-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T5Xvw00zq4U8KEYIZZzDvPHt+F3kFWbK/OURVg1aJUQa2D2NfiL1vKXNjDPMhFwb K5vgKLtfDVYEBNjfaa/N6Q== 0000950123-01-508324.txt : 20020410 0000950123-01-508324.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950123-01-508324 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLIANT CORP CENTRAL INDEX KEY: 0001049442 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS, FOIL & COATED PAPER BAGS [2673] IRS NUMBER: 870496065 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-40067 FILM NUMBER: 1783944 BUSINESS ADDRESS: STREET 1: 2755 E. COTTONWOOD PARKWAY CITY: SALT LAKE CITY STATE: UT ZIP: 84121 BUSINESS PHONE: 8019938200 MAIL ADDRESS: STREET 1: 2755 E. COTTONWOOD PARKWAY CITY: SALT LAKE CITY STATE: A1 ZIP: 84121 FORMER COMPANY: FORMER CONFORMED NAME: HUNTSMAN PACKAGING CORP DATE OF NAME CHANGE: 19971110 10-Q 1 y54988e10-q.txt PLIANT CORPORATION =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 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.) 2755 E. Cottonwood Parkway, Suite 400 Salt Lake City, Utah 84121 (801) 993-8221 (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 ----- ----- 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 November 12, 2001, there were 598,943 outstanding shares of the registrant's Common Stock. =============================================================================== PLIANT CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS
PAGE ----- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 5 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY(DEFICIT) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 6 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 25 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 34 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 35 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 35
2 PART I. FINANCIAL INFORMATION - ------------------------------- ITEM 1. FINANCIAL STATEMENTS PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 (DOLLARS IN THOUSANDS) (UNAUDITED)
September 30, December 31, 2001 2000 ------------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,766 $ 3,060 Receivables, net of allowances of $4,096 and $2,166, respectively 135,411 115,058 Inventories 80,228 79,151 Prepaid expenses and other 3,638 1,983 Income taxes receivable 737 2,758 Deferred income taxes 12,832 12,992 ---------- ------------ Total current assets 236,612 215,002 PROPERTY, PLANT AND EQUIPMENT, net 362,288 333,083 INTANGIBLE ASSETS, net 234,362 205,870 OTHER ASSETS 30,500 31,079 ---------- ------------ TOTAL ASSETS $ 863,762 $ 785,034 ========== ============ LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Current portion of long-term debt $ 15,713 $ 9,362 Trade accounts payable 107,212 109,018 Accrued liabilities 54,515 39,012 ---------- ------------ Total current liabilities 177,440 157,392 LONG-TERM DEBT, net of current portion 686,620 678,031 OTHER LIABILITIES 19,704 17,385 DEFERRED INCOME TAXES 31,928 33,060 ---------- ------------ Total liabilities 915,692 894,240 ---------- ------------ REDEEMABLE PREFERRED STOCK - 200,000 shares authorized, 130,983 shares outstanding and designated as Series A, no par value, with a redemption and liquidation value of $1,000 per share 120,501 88,721 ---------- REDEEMABLE COMMON STOCK - no par value; 60,000 shares authorized; 53,996 shares outstanding as of September 30, 2001 and 57,121 outstanding as of December 31, 2000, net of related stockholders' notes receivable of $12,875 at September 30, 2001 and $14,551 at December 31, 2000 16,623 16,456 ---------- ------------ Minority Interest 357 ---------- STOCKHOLDERS' DEFICIT: Common stock - no par value; 10,000,000 shares authorized, 544,947 shares Outstanding at September 30, 2001 and 510,674 at December 31, 2000 104,387 87,989 Warrants 38,852 26,500 Accumulated deficit (320,728) (312,414) Stockholders' notes receivable (605) (825) Accumulated other comprehensive income (11,317) (7,261) ---------- ------------ Total stockholders' deficit (189,411) (206,011) ---------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 863,762 $ 785,034 ========== ============
See notes to condensed consolidated financial statements. 3 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (IN THOUSANDS) (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------------------- ---------------------------------- 2001 2000 2001 2000 -------------- --------------- --------------- -------------- NET SALES $ 220,350 $ 210,795 $ 626,578 $ 642,895 COST OF SALES 173,889 176,539 498,497 529,380 ----------- ---------- ---------- ---------- Gross profit 46,461 34,256 128,081 113,515 ----------- ---------- ---------- ---------- OPERATING EXPENSES: Sales, General, and Administrative 21,971 18,207 68,803 66,998 Research and development 2,431 2,155 7,314 6,453 Stock-based compensation related to administrative employees - - 7,033 - Compensation and transaction costs related to recapitalization - 2,405 - 9,031 Plant closing costs (7,502) - (7,502) - ----------- ---------- ---------- ---------- Total operating expenses 16,900 22,767 75,648 82,482 ----------- ---------- ---------- ---------- OPERATING INCOME 29,561 11,489 52,433 31,033 INTEREST EXPENSE (18,877) (21,087) (58,302) (46,935) OTHER INCOME(EXPENSE) - Net 882 (25) 6,654 (183) ----------- ---------- ---------- ---------- INCOME(LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 11,566 (9,623) 785 (16,085) INCOME TAX PROVISION (BENEFIT) 4,704 (3,083) 2,851 (2,102) ----------- ---------- ---------- ---------- INCOME(LOSS) BEFORE EXTRAORDINARY (LOSS) 6,862 (6,540) (2,066) (13,983) EXTRAORDINARY (LOSS) (net of income taxes) - - - (11,250) ----------- ---------- ---------- ---------- NET INCOME(LOSS) $ 6,862 $ (6,540) $ (2,066) $ (25,233) =========== ========== ========== ==========
See notes to condensed consolidated financial statements. 4 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (IN THOUSANDS) (UNAUDITED)
2001 2000 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income(loss) $ (2,066) $ (25,233) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 34,052 28,707 Deferred income taxes 1,517 (4,209) Reduction in provision for losses on accounts receivable - (752) Non-cash compensation expense 7,033 1,223 (Gain)/loss on disposal of assets (349) 474 Plant closing costs (7,502) - Extraordinary loss - 11,250 Changes in assets and liabilities, net of assets acquired and liabilities assumed : Receivables (12,742) 313 Inventories 5,969 (487) Prepaid expenses and other (1,263) (1,377) Intangible Assets and Other assets 974 2,181 Trade accounts payable (9,319) 28,482 Income taxes payable/receivable 2,149 (1,909) Accrued liabilities 7,676 10,120 Due to affiliates - (4,715) Other liabilities 276 4,479 ---------- ---------- Net cash provided by operating activities 23,371 48,547 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets 7,914 - Uniplast acquisition, net of cash (55,531) - Capital expenditures for plant and equipment (40,027) (40,080) ---------- ---------- Net cash used in investing activities (87,644) (40,080) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of capitalized loan fees (1,932) (21,928) Payment of fees from tender offer - (10,055) Redemption of common stock - (314,034) Net proceeds from issuance of common and preferred stock and net change in related common stockholders' notes receivables 47,636 161,255 New borrowings/principal payments on long-term debt 14,940 (517,494) Proceeds from issuance of long term debt 699,508 Minority Investment 357 - ---------- ---------- Net cash provided by (used in)financing activities 61,001 (2,748) ---------- ---------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 3,978 (1,624) ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 706 4,095 CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 3,060 9,097 ---------- ---------- CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 3,766 $ 13,192 ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid (received) during the period for: Interest $ 41,949 $ 34,661 Income taxes $ (1,465) $ 986 Other non-cash disclosure: Preferred dividends accrued but not paid $ 12,641 $ 4,668
See notes to condensed consolidated financial statements. 5 PLIANT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (IN THOUSANDS) (UNAUDITED)
ACCUMULATED COMMON STOCK WARRANTS STOCKHOLDERS' OTHER ------------------- TO PURCHASE ACCUMULATED NOTES COMPREHENSIVE SHARES AMOUNT COMMON STOCK DEFICIT RECEIVABLE INCOME TOTAL -------- -------- ------------ ----------- -------------- ------------- ----------- BALANCE, DECEMBER 31, 2000 511 $87,989 $26,500 $(312,414) $(825) $(7,261) $(206,011) Net loss - - - (2,066) - - (2,066) Stock-based compensation related to administrative employees - - - 7,033 - - 7,033 Fair value change in interest rate derivatives classified as cash flow hedges - - - - - (3,417) (3,417) Preferred stock dividend and Accretion - - - (13,281) - - (13,281) Issuance of stock as a result of Uniplast acquisition 35 16,760 - - - - 16,760 Issuance of warrants with preferred stock as a result of the Uniplast acquisition - - 11,555 - - - 11,555 Issuance of warrants with preferred stock purchased by employees - - 797 - - - 797 Repurchase of common stock and cancellation of notes from management (1) (362) - - 251 - (111) Amortization of discount on stockholder's note receivable - - - - (31) - (31) Foreign currency transaction (639) (639) Adjustment - - - - - --- -------- ------- --------- ----- -------- --------- BALANCE, SEPTEMBER 30, 2001 545 $104,387 $38,852 $(320,728) $(605) $(11,317) $(189,411) === ======== ======= ========= ===== ======== =========
See notes to condensed consolidated financial statements. 6 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements have been prepared, without audit, in accordance with U.S. generally accepted accounting principles and pursuant to the rules and regulations of the Securities and Exchange Commission. The information reflects all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the financial position, results of operations and cash flows of Pliant Corporation and its subsidiaries ("Pliant" or the "Company") as of the dates and for the periods presented. Results of operations for the period ended September 30, 2001 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, 2000 and the Company's Registration Statement on Form S-1 (File No.333-65754). Certain reclassifications have been made to the condensed consolidated financial statements for the period ended September 30, 2000 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 September 30, 2001 and December 31, 2000 consisted of the following (in thousands):
September 30, December 31, 2001 2000 ------------- ------------ Finished goods $46,543 $46,760 Raw materials 25,783 24,158 Work-in-process 7,902 8,233 ----- ----- Total $80,228 $79,151
3. PLANT CLOSING COSTS, OTHER CLOSING COSTS AND WORKFORCE REDUCTION PLANT CLOSING COSTS -- During 2000, we approved and announced a strategic initiative to cease operations at our Dallas, Texas; Birmingham, Alabama; and Harrington, Delaware facilities. These facilities represent a portion of our Design, Industrial and Specialty Films segments, respectively. The intent of this initiative was to maximize the capacity of other company owned facilities by moving the production from these locations to plants that were not operating at capacity. As a result of this strategic initiative, we recorded a pre-tax charge of $19.6 million which is included as part of plant closing costs in the consolidated statement of operations for the year ended December 31, 2000. Of the $19.6 million, $13.8 million represented a reserve for impaired plant and equipment, $5.0 million represented a charge for severance costs and $0.8 million represented a charge for other closure costs and inventory write-offs. The major actions relating to the exit of these facilities include closing each of the respective facilities, disposal of the related equipment of each facility and termination of the employees of the respective facilities. As of December 31, 2000, we had completed our closure of our Dallas facility. In addition, we completed the closure of our Birmingham facility during the second quarter of 2001. We have analyzed the economics of closing our Harrington facility in light of changes in customer demand and our recent acquisition of Uniplast. These changes together with the movement of a production line from our Birmingham plant have significantly improved the profitability of the Harrington plant. As a result we have revised our plans to close that 7 facility. During the first six months of 2001, $1.1 million was incurred to downsize the Harrington facility. The remaining balance of the plant closure costs of $ 7.5 million accrued in 2000 has been credited to plant closing costs in the statement of operations for the three and nine months ended September 30, 2001. The following is a summary of the remaining key elements of the 2000 exit plan:
DALLAS BIRMINGHAM TOTAL -------- ---------- ------- Number of employees to be terminated... 68 105 173 Book value of property and equipment to be Disposed of....................... $1,593 $8,913 $ 10,506 Estimated proceeds from disposal....... 1,200 1,749 2,949 ----- ----- ----- Net write-off from disposal............ 393 7,164 7,557 Severance costs........................ 588 2,271 2,859 Other closure costs.................... 302 225 527 ------ ------ -------- Total closure costs.................... $1,283 $9,660 $ 10,943 ====== ====== ========
We do not anticipate the loss of any revenues or income from the closure of these facilities due to the fact that their respective sales volumes will be transferred to other facilities. As of September 30, 2001, the remaining reserves related to severance costs and other costs are included in other accrued liabilities in the accompanying consolidated balance sheet while the reserve for impairment of property and equipment has been recorded as a direct reduction of the net property and equipment balances. Utilization of the reserves remaining as of September 30, 2001 is summarized below:
UTILIZED BALANCE ---------------- BALANCE 12/31/00 NON-CASH CASH REVERSAL 9/30/01 -------- -------- ------- -------- -------- Property and equipment reserves.. $ 13,801 $4,689 $ -- $ 6,244 $ 2,868 Severance costs.................. 4,371 -- 3,091 1,088 192 Other costs...................... 585 -- 123 170 292 -------- ------ ------ ------- ------- Total............................ $ 18,757 $4,689 $3,214 $ 7,502 $ 3,352 ======== ====== ====== ======= =======
As of September 30, 2001, 68 and 104 of the expected employee terminations had been completed at our Dallas and Birmingham facilities, respectively. As of September 30, 2001, all planned employee terminations have been completed at the Harrington facility. There are no reserves remaining for the Harrington facility closure as of September 30, 2001. OFFICE CLOSING COSTS AND WORKFORCE REDUCTION -- During the fourth quarter 2000, we approved and announced a cost saving initiative resulting in a company-wide workforce reduction, relocation of the corporate office from Salt Lake City, Utah to the Chicago, Illinois area and closure of the Dallas, Texas divisional office. As a result of this initiative we recorded a pre-tax charge of $7.1 million which is included as part of administration and other expenses in the accompanying consolidated statements of operations. The major actions relating to this initiative included a reduction in workforce due to consolidation of duties, and closing the offices in Dallas, Texas and Salt Lake City, Utah. We completed the workforce reduction of 52 employees and the closure of the office in Dallas, Texas during the first quarter 2001, as well as the Salt Lake City office closure during the second quarter 2001. The following is a summary of the key elements of this plan:
RELOCATION CLOSURE WORKFORCE OF CORPORATE OF DALLAS REDUCTION OFFICE OFFICE TOTAL ----------- ------------ ---------- ------ Number of employees...... 52 36 2 90 Leasehold improvements... $1,000 $1,000 Severance cost........... $ 2,940 2,352 $ 21 5,313 Other costs related to leases................... 721 82 803 ------- ------ ----- ------ Total cost............... $ 2,940 $4,073 $ 103 $7,116 ======= ====== ===== ======
As of September 30, 2001, the remaining reserves related to severance costs and other costs related to leases are included in other accrued liabilities in the accompanying condensed consolidated balance sheet while the reserve for impairment related to leasehold improvements has been recorded as a reduction of the net property and equipment balance. Utilization of these reserves during the period ended September 30, 2001 is summarized below:
UTILIZED BALANCE ----------------- BALANCE 12/31/00 NON-CASH CASH 9/30/01 -------- -------- ------- -------- Leasehold improvements......... $1,000 - - $ 1,000 Severance cost................. 3,254 - $ 2,684 570 Other costs related to leases.. 803 - 388 415 ------ ----- ------- ------- Total cost.................... $5,057 $ - $ 3,072 $ 1,985 ====== ===== ======= =======
As of September 30, 2001, 52, 34 and 2 of the expected employee terminations had been completed of the workforce 8 reduction, closure of the Salt Lake City and the closure of the Dallas offices respectively. 4. REDEEMABLE COMMON STOCK Under the May 2000 stock purchase agreements, we have repurchase rights, which allow us to repurchase certain shares from the employees, if the individuals cease to be employees for any reason. The repurchase rights lapse as follows: (1) one-sixth on January 1, 2001, so long as the recipient is still our employee on such date and (2) the remainder in equal increments over a five-year period commencing on December 31, 2000 as follows: (a) in full if 100% or more of the applicable target market value of equity is achieved as of the end of the applicable calendar year and (b) partial, if more than 90% of the applicable target market value of equity is achieved or (c) if the target market value of equity is not achieved, in full on December 31, 2009. The repurchase rights terminate in the event of certain acceleration events as defined in the agreement. The repurchase price per share is the original price paid by the employee plus interest compounded annually at 7% commencing on the 181st day after the date of termination of the employee through the date on which the shares are actually repurchased. In addition, under employment agreements, additional repurchase rights and put options were established. The repurchase rights allow the Company to repurchase shares, not already subject to the May 2000 stock purchase agreement repurchase rights, from the employee in the event of termination for any reason. The put options allow for the employees to require the Company to purchase all of the shares in the event of resignation for good reason, death, disability or retirement, subject to the restrictive provisions of any credit or other agreements. However, the put option related to 32,750 shares, in no event can be exercised until January 1, 2006. The price under the repurchase rights and the put options is the fair market value of the common stock, as determined in good faith. On December 27, 2000, we entered into a severance agreement with an employee. Under the agreement, we cancelled approximately $133,000 of accrued interest on a note receivable. We repurchased 6,211 shares of restricted stock for $483.13 per share and offset the purchase price against $3.0 million of note principal. In addition, on January 2, 2001, we repurchased an additional 539 shares of restricted stock for $483.13 per share and offset the purchase price against $260,000 of note principal. The Company's repurchase rights were changed on the remaining 7,423 shares of common stock owned by this individual, whereby the Company agreed not to repurchase the shares until February 28, 2003 at a repurchase price of the greater of the fair market value and $111.53 per share. Interest ceased to accrue on the remaining $787,000 balance of the note related to the sale of stock in 1999. Further, the put option was cancelled. As a result of these modifications, a $323,000 discount on the note receivable balance was recorded as compensation expense in 2000. The discount will be amortized to interest income over the remaining term of the note. In the event we determine to repurchase the stock from this individual at an amount that is: (1) greater than the fair value of the stock (i.e. the note balance is greater than the fair value) or (2) greater than the note balance as a result of future increases in fair value of the stock, we will record additional expense. On January 22, 2001, we entered into a severance agreement with another employee. Under this agreement, we cancelled approximately $85,000 of accrued interest on a note receivable. We repurchased 3,125 shares of restricted stock for $483.13 and offset the purchase price against $1.5 million of note principal. We further agreed to cease interest on the remaining $302,000 principal balance of the note receivable related to 625 shares and to cease interest on the $262,000 principal balance related to the sale of stock in 1999. As a result of these interest modifications, a $208,000 discount on the note receivable balance was recorded as compensation expense in the first quarter of 2001. The discount will be amortized to interest income over the remaining term of the note. In addition, the Company's repurchase rights and the individual's put option were changed on the remaining 2,832 shares of common stock owned by this individual. We agreed not to repurchase and the individual agreed not to exercise the put option on the shares until February 28, 2003. The repurchase price and the put option price were changed to be the greater of the fair value of the stock or the balance on the note receivable. Because the fair value of these shares was $483.13 per share on January 22, 2001, compensation expense of approximately $1.0 million was recorded in the first quarter of 2001, which 9 represents the difference between the carrying amount and the fair value of the 2,622 shares common stock that are subject to the note receivable. On February 1, 2001, we amended the note agreements with another employee that was issued in connection with the sale of restricted stock in 1999 and 2000. Under the amended agreements, interest ceases to accrue, effective December 31, 2000, on one note with a principal balance of $1.6 million and another note with a principal balance of $7.0 million. Further, the notes were modified to remove the full recourse provisions and modify the pledge agreement. As a result of these modifications, the sale of stock for notes will now be accounted for as stock options and will be subject to variable accounting. Accordingly, changes in the fair value of the common stock in excess of the note balance will be recorded as compensation expense until the note is paid in full. In addition, interest income will not be recorded on these notes. In connection with this modification we recorded compensation expense of $6.0 million, in the first quarter of 2001. Because of the modifications of these employee notes, in the first quarter of 2001 another employee's 2000 stock purchase will be accounted for as stock options, subject to variable accounting. In addition, interest income will not be recorded on this note with a principal balance of $3.7 million. 5. STOCK OPTION PLANS During the three and nine month periods ended September 30, 2001, options to purchase 1,600 and 11,780 shares, respectively, at $483.13 per share were granted to employees. These options vest over five (5) years. During the same periods, options to purchase 90 and 4,342 shares, respectively, were forfeited due to employee terminations. 6. OPERATING LEASES In March 2001 we completed a sale and leaseback of certain equipment and received proceeds of $7.9 million. There was no gain or loss in connection with the sale and the lease is accounted for as an operating lease. As part of the transaction we issued a $3.4 million letter of credit for which the lessor is the beneficiary should we default on any payments. The monthly lease payments are $139,967 for 72 months. 7. DERIVATIVE INSTRUMENTS Effective January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137 and SFAS No. 138. We recognize the fair value of derivatives as either assets or liabilities in the balance sheet. To the extent that the derivatives qualify as hedges, gains or losses associated with the effective portion are recorded as a component of other comprehensive income while the ineffective portion is recognized in income. At the adoption of this pronouncement, we had one interest rate cap agreement, which had been entered into during the fourth quarter of 2000. As a result, the initial adoption of this pronouncement did not result in a material effect to our financial statements. During the first quarter of 2001, we entered into three additional interest rate derivative agreements with separate financial institutions. We use our interest rate derivatives to manage interest rate risk associated with future interest payments on variable rate borrowings under our Credit Facilities. Our interest rate derivative agreements are considered cash flow hedges and consisted of the following as of September 30, 2001 (dollars in millions): 10
Notional Variable Fixed Maturity Type Amount Rate* Rate ** Dates ---------------------- --------- -------- ------------- ----------- Interest rate cap $128.0 LIBOR 10.00% 12/31/2003 Interest rate cap 30.0 LIBOR 7.25% 02/09/2004 Interest rate collar 40.0 LIBOR 4.15% - 7.25% 02/13/2004 Interest rate swap 60.0 LIBOR 5.40% 02/13/2004
-------------- * Three-month LIBOR, as defined; 2.59% as of September 28, 2001 ** Strike for caps; floor and strike for collar The fair value of our interest rate derivative agreements is reported on our consolidated balance sheet at September 30, 2001 in other liabilities of approximately $3,425,518 and in other assets of approximately $33,000. 8. OTHER INCOME Other Income for the nine months ended September 30, 2001 includes the proceeds and assets received from a settlement with a potential new customer and other less significant items. 9. MINORITY INTEREST During the third quarter of 2001, the Company signed a joint venture agreement with Supreme Plastics Group PLC for the production and marketing of plastic zippers. Each joint venture partner contributed $375,000 in cash. The profits and losses will be shared equally. The Company will consolidate the results of the joint venture and account for the minority interest as a reduction from pretax income. The results of the joint venture for the third quarter ended September 30, 2001 was not significant. 10. RECENT ACCOUNTING PRONOUNCEMENT In July 2001 the Financial Accounting Standards Board (FASB) issued SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets". SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against this new criteria and may result in certain intangibles being subsumed into goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. SFAS 142 requires the use of a non-amortization approach to account for all purchased goodwill and certain intangible assets. Under a non-amortization approach, goodwill and certain intangible assets will not be amortized into results of operations, but instead would be reviewed for impairment and written down and charged to results of operations only in periods in which the recorded value of goodwill and certain intangible assets is more than its fair value. The provisions of SFAS 141 and SFAS 142 which apply to goodwill and intangible assets acquired prior to June 30, 2001 will be adopted by the Company on January 1, 2002. We expect that the adoption of these accounting standards will have the impact of reducing amortization of goodwill and certain intangible assets. 10. ACQUISITIONS 11 On July 16, 2001, we acquired 100% of the outstanding stock of Uniplast Holdings, Inc. ( "Uniplast") for approximately $57.1 million, consisting of the assumption of approximately $40.3 million of debt and the issuance of shares of our common stock valued at approximately $16.8 million to the selling shareholders of Uniplast (of which 3,468 shares valued at approximately $1.7 million are subject to certain holdback arrangements and had not been delivered at closing). We believe that this acquisition resulted in significant synergies to the combined operations and increased the market share in a number of market segments. At the closing of the acquisition, we refinanced approximately $37.0 million of assumed debt with the proceeds from a private placement of 29,000 of preferred stock at $ 1,000 per share and borrowings under our revolving credit facility. In connection with the Uniplast acquisition, we entered into an amendment of our credit facilities and incurred amendment fees of $1.4 million. In addition, we also issued 1,983 shares of our preferred stock at $1,000 per share, together with warrants to purchase 2,013 shares of common stock, to certain employees of the Company. We also incurred $0.9 million of legal and administrative expenses. We recorded $14.4 million as intangible assets and $ 19.3 million as goodwill as a result of this acquisition. The intangible assets are being amortized over 15 years while the goodwill is not being amortized. The operating results for Uniplast from July 16, 2001 is included in the statements of operations for the periods ended September 30, 2001. The purchase price of $ 56.8 million was allocated to assets and liabilities as follows:
(in millions) ------------- Current Assets $ 18.5 Property Plant and Equipment 20.6 Intangible Assets 14.4 Goodwill 19.3 Current Liabilities (13.7) Long-term Liabilities (2.0) -------- Total Purchase Price $ 57.1 ========
11. OPERATING SEGMENTS Operating segments are components of the Company for which separate financial information is available that is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and in assessing performance. This information is reported on the same basis that is used internally for evaluating segment performance. We have three reportable operating segments: specialty films, design products and industrial films. The specialty films segment produces converter films that are sold to other flexible packaging manufacturers for additional fabrication, barrier films used to package and protect food and other products, and other films used in the personal care, medical and agriculture industries. The design products segment produces printed rollstock, bags and sheets used to package products in the food and other industries. The industrial films segment produces stretch films, used for industrial unitizing and containerization, and PVC films, used to wrap meat, cheese and produce. Sales and transfers between our segments are eliminated in consolidation. We evaluate performance of the operating segments based on profit or loss before income taxes, not including nonrecurring gains or losses. Our reportable segments are managed separately with separate management teams, because each segment has different products, customer requirements, technology and marketing strategies. During the first quarter of 2001, two plant operations were reclassified from our Specialty segment to our Industrial segment in accordance with a change in business focus. Accordingly, the 2000 amounts have been 12 reclassified to reflect this change. In addition, certain operating expenses were reclassified from our segments to the corporate category as a result of expenses which are no longer attributable and allocated to the segment. Segment profit or loss and segment assets as of and for the three months ended September 30, 2001 and 2000 are presented in the following table (in thousands):
SPECIALTY DESIGN INDUSTRIAL CORPORATE FILMS PRODUCTS FILMS /OTHER TOTAL --------- --------- ---------- ---------- --------- SEPTEMBER 30, 2001 Net sales to customers $105,414 $52,058 $62,878 $ - $220,350 Inter-segment sales 1,171 763 1,836 (3,770) - -------- ------- ------- -------- -------- Total net sales 106,585 52,821 64,714 (3,770) 220,350 Depreciation and amortization 3,250 3,009 2,122 3,944 12,325 Interest expense 44 638 (51) 18,246 18,877 Segment profit (loss) 23,071 7,788 12,465 (31,758) 11,566 Segment total assets 442,374 181,280 130,755 109,353 863,762 Capital expenditures 7,308 2,006 900 726 10,940 SEPTEMBER 30, 2000 Net sales to customers 93,445 55,650 61,700 - 210,795 Inter-segment sales 1,764 878 1,492 (4,134) - -------- ------- ------- -------- -------- Total net sales 95,209 56,528 63,192 (4,134) 210,795 Depreciation and amortization 2,822 2,262 1,861 2,714 9,659 Interest expense 7 902 89 20,089 21,087 Segment profit (loss) 15,180 7,021 8,356 (40,180) (9,623) Segment total assets 407,235 177,510 131,798 90,972 807,515 Capital expenditures 3,505 4,782 2,239 4,369 14,895
13 Segment profit or loss and segment assets as of and for the nine months ended September 30, 2001 and 2000 are presented in the following table (in thousands):
SPECIALTY DESIGN INDUSTRIAL CORPORATE FILMS PRODUCTS FILMS /OTHER TOTAL --------- --------- ---------- ---------- --------- SEPTEMBER 30, 2001 Net sales to customers $281,040 $160,940 $184,598 $ - $626,578 Inter-segment sales 5,304 3,829 4,714 (13,847) - -------- -------- -------- -------- -------- Total net sales 286,344 164,769 189,312 (13,847) 626,578 Depreciation and amortization 9,001 8,380 6,035 10,636 34,052 Interest expense 56 2,371 (109) 55,984 58,302 Segment profit (loss) 61,867 28,667 32,928 (122,677) 785 Capital expenditures 20,087 10,017 5,399 4,524 40,027 SEPTEMBER 30, 2000 Net sales to customers 298,692 161,799 182,404 - 642,895 Inter-segment sales 4,927 3,655 5,224 (13,806) - -------- -------- -------- -------- -------- Total net sales 303,619 165,454 187,628 (13,806) 642,895 Depreciation and amortization 8,376 6,699 5,610 8,022 28,707 Interest expense 19 2,681 263 43,972 46,935 Segment profit (loss) 56,002 18,748 26,875 (117,710) (16,085) Capital expenditures 14,496 8,986 8,275 8,323 40,080
14 A reconciliation of the totals reported for the operating segments to our totals reported in the consolidated condensed financial statements is as follows (in thousands):
Three months ended September 30, -------------------------- 2001 2000 ------ ------ PROFIT OR LOSS Total segment profit for reportable segments $43,324 $ 30,557 ------- ------- Unallocated Corporate expenses (21,014) (17,686) Compensation and transaction costs related to recapitalization - (2,405) Plant closing costs 7,502 - Interest expense (18,246) (20,089) ------- ------- Total Corporate/Other (31,758) (40,180) -------- ------- Income (loss) before income taxes $11,566 $ (9,623) ======= ========
15 A reconciliation of the totals reported for the operating segments to our totals reported in the consolidated condensed financial statements is as follows (in thousands):
Nine months ended September 30, ------------------------------ 2001 2000 --------- --------- PROFIT OR LOSS Total segment profit for reportable segments $ 123,462 $ 101,625 --------- --------- Unallocated Corporate expenses (67,162) (64,707) Compensation and transaction costs related to recapitalization - (9,031) Stock-based compensation related to administrative employees (7,033) - Plant closing costs 7,502 - Interest expense (55,984) (43,972) Total Corporate/Other (122,677) (117,710) --------- --------- Income (loss) before taxes $ 785 $ (16,085) ========= =========
September 30, September 30, 2001 2000 -------------- ------------- ASSETS Total assets for reportable segments $754,409 $716,543 Intangible assets not allocated to segments 48,061 15,183 Other unallocated assets 61,292 75,789 -------- -------- Total consolidated assets $863,762 $807,515 ======== ========
12. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS The following condensed consolidating financial statements present, in separate columns, financial information for (i) Pliant (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 "Indenture") relating to Pliant's $220 million senior subordinated notes due 2010 (the "Notes")) on a combined basis, with any investments in non-guarantor subsidiaries specified in the Indenture 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 and its subsidiaries on a consolidated basis, and (v) Pliant on a consolidated basis, in each case as of September 30, 2001 and December 31, 2000 and for the three and nine month periods ended September 30, 2001 and 2000. The Notes are fully and unconditionally guaranteed on a joint and several basis by each guarantor subsidiary and each guarantor subsidiary is wholly owned, directly or indirectly, by Pliant. There are no contractual restrictions limiting transfers of cash from guarantor and non-guarantor subsidiaries to Pliant. 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. During the first quarter of 2001, our Blessings subsidiary was merged with and into Pliant. Accordingly, the former Blessings subsidiary is reflected as part of "Pliant Corporation Only" column for all periods presented. 16 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET AS OF SEPTEMBER 30, 2001 (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 $ 4,343 $ (3,760) $ 3,183 $ - $ 3,766 Receivables - net 104,530 10,848 20,033 - 135,411 Inventories 61,362 8,755 10,111 - 80,228 Prepaid expenses and other 2,473 371 795 3,638 Income taxes receivable 383 - 354 - 737 Deferred income taxes 12,994 1,206 (1,368) - 12,832 ---------- --------- -------- --------- -------- Total current assets 186,084 17,420 33,108 - 236,612 PLANT AND EQUIPMENT - Net 286,622 26,836 48,830 - 362,288 INTANGIBLE ASSETS - Net 213,758 3,823 16,781 - 234,362 INVESTMENT IN SUBSIDIARIES 62,575 - - (62,575) OTHER ASSETS 27,602 182 2,716 30,500 ---------- --------- -------- --------- -------- TOTAL ASSETS $ 776,641 $ 48,261 $101,435 $ (62,575) $863,762 ========== ========= ======== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current portion of long-term debt $ 15,713 $ - $ - $ - $ 15,713 Trade accounts payable 86,733 5,474 15,005 - 107,212 Accrued liabilities 47,665 2,247 4,603 - 54,515 Due to (from) affiliates (17,186) 18,198 (1,012) - ---------- --------- -------- --------- -------- Total current liabilities 132,925 25,919 18,596 - 177,440 LONG-TERM DEBT - Net of current portion 649,740 1,880 35,000 - 686,620 OTHER LIABILITIES 18,135 - 1,569 - 19,704 DEFERRED INCOME TAXES 28,146 1,229 2,553 - 31,928 ---------- --------- -------- --------- -------- Total liabilities 828,946 29,028 57,718 - 915,692 ---------- --------- -------- --------- -------- MINORITY INTEREST (18) - 375 - 357 REDEEMABLE STOCK 137,124 - - - 137,124 ---------- --------- -------- --------- -------- STOCKHOLDERS' EQUITY (DEFICIT): Common stock 104,387 14,034 29,616 (43,650) 104,387 Warrants 38,852 38,852 Retained earnings accumulated (deficit) (320,728) 5,210 20,566 (25,776) (320,728) Stockholders' note receivable (605) (605) Accumulated other comprehensive loss (11,317) (11) (6,840) 6,851 (11,317) ---------- --------- -------- --------- -------- Total stockholders' equity (deficit) (189,411) 19,233 43,342 (62,575) (189,411) ---------- --------- -------- --------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 776,641 $ 48,261 $101,435 $ (62,575) $863,762 ========== ========= ======== ========= ========
17 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2000 (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 $ 459 $ 10 $ 2,591 $ - $ 3,060 Receivables, net 90,670 4,966 19,422 - 115,058 Inventories 64,884 6,983 7,284 - 79,151 Prepaid expenses and other 1,527 30 426 - 1,983 Income taxes receivable 1,885 (24) 897 - 2,758 Deferred income taxes 14,431 37 (1,476) - 12,992 -------- --------- -------- -------- -------- Total current assets 173,856 12,002 29,144 - 215,002 PLANT AND EQUIPMENT, net 268,739 16,538 47,806 - 333,083 INTANGIBLE ASSETS, net 185,727 2,482 17,661 - 205,870 INVESTMENT IN SUBSIDIARIES 49,611 - - (49,611) - OTHER ASSETS 28,593 - 2,486 - 31,079 -------- --------- -------- -------- -------- TOTAL ASSETS $706,526 $ 31,022 $ 97,097 $(49,611) $785,034 ======== ========= ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current portion of long-term debt $ 8,312 $ - $1,050 $ - $ 9,362 Trade accounts payable 87,970 5,730 15,318 - 109,018 Accrued liabilities 32,068 1,201 5,743 - 39,012 Due to (from) affiliates (10,000) 13,442 (3,442) - - -------- --------- -------- -------- -------- Total current liabilities 118,350 20,373 18,669 - 157,392 LONG-TERM DEBT, net of current portion 642,976 - 35,055 - 678,031 OTHER LIABILITIES 24,200 - 1,557 - 25,757 DEFERRED INCOME TAXES 30,206 497 2,357 - 33,060 -------- --------- -------- -------- -------- Total liabilities 815,732 20,870 57,638 - 894,240 -------- --------- -------- -------- -------- REDEEMABLE STOCK 96,805 - - - 96,805 -------- --------- -------- -------- -------- STOCKHOLDERS' EQUITY (DEFICIT) Common stock 87,989 14,020 29,241 (43,261) 87,989 Warrants to purchase common stock 26,500 - - - 26,500 Retained earnings (accumulated deficit) (312,414) (3,857) 15,966 (12,109) (312,414) Shareholder note receivable (825) - - - (825) Accumulated other comprehensive income (loss) (7,261) (11) (5,748) 5,759 (7,261) -------- --------- -------- -------- -------- Total stockholders' equity (deficit) 206,011) 10,152 39,459 (49,611) (206,011) -------- --------- -------- -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $706,526 $ 31,022 $ 97,097 $(49,611) $785,034 ======== ========= ======== ======== ========
18 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING INCOME STATEMENT FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 (IN THOUSANDS) (UNAUDITED)
Pliant Combined Combined Consolidated Corporation Guarantor Non-Guarantor Pliant (Parent Only) Subsidiaries Subsidiaries Eliminations Corporation ------------- ------------- ------------ ------------ ----------- NET SALES $ 177,202 $ 14,819 $ 32,099 $ (3,770) $ 220,350 COST OF SALES 139,815 12,481 25,363 (3,770) 173,889 ---------- --------- --------- --------- ---------- GROSS PROFIT 37,387 2,338 6,736 - 46,461 OPERATING EXPENSES 13,744 337 2,819 - 16,900 ---------- --------- --------- --------- ---------- OPERATING INCOME 23,643 2,001 3,917 - 29,561 INTEREST EXPENSE (18,203) (36) (638) - (18,877) EQUITY IN EARNINGS OF SUBSIDIARIES 3,604 (3,604) OTHER INCOME (EXPENSE), Net 805 (49) 126 - 882 ---------- --------- --------- --------- ---------- INCOME (LOSS) BEFORE INCOME TAXES 9,849 1,916 3,405 (3,604) 11,566 INCOME TAX PROVISION (BENEFIT) 2,987 - 1,717 - 4,704 ---------- --------- --------- --------- ---------- NET INCOME (LOSS) $ 6,862 $ 1,916 $ 1,688 $ (3,604) $ 6,862 ========== ========= ======== ========== ==========
19 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING INCOME STATEMENT FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 (IN THOUSANDS) (UNAUDITED)
Pliant Combined Combined Consolidated Corporation Guarantor Non-Guarantor Pliant (Parent Only) Subsidiaries Subsidiaries Eliminations Corporation ------------- ------------- ------------- ------------ ----------- NET SALES $ 175,644 $ 10,367 $ 28,918 $ (4,134) $210,795 COST OF SALES 148,633 9,775 22,265 (4,134) 176,539 --------- -------- --------- --------- ---------- GROSS PROFIT 27,011 592 6,653 - 34,256 OPERATING EXPENSES 19,955 90 2,722 - 22,767 --------- -------- --------- --------- ---------- OPERATING INCOME (LOSS) 7,056 502 3,931 - 11,489 INTEREST EXPENSE (20,095) (2) (990) - (21,087) EQUITY IN EARNINGS OF SUBSIDIARIES 2,148 (2,148) OTHER INCOME (EXPENSE), Net (446) 9 412 - (25) --------- -------- --------- --------- ---------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS (11,337) 509 3,353 (2,148) (9,623) INCOME TAX PROVISION (BENEFIT) (4,797) 207 1,507 - (3,083) --------- -------- --------- --------- ---------- NET INCOME (LOSS) BEFORE EXTRAORDINARY LOSS (6,540) 302 1,846 - (6,540) EXTRAORDINARY LOSS (NET OF TAX) - - - - - --------- -------- --------- --------- ---------- NET INCOME (LOSS) $ (6,540) $ 302 $ 1,846 $ (2,148) $ (6,540) ========= ======== ========== ========= ==========
20 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING INCOME STATEMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (IN THOUSANDS) (UNAUDITED)
Pliant Combined Combined Consolidated Corporation Guarantor Non-Guarantor Pliant (Parent Only) Subsidiaries Subsidiaries Eliminations Corporation ------------- ------------- ------------ ------------ ----------- NET SALES $518,126 $33,234 $89,065 $(13,847) $(626,578) COST OF SALES 414,074 28,174 70,096 (13,847) 498,497 -------- ------- ------- -------- --------- GROSS PROFIT 104,052 5,060 18,969 - 128,081 OPERATING EXPENSES 67,037 517 8,094 - 75,648 -------- ------- ------- -------- --------- OPERATING INCOME 37,015 4,543 10,875 - 52,433 INTEREST EXPENSE (55,892) (36) (2,374) - (58,302) EQUITY IN EARNINGS OF SUBSIDIARIES 13,817 (13,817) OTHER INCOME , Net 1,926 4,560 168 - 6,654 -------- ------- ------- -------- --------- INCOME (LOSS) BEFORE INCOME TAXES (3,134) 9,067 8,669 (13,817) 785 INCOME TAX PROVISION (BENEFIT) (1,068) - 3,919 (13,817) 2,851 -------- ------- ------- -------- -------- NET INCOME (LOSS) $ (2,066) $ 9,067 $ 4,750 $(13,817) $ (2,066) ======== ======= ======= ======== ========
21 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING INCOME STATEMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (IN THOUSANDS) (UNAUDITED)
Pliant Combined Combined Consolidated Corporation Guarantor Non-Guarantor Pliant (Parent Only) Subsidiaries Subsidiaries Eliminations Corporation ------------- ------------ ------------- ------------ ------------ NET SALES $540,784 $ 31,970 $ 83,947 $ (13,806) $ 642,895 COST OF SALES 447,523 30,785 64,878 (13,806) 529,380 -------- -------- -------- --------- ---------- GROSS PROFIT 93,261 1,185 19,069 - 113,515 OPERATING EXPENSES 73,768 270 8,444 - 82,482 -------- -------- -------- --------- ---------- OPERATING INCOME (LOSS) 19,493 915 10,625 - 31,033 INTEREST EXPENSE (43,989) (12,185) (2,946) - (46,935) EQUITY IN EARNINGS OF SUBSIDIARIES 5,394 (5,394) OTHER INCOME (EXPENSE), Net (1,182) (9) 1,008 - (183) -------- -------- -------- --------- ---------- INCOME(LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS (20,284) 906 8,687 (5,394) (16,085) INCOME TAX PROVISION (BENEFIT) (6,301) 367 3,832 - (2,102) -------- -------- -------- --------- ---------- NET INCOME (LOSS) BEFORE EXTRAORDINARY LOSS (13,983) 539 4,855 (5,394) (13,983) EXTRAORDINARY LOSS (NET OF TAX) (11,250) - - - (11,250) -------- -------- -------- --------- ---------- NET INCOME (LOSS) $(25,233) $ 539 $ 4,855 $ (5,394) $ (25,233) ======== ======== ======== ========= ==========
22 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (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 $ 7,239 $ 6,491 $ 9,641 $ - $ 23,371 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets 2,966 4,948 - - 7,914 Uniplast Acquisition (net of cash) (31,698) (14,020) (9,813) - (55,531) Capital expenditures for plant and equipment (34,630) (3,274) (2,123) - (40,027) --------- -------- ------- -------- ---------- Net cash (used in) provided by investing activities (63,362) (12,346) (11,936) - (87,644) --------- -------- ------- -------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of Capitalized Fees (1,932) - - - (1,932) Receipt/payment of dividends 150 - (150) - - Net proceeds from issuance of common stock and net change in related stockholders' notes receivables 47,636 - - - 47,636 - Minority Interest (18) - 375 357 Borrowings on long-term debt 14,165 1,880 (1,105) - 14,940 --------- -------- ------- -------- ---------- Net cash provided by financing activities 60,001 1,880 (880) - 61,001 --------- -------- ------- -------- ---------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 6 205 3,767 - 3,978 --------- -------- ------- -------- ---------- NET INCREASE (DECREASE) IN CASH 3,884 (3,770) 592 - 706 AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 459 10 2,591 - 3,060 --------- -------- ------- -------- ---------- CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 4,343 $ (3,760) $ 3,183 $ - $ 3,766 ========= ======== ======= ======== ==========
23 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (IN THOUSANDS) (UNAUDITED)
Pliant Combined Combined Consolidated Corporation Guarantor Non-Guarantor Pliant Parent Only Subsidiaries Subsidiaries Eliminations Corporation ----------- ------------ ------------- ------------ ------------ CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 32,647 $ 6,535 $ 9,365 $ - $ 48,547 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures for plant and equipment (33,262) (4,517) (2,301) - (40,080) --------- -------- -------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of capitalized loan fees (21,928) - - - (21,928) Payment of fees from tender offer (10,055) - - - (10,055) Redemption of common stock (314,034) - - - (314,034) Net proceeds from issuance of stock and net change in related stockholder notes receivable 161,255 - - - 161,255 Principal payments to and proceeds from long-term debt 187,921 - (5,907) - 182,014 --------- -------- -------- -------- --------- Net cash provided by/(used in) financing Activities 3,159 - (5,907) - (2,748) --------- -------- -------- -------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 3,327 (2,527) (2,424) - (1,624) --------- -------- -------- -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,871 (509) (1,267) - 4,095 CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 1,231 517 7,349 - 9,097 --------- -------- -------- -------- --------- CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 7,102 $ 8 $ 6,082 $ - $ 13,192 ========= ======== ======== ======== =========
24 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, 2000 (the "2000 10-K") and our Registration Statement on Form S-1 (file No. 333-65754). This section contains certain forward-looking statements within the meanings of federal securities laws that involve risks and uncertainties, including statements regarding our plans, objectives, goals, strategies and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under "Cautionary Statement for Forward-Looking Information" below and elsewhere in this report. GENERAL We generate our revenues, earnings and cash flows from the sale of film and flexible packaging products throughout the world. We manufacture these products at 26 facilities located in North America, Central America, Europe and Australia. Our annual 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. On May 31, 2000, we consummated a recapitalization pursuant to an agreement dated March 31, 2000 (the "Recapitalization Agreement") among us, our then existing stockholders and an affiliate of J.P. Morgan Partners, LLC, whereby an affiliate of J.P. Morgan Partners, LLC acquired majority control of our common stock. Pursuant to the Recapitalization Agreement, we redeemed all of the shares of our common stock held by Jon M. Huntsman, our founder, then majority stockholder and then Chairman of the Board (the "Equity Redemption") for approximately $314.0 million. An affiliate of J.P. Morgan Partners, LLC purchased approximately one-half of the shares of our common stock held collectively by The Christena Karen H. Durham Trust (the "Trust") and by members of our current and former senior management (the "Management Investors") for approximately $101.8 million. An affiliate of J.P. Morgan Partners, LLC and certain other institutional investors also purchased (the "Investor Common Equity Contribution") shares of common stock directly from us for approximately $63.5 million ($62.6 million net of offering costs). The Trust and the Management Investors retained or "rolled over" approximately one-half of the shares of our common stock collectively owned by them prior to the recapitalization. In addition, we issued to another affiliate of J.P. Morgan Partners, LLC and to certain other institutional investors a new series of senior cumulative exchangeable redeemable preferred stock (the "Preferred Stock") and detachable warrants for our common stock (the "Preferred Stock Warrants") for net consideration of approximately $98.5 million. The foregoing transactions are collectively referred to as the "Recapitalization." The total consideration paid in the Recapitalization was approximately $1.1 billion, including transaction costs. On November 12, 2001, approximately 53.0% of our total common stock was owned by an affiliate of J.P. Morgan Partners, LLC, approximately 9.9% of our total common stock was owned by certain other institutional investors and approximately 37.1% of our total common stock was owned collectively by the Trust and the Management Investors. J.P. Morgan Partners, LLC owns our common stock through its Flexible Film, LLC subsidiary and owns our preferred stock through its Southwest Industrial Films, LLC subsidiary. 25 The Recapitalization constituted a "change of control" under the provisions of our long-term incentive plans ("LTIP"). Upon a change of control, all participants in the LTIP fully vest and all amounts due to the participants were payable within 90 days. As a result, we accrued $5.0 million of compensation expense in the three months ended March 31, 2000 relating to the vesting under the LTIP. In addition, we incurred $0.2 million of fees and expenses in connection with the Recapitalization in the three months ended March 31, 2000. Both the LTIP compensation expense and these fees and expenses are included in "compensation and transaction costs related to recapitalization" in the accompanying condensed consolidated statement of operations for the six months ended June 30, 2000. 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, 2001 and 2000 (dollars in millions).
Three Months Ended September 30 Nine Months Ended September 30 -------------------------------------- -------------------------------------- 2001 2000 2001 2000 ------------------ ----------------- -------------------- --------------- % of % of % of % of $ Sales $ Sales $ Sales $ Sales ------ ----- ------ ----- ------ ----- ------ ----- Net Sales $220.4 100.0% $210.8 100.0% $626.6 100.0% $642.9 100.0% Cost of sales 173.9 78.9 176.5 83.7 498.5 79.6 529.4 82.3 ------ ----- ------ ----- ------ ----- ------ ----- Gross profit 46.5 21.1 34.3 16.3 128.1 20.4 113.5 17.6 Total operating expenses 16.9 7.7 22.8 10.8 75.6 12.1 82.5 12.8 ------ ----- ------ ----- ------ ----- ------ ----- Operating income $ 29.6 13.4% $ 11.5 5.5% $ 52.5 8.4% $ 31.0 4.8% ====== ===== ====== ===== ====== ===== ====== =====
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 Net Sales Net sales increased by $9.6 million, or 4.5%, from $210.8 million for the three months ended September 30, 2000 to $220.4 million for the three months ended September 30, 2001. This increase was primarily due to a 12% increase in sales volume partially offset by a decrease in average selling prices of 6.7%. Excluding the sales volume from the Uniplast acquisition, sales volumes in the third quarter of 2001 increased 4% as compared to the same period in 2000. In the markets we serve, the average selling price of our products generally increases or decreases as the price of resins, our primary raw material, increases or decreases. Average resin prices were lower during the third quarter of 2001 compared to the third quarter of 2000 resulting in a decrease in our average selling prices. Gross Profit Gross profit increased by $12.2 million, or 35.6%, from $34.3 million for the three months ended September 30, 2000, to $46.5 million for the three months ended September 30, 2001. The increase was primarily due to higher gross margins and the effect of higher sales volumes. Total Operating Expenses Total operating expenses decreased by $5.9 million, or 25.9%, from $22.8 million for the third quarter of 2000 to $16.9 million for the third quarter ended September 30, 2001. The most significant item contributing to this decrease was a $7.5 million credit to plant closing costs. We analyzed the economics of closing our Harrington facility in light of changes in customer demand and the acquisition of Uniplast. These changes together with the movement of a production line from the Birmingham plant have significantly improved the profitability of the 26 Harrington facility. As a result, we have revised our plans to close the Harrington facility. Therefore, the remaining balance of the closure accrual related to the Harrington facility was credited to the plant closing costs. In addition, other plant and office closing costs of $1.3 million was expensed in the third quarter of 2001 while depreciation expenses in the third quarter 2001 increased $1.2 million due to new computer systems. Further, the operating expenses for the third quarter of 2000 included $2.4 million of compensation and transaction costs related to the Recapitalization. Operating Income Operating income increased by $18.1 million, or 157%, from $11.5 million for the third quarter of 2000 to $29.6 million for the third quarter ended September 30, 2001, due to the factors discussed above. Interest Expense Interest expense decreased by $2.2 million, or 10.4%, from $21.1 million for the third quarter of 2000, to $18.9 million for the third quarter ended September 30, 2001. This decrease was principally due to the reduction in LIBOR that effect the borrowing costs of the companies term debt partially offset by the increase in the use of the line of credit. Other Income (Expense) Other income (expense), net changed from expense of approximately $25,000 for the third quarter ended September 30, 2000, to income of approximately $882,000 for the third quarter ended September 30, 2001, an increase in income of approximately $907,000. The increase was primarily due to an insurance claim at the Danville plant as a result of a fire. NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000 Net Sales Net sales decreased by $16.3 million, or 2.5%, from $642.9 million for the nine months ended September 30, 2000 to $626.6 million for the nine months ended September 30, 2001. The decrease was primarily due to a 5.2% decrease in our average selling prices partially offset by a 2.9% increase in sales volume. Excluding the sales volume from the Uniplast acquisition, sales volumes in the nine months ended September 30, 2001 increased .3% as compared to the same period in 2000. In the markets we serve, the average selling price of our products generally increases or decreases as the price of resins, our primary raw material, increases or decreases. Average resin prices were lower during the first nine months of 2001 compared to the same period in 2000 resulting in a decrease in our average selling prices. Gross Profit Gross profit increased by $14.6 million, or 12.8%, from $113.5 million for the nine months ended September 30, 2000, to $128.1 million for the nine months ended September 30, 2001. The increase was primarily due to the effect of higher gross margins and the effect of higher sales volumes. Total Operating Expenses Total operating expenses decreased by $6.9 million, or 8.4%, from $82.5 million for the nine months ended September 30, 2000 to $75.6 million for the nine months ended September 30, 2001. The most significant items contributing to this decrease were a $6.1 million reduction in fees paid to consultants relating to a company-wide 27 supply chain improvement initiative and a $7.5 million credit to plant closing costs. We analyzed the economics of closing our Harrington facility in light of changes in customer demand and the acquisition of Uniplast. These changes together with the movement of a production line from the Birmingham plant have significantly improved the profitability of the Harrington facility. As a result, we have revised our plans to close the Harrington facility. Therefore, the remaining balance of the closure accrual related to the Harrington facility was credited to the plant closing costs for the nine months ended September 30, 2001. In addition, other plant and office closing and downsizing costs of $4.6 million was expensed during the nine months ended September 30, 2001. Depreciation expenses for the nine months ended September 30, 2001 increased $2.6 million due to new computer systems Operating Income Operating income increased by $21.5 million, or 69.4%, from $31.0 million for the nine months ended September 30, 2000 to $52.5 million for the nine months ended September 30, 2001, due to the factors discussed above. Interest Expense Interest expense increased by $11.4 million, or 24%, from $46.9 million for the nine months ended September 30, 2000, to $58.3 million for the nine months ended September 30, 2001. As a result of the financing for the May 31, 2000 recapitalization, interest expense increased significantly compared to the prior year. This increase was partially offset by the reduction in LIBOR in the third quarter of 2001. Other Income (Expense) Other income (expense), net changed from expense of $0.2 million for the nine months ended September 30, 2000, to income of $6.6 million for the nine months ended September 30, 2001, an increase in income of $6.8 million. The increase was primarily due to the proceeds and assets received from a settlement with a potential new customer in the second quarter of 2001 and other less significant items. OPERATING SEGMENT REVIEW General. Operating segments are components of our company 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. For more information on our operating segments see Note 11 to the unaudited condensed consolidated financial statements. THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2000 Specialty Films Net Sales. The net sales of our specialty films segment increased $12 million, or 12.8%, from $93.4 million for the three months ended September 30, 2000 to $105.4 million for the three months ended September 30, 2001. This increase was primarily due to a 16.6% increase in sales volume partially offset by a 3.2% decrease in our average selling prices. Excluding the effect of the Uniplast acquisition, sales volumes increased 6.5% during the three months ended September 30, 2001 as compared to the same period in 2000. Selling prices decreased principally due to the effects of a decrease in resin prices. 28 Segment Profit. The specialty films segment profit increased $7.9 million, or 52%, from $15.2 million for the three months ended September 30, 2000 to $23.1 million for the three months ended September 30, 2001. The increase was primarily due to the increase in sales discussed above including the effect of the Uniplast acquisition and improved margins. Segment Total Assets. The specialty films segment total assets increased $35.2 million, or 8.6%, from $407.2 million as of September 30, 2000 to $442.4 million as of September 30, 2001. The increase was principally due to the acquisition of Uniplast, capital expenditures for capacity expansions and the reserve for plant closing cost for Harrington that was deducted from segment assets as of September 30, 2000 partially offset by depreciation expenses. Design Products Net Sales. The net sales of our design products segment decreased $3.6 million, or 6.5%, from $55.7 million for the three months ended September 30, 2000 to $52.1 million for the three months ended September 30, 2001. This decrease was primarily due to a 7% decrease in our average selling prices. Sales volumes remained relatively stable for the three months ended September 30, 2001 as compared to the same period in 2000. Segment Profit. The design products segment profit increased $.8 million, or 11% , from $7 million for the three months ended September 30, 2000 to $7.8 million for the three months ended September 30, 2001. This increase was principally due to improved margins partially offset by the effect of lower sales volumes. Segment Total Assets. The design products segment total assets increased $3.8 million, or 2%, from $177.5 million as of September 30, 2000 to $181.3 million as of September 30, 2001. Capital expenditures for capacity additions were partially offset by depreciation expenses. Industrial Films Net Sales. The net sales in our industrial films segment increased $1.2 million, or 1.9%, from $61.7 million for the three months ended September 30, 2000 to $62.9 million for the three months ended September 30, 2001. This increase was primarily due to a 11.8% increase in sales volumes primarily as a result of the Uniplast acquisition partially offset by a 8.9% decrease in selling prices. Selling prices decreased due the effects of a decrease in resin prices and a change in sales mix. Segment Profit. The industrial films segment profit increased $4.1 million, or 49%, from $8.4 million for the three months ended September 30, 2000 to $12.5 million for the three months ended September 30, 2001. This increase was principally due to the acquisition of Uniplast, the effect of higher sales discussed above and the effect of higher margins. Segment Total Assets. The industrial films segment total assets decreased $1 million, or 0.7%, from $131.8 million as September 30, 2000 to $130.8 million as of September 30, 2001. This decrease was principally due to the write-down of fixed assets due to the closure of our Birmingham, Alabama facility partially offset by the assets from the Uniplast acquisition. In addition, capital expenditures for maintenance of business were offset by depreciation expenses. 29 UNALLOCATED CORPORATE EXPENSES Unallocated corporate expenses increased $3.3 million, or 18.6%, from $17.7 million, for the three months ended September 30, 2000 to $21.0 million for the three months ended September 30, 2001. The most significant items contributing to this increase were plant and office closing costs including inventory write-downs of $1.8 million recorded in the third quarter of 2001 and higher depreciation expenses in the third quarter 2001 of $1.2 million due to new computer systems. NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2000 Specialty Films Net Sales. The net sales of our specialty films segment decreased $17.7 million, or 5.9%, from $298.7 million for the nine months ended 2000 to $281.0 million for the nine months ended September 30, 2001. The decrease was primarily due to a 2.5% decrease in sales volume and a 3.4% decrease in our average selling prices. The volume decrease was primarily due to the insourcing of a specific product by one of our most significant customers partially offset by the sales volume from the Uniplast acquisition in the third quarter of 2001. Selling prices decreased principally due to the effect of a decrease in resin prices. Segment Profit. The specialty film segment profit increased $5.9 million, or 10.5%, from $56 million for the nine months ended September 30, 2000 to $61.9 million for the nine months ended September 30, 2001. This increase was principally due to the increase in gross margin partially offset by the effect of lower sales volumes. Design Products Net Sales. The net sales of our design products segment remained relatively stable at $161 million for the nine months ended September 30, 2001 as compared to the same period in 2000. An increase in sales volume of 6.3% was offset by a 5.8% decrease in selling prices. The increase in sales volume was primarily due to growth of new product lines. Selling prices decreased primarily due to the effects of a decrease in resin prices and a change in product mix. Segment Profit. The design products segment profit increased $10.0 million, or 53.5%, from $18.7 million for the nine months ended September 30, 2000 to $28.7 million for the nine months ended September 30, 2001. This increase was principally due to a settlement with a potential customer during the second quarter of 2001. In addition, segment profits were favorably affected by higher margins. Industrial Films Net Sales. The net sales in our industrial films segment increased $2.2 million, or 1.2%, from $182.4 million for the nine months ended September 30, 2000 to $184.6 million for the nine months ended September 30, 2001. An increase in sales volume of 8.1% was partially offset by a 6.3% decrease in selling prices. Selling prices decreased due to the effect of a decrease in resin prices and a change in sales mix. 30 Segment Profit. The industrial films segment profit increased $6.0 million, or 22%, from $26.9 million for the nine months ended September 30, 2000 to $32.9 million for the nine months ended September 30, 2001 principally due to the effects of an increase in sales volume and gross margin. UNALLOCATED CORPORATE EXPENSES Unallocated corporate expenses increased $2.5 million or 3.9% from $64.7 million for nine months ended September 30, 2000 to $67.2 million for the nine months ended September 30, 2001. The most significant items contributing to this increase were a $6.5 million reduction in fees paid to consultants relating to a company-wide supply chain improvement initiative, which was more than offset by plant and office closing costs of $6.4 million recorded in the nine months ended September 30, 2001 and higher depreciation expenses in the nine months ended September 30, 2001 of $2.6 million due to new computer systems. LIQUIDITY AND CAPITAL RESOURCES Upon closing of the Recapitalization, we issued 220,000 Units (the "Units") consisting of $220.0 million principal amount of 13% Senior Subordinated Notes due 2010 (the "Notes") and Warrants (the "Note Warrants") to purchase 18,532 shares of common stock. The Notes were issued at a discount of approximately $5.9 million and mature on June 1, 2010. The Units were issued in a private placement transaction exempt from the registration requirements under the Securities Act of 1933. On August 29, 2000, our registration statement relating to the exchange of the private Notes for Notes registered under the Securities Act of 1933 was declared effective by the Securities and Exchange Commission, and, as a result, the Notes and the Note Warrants became separated. We consummated the exchange offer and issued $220.0 million of registered Notes for all of the private Notes on October 12, 2000. Interest on the Notes is payable semi-annually on each June 1 and December 1, commencing on December 1, 2000. The Notes are unsecured. The Notes are subordinated to all of our existing and future senior debt, rank equally with any future senior subordinated debt and rank senior to any future subordinated debt. The Notes are guaranteed by some of our subsidiaries. The Note Warrants became exercisable on August 29, 2000, and mature on June 1, 2010. Upon closing of the offering of the Units and the Recapitalization, we purchased all of our outstanding $125.0 million principal amount of 9 1/8% Senior Subordinated Notes due 2007, refinanced all amounts outstanding under our prior credit facility (the "Prior Credit Facility") and replaced the Prior Credit Facility with amended and restated senior secured credit facilities (the "New Credit Facilities") with The Chase Manhattan Bank, Bankers Trust Company, The Bank of Nova Scotia and a syndicate of banking institutions. The New Credit Facilities consist of a $200.0 million senior secured tranche A facility, $40.0 million of which was made available to our principal Mexican subsidiary (the "Tranche A Facility"), a $280.0 million senior secured tranche B facility (the "Tranche B Facility") and a $100.0 million revolving credit facility (the "Revolving Credit Facility"). Effective September 30, 2000, we entered into an amendment of our New Credit Facilities. The amendment modified certain financial covenants contained in the New Credit Facilities, including the leverage and interest coverage ratios and the permitted amount of capital expenditures. We were in compliance with the amended covenants of our New Credit Facilities as of September 30, 2001. On July 16, 2001, we acquired 100% of the outstanding stock of Uniplast Holdings Inc. for approximately $57.1 million, consisting of the assumption of approximately $40.3 million of debt and the issuance of shares of our common stock valued at approximately $16.8 million to the selling shareholders of Uniplast (of which 3,468 shares valued at approximately $1.7 million are subject to certain holdback arrangements and had not been delivered at closing). At the closing of the acquisition, we refinanced approximately $37.0 million of assumed debt with the proceeds from a private placement of 29,000 of preferred stock at $ 1,000 per share and borrowings under our revolving credit facility. In connection with the Uniplast acquisition, we entered into an 31 amendment of our credit facilities and incurred amendment fees of $1.4 million. In addition, we also issued 1,983 shares of our preferred stock at $1,000 per share, together with warrants to purchase 2,013 shares of common stock, to certain of our employees. We also incurred $0.9 million of legal and administrative expenses. We recorded $14.4 million as intangible assets and $ 19.3 million as goodwill as a result of this acquisition. The intangible assets are being amortized over 15 years while the goodwill is not being amortized. The operating results for Uniplast from July 16,2001 is included in the statements of operations for the periods ended September 30, 2001. Loans under the Revolving Credit Facility and the Tranche A Facility bear interest, at our option, at either Adjusted LIBOR plus 3.25% or ABR (as defined below) plus 2.25%, in each case subject to certain adjustments. Loans under the Tranche B Facility bear interest, at our option, at either Adjusted LIBOR plus 3.75% or ABR plus 2.75%. We may elect interest periods of one, two, three or six months for Adjusted LIBOR borrowings. Interest is calculated on the basis of actual days elapsed in a year of 360 days (or 365 or 366 days, as the case may be, in the case of ABR loans based on the Prime Rate) and interest is payable at the end of each interest period and, in any event, at least every three months. ABR is the Alternate Base Rate, which is the higher of Bankers Trust Company's Prime Rate or the Federal Funds Effective Rate plus 1/2 of 1%. Adjusted LIBOR will at all times include statutory reserves. Our obligations under the New Credit Facilities are guaranteed by substantially all of our domestic subsidiaries and secured by substantially all of our domestic assets. The New Credit Facilities are also secured by a pledge of 65% of the capital stock of each of our foreign subsidiaries. The New Credit Facilities and the indenture relating to the Notes impose certain restrictions on us, including restrictions on our ability to incur indebtedness, pay dividends, make investments, grant liens, sell our assets and engage in certain other activities. In addition, the New Credit Facilities require us to maintain certain financial ratios. Indebtedness under the New Credit Facilities is secured by substantially all of our assets, including our real and personal property, inventory, accounts receivable, intellectual property, and other intangibles. Net Cash Provided by Operating Activities Net cash provided by operating activities was $23.4 million for the nine months ended September 30, 2001, a decrease of $25.1 million, or 52%, from the same period in 2000. The decrease resulted primarily from changes in working capital partially offset by an increase in operating income. Net Cash Used in Investing Activities Net cash used in investing activities was $87.6 million for the nine months ended September 30, 2001, compared to $40.1 million for the same period in 2000. Acquisition of Uniplast excluding cash amounted to $55.5 million. Capital expenditures were $40 million and $40.1 million for the nine months ended September 30, 2001 and 2000, respectively. Capital expenditures in both periods were primarily for major expansion projects in all of our product lines, for upgrading our information systems, and for several new and carryover maintenance projects throughout our company. In 2001, we received $7.9 million as part of a sale-leaseback transaction of newly-acquired machinery and equipment. Net Cash Provided By Financing Activities Net cash provided by financing activities was $61.0 million for the nine months ended September 30, 2001, compared to a use of funds for financing activities of $2.7 million for the same period in 2000. The activity for the nine months ended September 30, 2001 primarily represented issuance of preferred stock and common stock for the acquisition of Uniplast and principal payments and revolving debt borrowings on the New Credit Facilities. In 2001, we prepaid $8.0 million of principal on our term loans under the New Credit Facilities. The 32 activity for the nine months ended September 30, 2000 represented payments and borrowings on the Prior and New Credit Facilities and the financing transactions related to the 2000 Recapitalization. Liquidity As of September 30, 2001, we had approximately $70.5 million of working capital and approximately $70.9 million available under our $100.0 million Revolving Credit Facility. We had $5.0 million of letters of credit issued, which reduces the amount available for borrowings under our Revolving Credit Facility. As of September 30, 2001, the debt under the New Credit Facilities bore interest at a weighted average rate of 9.0%. As of September 30, 2001, we had $3.8 million in cash and cash equivalents, of which the majority was held by our foreign subsidiaries. The effective tax rate of repatriating this money and future foreign earnings to the United States varies from approximately 25% to 45%, depending on various U.S. and foreign tax factors, including each foreign subsidiary's country of incorporation. High effective repatriation tax rates may limit our ability to access cash and cash equivalents generated by our foreign operations for use in our United States operations, including to pay principal, premium, if any, and interest on the Notes and the New Credit Facilities. For the nine months ended September 30, 2001, our foreign operations generated net income from continuing operations of approximately $4.8 million. Interest expense and scheduled principal payments on our borrowings under the New Credit Facilities and the Notes have significantly increased our future liquidity requirements. We expect that cash flows from operating activities and available borrowings under the New Credit Facilities will provide sufficient working capital to operate our business, to make expected capital expenditures and to meet foreseeable liquidity requirements. If we were to engage in a significant acquisition transaction, however, it may be necessary for us to restructure our existing credit arrangements. CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION Certain information set forth in this report contains "forward-looking statements" within the meaning of federal securities laws. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends, and other information that is not historical information. When used in this report, the words "estimates," "expects," "anticipates," "forecasts," "plans," "intends," "believes" and variations of such words or similar expressions are intended to identify forward-looking statements. We may also make additional forward-looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, by us or on our behalf, are also expressly qualified by these cautionary statements. All forward-looking statements, including, without limitation, management's examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. But, there can be no assurance that management's expectations, beliefs and projections will result or be achieved. All forward-looking statements apply only as of the date made. We undertake no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in or contemplated by this report. The following risks and uncertainties, together with those discussed in our Registration Statement on Form S-1 declared effective by the Securities and Exchange Commission on August 10, 2001, are among the factors that could cause our actual results to differ materially from the forward-looking statements. There may be other factors, including those discussed 33 elsewhere in this report, that may cause our actual results to differ materially from the forward-looking statements. Any forward-looking statements should be considered in light of these factors. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to various interest rate and resin price risks that arise in the normal course of business. We finance our operations with borrowings comprised primarily of variable rate indebtedness. We enter into interest rate collar and swap agreements to manage interest rate market risks and commodity collar agreements to manage resin market risks. Our raw material costs are comprised primarily of resins. Significant increases in interest rates or the price of resins could adversely affect our operating margins, results of operations and ability to service our indebtedness. An increase of 1% in interest rates payable on our variable rate indebtedness would increase our annual interest expense by approximately $4.1 million. In the first quarter of 2001, we entered into certain interest rate collars, caps and swaps. We adopted SFAS No. 133 to account for these instruments as of January 1, 2001. Under the conditions of our credit facilities, we are required to obtain interest rate protection on 50% of our entire debt. See Note 7 to the condensed consolidated financial statement contained elsewhere in this report. As a result of the mandatory redemption features, the carrying value of the Preferred Stock is increased each quarter to reflect accretion towards the $131.0 million redemption value at May 31, 2011, excluding accumulated dividends. The accretion for the nine months ended September 30, 2001 was $1.0 million. As of September 30, 2001, we have accrued dividends of approximately $21.0 million which is included as part of the liquidation value of the Preferred Stock. 34 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On July 16, 2001, we issued the following equity securities in connection with (a) our acquisition of 100% of the outstanding shares of common stock of Uniplast Holdings Inc. pursuant to the stock purchase agreement dated as of June 15, 2001 and (b) the refinancing of a portion of the debt of Uniplast that we assumed as part of the acquisition consideration: o 34,677 shares of our common stock to the selling shareholders of Uniplast (of which 3,468 shares valued at approximately $1.7 million are subject to certain holdback arrangements and had not been delivered at closing or as of the date hereof); and o 29,000 shares of our Series A Cumulative Exchangeable Redeemable Preferred Stock, no par value (the "Preferred Stock"), and warrants (the "Preferred Stock Warrants") to purchase an additional 29,436 shares of our common stock to Southwest Films, LLC and certain other securityholders for which we received cash consideration of approximately $29.0 million in the aggregate. The Preferred Stock Warrants are exercisable at any time prior to May 31, 2011 at an exercise price of $0.01 per share. Each Preferred Stock Warrant entitles the holder to purchase 1.015 shares of common stock. On September 13, 2001, we issued 1,579 shares of our Preferred Stock and Preferred Stock Warrants to purchase an additional 1,603 shares of our common stock to certain holders of our common stock to whom we were obligated to make a preemptive rights offering. We received cash consideration of approximately $1.579 million in the aggregate for such securities. The Preferred Stock Warrants are exercisable at any time prior to May 31, 2011 at an exercise price of $0.01 per share. Each Preferred Stock Warrant entitles the holder to purchase 1.015 shares of common stock. In addition, on September 13, 2001, we issued 404 shares of our Preferred Stock and Preferred Stock Warrants to purchase an additional 410 shares of our common stock to members of our senior management. We received cash consideration of approximately $404,000 in the aggregate for such securities. The Preferred Stock Warrants are exercisable at any time prior to May 31, 2011 at an exercise price of $0.01 per share. Each Preferred Stock Warrant entitles the holder to purchase 1.015 shares of common stock. We believe that the foregoing issuance of our equity securities in the third quarter of 2001 did not involve a public offering or sale of securities and were exempt from the registration requirements of the Securities Act pursuant to the exemption from registration afforded by Section 4(2) of the Securities Act or Regulation D promulgated thereunder. No underwriters, brokers or finders were involved in any of these transactions. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: EXHIBIT NO. EXHIBIT - ----------- ------- 4.1 First Supplement Indenture, dated as of July 16, 2001, among Pliant Corporation, the New Note Guarantors party thereto, the existing Note Guarantors party thereto and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.3 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-65754)). 35 EXHIBIT NO. EXHIBIT - ----------- ------- 10.1 Amendment No. 1 and Waiver dated as of July 16, 2001 to the Stockholder's Agreement, dated as of May 31, 2000, among Pliant Corporation, Chase Domestic Investments, L.L.C. and each of the stockholders and warrantholders listed on the signature pages thereto (incorporated by reference to Exhibit 10.3 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-65754)). 10.2 Amendment No. 1 and Waiver dated as of July 16, 2001 to the Securities Purchase Agreement dated as of May 31, 2000 among Pliant Corporation, and each of the purchasers of Pliant Corporation's preferred stock listed on the signature pages thereto (incorporated by reference to Exhibit 10.7 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-65754)). 10.3 Amendment No. 1 dated as of July 16, 2001 to the Warrant Agreement dated as of May 31, 2000 among Pliant Corporation and the initial warrantholders listed in Schedule I thereto (incorporated by reference to Exhibit 10.9 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-65754)). 10.4 Securities Purchase Agreement dated as of July 16, 2001 among Pliant Corporation and the purchasers of Pliant Corporation's preferred stock listed on the schedules thereto (incorporated by reference to Exhibit 10.10 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-65754)). 10.5 Amendment No. 2, dated as of July 10, 2001, to the Credit Agreement dated as of September 30, 1997, as amended and restated as of May 31, 2000 (incorporated by reference to Exhibit 10.13 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-65754)). 10.6 Supplement No. 1, dated as of July 19, 2001, to the Guarantee Agreement, dated as of September 30, 1997, as amended and restated as of May 31, 2000, among Pliant Corporation, each of the subsidiaries listed on Schedule I thereto and Bankers Trust Company, as Administrative Agent (incorporated by reference to Exhibit 10.15 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-65754)). 10.7 Supplement No. 1, dated as of July 19, 2001, to the Security Agreement, dated as of September 30, 1997, as amended and restated as of May 31, 2000, among Pliant Corporation, each of the subsidiaries listed on Schedule I thereto and Bankers Trust Company, as Collateral Agent (incorporated by reference to Exhibit 10.17 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-65754)). 10.8 Supplement No. 1, dated as of July 19, 2001, to the Pledge Agreement, dated as of September 30, 1997, as amended and restated as of May 31, 2000, among Pliant Corporation, each of the subsidiaries listed on Schedule I thereto and Bankers Trust Company, as Collateral Agent (incorporated by reference to Exhibit 10.19 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-65754)). 36 EXHIBIT NO. EXHIBIT - ----------- ------- 10.9 Supplement No. 1, dated as of July 19, 2001, to the Indemnity, Subrogation and Contribution Agreement, dated as of September 30, 1997, as amended and restated as of May 31, 2000, among Pliant Corporation, each of the subsidiaries listed on Schedule I thereto and Bankers Trust Company, as Collateral Agent (incorporated by reference to Exhibit 10.21 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-65754)). (b) We filed a current report on Form 8-K dated July 18, 2001 to announce the completion of our acquisition of all of the outstanding shares of Uniplast Holdings Inc. 37 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: November 13, 2001 38 -----END PRIVACY-ENHANCED MESSAGE-----