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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission file number 333-40067
PLIANT CORPORATION
(Exact name of registrant as specified in its charter)
Utah 87-0496065
- ------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1475 Woodfield Road, Suite 700
Schaumburg, IL 60173
(847) 969-3300
(Address of principal executive offices and telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes ___ No X
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. On May 7, 2003, there were
576,878 outstanding shares of the registrant's Common Stock.
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PLIANT CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
--------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31,
2003 AND DECEMBER 31, 2002 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 5
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS'
DEFICIT FOR THE THREE MONTHS ENDED MARCH 31, 2003 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 24
ITEM 4. CONTROLS AND PROCEDURES 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 25
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 25
ITEM 5. OTHER INFORMATION 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 26
2
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
PLIANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2003 AND DECEMBER 31, 2002 (DOLLARS IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------
March 31, 2003 December 31, 2002
-------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,479 $ 1,635
Receivables, net of allowances of $5,104 and $5,583, respectively 134,919 119,023
Inventories 103,766 98,022
Prepaid expenses and other 4,803 4,149
Income taxes receivable 1,227 2,368
Deferred income taxes 8,425 8,182
--------- ---------
Total current assets 257,619 233,379
PLANT AND EQUIPMENT, net 342,763 350,479
GOODWILL 204,052 203,997
INTANGIBLE ASSETS, net 26,361 27,034
OTHER ASSETS 39,250 38,314
--------- ---------
TOTAL ASSETS $ 870,045 $ 853,203
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Trade accounts payable $ 118,795 $ 113,988
Accrued liabilities 67,711 58,877
Current portion of long-term debt 14,445 14,745
--------- ---------
Total current liabilities 200,951 187,610
LONG-TERM DEBT, net of current portion 721,853 721,636
OTHER LIABILITIES 28,305 26,977
DEFERRED INCOME TAXES 23,422 23,836
--------- ---------
Total liabilities 974,531 960,059
--------- ---------
Minority Interest 46 192
REDEEMABLE PREFERRED STOCK - 200,000 shares authorized, designated as Series A,
no par value, with a redemption and liquidation value of $1,000 per share;
140,973 shares outstanding at March 31, 2003 and 130,973 shares
outstanding at December 31, 2002 167,046 150,816
REDEEMABLE COMMON STOCK - no par value; 60,000 shares authorized;
34,240 shares outstanding as of March 31, 2003 and December 31, 2002,
net of related stockholders' notes receivable of $6,754 at March 31, 2003
and December 31, 2002 13,008 13,008
--------- ---------
180,054 163,824
--------- ---------
STOCKHOLDERS' DEFICIT:
Common stock - no par value; 10,000,000 shares authorized, 542,638 shares
outstanding at March 31, 2003 and December 31, 2002 103,376 103,376
Warrants to purchase common stock 39,133 38,676
Accumulated deficit (408,450) (394,420)
Stockholders' notes receivable (671) (660)
Accumulated other comprehensive income (loss) (17,974) (17,844)
--------- ---------
Total stockholders' deficit (284,586) (270,872)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 870,045 $ 853,203
========= =========
See notes to condensed consolidated financial statements.
3
PLIANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------
2003 2002
---------- ---------
NET SALES $ 240,511 $ 210,083
COST OF SALES 197,714 164,432
--------- ---------
Gross profit 42,797 45,651
--------- ---------
OPERATING EXPENSES:
Sales, General and Administrative 21,316 19,290
Research and Development 1,377 2,110
Restructuring and Other Costs 6,064 3,330
--------- ---------
Total operating expenses 28,757 24,730
--------- ---------
OPERATING INCOME 14,040 20,921
INTEREST EXPENSE (19,856) (16,855)
OTHER INCOME - Net 496 452
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (5,320) 4,518
INCOME TAX EXPENSE (BENEFIT) 2,023 1,942
--------- ---------
NET INCOME (LOSS) $ (7,343) $ 2,576
========= =========
See notes to condensed consolidated financial statements.
4
PLIANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (7,343) $ 2,576
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 11,156 11,343
Deferred income taxes (657) 88
Change in provision for losses on accounts receivable
Non-cash plant closing costs 3,260 -
Gain or loss on disposal of assets 96 (63)
Changes in assets and liabilities:
Receivables (15,896) (9,100)
Inventories (5,744) 180
Prepaid expenses and other (654) (207)
Income taxes payable/receivable 1,141 (147)
Other assets 1,149 83
Trade accounts payable 4,807 5,369
Accrued liabilities 5,982 746
Other liabilities 1,329 1,081
Other (146) (36)
--------- ---------
Net cash (used in)/provided by operating activities (1,520) 11,913
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for plant and equipment (3,622) (10,475)
--------- ---------
Net cash used in investing activities (3,622) (10,475)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of preferred stock 9,988 -
Change in stockholders' notes receivables - (34)
Payment of financing fees (2,200)
Principal payments on long-term debt (10,000) (5,761)
Proceeds from revolving debt 9,917 3,109
--------- ---------
Net cash provided by (used in) financing activities 7,705 (2,686)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 281 635
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,844 (613)
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 1,635 4,818
--------- ---------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 4,479 $ 4,205
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest $ 6,401 $ 8,968
Income taxes 1,802 318
Other non-cash disclosure:
Preferred Stock dividends accrued but not paid $ 6,321 $ 5,581
See notes to condensed consolidated financial statements.
5
PLIANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2003 (IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------
Accumulated
Warrants Stockholders' Other
Common Stock To Purchase Accumulated Notes Comprehensive
Shares Amount Common Stock Deficit Receivable Income (Loss) Total
----------------- ------------ ----------- ------------- ------------- ----------
BALANCE, DECEMBER 31, 2002 543 $ 103,376 $ 38,676 $ (394,420) $ (660) $ (17,844) $ (270,872)
Net loss - - - (7,343) - - (7,343)
Fair value change in interest rate
Derivatives classified as cash - - - - - 408 408
Flow hedges
Preferred stock dividend and
Accretion - - - (6,687) - - (6,687)
Issuance of warrants 457 457
Amortization of discount on
Stockholder's note receivable - - - - (11) - (11)
Foreign currency translation
Adjustment - - - - - (538) (538)
--- --------- -------- ---------- ------ --------- ----------
BALANCE, MARCH 31, 2003 543 $ 103,376 $ 39,133 $ (408,450) $ (671) $ (17,974) $ (284,586)
=== ========= ======== ========== ====== ========= ==========
See notes to condensed consolidated financial statements.
6
PLIANT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared, without audit, in accordance with U.S. generally accepted
accounting principles and pursuant to the rules and regulations of the
Securities and Exchange Commission. The information reflects all normal
recurring adjustments that, in the opinion of management, are necessary
for a fair presentation of the financial position, results of operations
and cash flows of Pliant Corporation and its subsidiaries ("Pliant", the
"Company" or "we") as of the dates and for the periods presented. Results
of operations for the period ended March 31, 2003 are not necessarily
indicative of results of operations to be expected for the full fiscal
year.
Certain information in footnote disclosures normally included in financial
statements presented in accordance with U.S. generally accepted accounting
principles has been condensed or omitted in accordance with the rules and
regulations of the Securities and Exchange Commission. These statements
should be read in conjunction with the Company's Annual Report on Form
10-K for the year ended December 31, 2002 and the Company's Registration
Statement on Form S-4 (File No. 333-86532). Certain reclassifications have
been made to the condensed consolidated financial statements for the
quarter ended March 31, 2002 for comparative purposes.
2. INVENTORIES
Inventories are valued at the lower of cost (using the first-in, first-out
method) or market value. Inventories as of March 31, 2003 and December 31,
2002 consisted of the following (in thousands):
March 31, 2003 December 31, 2002
---------------- -----------------
Finished goods $ 58,180 $ 60,758
Raw materials 36,153 28,045
Work-in-process 9,433 9,219
--------- --------
Total $ 103,766 $ 98,022
========= ========
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 three
months ended March 31 (in thousands):
2003 2002
------- -------
Plant closing costs:
Severance $ 300 $ 186
Relocation of production lines 1,294 1,484
Other plant closure costs 1,200 780
------- -------
2,794 2,450
------- -------
Office closing and workforce
reduction costs:
Severance 10 880
Leases 3,260 -
------- -------
3,270 880
------- -------
$ 6,064 $ 3,330
======= =======
7
The following table summarizes the roll-forward of the reserve from
December 31, 2002 to March 31, 2003:
Accruals for the Quarter Ended March 31, 2003
--------------------------------------------------
12/31/2002 3/31/2003
------------------- -------------------
Accrual Additional Relocated Other Accrual
# Employees Balance Employees Severance Production Leases Plant Total Payments # Employees Balance
Lines Closure
Costs
- ------------------------------------------------------------------------------------------------------------------------------------
Plant Closing Costs:
Merced 54 $1,527 $443 $516 $959 ($1,262) 54 $1,224
Shelbyville 12 $327 $92 $9 $208 $309 ($378) 12 $258
Toronto 18 $124 $126 $3 $129 ($161) 18 $92
Decora 145 $1,727 20 $82 $842 $473 $1,397 ($1,947) 165 $1,177
------------ ------- --------- --------- ---------- ------ ------ -------- ----- -------
229 $3,705 20 $300 $1,294 $ 0 $1,200 $2,794 ($3,748) 249 $2,751
------------ ------- --------- --------- ---------- -------- ------ ------- -------- ----- -------
Office Closing and Workforce Reduction Costs:
Leases $1,071 $3,260 $3,260 ($452) -- $3,879
Severance 111 $3,580 1 $ 10 $ 10 ($1,471) 112 $2,119
------------ ------- -------- --------- ------- --------- ----- -------
111 $4,651 1 $ 10 $ 0 $3,260 0 $3,270 ($1,923) 112 $5,998
---------- ------- -------- --------- ---------- ------- ------- ------- -------- ----- -------
TOTAL 340 $8,356 21 $310 $1,294 $3,260 $1,200 $6,064 ($5,671) 361 $8,749
============ ======= ======== ========= ========== ======= ======= ======= ======== ===== =======
All of the employee terminations have been completed as of March 31, 2003.
Plant Closing Costs
2003 accruals- During the first quarter of 2003, we continued to incur
costs related to the closure of our facilities in Merced, California and
Shelbyville, Indiana; production rationalizations in Toronto, Canada; and
the relocation of certain lines from our Merced plant and Fort Edward plant
to our other facilities.
Office Closing and Workforce Reduction Costs
2003 accruals - During the first quarter of 2003, we accrued the present
value of future lease payments on two buildings that we do not currently
occupy. In connection with the 2001 restructuring plan, we vacated and
subleased these facilities in 2001. During the first quarter of 2003, the
sublessees defaulted on the subleases.
4. STOCK OPTION PLANS
During the three months ended March 31, 2003, options to purchase 4,750
shares of our common stock were granted and options to purchase 487 shares
of our common stock were cancelled in connection with employee
terminations.
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. We did not have compensation expense
related to stock options for the three month periods ended March 31, 2003
and March 31, 2002. Had the compensation cost for all the outstanding
options been determined in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation," our net income (loss) for the quarters ended
March 31, 2003 and 2002 would have been the following pro forma amounts (in
thousands):
2003 2002
------- ------
As reported $(7,343) $2,576
Pro forma stock compensation expense (188) (177)
------- ------
Pro forma $(7,531) $2,399
======= ======
8
5. INCOME TAXES
For the three months ended March 31, 2003, our income tax expense was $2.0
million, on pretax losses of $5.3 million as compared to an income tax expense
of $1.9 million, or 43.0%, on pretax income of $4.5 million for three months
ended March 31, 2002. The significant variance in the effective income tax rate
is principally due to the increase in the valuation allowance which offset the
United States tax benefit accrued for the 2003 net operating loss. In addition,
income taxes are accrued for foreign operations since the pretax losses are
principally related to operations in the United States. The effective rate for
foreign income taxes is substantially higher than the effective rate for income
taxes in the United States.
6. COMPREHENSIVE INCOME/(LOSS)
Other comprehensive income (loss) for the three months ended March 31, 2003 and
2002 were $7.5 million of losses and $5.4 million of income, respectively. The
components of other comprehensive income/(loss) are net income, the change in
cumulative unrealized losses on derivatives recorded in accordance with
Statement of Financial Accounting Standards No. 133 and foreign currency
translation.
7. AMENDMENT TO CREDIT FACILITIES AND ISSUANCE OF PREFERRED SHARES
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 and related warrants.
8. 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 four operating segments: Pliant U.S., Pliant Flexible Packaging, Pliant
International and Pliant Solutions. In previous reporting periods we had three
operating segments. During the first quarter of 2003, we reorganized our old
Pliant U.S. segment into two new separate segments, Pliant U.S. and Pliant
Flexible Packaging. Segment information in this report with respect to 2002 has
been restated for comparative purposes.
9
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 and other non-cash
charges and net adjustments for certain unusual items. 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 periods ended March 31, 2003
and 2002 are presented in the following table (in thousands). Certain
reclassifications have been made to the prior year amounts to be consistent with
the 2003 presentation.
Pliant Pliant Flexible Pliant Pliant Corporate/
U.S. Packaging International Solutions Other Total
-------- --------------- ------------- --------- ---------- ---------
2003
Net sales to customers ........... $151,929 $ 51,757 $ 28,036 $ 8,789 $ 0 $240,511
Intersegment sales ............... 3,155 881 2,771 0 (6,807) 0
-------- -------- -------- ------- ------- --------
Total net sales .................. 155,084 52,638 30,807 8,789 (6,807) 240,511
Depreciation and amortization .... 6,557 1,977 1,739 305 578 11,156
Interest expense ................. (2) 13 577 5 19,263 19,856
Segment profit ................... 26,761 7,675 2,880 (901) (4,356) 32,059
Segment total assets ............. 533,907 137,488 99,695 33,860 65,095 870,045
Capital expenditures ............. 1,129 703 1,406 0 384 3,622
2002
Net sales to customers ........... $132,963 $ 48,646 $ 28,474 $ 0 $ 0 $210,083
Intersegment sales ............... 3,945 682 76 0 (4,703) 0
-------- -------- -------- ------- ------- --------
Total net sales .................. 136,908 49,328 28,550 0 (4,703) 210,083
Depreciation and amortization .... 4,627 2,004 1,561 0 3,151 11,343
Interest expense ................. (4) 36 591 0 16,232 16,855
Segment profit ................... 26,695 8,242 5,507 0 (4,443) 36,001
Segment total assets ............. 557,034 142,834 108,977 0 52,283 861,128
Capital expenditures ............. 6,698 1,965 670 0 1,142 10,475
The business operated by our Pliant Solutions segment was acquired in May 2002.
A reconciliation of the totals reported for the operating segments to the totals
reported in the consolidated financial statements as of and for the three months
ended March 31 is as follows (in thousands):
2003 2002
-------- --------
Profit or Loss
Total segment profit ..................... $ 32,059 $ 36,001
Depreciation and amortization ............ (11,156) (11,343)
Restructuring and other costs ............ (6,064) (3,330)
Interest expense ......................... (19,856) (16,855)
Other expenses and adjustments for
non-cash charges and certain adjustments
defined by our credit agreement ........ (303) 45
-------- --------
Income (loss)
before taxes ......................... $ (5,320) $ 4,518
======== ========
Assets
Total assets for reportable segments ..... $804,950 $808,845
Other unallocated assets ................. 65,095 52,283
-------- --------
Total consolidated assets ................ $870,045 $861,128
======== ========
In April 2003, we combined our Pliant U.S. and Pliant Solutions segments into a
single segment. Therefore, beginning with the second quarter of 2003 our
operating segments for financial reporting purposes will be Pliant U.S.
(including our current Pliant Solutions segment), Pliant Flexible Packaging and
Pliant International.
10
9. 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 March 31, 2003 and December 31, 2002 and for the three months ended
March 31, 2003 and 2002. 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. Alliant is a joint venture between us and Supreme Plastics Ltd., a
company based in the United Kingdom. We own a fifty-percent interest in Alliant.
The limited liability company agreement governing the joint venture prohibits
distributions to the members of the joint venture before July 27, 2004, other
than annual distributions sufficient to pay taxes imposed upon the members as a
result of the attribution to the members of income of the 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.
11
PLIANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2003 (IN THOUSANDS) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
Pliant Combined Combined Consolidated
Corporation Guarantor Non-Guarantor Pliant
(Parent Only) Subsidiaries Subsidiaries Eliminations Corporation
------------- ------------ ------------- ------------ -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,206 $ 431 $ 842 $ - $ 4,479
Receivables -- net 95,865 15,462 23,592 - 134,919
Inventories 71,192 19,393 13,181 - 103,766
Prepaid expenses and other 2,767 1,532 504 - 4,803
Income taxes receivable 565 4 658 - 1,227
Deferred income taxes 8,003 1,522 (1,100) - 8,425
--------- ------- --------- -------- ---------
Total current assets 181,598 38,344 37,677 - 257,619
PLANT AND EQUIPMENT -- Net 276,303 18,815 47,645 - 342,763
INTANGIBLE ASSETS -- Net 215,421 - 14,992 - 230,413
INVESTMENT IN SUBSIDIARIES 53,635 - - (53,635) -
OTHER ASSETS 35,730 - 3,520 - 39,250
--------- ------- --------- -------- ---------
TOTAL ASSETS $ 762,687 $57,159 $ 103,834 $(53,635) $ 870,045
========= ======= ========= ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $ 13,817 $ - $ 628 $ - $ 14,445
Trade accounts payable 87,568 9,766 21,461 - 118,795
Accrued liabilities 57,817 4,950 4,944 - 67,711
Due to (from) affiliates (36,357) 21,491 14,866 - -
--------- ------- --------- -------- ---------
Total current liabilities 122,845 36,207 41,899 - 200,951
LONG-TERM DEBT -- Net of current portion 698,318 - 23,535 - 721,853
OTHER LIABILITIES 26,306 - 1,999 - 28,305
DEFERRED INCOME TAXES 19,750 1,751 1,921 - 23,422
--------- ------- --------- -------- ---------
Total liabilities 867,219 37,958 69,354 - 974,531
--------- ------- --------- -------- ---------
MINORITY INTEREST - - 46 - 46
REDEEMABLE STOCK:
Preferred Stock 167,046 - - - 167,046
Common Stock 13,008 - - - 13,008
--------- ------- --------- -------- ---------
REDEEMABLE STOCK 180,054 - - - 180,054
--------- ------- --------- -------- ---------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock 103,376 - 9,650 (9,650) 103,376
Additional paid-in capital - 14,020 19,590 (33,610) -
Warrants 39,133 - - - 39,133
Retained earnings accumulated (deficit) (408,450) 5,192 15,427 (20,619) (408,450)
Stockholders' note receivable (671) - - - (671)
Accumulated other comprehensive loss (17,974) (11) (10,233) 10,244 (17,974)
--------- ------- --------- -------- ---------
Total stockholders' equity (deficit) (284,586) 19,201 34,434 (53,635) (284,586)
--------- ------- --------- -------- ---------
========= ======= ========= ======== =========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 762,687 $57,159 $ 103,834 $(53,635) $ 870,045
========= ======= ========= ======== =========
12
PLIANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2002 (IN THOUSANDS) (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------
Pliant Consolidated
Corporation Combined Combined Pliant
Parent Only Guarantors Non-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
========= ======= ======== ======== =========
13
PLIANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 2003 (IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------
Pliant Combined Combined Consolidated
Corporation Guarantor Non-Guarantor Pliant
(Parent Only) Subsidiaries Subsidiaries Eliminations Corporation
------------- ------------ ------------- ------------ ------------
SALES, Net $190,855 $19,885 $36,578 $(6,807) $240,511
COST OF SALES 155,514 17,691 31,316 (6,807) 197,714
-------- ------- ------- ------- --------
GROSS PROFIT 35,341 2,194 5,262 - 42,797
OPERATING EXPENSES 23,561 2,028 3,168 - 28,757
-------- ------- ------- ------- --------
OPERATING INCOME 11,780 166 2,094 - 14,040
INTEREST EXPENSE (19,269) (5) (582) - (19,856)
EQUITY IN EARNINGS OF SUBSIDIARIES 1,063 - - (1,063) -
OTHER INCOME (EXPENSE), Net (129) (36) 661 - 496
-------- ------- ------- ------- --------
INCOME (LOSS) BEFORE INCOME TAXES (6,555) 125 2,173 (1,063) (5,320)
INCOME TAX PROVISION (BENEFIT) 788 - 1,235 - 2,023
-------- ------- ------- ------- --------
NET INCOME (LOSS) $ (7,343) $ 125 $ 938 $(1,063) $ (7,343)
-------- ------- ------- ------- --------
14
PLIANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 2002 (IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------
Pliant Combined Combined Consolidated
Corporation Guarantor Non-Guarantor Pliant
(Parent Only) Subsidiaries Subsidiaries Eliminations Corporation
------------- ------------ ------------- ------------ ------------
SALES, Net $170,037 $10,739 $34,010 $(4,703) $210,083
COST OF SALES 133,264 9,502 26,369 (4,703) 164,432
-------- -------- ------- ------- --------
GROSS PROFIT 36,773 1,237 7,641 - 45,651
OPERATING EXPENSES 21,266 84 3,380 - 24,730
-------- -------- ------- ------- --------
OPERATING INCOME 15,507 1,153 4,261 - 20,921
INTEREST EXPENSE (16,237) - (618) - (16,855)
EQUITY IN EARNINGS OF SUBSIDIARIES 3,748 - - (3,748) -
OTHER INCOME (EXPENSE), Net 14 3 435 - 452
-------- -------- ------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 3,032 1,156 4,078 (3,748) 4,518
INCOME TAX PROVISION (BENEFIT) 456 - 1,486 - 1,942
-------- -------- ------- ------- --------
NET INCOME (LOSS) $ 2,576 $ 1,156 $ 2,592 $(3,748) $ 2,576
-------- -------- ------- ------- --------
15
PLIANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 (IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------------
Pliant Combined Combined Consolidated
Corporation Guarantor Non-Guarantor Pliant
(Parent Only) Subsidiaries Subsidiaries Eliminations Corporation
------------- ------------ ------------- ------------ ------------
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ (4,225) $ 2,024 $ 681 - $ (1,520)
------------- ------------ ------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Asset transfers - - - - -
Capital expenditures for plant and equipment (1,333) (374) (1,915) - (3,622)
------------- ------------ ------------- ------------ ------------
Net cash used in investing activities (1,333) (374) (1,915) - (3,622)
------------- ------------ ------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of preferred stock 9,988 - - - 9,988
Payment of financing fees (2,200) - - - (2,200)
Principal payments on long-term debt, net 546 - (629) - (83)
------------- ------------ ------------- ------------ ------------
Net cash used in financing activities 8,334 - (629) - 7,705
------------- ------------ ------------- ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS 430 (1,219) 1,070 - 281
------------- ------------ ------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 3,206 431 (793) - 2,844
CASH AND CASH EQUIVALENTS AT
BEGINNING OF THE PERIOD - - 1,635 - 1,635
------------- ------------ ------------- ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF THE PERIOD $ 3,206 $ 431 $ 842 $ - $ 4,479
============= ============ ============= ============ ============
16
PLIANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 (IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------------
Pliant Combined Combined Consolidated
Corporation Guarantor Non-Guarantor Pliant
(Parent Only) Subsidiaries Subsidiaries Eliminations Corporation
------------- ------------ ------------- ------------ ------------
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 14,991 $ (3,745) $ 667 - $ 11,913
------------- ------------ ------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Asset transfers (4,805) 4,805 - - -
Capital expenditures for plant and equipment (8,442) (1,328) (705) - (10,475)
------------- ------------ ------------- ------------ ------------
Net cash provided by investing activities (13,247) 3,477 (705) - (10,475)
------------- ------------ ------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock
and net change in related stockholders'
notes receivables (34) - - - (34)
Principal payments on long-term debt (1,652) - (1,000) - (2,652)
------------- ------------ ------------- ------------ ------------
Net cash used in financing Activities (1,686) - (1,000) - (2,686)
------------- ------------ ------------- ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS (58) 266 427 - 635
------------- ------------ ------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS - (2) (611) - (613)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF THE PERIOD - 967 3,851 - 4,818
------------- ------------ ------------- ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF THE PERIOD $ - $ 965 $ 3,240 $ - $ 4,205
============= ============ ============= ============ ============
17
ITEM 2. 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 Management's Discussion and Analysis
of Financial Condition and Results of Operations contained in our Annual Report
on Form 10-K for the year ended December 31, 2002 (the "2002 10-K") and our
Registration Statement on Form S-4 (file No. 333-86532). 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 generate 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 the United States, Australia, Brazil, Canada,
Germany and Mexico. Our sales have 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 markets for film and flexible packaging products.
Results of Operations
The following table sets forth net sales, operating expenses, and operating
income, and such amounts as a percentage of net sales, for the three months
ended March 31, 2003 and 2002 (dollars in millions).
Three Months Ended March 31,
2003 2002
-------------- --------------
% of % of
$ Sales $ Sales
------ ----- ------ -----
Net sales $240.5 100.0% $210.1 100.0%
Cost of sales 197.7 82.2 164.4 78.3
------ ----- ------ -----
Gross profit 42.8 17.8 45.7 21.7
Operating expenses before
restructuring and other costs 22.7 9.5 21.4 10.2
Restructuring and other costs 6.1 2.5 3.3 1.6
------ ----- ------ -----
Total operating expenses 28.8 12.0 24.7 11.8
------ ----- ------ -----
Operating income $ 14.0 5.8% $ 21.0 9.9%
------ ----- ------ -----
Three Months Ended March 31, 2003 Compared with the Three Months Ended March 31,
2002
Net Sales
Net sales increased by $30.4 million, or 14.5%, to $240.5 million for the first
quarter of 2003 from $210.1 million for the three months ended March 31, 2002.
The increase was primarily due to a 4.7% increase in sales volume and a 9.5%
increase in our average selling price resulting primarily from increases in our
raw material costs. 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 $2.9 million, or 6.3%, to $42.8 million for the first
quarter of 2003, from $45.7 million for the three months ended March 31, 2002.
This decrease was primarily due to lower margins, partially offset by the
18
effect of higher sales volumes. See "Operating Segment Review" below for a
detailed discussion of the margin variances by segment.
Total Operating Expenses before Restructuring and Other Costs
Total operating expenses before restructuring and other costs increased $1.3
million, or 6.1%, to $22.7 million for the first quarter of 2003 from $21.4
million for the first quarter of 2002. This increase was principally due to the
selling, general and administrative expenses of the Pliant Solutions segment,
which was created from the acquisition of the assets of Decora Industries, Inc.
and its operating subsidiary in May 2002.
Restructuring and Other Costs
Restructuring and other costs increased by $2.8 million to $6.1 million for the
first quarter of 2003 from $3.3 million for the three months ended March 31,
2002. The costs for the first quarter of 2003 included an accrual for the
present value of future lease payments on two buildings that we do not currently
occupy, the exit costs related to the closure of our Merced facility and costs
of moving production lines to our Toronto plant, costs related to the transition
of production from the Fort Edward plant to our plant in Mexico and exit costs
related to the closure of our Shelbyville plant. The costs for the first quarter
of 2002 included costs of relocating production lines from the plants acquired
and closed as a result of the acquisition of Uniplast Holdings, Inc.
Operating Income
Operating income decreased by $7.0 million, or 33.3%, to $14.0 million for the
three months ended March 31, 2003 from $21.0 million for the three months ended
March 31, 2002, due to the factors discussed above.
Interest Expense
Interest expense increased by $3.0 million, or 17.8%, to $19.9 million for the
three months ended March 31, 2003 from $16.9 million for the three months ended
March 31, 2002. This increase was principally due to the higher interest costs
resulting from the issuance of an additional $100 million of senior subordinated
debt in April 2002.
Other Income
Other income was $0.5 million for the three months ended March 31, 2003, which
was comparable to the amount of other income for the three months ended March
31, 2002.
Income Tax Expense (Benefit)
Income tax expense for the three months ended March 31, 2003 was $2.0 million on
pretax losses of $5.3 million as compared to $1.9 million on pretax income of
$4.5 million for the same period in 2002. See Note 5 to the condensed
consolidated financial statements included elsewhere in this report for a
discussion of the change in the effective income tax rate.
Operating Segment Review
General
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. 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
and other non-cash charges and net adjustments for certain unusual items. For
more information on our operating segments, including a reconciliation of
segment profit to income before taxes, see Note 8 to the consolidated financial
statements included elsewhere in this report.
19
In our Annual Report on Form 10-K for the year ended December 31, 2002 we had
three reporting segments: Pliant U.S., Pliant International and Pliant
Solutions. During the first quarter of 2003, we reorganized our operations under
four operating segments: Pliant U.S., Pliant Flexible Packaging, Pliant
International and Pliant Solutions. Segment information below with respect to
2002 has been restated for comparative purposes.
In April 2003, we combined our Pliant U.S. and Pliant Solutions segments into a
single segment. Therefore, beginning with the second quarter of 2003 our
operating segments for financial reporting purposes will be Pliant U.S.
(including our current Pliant Solutions segment), Pliant Flexible Packaging and
Pliant International.
Summary of segment information (in millions of dollars):
Pliant Unallocated
Pliant Flexible Pliant Pliant Corporate
U.S. Packaging International Solutions Expenses Total
----- --------- ------------- --------- -------- -----
Quarter ended March 31, 2003
- ----------------------------
Net sales $ 151.9 $ 51.8 $ 28.0 $ 8.8 $ - $ 240.5
------- ------ ------ ------ ------ -------
Segment profit $ 26.8 $ 7.7 $ 2.9 $ (0.9) $ (4.4) $ 32.1
------- ------ ------ ------ ------ -------
Quarter ended March 31, 2002
- ----------------------------
Net sales $ 132.9 $ 48.7 $ 28.5 - $ - $ 210.1
------- ------ ------ ------ ------ -------
Segment profit $ 26.7 $ 8.2 $ 5.5 - $ (4.4) $ 36.0
------- ------ ------ ------ ------ -------
Three Months Ended March 31, 2003 Compared with the Three Months Ended March 31,
2002
Pliant U.S.
Net sales. The net sales of our Pliant U.S. segment increased $19.0 million, or
14.3%, to $151.9 million for the first quarter of 2003 from $132.9 million for
the first quarter of 2002. This increase was primarily due to a 5.1% increase in
our sales volumes, and an increase in our average selling prices of 7.6 cents
per pound, or 8.7%. The increase in sales volumes is discussed for each Pliant
U.S. division below, and the increase in our average selling prices is discussed
under "Segment profit," below.
Net sales in our Industrial Films division increased $11.1 million, or 30.6%, to
$47.4 million for the first quarter of 2003 from $36.3 million for the first
quarter of 2002. This increase was principally due to an increase in sales
volumes of 7.0 million pounds, or 13%, and an increase in our average selling
prices of 10.5 cents per pound, or 15.6%. The increase in sales volume was
primarily the result of incremental sales from new stretch film production lines
at our Lewisburg plant and an increase in demand in this market during the first
quarter of 2003. Net sales in our Specialty Films division increased $6.8
million, or 16.5%, to $48.1 million for the first quarter of 2003 from $41.3
million for the first quarter of 2002. This increase was principally due to an
increase in our sales volume of 4.7 million pounds, or 12.1%, and an increase in
our average selling prices of 4.1 cents per pound, or 3.9%. The increase in
sales volume was primarily the result of incremental sales from a new film line
at our Washington, Georgia plant. Net sales in our Converter Films division
increased $1.1 million, or 1.9%, to $56.4 million for the first quarter of 2003
from $55.3 million for the first quarter of 2002. This increase was principally
due to an increase in our average selling prices of 8.4 cents per pound, or
9.1%, partially offset by the effect of lower sales volumes, which decreased
6.6%. The sales volumes decreased primarily as a result of the slowdown in the
economy.
Segment profit. The Pliant U.S. segment profit was $26.8 million for the first
quarter of 2003 as compared to $26.7 million for the first quarter of 2002. The
increases in sales volumes discussed above were offset by lower gross margins.
The decrease in gross margins was principally due to the fact that the higher
selling prices discussed above were not sufficient to offset the increase in raw
material prices. Our raw material costs for this segment increased 10.5 cents
per pound, or 27.5%, for the first quarter of 2003 as compared to the first
quarter of 2002.
20
Pliant Flexible Packaging
- -------------------------
Net sales. The net sales of our Pliant Flexible Packaging segment increased $3.1
million, or 6.4%, to $51.8 million for the first quarter of 2003 from $48.7
million for the first quarter of 2002. This increase was principally due to an
increase in our sales volumes of 3.3%, primarily due to incremental sales from a
new printing press and a new extrusion line, and an increase in our average
selling prices of 4.4 cents per pound, or 3.0%.
Segment profit. The Pliant Flexible Packaging segment profit decreased $0.5
million, or 6.1%, to $7.7 million for the first quarter of 2003 from $8.2
million for the first quarter of 2002. This decrease in segment profit was
primarily due to a decrease in gross margins, which was partially offset by the
effect of higher sales volumes discussed above. The decrease in gross margins
was principally due to the fact that the higher selling prices discussed above
were not sufficient to offset the increase in raw material prices. Our raw
material costs for this segment increased 10.9 cents per pound, or 20.2%, for
the first quarter of 2003 as compared to the first quarter of 2002.
Pliant International
- --------------------
Net sales. The net sales of our Pliant International segment decreased $0.5
million, or 1.8%, to $28.0 million for the first quarter of 2003 from $28.5
million for the first quarter of 2002. This decrease was principally due to a
7.1% decrease in our sales volume, partially offset by an increase in our
average selling prices of 5.4 cents per pound, or 6.0%. Among other factors, our
sales volumes were adversely affected by a reduction in sales of personal care
films sold in Latin America.
Segment profit. The Pliant International segment profit decreased $2.6 million,
to $2.9 million for the first quarter of 2003 from $5.5 million for the first
quarter of 2002. The decrease was due principally to the decrease in sales
volume and lower gross margins. The decrease in gross margins was principally
due to the fact that the higher selling prices discussed above were not
sufficient to offset the increase in raw material prices. Our raw material costs
for this segment increased 9.9 cents per pound, for the first quarter of 2003 as
compared to the first quarter of 2002.
Pliant Solutions
- ----------------
Our Pliant Solutions segment was created following the Decora acquisition in May
2002. Therefore, a discussion of results of operations for this segment as
compared to the first quarter of 2002 is not presented.
Pliant Solutions had net sales of $8.8 million and a segment loss of $0.9
million for the first quarter of 2003.
Unallocated Corporate Expenses
- ------------------------------
Unallocated corporate expenses remained unchanged at $4.4 million for the three
months ended March 31, 2003 and 2002.
Liquidity and Capital Resources
Net Cash Used in Operating Activities
Net cash used in operating activities was $1.5 million for the three months
ended March 31, 2003, a decrease of $13.4 million, as compared to net cash
provided by operations of $11.9 million for the same period in 2002. This
decrease was largely due to changes in working capital items, including
increases in accounts receivable and inventory. Accounts receivable increased
due to significantly higher sales volume in March 2003 and increases in selling
prices for our products. Inventory increased principally due to the price
increase for raw materials.
21
Net Cash Used in Investing Activities
Net cash used in investing activities was $3.6 million for the three months
ended March 31, 2003, as compared to $10.5 million for the same period in 2002,
in each case for capital expenditures. Capital expenditures for the first
quarter of 2003 were principally for ongoing maintenance. Capital expenditures
in the first quarter of 2002 were primarily for expansion projects as well as
ongoing maintenance costs.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $7.7 million for the three months
ended March 31, 2003, as compared to net cash used in financing activities of
$2.7 million for the three months ended March 31, 2002. The activity for the
first quarter of 2003 includes the net proceeds from the issuance of $10 million
of Series A preferred stock and warrants and the use of these proceeds to repay
term debt. In addition, we paid $2.2 million in financing fees for a related
amendment to our credit facilities and the issuance of the Series A preferred
stock and warrants. The activity for both periods also includes scheduled
principal payments on our term loans and borrowings and repayments under our
revolving credit facility.
Liquidity
As of March 31, 2003, we had approximately $56.7 million of working capital. As
of March 31, 2003, we had approximately $54.5 million available for borrowings
under our $100.0 million revolving credit facility, with outstanding borrowings
of approximately $38.9 million and approximately $6.6 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 $81.2 million during the quarter
ended March 31, 2003.
As of March 31, 2003, we had approximately $4.5 million in cash and cash
equivalents. A portion of this amount was held by our foreign subsidiaries.
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 and interest on outstanding borrowings.
We expect that our total capital expenditures will be approximately $20 million
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
March 31, 2003 (in thousands):
Payments Due by Period
-----------------------------------------------
Less than After 5
Contractual Cash Obligations Total 1 year 1-3 years 4-5 years years
-------- --------- --------- --------- --------
Long-term debt (including capital lease
obligations) $736,298 $14,445 $ 93,953 $177,337 $450,563
Operating leases 66,971 11,259 23,146 17,404 15,162
167,046 - - - 167,046
Redeemable preferred stock -------- ------- -------- -------- --------
Total contractual cash obligations $970,315 $25,704 $117,099 $194,741 $632,771
-------- ------- -------- -------- --------
The credit facilities and the indentures relating to our outstanding 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. In addition, the credit
facilities require us to maintain certain financial ratios.
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
22
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 and related warrants.
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 $100 million revolving credit
facility and other available financing sources will provide sufficient cash flow
to operate our business, to make expected capital expenditures and to meet
foreseeable liquidity requirements. As discussed above, 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.
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. These risks include, but are not limited to:
general economic and business conditions, particularly an economic downturn;
industry trends; increases in our
23
leverage; interest rate increases; changes in our ownership structure; raw
material costs and availability, particularly resin; competition; the loss of
any of our significant customers; changes in the demand for our products; new
technologies; changes in distribution channels or competitive conditions in the
markets or countries in which we operate; costs of integrating any future
acquisitions; loss of our intellectual property rights; foreign currency
fluctuations and devaluations and political instability in our foreign markets;
changes in our business strategy or development plans; availability, terms and
deployment of capital; availability of qualified personnel; and increases in the
cost of compliance with laws and regulations, including environmental laws and
regulations. Each of these risks and certain other uncertainties are discussed
in more detail in the 2002 10-K and in our Registration Statement on Form S-4
(file no. 333-86532), as amended, filed with the Securities and Exchange
Commission. 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.
ITEM 3. 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 finance our operations with borrowings comprised
primarily of variable rate indebtedness. We enter into interest rate collar and
swap agreements to manage interest rate market risks and commodity collar
agreements to manage resin market risks. Our raw material costs are comprised
primarily of resins. 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. An increase of 1% in interest rates payable
on our variable rate indebtedness would increase our annual interest expense by
approximately $3.0 million, after accounting for the effect of our interest rate
hedge agreements.
ITEM 4.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.
24
PART II.OTHER INFORMATION
-------------------------
ITEM 1. LEGAL PROCEEDINGS
On February 26, 2003, former employees of our Fort Edward, New York
manufacturing facility, which we acquired as part of the Decora acquisition,
named us as defendants in a complaint filed in the Supreme Court of the State of
New York, County of Washington (Index No. 4417E). We received service of this
complaint on April 2, 2003. The complaint alleges claims against us for
conspiracy to defraud and breach of contract arising out of our court-approved
purchase of the assets of Decora Industries, Inc. and Decora, Incorporated.
Plaintiffs' complaint seeks compensatory and punitive damages and a declaratory
judgment nullifying severance agreements for lack of consideration and economic
duress. We intend to resist the plaintiffs' claims vigorously. We do not believe
this proceeding will have a material adverse affect on our financial condition
or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
On March 25, 2003, we issued 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. for $10 million. All of the proceeds of this sale were used to
reduce our term debt. The warrants are exercisable at any time prior to May 31,
2011 at an exercise price of $0.01 per share. Each warrant entitles the holder
to purchase 4.3962 shares of common stocks. We believe that the issuance of the
shares of Series A preferred stock and the warrants to purchase shares of our
common stock 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.
During the three months ended March 31, 2003, we issued options to purchase up
to 4,750 shares of our common stock to two employees in exchange for services.
We issued these options under our 2000 Stock Incentive Plan at an exercise price
of $483.13 per share. These options vest in increments upon the achievement of
performance targets as of the end of any calendar quarter during the option
term. Any options that remain unvested will vest in full on December 31, 2009 if
the option holder is still our employee on this date. These options expire ten
years from the date of grant. We believe that the issuance of the 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 14, 2003, not less than sixty percent (60%) of the holders of our
outstanding Series A preferred stock and a majority of the holders of our
outstanding common stock approved, by written consent, an amendment to Article
III of our Third Amended and Restated Articles of Incorporation. This amendment,
which was effective March 25, 2003, increased the number of shares of our Series
A preferred stock from 132,000 shares to 167,000 shares.
ITEM 5. OTHER INFORMATION
Ronald A. Artzer left his position as Senior Vice President and President,
Pliant Solutions Corporation on April 21, 2003. Mr. Artzer joined Pliant in May
2002 following Pliant's acquisition of Decora Industries, Inc. and Decora
Incorporated.
25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with this report.
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.
(b) During the quarter ended March 31, 2003, we filed two Current Reports on
Form 8-K. On March 17, 2003, we filed a report on Form 8-K 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. On March 25, 2003, we filed
a report on Form 8-K 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.
Subsequent to the end of the quarter, on April 2, 2003, we filed a report
on Form 8-K to report the scheduling of our earnings conference call and
to provide certain information required by Regulation G.
26
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PLIANT CORPORATION
/s/ BRIAN E. JOHNSON
--------------------------
BRIAN E. JOHNSON
Executive Vice President and
Chief Financial Officer
(Authorized Signatory and
Principal Financial and Accounting Officer)
Date: May 7, 2003
27
CERTIFICATION
-------------
Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
I, Jack E. Knott, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pliant
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying 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 quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying 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
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 7, 2003
/s/ Jack E. Knott
--------------------------------------------
Jack E. Knott
Chief Executive Officer
28
CERTIFICATION
-------------
Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
I, Brian E. Johnson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pliant
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying 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 quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying 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
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 7, 2003
/s/ Brian E. Johnson
----------------------------
Brian E. Johnson
Chief Financial Officer
29
INDEX TO EXHIBITS
Exhibits
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.
30