on April 12, 2000).
42
2.2 Amendment No. 1, dated as of April 3, 2000, to the
Recapitalization Agreement (incorporated by reference to Exhibit
2.2 to Pliant Corporation's Registration Statement on Form S-4
(File No. 333-42008)).
2.3 Amendment No. 2, dated as of May 31, 2000, to the Recapitalization
Agreement (incorporated by reference to Exhibit 2.3 to Pliant
Corporation's Registration Statement on Form S-4 (File No.
333-42008)).
3.1 Third Amended and Restated Articles of Incorporation of Pliant
Corporation (incorporated by reference to Exhibit 3.1 to Pliant
Corporation's Registration Statement on Form S-4 (File No.
333-42008)).
3.2 Articles of Amendment of Third Amended and Restated Articles of
Incorporation of Pliant Corporation (incorporated by reference to
Exhibit 3.2 to Pliant Corporation's Annual Report on Form 10-K for
the year ended December 31, 2000 filed on April 2, 2001).
3.3 Articles of Amendment of Third Amended and Restated Articles of
Incorporation of Pliant Corporation (incorporated by reference to
Exhibit 3.3 to Pliant Corporation's Registration Statement on Form
S-1 (File No. 333-65754)).
3.4* Articles of Amendment of Third Amended and Restated Articles of
Incorporation of Pliant Corporation.
3.5* Articles of Amendment of Third Amended and Restated Articles of
Incorporation of Pliant Corporation.
3.6* Second Amended and Restated Bylaws of Pliant Corporation.
4.1 Indenture, dated as of May 31, 2000, among Pliant Corporation, the
Note Guarantors party thereto and The Bank of New York, as trustee
(incorporated by reference to Exhibit 4.1 to Pliant Corporation's
Registration Statement on Form S-4 (File No. 333-42008)).
4.2 First Supplemental Indenture, dated as of July 16, 2001, among
Pliant Corporation, the New Note Guarantors party thereto, the
existing Note Guarantors party thereto and The Bank of New York,
as trustee (incorporated by reference to Exhibit 4.3 to Pliant
Corporation's Registration Statement on Form S-1 (File No.
333-65754)).
4.3 Form of 2000 Notes (incorporated by reference to Exhibit B to
Exhibit 4.1).
4.4 Indenture, dated as of April 10, 2002, among Pliant Corporation,
the Note Guarantors party thereto and The Bank of New York, as
trustee (incorporated by reference to Exhibit 4.4 to Pliant
Corporation's Registration Statement on Form S-4 (File No.
333-86532)).
4.5 Form of 2002 Note (incorporated by reference to Exhibit B to
Exhibit 4.4).
4.6 Exchange and Registration Rights Agreement, dated as of May 31,
2000, among Pliant Corporation, the Note Guarantors party thereto,
and Chase Securities, Inc. and Deutsche Bank Securities Inc., as
Initial Purchasers (incorporated by reference to Exhibit 4.3 to
Pliant Corporation's Registration Statement on Form S-4 (File No.
333-42008)).
4.7 Exchange and Registration Rights Agreement, dated as of April 10,
2002, among Pliant Corporation, the Note Guarantors party thereto,
and J.P. Morgan Securities, Inc. and Deutsche Bank Securities
Inc., as Initial Purchasers (incorporated by reference to Exhibit
4.7 to Pliant Corporation's Registration Statement on Form S-4
(File No. 333-86532)).
10.1 Note Warrant Agreement, dated as of May 31, 2000, among Pliant
Corporation and The Bank of New York, as Warrant Agent, relating
to the 220,000 Note Warrants (incorporated by reference to Exhibit
10.1 to Pliant Corporation's Registration Statement on Form S-4
(File No. 333-42008)).
10.2 Stockholders' Agreement, dated as of May 31, 2000, among Pliant
Corporation, Chase Domestic Investments, L.L.C. and each of the
stockholders and warrantholders listed on the signature pages
thereto (incorporated by reference to Exhibit 10.2 to Pliant
Corporation's Registration Statement on Form S-4 (File No.
333-42008)).
10.3 Amendment No. 1 and Waiver, dated as of July 16, 2001, to the
Stockholder's Agreement, dated as of May 31, 2000, among Pliant
Corporation, Chase Domestic Investments, L.L.C. and each of the
stockholders and warrantholders listed on the signature pages
thereto (incorporated by reference to Exhibit 10.3 to Pliant
Corporation's Registration Statement on Form S-1 (File No.
333-65754)).
10.4 Amendment No. 2, dated as of December 19, 2001, to the
Stockholder's Agreement, dated as of May 31, 2000, among Pliant
Corporation, Chase Domestic Investments, L.L.C. and each of the
stockholders and warrantholders listed on the signature pages
thereto (incorporated by reference to Exhibit 10.4 to Pliant
Corporation's Annual Report on Form 10-K for the year ended
December 31, 2001).
10.5* Amendment No. 3, dated as of March 25, 2003, to the Stockholder's
Agreement, dated as of May 31, 2000, among Pliant Corporation,
Chase Domestic Investments, L.L.C. and each of the stockholders
and warrantholders listed on the signature pages thereto.
43
10.6 Registration Rights Agreement, dated as of May 31, 2000, among
Pliant Corporation, Chase Domestic Investments, L.L.C. and each of
the stockholders and warrantholders listed on the signature pages
thereto (incorporated by reference to Exhibit 10.3 to Pliant
Corporation's Registration Statement on Form S-4 (File No.
333-42008)).
10.7 Amendment No. 1, dated as of June 13, 2000, to the Registration
Rights Agreement, dated as of May 31, 2000, among Pliant
Corporation, Chase Domestic Investments, L.L.C. and each of the
stockholders and warrantholders listed on the signature pages
thereto (incorporated by reference to Exhibit 10.4 to Pliant
Corporation's Registration Statement on Form S-4 (File No.
333-42008)).
10.8* Amendment No. 2, dated as of March 25, 2003, to the Registration
Rights Agreement, dated as of May 31, 2000, among Pliant
Corporation, Chase Domestic Investments, L.L.C. and each of the
stockholders and warrantholders listed on the signature pages
thereto.
10.9 Securities Purchase Agreement, dated as of May 31, 2000, among
Pliant Corporation and each of the purchasers of Pliant
Corporation's preferred stock listed on the signature pages
thereto (incorporated by reference to Exhibit 10.5 to Pliant
Corporation's Registration Statement on Form S-4 (File No.
333-42008)).
10.10 Amendment No. 1 and Waiver, dated as of July 16, 2001, to the
Securities Purchase Agreement dated as of May 31, 2000 among
Pliant Corporation, and each of the purchasers of Pliant
Corporation's preferred stock listed on the signature pages
thereto (incorporated by reference to Exhibit 10.7 to Pliant
Corporation's Registration Statement on Form S-1 (File No.
333-65754)).
10.11 Warrant Agreement, dated as of May 31, 2000, among Pliant
Corporation and Chase Domestic Investments, L.L.C. (incorporated
by reference to Exhibit 10.6 to Pliant Corporation's Registration
Statement on Form S-4 (File No. 333-42008)).
10.12 Amendment No. 1, dated as of July 16, 2001, to the Warrant
Agreement dated as of May 31, 2000 among Pliant Corporation and
the initial warrantholders listed in Schedule I thereto
(incorporated by reference to Exhibit 10.9 to Pliant Corporation's
Registration Statement on Form S-1 (File No. 333-65754)).
10.13* Amendment No. 2, dated as of March 25, 2003, to the Warrant
Agreement dated as of May 31, 2000 among Pliant Corporation and
the initial warrantholders listed in Schedule I thereto.
10.14 Securities Purchase Agreement, dated as of July 16, 2001, among
Pliant Corporation and the purchasers of Pliant Corporation's
preferred stock listed on the schedules thereto (incorporated by
reference to Exhibit 10.10 to Pliant Corporation's Registration
Statement on Form S-1 (File No. 333-65754)).
10.15* Securities Purchase Agreement, dated as of March 25, 2003, among
Pliant Corporation and the Purchasers named therein.
10.16* Securities Purchase Agreement, dated as of March 25, 2003, between
Pliant Corporation and J.P. Morgan Partners (BHCA), L.P.
10.17 Credit Agreement, dated as of September 30, 1997, as amended and
restated as of May 31, 2000, among Pliant Corporation, the
subsidiary guarantors party thereto, the various lenders from time
to time party thereto, Bankers Trust Company, as Administrative
Agent and Collateral Agent, and The Chase Manhattan Bank, as
Syndication Agent, and The Bank of Nova Scotia, as the
Documentation Agent (incorporated by reference to Exhibit 10.7 to
Pliant Corporation's Registration Statement on Form S-4 (File No.
333-42008)).
10.18 Amendment No. 1, dated as of September 30, 2000, to Credit
Agreement dated as of September 30, 1997, as amended and restated
as of May 31, 2000 (incorporated by reference to Exhibit 10.1 to
Pliant Corporation's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000).
10.19 Amendment No. 2, dated as of July 10, 2001, to the Credit
Agreement dated as of September 30, 1997, as amended and restated
as of May 31, 2000 (incorporated by reference to Exhibit 10.13 to
Pliant Corporation's Registration Statement on Form S-1 (File No.
333-65754)).
10.20 Amendment No. 3, dated as of April 2, 2002, to the Credit
Agreement dated as of September 30, 1997, as amended and restated
as of May 31, 2000 (incorporated by reference to Exhibit 10.15 to
Pliant Corporation's Registration Statement on Form S-4 (File No.
333-86532)).
10.21 Amendment No. 4, dated as of September 30, 2002, to the Credit
Agreement dated as of September 30, 1997, as amended and restated
as of May 31, 2000 (incorporated by reference to Exhibit 10.2 to
Pliant Corporation's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2002).
10.22* Amendment No. 5, dated as of March 24, 2003, to the Credit
Agreement dated as of September 30, 1997, as amended and restated
as of May 31, 2000.
44
10.23 Guarantee Agreement, dated as of September 30, 1997, as amended
and restated as of May 31, 2000, among the subsidiary guarantors
party thereto and Bankers Trust Company, as Collateral Agent
(incorporated by reference to Exhibit 10.8 to Pliant Corporation's
Registration Statement on Form S-4 (File No. 333-42008)).
10.24 Supplement No. 1, dated as of July 19, 2001, to the Guarantee
Agreement, dated as of September 30, 1997, as amended and restated
as of May 31, 2000, among Pliant Corporation, each of the
subsidiaries listed on Schedule I thereto and Bankers Trust
Company, as Administrative Agent (incorporated by reference to
Exhibit 10.15 to Pliant Corporation's Registration Statement on
Form S-1 (File No. 333-65754)).
10.25 Security Agreement, dated as of September 30, 1997, as amended and
restated as of May 31, 2000, among the subsidiary guarantors party
thereto and Bankers Trust Company, as Collateral Agent
(incorporated by reference to Exhibit 10.9 to Pliant Corporation's
Registration Statement on Form S-4 (File No. 333-42008)).
10.26 Supplement No. 1, dated as of July 19, 2001, to the Security
Agreement, dated as of September 30, 1997, as amended and restated
as of May 31, 2000, among Pliant Corporation, each of the
subsidiaries listed on Schedule I thereto and Bankers Trust
Company, as Collateral Agent (incorporated by reference to Exhibit
10.17 to Pliant Corporation's Registration Statement on Form S-1
(File No. 333-65754)).
10.27 Pledge Agreement, dated as of September 30, 1997, as amended and
restated as of May 31, 2000, among the subsidiary guarantors party
thereto and Bankers Trust Company, as Collateral Agent
(incorporated by reference to Exhibit 10.10 to Pliant
Corporation's Registration Statement on Form S-4 (File No.
333-42008)).
10.28 Supplement No. 1, dated as of July 19, 2001, to the Pledge
Agreement, dated as of September 30, 1997, as amended and restated
as of May 31, 2000, among Pliant Corporation, each of the
subsidiaries listed on Schedule I thereto and Bankers Trust
Company, as Collateral Agent (incorporated by reference to Exhibit
10.19 to Pliant Corporation's Registration Statement on Form S-1
(File No. 333-65754)).
10.29 Indemnity, Subrogation and Contribution Agreement, dated as of
September 30, 1997, as amended and restated as of May 31, 2000,
among the subsidiary guarantors party thereto and Bankers Trust
Company, as Collateral Agent (incorporated by reference to Exhibit
10.11 to Pliant Corporation's Registration Statement on Form S-4
(File No. 333-42008)).
10.30 Supplement No. 1, dated as of July 19, 2001, to the Indemnity,
Subrogation and Contribution Agreement, dated as of September 30,
1997, as amended and restated as of May 31, 2000, among Pliant
Corporation, each of the subsidiaries listed on Schedule I thereto
and Bankers Trust Company, as Collateral Agent (incorporated by
reference to Exhibit 10.21 to Pliant Corporation's Registration
Statement on Form S-1 (File No. 333-65754)).
10.31 Employment Agreement, dated as of May 31, 2000, between Pliant
Corporation and Richard P. Durham (incorporated by reference to
Exhibit 10.12 to Pliant Corporation's Registration Statement on
Form S-4 (File No. 333-42008)).
10.32 Amendment No. 1, dated as of February 1, 2001, to the Employment
Agreement, dated as of May 31, 2000, between Pliant Corporation
and Richard P. Durham (incorporated by reference to Exhibit 10.14
to Pliant Corporation's Annual Report on Form 10-K for the year
ended December 31, 2000 filed on April 2, 2001).
10.33 Separation Agreement, dated as of June 10, 2002, between Pliant
Corporation and Richard P. Durham (incorporated by reference to
Exhibit 10.1 to Pliant Corporation's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002).
10.34 Employment Agreement, dated as of May 31, 2000, between Pliant
Corporation and Jack E. Knott (incorporated by reference to
Exhibit 10.13 to Pliant Corporation's Registration Statement on
Form S-4 (File No. 333-42008)).
10.35 Employment Agreement, dated as of May 31, 2000, between Pliant
Corporation and Scott K. Sorensen (incorporated by reference to
Exhibit 10.14 to Pliant Corporation's Registration Statement on
Form S-4 (File No. 333-42008)).
10.36 Letter Agreement, dated as of December 27, 2000, terminating the
Employment Agreement, dated as of May 31, 2000, between Pliant
Corporation and Scott K. Sorensen (incorporated by reference to
Exhibit 10.17 to Pliant Corporation's Annual Report on Form 10-K
for the year ended December 31, 2000 filed on April 2, 2001).
10.37 Employment Agreement, dated as of May 31, 2000, between Pliant
Corporation and Ronald G. Moffitt (incorporated by reference to
Exhibit 10.15 to Pliant Corporation's Registration Statement on
Form S-4 (File No. 333-42008)).
10.38 Letter Agreement, dated as of January 22, 2001, terminating the
Employment Agreement, dated as of May 31, 2000, between Pliant
Corporation and Ronald G. Moffitt (incorporated by reference to
Exhibit 10.19 to Pliant Corporation's Annual Report on Form 10-K
for the year ended December 31, 2000 filed on April 2, 2001).
45
10.39 Employment Agreement, dated as of March 30, 2001, between Pliant
Corporation and Brian E. Johnson (incorporated by reference to
Exhibit 10.30 to Pliant Corporation's Annual Report on Form 10-K
for the year ended December 31, 2001).
10.40 Restricted Stock Agreement, dated as of May 31, 2000, between
Pliant Corporation and Richard P. Durham (incorporated by
reference to Exhibit 10.16 to Pliant Corporation's Registration
Statement on Form S-4 (File No. 333-42008)).
10.41 Restricted Stock Agreement, dated as of May 31, 2000, between
Pliant Corporation and Jack E. Knott (incorporated by reference to
Exhibit 10.17 to Pliant Corporation's Registration Statement on
Form S-4 (File No. 333-42008)).
10.42 Restricted Stock Agreement, dated as of May 31, 2000, between
Pliant Corporation and Scott K. Sorensen (incorporated by
reference to Exhibit 10.18 to Pliant Corporation's Registration
Statement on Form S-4 (File No. 333-42008)).
10.43 Stock Redemption Agreement, dated as of December 27, 2000, between
Pliant Corporation and Scott K. Sorensen (incorporated by
reference to Exhibit 10.23 to Pliant Corporation's Annual Report
on Form 10-K for the year ended December 31, 2000 filed on April
2, 2001).
10.44 Restricted Stock Agreement, dated as of May 31, 2000, between
Pliant Corporation and Ronald G. Moffitt (incorporated by
reference to Exhibit 10.19 to Pliant Corporation's Registration
Statement on Form S-4 (File No. 333-42008)).
10.45 Stock Redemption Agreement, dated as of February 1, 2001, between
Pliant Corporation and Ronald G. Moffitt (incorporated by
reference to Exhibit 10.25 to Pliant Corporation's Annual Report
on Form 10-K for the year ended December 31, 2000 filed on April
2, 2001).
10.46 Pledge Agreement, dated as of May 31, 2000, in favor of Pliant
Corporation made by Richard P. Durham (incorporated by reference
to Exhibit 10.20 to Pliant Corporation's Registration Statement on
Form S-4 (File No. 333-42008)).
10.47 Amendment No. 1, dated as of March 1, 2001, to the Pledge
Agreement dated as of May 31, 2000, among Pliant Corporation and
Richard P. Durham (incorporated by reference to Exhibit 10.35 to
Post-Effective Amendment No. 2 to Pliant Corporation's
Registration Statement on Form S-4 (File No. 333-42008)).
10.48 Pledge Agreement, dated as of May 31, 2000, in favor of Pliant
Corporation made by Jack E. Knott (incorporated by reference to
Exhibit 10.21 to Pliant Corporation's Registration Statement on
Form S-4 (File No. 333-42008)).
10.49 Amendment No. 1, dated as of April 1, 2001, to the Pledge
Agreement dated as of May 31, 2000, among Pliant Corporation and
Jack E. Knott (incorporated by reference to Exhibit 10.36 to
Post-Effective Amendment No. 2 to Pliant Corporation's
Registration Statement on Form S-4 (File No. 333-42008)).
10.50 Pledge Agreement, dated as of May 31, 2000, in favor of Pliant
Corporation made by Scott K. Sorensen (incorporated by reference
to Exhibit 10.22 to Pliant Corporation's Registration Statement on
Form S-4 (File No. 333-42008)).
10.51 Pledge Agreement, dated as of May 31, 2000, in favor of Pliant
Corporation made by Ronald G. Moffitt (incorporated by reference
to Exhibit 10.23 to Pliant Corporation's Registration Statement on
Form S-4 (File No. 333-42008)).
10.52 1998 Pliant Corporation Stock Option Plan (incorporated by
reference to Exhibit 10.10 to Pliant Corporation's Annual Report
on Form 10-K for the year ended December 31, 1998).
10.53 Pliant Corporation Management Incentive Plan for Senior Divisional
Management (1999) (incorporated by reference to Exhibit 10.1 to
Pliant Corporation's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000).
10.54* Pliant Corporation 2000 Stock Incentive Plan (as amended and
restated through April 17, 2002).
10.55 Second Amended and Restated Stock Option Agreement, dated as of
May 31, 2000 between Pliant Corporation and Jack E. Knott
(incorporated by reference to Exhibit 10.27 to Pliant
Corporation's Registration Statement on Form S-4 (File No.
333-42008)).
10.56 Pliant Corporation Management Incentive Plan (2000) (incorporated
by reference to Exhibit 10.2 to Pliant Corporation's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000).
10.57 Pliant Corporation Management Incentive Plan (2001) (incorporated
by reference to Exhibit 10.48 to Pliant Corporation's Annual
Report on Form 10-K for the year ended December 31, 2001).
46
10.58 Pliant Corporation Management Incentive Plan (2002) (incorporated
by reference to Exhibit 10.49 to Pliant Corporation's Annual
Report on Form 10-K for the year ended December 31, 2001).
10.59 Pliant Corporation 2002 Stock Incentive Plan (incorporated by
reference to Exhibit 10.1 to Pliant Corporation's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2002).
12.1* Statement re: computation of ratios of earning to fixed charges.
21.1* Subsidiaries of Pliant Corporation.
99.1* Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2* Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- -------
* Filed with this report.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the fourth quarter of 2002.
Subsequent to the end of the quarter, we filed reports on Form 8-K (i)
on March 17, 2003 to report that our shareholders had approved an
amendment to our articles of incorporation increasing the number of
shares of our Series A preferred stock from 132,000 shares to 167,000
shares in connection with a proposed amendment to our credit facilities
and (ii) on March 25, 2003 to report that we had entered into an
amendment to our credit facilities that, among other things, adjusted
certain financial covenants and allows us to issue $40 million of
additional equity securities, of which J.P. Morgan Partners (BHCA),
L.P. is obligated to purchase up to $25 million under certain
circumstances, and that, as a condition to the effectiveness of the
amendment, we had issued 10,000 shares of Series A preferred stock and
warrants to purchase 43,962 shares of common stock to J.P. Morgan
Partners (BHCA), L.P. for $10 million.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 28, 2003.
PLIANT CORPORATION
By /s/ JACK E. KNOTT II
-----------------------------------------
Jack E. Knott II, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on March 28, 2003 by the following persons on
behalf of the Registrant and in the capacities indicated.
By /s/ JACK E. KNOTT II
-----------------------------------------
Jack E. Knott II, Chief Executive
Officer and Director
(Principal Executive Officer)
By /s/ BRIAN E. JOHNSON
-----------------------------------------
Brian E. Johnson, Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
By /s/ RICHARD P. DURHAM
-----------------------------------------
Richard P. Durham, Director
By./s/ DONALD J. HOFMANN, JR.
-----------------------------------------
Donald J. Hofmann, Jr., Director
By /s/ TIMOTHY J. WALSH
-----------------------------------------
Timothy J. Walsh, Chairman and Director
By /s/ JOHN M.B. O'CONNOR
-----------------------------------------
John M.B. O'Connor, Director
By /s/ EDWARD A. LAPEKAS
-----------------------------------------
Edward A. Lapekas, Director
By /s/ ALBERT MACMILLAN
-----------------------------------------
Albert MacMillan, Director
48
CERTIFICATIONS
I, Jack E. Knott II, certify that:
1. I have reviewed this annual report on Form 10-K of Pliant
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the
"Evaluation Date"); and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and
report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003
/s/ JACK E. KNOTT II
-----------------------------------
Jack E. Knott II
Chief Executive Officer
49
I, Brian E. Johnson, certify that:
1. I have reviewed this annual report on Form 10-K of Pliant
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the
"Evaluation Date"); and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and
report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003
/s/ BRIAN E. JOHNSON
-------------------------------------
Brian E. Johnson
Chief Financial Officer
50
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT
REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
The Registrant has not sent to its security holders any annual report
to security holders covering the Registrant's last fiscal year or any proxy
statement, form of proxy or other proxy soliciting material sent to more than 10
of the Registrant's security holders with respect to any annual or other meeting
of security holders.
51
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Pliant Corporation and Subsidiaries Financial Statements:
Report of Independent Public Accountants F-2
Report of Independent Public Accountants F-3
Consolidated Balance Sheets as of December 31, 2002 and 2001 F-4
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 F-5
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 2002, 2001 and 2000 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 F-8
Notes to Consolidated Financial Statements F-10
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts S-1
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Pliant Corporation
We have audited the accompanying consolidated balance sheet of Pliant
Corporation as of December 31, 2002, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the year then
ended. Our audit also included the financial statement schedule for the year
ended December 31, 2002 listed in Item 15(a)(2) of this Annual Report on Form
10-K. These consolidated financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audit. The financial statements and schedule of Pliant Corporation as of
December 31, 2001 and for the two years then ended were audited by other
auditors who have ceased operations. Those auditors expressed an unqualified
opinion on those statements and schedule in their report dated January 28, 2002,
before the restatement and inclusion of additional disclosures referred to in
the last paragraph of this report.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements and schedule
referred to above present fairly, in all material respects, the consolidated
financial position of Pliant Corporation as of December 31, 2002, and the
results of its operations and its cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States.
As discussed in Notes 1 and 5 to the financial statements, in the year
ended December 31, 2002 the Company changed its method of accounting for
goodwill.
As discussed above, the financial statements of Pliant Corporation as
of December 31, 2001 and for the two years in the period then ended were audited
by other auditors who have ceased operations. As described in Note 5, these
financial statements have been revised to include the transitional disclosures
required by Statement of Financial Accounting Standards No. 142, (SFAS 142)
Goodwill and Other Intangible Assets, which was adopted by the Company as of
January 1, 2002. Our audit procedures with respect to the disclosures in Note 5
with respect to 2001 and 2000 included (a) agreeing the previously reported net
income (loss) to the previously issued financial statements and the adjustments
to reported net income (loss) representing amortization expense (including any
related tax effects) recognized in those periods related to goodwill to the
Company's underlying records obtained from management, and (b) testing the
mathematical accuracy of the reconciliation of adjusted net income (loss) to
reported net income (loss). In our opinion the disclosures relating to adjusted
net income (loss) for 2001 and 2000 in Note 5 are appropriate. Also, as
described in Note 14, the Company changed the composition of its reportable
segments in 2002, and the amounts in the 2001 and 2000 financial statements
relating to reportable segments have been restated to conform to the 2002
composition of reportable segments. We audited the adjustments that were applied
to restate the disclosures for reportable segments reflected in the 2001 and
2000 financial statements. Our procedures included (a) agreeing the adjusted
amounts of segment net sales, segment profit (loss), segment depreciation and
amortization, segment interest expense, segment capital expenditures and segment
total assets to the Company's underlying records obtained from management, and
(b) testing the mathematical accuracy of the reconciliations of segment amounts
to the consolidated financial statements. In our opinion, such adjustments are
appropriate and have been properly applied. However, we were not engaged to
audit, review or apply any procedures to the 2001 or 2000 financial statements
of the Company other than with respect to such SFAS 142 transition disclosures
and segment adjustments, accordingly, we do not express an opinion or any other
form of assurance on the 2001 or 2000 financial statements taken as a whole.
/s/ Ernst & Young LLP
Chicago, Illinois
February 28, 2003, except for Note 6, as to
which the date is March 25, 2003
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pliant Corporation:
We have audited the accompanying consolidated balance sheets of Pliant
Corporation and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements and schedule referred to below are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Pliant
Corporation and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Chicago, Illinois
January 28, 2002
This report is a copy of the previously issued report covering 2000 and 2001.
The predecessor auditor has ceased operations and has not reissued their report.
F-3
PLIANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2002 and 2001 (Dollars in Thousands, Except per Share Data)
- --------------------------------------------------------------------------------
2002 2001
--------- ---------
ASSETS
CURRENT ASSETS :
Cash and cash equivalents ............................................................ $ 1,635 $ 4,818
Receivables:
Trade accounts, net of allowances of $5,583 and $2,438, respectively ............. 104,157 111,768
Other ............................................................................ 14,866 13,668
Inventories .......................................................................... 98,022 83,948
Prepaid expenses and other ........................................................... 4,149 3,026
Income taxes receivable .............................................................. 2,368 985
Deferred income taxes ................................................................ 8,182 2,563
--------- ---------
Total current assets .................................................... 233,379 220,776
PLANT AND EQUIPMENT, net: ................................................................. 350,479 369,324
GOODWILL .................................................................................. 203,997 204,426
OTHER INTANGIBLE ASSETS, net: ............................................................. 27,034 26,773
OTHER ASSETS .............................................................................. 38,314 30,384
--------- ---------
Total assets ............................................................ $ 853,203 $ 851,683
========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable ............................................................... $ 113,988 $ 101,508
Accrued liabilities:
Interest payable ............................................................ 16,175 10,392
Customer rebates ............................................................ 10,439 7,571
Other ....................................................................... 32,263 25,134
Current portion of long-term debt .................................................... 14,745 17,767
--------- ---------
Total current liabilities ............................................... 187,610 162,372
LONG-TERM DEBT, net of current portion .................................................... 721,636 695,556
OTHER LIABILITIES ......................................................................... 26,977 18,944
DEFERRED INCOME TAXES ..................................................................... 23,836 26,156
--------- ---------
Total liabilities ....................................................... 960,059 903,028
--------- ---------
MINORITY INTEREST ......................................................................... 192 271
COMMITMENTS AND CONTINGENCIES (Notes 7 and 12) ............................................ -- --
REDEEMABLE STOCK:
Preferred stock - 200,000 shares authorized, 130,973 shares outstanding as of
December 31, 2002, and 2001 and designated as Series A, no par value with a
redemption and liquidation value of $1,000 per share plus
accumulated dividends ................................................................ 150,816 126,149
Common stock - 60,000 shares authorized, no par value; 34,240 shares outstanding as of
December 31,2002 and 53,996 outstanding as of December 31, 2001 net of related
stockholders' notes receivable of $6,754 at December 31, 2002 and $12,720 at
December 31, 2001 .................................................................... 13,008 16,778
--------- ---------
Total redeemable stock .................................................. 163,824 142,927
--------- ---------
STOCKHOLDERS' DEFICIT:
Common stock - no par value; 10,000,000 shares authorized, 542,638 and 542,571
shares outstanding as of December 31, 2002 and December 31, 2001, respectively ....... 103,376 103,362
Warrants to purchase common stock .................................................... 38,676 38,715
Accumulated deficit .................................................................. (394,420) (326,356)
Stockholders' notes receivable ....................................................... (660) (616)
Accumulated other comprehensive loss ................................................. (17,844) (9,648)
--------- ---------
Total stockholders' deficit ............................................. (270,872) (194,543)
--------- ---------
Total liabilities and stockholders' deficit ............................. $ 853,203 $ 851,683
========= =========
See notes to consolidated financial statements.
F-4
PLIANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2002, 2001 and 2000 (Dollars in Thousands)
- --------------------------------------------------------------------------------
2002 2001 2000
--------- --------- ---------
NET SALES ............................................................. $ 879,197 $ 840,360 $ 843,797
COST OF SALES ......................................................... 714,463 665,092 696,716
--------- --------- ---------
Gross profit ........................................ 164,734 175,268 147,081
--------- --------- ---------
OPERATING EXPENSES:
Selling, general and administrative .............................. 85,351 88,821 93,937
Research and development ......................................... 8,124 9,821 8,596
Stock-based compensation related to administrative employees ..... -- 7,033 --
Compensation and transaction costs related to recapitalization ... -- -- 10,754
Restructuring and other costs .................................... 43,143 (4,588) 19,368
--------- --------- ---------
Total operating expenses ............................ 136,618 101,087 132,655
--------- --------- ---------
OPERATING INCOME ...................................................... 28,116 74,181 14,426
INTEREST EXPENSE ...................................................... (75,284) (75,988) (68,534)
OTHER INCOME, net ..................................................... 2,276 6,525 332
--------- --------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES AND EXTRAORDINARY LOSS .............................. (44,892) 4,718 (53,776)
--------- --------- ---------
INCOME TAX EXPENSE (BENEFIT):
Current .......................................................... 3,980 4,204 4,144
Deferred ......................................................... (5,442) 2,582 (18,387)
--------- --------- ---------
Total income tax expense (benefit) .................. (1,462) 6,786 (14,243)
--------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS .............................. (43,430) (2,068) (39,533)
EXTRAORDINARY LOSS (net of income tax benefit of $7,500) .............. -- -- (11,250)
--------- --------- ---------
NET INCOME (LOSS) ..................................................... $ (43,430) $ (2,068) $ (50,783)
========= ========= =========
See notes to consolidated financial statements.
F-5
PLIANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 2002, 2001 and 2000 (In Thousands)
- --------------------------------------------------------------------------------
Warrants
Class A Class B to Accumulated
Common Stock Common Stock Common Stock Purchase Stockholder's Other
------------------ ---------------- ----------------- Common Accumulated Notes Comprehensive
Total Shares Amount Shares Amount Shares Amount Stock Deficit Receivable Income/(Loss)
--------- -------- -------- ------- ------- ------- -------- -------- --------- -------- ---------
Balance,
December 31, 1999 ... $ 90,662 1,000 $ 63,161 7 $ 515 $ 32,042 $ (299) $ (4,757)
Comprehensive
income:
Net loss .......... (50,783) (50,783)
Foreign currency
translation
adjustment ..... (2,504) (2,504)
---------
Comprehensive
loss .............. (53,287)
---------
Recapitalization
transaction ...... (231,762) (1,000) (63,161) (7) (515) 508 86,932 18,550 (272,979) (589)
Issuance of
warrants to
purchase common
stock with
senior notes ...... 7,950 7,950
Preferred stock
dividends
and accretion ..... (8,771) (8,771)
Increase to
redemption
value of
redeemable
common stock ...... (11,923) (11,923)
Issuance of
stock to
management in
exchange
for promissory
notes ............. 7 3,261 (3,261)
Discount on
stockholder
note receivable ... 323 323
Issuance of
stock to
management ........ 797 2 797
Repurchase of
common stock
from management
and cancellation
of note ........... (6) (3,001) 3,001
--------- -------- -------- ------- ------- ------- -------- -------- --------- -------- ---------
Balance,
December 31, 2000 . (206,011) -- -- -- -- 511 87,989 26,500 (312,414) (825) (7,261)
Comprehensive
income:
Net loss .......... (2,068) (2,068)
Fair value
change in
interest rate
derivatives
classified as
cash flow
hedges ......... (2,944) (2,944)
Foreign currency
translation
adjustment ..... 557 557
---------
Comprehensive
loss ........... (4,455)
---------
Stock-based
compensation
related to
administrative
employees ....... 7,033 7,033
Preferred stock
dividend
and accretion ... (18,907) (18,907)
Issuance of
stock as a
result of Uniplast
acquisition ...... 15,735 33 15,735
Issuance of
warrants with
preferred stock .. 12,215 12,215
Repurchase of
common stock
and cancellation
of notes from
management ....... (111) (1) (362) 251
Amortization of
discount on
Stockholder's note
receivable ....... (42) (42)
--------- -------- -------- ------- ------- ------- -------- -------- --------- -------- ---------
Balance,
December 31, 2001 $(194,543) -- $ -- -- $ -- 543 $103,362 $ 38,715 $(326,356) $ (616) $ (9,648)
See notes to consolidated financial statements
F-6
PLIANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 2002, 2001 and 2000 (In Thousands)
- --------------------------------------------------------------------------------
Warrants
Class A Class B to Accumulated
Common Stock Common Stock Common Stock Purchase Stockholder's Other
------------------ ---------------- ----------------- Common Accumulated Notes Comprehensive
Total Shares Amount Shares Amount Shares Amount Stock Deficit Receivable Income/(Loss)
--------- -------- -------- ------- ------- ------- -------- -------- --------- -------- ---------
Balance,
December 31, 2001.... $(194,543) 543 $103,362 $ 38,715 $(326,356) $ (616) $ (9,648)
Comprehensive
income:
Net loss........... (43,430) (43,430)
Minimum pension
liability, net
of taxes........ (937) (937)
Fair value change
in interest
rate derivatives
classified
as cash flow
hedges, net of
taxes............. (2,453) (2,453)
Foreign currency
translation
adjustment........ (4,806) (4,806)
---------
Comprehensive
loss............. (51,626)
---------
Issuance of common
stock to
management for
warrants........... -- 39 (39)
Preferred stock
dividend
and accretion...... (24,634) (24,634)
Purchase of stock
by directors....... 63 63
Repurchase of stock
from management.... (88) (88)
Amortization of
discount on
stockholder's
note receivable.... (44) (44)
--------- -------- -------- ------- ------- ------- -------- -------- --------- -------- ---------
Balance,
December 31, 2002.... $(270,872) -- $ -- -- $ -- 543 $103,376 $ 38,676 $(394,420) $ (660) $ (17,844)
========= ======== ======== ======= ======= ======= ======== ======== ========= ======== =========
See notes to consolidated financial statements
F-7
PLIANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2002, 2001 and 2000 (Dollars in Thousands)
- --------------------------------------------------------------------------------
2002 2001 2000
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) ................................................................ $ (43,430) $ (2,068) $ (50,783)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization .................................................. 46,912 47,017 39,546
Amortization of deferred financing costs ....................................... 3,707 -- --
Deferred income taxes .......................................................... (5,442) 2,980 (18,387)
Change in provision for losses on accounts receivable .......................... 2,635 272 (156)
Non-cash compensation expense related to stock options ......................... -- 7,033 2,641
Discount on stockholder note receivable ........................................ -- -- 323
Non-cash plant closing costs ................................................... 14,204 (7,615) 14,801
Write down of impaired goodwill ................................................ 8,600 -- --
(Gain) or loss on disposal of assets ........................................... 381 (433) 514
Extraordinary loss (net of income taxes) ....................................... -- -- 11,250
Minority Interest .............................................................. (79) 271 --
Changes in operating assets and liabilities - net of effects of acquisitions:
Trade accounts receivable .................................................... 12,135 (182) 4,886
Other receivables ............................................................ (1,565) (2,857) 2,055
Inventories .................................................................. (8,505) 2,249 (952)
Prepaid expenses and other ................................................... (950) (651) 661
Intangible assets and other assets ........................................... (4,704) 1,090 1,930
Trade accounts payable ....................................................... 5,180 (15,023) 48,962
Accrued liabilities .......................................................... 9,129 (2,988) 4,355
Due to affiliates ............................................................ -- -- (4,715)
Income taxes payable/receivable .............................................. 145 1,733 (67)
Other liabilities ............................................................ 5,243 (484) 3,402
--------- --------- ---------
Net cash provided by operating activities ................................ 43,596 30,344 60,266
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures for plant and equipment ..................................... (49,194) (56,418) (65,644)
Acquisitions, net of cash acquired ............................................... (23,164) (38,778) --
Proceeds from sale of assets ..................................................... 17,122 7,914 --
--------- --------- ---------
Net cash used in investing activities .............................. (55,236) (87,282) (65,644)
--------- --------- ---------
Cash flows from financing activities:
Payment of capitalized loan fees ................................................. (7,439) (1,932) (22,303)
Payment of fees for tender offer ................................................. -- -- (10,055)
Redemption of common stock ....................................................... -- -- (314,034)
Net proceeds (net of repurchases) from issuance of common and preferred stock .... (3,227) 30,991 161,820
(Payments)/Borrowings on long-term debt .......................................... -- 25,930 (507,002)
Payments received from stockholder on note receivable ............................ -- -- 165
Proceeds from issuance of senior subordinated notes .............................. 103,752 -- 691,684
Repayments of debt under credit facilities ....................................... (80,694) -- --
--------- --------- ---------
Net cash provided by financing activities ................................ $ 12,392 $ 54,989 $ 275
========= ========= =========
See notes to consolidated financial statements
F-8
PLIANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (Continued)
For the Years Ended December 31, 2002, 2001 and 2000 (Dollars in Thousands)
- --------------------------------------------------------------------------------
2002 2001 2000
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents .... $ (3,935) $ 3,707 $ (934)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ............ (3,183) 1,758 (6,037)
Cash and cash equivalents, beginning of the year ................ 4,818 3,060 9,097
-------- -------- --------
Cash and cash equivalents, end of the year ...................... $ 1,635 $ 4,818 $ 3,060
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest ............................................... $ 69,207 $ 69,503 $ 62,781
======== ======== ========
Income taxes ........................................... $ 4,884 $ (1,594) $ (4,160)
======== ======== ========
Supplemental schedule of non-cash investing and financing activities:
On July 16, 2001, certain assets were acquired and certain liabilities were
assumed of Uniplast Films Corporation for an initial purchase price of
approximately $56,000. The purchase price was paid through a cash payment of
approximately $40,300 to discharge pre-acquisition debt and the issuance of
Pliant common stock of approximately $15,700 to the shareholders of Uniplast.
See Note 13 to the Consolidated Financial Statements.
In 2002 we repurchased $6.5 million of redeemable common stock in exchange for
the cancellation of $6.5 million of notes receivable.
See notes to consolidated financial statements
F-9
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Nature of operations - Pliant Corporation and its subsidiaries
(collectively "Pliant") produce polymer-based (plastic), value-added films for
flexible packaging, personal care, medical, agricultural and industrial
applications. Our manufacturing facilities are located in North America, Latin
America, Germany and Australia.
Recapitalization - On May 31, 2000, we consummated a recapitalization
pursuant to an agreement dated March 31, 2000 (the "Recapitalization Agreement")
among us, our then existing stockholders and an affiliate of J.P. Morgan
Partners, LLC, whereby J.P. Morgan Partners, LLC acquired majority control of
our common stock. Pursuant to the Recapitalization Agreement, we redeemed all of
the shares of our common stock held by Jon M. Huntsman, our founder, then
majority stockholder and then Chairman of the Board (the "Equity Redemption")
for approximately $314.0 million. An affiliate of J.P. Morgan Partners, LLC
purchased approximately one-half of the shares of our common stock held
collectively by The Christena Karen H. Durham Trust (the "Trust") and by members
of our current and former senior management (the "Management Investors") for
approximately $101.8 million. An affiliate of J.P. Morgan Partners, LLC and
certain other institutional investors also purchased (the "Investor Common
Equity Contribution") shares of common stock directly from us for approximately
$63.5 million ($62.6 million net of offering costs). The Trust and the
Management Investors retained approximately one-half of the shares of our common
stock collectively owned by them prior to the recapitalization. In addition, we
issued to another affiliate of J.P. Morgan Partners, LLC and to certain other
institutional investors a new series of senior cumulative exchangeable
redeemable preferred stock (the "Preferred Stock") and detachable warrants for
our common stock (the "Preferred Stock Warrants") for net consideration of
approximately $98.5 million. The foregoing transactions are collectively
referred to as the "Recapitalization." The total consideration paid in the
Recapitalization was approximately $1.1 billion, including transaction costs.
Immediately following the Recapitalization, approximately 55.5% of our
total common stock was owned by an affiliate of J.P. Morgan Partners, LLC,
approximately 4.3% of our total common stock was owned by certain other
institutional investors, and approximately 40.2% of our total common stock was
owned collectively by the Trust and the Management Investors. J.P. Morgan
Partners, LLC owns our common stock through its Southwest Industrial Films, LLC
subsidiary and owns our preferred stock through Flexible Films, LLC.
The accounting for the Recapitalization did not result in changes to
the historical cost presentation of our assets and liabilities.
Principles of Consolidation - The consolidated financial statements
include the accounts of Pliant Corporation and its subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Recognition - Sales revenue is recognized when title transfers,
the risks and rewards of ownership have been transferred to the customer, the
price is fixed and determinable and collection of the related receivable is
probable, which is generally at the time of shipment. Revenue is reduced by
rebates made to customers based on an estimate of the amount of the rebate at
the time the sale is recorded.
Accounts Receivable - Accounts receivable consist primarily of amounts
due to us from our normal business activities. Accounts receivable amounts are
determined to be past due when the amount is overdue based on contractual terms.
We maintain an allowance for doubtful accounts to reflect the expected
uncollectibility of accounts receivable based on past collection history and
specific risks identified among uncollected amounts. Accounts receivable are
charged off against the allowance for doubtful accounts when we have determined
that the receivable will not be collected. One customer represented
approximately 5% and 9% of consolidated receivables at December 31, 2002 and
2001, respectively.
Inventories - Inventories consist principally of finished film and
packaging products and the raw materials necessary to produce them. Inventories
are carried at the lower of cost (on a first-in, first-out basis) or market
value. Resin costs comprise the majority of our total manufacturing costs. Resin
shortages or significant increases in the price of resin could have a
significant adverse effect on our business.
F-10
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- --------------------------------------------------------------------------------
Plant and Equipment - Plant and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
economic useful lives of the assets as follows:
Land improvements................................ 20 years
Buildings and improvements....................... 20 years
Computer Equipment and Software.................. 3-7 years
Machinery and equipment.......................... 7-15 years
Furniture, fixtures and vehicles................. 3-7 years
Leasehold improvements........................... 10-20 years
Maintenance and repairs are charged to expense as incurred and costs of
improvements and betterments are capitalized. Upon disposal, related costs and
accumulated depreciation are removed from the accounts and resulting gains or
losses are reflected in operations.
Costs incurred in connection with the construction or major rebuild of
equipment are capitalized as construction in progress. No depreciation is
recognized on these assets until placed in service.
Goodwill and Other Intangible Assets - Intangible assets are stated at
cost. Generally, effective January 1, 2002, goodwill and other indefinite life
intangible assets are no longer amortized but are subject to an annual
impairment test. Amortization of other intangible assets is computed using the
straight-line method over the estimated economic useful lives of 2-15 years.
Impairment of Long-Lived Assets - When events or conditions indicate a
potential impairment, we evaluate the carrying value of long-lived assets,
including intangible assets, based upon current and expected undiscounted cash
flows, and recognize an impairment when the estimated cash flows are less than
the carrying value of the asset. Measurement of the amount of impairment, if
any, is based upon the difference between the asset's carrying value and fair
value.
Other Assets - Other assets consist primarily of deferred debt issuance
costs, deposits, spare parts and the cash surrender values of key-person life
insurance policies. Deferred debt issuance costs are amortized using a straight
line method which approximates the effective yield method. Major spare parts are
depreciated from the purchase date using the straight-line method over the
useful lives of the related machinery and equipment.
Cash and Cash Equivalents - For the purpose of the consolidated
statements of cash flows, we consider short-term highly liquid investments with
maturity when purchased of three months or less to be cash equivalents. Cash
generated outside of the United States is generally subject to taxation if
repatriated.
Income Taxes - Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial and tax reporting purposes.
Derivative Financial Instruments - Our borrowings under the credit
facilities are at variable rates of interest and expose us to interest rate
risk. The Company has entered into several interest rate derivative contracts in
order to comply with the requirements of the agreements to the credit facilities
and to reduce the effect of interest rate increases. (See Note 6).
Foreign Currency Translation - The accounts of our foreign subsidiaries
are translated into U.S. dollars using the exchange rate at each balance sheet
date for assets and liabilities and an average exchange rate for each month for
revenues, expenses, gains and losses. Transactions are translated using the
exchange rate at each transaction date. Where the local currency is the
functional currency, translation adjustments are recorded as a separate
component of stockholders' equity (deficit). Where the U.S. dollar is the
functional currency, translation adjustments are recorded in other income within
current operations.
Accounting For Stock-Based Compensation Plans - We apply Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
stock-based compensation plans as they relate to employees and directors. For
the years ended December 31, 2001, and 2000, the Company recorded compensation
expense of $7.0 million and $2.6 million, respectively, related to these plans.
The Company did not have compensation expense for the year ended December 31,
2002. Had compensation cost for all the outstanding options been determined in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," our net
loss for the years ended December 31, 2002, 2001 and 2000 would have been the
following pro forma amounts (in thousands):
F-11
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- --------------------------------------------------------------------------------
2002 2001 2000
---------- ---------- ----------
As reported $ (43,430) $ (2,068) $ (50,783)
Stock compensation expense -- 7,033 2,641
Pro forma stock compensation expense (707) 442 (322)
---------- ---------- ----------
Pro forma $ (44,137) $ 5,407 $ (48,464)
========== ========== ==========
The fair market value of each option is estimated on the date of grant
using the minimum value option-pricing model based on the following assumptions
for 2002, 2001 and 2000 grants, respectively: risk free rate of return of 6.02%
to 6.75%; expected life of 7 years to 10 years; dividend yield of 0% and 0%; and
volatility of 0% and 0%. The weighted average fair value of the options as
determined by the minimum value option-pricing model was $202 per share for
2002, 2001 and 2000 grants.
Reclassifications - Certain reclassifications have been made to the
consolidated financial statements for comparative purposes.
2. Inventories
Inventory Balances - Inventories consisted of the following at December
31 (in thousands):
2002 2001
--------- ---------
Finished goods............... $ 60,758 $ 50,738
Raw materials and other...... 28,045 27,499
Work-in-process.............. 9,219 5,711
--------- ---------
Total........................ $ 98,022 $ 83,948
========= =========
3. Restructuring and Other Costs
Restructuring and other costs include plant closing costs (including
costs related to relocation of manufacturing equipment), office closing costs
and other costs related to workforce reductions.
The following table summarizes Restructuring and Other costs for the
years ended December 31 (in thousands):
2002 2001 2000
-------- -------- --------
Plant closing costs
Severance $ 3,956 $ -- $ 4,991
Reversal of Harrington -- (7,615) --
Relocation of
production lines 3,000 3,027 --
Other 6,315 -- 797
Fixed asset impairment 13,906 13,580
Office closing costs -- -- --
Severance 7,013 -- --
Other 353 -- --
Goodwill impairment 8,600 -- --
-------- -------- --------
$ 43,143 $ (4,588) $ 19,368
======== ======== ========
Plant Closing Costs:
2002 -- In September 2002, we approved a plan to close our production
facility in Merced, California and relocate its production lines to our plants
in Toronto, Canada and Danville, Kentucky. As of December 31, 2002, we accrued
$1.6 million as part of plant closing costs for the severance expenses related
to the closure of the Merced facility. The cost of relocating the production
lines will be expensed to plant closing costs as incurred. In October 2002, we
approved a plan to close our production facility in Shelbyville, Indiana and
consolidate its production lines with our Alliant joint venture. As of December
31, 2002, we accrued $0.4 million as part of plant closing costs for severance
expenses. Other costs will be expensed to plant closing costs as incurred. The
F-12
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- --------------------------------------------------------------------------------
Shelbyville closure and the Merced closure were completed in the first quarter
of 2003. We expect to utilize the remaining reserves related to these closures
of $1.9 million by December 2003.
In addition, we have commenced a process to consolidate our two plants
in Mexico. The cost of relocating the production lines will be expensed to plant
closing costs as incurred. We also incurred $2.3 million in plant closure costs
in connection with the closing of our Fort Edward, New York facility (acquired
as a part of the Decora acquisition) and moving production to our facilities in
Mexico and Danville, Kentucky. We also made certain production rationalizations
at our Toronto, Canada plant and Calhoun, Georgia plant.
As a part of the 2001 Uniplast acquisition the Company approved a plan
to close three Uniplast production facilities and reduce the sales and
administrative personnel. As of December 31, 2002 the closure of the production
plants and reduction of sales and administrative personnel were complete.
Severance costs associated with this plan of $3.0 million were accrued as a part
of the cost of the acquisition. The cost of relocating production lines to
existing Company locations was expensed to plant closing costs as incurred. The
Company incurred approximately $3.9 million for these relocation costs in 2002.
There is no accrual remaining at December 31, 2002.
2000 - 2001 -- During 2000, we approved and announced a strategic
initiative to cease operations at our Dallas, Texas; Birmingham, Alabama; and
Harrington, Delaware facilities. These facilities represent a portion of our
Pliant U.S. segment. The intent of this initiative was to maximize the capacity
of other company owned facilities by moving the production from these locations
to plants that were not operating at capacity. As a result of this strategic
initiative, we recorded a pre-tax charge of $19.6 million which is included as
part of plant closing costs in the consolidated statement of operations for the
year ended December 31, 2000. Of the $19.6 million, $13.8 million represented a
reserve for impaired plant and equipment, $5.0 million represented a charge for
severance costs and $0.8 million represented a charge for other closure costs
and inventory write-offs. The major actions relating to the exit of these
facilities include closing each of the respective facilities, disposal of the
related equipment of each facility and termination of the employees of the
respective facilities. As of December 31, 2000, we had completed our closure of
our Dallas facility. In addition, we completed the closure of our Birmingham
facility during the second quarter of 2001.
During the third quarter of 2001, we analyzed the economics of closing
our Harrington facility in light of changes in customer demand and our 2001
acquisition of Uniplast. These changes together with the movement of a
production line from our Birmingham plant significantly improved the
profitability of the Harrington plant. As a result, we revised our plans to
close that facility. During the first six months of 2001, $1.1 million was
incurred to downsize the Harrington facility. The remaining balance of the plant
closure costs of $7.6 million accrued in 2000 was credited to plant closing
costs in the consolidated statement of operations for the year ended December
31, 2001.
The following is a summary of the key elements of the 2000 exit plan,
excluding Harrington as management revised their closure plans for that facility
in 2001 (dollars in thousands):
Dallas Birmingham Total
---------- ---------- ----------
Number of employees to be terminated........ 68 105 173
Book value of property and equipment to be
Disposed of............................... $ 1,593 $ 8,913 $ 10,506
Estimated proceeds from disposal............ 1,200 1,749 2,949
---------- ---------- ----------
Net write-off from disposal................. 393 7,164 7,557
Severance costs............................. 588 2,271 2,859
Other closure costs......................... 302 225 527
---------- ---------- ----------
Total closure costs......................... $ 1,283 $ 9,660 $ 10,943
========== ========== ==========
Utilization of the reserves during 2002 is summarized below in
thousands:
Utilized Utilized
Balance ------------------- Balance ------------------- Balance
12/31/00 Non-Cash Cash Reversal 12/31/01 Non-Cash Cash 12/31/02
-------- -------- -------- -------- -------- -------- -------- --------
Property and equipment reserves . $ 13,801 $ 5,001 $ -- $ 6,244 $ 2,556 $ 2,556 $ -- $ --
Severance costs ................. 4,371 -- 3,170 1,201 -- -- -- --
Other costs ..................... 585 -- 182 170 233 -- 233 --
-------- -------- -------- -------- -------- -------- -------- --------
Total ........................... $ 18,757 $ 5,001 $ 3,352 $ 7,615 $ 2,789 $ 2,556 $ 233 $ --
======== ======== ======== ======== ======== ======== ======== ========
F-13
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- --------------------------------------------------------------------------------
As of December 31, 2002, all of the expected employee terminations had
been completed at our Dallas, Birmingham, and Harrington facilities. We do not
anticipate loss of substantial revenue or income from the closure of the
facilities due to the fact that their sales volumes were largely transferred to
other facilities.
Office Closing and Workforce Reduction Costs
2002 --During the year ended December 31, 2002, we implemented four
workforce reduction programs. During the year ended December 31, 2002, 111
employees were terminated, resulting in an estimated annual cost saving,
including benefits, of $10.1 million. Total severance cost, including benefits,
for these terminations was $6.9 million. The accrual remaining at December 31,
2002 was $3.5 million and the accrual is expected to be fully utilized by the
end of 2003.
Total plant closing costs and severance and related costs resulting
from the 2002 workforce reductions discussed above have been included as part of
restructuring and other costs in the consolidated statement of operations for
the year ended December 31, 2002.
2000 - 2001 --During the fourth quarter of 2000, we approved and
announced a cost saving initiative resulting in a company-wide workforce
reduction, relocation of the corporate office from Salt Lake City, Utah to the
Chicago, Illinois area and closure of the Dallas, Texas divisional office. As a
result of this initiative we recorded a pre-tax charge of $7.1 million, which is
included as part of selling, general and administrative expenses in the
accompanying consolidated statements of operations for the year ended December
31, 2000. The major actions relating to this initiative included a reduction in
workforce due to consolidation of duties, and closing the offices in Dallas,
Texas and Salt Lake City, Utah.
The following is a summary of the key elements of this plan (dollars in
thousands):
Workforce Relocation of Closure of
Reduction Corporate Office Dallas Office Total
------------ ---------------- ------------- ------------
Number of employees ............ 52 36 2 90
Leasehold improvements ......... -- $ 1,000 -- $ 1,000
Severance cost ................. $ 2,940 2,352 $ 21 5,313
Other costs related to leases .. -- 721 82 803
------------ ------------ ------------ ------------
Total cost ..................... $ 2,940 $ 4,073 $ 103 $ 7,116
============ ============ ============ ============
In the fourth quarter of 2001 an additional $0.9 million was accrued to
revise the estimate of future non-cancelable lease costs in excess of income
from subleasing. As of December 31, 2002, the remaining reserves related to
severance costs and other costs related to leases expected to continue through
May, 2004. These reserves are included in other accrued liabilities in the
accompanying consolidated balance sheets, while the reserve for impairment
related to leasehold improvements has been recorded as a reduction of the net
property and equipment balance. Utilization of these reserves during the period
ended December 31, 2002 is summarized below (in thousands):
Utilized Utilized
Balance ------------------- Additional Balance ------------------- Balance
12/31/00 Non-Cash Cash Accrual 12/31/01 Non-Cash Cash 12/31/02
-------- -------- -------- -------- -------- -------- -------- --------
Leasehold improvements $ 1,000 $ 1,000 $ -- $ -- $ -- $ -- $ -- $ --
-------- --------
Severance cost................. 3,254 210 $ 2,916 -- 128 -- $ 78 50
Other costs related to leases.. 803 -- 545 878 1,136 -- 806 330
-------- -------- -------- -------- -------- -------- -------- --------
Total cost..................... $ 5,057 $ 1,210 $ 3,461 $ 878 $ 1,264 $ -- $ 884 $ 380
======== ======== ======== ======== ======== ======== ======== ========
As of December 31, 2002, all of the expected employee terminations had
been completed in connection with the workforce reduction, closure of the Salt
Lake City and the closure of the Dallas offices.
F-14
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- --------------------------------------------------------------------------------
4. Plant and Equipment
The cost and the related accumulated depreciation at December 31 is as
follows (in thousands ) :
2002 2001
---------- ----------
Land and improvements .......................... $ 7,504 $ 8,136
Buildings and improvements ..................... 65,004 66,960
Machinery and equipment ........................ 396,868 378,513
Computer equipment and software ................ 33,970 30,018
Furniture, fixtures and vehicles ............... 8,413 6,204
Leasehold improvements ......................... 4,198 2,201
Construction in progress ....................... 9,004 12,955
---------- ----------
524,961 504,987
Less accumulated depreciation and amortization . (174,482) (135,663)
---------- ----------
Plant and equipment, net ..................... $ 350,479 $ 369,324
========== ==========
The depreciation expense for the years ended December 31, 2002, 2001
and 2000 was $43.4 million, $37.3 million and $30.3 million, respectively.
5. Goodwill and Intangible Assets
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other
Intangible Assets". SFAS No. 142, which was effective for fiscal years beginning
after December 15, 2001, requires that ratable amortization of goodwill be
replaced with periodic tests of goodwill impairment and that intangible assets,
other than goodwill, which have determinable useful lives, be amortized over
their useful lives. As required by SFAS 142, the Company stopped amortizing
goodwill effective January 1, 2002. The Company has evaluated any possible
impairment of goodwill under SFAS 142 guidelines. The Company revised its
reportable operating segments in the third quarter of 2002, and as a result
completed an evaluation of the fair values of the new segments. Based on this
evaluation the Company has determined that the goodwill in our international
segment was impaired, and the goodwill was written down in the fourth quarter.
The recorded impairment is based on methodology including prices of comparable
businesses and discounted cash flows.
We have three reporting segments, all of which have goodwill. During
the third quarter of 2002, a portion of goodwill related to the Decora
acquisition was allocated to intangible assets as a trademark in connection with
the finalization of the purchase price allocation. The changes in the carrying
value of goodwill for the year ended December 31, 2002 were as follows (in
thousands):
Pliant Pliant Corporate/
Pliant U.S. International Solutions Other Total
------------- ------------- ------------- ------------- -------------
Balance as of December 31, 2001 $ 176,064 $ 28,362 $ -- $ -- $ 204,426
Goodwill recorded in acquisitions 2,393 1,984 3,794 -- 8,171
Goodwill impaired -- (8,600) -- -- (8,600)
------------- ------------- ------------- ------------- -------------
Balance as of December 31, 2002 $ 178,457 $ 21,746 $ 3,794 $ -- $ 203,997
============= ============= ============= ============= =============
The changes to goodwill in the year ended December 31, 2002 relate to
the Decora acquisition, the Roll-O-Sheets acquisition, adjustments related to
the opening balance sheet of the Uniplast acquisition, and impairment of
international goodwill.
Following is a reconciliation of net income/(loss) between the amounts
reported in the 2001 and 2000 statements of operations and the pro forma
adjusted amount reflecting these new accounting rules under SFAS 142 (in
thousands):
F-15
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- --------------------------------------------------------------------------------
Year Ended December 31
------------------------
2001 2000
---------- ----------
Net income (loss):
Reported net income (loss) $ (2,068) $ (50,783)
Goodwill amortization (net of income taxes) 7,023 6,759
---------- ----------
Adjusted net income (loss) $ 4,955 $ (44,024)
========== ==========
Other intangible assets that are amortized over their useful lives
under SFAS 142, are as follows as of December 31 (in thousands):
2002 2001
--------------------------- ---------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Value Amortization Value Amortization
------------ ------------ ------------ ------------
Amortized other intangible assets:
Customer lists $ 25,500 $ (6,334) $ 25,500 $ (4,264)
Trademark 5,000 -- -- --
Other 19,209 (16,341) 22,332 (16,795)
------------ ------------ ------------ ------------
Total $ 49,709 $ (22,675) $ 47,832 $ (21,059)
============ ============ ============ ============
The estimated amortization for each of the next five years on the other
intangible assets included above is as follows (in thousands):
Year Ending December 31
-----------------------
2003........................... $ 2,866
2004........................... 2,487
2005........................... 2,477
2006........................... 2,405
2007........................... 2,237
Amortization expense for other intangible assets was approximately $3.5
million, $2.6 million, and $2.1 million for the years ended December 31, 2002,
2001 and 2000, respectively.
F-16
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- -------------------------------------------------------------------------------
6. Long-Term Debt
Long-term debt as of December 31, consists of the following (in
thousands):
2002 2001
--------- ---------
Credit Facilities:
Revolver, variable interest, 5.1% as of December 31,
2002 ................................................. $ 28,404 $ 39,511
Tranche A and B term loans, variable interest at a
weighted average rate of 5.4 % as of December 31,
2002 ................................................. 394,575 463,800
Senior subordinated notes, interest at 13.0% (net of
unamortized issue discount, premium and discount related
to warrants of $8,312 and $12,747 at 2002 and 2001,
respectively) .......................................... 311,688 207,253
Obligations under capital leases (see Note 7) ............ 1,039 2,090
Insurance financing, interest at 3.21% as of December 31,
2002 ................................................... 675 588
Other financing .......................................... -- 81
--------- ---------
Total ................................ 736,381 713,323
Less current portion ..................................... (14,745) (17,767)
--------- ---------
Long-term portion ........................................ $ 721,636 $ 695,556
========= =========
The scheduled maturities of long-term debt by year as of December 31,
2002 are as follows (in thousands):
Year Ending December 31,
------------------------
2003........................ $ 14,745
2004........................ 46,075
2005........................ 58,127
2006........................ 31,590
2007........................ 145,748
Thereafter.................. 440,096
---------
Total....................... $ 736,381
=========
Credit Facilities
As amended, our credit facilities consist of:
o tranche A term loans in an aggregate principal amount of
$117.9 million outstanding as of December 31, 2002;
o Mexico term loans in an aggregate principal amount of $24.8
million outstanding as of December 31, 2002;
o tranche B term loans in an aggregate principal amount of
$251.9 million outstanding as of December 31, 2002; and
o revolving credit facility in an aggregate principal amount
of up to $100 million.
o Up to $30.0 million (plus an additional amount up
to $40.0 million to support certain borrowings by
our principal Mexican subsidiary) of the revolving
credit facility is available in the form of
letters of credit.
The interest rates under the revolving credit facility, the tranche A
facility and the Mexico facility are, at our option, Adjusted LIBOR or ABR, plus
a spread determined by reference to our leverage ratio. In accordance with the
March 24, 2003 amendment to our credit facilities, the spread will not exceed
4.0% for Adjusted LIBOR or 3.0% for ABR. Adjusted LIBOR is the London inter-bank
offered rate adjusted for statutory reserves. ABR is the alternate base rate,
which is the higher of the lender's prime rate or the federal funds effective
rate plus 1/2 of 1%. The interest rates under the tranche B facility are, at our
option, Adjusted LIBOR or ABR, plus a spread determined by reference to our
leverage ratio. As amended, our credit facilities provide that the spread will
not exceed
F-17
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- -------------------------------------------------------------------------------
4.75% for Adjusted LIBOR or 3.75% for ABR. We may elect interest periods of one,
two, three or six months for Adjusted LIBOR borrowings. The calculation of
interest is on the basis of actual days elapsed in a year of 360 days (or 365 or
366 days, as the case may be, in the case of ABR loans based on the Prime Rate)
and interest is payable at the end of each interest period and, in any event, at
least every three months.
Our credit facilities require us to maintain certain key financial
ratios on a quarterly basis. These key ratios include a leverage ratio and an
interest coverage ratio. Effective March 24, 2003, we entered into an amendment
(the "Amendment") of our credit facilities to, among other things, permit us to
issue up to $50 million of our common stock, qualified preferred stock, warrants
to acquire our common stock or qualified preferred stock, or any combination of
our common stock, qualified preferred stock or warrants, or other capital
contributions with respect to our common stock or qualified preferred stock. The
Amendment also adjusted certain financial covenants, including the leverage and
interest coverage ratios. As a condition to the effectiveness of the Amendment,
we agreed to issue 10,000 shares of our Series A preferred stock and warrants to
purchase 43,962 shares of our common stock to J.P. Morgan Partners (BHCA), L.P.
("J.P. Morgan Partners") and J.P. Morgan Partners agreed to purchase such shares
and warrants for $10 million. We completed this sale on March 25, 2003. All of
the proceeds of this sale were used to reduce our term debt. In addition, the
Amendment allows us to issue an additional $40 million of equity securities
between March 25, 2003 and March 31, 2005 in order to obtain cash to reduce the
revolving borrowings and/or term borrowings under our credit facilities. J.P.
Morgan Partners is required to purchase up to $25 million of such additional
equity securities to the extent necessary to enable us to meet our leverage
ratio or the target senior debt leverage ratio specified in the Amendment at the
end of any calendar quarter or fiscal year ending on or before December 31,
2004. Our obligations to issue, and J.P. Morgan Partners' obligation to
purchase, such equity securities are set forth in a Securities Purchase
Agreement dated as of March 25, 2003. Generally, if we are required to issue any
portion of such $25 million of equity securities under the Amendment with
respect to any fiscal quarter in 2003, we must use 50% of the net proceeds from
the issuance of any such equity securities to reduce our revolving borrowings,
and 50% to reduce our term borrowings. If we are required to issue any such
equity securities under the Amendment with respect to any fiscal quarter in
2004, we must use 100% of the net proceeds to reduce our term borrowings. The
issuance of the remaining $15 million of equity securities is voluntary on our
part, and neither J.P. Morgan Partners nor any other person is required to
purchase such equity securities. We incurred an amendment fee of $2.2 million in
connection with the amendment. We also incurred approximately $0.5 million of
legal and administrative expenses in connection with negotiating the Amendment.
We are required to make annual mandatory prepayments of the term loans
under the credit facilities within 90 days following the end of each year in an
amount equal to the amount by which 100% of excess cash flow for such year (or
50% of excess cash flow if our leverage ratio at the end of such year is less
than or equal to 4.0 to 1.0) exceeds the aggregate amount of voluntary
prepayments made since the last excess cash flow payment, subject to certain
adjustments. In addition, the term loan facilities are subject to mandatory
prepayments in an amount equal to (a) 100% of the net cash proceeds of equity
and debt issuances by us or any of our subsidiaries, and (b) 100% of the net
cash proceeds of asset sales or other dispositions of property by us or any of
our subsidiaries, in each case subject to certain exceptions.
We currently pay a quarterly commitment fee on the unused amount of the
Revolver at an annual rate of 0.75%. The commitment fee is subject to reduction
if we achieve certain financial ratios. As of December 31, 2002, we had
outstanding letters of credit of approximately $4.0 million.
Indebtedness under the Credit Facilities is secured by substantially
all of our assets, including our real and personal property, inventory, accounts
receivable, intellectual property, and other intangibles. Our obligations under
the Credit Facilities are guaranteed by substantially all of our domestic
subsidiaries and secured by substantially all of our domestic assets. The Credit
Facilities are also secured by a pledge of 65% of the capital stock of each of
our foreign subsidiaries.
Senior Subordinated Notes
In 2000, we issued $220 million aggregate principal amount of 13%
Senior Subordinated Notes due 2010 including 18,532 warrants (the "Note
Warrants") to purchase common stock at an exercise price of $0.01 per share. In
2002, we issued an additional $100 million of 13% Senior Subordinated Notes due
2010. The Notes mature on June 1, 2010, and interest on the Notes is payable on
June 1 and December 1 of each year. The Notes are subordinated to all of our
existing and future senior debt, rank equally with any future senior
subordinated debt, and rank senior to any future subordinated debt. The Notes
are guaranteed by some of our subsidiaries. The Notes are unsecured. Prior to
June 1, 2003, the Company may, on one or more occasions, redeem up to a maximum
of 35% of the original aggregate principal amount of the Notes with the net cash
proceeds of one or more equity offerings by the Company at a redemption price
equal to 113% of the principal amount thereof, plus accrued and unpaid interest.
Otherwise, the Company may not redeem the Notes prior to June 1, 2005. On or
after that date, the Company may redeem the Notes, in whole or in part, at a
redemption price (expressed as percentages of principal amount), (plus accrued
and unpaid interest) multiplied by the following percentages: 106.5% if redeemed
prior to June 1, 2006; 104.333% if redeemed prior to June 1, 2007; 102.167% if
redeemed prior to June 1, 2008. The Note Warrants became exercisable on August
29, 2000, and expire on June 1, 2010.
F-18
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- -------------------------------------------------------------------------------
The Credit Facilities and the indentures relating to the Senior
Subordinated Notes impose certain restrictions on us, including restrictions on
our ability to incur indebtedness, pay dividends, make investments, grant liens,
sell our assets and engage in certain other activities.
Interest Rate Risk and Derivative Instruments
Certain of our borrowings, including borrowings under our Credit
Facilities, are at variable rates of interest, exposing us to the risk of
increased interest rates. Our leveraged position and the covenants contained in
our debt instruments may also limit our flexibility to adjust to changing market
conditions and our ability to withstand competitive pressures, thus putting us
at a competitive disadvantage. We may be vulnerable to a downturn in general
economic conditions or in our business or be unable to carry out capital
spending that is important to our growth and productivity improvement programs.
Effective January 1, 2001, we adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS No. 137 and
SFAS No. 138. In accordance with the statements, we recognize the fair value of
derivatives as either assets or liabilities in the balance sheet. To the extent
that the derivatives qualify as a hedge, gains or losses associated with the
effective portion are recorded as a component of other comprehensive income
while the ineffective portion is recognized in income.
At the adoption of this pronouncement, we had one interest rate cap
agreement, which had been entered into during the fourth quarter of 2000. As a
result, the initial adoption of this pronouncement did not result in a material
effect to our financial statements.
We have entered into six interest rate derivative agreements with
financial institutions. We use our interest rate derivatives to manage interest
rate risk associated with future interest payments on variable rate borrowings
under our Credit Facilities. Our interest rate derivative agreements are
considered cash flow hedges and consisted of the following as of December 31,
2002 (dollars in millions):
Notional Variable Fixed Maturity
Type Amount Rate* Rate ** Dates
-------------------- ------------ ------------ ------------ ------------
Interest rate cap $ 128.0 LIBOR 10.00% 12/31/2003
Interest rate cap 30.0 LIBOR 7.25% 02/09/2004
Interest rate collar 40.0 LIBOR 4.15% - 7.25% 02/13/2004
Interest rate swap 60.0 LIBOR 5.40% 02/13/2004
Interest rate swap 50.0 LIBOR 4.32% 12/24/2004
Interest rate swap 50.0 LIBOR 3.90% 01/18/2005
* Three-month LIBOR, as defined; 1.38% as of December 31, 2002
** Strike for caps; floor and strike for collar; fixed LIBOR for swap
agreements.
The fair value of our interest rate derivative agreements is reported
on our consolidated balance sheet at December 31, 2002 and 2001 in other
liabilities of approximately $9.1 million and $3.0 million, respectively and in
other assets of approximately $0.1 million in each of 2002 and 2001. The
effective portion of the changes in fair value of these instruments is reported
in other comprehensive income. As the hedged contract matures, the gain or loss
is recorded as interest expense in the consolidated statement of operations. We
monitor the effectiveness of these contracts each quarter. Any changes in fair
value of the ineffective portion of the instruments is reported as interest
expense in the consolidated statement of operations. The ineffective portion for
the years ended December 31, 2002 and 2001 was not material.
The change in accumulated derivative loss included as a part of
accumulated other comprehensive loss as of December 31, is as follows (in
thousands):
2002 2001
-------- --------
Beginning accumulated derivative loss $ 2,944 $ --
Change associated with current period hedge transactions 2,674 2,961
Amount reclassified into earnings (221) (17)
-------- --------
Ending accumulated derivative loss, net of taxes $ 5,397 $ 2,944
======== ========
F-19
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- -------------------------------------------------------------------------------
We are exposed to credit losses in the event of nonperformance by the
counter-party to the financial instrument. We anticipate, however, that the
counter-party will be able to fully satisfy its obligations under the contract.
Market risk arises from changes in interest rates.
Our extraordinary loss for 2000 consisted of a $6.0 million charge (net
of tax) for the payment made pursuant to a tender offer for our previously
issued senior subordinated notes and a $5.25 million charge (net of tax) for the
write-off of capitalized loan fees associated with the early retirement of
various debt facilities.
7. Leases
Capital Leases - We have acquired certain land, building, machinery and
equipment under capital lease arrangements that expire at various dates through
2008. At December 31, the gross amounts of plant and equipment and related
accumulated amortization recorded under capital leases were as follows (in
thousands):
2002 2001
-------- --------
Land and building ........................ $ 442 $ 442
Machinery and equipment .................. 829 2,375
-------- --------
Total assets held under capital leases ... 1,271 2,817
Less: accumulated amortization ........... (276) (381)
-------- --------
$ 995 $ 2,436
======== ========
The amortization expense is included in depreciation expense.
Operating Leases - We have non-cancelable operating leases, primarily
for vehicles, equipment, warehouse, and office space that expire through 2014,
as well as month-to-month leases. The total expense recorded under all operating
lease agreements in the accompanying consolidated statements of operations is
approximately $10.5 million, $7.8 million and $6.7 million for the years ended
December 31, 2002, 2001 and 2000, respectively. Future minimum lease payments
under operating leases and the present value of future minimum capital lease
payments (with interest rates between 7.5% and 10.25%) as of December 31, 2002
are as follows (in thousands):
Operating Capital
Leases Leases
--------- ---------
Year Ending December 31,
2003 ...................................... $ 13,595 $ 277
2004 ...................................... 12,103 287
2005 ...................................... 11,043 238
2006 ...................................... 10,262 243
2007 ...................................... 7,142 228
Thereafter ................................ 15,162 62
--------- ---------
Total minimum lease payments $ 69,307 $ 1,335
=========
Amounts representing interest (296)
---------
Present value of net minimum capital lease payments $ 1,039
=========
During the year ended December 31, 2001 the Company entered into a
transaction in which production lines were sold for approximately $7.9 million
and leased back to the Company under an operating lease agreement. The
production lines were sold for their carrying values, thus no gain or loss was
recorded on the transactions.
During the year ended December 31, 2002, the Company entered into a
transaction in which production lines were sold for approximately $15 million
($5 million of which was retained by the lessor as a required security deposit)
and leased back to the Company under an operating lease agreement. These
production lines were sold for their carrying values, thus no gain or loss was
recorded on the transactions.
F-20
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- -------------------------------------------------------------------------------
8. Income Taxes
The components of income (loss) before income taxes and extraordinary
loss for the years ended December 31 are as follows (in thousands):
2002 2001 2000
-------- -------- --------
United States $(46,477) $ (5,341) $(62,528)
Foreign 1,585 10,059 8,752
-------- -------- --------
Total $(44,892) $ 4,718 $(53,776)
======== ======== ========
The following is a summary of domestic and foreign provisions for
current and deferred income taxes and a reconciliation of the U.S. statutory
income tax rate to the effective income tax rate.
The provisions (benefits) for income taxes for the years ended December
31, are as follows (in thousands):
2002 2001 2000
-------- -------- --------
Current:
Federal ..................................... $ -- $ 23 $ (112)
State ....................................... 261 111 266
Foreign ..................................... 3,719 4,070 3,990
-------- -------- --------
Total current ..................... 3,980 4,204 4,144
-------- -------- --------
Deferred:
Federal ..................................... (5,887) 2,021 (18,401)
State ....................................... (1,848) 179 18
Foreign ..................................... 2,293 382 (4)
-------- -------- --------
Total deferred .................... (5,442) 2,582 (18,387)
-------- -------- --------
Total income tax expense (benefit) (excluding
income taxes applicable to the extraordinary
item) ....................................... $ (1,462) $ 6,786 $(14,243)
======== ======== ========
The effective income tax rate reconciliations for the years ended
December 31, are as follows (in thousands):
2002 2001 2000
-------- -------- --------
Income (loss) before income taxes and
extraordinary item .......................... $(44,892) $ 4,718 $(53,776)
======== ======== ========
Expected income tax provision (benefit) at U.S.
statutory rate of 35% ....................... (15,712) $ 1,652 $(18,822)
Increase (decrease) resulting from:
Goodwill .................................... -- 1,726 1,636
State taxes ................................. (1,092) 188 137
Change in valuation allowance ............... 8,907 1,078 (174)
Foreign rate difference and other, net ...... 6,435 2,142 1,099
Costs related to recapitalization ........... -- -- 1,881
-------- -------- --------
Total income tax expense (benefit) (excluding
income taxes applicable to the extraordinary
item ........................................ $ (1,462) $ 6,786 $(14,243)
======== ======== ========
Effective income tax rate ..................... 3.3% 143.8% 26.5%
-------- -------- --------
F-21
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- -------------------------------------------------------------------------------
Components of net deferred income tax assets and liabilities as of
December 31, are as follows (in thousands):
2002 2001
-------- --------
Deferred income tax assets:
Net operating loss carryforwards ................... $ 46,157 $ 30,627
AMT and foreign tax credit carryforwards ........... 8,237 4,346
Accrued pension costs .............................. 10,531 4,893
Accrued employee benefits .......................... 3,374 6,114
Accrued plant closing costs ........................ 4,804 834
Allowance for doubtful trade accounts receivable ... 659 103
Inventory related costs ............................ 1,326 642
Other .............................................. 4,017 350
-------- --------
79,105 47,909
Valuation Allowance ................................ (10,775) (1,868)
-------- --------
Total deferred income tax assets ......... 68,330 46,041
======== ========
Deferred income tax liabilities:
Tax depreciation in excess of book depreciation .... (70,419) (62,595)
Amortization of intangibles ........................ (11,002) (5,123)
Other .............................................. (2,563) (1,916)
-------- --------
Total deferred income tax liabilities .... (83,984) (69,634)
-------- --------
Net deferred income tax liability .................... $(15,654) $(23,593)
======== ========
As reported on consolidated balance sheets:
Net current deferred income tax asset .............. $ 8,182 $ 2,563
Net non-current deferred income tax liability ...... (23,836) (26,156)
-------- --------
Net deferred income tax liability .................. $(15,654) $(23,593)
======== ========
The net operating loss carryforwards for federal tax purposes are
approximately $118.4 million. These losses expire in 2020 through 2022. Due to
uncertainty regarding realization, a valuation allowance of approximately $3.8
million has been recorded in 2002 to offset the deferred tax asset related to
the net operating losses.
The foreign tax credit carryforwards for federal tax purposes are
approximately $4.4 million expiring in 2005 through 2007, and $2.6 million with
no set expiration date. Due to uncertainty regarding realization, valuation
allowances of approximately $5.2 million and $1.8 million in 2002 and 2001,
respectively have been recorded to offset the deferred tax asset related to the
foreign tax credits.
9. Employee Benefit Plans
Defined Contribution Plan - We sponsor a salary deferral plan covering
substantially all of our non-union domestic employees. Plan participants may
elect to make voluntary contributions to this plan up to 15% of their
compensation. We contribute up to 1% of the participants' compensation based on
our profits and also match employee contributions up to 2% of the participants'
compensation. We expensed approximately $2.4 million, $2.6 million and $2.6
million as our contribution to this plan for the years ended December 31, 2002,
2001 and 2000, respectively.
Defined Benefit Plans - We sponsor three noncontributory defined
benefit pension plans (the "United States Plans") covering domestic employees
with 1,000 or more hours of service. We fund our plans in amounts to fulfill the
funding requirements of the Employee Retirement Income Security Act of 1974.
Contributions are intended to not only provide for benefits attributed to
service to date but also for those expected to be earned in the future. We also
sponsor a defined benefit plan in Germany (the "Germany Plan"). The consolidated
accrued net pension expense for the years ended December 31, 2002, 2001 and 2000
includes the following components (in thousands):
F-22
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- -------------------------------------------------------------------------------
United States Plans 2002 2001 2000
-------- -------- --------
Service cost - benefits earned during the period .................... $ 3,845 $ 3,707 $ 4,098
Interest cost on projected benefit obligation ....................... 4,582 4,101 4,192
Expected return on assets ........................................... (3,698) (4,183) (4,348)
Other ............................................................... 160 (273) (185)
-------- -------- --------
Total accrued pension expense ....................................... $ 4,889 $ 3,352 $ 3,757
======== ======== ========
Germany Plan
Service cost - benefits earned during the period .................... $ 82 $ 66 $ 62
Interest cost on projected benefit obligation ....................... 80 61 62
-------- -------- --------
Total accrued pension expense ....................................... $ 162 $ 127 $ 124
======== ======== ========
The following table sets forth the funded status of the United States
Plans and the Germany Plan as of December 31, 2002, 2001 and 2000 and the
amounts recognized in the consolidated balance sheets at those dates (in
thousands):
United States Plans 2002 2001 2000
-------- -------- --------
Change in benefit obligation:
Obligation at January 1 ........................................... $ 60,706 $ 58,036 $ 50,405
Service cost ...................................................... 3,845 3,707 4,098
Interest cost ..................................................... 4,582 4,101 4,192
Plan amendments ................................................... 593 544 219
Transfer of liability from Huntsman Corporation plan .............. -- -- 138
Actuarial (gain) loss ............................................. 5,388 (3,602) 942
Other ............................................................. 152 -- --
Benefits paid ..................................................... (2,263) (2,080) (1,958)
-------- -------- --------
Obligation at December 31 ........................................... $ 73,003 $ 60,706 $ 58,036
======== ======== ========
Change in plan assets:
Fair value of assets at January 1 ................................. $ 41,872 $ 46,964 $ 49,290
Actual return on plan assets ...................................... (3,260) (4,378) (505)
Transfer of assets from Huntsman Corporation plan ................. -- -- 138
Employer contributions ............................................ 569 1,367 --
Other ............................................................. 153 -- --
Benefit payments .................................................. (2,263) (2,081) (1,958)
-------- -------- --------
Fair value of plan assets at December 31 ............................ $ 37,071 $ 41,872 $ 46,965
======== ======== ========
Underfunded status at December 31 ................................... $ 35,932 $ 18,833 $ 11,071
Unrecognized net actuarial (gain)loss ............................... (12,661) (333) 5,011
Unrecognized prior service cost ..................................... (2,469) (2,017) (1,584)
-------- -------- --------
Accrued long-term pension liability included in other liabilities ... $ 20,802 $ 16,483 $ 14,498
======== ======== ========
Amounts recognized in the balance sheet consist of:
2002 2001
-------- --------
Accrued benefit cost $(20,802) $(16,483)
Additional minimum liability (2,211) --
Intangible asset 699 --
Accumulated other comprehensive income 1,512 --
-------- --------
Accumulated pension liability $(20,802) $(16,483)
======== ========
F-23
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- -------------------------------------------------------------------------------
For the above calculations, increases in future compensation ranging
from 4.0% to 4.5% were used for the non-union plan. The benefit payments under
the two union plans are not based on future compensation. For the 2002
calculations, the discount rate was 6.75% and expected rates of return on plan
assets of 9.0% were used for all plans. For the 2001 calculations, the discount
rates range from 7.25% to 7.5% and expected rates of return on plan assets of
9.0% were used for all plans. For the 2000 calculations, the discount rates
range from 7.5% to 7.75% and expected rates of return on plan assets of 9.0%
were used for all plans.
Germany Plan 2002 2001
-------- --------
Change in benefit obligation:
Obligation at January 1 ............................................ $ 1,142 $ 1,168
Service cost ....................................................... 82 66
Interest cost ...................................................... 80 61
Benefits paid ...................................................... (16) (11)
Change due to exchange rate ........................................ 303 (142)
-------- --------
Obligation at December 31 ............................................ $ 1,591 $ 1,142
-------- --------
Fair value of plan assets at December 31 ............................. None None
-------- --------
Underfunded status at December 31 .................................... $ 1,591 $ 1,142
Unrecognized net actuarial loss (gain) ............................... (96) 85
-------- --------
Accrued long-term pension liability included in other liabilities .... $ 1,495 $ 1,227
-------- --------
Increases in future compensation ranging from 2.0% to 3.5% and discount
rates ranging from 6.0% to 7.0% were used in determining the actuarially
computed present value of the projected benefit obligation of the Germany Plan.
The cash surrender value of life insurance policies for Germany Plan
participants included in other assets in the consolidated balance sheets is
approximately $0.5 million as of December 31, 2002 and 2001.
Effective January 1, 2003 we revised the United States Plans to exclude
the participation of new non-union employees in such plans.
Foreign Plans Other Than Germany - Employees in other foreign countries
are covered by various post employment arrangements consistent with local
practices and regulations. Such obligations are not significant and are included
in the consolidated financial statements in other liabilities.
Other Plans - As part of the acquisition of Blessings Corporation in
1998, we assumed two supplemental retirement plans covering certain former
employees of Blessings Corporation. The liability for these plans included in
other liabilities at December 31, 2002 was approximately $2.0 million. This
liability was frozen at the time of the acquisition.
10. Redeemable Stock
Common Stock -- Prior to the Recapitalization, we sold 50,611 shares of
Class C nonvoting common stock to employees. As consideration, we received cash
of approximately $2.5 million and secured promissory notes for approximately
$2.6 million. We redeemed 1,100 of these shares prior to the Recapitalization.
An additional 17,967 shares were redeemed in connection with the
Recapitalization, and the remaining 31,544 shares were exchanged for the same
number of common shares.
As part of the Recapitalization, we entered into employment agreements
with our executive officers serving at that time: Richard P. Durham, Jack E.
Knott II, Scott K. Sorensen and Ronald G. Moffitt. The employment agreements
established repurchase rights and put options for shares held by these executive
officers following the Recapitalization. These repurchase rights allow us to
repurchase these shares from the employee in the event of termination for any
reason. The put options allow the employees to require us to purchase all of the
shares held by the employee in the event of resignation for good reason, death,
disability or retirement, subject to the restrictive provisions of our credit
facilities or any other agreements. The purchase price under the repurchase
rights and the put options is the fair market value of the common stock, as
determined in good faith by our board of directors.
The $2.6 million of notes receivable we originally received as partial
consideration for the shares sold prior to the Recapitalization related to
shares purchased by Mr. Durham, Mr. Sorensen and Mr. Moffitt. These secured
promissory notes bore interest at 7% per annum. These notes were amended in
connection
F-24
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- -------------------------------------------------------------------------------
with the Recapitalization and were further amended in connection with certain
severance arrangements and other events relating to the transition to a new
management team. Pursuant to these amendments, interest ceased to accrue on Mr.
Sorensen's note as of December 31, 2000, and interest ceased to accrue on Mr.
Durham's note and Mr. Moffitt's note as of February 28, 2001. Interest accrued
prior to these dates is payable in three annual installments beginning on May
31, 2006 and the principal is due May 31, 2008.
In connection with the Recapitalization in May 2000, we sold an
aggregate of 32,750 shares of additional restricted common stock to Messrs.
Durham, Knott, Sorensen and Moffitt for $483.13 per share, the estimated fair
market value. We received, as consideration, notes receivable totaling $15.8
million. Under the May 2000 restricted stock purchase agreements related to the
restricted common stock, we have repurchase rights, which allow us to repurchase
unvested shares from these individuals, if the individuals cease to be employees
for any reason. The repurchase rights lapsed with respect to one-sixth of these
shares on January 1, 2001. The repurchase rights lapsed with respect to an
additional one-sixth of these shares in January 2002 based on the financial
results for the year ended December 31, 2001. Vesting for the remainder of the
shares is reviewed at the end of each calendar quarter as follows: (a) vesting
in full if 100% or more of the applicable target market value of equity is
achieved as of the end of the applicable calendar quarter and (b) partial
vesting if more than 90% of the applicable target market of equity is achieved
as of the end of the applicable calendar quarter. If the applicable targets are
below 90% each year, vesting will automatically occur in full on December 31,
2009. The repurchase rights also terminate in the event of certain acceleration
events as defined in the agreement. The repurchase price per share is the
original price paid by the employee plus interest compounded annually at 7%
commencing on the 181st day after the date of termination of the employee
through the date on which the shares are actually repurchased. The foregoing
repurchase rights with respect to the restricted stock apply only to unvested
restricted shares. As discussed above, however, our employment agreements with
Messrs. Durham, Knott, Sorensen and Moffitt established additional repurchase
rights and put options applicable to all other shares held by these individuals.
The $15.8 million of secured promissory notes received as consideration
for the 32,750 shares of restricted common stock bore interest at 7% per annum.
These notes were also modified in connection with the severance arrangements and
other events relating to the transition to a new management team. These
modifications are described below.
On December 27, 2000, we entered into a severance agreement with
Mr. Sorensen. Under the agreement, we cancelled approximately $133,000 of
accrued interest on a note receivable. We repurchased 6,211 shares of restricted
stock for $483.13 per share and offset the purchase price against $3.0 million
of note principal. In addition, we agreed on January 2, 2001, to repurchase an
additional 539 shares of restricted stock for $483.13 per share and offset the
purchase price against $260,000 of note principal. The Company's repurchase
rights were changed on the remaining 7,423 shares of common stock owned by
Mr. Sorensen, whereby the Company agreed not to repurchase the shares until
February 28, 2003 at a repurchase price of the greater of the fair market value
or the balance on the note receivable. Interest ceased to accrue on the
remaining $787,000 balance of the note related to Mr. Sorensen's purchase of
stock in 1999. Further, the put option was cancelled. As a result of these
modifications, a $323,000 discount on the note receivable balance was recorded
as compensation expense. The discount will be amortized to interest income over
the remaining term of the note. In the event we determine to repurchase the
stock from Mr. Sorensen at an amount that is: (1) greater than the fair value of
the stock (i.e. the note balance is greater than the fair value) or (2) greater
than the note balance as a result of future increases in fair value of the
stock, we will record additional expense.
On January 22, 2001, we entered into a severance agreement with Mr.
Moffitt. Under this agreement, we cancelled approximately $85,000 of accrued
interest on a note receivable. We repurchased 3,125 shares of restricted stock
for $483.13 per share and offset the purchase price against $1.5 million of note
principal. We further agreed to cease charging interest on the remaining
$302,000 principal balance of the note receivable related to 625 shares and to
cease charging interest on the $262,000 principal balance related to Mr.
Moffitt's purchase of stock in 1999. As a result of these interest
modifications, a $208,000 discount on the note receivable balance was recorded
as compensation expense in the first quarter of 2001. The discount will be
amortized to interest income over the remaining term of the note. In addition,
the Company's repurchase rights and Mr. Moffitt's put option were changed on the
remaining 3,457 shares of common stock held by him. We agreed not to repurchase
and Mr. Moffitt agreed not to exercise the put option on the shares until
February 28, 2003. The repurchase price and the put option price were changed to
be the greater of the fair value of the stock or the balance on the note
receivable. Because the fair value of these shares was $483.13 per share on
January 22, 2001, compensation expense of $1.0 million was recorded in the first
quarter of 2001, which represents the difference between the carrying amount and
the fair value of the 2,622 shares of common stock that are subject to the note
receivable.
On February 1, 2001, we amended Mr. Durham's promissory notes that were
issued in connection with his purchases of stock in 1999 and 2000. Under the
amended notes receivable, interest ceased to accrue, effective December 31,
2000, on one note with a principal balance of $1.6 million and another note with
a principal balance of $7.0 million. Further, the notes were modified to remove
the full recourse provisions and modify the related pledge agreement. As a
result of these modifications, Mr. Durham's purchase of stock for promissory
notes will now be accounted for as stock options and will be subject to variable
accounting. Accordingly, changes in the fair value of the common stock in excess
of the note balance will be recorded as compensation expense
F-25
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- -------------------------------------------------------------------------------
until the note is paid in full. In addition, interest income will not be
recorded on these notes. As a result of these modifications, a compensation
expense of $6.0 million was recorded in the first quarter of 2001.
On April 21, 2001, we amended the terms of Mr. Knott's promissory note
issued in connection with his purchase of stock in 2000. Further, Mr. Knott's
note was modified to remove the full recourse provisions and modify the related
pledge agreement. As a result of these modifications and the modifications to
the other officer's notes in the first quarter of 2001, Mr. Knott's purchase of
stock for a promissory note in 2000 will be accounted for as stock options,
subject to variable accounting. In addition, interest income will not be
recorded on this note with a principal balance of $3.7 million.
On June 10, 2002, we entered into a separation agreement with Mr.
Durham. As of the date of the separation agreement, Mr. Durham owned 28,289
shares of common stock, 12,083 performance vested shares, 2,417 time vested
shares, warrants to purchase 1,250.48 shares of common stock and 1,232 shares of
preferred stock of Pliant. All of Mr. Durham's time vested shares and 2,416 of
Mr. Durham's performance vested shares had vested as of the date of the
separation agreement. Pursuant to the separation agreement, Mr. Durham agreed to
convert one of his outstanding promissory notes issued as payment for a portion
of his shares into two promissory notes. The first note (the "Vested Secured
Note"), in the principal amount of $2,430,798, relates to Mr. Durham's time
vested shares and the vested portion of his performance vested shares. The
second note (the "Non-Vested Secured Note"), in the principal amount of
$4,862,099, related to the 9,667 performance vested shares which had not vested
as of the date of the separation agreement. In addition to these notes, Mr.
Durham had an additional outstanding promissory note (the "Additional Note"),
with a principal amount of $1,637,974, relating to a portion of the shares of
common stock held by Mr. Durham. In accordance with the separation agreement, we
repurchased and canceled Mr. Durham's 9,667 unvested shares in exchange for
cancellation of the Non-Vested Secured Note on October 3, 2002.
The separation agreement preserved the put option established by Mr.
Durham's employment agreement with respect to his shares. For purposes of this
put option, the separation agreement provides that the price per share to be
paid by us is $483.13 with respect to common stock, $483.13 less any exercise
price with respect to warrants, and the liquidation preference with respect to
preferred stock. On July 9, 2002, Mr. Durham exercised his put option with
respect to 28,289 shares of common stock, 1,232 shares of preferred stock and
warrants to purchase 1,250.48 shares of common stock. Mr. Durham's put option is
subject to any financing or other restrictive covenants to which we are subject
at the time of the proposed repurchase. Restrictive covenants under our credit
facilities limit the number of shares we can currently repurchase from Mr.
Durham. On October 3, 2002, as permitted by the covenants contained in our
credit facilities, we purchased 8,204 shares from Mr. Durham for a purchase
price of $3,963,599 less the outstanding amount of the Additional Note, which
was cancelled. In December 2002 we purchased an additional 1,885 shares of
common stock from Mr. Durham for an aggregate purchase price of approximately
$910,700. As of December 31, 2002, our total remaining purchase obligation to
Mr. Durham was approximately $10,623,097, excluding accrued preferred dividends.
We are limited to a maximum purchase from Mr. Durham of $5,000,000 of shares in
2003, which purchase may only be made if we meet certain leverage ratios.
As of December 31, 2002, there were a total of 34,240 outstanding
common shares subject to put options as described above, of which 12,765 shares
were acquired by the employees for cash from 1997 through 1999. As a result of
the put options, the carrying value of all shares subject to put options will be
adjusted to fair value at each reporting period with a corresponding offset to
shareholders' equity for amounts related to the 12,765 shares and compensation
expense for amounts related to the remaining shares until the notes receivable
are paid in full.
Preferred Stock - We are authorized to issue up to 200,000 shares of
preferred stock. As of December 31, 2002, 130,973 shares were issued and
designated as Series A Cumulative Exchangeable Redeemable Preferred Stock (the
"Preferred Stock"). In connection with the Recapitalization, we sold 100,000
shares of Preferred Stock and detachable warrants to purchase 43,242 shares of
common stock for net consideration of $98.5 million, net of issuance costs of
$1.5 million. We allocated approximately $80.0 million to Preferred Stock and
$18.5 million to the warrants based on the relative fair values of the
instruments. In connection with the Uniplast acquisition we issued 30,983 shares
of Preferred stock (including 1,983 shares to employees) and detachable warrants
to purchase shares of common stock for a consideration of $31.0 million, net of
issue costs. We allocated $18.6 million to Preferred Stock, and $12.4 million to
the warrants based on the relative fair values of the instruments. The common
stock warrants have an exercise price of $0.01 per share and expire on May 31,
2011.
Dividends on Preferred Stock accrue at an annual rate of 14%. We have
the option to pay dividends in cash or to have the dividends accrue and compound
quarterly. After May 31, 2005, however, the annual dividend rate increases to
16% unless we pay dividends in cash. The annual dividend rate also increases to
16% if we fail to comply with certain of our obligations or upon certain events
of bankruptcy.
The Preferred Stock is our most senior class of capital stock. We may,
at our option, exchange the Preferred Stock for 14% senior subordinated exchange
notes so long as such exchange and the associated debt incurrence is permitted
by our existing debt
F-26
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- -------------------------------------------------------------------------------
instruments. We must redeem the Preferred Stock at a price equal to its
liquidation preference of $1,000 per share, plus accumulated dividends, on May
31, 2011. On or after May 31, 2003, we may redeem the Preferred Stock at our
option, in whole or in part, at a redemption price equal to the sum of the
liquidation preference plus accrued and unpaid dividends multiplied by the
following percentages: 107% if redeemed prior to May 31, 2004; 103% if redeemed
on or after May 31, 2004 and prior to May 31, 2005; and 100% if redeemed at any
time on or after May 31, 2005.
As a result of the mandatory redemption features, as of December 31,
2002, the carrying value of the Preferred Stock has been increased by $2.7
million to reflect accretion towards the $131.0 million redemption value at May
31, 2011. In addition, the preferred stock balance as of December 31, 2002
includes $49.6 million for accrued dividends.
11. Stock Option Plans
Pursuant to the Recapitalization, we adopted a 2000 stock incentive
plan, which, as amended, allows us to grant to employees nonqualified options to
purchase up to 65,600 shares of common stock. The option price must be no less
than fair market value on the date of grant. Unvested options are forfeited upon
the employee's termination of employment. Vested options are forfeited, if not
exercised 90 days after the employee's termination of employment. The plan is
administered by the board of directors who determines the quantity, terms and
conditions of an award, including any vesting conditions. The plan expires on
either May 31, 2010 or a date which the board of directors, in its sole
discretion, determines that the plan will terminate.
In August 2002, we adopted our 2002 Stock Incentive Plan. The 2002 plan
authorizes grants of incentive stock options, nonqualified stock options and
stock bonuses, as well as the sale of shares of common stock, to our employees,
officers, directors and consultants of Pliant or any of its subsidiaries. A
total of 4,793 shares are authorized for issuance under the 2002 plan. As of
December 31, 2002, no options or shares had been granted or sold under the 2002
plan.
A summary of stock option activity under the 2000 plan is as follows:
Weighted
Option Average
Shares Exercise Price
-------------- --------------
Outstanding at December 31, 1999 .... 10,489 $ 100.00
Granted ........................... 15,435 483.13
Exercised ......................... (1,587) 100.00
Forfeited or cancelled ............ (1,635) 483.13
-------- --------
Outstanding at December 31, 2000 .... 22,702 332.90
Granted ........................... 12,865 483.13
Exercised ......................... -- --
Forfeited or cancelled ............ (730) 483.13
-------- --------
Outstanding at December 31, 2001 .... 34,837 385.22
Granted ............................. 20,425 483.13
Exercised ........................... -- --
Forfeited or cancelled .............. (3,920) 483.13
-------- --------
Outstanding at December 31, 2002 .... 51,342 416.70
-------- --------
Exercisable at December 31, 2002 .... 15,149 $ 258.00
======== ========
The weighted average remaining contractual life of the options is 7.8
years at December 31, 2002. The options granted prior to January 1, 2001
pursuant to the 2000 plan, as amended, provide for vesting as follows: (1)
one-sixth are "time-vested" options or shares, which vested on January 1, 2001,
so long as the recipient was still our employee on such date, and (2) the
remainder are "performance vested" options or shares, which vest in increments
upon the achievement of performance targets as follows: (a) vesting in full, if
100% or more of the applicable performance target is achieved as of the end of
any calendar quarter during the option term and (b) partial vesting if more than
90% of the applicable performance target is achieved as of the end of any
calendar quarter during the option term. Moreover, all performance vested
options or shares not previously vested in accordance with the preceding
sentence will vest automatically in full on December 31, 2009 so long as the
recipient is still our employee on such date. Options granted pursuant to the
2000 plan subsequent to January 1, 2001 vest similarly, except that all of the
options are "performance vested" options, which vest in increments upon the
achievement of performance targets.
Subsequent to December 31, 2002, unvested options to purchase 116
shares were forfeited as a result of employee terminations and vested options to
purchase 260 shares were forfeited. Additional vested options to purchase 24
shares will be forfeited if not exercised within 90 days from the termination
date.
F-27
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- -------------------------------------------------------------------------------
12. Commitments and Contingencies
Environmental Contingencies - Our operations are subject to extensive
environmental laws and regulations concerning emissions to the air, discharges
to surface and subsurface waters, and the generation, handling, storage,
transportation, treatment, and disposal of waste materials, as adopted by
various governmental authorities in the jurisdictions in which we operate. We
make every reasonable effort to remain in full compliance with existing
governmental laws and regulations concerning the environment.
Royalty Agreements - We have entered into royalty agreements (the
"Agreements") for the right to use certain patents in the production of our
Winwrap stretch film. The Agreements require us to pay the patent holder a fee
of $.05 for each pound of Winwrap produced and $.10 per pound for each pound of
coreless Winwrap produced. The Agreements terminate upon the expiration of the
related patents in 2009. During the years ended December 31, 2002, 2001 and
2000, we paid royalties of $1.5 million, $1.6 million and $1.1 million,
respectively, under the Agreements.
Litigation - On November 19, 2001, S.C. Johnson & Son, Inc. and S.C.
Johnson Home Storage, Inc. (collectively, "S.C. Johnson") filed a complaint
against us in the U.S. District Court for the District of Michigan, Northern
Division (Case No. 01-CV-10343-BC). The complaint alleges misappropriation of
proprietary trade secret information relating to certain componentry used in the
manufacture of reclosable "slider" bags. We counterclaimed alleging that S.C.
Johnson misappropriated certain of our trade secrets relating to the extrusion
of flange zipper and unitizing robotics. Both the S.C. Johnson complaint and our
counterclaim seek damages and injunctive and declaratory relief. Discovery in
this proceeding is currently set to close on April 30, 2003. We intend to resist
S.C. Johnson's claims and to pursue our counterclaim vigorously. We do not
believe this proceeding will have a material adverse affect on our financial
condition or results of operations.
We are subject to other litigation matters and claims arising in the
ordinary course of business. We believe, after consultation with legal counsel,
that any liabilities arising from such litigation and claims will not have a
material adverse effect on our financial position or results of operations.
13. Acquisitions
In May 2002, we acquired substantially all of the assets and assumed
certain liabilities of Decora Industries, Inc. and its operating subsidiary,
Decora Incorporated (collectively, "Decora"), a New York based manufacturer and
reseller of printed, plastic films, including plastic films and other consumer
products sold under the Con-Tact(R) brand name. Our purchase of Decora's assets
was approved by the United States Bankruptcy Court. The purchase price was
approximately $18 million. The purchase price was negotiated with the creditors
committee and was paid in cash using borrowings from our existing revolving
credit facility. The assets purchased consisted of one plant in Fort Edward, New
York, and related equipment used by Decora primarily to print, laminate and
convert films into adhesive shelf liner. We have commenced the process of
closing the Decora plant in Fort Edward, New York and have moved the production
to our facilities in Mexico and Danville, Kentucky. This purchase expands our
product base to a new market. In addition, we expect to realize synergies from
lower costs and administrative expenses. In addition to the purchase price of
$18 million, we have accrued $5.2 million of liabilities related to acquisition
costs and severance payments. We sold our Fort Edward, New York plant on
September 30, 2002 for $2.1 million and leased it back for $1 for up to twelve
months. Results of operations from the date of acquisition are included in the
consolidated statement of operations.
The aggregate purchase price of $23.2 million, including accrued
liabilities related to acquisition costs and severance payments, has been
allocated to assets and liabilities. The allocation is as follows (dollars in
thousands):
Current Assets $ 15,805
Property Plant and Equipment 4,961
Goodwill 3,794
Intangible Assets - Trademark 5,000
Current Liabilities (6,312)
--------
Total Purchase Price $ 23,248
========
Since the intangible assets have an indefinite life there is no
amortization. The amortization of goodwill is deductible for tax purposes.
The pro forma results of operations for the years ended December 31,
(assuming the Decora acquisition had occurred on January 1, 2002 and January 1,
2001, respectively) are as follows (dollars in thousands):
F-28
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- -------------------------------------------------------------------------------
Year Ended December 31
------------------------
2002 2001
---------- ----------
Net sales $ 894,505 $ 889,411
Net loss $ (44,653) $ (14,592)
The pro forma results reflect certain non-recurring items. The net loss
for the year ended December 31, 2001 include results from a division that was
sold by Decora in 2001. The net loss reflects the write down of goodwill and
long-lived assets and reorganization costs related to the bankruptcy that are
considered non-recurring. The reorganization items were $0.6 million and $2.3
million for the years ended December 31, 2002 and 2001, respectively. The
effective income tax rate for pre-acquisition results of operations of Decora
was 0% due to the net operating losses and valuation allowances.
On August 15, 2002, we purchased substantially all of the assets and
assumed certain liabilities of the business of Roll-O-Sheets Canada Limited
("Roll-O-Sheets"). The Roll-O-Sheets business consists of one plant in Barrie,
Canada primarily engaged in the conversion and sale of PVC and polyethylene film
for the food industry. In addition, the business includes the distribution of
polyester film and polypropylene food trays and other food service products.
Detailed financial information and pro forma results are not presented as they
are not material to our consolidated financial statements.
Uniplast Holdings - On July 16, 2001, we acquired 100% of the
outstanding stock of Uniplast Holdings, Inc. ("Uniplast") for an initial
purchase price of approximately $56.0 million, consisting of the assumption of
approximately $40.3 million of debt and the issuance of shares of our common
stock valued at approximately $15.7 million to the selling shareholders of
Uniplast. We believe that this acquisition resulted in significant synergies to
the combined operations and increased the market share in a number of our market
segments. At the closing of the acquisition, we refinanced approximately $37.0
million of assumed debt with the proceeds from a private placement of 29,000
shares of preferred stock at $1,000 per share and borrowings under our revolving
credit facility. In connection with the Uniplast acquisition, we entered into an
amendment of our credit facilities and incurred amendment fees of $1.4 million.
In addition, we also issued 1,983 shares of our preferred stock at $1,000 per
share, together with warrants to purchase 2,013 shares of common stock, to
certain employees of the Company. We also incurred $0.9 million of legal and
administrative expenses. We recorded $14.4 million as intangible assets and
$21.9 million as goodwill as a result of this acquisition. The intangible assets
are being amortized over 15 years while the goodwill is not being amortized. The
operating results for Uniplast from July 16, 2001 are included in the statement
of operations for the year ended December 31, 2001.
During 2002 we made adjustments to the carrying value of Uniplast
assets and the initial purchase price totaling $3.3 million. The final purchase
price including adjustments made during 2002 to the initial purchase price of
$56.0 million has been allocated to assets and liabilities as follows:
(in millions)
Current Assets $ 19.3
Property Plant and Equipment 20.6
Intangible Assets 14.4
Goodwill 21.9
Current Liabilities (13.1)
Long-term Liabilities (3.8)
--------
Total Purchase Price $ 59.3
========
Our pro forma results of operations for the year ended December 31,
2001 (assuming the Uniplast acquisition had occurred as of January 1, 2001) are
as follows (in thousands):
2001
----------
Revenues ..................... $ 882,860
Net income (loss) ............ (424)
F-29
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- -------------------------------------------------------------------------------
14. Operating Segments
Operating segments are components of our business for which separate
financial information is available that is evaluated regularly by our chief
operating decision maker in deciding how to allocate resources and in assessing
performance. This information is reported on the basis that it is used
internally for evaluating segment performance.
We have three operating segments: Pliant U.S., Pliant International and
Pliant Solutions. In previous reporting periods, we had three operating segments
classified by our primary product types. During the third quarter of 2002, we
reorganized our operations under our three current operating segments. Segment
information in this report with respect to 2001 and 2000 has been restated for
comparative purposes. Disclosures for each product line within operating
segments are not required because amounts of net revenues are impracticable to
obtain.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. Sales and transfers
between our segments are eliminated in consolidation. We evaluate the
performance of our operating segments based on net sales (excluding intercompany
sales) and segment profit. The segment profit reflects income before
discontinued operations, extraordinary items, interest expense, income taxes,
depreciation, amortization, restructuring costs, all non-cash charges and
certain other adjustments defined by our credit agreement. Our reportable
segments are managed separately with separate management teams, because each
segment has differing products, customer requirements, technology and marketing
strategies.
Segment profit and segment assets as of and for the years ended
December 31, 2002, 2001 and 2000 are presented in the following table (in
thousands). Certain reclassifications have been made to the prior year amounts
to be consistent with the 2002 presentation.
Pliant Pliant Pliant Corporate/
U.S. International Solutions Other Total
------------- ------------- ------------- ------------- -------------
2002
Net sales to customers ............ $ 742,644 $ 108,263 $ 28,290 -- $ 879,197
Intersegment sales ................ 25,516 1,104 -- (26,620) --
------------- ------------- ------------- ------------- -------------
Total net sales ................... 768,160 109,367 28,290 (26,620) 879,197
Depreciation and amortization ..... 26,390 6,246 1,195 13,081 46,912
Interest expense .................. 125 2,122 23 73,014 75,284
Segment profit .................... 117,989 15,591 2,768 (14,731) 121,617
Segment total assets .............. 659,757 103,971 27,625 61,850 853,203
Capital expenditures .............. 34,508 9,004 43 5,639 49,194
2001
Net sales to customers ............ $ 736,067 $ 104,293 $ -- $ -- $ 840,360
Intersegment sales ................ 19,230 101 -- (19,331) --
------------- ------------- ------------- ------------- -------------
Total net sales ................... 755,297 104,394 -- (19,331) 840,360
Depreciation and amortization ..... 25,998 6,043 -- 14,976 47,017
Interest expense .................. 59 3,302 -- 72,627 75,988
Segment profit .................... 136,497 19,359 -- (14,024) 141,832
Segment total assets .............. 684,982 113,417 -- 53,284 851,683
Capital expenditures .............. 48,549 2,684 -- 5,185 56,418
2000
Net sales to customers ............ $ 753,216 $ 90,581 $ -- $ -- $ 843,797
Intersegment sales ................ 17,406 -- -- (17,406) --
------------- ------------- ------------- ------------- -------------
Total net sales ................... 770,622 90,581 -- (17,406) 843,797
Depreciation and amortization ..... 23,132 6,037 -- 10,377 39,546
Interest expense .................. 303 3,618 -- 64,613 68,534
Segment profit ................... 110,437 17,072 -- (19,922) 107,587
Segment total assets .............. 626,580 90,650 -- 67,804 785,034
Capital expenditures .............. 46,160 6,443 -- 13,041 65,644
F-30
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- -------------------------------------------------------------------------------
A reconciliation of the totals reported for the operating segments to
the totals reported in the consolidated financial statements is as follows (in
thousands):
2002 2001 2000
---------- ---------- ----------
Profit or Loss
Total segment profit .............................. $ 121,617 $ 141,832 $ 107,587
Depreciation and amortization ..................... (46,912) (47,017) (39,546)
Restructuring and other costs ..................... (43,143) 4,588 (19,368)
Interest expense ................................ (75,284) (75,988) (68,534)
Other expenses and adjustments for non-cash
charges and certain adjustments defined by our
credit agreement .................................. (1,170) (18,697) (33,915)
---------- ---------- ----------
Income (loss) from continuing operations
before taxes .................................. $ (44,892) $ 4,718 $ (53,776)
========== ========== ==========
Assets
Total assets for reportable segments .............. $ 791,353 $ 798,399 $ 717,230
Other unallocated assets .......................... $ 61,850 53,284 67,804
---------- ---------- ----------
Total consolidated assets ......................... $ 853,203 $ 851,683 $ 785,034
========== ========== ==========
Our sales to a single customer and its affiliates represented
approximately 13% and 12% of consolidated net sales in 2001 and 2000,
respectively.
15. Warrants Outstanding
The following warrants were issued and outstanding as of December 31:
2002 2001
-------- --------
Issued with the senior subordinated notes 18,532 18,532
Issued in connection with recapitalization
transaction 43,242 43,242
Issued in connection with Uniplast acquisition 31,003 31,003
-------- --------
Total outstanding 92,777 92,777
======== ========
As of December 31, 2002, 92,777 warrants were exercisable at an
exercise price of $0.01 per share. The Company has reserved up to 92,777 shares
of common stock for issuance upon the exercise of issued and outstanding
warrants.
16. Estimated Fair Value of Financial Instruments
The estimated fair value of a financial instrument is the amount at
which the instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. In the case of cash and
cash equivalents, accounts receivable and accounts payable, the carrying amount
is considered a reasonable estimate of fair value. The fair value of fixed and
floating rate debt in 2002 and 2001 was obtained from market quotes. Fair value
estimates are made at a specific point in time. Because no market exists for a
significant portion of our financial instruments, fair value estimates are based
on judgments regarding current economic conditions, risk characteristics of
various financial instruments, interest rate levels, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
judgment and therefore cannot be determined or relied on with any degree of
certainty. Changes in assumptions could significantly affect the estimates.
F-31
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- -------------------------------------------------------------------------------
Below is a summary of our financial instruments' carrying amounts and
estimated fair values as of December 31, (in thousands):
2002 2001
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
Financial assets:
Cash and cash equivalents .... $ 1,635 $ 1,635 $ 4,818 $ 4,818
Accounts receivable .......... 104,157 104,157 111,768 111,768
---------- ---------- ---------- ----------
Total financial assets ......... $ 105,792 $ 105,792 $ 116,586 $ 116,586
========== ========== ========== ==========
Financial liabilities:
Floating rate debt ........... $ 422,979 $ 422,979 $ 503,311 $ 503,311
Fixed rate debt .............. 313,402 288,000 210,012 228,800
Accounts payable ............. 113,988 113,988 101,508 101,508
---------- ---------- ---------- ----------
Total financial liabilities .... $ 850,369 $ 824,967 $ 814,831 $ 833,619
========== ========== ========== ==========
17. Related-Party Transactions
The accompanying consolidated financial statements for the year ended
December 31, 2000 includes the following transactions with companies affiliated
with Jon M. Huntsman, our majority stockholder prior to our Recapitalization (in
thousands). All related-party transactions have been recorded at estimated fair
market values for the related products and services.
2000
----------
With Huntsman Corporation and affiliates (HC)
Inventory purchases ............................ $ 20,363
Rent expense under operating lease ............. 377
Administrative expenses ........................ 796
Insurance Coverage - Prior to the Recapitalization, we obtained most of
our insurance coverage under policies of HC. Reimbursement payments to HC were
based on premium allocations, which were determined in cooperation with an
independent insurance broker and are not included in the above amounts.
Administrative Expenses - Administrative expenses were allocated to us
under a cancelable services agreement which was cancelled upon completion of the
Recapitalization.
Rent Expense - We were obligated to pay rent calculated as a pro rata
portion (based on our percentage occupancy) of the mortgage principal and
interest payments related to the HC headquarters facility. In November 2000, we
relocated and paid no further rent payments.
Stockholders' Notes Receivable - Notes receivable were issued to
various employees in connection with the sale of stock (see Note 10).
J.P. Morgan Partner and Affiliates - JPMorgan Chase Bank is the
syndication agent, and its affiliate, J.P. Morgan Chase & Co., is a lender under
our credit facilities. Both JPMorgan Chase Bank and J.P. Morgan Chase & Co.
receive customary fees under the credit facilities for acting in such capacities
including approximately $1.2 million in 2002. JPMorgan Chase Bank was also a
lender under our prior credit facility, and as a result, received a portion of
the proceeds from the financing for the recapitalization and related
transactions. Chase Securities Inc. was one of the initial purchasers in the
offering of the $220.0 million aggregate principal amount of 13% senior
subordinated notes due 2010, and was also the dealer manager for the debt tender
offer and consent solicitation relating to our 9 1/8% senior subordinated notes
due 2007 and received customary fees for acting in such capacities. Each of
JPMorgan Chase Bank, J.P. Morgan Chase & Co. and Chase Securities Inc. are
affiliates of Southwest Industrial Films, LLC, which owns approximately 55% of
our outstanding common stock and currently has the right under the stockholders'
agreement to appoint four of our directors, and of Flexible Films, LLC, which,
together with affiliates, owns approximately 59% of our Preferred Stock, subject
to certain preemptive rights with respect to 10,000 shares of Preferred Stock
issued on March 25, 2003.
F-32
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- -------------------------------------------------------------------------------
18. Accumulated Other Comprehensive Income/(Loss)
The components of accumulated other comprehensive income/(loss) as of
December 31, were as follows (in thousands):
2002 2001
-------- --------
Minimum pension liability, net of taxes of $575 $ (937) $ --
Fair value change in interest rate derivatives classified
as cash flow hedges, net of taxes of $3,450 (5,397) (2,944)
Foreign currency translation adjustments (11,510) (6,704)
-------- --------
Accumulated other comprehensive income/(loss) $(17,844) $ (9,648)
======== ========
19. Condensed Consolidating Financial Statements
The following condensed consolidating financial statements present, in
separate columns, financial information for (i) Pliant Corporation (on a parent
only basis) with its investment in its subsidiaries recorded under the equity
method, (ii) guarantor subsidiaries (as specified in the Indenture dated May 31,
2000 (the "2000 Indenture") relating to Pliant Corporation's $220 million senior
subordinated notes due 2010 (the "2000 Notes") and the Indenture, dated April
10, 2002 (the "2002 Indenture" and, together with the 2000 Indenture, the
"Indentures"), relating to Pliant's $100 million senior subordinated notes due
2010 (the "2002 Notes" and, together with the 2000 Notes, the "Notes") on a
combined basis, with any investments in non-guarantor subsidiaries specified in
the Indentures recorded under the equity method, (iii) direct and indirect
non-guarantor subsidiaries on a combined basis, (iv) the eliminations necessary
to arrive at the information for Pliant Corporation and its subsidiaries on a
consolidated basis, and (v) Pliant Corporation on a consolidated basis, in each
case as of December 31, 2002 and 2001 and for the years ended December 31, 2002,
2001 and 2000. The Notes are fully and unconditionally guaranteed on a joint and
several basis by each guarantor subsidiary and each guarantor subsidiary is
wholly owned, directly or indirectly, by Pliant Corporation. There are no
contractual restrictions limiting transfers of cash from guarantor and
non-guarantor subsidiaries to Pliant Corporation except from our Alliant joint
venture. The condensed consolidating financial statements are presented herein,
rather than separate financial statements for each of the guarantor
subsidiaries, because management believes that separate financial statements
relating to the guarantor subsidiaries are not material to investors.
In 2001, our Blessings subsidiary was merged with and into Pliant.
Accordingly, this former guarantor subsidiary company is now included as part of
the "Pliant Corporation Parent Only" column for all periods presented.
F-33
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2002 (In Thousands)
Pliant Combined Consolidated
Corporation Combined Non- Pliant
Parent Only Guarantors Guarantors Eliminations Corporation
------------ ------------ ------------ ------------ ------------
Assets
Current assets:
Cash and cash equivalents ....................... $ -- $ -- $ 1,635 $ -- $ 1,635
Receivables ..................................... 82,421 13,444 23,158 -- 119,023
Inventories ..................................... 71,586 15,832 10,604 -- 98,022
Prepaid expenses and other ...................... 2,842 899 408 -- 4,149
Income taxes receivable ......................... 1,145 4 1,219 -- 2,368
Deferred income taxes ........................... 6,909 1,522 (249) -- 8,182
------------ ------------ ------------ ------------ ------------
Total current assets .......................... 164,903 31,701 36,775 -- 233,379
Plant and equipment, net .......................... 283,638 17,919 48,922 -- 350,479
Goodwill .......................................... 189,106 -- 14,891 -- 203,997
Intangible assets, net ............................ 26,964 -- 70 -- 27,034
Investment in subsidiaries ........................ 52,813 -- -- (52,813) --
Other assets ...................................... 34,871 17 3,426 -- 38,314
------------ ------------ ------------ ------------ ------------
Total assets ...................................... $ 752,295 $ 49,637 $ 104,084 $ (52,813) $ 853,203
============ ============ ============ ============ ============
Liabilities and stockholders' equity (deficit)
Current liabilities:
Trade accounts payable ............................ $ 83,918 $ 8,675 $ 21,395 $ -- $ 113,988
Accrued liabilities ............................... 48,091 4,818 5,968 -- 58,877
Current portion of long-term debt ................. 14,117 -- 628 -- 14,745
Due to (from) affiliates .......................... (28,373) 15,316 13,057 -- --
------------ ------------ ------------ ------------ ------------
Total current liabilities ......................... 117,753 28,809 41,048 -- 187,610
Long-term debt, net of current portion ............ 697,472 -- 24,164 -- 721,636
Other liabilities ................................. 25,101 -- 1,876 -- 26,977
Deferred income taxes ............................. 19,017 1,751 3,068 -- 23,836
------------ ------------ ------------ ------------ ------------
Total liabilities ............................. 859,343 30,560 70,156 -- 960,059
------------ ------------ ------------ ------------ ------------
Minority interest ................................. -- -- 192 -- 192
Redeemable stock:
Preferred stock ................................. 150,816 -- -- -- 150,816
Common stock .................................... 13,008 -- -- -- 13,008
------------ ------------ ------------ ------------ ------------
Total redeemable stock ............................ 163,824 -- -- -- 163,824
------------ ------------ ------------ ------------ ------------
Stockholders' (deficit):
Common stock .................................... 103,376 14,020 29,240 (43,260) 103,376
Warrants to purchase common stock ............... 38,676 -- -- -- 38,676
Retained earnings (deficit) ..................... (394,420) 5,067 14,489 (19,556) (394,420)
Stockholders' notes receivable .................. (660) -- -- -- (660)
Accumulated other comprehensive loss ............ (17,844) (10) (9,993) 10,003 (17,844)
------------ ------------ ------------ ------------ ------------
Total stockholders' (deficit) ................. (270,872) 19,077 33,736 (52,813) (270,872)
------------ ------------ ------------ ------------ ------------
Total liabilities and stockholders' (deficit) ..... $ 752,295 $ 49,637 $ 104,084 $ (52,813) $ 853,203
============ ============ ============ ============ ============
F-34
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 2002 (In Thousands)
Pliant Combined Consolidated
Corporation Combined Non- Pliant
Parent Only Guarantors Guarantors Eliminations Corporation
------------ ------------ ------------ ------------ ------------
Net sales ............................. $ 695,002 $ 75,360 $ 135,455 $ (26,620) $ 879,197
Cost of sales ......................... 567,702 61,809 111,572 (26,620) 714,463
------------ ------------ ------------ ------------ ------------
Gross profit .......................... 127,300 13,551 23,883 -- 164,734
Total operating expenses .............. 108,307 6,264 22,047 -- 136,618
------------ ------------ ------------ ------------ ------------
Operating income ...................... 18,993 7,287 1,836 -- 28,116
Interest expense ...................... (73,033) (23) (2,228) -- (75,284)
Equity in earnings of subsidiaries .... (5,159) -- -- 5,159 --
Other income (expense), net ........... 10,715 (5,697) (2,742) 2,276
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes and
extraordinary loss ................ (48,484) 1,567 (3,134) 5,159 (44,892)
Income tax expense .................... (5,054) -- 3,592 -- (1,462)
------------ ------------ ------------ ------------ ------------
Net income (loss) ..................... $ (43,430) $ 1,567 $ (6,726) $ 5,159 $ (43,430)
============ ============ ============ ============ ============
F-35
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2002 (In Thousands)
Pliant Combined Consolidated
Corporation Combined Non- Pliant
Parent Only Guarantors Guarantors Eliminations Corporation
------------ ------------ ------------ ------------ ------------
Cash flows from operating activities: ........... $ 10,186 $ 9,013 $ 24,397 $ -- $ 43,596
Cash flows from investing activities:
Capital expenditures for plant and equipment .. (35,181) (4,764) (9,249) -- (49,194)
Decora acquisition, net of cash acquired ...... (8,794) (14,370) -- -- (23,164)
Asset transfer ................................ (9,116) 9,762 (646) -- --
Proceeds from sale of assets .................. 15,033 3,589 (1,500) 17,122
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities ...... (38,058) (5,783) (11,395) -- (55,236)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Payment of capitalized fees ................... (7,439) -- -- -- (7,439)
Net proceeds from issuance of common and
preferred stock ............................ (3,227) -- -- -- (3,227)
Borrowings/(payments) on long-term debt ....... 31,266 -- (8,208) -- 23,058
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities .............................. 20,600 -- (8,208) -- 12,392
------------ ------------ ------------ ------------ ------------
Effect of exchange rate changes on cash and
cash equivalents .............................. 7,272 (4,197) (7,010) -- (3,935)
------------ ------------ ------------ ------------ ------------
Net (decrease)/increase in cash and cash
equivalents ................................... -- (967) (2,216) -- (3,183)
Cash and cash equivalents at beginning of the
year .......................................... -- 967 3,851 -- 4,818
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of the year .... $ -- $ -- $ 1,635 -- $ 1,635
============ ============ ============ ============ ============
F-36
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2001 (In Thousands)
Pliant Combined Consolidated
Corporation Combined Non- Pliant
Parent Only Guarantors Guarantors Eliminations Corporation
------------ ------------ ------------ ------------ ------------
Assets
Current assets:
Cash and cash equivalents ................. $ -- $ 967 $ 3,851 $ -- $ 4,818
Receivables ............................... 94,163 7,321 23,952 -- 125,436
Inventories ............................... 65,135 9,087 9,726 -- 83,948
Prepaid expenses and other ................ 1,856 398 772 -- 3,026
Income taxes receivable ................... 361 7 617 -- 985
Deferred income taxes ..................... 4,670 (314) (1,793) -- 2,563
------------ ------------ ------------ ------------ ------------
Total current assets ................... 166,185 17,466 37,125 -- 220,776
Plant and equipment, net ..................... 293,628 26,386 49,310 -- 369,324
Goodwill, net ................................ 185,808 2,122 16,496 -- 204,426
Intangible assets, net ....................... 25,138 1,506 129 -- 26,773
Investment in subsidiaries ................... 62,837 -- -- (62,837) --
Other assets ................................. 27,188 182 3,014 -- 30,384
------------ ------------ ------------ ------------ ------------
Total assets ................................. $ 760,784 $ 47,662 $ 106,074 $ (62,837) $ 851,683
============ ============ ============ ============ ============
Liabilities and stockholders' equity(deficit)
Current liabilities:
Trade accounts payable .................... $ 81,099 $ 4,678 $ 15,731 $ -- $ 101,508
Accrued liabilities .......................... 36,541 1,703 4,853 -- 43,097
Current portion of long-term debt ......... 17,767 -- -- -- 17,767
Due to (from) affiliates .................. (24,978) 22,147 2,831 -- --
------------ ------------ ------------ ------------ ------------
Total current liabilities ............... 110,429 28,528 23,415 -- 162,372
Long-term debt, net of current portion ....... 662,556 -- 33,000 -- 695,556
Other liabilities ............................ 17,411 -- 1,533 -- 18,944
Deferred income taxes ........................ 22,108 1,625 2,423 -- 26,156
------------ ------------ ------------ ------------ ------------
Total liabilities ....................... 812,504 30,153 60,371 -- 903,028
------------ ------------ ------------ ------------ ------------
Minority interest ............................ (104) -- 375 -- 271
Redeemable stock:
Preferred stock .......................... 126,149 -- -- -- 126,149
Common stock ............................. 16,778 -- -- -- 16,778
------------ ------------ ------------ ------------ ------------
Redeemable stock ............................. 142,927 -- -- -- 142,927
------------ ------------ ------------ ------------ ------------
Stockholders' (deficit):
Common stock .............................. 103,362 14,020 29,616 (43,636) 103,362
Warrants to purchase common stock ......... 38,715 -- -- -- 38,715
Retained earnings (deficit) ............... (326,356) 3,500 21,215 (24,715) (326,356)
Stockholders' notes receivable ............ (616) -- -- -- (616)
Accumulated other comprehensive loss ...... (9,648) (11) (5,503) 5,514 (9,648)
------------ ------------ ------------ ------------ ------------
Total stockholders' (deficit) ........... (194,543) 17,509 45,328 (62,837) (194,543)
------------ ------------ ------------ ------------ ------------
Total liabilities and stockholders' (deficit) $ 760,784 $ 47,662 $ 106,074 $ (62,837) $ 851,683
============ ============ ============ ============ ============
F-37
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 2001 (In Thousands)
Pliant Combined Consolidated
Corporation Combined Non- Pliant
Parent Only Guarantors Guarantors Eliminations Corporation
------------ ------------ ------------ ------------ ------------
Net sales .............................. $ 687,349 $ 45,088 $ 127,254 $ (19,331) $ 840,360
Cost of sales .......................... 546,541 38,423 99,459 (19,331) 665,092
------------ ------------ ------------ ------------ ------------
Gross profit ........................... 140,808 6,665 27,795 -- 175,268
Total operating expenses ............... 89,117 690 11,280 -- 101,087
------------ ------------ ------------ ------------ ------------
Operating income ....................... 51,691 5,975 16,515 -- 74,181
Interest expense ....................... (72,563) (82) (3,343) -- (75,988)
Equity in earnings of subsidiaries ..... 12,756 -- -- (12,756) --
Other income (expense), net ............ 8,382 1,464 (3,321) -- 6,525
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes and
extraordinary loss ................ 266 7,357 9,851 (12,756) 4,718
Income tax expense ..................... 2,334 -- 4,452 -- 6,786
------------ ------------ ------------ ------------ ------------
Net income (loss) ...................... $ (2,068) $ 7,357 $ 5,399 $ (12,756) $ (2,068)
============ ============ ============ ============ ============
F-38
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2001 (In Thousands)
Pliant Combined Consolidated
Corporation Combined Non- Pliant
Parent Only Guarantors Guarantors Eliminations Corporation
------------ ------------ ------------ ------------ ------------
Cash flows from operating activities: ............. $ 3,574 $ 13,290 $ 13,480 -- $ 30,344
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of assets ................... 2,966 4,948 -- -- 7,914
Uniplast acquisition, net of cash acquired ..... (14,945) (14,020) (9,813) -- (38,778)
Capital expenditures for plant and equipment ... (49,640) (3,490) (3,288) -- (56,418)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities ........ (61,619) (12,562) (13,101) -- (87,282)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Payment of capitalized fees .................... (1,932) -- -- -- (1,932)
(Payment) receipt of dividends ................. 150 -- (150) -- --
Net proceeds from issuance of common and
preferred stock .............................. 30,991 -- -- -- 30,991
Borrowings / (payments) on long-term debt ...... 29,035 -- (3,105) -- 25,930
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities ................................. 58,244 -- (3,255) -- 54,989
------------ ------------ ------------ ------------ ------------
Effect of exchange rate changes on cash and cash
equivalents .................................... (658) 229 4,136 -- 3,707
------------ ------------ ------------ ------------ ------------
Net (decrease)/ increase in cash and cash
equivalents .................................... (459) 957 1,260 -- 1,758
Cash and cash equivalents at beginning of the
year ........................................... 459 10 2,591 -- 3,060
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of the year ...... $ -- $ 967 $ 3,851 $ -- $ 4,818
============ ============ ============ ============ ============
F-39
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 2000 (In Thousands)
Pliant Combined Consolidated
Corporation Combined Non- Pliant
Parent Only Guarantors Guarantors Eliminations Corporation
------------ ------------ ------------ ------------ ------------
Net sales ............................... $ 707,218 $ 40,670 $ 113,315 $ (17,406) $ 843,797
Cost of sales ........................... 587,281 39,628 87,213 (17,406) 696,716
------------ ------------ ------------ ------------ ------------
Gross profit ............................ 119,937 1,042 26,102 -- 147,081
Total operating expenses ................ 108,386 9,489 14,780 -- 132,655
------------ ------------ ------------ ------------ ------------
Operating income (loss) ................. 11,551 (8,447) 11,322 14,426
Interest expense ........................ (64,638) 27 (3,923) -- (68,534)
Equity in earnings of subsidiaries ...... 1,209 -- -- (1,209)
Other income (expense), net ............. (6,601) 5,580 1,353 -- 332
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes and
extraordinary item ................. (58,479) (2,840) 8,752 (1,209) (53,776)
Income tax expense (benefit) ............ (18,946) 718 3,985 (14,243)
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary item . (39,533) (3,558) 4,767 (1,209) (39,533)
Extraordinary loss ...................... (11,250) -- -- -- (11,250)
------------ ------------ ------------ ------------ ------------
Net income (loss) ....................... $ (50,783) $ (3,558) $ 4,767 $ (1,209) $ (50,783)
============ ============ ============ ============ ============
F-40
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2000 (In Thousands)
Pliant Combined Consolidated
Corporation Combined Non- Pliant
Parent Only Guarantors Guarantors Eliminations Corporation
------------ ------------ ------------ ------------ ------------
Cash flows from operating activities: ............. $ 38,398 $ 4,895 $ 16,973 -- $ 60,266
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures for plant and equipment ... (52,042) (6,506) (7,096) -- (65,644)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities ........ (52,042) (6,506) (7,096) -- (65,644)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Payment of capitalized loan fees ............... (22,303) -- -- -- (22,303)
Payment of fees for tender offer ............... (10,055) -- -- -- (10,055)
Proceeds from issuance of stock ................ 161,820 -- -- -- 161,820
(Payment) receipt of dividends ................. 750 -- (750) --
Redemption of common stock ..................... (314,034) -- -- -- (314,034)
Payments received from stockholder on note
receivable ................................... 165 -- -- -- 165
Proceeds from long-term debt ................... 691,684 -- -- -- 691,684
Principal payments on long-term debt ........... (497,296) -- (9,706) -- (507,002)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities ................................. 10,731 -- (10,456) -- 275
------------ ------------ ------------ ------------ ------------
Effect of exchange rate changes on cash and cash
equivalents .................................... 2,141 1,104 (4,179) -- (934)
------------ ------------ ------------ ------------ ------------
Net decrease in cash and cash equivalents ......... (772) (507) (4,758) -- (6,037)
Cash and cash equivalents at beginning of the
year ........................................... 1,231 517 7,349 -- 9,097
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of the year ...... $ 459 $ 10 $ 2,591 -- $ 3,060
============ ============ ============ ============ ============
20. OTHER INCOME
Other income for the year ended December 31, 2001 includes the proceeds
and assets received from a settlement with a potential new customer and other
less significant items.
F-41
PLIANT CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2002, 2001 and 2000
(In Thousands)
- --------------------------------------------------------------------------------
Additions
Balance at Charged to Balance
Description Beginning Costs and at End
----------- of Year Expenses Other of Year
------- -------- ----- -------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
2002 $ 2,438 $ 2,635 $ 510 (1) $ 5,583
2001 2,166 155 117 (2)(3) 2,438
2000 2,115 51 (2) 2,166
(1) Represents allowance acquired in the Decora acquisition.
(2) Represents the net of accounts written off against the allowance and
recoveries of previous write-offs.
(3) Represents an allowance acquired in the Uniplast acquisition.
S-1
INDEX TO EXHIBITS
Exhibit
Number
------
2.1 Recapitalization Agreement, dated as of March 31, 2000
(the "Recapitalization Agreement"), among Pliant
Corporation, Chase Domestic Investments, L.L.C., Richard
P. Durham as Representative, and the shareholders of
Pliant Corporation signatory thereto (incorporated by
reference to Exhibit 2.1 to the Current Report on Form
8-K filed by Pliant Corporation on April 12, 2000).
2.2 Amendment No. 1, dated as of April 3, 2000, to the
Recapitalization Agreement (incorporated by reference to
Exhibit 2.2 to Pliant Corporation's Registration
Statement on Form S-4 (File No. 333-42008)).
2.3 Amendment No. 2, dated as of May 31, 2000, to the
Recapitalization Agreement (incorporated by reference to
Exhibit 2.3 to Pliant Corporation's Registration
Statement on Form S-4 (File No. 333-42008)).
3.1 Third Amended and Restated Articles of Incorporation of
Pliant Corporation (incorporated by reference to Exhibit
3.1 to Pliant Corporation's Registration Statement on
Form S-4 (File No. 333-42008)).
3.2 Articles of Amendment of Third Amended and Restated
Articles of Incorporation of Pliant Corporation
(incorporated by reference to Exhibit 3.2 to Pliant
Corporation's Annual Report on Form 10-K for the year
ended December 31, 2000 filed on April 2, 2001).
3.3 Articles of Amendment of Third Amended and Restated
Articles of Incorporation of Pliant Corporation
(incorporated by reference to Exhibit 3.3 to Pliant
Corporation's Registration Statement on Form S-1 (File
No. 333-65754)).
3.4* Articles of Amendment of Third Amended and Restated
Articles of Incorporation of Pliant Corporation.
3.5* Articles of Amendment of Third Amended and Restated
Articles of Incorporation of Pliant Corporation.
3.6* Second Amended and Restated Bylaws of Pliant Corporation.
4.1 Indenture, dated as of May 31, 2000, among Pliant
Corporation, the Note Guarantors party thereto and The
Bank of New York, as trustee (incorporated by reference
to Exhibit 4.1 to Pliant Corporation's Registration
Statement on Form S-4 (File No. 333-42008)).
4.2 First Supplemental Indenture, dated as of July 16, 2001,
among Pliant Corporation, the New Note Guarantors party
thereto, the existing Note Guarantors party thereto and
The Bank of New York, as trustee (incorporated by
reference to Exhibit 4.3 to Pliant Corporation's
Registration Statement on Form S-1 (File No. 333-65754)).
4.3 Form of 2000 Notes (incorporated by reference to Exhibit
B to Exhibit 4.1).
4.4 Indenture, dated as of April 10, 2002, among Pliant
Corporation, the Note Guarantors party thereto and The
Bank of New York, as trustee (incorporated by reference
to Exhibit 4.4 to Pliant Corporation's Registration
Statement on Form S-4 (File No. 333-86532)).
4.5 Form of 2002 Note (incorporated by reference to Exhibit B
to Exhibit 4.4).
4.6 Exchange and Registration Rights Agreement, dated as of
May 31, 2000, among Pliant Corporation, the Note
Guarantors party thereto, and Chase Securities, Inc. and
Deutsche Bank Securities Inc., as Initial Purchasers
(incorporated by reference to Exhibit 4.3 to Pliant
Corporation's Registration Statement on Form S-4 (File
No. 333-42008)).
4.7 Exchange and Registration Rights Agreement, dated as of
April 10, 2002, among Pliant Corporation, the Note
Guarantors party thereto, and J.P. Morgan Securities,
Inc. and Deutsche Bank Securities Inc., as Initial
Purchasers (incorporated by reference to Exhibit 4.7 to
Pliant Corporation's Registration Statement on Form S-4
(File No. 333-86532)).
10.1 Note Warrant Agreement, dated as of May 31, 2000, among
Pliant Corporation and The Bank of New York, as Warrant
Agent, relating to the 220,000 Note Warrants
(incorporated by reference to Exhibit 10.1 to Pliant
Corporation's Registration Statement on Form S-4 (File
No. 333-42008)).
10.2 Stockholders' Agreement, dated as of May 31, 2000, among
Pliant Corporation, Chase Domestic Investments, L.L.C.
and each of the stockholders and warrantholders listed on
the signature pages thereto (incorporated by reference to
Exhibit 10.2 to Pliant Corporation's Registration
Statement on Form S-4 (File No. 333-42008)).
10.3 Amendment No. 1 and Waiver, dated as of July 16, 2001, to
the Stockholder's Agreement, dated as of May 31, 2000,
among Pliant Corporation, Chase Domestic Investments,
L.L.C. and each of the stockholders and warrantholders
listed on the signature pages thereto (incorporated by
reference to Exhibit 10.3 to Pliant Corporation's
Registration Statement on Form S-1 (File No. 333-65754)).
10.4 Amendment No. 2, dated as of December 19, 2001, to the
Stockholder's Agreement, dated as of May 31, 2000, among
Pliant Corporation, Chase Domestic Investments, L.L.C.
and each of the stockholders and warrantholders listed on
the signature pages thereto (incorporated by reference to
Exhibit 10.4 to Pliant Corporation's Annual Report on
Form 10-K for the year ended December 31, 2001).
10.5* Amendment No. 3, dated as of March 25, 2003, to the
Stockholder's Agreement, dated as of May 31, 2000, among
Pliant Corporation, Chase Domestic Investments, L.L.C.
and each of the stockholders and warrantholders listed on
the signature pages thereto.
10.6 Registration Rights Agreement, dated as of May 31, 2000,
among Pliant Corporation, Chase Domestic Investments,
L.L.C. and each of the stockholders and warrantholders
listed on the signature pages thereto (incorporated by
reference to Exhibit 10.3 to Pliant Corporation's
Registration Statement on Form S-4 (File No. 333-42008)).
10.7 Amendment No. 1, dated as of June 13, 2000, to the
Registration Rights Agreement, dated as of May 31, 2000,
among Pliant Corporation, Chase Domestic Investments,
L.L.C. and each of the stockholders and warrantholders
listed on the signature pages thereto (incorporated by
reference to Exhibit 10.4 to Pliant Corporation's
Registration Statement on Form S-4 (File No. 333-42008)).
10.8* Amendment No. 2, dated as of March 25, 2003, to the
Registration Rights Agreement, dated as of May 31, 2000,
among Pliant Corporation, Chase Domestic Investments,
L.L.C. and each of the stockholders and warrantholders
listed on the signature pages thereto.
10.9 Securities Purchase Agreement, dated as of May 31, 2000,
among Pliant Corporation and each of the purchasers of
Pliant Corporation's preferred stock listed on the
signature pages thereto (incorporated by reference to
Exhibit 10.5 to Pliant Corporation's Registration
Statement on Form S-4 (File No. 333-42008)).
10.10 Amendment No. 1 and Waiver, dated as of July 16, 2001, to
the Securities Purchase Agreement dated as of May 31,
2000 among Pliant Corporation, and each of the purchasers
of Pliant Corporation's preferred stock listed on the
signature pages thereto (incorporated by reference to
Exhibit 10.7 to Pliant Corporation's Registration
Statement on Form S-1 (File No. 333-65754)).
10.11 Warrant Agreement, dated as of May 31, 2000, among Pliant
Corporation and Chase Domestic Investments, L.L.C.
(incorporated by reference to Exhibit 10.6 to Pliant
Corporation's Registration Statement on Form S-4 (File
No. 333-42008)).
10.12 Amendment No. 1, dated as of July 16, 2001, to the
Warrant Agreement dated as of May 31, 2000 among Pliant
Corporation and the initial warrantholders listed in
Schedule I thereto (incorporated by reference to Exhibit
10.9 to Pliant Corporation's Registration Statement on
Form S-1 (File No. 333-65754)).
10.13* Amendment No. 2, dated as of March 25, 2003, to the
Warrant Agreement dated as of May 31, 2000 among Pliant
Corporation and the initial warrantholders listed in
Schedule I thereto.
10.14 Securities Purchase Agreement, dated as of July 16, 2001,
among Pliant Corporation and the purchasers of Pliant
Corporation's preferred stock listed on the schedules
thereto (incorporated by reference to Exhibit 10.10 to
Pliant Corporation's Registration Statement on Form S-1
(File No. 333-65754)).
10.15* Securities Purchase Agreement, dated as of March 25,
2003, among Pliant Corporation and the Purchasers named
therein.
10.16* Securities Purchase Agreement, dated as of March 25,
2003, between Pliant Corporation and J.P. Morgan Partners
(BHCA), L.P.
10.17 Credit Agreement, dated as of September 30, 1997, as
amended and restated as of May 31, 2000, among Pliant
Corporation, the subsidiary guarantors party thereto, the
various lenders from time to time party thereto, Bankers
Trust Company, as Administrative Agent and Collateral
Agent, and The Chase Manhattan Bank, as Syndication
Agent, and The Bank of Nova Scotia, as the Documentation
Agent (incorporated by reference to Exhibit 10.7 to
Pliant Corporation's Registration Statement on Form S-4
(File No. 333-42008)).
10.18 Amendment No. 1, dated as of September 30, 2000, to
Credit Agreement dated as of September 30, 1997, as
amended and restated as of May 31, 2000 (incorporated by
reference to Exhibit 10.1 to Pliant Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000).
10.19 Amendment No. 2, dated as of July 10, 2001, to the Credit
Agreement dated as of September 30, 1997, as amended and
restated as of May 31, 2000 (incorporated by reference to
Exhibit 10.13 to Pliant Corporation's Registration
Statement on Form S-1 (File No. 333-65754)).
10.20 Amendment No. 3, dated as of April 2, 2002, to the Credit
Agreement dated as of September 30, 1997, as amended and
restated as of May 31, 2000 (incorporated by reference to
Exhibit 10.15 to Pliant Corporation's Registration
Statement on Form S-4 (File No. 333-86532)).
10.21 Amendment No. 4, dated as of September 30, 2002, to the
Credit Agreement dated as of September 30, 1997, as
amended and restated as of May 31, 2000 (incorporated by
reference to Exhibit 10.2 to Pliant Corporation's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2002).
10.22* Amendment No. 5, dated as of March 24, 2003, to the
Credit Agreement dated as of September 30, 1997, as
amended and restated as of May 31, 2000.
10.23 Guarantee Agreement, dated as of September 30, 1997, as
amended and restated as of May 31, 2000, among the
subsidiary guarantors party thereto and Bankers Trust
Company, as Collateral Agent (incorporated by reference
to Exhibit 10.8 to Pliant Corporation's Registration
Statement on Form S-4 (File No. 333-42008)).
10.24 Supplement No. 1, dated as of July 19, 2001, to the
Guarantee Agreement, dated as of September 30, 1997, as
amended and restated as of May 31, 2000, among Pliant
Corporation, each of the subsidiaries listed on Schedule
I thereto and Bankers Trust Company, as Administrative
Agent (incorporated by reference to Exhibit 10.15 to
Pliant Corporation's Registration Statement on Form S-1
(File No. 333-65754)).
10.25 Security Agreement, dated as of September 30, 1997, as
amended and restated as of May 31, 2000, among the
subsidiary guarantors party thereto and Bankers Trust
Company, as Collateral Agent (incorporated by reference
to Exhibit 10.9 to Pliant Corporation's Registration
Statement on Form S-4 (File No. 333-42008)).
10.26 Supplement No. 1, dated as of July 19, 2001, to the
Security Agreement, dated as of September 30, 1997, as
amended and restated as of May 31, 2000, among Pliant
Corporation, each of the subsidiaries listed on Schedule
I thereto and Bankers Trust Company, as Collateral Agent
(incorporated by reference to Exhibit 10.17 to Pliant
Corporation's Registration Statement on Form S-1 (File
No. 333-65754)).
10.27 Pledge Agreement, dated as of September 30, 1997, as
amended and restated as of May 31, 2000, among the
subsidiary guarantors party thereto and Bankers Trust
Company, as Collateral Agent (incorporated by reference
to Exhibit 10.10 to Pliant Corporation's Registration
Statement on Form S-4 (File No. 333-42008)).
10.28 Supplement No. 1, dated as of July 19, 2001, to the
Pledge Agreement, dated as of September 30, 1997, as
amended and restated as of May 31, 2000, among Pliant
Corporation, each of the subsidiaries listed on Schedule
I thereto and Bankers Trust Company, as Collateral Agent
(incorporated by reference to Exhibit 10.19 to Pliant
Corporation's Registration Statement on Form S-1 (File
No. 333-65754)).
10.29 Indemnity, Subrogation and Contribution Agreement, dated
as of September 30, 1997, as amended and restated as of
May 31, 2000, among the subsidiary guarantors party
thereto and Bankers Trust Company, as Collateral Agent
(incorporated by reference to Exhibit 10.11 to Pliant
Corporation's Registration Statement on Form S-4 (File
No. 333-42008)).
10.30 Supplement No. 1, dated as of July 19, 2001, to the
Indemnity, Subrogation and Contribution Agreement, dated
as of September 30, 1997, as amended and restated as of
May 31, 2000, among Pliant Corporation, each of the
subsidiaries listed on Schedule I thereto and Bankers
Trust Company, as Collateral Agent (incorporated by
reference to Exhibit 10.21 to Pliant Corporation's
Registration Statement on Form S-1 (File No. 333-65754)).
10.31 Employment Agreement, dated as of May 31, 2000, between
Pliant Corporation and Richard P. Durham (incorporated by
reference to Exhibit 10.12 to Pliant Corporation's
Registration Statement on Form S-4 (File No. 333-42008)).
10.32 Amendment No. 1, dated as of February 1, 2001, to the
Employment Agreement, dated as of May 31, 2000, between
Pliant Corporation and Richard P. Durham (incorporated by
reference to Exhibit 10.14 to Pliant Corporation's Annual
Report on Form 10-K for the year ended December 31, 2000
filed on April 2, 2001).
10.33 Separation Agreement, dated as of June 10, 2002, between
Pliant Corporation and Richard P. Durham (incorporated by
reference to Exhibit 10.1 to Pliant Corporation's
Quarterly Report on Form 10-Q for the quarter ended June
30, 2002).
10.34 Employment Agreement, dated as of May 31, 2000, between
Pliant Corporation and Jack E. Knott (incorporated by
reference to Exhibit 10.13 to Pliant Corporation's
Registration Statement on Form S-4 (File No. 333-42008)).
10.35 Employment Agreement, dated as of May 31, 2000, between
Pliant Corporation and Scott K. Sorensen (incorporated by
reference to Exhibit 10.14 to Pliant Corporation's
Registration Statement on Form S-4 (File No. 333-42008)).
10.36 Letter Agreement, dated as of December 27, 2000,
terminating the Employment Agreement, dated as of May 31,
2000, between Pliant Corporation and Scott K. Sorensen
(incorporated by reference to Exhibit 10.17 to Pliant
Corporation's Annual Report on Form 10-K for the year
ended December 31, 2000 filed on April 2, 2001).
10.37 Employment Agreement, dated as of May 31, 2000, between
Pliant Corporation and Ronald G. Moffitt (incorporated by
reference to Exhibit 10.15 to Pliant Corporation's
Registration Statement on Form S-4 (File No. 333-42008)).
10.38 Letter Agreement, dated as of January 22, 2001,
terminating the Employment Agreement, dated as of May 31,
2000, between Pliant Corporation and Ronald G. Moffitt
(incorporated by reference to Exhibit 10.19 to Pliant
Corporation's Annual Report on Form 10-K for the year
ended December 31, 2000 filed on April 2, 2001).
10.39 Employment Agreement, dated as of March 30, 2001, between
Pliant Corporation and Brian E. Johnson (incorporated by
reference to Exhibit 10.30 to Pliant Corporation's Annual
Report on Form 10-K for the year ended December 31,
2001).
10.40 Restricted Stock Agreement, dated as of May 31, 2000,
between Pliant Corporation and Richard P. Durham
(incorporated by reference to Exhibit 10.16 to Pliant
Corporation's Registration Statement on Form S-4 (File
No. 333-42008)).
10.41 Restricted Stock Agreement, dated as of May 31, 2000,
between Pliant Corporation and Jack E. Knott
(incorporated by reference to Exhibit 10.17 to Pliant
Corporation's Registration Statement on Form S-4 (File
No. 333-42008)).
10.42 Restricted Stock Agreement, dated as of May 31, 2000,
between Pliant Corporation and Scott K. Sorensen
(incorporated by reference to Exhibit 10.18 to Pliant
Corporation's Registration Statement on Form S-4 (File
No. 333-42008)).
10.43 Stock Redemption Agreement, dated as of December 27,
2000, between Pliant Corporation and Scott K. Sorensen
(incorporated by reference to Exhibit 10.23 to Pliant
Corporation's Annual Report on Form 10-K for the year
ended December 31, 2000 filed on April 2, 2001).
10.44 Restricted Stock Agreement, dated as of May 31, 2000,
between Pliant Corporation and Ronald G. Moffitt
(incorporated by reference to Exhibit 10.19 to Pliant
Corporation's Registration Statement on Form S-4 (File
No. 333-42008)).
10.45 Stock Redemption Agreement, dated as of February 1, 2001,
between Pliant Corporation and Ronald G. Moffitt
(incorporated by reference to Exhibit 10.25 to Pliant
Corporation's Annual Report on Form 10-K for the year
ended December 31, 2000 filed on April 2, 2001).
10.46 Pledge Agreement, dated as of May 31, 2000, in favor of
Pliant Corporation made by Richard P. Durham
(incorporated by reference to Exhibit 10.20 to Pliant
Corporation's Registration Statement on Form S-4 (File
No. 333-42008)).
10.47 Amendment No. 1, dated as of March 1, 2001, to the Pledge
Agreement dated as of May 31, 2000, among Pliant
Corporation and Richard P. Durham (incorporated by
reference to Exhibit 10.35 to Post-Effective Amendment
No. 2 to Pliant Corporation's Registration Statement on
Form S-4 (File No. 333-42008)).
10.48 Pledge Agreement, dated as of May 31, 2000, in favor of
Pliant Corporation made by Jack E. Knott (incorporated by
reference to Exhibit 10.21 to Pliant Corporation's
Registration Statement on Form S-4 (File No. 333-42008)).
10.49 Amendment No. 1, dated as of April 1, 2001, to the Pledge
Agreement dated as of May 31, 2000, among Pliant
Corporation and Jack E. Knott (incorporated by reference
to Exhibit 10.36 to Post-Effective Amendment No. 2 to
Pliant Corporation's Registration Statement on Form S-4
(File No. 333-42008)).
10.50 Pledge Agreement, dated as of May 31, 2000, in favor of
Pliant Corporation made by Scott K. Sorensen
(incorporated by reference to Exhibit 10.22 to Pliant
Corporation's Registration Statement on Form S-4 (File
No. 333-42008)).
10.51 Pledge Agreement, dated as of May 31, 2000, in favor of
Pliant Corporation made by Ronald G. Moffitt
(incorporated by reference to Exhibit 10.23 to Pliant
Corporation's Registration Statement on Form S-4 (File
No. 333-42008)).
10.52 1998 Pliant Corporation Stock Option Plan (incorporated
by reference to Exhibit 10.10 to Pliant Corporation's
Annual Report on Form 10-K for the year ended December
31, 1998).
10.53 Pliant Corporation Management Incentive Plan for Senior
Divisional Management (1999) (incorporated by reference
to Exhibit 10.1 to Pliant Corporation's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2000).
10.54* Pliant Corporation 2000 Stock Incentive Plan (as amended
and restated through April 17, 2002).
10.55 Second Amended and Restated Stock Option Agreement, dated
as of May 31, 2000 between Pliant Corporation and Jack E.
Knott (incorporated by reference to Exhibit 10.27 to
Pliant Corporation's Registration Statement on Form S-4
(File No. 333-42008)).
10.56 Pliant Corporation Management Incentive Plan (2000)
(incorporated by reference to Exhibit 10.2 to Pliant
Corporation's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000).
10.57 Pliant Corporation Management Incentive Plan (2001)
(incorporated by reference to Exhibit 10.48 to Pliant
Corporation's Annual Report on Form 10-K for the year
ended December 31, 2001).
10.58 Pliant Corporation Management Incentive Plan (2002)
(incorporated by reference to Exhibit 10.49 to Pliant
Corporation's Annual Report on Form 10-K for the year
ended December 31, 2001).
10.59 Pliant Corporation 2002 Stock Incentive Plan
(incorporated by reference to Exhibit 10.1 to Pliant
Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002).
12.1* Statement re: computation of ratios of earning to fixed
charges.
21.1* Subsidiaries of Pliant Corporation.
99.1* Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2* Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
--------
* Filed with this report.