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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2003 COMMISSION FILE NUMBER 0-49741
PACKAGING DYNAMICS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 32-0009217
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
3900 WEST 43RD STREET
CHICAGO, ILLINOIS 60632
(Address of Principal Executive Office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(773) 843-8000
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
At May 13, 2003, there were 9,666,958 shares of common stock, par value
$0.01 per share, outstanding.
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1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACKAGING DYNAMICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
March 31, December 31,
2003 2002
---- ----
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,304 $ 1,864
Accounts receivable trade (net of allowance for doubtful
accounts of $438 and $609, respectively) 23,514 22,640
Inventories 31,201 28,257
Prepaid expenses and other 4,634 3,995
--------- ---------
Total current assets 61,653 56,756
--------- ---------
Property, Plant and Equipment:
Buildings and improvements 25,072 24,071
Machinery and equipment 64,551 64,440
Projects in progress 2,254 1,290
--------- ---------
91,877 89,801
Less - accumulated depreciation (28,338) (26,476)
--------- ---------
63,539 63,325
Land 1,276 1,276
--------- ---------
Total property, plant and equipment 64,815 64,601
--------- ---------
Other Assets:
Goodwill, net of accumulated amortization 42,969 42,771
Miscellaneous 2,066 2,227
--------- ---------
Total other assets 45,035 44,998
--------- ---------
Total Assets $ 171,503 $ 166,355
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 14,683 $ 7,420
Accounts payable 28,791 23,299
Accrued salary and wages 2,678 2,627
Other accrued liabilities 6,563 6,433
--------- ---------
Total current liabilities 52,715 39,779
Long-Term Debt 58,767 67,710
Other Liabilities 2,416 2,736
Deferred Income Taxes 10,466 10,423
--------- ---------
Total Liabilities 124,364 120,648
--------- ---------
Commitments and Contingencies (Note 5)
--------- ---------
Stockholders' Equity:
Common stock, $.01 par value -- 40,000,000 shares authorized;
(9,662,158 shares issued and outstanding) 96 96
Preferred stock, $.01 par value -- 5,000,000 shares authorized;
(no shares issued or outstanding) -- --
Paid in capital in excess of par value 45,860 45,560
Other comprehensive income (loss) (188) (253)
Retained earnings 1,371 304
--------- ---------
Total stockholders' equity 47,139 45,707
--------- ---------
Total Liabilities and Stockholders' Equity $ 171,503 $ 166,355
========= =========
The accompanying notes are an integral part of this statement.
2
PACKAGING DYNAMICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
For the Three Months Ended,
March 31, March 31,
2003 2002
---- ----
Net sales $ 64,454 $ 60,125
Cost of goods sold 56,473 53,153
----------- --------
Gross profit 7,981 6,972
----------- --------
Operating expenses:
Selling 1,763 1,834
General and administrative 2,904 2,916
Amortization of intangibles 90 18
----------- --------
Total operating expenses 4,757 4,768
----------- --------
Income from operations 3,224 2,204
Interest expense (1,469) (2,296)
----------- --------
Income (loss) before income taxes 1,755 (92)
Income tax provision 688 388
----------- --------
Net income (loss) $ 1,067 $ (480)
=========== ========
Net income per share (Note 1):
Basic $ 0.11
===========
Fully diluted $ 0.11
===========
Weighted average shares outstanding:
Basic 9,657,892
===========
Fully diluted 9,836,694
===========
The accompanying notes are an integral part of this statement.
3
PACKAGING DYNAMICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
For the Three Months Ended,
March 31, 2003 March 31, 2002
-------------- --------------
Cash flows from operating activities:
Net income (loss) $ 1,067 $ (480)
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation 2,090 1,959
Amortization of deferred finance costs 185 185
Gain on disposal of equipment -- (105)
Non-cash charge for long-term incentive compensation -- 1,076
Non-cash interest to related party -- 548
Changes in operating assets and liabilities:
Accounts receivable (703) (3,955)
Inventories (2,944) 251
Other assets (950) (1,382)
Accounts payable and accrued liabilities 5,463 4,532
------- -------
Net cash from operating activities 4,208 2,629
------- -------
Cash flows used by investing activities:
Additions to property, plant and equipment (2,076) (873)
Acquisition of Wolf Packaging, Inc, net of cash acquired (198) --
Proceeds from sale of assets -- 126
------- -------
Net cash used by investing activities (2,274) (747)
------- -------
Cash flows used by financing activities:
Principal payments for loan obligations (1,680) (1,680)
Payment of financing costs (114) --
Issuance of common stock 300 --
------- -------
Net cash used by financing activities (1,494) (1,680)
------- -------
Net increase in cash and cash equivalents 440 202
Cash and cash equivalents at beginning of period 1,864 1,041
------- -------
Cash and cash equivalents at end of period $ 2,304 $ 1,243
======= =======
Supplemental cash flow disclosures:
Cash paid during the period for:
Interest $ 1,365 $ 1,649
Income taxes 309 --
The accompanying notes are an integral part of this statement.
4
PACKAGING DYNAMICS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
OTHER COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN THOUSANDS)
Contributions Advances
Common Stock Paid In from To Retained
Shares Amount Capital Members Members Earnings
------ ------ ------- ------- ------- --------
Balance at December 31, 2001 $ 34,579 $ (298) $ 270
Formation of Packaging Dynamics
Corporation (Note1) 9,437,750 $ 94 $ 44,475 (34,579) 298 (897)
Net income 931
Exercise of common stock options 14,350 103
Issuance of common stock 166,667 2 982
Other comprehensive income (loss):
Reclassification of derivative
losses to earnings
Change in fair value of
derivative instruments, net
of income taxes
--------- ------ -------- --------- -------- -------
Comprehensive income
Balance at December 31, 2002 9,618,767 96 $ 45,560 $ -- $ -- $ 304
Net income 1,067
Exercise of common stock options 43,391 300
Other comprehensive income (loss):
Reclassification of derivative
losses to earnings
Change in fair value of
derivative instruments, net
of income taxes
--------- ------ -------- --------- -------- -------
Comprehensive income
Balance at March 31, 2003 9,662,158 $ 96 $ 45,860 $ -- -- $ 1,371
========= ====== ======== ========= ======== =======
Accumulated
Other
Comprehensive
Income Stockholders' Comprehensive
(Loss) Equity Income (Loss)
------ ------ -------------
Balance at December 31, 2001 $ (554) $ 33,997
Formation of Packaging Dynamics
Corporation (Note1) 704 10,095
Net income 931 $ 931
Exercise of common stock options 103
Issuance of common stock 984
Other comprehensive income (loss):
Reclassification of derivative
losses to earnings 957 957 957
Change in fair value of
derivative instruments, net
of income taxes (1,360) (1,360) (1,360)
------- --------- --------
Comprehensive income $ 528
========
Balance at December 31, 2002 $ (253) $ 45,707
Net income 1,067 1,067
Exercise of common stock options 300
Other comprehensive income (loss):
Reclassification of derivative
losses to earnings 257 257 257
Change in fair value of
derivative instruments, net
of income taxes (192) (192) (192)
------- --------- --------
Comprehensive income $ 1,132
========
Balance at March 31, 2003 $ (188) $ 47,139
======= =========
The accompanying notes are an integral part of this statement.
5
PACKAGING DYNAMICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Packaging Dynamics Corporation ("the Company" or "Packaging Dynamics") is
a Delaware corporation established as a holding company to own all of the
limited liability interest in Packaging Holdings L.L.C. ("Packaging Holdings" or
"PHLLC"). Packaging Holdings is a limited liability company organized under the
laws of the state of Delaware and is the sole member of Packaging Dynamics,
L.L.C. ("PDLLC") which is the parent company of several operating subsidiaries.
On March 18, 2002, the board of directors of Ivex Packaging Corporation
("Ivex") approved a merger agreement providing for the merger with Ivex of a
wholly-owned subsidiary of Alcoa Inc. As a result of the merger, Ivex became a
wholly-owned subsidiary of Alcoa on July 1, 2002. The merger was conditioned
upon, among other things, the prior distribution to Ivex stockholders and option
holders of Ivex's 48.19% ownership interest in Packaging Holdings. To facilitate
the distribution, Ivex formed Packaging Dynamics, a C-corporation for income tax
purposes, to be the holding company for all of the ownership interests in
Packaging Holdings. In preparation for the distribution, Ivex and the other
members of Packaging Holdings exchanged their ownership interests in Packaging
Holdings for common stock of Packaging Dynamics. On July 1, 2002, Ivex
distributed its shares of Packaging Dynamics to its stockholders and certain of
its option holders immediately prior to the merger. The consolidated financial
statements of Packaging Dynamics presented herein include the results of
operations, financial position and cash flows of Packaging Holdings.
Also in connection with the merger and distribution, a new holding company
structure was created by contributing all of the limited liability company
interests of Packaging Holdings to Packaging Dynamics, a C-corporation for
income tax purposes, in exchange for the common stock; the $12,500 12%
subordinated note payable to Ivex, plus accreted interest, totaling
approximately $19,238 was canceled; and a consulting agreement with Ivex was
canceled. The impact of the distribution is reflected on the Consolidated
Statements of Stockholders' Equity and Other Comprehensive Income (Loss) as
Formation of Packaging Dynamics Corporation. The impact on Stockholders' Equity
of the distribution includes (i) an increase of $19,238 resulting from the
cancellation of the $12,500 12% subordinated note payable to Ivex; (ii) a
decrease of $9,200 resulting from additional deferred tax liabilities due to
Packaging Dynamics' C-corporation status; (iii) an increase of $423 resulting
from the repayment of certain advances and obligations of members of Packaging
Holdings; and (iv) a decrease of $366 resulting from expenses associated with
the transaction.
On July 1, 2002, the Company issued 9,437,750 shares of common stock in
connection with the merger and distribution. Prior to July 1, 2002, the Company
ownership consisted of membership units. Accordingly, no earnings per share
information has been presented for any period prior to July 1, 2002.
In the opinion of management, the information in the accompanying
unaudited financial statements reflects all adjustments (consisting solely of
normal recurring adjustments) necessary to present fairly the results of
operations, cash flows and comprehensive income (loss) for the three months
ended March 31, 2003 and March 31, 2002 and the financial position at March 31,
2003. The interim results are not necessarily indicative of results for a full
year and do not contain information included in the Company's annual
consolidated financial statements and notes for the year ended December 31,
2002. The consolidated balance sheet as of December 31, 2002 was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. These interim financial statements
should be read in conjunction with our audited consolidated financial statements
and notes thereto included with the Company's filings with the Securities and
Exchange Commission.
6
PACKAGING DYNAMICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 2 -- STOCK BASED COMPENSATION
At March 31, 2003, the Company has a stock-based compensation plan. The
company accounts for this plan under the recognition and measurement provisions
of Accounting Principles Board Opinion (APBO) No. 25 "Accounting for Stock
Issued to Employees," and related interpretations. Stock-based employee
compensation cost is reflected in earnings to the extent that option grants
under those plans had an exercise price below the market value of the underlying
common stock on the date of grant.
On a pro forma basis, there would have been no compensation expense
recognized for the three months ended March 31, 2003 related to the Company's
stock option plan. Similarly, there was no impact on the basic and diluted
earnings per share for the period. The fair value of the options granted was
estimated on the date earned using the Black-Scholes option-pricing model and
utilized the following assumptions: dividend yield -- 0%; volatility -- 35%;
risk-free interest rate -- 2.62%; and expected lives -- 5 years.
NOTE 3 -- INVENTORIES
Inventories are stated at the lower of cost or market as determined by the
first-in, first-out (FIFO) method. Such cost includes raw materials, direct
labor and manufacturing overhead. Inventories at March 31, 2003 and December 31,
2002 consist of the following:
March 31, December 31,
2003 2002
---- ----
Raw materials $13,835 $13,025
Work-in-process 1,418 1,089
Finished goods 15,948 14,143
------- -------
$31,201 $28,257
======= =======
NOTE 4 -- LONG-TERM DEBT
Long-term debt at March 31, 2003 and December 31, 2002 consists of the
following:
March 31, December 31,
2003 2002
---- ----
Senior Credit Facility:
Tranche A Term Loan $ 11,875 $ 13,375
Tranche B Term Loan 57,175 57,355
Revolving credit loan -- --
Seller note payable 3,000 3,000
Baxter Springs facility HUD loan 1,400 1,400
-------- --------
Subtotal 73,450 75,130
Current maturities of long term debt (14,683) (7,420)
-------- --------
Long-term debt $ 58,767 $ 67,710
======== ========
7
PACKAGING DYNAMICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
The Company is currently a party to various legal proceedings in various
federal and state jurisdictions arising out of the operations of its business.
The amount of alleged liability, if any, from these proceedings cannot be
determined with certainty; however, the Company believes that its ultimate
liability, if any, arising from the pending legal proceedings, as well as from
asserted legal claims and known potential legal claims which are probable of
assertion, would not have a material adverse effect on the Company's financial
condition, results of operations or liquidity.
The Company's manufacturing operations are subject to federal, state and
local regulations governing the environment and the discharge of materials into
air, land and water, as well as the handling and disposal of solid and hazardous
wastes. As is the case with manufacturers in general, if a release of hazardous
substances occurs on or from the Company's properties or any associated offsite
disposal location, or if contamination from prior activities is discovered at
any of the Company's properties, the Company may be held liable. From time to
time, the Company is involved in regulatory proceedings and inquiries relating
to compliance with environmental laws, permits and other environmental matters.
The Company believes that it is in substantial compliance with applicable
environmental regulations and does not believe that costs of compliance will
have a material adverse effect on the Company's financial condition, results of
operations or liquidity.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITIONS AND
RESULT OF OPERATIONS (DOLLARS IN THOUSANDS)
The following discussion addresses the consolidated financial statements
of Packaging Dynamics Corporation (the "Company," "Packaging Dynamics", "we" or
"our") which is a Delaware corporation established as a holding company to own
all of the limited liability company interests in Packaging Holdings, L.L.C.
("Packaging Holdings"), a Delaware limited liability company. Packaging Holdings
is the sole member of Packaging Dynamics, L.L.C. ("PDLLC") which is the parent
company of several operating companies.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND MARCH 31,
2002
Net Sales
Net sales increased by 7.2% during the first quarter of 2003 over our net
sales during the corresponding period in 2002. The increase resulted from the
acquisition of Wolf Packaging, Inc. ("Wolf") in October 2002. Excluding the
acquisition, net sales decreased 1.7% in the three months ended March 31, 2003
over the same period in 2002.
Gross Profit
Gross profit increased 14.5% during the first quarter of 2003 compared to
the corresponding period in 2002 primarily as a result of the Wolf acquisition.
The gross profit margin was 12.4% which was .8% higher than the same period in
2002. The current period gross profit margin was favorably impacted by the
acquisition of Wolf in October 2002.
Operating Expenses
Excluding the $1,076 of long-term incentive compensation expense and
$105 gain on asset sales from the first quarter of 2002, selling and
administrative expenses increased $888, or 24.2%, during the first quarter of
2003 compared to the corresponding period in 2002. The increase was primarily
due to the Wolf acquisition and the incremental expense associated with
operating as a public company.
On July 1, 2002, Packaging Dynamics granted to management, for incentive
purposes and in consideration of their waiver of cash payments under the
2001 Long Term Incentive Plan ("LTIP"), stock options for the purchase of an
aggregate of 815,089 shares of its common stock under the 2002 LTIP.
Additionally, on July 1, 2002, Packaging Dynamics granted to certain former
employees stock options for the purchase of an aggregate of 29,047 shares of its
common stock under individual nonqualified stock option agreements in
consideration of their waiver of cash payments under the 2001 LTIP. The options
have an exercise price of $3.90 per share, which was below the fair market value
of Packaging Dynamics' common stock on the grant date and 730,924 options,
although fully vested, are not exercisable for three years after the grant date.
Consequently, for such options we have the right to repurchase an executive's
options if he terminates employment before the end of the three-year period. For
the three months ended March 31, 2003, the Company recorded no expense related
to this plan. For the three months ended March 31, 2002, the Company recorded a
non-cash compensation charge of $1,076.
Income from Operations
Income from operations and operating margins were $3,224 and 5.0%,
respectively, during the first quarter of 2003 compared to income from
operations and operating margin of $2,204 and 3.7%, respectively, during the
first quarter of 2002. The increase was primarily due to the non-cash
compensation charge taken in the first quarter of 2002.
Interest Expense
Interest expense during the first quarter 2003 was $1,469 compared to
$2,296 during the same period in 2002. The decrease in interest expense in 2003
compared to 2002 resulted primarily from decreased average outstanding
9
indebtedness, the forgiveness of the 12% Promissory Note payable to Ivex and
reduced interest rates. The average interest rates on borrowings on our senior
credit facility were approximately 1.13% less during 2003 compared to 2002. The
paid-in-kind interest accruing on the 12% Promissory Note was zero and $548
during the first quarter of 2003 and 2002, respectively. The note was cancelled
on July 1, 2002.
Income Taxes
To facilitate the distribution on July 1, 2002, a new holding company
structure was created by contributing all of the limited liability company
interests of Packaging Holdings to Packaging Dynamics, a C-corporation for
income tax purposes, in exchange for the common stock. Prior to the
distribution, the members reported federal and state taxable income on their
income tax returns. International Converter, Inc. ("ICI"), a wholly owned
subsidiary, had remained a taxable C-corporation from the time we acquired it in
July, 1999 through the date of the distribution. The income tax provision for
the first quarter of 2003 was $688 as compared to $388 in the first quarter of
2002. The increase in income tax provision was primarily associated with our
change in filing status.
Net Income
Net income increased to $1,067 during the first quarter of 2003 compared
to net loss of $480 in the prior year. The increase was primarily attributable
to the acquisition of Wolf and decrease in interest expense related to the
cancellation of the 12% Promissory Note payable to Ivex.
EBITDA and Adjusted EBITDA
In addition to financial results determined in accordance with generally
accepted accounting principles ("GAAP"), Packaging Dynamics utilizes non-GAAP
financial measures (within the meaning of Regulation G promulgated by the
Securities and Exchange Commission). For purposes of Regulation G, a non-GAAP
financial measure is a numerical measure of a registrant's historical or future
financial performance, financial position or cash flows that excludes amounts,
or is subject to adjustments that have the effect of excluding amounts, that are
included in the most directly comparable measure calculated and presented in
accordance with GAAP in the statement of income, balance sheet or statement of
cash flows (or equivalent statements) of the issuer; or includes amounts, or is
subject to adjustments that have the effect of including amounts, that are
excluded from the most directly comparable measure so calculated and presented.
These measures should be considered in addition to results prepared in
accordance with GAAP, but are not a substitute for or superior to GAAP results.
Non-GAAP financial measures are used because management believes this
information provides investors useful information in evaluating the results of
the continuing operations and believes that this information provides the users
of the financial statements a valuable insight into the operating results given
the restructuring of Packaging Dynamics and distribution by Ivex Packaging
Corporation of its ownership interest in Packaging Dynamics last year. The
non-GAAP measure of adjusted EBITDA is presented to supplement the consolidated
financial statements in accordance with GAAP. Specifically, management believes
that adjusted EBITDA is of interest to its investors and lenders in relation to
its debt covenants, as certain of its debt covenants include adjusted EBITDA as
a performance measure.
Packaging Dynamics defines EBITDA as earnings from operations plus
depreciation and amortization. EBITDA should not be construed as an alternative
to earnings from operations as determined in accordance with generally accepted
accounting principles, as an indicator of our operating performance, as a
measure of liquidity or as an alternative to cash flow from operating activities
as determined in accordance with generally accepted accounting principles. We
have significant uses of cash flow, including capital expenditures and debt
principal repayments that are not reflected in EBITDA. It should also be noted
that not all companies that report EBITDA or Adjusted EBITDA information
calculate EBITDA or Adjusted EBITDA in the same manner as we do.
Adjusted EBITDA is EBITDA plus the supplemental adjustments believed by
management to be non-recurring. Adjusted EBITDA does not represent cash flow
from operations, as defined by GAAP. Adjusted EBITDA should not be considered a
substitute for net income or loss, or as an indicator of operating performance
or whether cash flows will be sufficient to fund cash needs.
EBITDA and Adjusted EBITDA for the three months ended March 31, 2003 and
March 31, 2002 are computed as follows:
10
For the Three Months Ended,
March 31, March 31,
2003 2002
---- ----
Income from operations, as reported $3,224 $ 2,204
Depreciation and amortization 2,090 1,959
------ -------
EBITDA 5,314 4,163
Long-term incentive compensation expense -- 1,076
Asset sales and disposals -- (105)
------ -------
Adjusted EBITDA $5,314 $ 5,134
====== =======
In the three months ended March 31, 2003, Adjusted EBITDA and Adjusted
EBITDA margins were $5,314 and 8.2%, respectively, as compared to $5,134 and
8.5%, respectively, in the three months ended March 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, we had cash and cash equivalents of $2,304, and
$23,675 was available under the revolving portion of the Senior Credit Facility.
Our working capital at March 31, 2003 was $8,938.
Our primary short-term and long-term operating cash requirements are
for debt service, working capital and capital expenditures. We expect to rely on
cash generated from operations supplemented by revolving borrowings under the
Senior Credit Facility to fund principal short-term and long-term cash
requirements.
The Senior Credit Facility provides for Term A Loans and Term B Loans
totaling $69,050 and a $25,000 revolving credit facility, up to $5,000 of which
may be in the form of letters of credit. The Term A Loan had a balance of
$11,875 at March 31, 2003 and is required to be repaid in quarterly payments
totaling $4,500 in 2003 and $7,375 in 2004. The Term B Loan had a balance of
$57,175 at March 31, 2003 and is required to be repaid in quarterly payments
totaling $540 in 2003, $28,400 in 2004 and $28,235 in 2005.
Loans under the Senior Credit Facility are designated from time to
time, at our election, either (1) as Eurodollar Loans, which bear interest at a
rate based on the London Interbank Offered Rate, or LIBOR, adjusted for
regulatory reserve requirements, or (2) as Base Rate Loans, which bear interest
at a rate based on the Federal Funds Rate or the prime rate. The interest rate
on Eurodollar Loans is equal to LIBOR plus an applicable percentage that varies
with the leverage ratio of PDLLC and its consolidated subsidiaries. The interest
rate on Base Rate Loans is equal to
- a base rate equal to the greater of (1) the Federal Funds rate
plus 1/2 of 1% and (2) the prime rate, plus
- an applicable percentage that varies with the leverage ratio
of PDLLC and its consolidated subsidiaries.
Accordingly, Tranche A Term Loans and revolving loans bear interest at
rates of up to 2.75% plus the base rate, in the case of Base Rate Loans, and up
to 3.75% plus LIBOR, in the case of Eurodollar Loans. Tranche B Term Loans bear
interest at rates of up to 3.25% plus the base rate, in the case of Base Rate
Loans, and up to 4.25% plus LIBOR, in the case of Eurodollar Loans.
At March 31, 2003, the interest rates on borrowings under the Tranche A
Term Loan and the Tranche B Term Loan were 3.25% plus LIBOR and 3.75% plus
LIBOR, respectively, compared with 3.25% plus LIBOR and 4.0% plus LIBOR,
respectively, at March 31, 2002. In addition, as of March 31, 2003, we had
entered into interest rate derivative instruments, which are discussed in Item 3
- -- "Quantitative and Qualitative Disclosures About Market Risk." Borrowings are
collateralized by substantially all of the assets of our operating subsidiaries.
The revolving credit facility and Term A Loan will terminate on November 20,
2004 and the Term B Loan will terminate on November 20, 2005.
11
Under the Senior Credit Facility, PDLLC is required to comply on a
quarterly basis with the following four financial covenants:
- under the leverage ratio covenant, as of the last day of each fiscal
quarter, PDLLC's ratio of total funded debt to consolidated EBITDA
for the 12-month period then ended must not exceed specified levels,
decreasing from 3.1 to 1 at present to 2 to 1 from and after April
1, 2004;
- under the interest coverage ratio covenant, as of the last day of
each fiscal quarter, PDLLC's ratio of consolidated EBITDA for the
12-month period then ended to cash interest expense for such
12-month period must be equal to or greater than certain specified
levels, increasing from 3.25 to 1 at present to 4 to 1 from and
after July 1, 2004;
- under the fixed charge coverage ratio covenant, as of the last day
of each fiscal quarter, for the 12-month period then ended, PDLLC's
ratio of consolidated EBITDA less capital expenditures and taxes to
PDLLC's cash interest expense and scheduled funded debt payments
must be equal to or greater than 1.15 to 1; and
- under the net worth covenant, Packaging Holdings consolidated net
worth as of the last day of each fiscal quarter must be equal to or
greater than $27,500 increased on a cumulative basis by (1) as of
the last day of each fiscal quarter, 50% of the consolidated net
income of Packaging Holdings (to the extent positive) for the fiscal
quarter then ended, commencing with the fiscal quarter ended
December 31, 1998 and (2) 50% of the net cash proceeds from any
equity issuance after November 20, 1998 by Packaging Holdings or any
subsidiary of Packaging Holdings.
For purposes of the Senior Credit Facility, consolidated EBITDA,
calculated on a consolidated basis for PDLLC and its subsidiaries, consists of
(1) net income, excluding the effect of any extraordinary or other non-recurring
gains or losses or non-cash losses, plus (2) an amount which, in the
determination of net income, has been deducted for interest expense, taxes,
depreciation and amortization.
The Senior Credit Facility also contains various negative covenants that,
among other things, require Packaging Holdings and its subsidiaries to limit
future capital expenditures, borrowings, dividend payments, and payments to
related parties, and restricts Packaging Holdings' ability and the ability of
its subsidiaries to merge or consolidate. In addition, the Senior Credit
Facility prevents our subsidiaries from making distributions, prohibits changes
in the nature of business conducted by our subsidiaries and effectively
requires, subject to limited exceptions, that Packaging Dynamics'
pre-distribution stockholders, other than Ivex, retain beneficial ownership of
at least 42.5% in Packaging Dynamics. The failure to comply with the covenants
would result in a default under the Senior Credit Facility and permit the
lenders under the Senior Credit Facility to accelerate the maturity of the
indebtedness governed by the senior credit facility. We believe that we are
currently in compliance with the terms and conditions of the Senior Credit
Facility in all material respects.
On July 14, 1999, Packaging Holdings issued a $3,000 note to the sellers
in connection with the acquisition of ICI. Interest on this note is 7.5% payable
semi-annually commencing on December 31, 1999. This note is unsecured and
subordinated to the senior credit facility. The note matures on July 14, 2004
and may be accelerated under specified circumstances, including a change in
control or an acceleration under the Senior Credit Facility.
The Senior Credit Facility and the ICI note include terms that limit
changes in our ownership structure. Modifications to the ownership structure
outside the limits prescribed by such agreements could place us in default under
these debt instruments.
We have outstanding obligations under debt agreements with the U.S.
Department of Housing and Urban Development, or HUD, in the form of promissory
notes payable to the City of Baxter Springs. These notes bear
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interest at rates varying from 4.57% to 6.57%, as determined by HUD, and
interest is payable on a semi-annual basis. These notes are payable in annual
installments of $700 through August 2004. Borrowings are collateralized by a
first lien on the land and building at our Baxter Springs, Kansas production
facility and by a second lien on specified machinery and equipment. Under
specified circumstances, repayment of the borrowings is subordinated to the
repayment of obligations under the senior credit facility.
To reduce the impact of changes in interest rates on our variable rate
debt, the Company has entered into interest rate derivative instruments, which
are discussed in " -- Quantitative and Qualitative Disclosures About Market
Risk".
We made capital expenditures for the three months ended March 31, 2003 and
March 31, 2002 of $2,076 and $873, respectively. The increase in capital
expenditures during 2003 compared to 2002 resulted primarily from expenditures
incurred for two new bag machines. At March 31, 2003, we have capital projects
ongoing at all locations. In 2003, capital expenditures are expected to
approximate $5,500.
The Senior Credit Facility requires PDLLC to maintain specified financial
ratios and levels of tangible net worth. PDLLC was in compliance with those
covenants as of March 31, 2003 the latest measurement date. The occurrence of
any default of these covenants could result in acceleration of our obligations
under the Senior Credit Facility ($69,050 as of March 31, 2003) and foreclosure
on the collateral securing those obligations. We are anticipating the need to
refinance the Senior Credit Facility by the end of 2003 in order to avoid
non-compliance with certain of the four financial covenants described above.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We use interest rate swaps and collars to modify our exposure to interest
rate movements and to reduce borrowing costs. We have designated these
instruments as cash flow hedges and consider these instruments effective at
offsetting our risk to variable interest rates on debt. Our exposure to interest
rate risk consists of floating rate debt instruments that are benchmarked to
LIBOR. As of March 31, 2003, we had interest rate swap agreements with a group
of banks having notional amounts totaling $55,000 and with various maturity
dates through December 10, 2003. These agreements effectively fix our LIBOR rate
for $40,000 and $15,000 of our Senior Credit Facility indebtedness at rates of
3.83% and 1.61%, respectively. Beginning on December 10, 2003, we have a no-cost
collar agreement with a notional amount of $25,000 maturing on December 10,
2004. This collar agreement effectively fixes the LIBOR base rate for $25,000 of
our Senior Credit Facility indebtedness at a maximum of 3.97% and allows for us
to pay the market LIBOR from a floor of 2.34% to the maximum rate. If LIBOR
falls below 2.34%, we are required to pay the floor rate of 2.34%. A 10%
unfavorable movement in LIBOR would not expose us to material losses of earnings
or cash flows.
Income or expense related to settlements under these agreements is
recorded as adjustments to interest expense in our financial statements. The
fair market value of our derivative instruments outlined above approximates a
loss of $1,019 as of March 31, 2003 and is based upon the amount at which it
could be settled with a third party, although we have no current intention to
trade any of these instruments and plan to hold them as hedges for the Senior
Credit Facility. The fair market value of our derivative instruments, net of
income tax, was recorded in other comprehensive income (loss).
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's
Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the Company's disclosure controls and procedures (as such term
is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"). Based on such
evaluation, such officers have concluded that, as of the Evaluation Date, the
Company's disclosure controls and procedures are effective in alerting them on a
timely basis to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
filings under the Exchange Act.
13
(b) Changes in Internal Controls. Since the Evaluation Date, there have
not been any significant changes in the Company's internal controls or in other
factors that could significantly affect such controls.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements included in this form, including without
limitation, "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations -- For the Three Months Ended
March 31, 2003 and March 31, 2002 -- Liquidity and Capital Resources, --
Recently Issued Accounting Pronouncements, and -- Quantitative and Qualitative
Disclosure About Market Risk" constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Among the factors that could cause results to differ
materially from current expectations are: (i) changes in consumer demand and
prices resulting in a negative impact on revenues and margins; (ii) raw material
substitutions and increases in the costs of raw materials, utilities, labor and
other supplies; (iii) increased competition in the Company's product lines; (iv)
changes in capital availability or costs; (v) workforce factors such as strikes
or labor interruptions; (vi) the ability of the Company and it subsidiaries to
develop new products, identify and execute capital programs and efficiently
integrate acquired businesses; (vii) the cost of compliance with applicable
governmental regulations and changes in such regulations, including
environmental regulations; (viii) the general political, economic and
competitive conditions in markets and countries where the Company and its
subsidiaries operate, including currency fluctuations and other risks associated
with operating in foreign countries; and (ix) the timing and occurrence (or
non-occurrence) of transactions and events which may be subject to circumstances
beyond the control of the Company and its subsidiaries.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time Packaging Dynamics and its subsidiaries are involved in
various litigation matters arising in the ordinary course of business. Packaging
Dynamics believes that none of the matters which arose during the quarter,
either individually or in the aggregate, is material to Packaging Dynamics.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
99.1 Certification of CEO and CFO pursuant to 18
U.S.C., Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
Current Report, Form 8-K regarding Packaging Dynamics
Corporation's first quarter 2003 earnings release and
conference call, filed on May 1, 2003.
SIGNATURE PAGE FOLLOWS
14
SIGNATURE
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.
PACKAGING DYNAMICS CORPORATION
By: /s/ HENRY C. NEWELL
-----------------------
HENRY C. NEWELL
Vice President and Chief Financial Officer
(Principal Financial Officer)
May 13, 2003
15
CERTIFICATION FOR
QUARTERLY REPORTS ON FORM 10-Q
I, Phillip D. Harris, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Packaging
Dynamics 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.
May 13, 2003 s/ PHILLIP D. HARRIS
--------------------
PHILLIP D. HARRIS
President and Chief Executive Officer
16
CERTIFICATION FOR
QUARTERLY REPORTS ON FORM 10-Q
I, Henry C. Newell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Packaging
Dynamics 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.
May 13, 2003 s/ HENRY C. NEWELL
------------------
HENRY C. NEWELL
Vice President and Chief Financial Officer
17