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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 JUNE 30, 2004
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 August 4, 2004, there were
571,711 outstanding shares of the registrant's Common Stock.
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PLIANT CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 3
2004 AND DECEMBER 31, 2003
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR 4
THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR 5
THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' 6
DEFICIT FOR THE SIX MONTHS ENDED JUNE 30, 2004
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 22
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 32
ITEM 4. CONTROLS AND PROCEDURES 32
PART II. OTHER INFORMATION 33
ITEM 1. LEGAL PROCEEDINGS 33
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND 33
ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 33
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 33
ITEM 5. OTHER INFORMATION 33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 33
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLIANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2004 AND DECEMBER 31, 2003 (DOLLARS IN THOUSANDS) (UNAUDITED)
JUNE 30, 2004 DECEMBER 31, 2003
------------------- ----------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,684 $ 3,308
Receivables, net of allowances of $5,317 and $5,776 respectively 127,292 111,942
Inventories 89,149 95,219
Prepaid expenses and other 3,919 3,809
Income taxes receivable, net -- 1,436
Deferred income taxes 7,901 9,417
------------------- ----------------------
Total current assets 231,945 225,131
PLANT AND EQUIPMENT, net 305,748 319,569
GOODWILL 182,150 182,162
INTANGIBLE ASSETS, net 18,386 19,752
OTHER ASSETS 39,094 40,172
------------------- ----------------------
TOTAL ASSETS $ 777,323 $ 786,786
=================== ======================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Trade accounts payable $ 94,047 $ 89,800
Accrued liabilities:
Interest payable 14,095 19,775
Customer rebates 6,793 7,924
Other 34,965 35,947
Current portion of long-term debt 201 1,033
------------------- ----------------------
Total current liabilities 150,101 154,479
LONG-TERM DEBT, net of current portion 813,969 782,624
OTHER LIABILITIES 26,696 27,493
DEFERRED INCOME TAXES 26,644 27,792
SHARES SUBJECT TO MANDATORY REDEMPTION (Note 10) 211,618 --
------------------- ----------------------
Total Liabilities 1,229,028 992,388
------------------- ----------------------
MINORITY INTEREST 198 291
------------------- ----------------------
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 December 31, 2003 -- 188,223
------------------- ----------------------
REDEEMABLE COMMON STOCK - no par value; 60,000 shares authorized; 10,873 shares
outstanding as of June 30, 2004 and 29,073 shares outstanding as of December 31,
2003, net of related stockholders' notes receivable of $1,827 at June 30, 2004
and $4,258 at December 31, 2003 6,645 13,008
------------------- ----------------------
STOCKHOLDERS' DEFICIT:
Common stock - no par value; 10,000,000 shares authorized, 542,638 shares
outstanding at June 30, 2004 and December 31, 2003 103,376 103,376
Warrants to purchase common stock 39,133 39,133
Accumulated deficit (589,180) (537,052)
Stockholders' notes receivable (660) (660)
Accumulated other comprehensive income (loss) (11,217) (11,921)
------------------- ----------------------
Total stockholders' deficit (458,548) (407,124)
------------------- ----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 777,323 $ 786,786
=================== ======================
See notes to condensed consolidated financial statements.
PLIANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------------
2004 2003 2004 2003
NET SALES $ 242,696 $ 226,573 $ 486,863 $ 467,084
COST OF SALES 207,145 190,332 414,520 388,046
------------------------------------------------------
Gross profit 35,551 36,241 72,343 79,038
OPERATING EXPENSES:
Sales, General and Administrative 21,632 22,257 42,615 43,573
Research and Development 1,432 1,380 3,264 2,757
Restructuring and Other Costs -- 2,543 -- 8,607
------------------------------------------------------
Total operating expenses 23,064 26,180 45,879 54,937
------------------------------------------------------
OPERATING INCOME 12,487 10,061 26,464 24,101
INTEREST EXPENSE-Current and Long-term debt (note 4, 8) (24,569) (27,382) (59,168) (47,238)
INTEREST EXPENSE-Dividends and accretion on Redeemable Preferred Stock
(note 10) (8,666) -- (17,033) --
OTHER INCOME(EXPENSE) - Net 87 1,263 (31) 1,759
------------------------------------------------------
INCOME(LOSS) BEFORE INCOME TAXES (20,661) (16,058) (49,768) (21,378)
INCOME TAX EXPENSE (BENEFIT) 708 2,843 2,360 4,866
------------------------------------------------------
NET INCOME(LOSS) $ (21,369) $ (18,901) $ (52,128) $ (26,244)
======================================================
See notes to condensed consolidated financial statements.
PLIANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (IN THOUSANDS) (UNAUDITED)
2004 2003
---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (52,128) $ (26,244)
Adjustments to reconcile net income (loss) to net cash (used in)/ provided by operating
activities:
Depreciation and amortization 21,892 24,538
Amortization of deferred financing costs and accretion of debt discount 19,599 7,648
Deferred dividends and accretion on preferred shares 17,033 --
Deferred income taxes 820 1,041
Provision for losses on accounts receivable 487 331
Non-cash plant closing costs -- 3,260
Gain or loss on disposal of assets (11) 148
Changes in assets and liabilities:
Receivables (16,518) (11,060)
Inventories 5,732 (12,032)
Prepaid expenses and other (123) 133
Income taxes payable/receivable 1,773 1,112
Other assets 649 (1,697)
Trade accounts payable 4,752 (13,072)
Accrued liabilities (5,132) (8,894)
Other liabilities (601) 1,811
Other (93) (192)
---------------- -----------------
Net cash (used in) / provided by operating activities (1,869) (33,169)
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for plant and equipment (11,132) (10,722)
---------------- -----------------
Net cash used in investing activities (11,132) (10,722)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of preferred stock -- 9,532
Net proceeds from issuance of senior secured discount notes 225,299 --
Proceeds from issuance of senior subordinated debt -- 250,000
Payment of financing fees (9,327) (9,734)
Repayments/Payments of term debt and revolver (219,575) (252,028)
Repayment of capital leases and other, net (1,077) --
Proceeds from revolving debt - net 16,000 48,206
---------------- -----------------
Net cash provided by (used in) / financing activities 11,320 45,976
---------------- -----------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 2,057 1,397
---------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 376 3,482
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 3,308 1,635
---------------- -----------------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 3,684 $ 5,117
================ =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest $ 43,170 $ 36,902
Income taxes 2,090 2,841
Other non-cash disclosure:
Preferred Stock dividends accrued but not paid $ 16,112 $ 12,864
See notes to condensed consolidated financial statements.
PLIANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 2004 (IN THOUSANDS) (UNAUDITED)
ACCUMULATED
COMMON STOCK WARRANTS STOCKHOLDERS' OTHER
-------------------- TO PURCHASE ACCUMULATED NOTES COMPREHENSIVE
SHARES AMOUNT COMMON STOCK DEFICIT RECEIVABLE INCOME (LOSS) TOTAL
--------- ---------- ------------------ ------------------ ------------------ --------------- ------------
BALANCE,
DECEMBER 31,
2003 543 $ 103,376 $ 39,133 $ (537,052) $ (660) $ (11,921) $ (407,124)
Net loss (52,128) (52,128)
Accumulated fair
value change in
interest rate
derivatives
charged to
interest expense,
net of taxes 2,220 2,220
Foreign currency
translation
adjustment (1,516) (1,516)
--------- ---------- ------------------ ------------------ ------------------ --------------- ------------
BALANCE, JUNE 30,
2004 543 $ 103,376 $ 39,133 $ (589,180) $ (660) $ (11,217) $ (458,548)
========= ========== ================== ================== ================== =============== ============
See notes to condensed consolidated financial statements.
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 periods ended June 30, 2004 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, 2003 and the Company's Registration
Statement on Form S-4, as amended (File No 333-114608) filed on April 20,
2004. Certain reclassifications have been made to the condensed
consolidated financial statements for the periods ended June 30, 2003 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 June 30, 2004 and December 31,
2003 consisted of the following (in thousands):
JUNE 30, 2004 DECEMBER 31, 2003
-------------------- ---------------------
Finished goods $ 51,760 $ 55,858
Raw materials 26,968 28,551
Work-in-process 10,421 10,810
-------------------- ---------------------
Total $ 89,149 $ 95,219
==================== =====================
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
and six months ended June 30 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-----------------------------------------------------------
2004 2003 2004 2003
--------------- --------------------------- ---------------
PLANT CLOSING COSTS:
Severance $ -- $ (192) $ -- $ 108
Relocation of production lines -- 962 -- 2,256
Other plant closure costs -- 1,226 -- 4,329
------------- --------------------------- ---------------
-- 1,996 -- 6,693
------------- --------------------------- ---------------
OFFICE CLOSING AND WORKFORCE REDUCTION COSTS:
Severance -- 547 -- 557
Leases -- -- -- 1,357
------------- --------------------------- ---------------
-- 547 -- 1,914
------------- --------------------------- ---------------
$ -- $ 2,543 $ -- $ 8,607
=============== =========================== ===============
2003 ACCRUALS:
PLANT CLOSING COSTS - During the first half 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 - During the first half 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 sub-lessees defaulted on the subleases.
The following table summarizes the roll-forward of the reserve from
December 31, 2003 to June 30, 2004:
ACCRUALS FOR THE SIX MONTHS ENDED JUNE 30, 2004
--------------------------------------------------------
12/31/2003 6/30/ 04
-------------------- OTHER -------------------
RELOCATED PLANT
# EMPLOYEES ACCRUAL ADDITIONAL PRODUCTION CLOSURE PAYMENTS/ # EMPLOYEES ACCRUAL
TERMINATED BALANCE EMPLOYEES SEVERANCE LINES LEASES COSTS TOTAL CHARGES TERMINATED BALANCE
----------- ------- ---------- --------- ---------- ------ --------- ------- --------- ----------- -------
PLANT CLOSING COSTS:
Merced 54 $ 1,235 -- -- -- -- -- $ -- $ (170) 54 $ 1,065
Shelbyville 8 -- -- -- -- -- -- -- -- 8 --
Toronto 4 -- -- -- -- -- -- -- -- 4 --
Pliant Solutions 148 541 -- -- -- -- -- -- (112) 165 429
Mexico 17 -- -- -- -- -- -- -- -- -- --
Leases -- 2,004 -- -- -- -- -- -- (175) -- 1,829
------------------------------ ---------------------------------------------------------------------------
231 $ 3,780 -- -- -- -- -- $ -- $ (457) 231 $ 3,323
------------------------------ ---------------------------------------------------------------------------
OFFICE CLOSING AND
WORKFORCE REDUCTION
COSTS:
Leases -- $ 1,129 -- -- -- -- -- $ -- $ (298) -- $ 831
Severance 114 237 -- -- -- -- -- -- (153) 114 84
Singapore -- 152 -- -- -- -- -- -- (23) -- 129
----------------------------------------------------------------------------------------------------------
114 $ 1,518 -- -- -- -- -- $ -- $ (474) 114 1,044
----------------------------------------------------------------------------------------------------------
TOTAL 345 $ 5,298 -- -- -- -- -- $ -- $ (931) 345 $ 4,367
============================== ===========================================================================
PLANT CLOSING COSTS AND OFFICE CLOSING AND WORKFORCE REDUCTION COSTS
2004 ACCRUALS -There were no accruals made in 2004. The only activity
during the six months related to payments charged to the accrual.
4. INTEREST EXPENSE - CURRENT AND LONG-TERM DEBT
Interest expense - current and long-term debt in the statement of operations for
the three and six months ended June 30, 2004 and 2003 are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ------------------------------
2004 2003 2004 2003
-------------- -------------- --------------- --------------
Interest expense accrued, net $ 23,488 $ 20,796 $ 46,821 $ 39,244
Recurring amortization of financing fees 1,081 1,292 2,229 2,700
Write-off of previously capitalized financing fees and interest rate
derivatives costs(a) -- 5,294 10,118 5,294
-------------- -------------- --------------- --------------
TOTAL $ 24,569 $ 27,382 $ 59,168 $ 47,238
============== ============== =============== ==============
Cash interest payments $ 22,316 $ 30,501 $ 43,170 $ 36,902
============== ============== =============== ==============
- -------------
(a) This write-off resulted from the repayment of the old credit facilities in
February 2004, from the net proceeds from the issuance of the senior secured
discount notes and borrowings under our revolving credit facility. In May 2003,
a portion of the financing fees capitalized in connection with our then existing
credit facilities was written off in connection with the amendment to these
agreements.
5. STOCK OPTION PLANS
During the three and six months ended March 31, 2004 and June 30, 2004,
options to purchase 4,365 and 8,815 shares respectively 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 and six month periods ended June 30,
2004 and June 30, 2003. 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 three and six
month periods ended June 30, 2004 and 2003 would have been the following
pro forma amounts (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
2004 2003 2004 2003
-------------- ------------- -----------------------------
As reported $ (21,369) $ (18,901) $ (52,128) $ (26,244)
Pro forma stock compensation expense (200) (188) (400) (376)
-------------- ------------- -----------------------------
Pro forma $ (21,569) $ (19,089) $ (52,528) $ (26,620)
============== ============= =============================
6. INCOME TAXES
For the three months ended June 30, 2004, income tax expense was $0.7
million on pretax losses of $20.7 million as compared to income tax expense of
$2.8 million on pretax loss of $16.0 million for the three months ended June 30,
2003. For the six months ended June 30, 2004, income tax expense was $2.4
million on pretax loss of $49.8 million compared to income tax expense of $4.9
million on pretax loss of $21.4 million for the six months ended June 30, 2003.
Income tax benefits related to net operating losses in the United States are
offset by a valuation allowance as the realization of these tax benefits are not
certain. Therefore, the income tax expense in the statements of operations
primarily reflects foreign income taxes.
7. COMPREHENSIVE INCOME/(LOSS)
Other comprehensive income (loss) for the three months ended June 30, 2004
and 2003 was ($22.1) million and ($14.1) million, respectively. Other
comprehensive income (loss) for the six months ended June 30, 2004 and 2003 was
($51.4) million and ($21.6) million, respectively. The components of other
comprehensive income (loss) are net income (loss), the change in cumulative
unrealized losses on derivatives recorded in accordance with Statement of
Financial Accounting Standards No. 133 and foreign currency translation.
8. REVOLVING CREDIT FACILITY AND ISSUANCE OF SENIOR SECURED DISCOUNT NOTES DUE
2009
Long-term debt as of June 30, 2004 and December 31, 2003 consists of the
following (in thousands):
JUNE 30, DECEMBER 31,
2004 2003
---------------- -----------------
Credit Facilities:
Revolving credit facility $ 16,000 $ --
Tranche A and B term loans under old credit facilities -- 219,575
Senior secured discount notes at 11 1/8%, net of unamortized issue discount 234,617 --
Senior secured notes, interest at 11 1/8% 250,000 250,000
Senior subordinated notes, interest at 13.0% (net of unamortized issue discount,
premium and discount related to warrants) 312,795 312,402
Obligations under capital leases 758 856
Insurance financing -- 824
---------------- -----------------
Total 814,170 783,657
Less current portion (201) (1,033)
---------------- -----------------
Long-term portion $ 813,969 $ 782,624
================ =================
On February 17, 2004 we repaid the balance outstanding on the credit facilities
that existed on that date from the proceeds from the issuance of Senior Secured
Discount Notes (discussed below) and the revolving credit facility (discussed
below).
REVOLVING CREDIT FACILITY
On February 17, 2004, we entered into a revolving credit facility providing
up to $100 million (subject to a borrowing base). The revolving credit facility
includes a $15 million letter of credit sub-facility, with letters of credit
reducing availability under the revolving credit facility.
The revolving credit facility is secured by a first priority security
interest in substantially all inventory, receivables, deposit accounts, 100% of
capital stock of, or other equity interests in existing and future domestic
subsidiaries and foreign subsidiaries that are note guarantors, and 65% of the
capital stock of, or other equity interests in existing and future first-tier
foreign subsidiaries, investment property and certain other assets of the
Company and the note guarantors (the "Second Priority Collateral") and a
second-priority security interest in our real property, fixtures, equipment,
intellectual property and other assets ("First Priority Collateral").
The revolving credit facility matures on February 17, 2009. The Company is
subject to periodic reporting of a borrowing base consisting of eligible
accounts receivable and eligible inventory. The interest rates are at LIBOR plus
2.5% to 2.75% or ABR plus 1.5% - 1.75%. The commitment fee for the unused
portion of the revolving credit facility is 0.50% per annum.
The borrowings under the revolving credit facility may be limited to 75% of
the lesser of the total commitment at such time and the borrowing base in effect
at such time if the fixed coverage ratio defined in the revolving credit
facility is less than or equal to 1.10 to 1.00.
ISSUANCE OF 11 1/8% SENIOR SECURED DISCOUNT NOTES DUE 2009
On February 17, 2004 we completed the sale of $306 million ($225.3 million
of proceeds) principal amount at maturity of 11 1/8% Senior Secured Discount
Notes due 2009. The proceeds of this offering and the borrowing under the new
revolving credit facility (discussed above) were used to repay and terminate the
credit facilities that existed at December 31, 2003.
The Senior Secured Discount Notes are secured by a first priority security
interest in the First-Priority Collateral and a second-priority security
interest in the Second-Priority Collateral.
Unless we elect to pay cash interest as described below, and except under
certain limited circumstances, the notes will accrete from the date of issuance
at the rate of 11 1/8% until December 15, 2006, compounded semiannually on each
June 15 and December 15, commencing June 15, 2004, to an aggregate principal
amount of $1,000 per note ($306.0 million in the aggregate assuming no
redemption or other repayments). Commencing on December 15, 2006, interest on
the notes will accrue at the rate of 11 1/8% per annum and will be payable in
cash semiannually on June 15 and December 15, commencing on June 15, 2007.
On any interest payment date prior to December 15, 2006, we may elect to
commence paying cash interest (from and after such interest payment date) in
which case (i) we will be obligated to pay cash interest on each subsequent
interest payment date, (ii) the notes will cease to accrete after such interest
payment date and (iii) the outstanding principal amount at the stated maturity
of each note will equal the accreted value of such note as of such interest
payment date.
On or after June 15, 2007, we may redeem some or all of the notes at the
following redemption prices (expressed as a percentage of principal amount),
plus accrued and unpaid interest: 105.563% if redeemed prior to June 15, 2008;
102.781% if redeemed prior to June 15, 2009; and 100% if redeemed on or after
June 15, 2009. Prior to such date, we may not redeem the notes except as
described in the following paragraph.
At any time prior to June 15, 2007, we may redeem up to 35% of the accreted
value of the notes with the net cash proceeds of certain equity offerings by us
at a redemption price equal to 111.125% of the accreted value thereof plus
accrued interest, so long as (i) at least 65% of the accreted value of the notes
remains outstanding after such redemption and (ii) any such redemption by us is
made within 120 days after such equity offering.
9. OPERATING SEGMENTS
Operating segments are components of our business for which separate
financial information is available and 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 is used internally
for evaluating segment performance.
We have four operating segments: Pliant U.S., Pliant Flexible Packaging,
Pliant International and Pliant Solutions. Sales and transfers between our
segments are eliminated in consolidation. We evaluate the performance of our
operating segments based on net sales (excluding inter-company sales) and
segment profit. The segment profit reflects income before 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 June 30,
2004 and 2003 are presented in the following table (in thousands). Certain
reclassifications have been made to the prior year amounts to be consistent
with the 2004 presentation.
PLIANT
PLIANT FLEXIBLE PLIANT PLIANT CORPORATE/
U.S. PACKAGING INTERNATIONAL SOLUTIONS OTHER TOTAL
-------------- --------------- -------------- -------------- -------------- --------------
THREE MONTHS ENDED JUNE 30, 2004
Net sales to customers $ 149,930 $ 58,330 $ 26,925 $ 7,511 $ -- $ 242,696
Intersegment sales 3,496 708 3,096 -- (7,300) --
-------------- --------------- -------------- -------------- -------------- --------------
Total net sales 153,426 59,038 30,021 7,511 (7,300) 242,696
Depreciation and amortization 5,984 1,899 1,946 335 366 10,530
Interest expense (1) (6) 1,303 1 31,938 33,235
Segment profit 21,524 7,367 2,147 (2,591) (5,343) 23,104
Capital expenditures 3,474 329 3,617 187 426 8,033
THREE MONTHS ENDED JUNE 30, 2003
Net sales to customers $ 136,609 $ 53,566 $ 27,655 $ 8,743 $ -- $ 226,573
Intersegment sales 3,083 1,121 4,584 -- (8,788) --
-------------- --------------- -------------- -------------- -------------- --------------
Total net sales 139,692 54,687 32,239 8,743 (8,788) 226,573
Depreciation and amortization 7,960 2,010 1,810 416 1,186 13,382
Interest expense (3) 19 638 6 26,722 27,382
Segment profit 21,851 7,740 3,446 (744) (5,242) 27,051
Capital expenditures 2,371 3,439 883 -- 407 7,100
PLIANT
PLIANT FLEXIBLE PLIANT PLIANT CORPORATE/
U.S. PACKAGING INTERNATIONAL SOLUTIONS OTHER TOTAL
-------------- --------------- -------------- -------------- -------------- --------------
SIX MONTHS ENDED JUNE 30, 2004
Net sales to customers $ 304,020 $ 114,714 $ 53,357 $ 14,772 $ (0) $ 486,863
Intersegment sales 6,745 1,280 4,637 107 (12,769) --
-------------- -------------- -------------- -------------- -------------- --------------
Total net sales 310,765 115,994 57,994 14,879 (12,769) 486,863
Depreciation and amortization 13,139 3,798 3,848 663 444 21,892
Interest expense (4) 12 2,227 6 73,960 76,201
Segment profit 44,522 15,971 3,201 (4,865) (10,504) 48,325
Segment total assets 463,718 136,153 80,952 16,862 79,638 777,323
Capital expenditures 4,971 473 4,877 222 589 11,132
SIX MONTHS ENDED JUNE 30, 2003
Net sales to customers $ 288,541 $ 105,323 $ 55,691 $ 17,529 $ -- $ 467,084
Intersegment sales 6,239 2,002 7,355 -- (15,596) --
-------------- -------------- -------------- -------------- -------------- --------------
Total net sales 294,780 107,325 63,046 17,529 (15,596) 467,084
Depreciation and amortization 14,517 3,987 3,549 721 1,764 24,538
Interest expense (5) 32 1,215 11 45,985 47,238
Segment profit 48,612 15,415 6,326 (1,645) (9,598) 59,110
Segment total assets 503,805 156,104 104,237 36,852 69,337 870,335
Capital expenditures 3,499 4,143 2,288 -- 792 10,722
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 and
six months ended June 30 is as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -- -------------- -------------- -- --------------
2004 2003 2004 2003
----------------- -------------- -------------- --------------
PROFIT OR LOSS
Total segment profit $ 23,104 $ 27,051 $ 48,325 $ 59,110
Depreciation and amortization (10,530) (13,382) (21,892) (24,538)
Restructuring and other costs -- (2,543) -- (8,607)
Interest expense (33,235) (27,382) (76,201) (47,238)
Other expenses and adjustments for non-cash charges and
certain adjustments defined by our credit agreement -- -- (105)
198
----------------- -------------- -------------- --------------
Income (loss) before taxes $ (20,661) $ (16,058) $ (49,768) $ (21,378)
================= ============== ============== ==============
ASSETS
Total assets for reportable segments 697,685 800,998
Other unallocated assets 79,638 69,337
--------------- ---------------
Total consolidated assets $ 777,323 $ 870,335
=============== ===============
10. SHARES SUBJECT TO MANDATORY REDEMPTION
The Company adopted Statement of Financial Accounting Standard No. 150 (
"SFAS 150"), ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS
OF BOTH LIABILITIES AND EQUITY, effective January 1, 2004. As a result, the
redeemable preferred stock of the Company that contains an unconditional
mandatory redemption feature was recorded as a liability on the date of adoption
at fair market value. Fair market value was determined using the value of the
securities on the date of issuance plus accretion of discount from the date of
issuance through December 31, 2003 and the unpaid dividends at the end of each
quarter from the date of issuance through December 31, 2003. In addition,
effective January 1, 2004, the dividends and accretion on the preferred shares
are included as a part of interest expense in the statement of operations.
In addition, as a result of adopting SFAS 150, the Company's redeemable common
shares that have been put for redemption by the shareholder were recorded as a
liability at fair value. The fair value was computed using the agreed upon price
of the redemption times the number of shares put by the shareholder. As required
by SFAS 150 prior periods were not restated.
The shares subject to mandatory redemption are as follow (in thousands):
AS OF JANUARY 1, AS OF JUNE 30,
2004 2004
----------------- -----------------
Redeemable Preferred Shares 200,000 shares authorized, 140,973 shares
outstanding as of June 30, 2004, designated as Series A, no par value with a
redemption value of $1,000 per share plus accumulated dividends.
$188,223 $205,256
18,200 Redeemable Common Shares that have been put for redemption by a
shareholder, net of a shareholder note of $2,431 6,362 6,362
----------------- -----------------
Total shares subject to mandatory redemption $194,585 $211,618
================= =================
The cash settlement at the redemption date (assuming no cash dividends are paid
through the redemption date) is $ 680.6 million for the redeemable preferred
shares and $ 6.4 million (net of the note receivable of $ 2.4 million) for the
redeemable common shares that have been put for redemption by the shareholder.
11. DEFINED BENEFIT PLANS
The Company sponsors three noncontributory defined benefit pension plans
(the "United States Plans") covering domestic employees with 1,000 or more hours
of service. The Company funds these in accordance with the funding requirements
of the Employee Retirement Income Security Act of 1974. Contributions are
intended to not only provide for benefits attributed to service to date but also
for those expected to be earned in the future. We also sponsor a defined benefit
plan in Germany (the "Germany Plan"). For information on the Germany Plan please
refer to the Company's Form 10-K for the year ended December 31, 2003.
In the second quarter of 2004, the Company redesigned its retirement
programs which led to the curtailment and "freeze" of the pension plan for U.S.
salaried employees effective June 30, 2004. As a result, a curtailment benefit
of $1.6 million was recognized as income during the quarter ended June 30, 2004.
The consolidated accrued net pension expense for the three and six months
ended June 30, 2004 and 2003 includes the following components (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
----------------- --------------------------------------------------
UNITED STATES PLANS
Service cost-benefits earned during the period $ 1,189 $ 1,119 $ 2,378 $ 2,238
Interest cost on projected benefit obligation 1,374 1,289 2,748 2,578
Expected return on assets (1,105) (869) (2,210) (1,738)
Curtailment (gain) loss (1,563) -- (1,563) --
Other 184 130 368 260
----------------- --------------------------------------------------
Total accrued pension expense $ 79 $ 1,669 $ 1,721 $ 3,338
EMPLOYER CONTRIBUTIONS (A)
2004 Expected to plan trusts $ 7,261
- -------------
(a) Disclosed due to the change from Form 10-K for the year ended December 31,
2003 as a result of the minimum funding changes made under the Pension
Funding Equity Act.
12. CONTINGENCIES
ENVIRONMENTAL CONTINGENCIES Our operations are subject to extensive
environmental laws and regulations concerning emissions to the air, discharges
to surface and subsurface waters, and the generation, handling, storage,
transportation, treatment, and disposal of waste materials, as adopted by
various governmental authorities in the jurisdictions in which we operate. We
believe we make every reasonable effort to remain in full compliance with
existing governmental laws and regulations concerning the environment.
LITIGATION On June 14, 2004, the Company settled the complaint filed
against us by S.C. Johnson & Sons, Inc and S.C. Johnson Home Storage filed in
U.S. District Court for the District of Michigan, Northern Division (Case No.
01-CV-10343-BC) for $6.0 million plus legal fees which was within management's
estimated costs of $7.2 million accrued in the fourth quarter of 2003.
On February 26, 2003, former employees of our Fort Edward, NY 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, and successfully removed the case to the United States District
Court for the Northern District of New York (Case No. 1:03cv00533). 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.
We are involved in other litigation matters from time to time in the
ordinary course of our business. In our opinion, none of such litigation is
material to our financial condition or results of operations.
13. 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"), the Indenture dated April 10, 2002 (the "2002 Indenture") relating
to Pliant's $100 million senior subordinated notes due 2010 (the "2002
Notes"), the Indenture dated May 30, 2003 ( the " 2003 Indenture") relating
to Pliant's $ 250 million senior secured notes due 2009 (the "2003 Notes")
and Indenture dated February 17, 2004 ( the "2004 Indenture" and, together
with the 2000 Indenture, the 2002 Indenture and the 2003 Indenture, the
"Indentures") relating to Pliant's $ 306 million senior secured discount
notes due 2009 ( " 2004 Notes" and, together with the 2000 Notes, the 2002
Notes and the 2003 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 June 30, 2004 and December 31, 2003 and for the six months
ended June 30, 2004 and 2003. 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.
In 2004, one of our subsidiaries in Canada, Uniplast Industries Co. became
a guarantor subsidiary. As a result, all periods presented include Uniplast
Industries Co. as a guarantor subsidiary.
PLIANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2004 (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 $ -- $ 584 $ 3,100 $ -- $ 3,684
Receivables - net 91,907 16,956 18,429 -- 127,292
Inventories 61,975 15,109 12,065 -- 89,149
Prepaid expenses and other 1,441 533 1,945 -- 3,919
Income taxes receivable -- (132) 132 -- --
Deferred income taxes 9,849 (1,524) (424) -- 7,901
--------------- --------------- ---------------- ---------------- ----------------
Total current assets 165,172 31,526 35,247 -- 231,945
PLANT AND EQUIPMENT - Net 243,707 22,727 39,314 -- 305,748
INTANGIBLE ASSETS - Net 173,603 25,632 1,301 -- 200,536
INVESTMENT IN SUBSIDIARIES (5,468) (1,062) 1,062 5,468 --
OTHER ASSETS 35,542 -- 3,552 -- 39,094
--------------- --------------- ---------------- ---------------- ----------------
TOTAL ASSETS $ 612,556 $ 78,823 $ 80,476 $ 5,468 $ 777,323
=============== =============== ================ ================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $ 201 $ -- $ -- $ -- $ 201
Trade accounts payable 75,219 7,921 10,907 94,047
Accrued liabilities 46,003 5,279 4,571 -- 55,853
Due to (from) affiliates (129,701) 79,662 50,039 -- --
--------------- --------------- ---------------- ---------------- ----------------
Total current liabilities (8,278) 92,862 65,517 150,101
LONG-TERM DEBT - Net of current portion 813,969 -- -- 813,969
OTHER LIABILITIES 24,135 -- 2,561 -- 26,696
DEFERRED INCOME TAXES 23,015 1,209 2,420 -- 26,644
SHARES SUBJECT TO MANDATORY REDEMPTION 211,618 -- -- -- 211,618
--------------- --------------- ---------------- ---------------- ----------------
Total Liabilities 1,064,459 94,071 70,498 1,229,028
--------------- --------------- ---------------- ---------------- ----------------
MINORITY INTEREST -- -- 198 -- 198
REDEEMABLE COMMON STOCK 6,645 -- -- -- 6,645
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock 103,376 -- -- -- 103,376
Additional paid-in capital 14,020 29,302 (43,322) --
Warrants 39,133 -- -- -- 39,133
Retained earnings accumulated (deficit) (589,180) (29,369) (12,611) 41,980 (589,180)
Stockholders' note receivable (660) -- -- -- (660)
Accumulated other comprehensive loss (11,217) 101 (6,911) 6,810 (11,217)
--------------- --------------- ---------------- ---------------- ----------------
Total stockholders' equity (deficit) (458,548) (15,248) 9,780 5,468 (458,548)
--------------- --------------- ---------------- ---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) $ 612,556 $ 78,823 $ 80,476 $ 5,468 $ 777,323
=============== =============== ================ ================ ================
PLIANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 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 $ -- $ 1,192 $ 2,116 $ -- $ 3,308
Receivables - net 79,685 14,071 18,186 -- 111,942
Inventories 63,954 19,567 11,698 -- 95,219
Prepaid expenses and other 2,626 460 723 -- 3,809
Income taxes receivable 167 806 463 -- 1,436
Deferred income taxes 10,934 (1,521) 4 -- 9,417
--------------- ---------------- ---------------- ---------------- ----------------
Total current assets 157,366 34,575 33,190 -- 225,131
PLANT AND EQUIPMENT, Net 253,601 24,576 41,392 -- 319,569
GOODWILL 182,162 -- -- -- 182,162
INTANGIBLE ASSETS, Net 19,752 -- -- -- 19,752
INVESTMENT IN SUBSIDIARIES (916) (1,062) 1,062 916 --
OTHER ASSETS 36,125 -- 4,047 -- 40,172
--------------- ---------------- ---------------- ---------------- ----------------
TOTAL ASSETS $ 648,090 $ 58,089 $ 79,691 $ 916 $ 786,786
=============== ================ ================ ================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable $ 66,839 $ 8,520 $ 14,441 $ -- $ 89,800
Accrued liabilities 53,714 4,790 5,142 -- 63,646
Current portion of long-term debt 1,033 -- -- -- 1,033
Due to (from) affiliates (72,692) 56,423 16,269 -- --
--------------- ---------------- ---------------- ---------------- ----------------
Total current liabilities 48,894 69,733 35,852 -- 154,479
LONG-TERM DEBT, Net of current portion 758,461 -- 24,163 -- 782,624
OTHER LIABILITIES 24,952 -- 2,541 -- 27,493
DEFERRED INCOME TAXES 21,676 2,502 3,614 -- 27,792
--------------- ---------------- ---------------- ---------------- ----------------
Total liabilities 853,983 72,235 66,170 -- 992,388
--------------- ---------------- ---------------- ---------------- ----------------
MINORITY INTEREST -- -- 291 -- 291
REDEEMABLE STOCK:
Preferred stock 188,223 -- -- -- 188,223
Common stock 13,008 -- -- -- 13,008
--------------- ---------------- ---------------- ---------------- ----------------
Total redeemable stock 201,231 -- -- -- 201,231
--------------- ---------------- ---------------- ---------------- ----------------
STOCKHOLDERS' (DEFICIT):
Common stock 103,376 14,020 29,302 (43,322) 103,376
Warrants to purchase common stock 39,133 -- -- -- 39,133
Retained earnings (deficit) (537,052) (28,155) (9,845) 38,000 (537,052)
Stockholders' notes receivable (660) -- -- -- (660)
Accumulated other comprehensive loss (11,921) (11) (6,227) 6,238 (11,921)
--------------- ---------------- ---------------- ---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (407,124) (14,146) 13,230 916 (407,124)
--------------- ---------------- ---------------- ---------------- ----------------
Total liabilities and stockholders'
(deficit) $ 648,090 $ 58,089 $ 79,691 $ 916 $ 786,786
=============== ================ ================ ================ ================
PLIANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 2004 (IN THOUSANDS) (UNAUDITED)
PLIANT COMBINED COMBINED CONSOLIDATED
CORPORATION GUARANTOR NON-GUARANTOR PLIANT
(PARENT ONLY) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CORPORATION
--------------- --------------- ---------------- ---------------- ----------------
SALES , Net $ 385,362 $ 55,223 $ 59,047 $ (12,769) $ 486,863
COST OF SALES 319,538 52,765 54,986 (12,769) 414,520
---------------- --------------- ------------------ --------------- ---------------
GROSS PROFIT 65,824 2,458 4,061 72,343
OPERATING EXPENSES 38,130 3,153 4,596 -- 45,879
---------------- --------------- ------------------ --------------- ---------------
OPERATING INCOME 27,694 (695) (535) -- 26,464
INTEREST EXPENSE (73,967) (319) (1,915) -- (76,201)
EQUITY IN EARNINGS OF SUBSIDIARIES (3,980) -- -- 3,980 --
OTHER INCOME (EXPENSE), Net (279) (50) 298 -- (31)
---------------- --------------- ------------------ --------------- ---------------
NET INCOME (LOSS) BEFORE INCOME TAXES (50,532) (1,064) (2,152) 3,980 (49,768)
INCOME TAX PROVISION 1,596 150 614 -- 2,360
---------------- --------------- ------------------ --------------- ---------------
NET INCOME (LOSS) $ (52,128) $ (1,214) $ (2,766) $ 3,980 $ (52,128)
================ =============== ================== =============== ===============
PLIANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 2003 (IN THOUSANDS) (UNAUDITED)
PLIANT COMBINED COMBINED CONSOLIDATED
CORPORATION GUARANTOR NON-GUARANTOR PLIANT
(PARENT ONLY) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CORPORATION
--------------- --------------- ---------------- ---------------- ----------------
SALES , Net $ 365,677 $ 58,187 $ 58,815 $ (15,595) $ 467,084
COST OF SALES 300,835 50,553 52,253 (15,595) 388,046
---------------- ---------------- ---------------- ---------------- ----------------
GROSS PROFIT 64,842 7,634 6,562 -- 79,038
OPERATING EXPENSES 45,533 3,937 5,467 -- 54,937
---------------- ---------------- ---------------- ---------------- ----------------
OPERATING INCOME 19,309 3,697 1,095 -- 24,101
INTEREST EXPENSE (45,996) (298) (944) -- (47,238)
EQUITY IN EARNINGS OF SUBSIDIARIES 109 -- -- (109) --
OTHER INCOME (EXPENSE), Net 38 95 1,626 -- 1,759
---------------- ---------------- ---------------- ---------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES (26,540) 3,494 1,777 (109) (21,378)
INCOME TAX PROVISION (BENEFIT) (296) 4,029 1,133 -- 4,866
---------------- ---------------- ---------------- ---------------- ----------------
NET INCOME (LOSS) $ (26,244) $ (535) $ 644 $ (109) $ (26,244)
================ ================ ================ ================ ================
PLIANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 (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 $ (29,045) $ 506 $ 26,670 $ -- $ (1,869)
--------------- --------------- --------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for plant and equipment (5,623) (394) (5,115) -- (11,132)
--------------- --------------- --------------- --------------- ---------------
Net cash used in investing activities (5,623) (394) (5,115) -- (11,132)
--------------- --------------- --------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of senior secured
discount notes 225,299 -- -- -- 225,299
Payment of financing fees (9,327) -- -- -- (9,327)
Repayment of term debt and revolver (195,412) -- (24,163) -- (219,575)
Repayment of capital leases and other, net (1,077) -- -- -- (1,077)
Proceeds from revolving debt, net 16,000 -- -- -- 16,000
--------------- --------------- --------------- --------------- ---------------
Net cash used in financing activities 35,483 -- (24,163) 11,320
--------------- --------------- --------------- --------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS (815) (720) 3,592 -- 2,057
--------------- --------------- --------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS -- (608) 984 -- 376
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE
PERIOD -- 1,192 2,116 -- 3,308
--------------- --------------- --------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ -- $ 584 $ 3,100 $ -- $ 3,684
=============== =============== =============== =============== ===============
PLIANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 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 $ (40,494) $ 3,662 $ 3,663 $ -- $ (33,169)
-------------- --------------- --------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for plant and equipment (5,745) (2,662) (2,315) -- (10,722)
-------------- --------------- --------------- --------------- ---------------
Net cash used in investing activities (5,745) (2,662) (2,315) -- (10,722)
-------------- --------------- --------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of preferred stock 9,532 -- -- -- 9,532
Payment of financing fees (9,734) -- -- -- (9,734)
(Payment) receipt of dividends 2,499 -- (2,499) -- --
Proceeds from issuance of senior subordinated
debt 250,000 -- -- -- 250,000
Borrowings under revolver 48,206 -- -- -- 48,206
Repayment of term debt and revolver (251,399) -- (629) -- (252,028)
-------------- --------------- --------------- --------------- ---------------
Net cash used in financing activities 49,104 -- (3,128) -- 45,976
-------------- --------------- --------------- --------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS 741 (918) 1,574 -- 1,397
-------------- --------------- --------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 3,606 82 (206) -- 3,482
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE
PERIOD -- (21) 1,656 -- 1,635
-------------- --------------- --------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 3,606 $ 61 $ 1,450 $ -- $ 5,117
============== =============== =============== =============== ===============
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, 2003 (the "2003 10-K") and our
Registration Statement on Form S-4, as amended (file No. 333-114608) filed on
April 20, 2004. 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 25 facilities located in the United States, Australia, 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 and six
months ended June 30, 2004 and 2003 (dollars in millions).
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------------------- ----------------------------------------------
2004 2003 2004 2003
-------------------------------------------- --------------------- ------------------------
% OF % OF % OF % OF
$ SALES $ SALES $ SALES $ SALES
---------- ------------ --------- ---------- ----------- --------- ----------- ------------
Net sales $ 242.7 100.0% $226.6 100.0% $ 486.9 100.0% $ 467.1 100.0%
Cost of sales 207.1 85.3 190.4 84.0 414.5 85.1 388.1 83.1
---------- ------------ --------- ---------- ----------- --------- ----------- ------------
Gross profit 35.6 14.7 36.2 16.0 72.4 14.9 79.0 16.9
Operating expenses before
restructuring and other costs 23.1 9.5 23.7 10.5 45.9 9.4 46.3 9.9
Restructuring and other costs -- -- 2.5 1.1 -- -- 8.6 1.8
---------- ------------ --------- ---------- ----------- --------- ----------- ------------
Total operating expenses 23.1 9.5 26.2 11.6 45.9 9.4 54.9 11.7
---------- ------------ --------- ---------- ----------- --------- ----------- ------------
Operating income $ 12.5 5.2% $ 10.0 4.4% $ 26.5 5.5% $ 24.1 5.2%
---------- ------------ --------- ---------- ----------- --------- ----------- ------------
THREE MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2003
NET SALES
Net sales increased by $16.1 million, or 7.1%, to $242.7 million for the second
quarter of 2004 from $226.6 million for the three months ended June 30, 2003.
The increase was primarily due to an 8.1% increase in our in sales volume
partially offset by a 1.0% decrease in our average selling prices. 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 $0.6 million, or 2%, to $35.6 million for the second
quarter of 2004, from $36.2 million for the three months ended June 30, 2003.
This decrease was primarily due to the effect of lower margins. 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 decreased $0.6
million, or 2.5%, to $23.1 million for the second quarter of 2004 from $23.7
million for the second quarter of 2003.
RESTRUCTURING AND OTHER COSTS
Restructuring and other costs decreased by $2.5 million from the second quarter
of 2003 as there were no restructuring expenses incurred in the second quarter
of 2004.
OPERATING INCOME
Operating income increased by $ 2.5 million, or 25 %, to $12.5 million for the
second quarter of 2004, from $ 10.0 million for the second quarter of 2003, due
to the factors discussed above. In addition operating income for the second
quarter of 2004 was favorably affected by a curtailment gain of $1.6 million
related to the curtailment of the U.S. salaried pension plan. (See note 11 to
the condensed consolidated financial statements).
INTEREST EXPENSE
Interest expense on current and long-term debt decreased by $2.8 million, or
10.2%, to $24.6 million for the three months ended June 30, 2004 from $27.4
million for the three months ended June 30, 2003. This decrease was principally
due to a charge of $ 5.4 million in the second quarter of 2003 for the write-off
of previously capitalized financing fees. This decrease was partially offset by
the higher interest costs resulting from the issuance of an additional $250
million of senior secured notes in May 2003 and accretion of the issue discount
associated with the $ 225.3 million in net proceeds of senior secured discount
notes issued in February 2004. The proceeds from the issuance of these notes
were used to repay bank debt that carried a lower interest rate.
Interest expense on preferred stock reflects the dividends and accretion on the
redeemable preferred stock of the Company that is classified as interest expense
after adoption of SFAS 150, effective January 1, 2004.
OTHER INCOME(EXPENSE)
Other income was $0.1 million for the three months ended June 30, 2004, as
compared to other income of $ 1.3 million for the three months ended June 30,
2003. The other income for the three months ended June 30, 2003 included $0.5
million of currency gains, $0.2 million of royalty income, $0.1 million of
rental income and other less significant items.
INCOME TAX EXPENSE
Income tax expense for the three months ended June 30, 2004 was $0.7
million on pretax losses of $20.7 million as compared to income tax expense of
$2.8 million on pretax losses of $16.1 million for the same period in 2003.
Income tax benefits related to net operating losses in the United States were
offset by a valuation allowance as the realization of these tax benefits is not
certain. Therefore, the income tax expense in the statements of operations
primarily reflect foreign income taxes.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2003
NET SALES
Net sales increased by $19.8 million, or 4.2%, to $486.9 million for the six
months ended June 30, 2004 from $467.1 million for the six months ended June 30,
2003. The increase was primarily due to a 2.6% increase in sales volume and a
1.6% increase in our average selling price resulting primarily from the pass
through of increases in our raw material prices to customers. 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 $6.6 million, or 8%, to $72.4 million for six months
ended June 30, 2004, from $79.0 million for the six months ended June 30, 2003.
This decrease was primarily due to the effect of lower margins. 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 decreased $0.4
million, or 1.0%, to $45.9 million for the six months ended June 30, 2004 from
$46.3 million for the six months ended June 30, 2003.
RESTRUCTURING AND OTHER COSTS
Restructuring and other costs decreased by $8.6 million from the six months
ended June 30, 2003 as there were no restructuring expenses incurred in the six
months ended June 30, 2004.
OPERATING INCOME
Operating income increased by $ 2.4 million, or 10.0 %, to $26.5 million for the
six months ended June 30, 2004, from $ 24.1 million for the six months ended
June 30, 2003, due to the factors discussed above. In addition operating income
for the six months ended June 30, 2004 was favorably affected by a curtailment
gain of $1.6 million related to the curtailment of the U.S. salaried pension
plan. (See Note 11 to the condensed consolidated financial statements).
INTEREST EXPENSE
Interest expense on current and long-term debt increased by $12.0 million, or
25.4%, to $59.2 million for the six months ended June 30, 2004 from $47.2
million for the six months ended June 30, 2003. This increase was principally
due to the higher interest costs resulting from the issuance of an additional
$250 million of senior secured notes in May 2003 and the additional $ 225.3
million in net proceeds of senior secured discount notes in February 2004. The
proceeds from the issuance of these notes were used to repay bank debt that
carried a lower interest rate. In addition, the first quarter 2004 interest
expense included a charge for the write-off of previously capitalized financing
fees and losses related to interest rate derivatives totaling $ 10.1 million.
Partially offsetting these increases between years was a charge of $5.4 million
taken in the second quarter of 2003 for the write-off of previously capitalized
financing fees.
Interest expense on preferred stock reflects the dividends and accretion on the
redeemable preferred stock of the Company that is classified as interest expense
after adoption of SFAS 150, effective January 1, 2004.
OTHER INCOME(EXPENSE)
Other expense was $0.1 million for the six months ended June 30, 2004, as
compared to other income of $ 1.8 million for the six months ended March 31,
2003. The other income for the six months ended June 30, 2003 included primarily
net proceeds from the realization of certain insurance policies, $0.5 million of
currency gains, $0.2 million of royalty income, $0.2 million of rental income
and other less significant items.
INCOME TAX EXPENSE
Income tax expense for the six months ended June 30, 2004 was $2.4 million on
pretax losses of $49.8 million as compared to $4.9 million on pretax losses of
$21.4 million for the same period in 2003. Income tax benefits related to net
operating losses in the United States were offset by a valuation allowance as
the realization of these tax benefits is not certain. Therefore, the income tax
expense in the statements of operations primarily reflects foreign income taxes.
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 inter-company
sales) and segment profit. The segment profit reflects income before 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 9 to the consolidated financial
statements included elsewhere in this report.
We have four reporting segments: Pliant U.S., Pliant Flexible Packaging, Pliant
International and Pliant Solutions.
Summary of segment information (in millions of dollars):
UNALLOCATED
PLIANT PLIANT FLEXIBLE PLIANT PLIANT CORPORATE
U.S. PACKAGING INTERNATIONAL SOLUTIONS EXPENSES TOTAL
------------- ----------------- -------------- -------------- -------------- --------------
THREE MONTHS ENDED JUNE 30, 2004
Net sales $ 150.0 $ 58.3 $ 26.9 $ 7.5 $ -- $ 242.7
Segment profit (loss) $ 21.5 7.4 2.1 (2.6) (5.3) 23.1
THREE MONTHS ENDED JUNE 30, 2003
Net sales $ 136.6 53.6 27.7 8.7 -- 226.6
Segment profit (loss) $ 21.9 7.7 3.4 (0.7) (5.2) 27.1
SIX MONTHS ENDED JUNE 30, 2004
Net sales $ 304.1 114.7 53.4 14.7 -- 486.9
Segment profit (loss) $ 44.5 16.0 3.2 (4.9) (10.5) 48.3
SIX MONTHS ENDED JUNE 30, 2003
Net sales $ 288.6 105.3 55.7 17.5 -- 467.1
Segment profit (loss) $ 48.6 15.4 6.3 (1.6) (9.6) 59.1
THREE MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2003
PLIANT U.S.
NET SALES. The net sales of our Pliant U.S. segment increased $13.4 million, or
9.8%, to $150.0 million for the second quarter of 2004 from $136.6 million for
the second quarter of 2003. This increase was primarily due to an increase in
sales volumes of 10.6% partially offset by a decrease of 0.7% in our average
selling prices. The increase in sales volumes is discussed for each Pliant U.S.
division below.
Net sales in our Industrial Films division increased $7.1 million, or 16.7%, to
$49.7 million for the second quarter of 2004 from $42.6 million for the second
quarter of 2003. This increase was principally due to an increase in sales
volumes of 7.8 million pounds or 15.1% and an increase in our average selling
prices of 1.2 cents per pound or 1.4 %. The increase in sales volume was
primarily due to higher sales from our new "Revolution" stretch film products
and additional PVC sales from certain relocated lines that are now in operation.
Net sales in our Specialty Films division increased $0.9 million, or 2.1%, to
$43.7 million for the second quarter of 2004 from $42.8 million for the second
quarter of 2003. This increase was principally due to an increase in our sales
volume of 0.9 million pounds. Our average selling prices remained relatively
stable. The increase in sales volume was primarily the result of higher sales of
our agricultural films. Net sales in our Converter Films division increased $5.4
million, or 10.5%, to $56.6 million for the second quarter of 2004 from $51.2
million for the second quarter of 2003. This increase was principally due to an
increase in our sales volumes of 6.0 million pounds or 12.3% partially offset by
a decrease in our average selling prices of 1.7 cents per pound or 1.6%. The
increase in sales volumes were principally due to increased market share through
new customers in the engineered films market and additional volume from existing
customers in the industrial products market.
SEGMENT PROFIT. The Pliant U.S. segment profit decreased $ 0.4 million to $21.5
million for the second quarter of 2004 as compared to $21.9 million for the
second quarter of 2003 principally due to lower gross margins partially offset
by the effect of higher sales volumes. The decrease in gross margins was
principally due to the fact that the change in selling prices discussed above
were not sufficient to offset the increase in raw material prices, principally
in the industrial and converter divisions.
PLIANT FLEXIBLE PACKAGING
NET SALES. The net sales of our Pliant Flexible Packaging segment increased $4.7
million, or 8.8%, to $58.3 million for the second quarter of 2004 from $53.6
million for the first quarter of 2003. This increase was principally due to an
increase in our sales volumes of 1.4 million pounds, or 3.9%, and an increase in
our average selling prices of 7.1 cents per pound, or 4.8%. The sales volume
increased principally due to additional sales to existing customers principally
in our Bakery and Barrier film markets.
SEGMENT PROFIT. The Pliant Flexible Packaging segment profit decreased $0.3
million to $7.4 million for the second quarter of 2004 from $7.7 million for the
second quarter of 2003. This decrease in segment profit was primarily due to a
decrease in gross margins partially offset by the effect of higher sales volumes
discussed above. The decrease in gross margins was principally due to the fact
that selling prices increased at a rate lower than the increased prices of raw
materials in the second quarter of 2004. In addition, there is a delay in
implementing price increases and decreases in this segment due to contracts with
certain customers. Therefore, the margins for this quarter were adversely
affected from increases in raw material prices not yet passed on to customers.
PLIANT INTERNATIONAL
NET SALES. The net sales of our Pliant International segment decreased $0.8
million, or 2.9%, to $26.9 million for the second quarter of 2004 from $27.7
million for the second quarter of 2003. This decrease was principally due to a
decrease in our average selling prices of 5.8 cents per pound, or 5.5% partially
offset by an increase in sales volume of 3.0%. The decrease in average selling
prices was caused primarily from our Mexico operations. Average selling prices
in Mexico decreased principally due to the deterioration of the Mexican peso and
a shift in our sales mix.
SEGMENT PROFIT. The Pliant International segment profit decreased $1.3 million
to $2.1 million for the second quarter of 2004 from $3.4 million for the second
quarter of 2003. The decrease was due principally to the operating losses in our
plant in Mexico. Our plant in Mexico was affected by operating issues and the
resulting loss of customers and products. Management changes have been made at
this location and increases in sales volume and improved operating results are
expected.
PLIANT SOLUTIONS
NET SALES. The net sales of our Pliant Solutions segment decreased $1.2 million,
or 13.8%, to $7.5 million for the second quarter of 2004 from $8.7 million for
the second quarter of 2003. This decrease was principally due to a 7.5% decrease
in our sales volume and a decrease in our average selling prices of 18.6 cents
per pound, or 7.2%. The decrease in sales volume was primarily due to several
promotional programs in the second quarter of 2003 that were not repeated by our
customers in the second quarter of 2004 and a reduction in sales to a major
customer due to the closing of several stores. Average selling prices decreased
due to a change in the sales mix.
SEGMENT PROFIT (LOSS). The Pliant Solutions segment profit decreased $1.9
million, to a loss of $(2.6) million for the second quarter of 2004 from a loss
of $(0.7) million for the second quarter of 2003. The decrease was due
principally to the decrease in sales volumes and a decrease in gross margins due
to a change in the sales mix.
UNALLOCATED CORPORATE EXPENSES
Unallocated corporate expenses increased $0.1 million to $5.3 million for the
second quarter of 2004 as compared to $ 5.2 million for the second quarter of
2003. 26 [GRAPHIC OMITTED]
SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2003
PLIANT U.S.
NET SALES. The net sales of our Pliant U.S. segment increased $15.5 million, or
5.4%, to $304.1 million for the six months ended June 30, 2004 from $288.6
million for the six months ended June 30, 2003. This increase was primarily due
to an increase in sales volume of 3.8% and an increase in our average selling
prices of 1.5 cents per pound or 1.5%. The increase in sales volumes is
discussed for each Pliant U.S. division below.
Net sales in our Industrial Films division increased $7.9 million, or 8.7%, to
$97.9 million for the six months ended June 30, 2004 from $90.0 million for the
same period in 2003. This increase was principally due to an increase in sales
volume of 3.5% and an increase in our average selling prices of 4.1 cents per
pound or 5.1%. The increase in sales volume was primarily due to higher sales
from our new "Revolution" stretch film products and additional PVC sales from
certain relocated lines that are now in operation. Net sales in our Specialty
Films division increased $1.7 million, or 1.9%, to $92.6 million for the six
months ended June 30, 2004 from $90.9 million for the same period in 2003. This
increase was principally due to an increase in our sales volume of 2.0 million
pounds, partially offset by a slight decrease in our average selling prices of
0.1 cents per pound. The increase in sales volume was primarily the result of
higher sales from our personal care business and agricultural films business.
Net sales in our Converter Films division increased $5.9 million, or 5.5%, to
$113.5 million for the six months ended June 30, 2004 from $107.6 million for
the same period in 2003. This increase was principally due to higher sales
volume which increased 5.2% and a slight increase in our average selling prices
of 0.1 cents per pound. The sales volume increased due to increased market share
through new customers in the engineered films market and additional volume from
existing customers in the industrial products market.
SEGMENT PROFIT. The Pliant U.S. segment profit decreased $ 4.1 million to $44.5
million for the six months ended June 30, 2004 as compared to $48.6 million for
the same period in 2003 principally due to lower gross margins partially offset
by the affects of the increases in sales volumes discussed above. The decrease
in gross margins was principally due to the fact that the selling prices
discussed above did not increase at a leval sufficient to compensate for the
increase in raw material prices.
PLIANT FLEXIBLE PACKAGING
NET SALES. The net sales of our Pliant Flexible Packaging segment increased $9.4
million, or 8.9%, to $114.7 million for the six months ended June 30, 2004 from
$105.3 million for the same period in 2003. This increase was principally due to
an increase in our sales volumes of 3.4 million pounds, or 4.7%, and an increase
in our average selling prices of 5.9 cents per pound, or 4.0%. The sales volume
increased principally due to additional sales to existing customers principally
from our Bakery and Barrier Films markets.
SEGMENT PROFIT. The Pliant Flexible Packaging segment profit increased $0.6
million to $16.0 million for six months ended June 30, 2004 from $15.4 million
for the same period in 2003. This increase in segment profit was primarily due
to the affect of the increase in sales volume partially offset by the effect of
higher conversion costs.
PLIANT INTERNATIONAL
NET SALES. The net sales of our Pliant International segment decreased $2.3
million, or 4.1%, to $53.4 million for the six months ended June 30, 2004 from
$55.7 million for the same period in 2003. This decrease was principally due to
a 4.6% decrease in our sales volume, partially offset by a slight increase in
our average selling prices of 0.1 cents per pound. Among other factors, our
sales volumes were adversely affected by a reduction in sales at our plant in
Mexico due to the loss of certain customers and products as a result of
operating issues discussed below.
SEGMENT PROFIT. The Pliant International segment profit decreased $3.1 million
to $3.2 million for the six months ended June 30, 2004 from $6.3 million for the
same period in 2003. The decrease was due principally to the operating losses in
our plant in Mexico. Our plant in Mexico was affected by operating issues and
the resulting loss of customers and products. Management changes have been made
at this location and increases in sales volume and improved operating results
are expected.
PLIANT SOLUTIONS
NET SALES. The net sales of our Pliant Solutions segment decreased $2.8 million,
or 16.0%, to $14.7 million for the six months ended June 30, 2004 from $17.5
million for the same period in 2003. This decrease was principally due to a 9.7%
decrease in our sales volume and a decrease in our average selling prices of
16.8 cents per pound, or 6.6%. The decrease in sales volume was primarily due to
several promotional programs in the first half of 2003 that were not repeated by
our customers in 2004 and a reduction in sales to a major customer due to the
closing of several stores. Average selling prices decreased due to a change in
the sales mix.
SEGMENT PROFIT (LOSS). The Pliant Solutions segment profit decreased $3.3
million, to a loss of $(4.9) million for the six months ended June 30, 2004 from
a loss of $(1.6) million for the same period in 2003. The decrease was due
principally to the decrease in sales volumes and a decrease in gross margins due
to a change in the sales mix.
UNALLOCATED CORPORATE EXPENSES
Unallocated corporate expenses increased $0.9 million to $10.5 million for the
six months ended June 30, 2004 as compared to $ 9.6 million for the same period
in 2003. The increase was principally due to an adjustment of $0.4 million in
the first quarter of 2004 related to employee benefits for an acquisition made
in prior years, increase in legal fees and increases in labor costs.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF CAPITAL
Our principal sources of funds are cash generated by our operations and
borrowings under our revolving credit facility. In addition, we have raised
funds through the issuance of our 13% Senior Subordinated Notes due 2010, 11
1/8% Senior Secured Notes due 2009, 11 1/8% Senior Secured Discount Notes due
2009 and the sale of shares of our preferred stock.
All of the term debt and revolver under the credit facilities that existed
at December 31, 2003 had been at variable rates of interest, so payment of the
term loans with the proceeds of our 11 1/8% Senior Secured Discount Notes and
borrowings under our revolving credit facility substantially reduced our
exposure to interest rate risk. Although our $100 million revolving credit
facility is at a variable rate of interest, there are substantially fewer
financial covenants than our credit facilities that existed at December 31,
2003, which will substantially reduce our exposure to covenant default risk.
While the effective interest rate on the Senior Secured Discount Notes is higher
than the term loans retired from the proceeds of the February 2004 offering, we
will realize greater short-term liquidity and flexibility in our debt structure
resulting from the elimination of a number of the financial and other covenants
in our then existing credit facilities and the deferral of cash interest on the
Senior Secured Discount Notes during the period in which they accrete.
PRIOR CREDIT FACILITIES
As of December 31, 2003, our credit facilities consisted of: tranche A term
loans in an aggregate principal amount of $9.6 million outstanding; Mexico term
loans in an aggregate principal amount of $24.2 million outstanding; tranche B
term loans in an aggregate principal amount of $185.8 million outstanding; and a
revolving credit facility in an aggregate principal amount of up to $100 million
(excluding $6.7 million of outstanding letters of credit).
REVOLVING CREDIT FACILITY
On February 17, 2004, we paid off and terminated our then existing credit
facilities and entered into a revolving credit facility providing up to $100.0
million (subject to a borrowing base). The revolving credit facility includes a
$15.0 million letter of credit sub-facility, with letters of credit reducing
availability under our revolving credit facility.
The revolving credit facility is secured by a first-priority security
interest in substantially all inventory, receivables, deposit accounts, 100% of
capital stock of, or other equity interests in existing and future domestic
subsidiaries and foreign subsidiaries that are guarantors of the Senior Secured
Discount Notes, and 65% of the capital stock of, or other equity interests in
existing and future first-tier foreign subsidiaries, investment property and
certain other assets of the Company and the note guarantors (the
"Second-Priority Collateral"), and a second-priority security interest in our
real property, fixtures, equipment, intellectual property and other assets (the
"First-Priority Collateral").
The revolving credit facility matures on February 17, 2009. The Company is
subject to periodic reporting of a borrowing base consisting of eligible
accounts receivable and eligible inventory. The interest rate will be at LIBOR
plus 2.5% to 2.75 % or ABR plus 1.5% - 1.75%.
The borrowings under the revolving credit facility may be limited at any
given time to 75% of the lesser of the total commitment at such time and the
borrowing base in effect at such time if the fixed coverage ratio defined in the
new revolving credit facility is less than or equal to 1.10 to 1.00.
ISSUANCE OF 11 1/8% SENIOR SECURED DISCOUNT NOTES DUE 2009
On February 17, 2004 we completed the sale of $306.0 million principal
amount at maturity (gross proceeds of $225.3 million) of 11 1/8% Senior Secured
Discount Notes due 2009. The proceeds of the offering and
borrowings under the revolving credit facility (discussed above) were used to
repay and terminate the credit facilities that existed at December 31, 2003.
The Senior Secured Discount Notes are secured by a first-priority security
interest in the First-Priority Collateral and a second-priority security
interest in the Second-Priority Collateral. The Senior Secured Discount Notes
are guaranteed by our existing and future domestic restricted subsidiaries and
certain foreign subsidiaries.
Unless we elect to pay cash interest as described below, and except under
certain limited circumstances the Senior Secured Discount Notes will accrete
from the date of issuance at the rate of 11 1/8% until December 15, 2006,
compounded semiannually on each June 15 and December 15 commencing June 15,
2004, to an aggregate principal amount of $1,000 per note ($306.0 million in the
aggregate assuming no redemption or other repayments). Commencing on December
15, 2006, interest on the Senior Secured Discount Notes will accrue at the rate
of 11 1/8% per annum and will be payable in cash semiannually on June 15 and
December 15, commencing on June 15, 2007.
On any interest payment date prior to December 15, 2006, we may elect to
commence paying cash interest (from and after such interest payment date) in
which case (i) we will be obligated to pay cash interest on each subsequent
interest payment date, (ii) the notes will cease to accrete after such interest
payment date and (iii) the outstanding principal amount at the stated maturity
of each note will equal the accreted value of such note as of such interest
payment date.
On or after June 15, 2007, we may redeem some of all of the Senior Secured
Discount Notes at the following redemption prices (expressed as a percentage of
principal amount), plus accrued and unpaid interest: 105.563% if redeemed prior
to June 15, 2008; 102.781% if redeemed prior to June 15, 2009; and 100% if
redeemed on or after June 15, 2009. Prior to such date, we may not redeem the
notes except as described in the following paragraph.
At any time prior to June 15, 2007, we may redeem up to 35% of the accreted
value of the Senior Secured Discount Notes with the net cash proceeds of certain
equity offerings by us at a redemption price equal to 111.125% of the accreted
value thereof plus accrued interest, so long as (i) at least 65% of the accreted
value of the notes remains outstanding after such redemption and (ii) any such
redemption by us is made within 120 days after such equity offering.
11 1/8% SENIOR SECURED NOTES DUE 2009
On May 30, 2003, we completed the sale of $250 million aggregate principal
amount of our 11 1/8% Senior Secured Notes due 2009. The 11 1/8% Senior Secured
Notes due 2009 mature on September 1, 2009, and interest is payable on March 1
and September 1 of each year. The net proceeds from the sale of the 11 1/8%
Senior Secured Notes due 2009 were used to repay borrowings under our then
existing credit facilities in accordance with an amendment to our then existing
credit facilities. The 11 1/8% Senior Secured Notes due 2009 rank equally with
our existing and future senior debt and rank senior to our existing and future
subordinated indebtedness, including the 13% Senior Subordinated Notes due 2010.
The 11 1/8% Senior Secured Notes due 2009 are secured, on a second-priority lien
basis, by a substantial portion of our assets. Due to this second-priority
status, the 11 1/8% Senior Secured Notes due 2009 effectively rank junior to our
obligations secured by a first-priority lien on the collateral securing the 11
1/8% Senior Secured Notes due 2009 to the extent of the value of such
collateral. These obligations secured by first-priority liens include our new
revolving credit facility with respect to Second-Priority Collateral and the
Senior Secured Discount Notes due 2009 with respect to First-Priority
Collateral. In addition, the 11 1/8% Senior Secured Notes due 2009 effectively
rank junior to any of our obligations that are secured by a lien on assets that
are not part of the collateral securing the 11 1/8% Senior Secured Notes due
2009, to the extent of the value of such assets. The 11 1/8% Senior Secured
Notes due 2009 are guaranteed by some of our subsidiaries.
Prior to June 1, 2007, we may, on one or more occasions, redeem up to a
maximum of 35% of the original aggregate principal amount of the 11 1/8% Senior
Secured Notes due 2009 with the net cash proceeds of one or more equity
offerings by us at a redemption price equal to 111.125% of the principal amount
thereof, plus accrued
and unpaid interest. Otherwise, we may not redeem the 11 1/8% Senior Secured
Notes due 2009 prior to June 1, 2007. On or after that date, we may redeem some
or all of the 11 1/8% Senior Secured Notes due 2009 at the following redemption
prices (expressed as a percentage of principal amount), plus accrued and unpaid
interest: 105.563% if redeemed prior to June 1, 2008; 102.781% if redeemed prior
to June 1, 2009; and 100% if redeemed on or after June 1, 2009.
13% SENIOR SUBORDINATED NOTES DUE 2010
In 2000, we issued $220 million aggregate principal amount of 13% Senior
Subordinated Notes due 2010. In 2002, we issued an additional $100 million of
13% Senior Subordinated Notes due 2010. The 13% Senior Subordinated Notes due
2010 mature on June 1, 2010, and interest on the 13% Senior Subordinated Notes
due 2010 is payable on June 1 and December 1 of each year. The 13% Senior
Subordinated Notes due 2010 are subordinated to all of our existing and future
senior debt, rank equally with any future senior subordinated debt, and rank
senior to any future subordinated debt. The 13% Senior Subordinated Notes due
2010 are guaranteed by some of our subsidiaries. The 13% Senior Subordinated
Notes due 2010 are unsecured. We may not redeem the 13% Senior Subordinated
Notes due 2010 prior to June 1, 2005. On or after that date, we may redeem the
13% Senior Subordinated Notes due 2010, in whole or in part, at the following
redemption prices (expressed as percentages of principal amount), plus accrued
and unpaid interest: 106.5% if redeemed prior to June 1, 2006; 104.333% if
redeemed prior to June 1, 2007; 102.167% if redeemed prior to June 1, 2008; and
100% if redeemed on or after June 1, 2008.
PREFERRED STOCK
We have approximately $205.3 million of Series A Cumulative Exchangeable
Redeemable Preferred Stock outstanding. The Series A preferred stock accrues
dividends at the rate of 14% per annum; however, our board of directors has
never declared or paid any dividends on the Series A preferred stock. Unpaid
dividends accumulate and are added to the liquidation amount of the Series A
preferred stock. After May 31, 2005 the annual dividend rate increases to 16%
unless we pay dividends in cash. The dividend rate also increases to 16% if we
fail to comply with certain of our obligations or upon certain events of
bankruptcy. The Series A preferred stock is mandatorily redeemable on May 31,
2011.
NET CASH USED IN OPERATING ACTIVITIES
Net cash used in operating activities was $1.9 million for the six months ended
June 30, 2004, a decrease of $31.3 million, as compared to net cash used in
operating activities of $33.2 million for the same period in 2003. This decrease
was due to reductions in working capital items of $35.4 million, offset by
reductions in non-cash plant closing costs of $3.3 million and depreciation and
amortization of $2.6 million.
NET CASH USED IN INVESTING ACTIVITIES
Net cash used in investing activities increased $0.4 million to $11.1 million
for the six months ended June 30, 2004, from $10.7 million for the six months
ended June 30, 2003. These cash outflows were for capital expenditures for
maintenance projects.
NET CASH PROVIDED BY FINANCING ACTIVITIES
Net cash provided by financing activities was $11.3 million for the six months
ended June 30, 2004, as compared to net cash provided by financing activities of
$46.0 million for the six months ended June 30, 2003. The activity for the first
six months of 2004 includes the net proceeds from the issuance of senior secured
discount notes of $225.3 million net of financing fees paid of $ 9.3 million and
the repayment of the old credit facilities of $ 219.6 million. In addition we
borrowed $ 16.0 million net of repayments under the credit facility for
operations and paid $1.1 million for capital leases. The transactions in the six
months of 2003 included the issuance of $ 10 million of
redeemable preferred shares, net proceeds of $250 million from the issuance of
Senior Secured Notes to repay term debt and $9.7 million in financing fees for a
related amendment to our credit facility and the preferred share issuance.
LIQUIDITY
As of June 30, 2004, we had approximately $82.0 million of working capital
excluding current maturities of long term debt. As of June 30, 2004 we have
approximately $48.5 million available for borrowings under our new $100.0
million revolving credit facility, with outstanding borrowings of approximately
$16.0 million and approximately $7.2 million of letters of credit issued under
our revolving credit facility. The borrowings under the new revolving credit
facility are limited to 75% of the lesser of the total commitment at such time
and the borrowing base in effect at such time if the fixed coverage ratio
defined in the new revolving credit facility is less than or equal to 1.10 to
1.00. 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.
As of June 30, 2004, we had approximately $3.7 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-$30
million in each of 2004 and 2005. These expenditures will consist primarily of
ongoing maintenance capital expenditures and limited capacity additions.
Our revolving credit facility and the indentures relating to our outstanding
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.
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 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; operational difficulties at any of our plants; 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 2003 Form 10-K and in our Registration Statement on Form
S-4 (file no. 333-114608), as amended, filed with the Securities and Exchange
Commission on April 20, 2004. 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 resin price risks that arise in the normal course of
business. Significant increases in the price of resins could adversely affect
our operating margins, results of operations and ability to service our
indebtedness. We may be limited in our ability to pass increases in resin prices
on to certain of our customers due to provisions in our contracts with those
customers.
Since the repayment of $219.6 million of variable rate term debt with the
proceeds of our Senior Secured Discount Notes and borrowings under our new
revolving credit facility on February 17, 2004 our interest rate risk has
decreased substantially.
Our new revolving credit facility is at a variable rate of interest. An
increase of 1% in interest rates would result in an additional $100,000 of
annual interest expense for each $10.0 million in borrowings under our new
revolving credit facility. We will thus continue to be exposed to interest rate
risk to the extent of our borrowings under the new revolving credit facility.
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 as of the end of the period
covered by 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 14, 2004, we settled the complaint filed against us by S.C. Johnson
& Sons, Inc and S.C. Johnson Home Storage filed in U.S. District Court for the
District of Michigan, Northern Division (Case No. 01-CV-10343-BC) for $6.0
million plus legal fees which was within management's estimated costs of $7.2
million accrued in the fourth quarter of 2003.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with this report.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer furnished pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification of Chief Financial Officer furnished 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
We furnished a Current Report on Form 8-K, dated April 27, 2004, under Item
9 of such form, announcing the Company's plan to host an Investor
Conference on May 18, 2004 in Lexington, Kentucky at the Marriott Griffin
Gate Resort followed by a tour of our plant in Danville, Kentucky.
We furnished a Current Report on Form 8-K, dated May 6, 2004, under Items 7
and 9 of such form, announcing the Company's 1st quarter 2004 results as
stated in a letter from Harold Bevis, President and Chief Executive Officer
of Pliant, to our customers, investors and employees. The information
included in Item 9 of this Current Report was furnished and shall not be
deemed to be filed.
We filed a Current Report on Form 8-K, dated May 5, 2004, under Items 9 and
12 of such form, "Regulation FD Disclosure and Results of Operations and
Financial Condition".
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: August 5, 2004
INDEX TO EXHIBITS
EXHIBITS
- --------
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer furnished pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer furnished pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.