-----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, COlOjKdxNpAwD/znMa9UldcmJ18Y+5GCaFMgw6sTut2iyqHFwAjRyITJV7Zw09gL RvbF0LCL2jY/LwYtBljEQQ== 0000950123-02-002713.txt : 20020415 0000950123-02-002713.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950123-02-002713 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020320 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 333-40067 FILM NUMBER: 02579556 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-K405 1 y58490e10-k405.txt PLIANT CORPORATION ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 10-K (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 the Registrant as Specified in its Charter) Utah 87-0496065 ---- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1515 Woodfield Road, Suite 600 Schaumburg, IL 60173 (847) 969-3300 (Address of principal executive offices and telephone number) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] At February 28, 2002 there were 596,556 outstanding shares of common stock. As of such date, 67,722 of the outstanding shares of common stock were held by persons other than affiliates of the Registrant having an aggregate market value (based on the price at which the shares were sold in the recapitalization) of approximately $32.7 million. There is no established trading market for the Registrant's common stock. ================================================================================ This report contains certain forward-looking statements that involve risks and uncertainties, including statements about our plans, objectives, goals, strategies and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements. Some of the factors that could negatively affect our performance are discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Statement for Forward-Looking Information" and elsewhere in this report. PART I ITEM 1. BUSINESS GENERAL Pliant Corporation (formerly known as Huntsman Packaging Corporation) ("Pliant," the "Company," "we" or "us"), with 2001 revenues of approximately $840.4 million, is one of North America's leading manufacturers of value-added films and flexible packaging for food, personal care, medical, agricultural and industrial applications. We offer one of the most diverse product lines in the film industry and have achieved leading market positions in each of our major product lines. We believe our market leadership is primarily attributable to our strategy of building strong relationships with market-leading customers, by offering a broad line of innovative products and by providing technological leadership through our modern and low-cost manufacturing facilities. Our products are frequently highly engineered and are important components of, or provide critical attributes to, our customers' end-products. We operate 26 manufacturing and research and development facilities worldwide and we currently have approximately 1.0 billion pounds of annual production capacity. The Company was founded in 1992, and for several years, operated as a subsidiary of Huntsman Corporation. In September 1997, the Company was "split off" from Huntsman Corporation. The separation from Huntsman Corporation allowed us to independently pursue our value-added films business, implement our strategy of growing our market position through superior products, technology and synergistic acquisitions, and improve our financial and operating performance. RECAPITALIZATION On May 31, 2000, we consummated a recapitalization pursuant to an agreement dated March 31, 2000 among us, our then existing stockholders and an affiliate of J.P. Morgan Partners, LLC (formerly Chase Capital Partners), whereby the affiliate acquired majority control of our common stock. The total consideration paid in the recapitalization was approximately $1.1 billion, including transaction costs. Pursuant to the recapitalization agreement: o we redeemed all of the shares of our common stock held by Jon M. Huntsman, our founder, then majority stockholder and then Chairman of the Board; o an affiliate of J.P. Morgan Partners, LLC purchased approximately one-half of the shares of our common stock held collectively by The Christena Karen H. Durham Trust and by members of our current and former senior management; o an affiliate of J.P. Morgan Partners, LLC and certain other institutional investors purchased shares of common stock directly from us; o the trust and the management investors retained or "rolled-over" approximately one-half of the shares of our common stock collectively owned by them prior to the recapitalization; and o we issued to an affiliate of J.P. Morgan Partners, LLC and to certain other institutional investors a new series of senior cumulative exchangeable redeemable preferred stock and detachable warrants for our common stock. In connection with the recapitalization, we offered to purchase in a tender offer all of our $125.0 million principal amount of 9 1/8% senior subordinated notes due 2007. We also solicited and received the requisite consents from tendering holders of the 9 1/8% senior subordinated notes to amend the related indenture to permit us to effect the recapitalization, the offering of $220.0 million principal amount of 13% Senior Subordinated Notes due 2010 (the "Old Notes") and the incurrence of borrowings under our credit facilities. On May 31, 2000, we purchased all of the $125.0 million of 9 1/8% senior subordinated notes tendered and discharged our obligations under the related indenture. On May 31, 2000, we refinanced all amounts outstanding under our then existing credit facility and replaced it with amended and restated senior secured credit facilities. In connection with the recapitalization, we issued 220,000 units consisting of $220 million principal amount of 13% Senior Subordinated Notes due 2010 (the "Old Notes") and warrants to purchase 18,532 shares of our common stock. The units were issued at a discount of approximately $5.9 million. The units were issued in a transaction exempt from the registration requirements under the Securities Act. On August 29, 2000, our registration statement relating to the exchange of the Old Notes for 13% Senior Subordinated Notes registered under the Securities Act was declared effective by the SEC, and, as a result, the Old Notes and the note warrants became separated. We consummated the exchange offer and issued $220.0 million of registered Notes for all of the Old Notes on October 12, 2000. As a result of the recapitalization, we changed our name to Pliant Corporation on October 9, 2000. CONTROLLING SHAREHOLDERS Southwest Industrial Films, LLC owns approximately 53% of our outstanding common stock and 62% of our preferred stock warrants to purchase common stock. Flexible Films, LLC, owns approximately 58% of our outstanding preferred stock. Southwest Industrial Films, LLC and Flexible Films LLC are subsidiaries of J.P. Morgan Partners (BHCA), L.P. J.P. Morgan Partners, LLC serves as investment advisor to J.P. Morgan Partners (BHCA), L.P. J.P. Morgan Partners, LLC is the private equity group of J.P. Morgan Chase & Co., which is one of the largest financial holding companies in the U.S., and J.P. Morgan Partners, LLC is one of the largest private equity organizations in the U.S., with over $20 billion under management. Through its affiliates, J.P. Morgan Partners, LLC invests in leveraged buyouts, recapitalizations and venture capital opportunities by providing equity and mezzanine capital. RECENT ACQUISITION On July 16, 2001, we acquired 100% of the outstanding shares of common stock of Uniplast Holdings Inc., a manufacturer of multi-layer packaging films, industrial films and cast-embossed films in the United States and Canada. The transaction was valued at approximately $56.0 million, consisting of the assumption of approximately $40.3 million of debt and the issuance of 32,391 shares of our common stock valued at approximately $15.7 million to the selling shareholders of Uniplast. At the closing of the Uniplast acquisition, we refinanced approximately $37 million of the assumed debt with proceeds of $29 million from the July 16, 2001 private placement of preferred stock and preferred stock warrants to our existing holders of preferred stock and to an affiliate of a selling stockholder of Uniplast and from borrowings under our revolving credit facility. In addition, we entered into an amendment to our credit facilities. We may incur additional borrowings under our revolving credit facility to refinance the remainder of the assumed debt. Under our stockholders' agreement, we were required to make a preemptive rights offering of additional shares of preferred stock and preferred stock warrants to holders of our common stock as a result of the $29 million private placement of preferred stock and preferred stock warrants described above. In addition to the preemptive rights offering, we also offered preferred stock and preferred stock warrants to certain of our officers. On September 13, 2001, we completed the preemptive rights offering and the offering to our officers and sold 1,983 shares of preferred stock and preferred stock warrants to purchase approximately 2,012 shares of our common stock to certain holders of our common stock and certain of our officers. We received cash consideration of approximately $2.0 million in the aggregate. INDUSTRY OVERVIEW AND MARKET SHARE DATA According to the Flexible Packaging Association, the North American market for flexible packaging was approximately $19.7 billion in 2001 and has grown at a CAGR of approximately 4.8% from 1992 to 2001. The flexible packaging industry consists generally of plastic films, wax papers and aluminum foils. The plastic film industry serves a variety of flexible packaging markets, as well as secondary packaging and non-packaging end markets, including food, pharmaceutical and medical, personal care, household, industrial and agricultural markets. We estimate that North American plastic film manufacturers produced approximately 16.7 billion pounds of film in 2001. Flexible packaging is the largest end market for plastic films, and food packaging is by far the largest market for flexible packaging. Plastic films are also used in secondary packaging such as pallet wrap, shrink wrap and grocery and garbage bags, and as components in many non-packaging products, such as moisture barriers for disposable diapers, feminine care products and surgical drapes and gowns. Finally, plastic films are used in a variety of agricultural applications, such as greenhouse films and mulch films. Recent advancements in film extrusion and resin technology have produced new, sophisticated films that are thinner and stronger and have better barrier and sealant properties than other materials or predecessor films. These technological advances have facilitated the replacement of many traditional forms of rigid packaging with film-based, flexible packaging that is lighter, is lower in cost and has enhanced performance characteristics, such as oxygen and moisture barriers, printability and durability. For example, in consumer applications, stand-up pouches that use plastic films are now often used instead of paperboard boxes, glass jars and metal cans. In industrial markets, stretch and shrink films continue to replace corrugated boxes and metal strapping to unitize, bundle and protect items during shipping and storage. All market share data presented in this report are for the year ended December 31, 2001. Unless otherwise indicated, the market share and industry data used throughout this report were obtained primarily from internal company surveys and management estimates based on these surveys and our management's knowledge of the industry. Although third-party industry and market data exist for the flexible packaging industry, third-party industry and market data on the film industry in which we participate are not readily available. Where we have relied on third-party market and industry data, we have so noted. The Flexible Packaging Association and Mastio & Company were the primary sources for third-party industry data. The flexible packaging market, as defined by the Flexible Packaging Association in compiling such data, does not include certain of the products we sell, including many of our industrial films, and includes certain products we do not sell, such as wax papers and aluminum foils. We believe, however, that trends affecting the flexible packaging industry, as defined by the Flexible Packaging Association, also affect many of the markets into which we sell. Industry surveys and publications generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy and completeness of such information. We have not independently verified any of the data from third-party sources. Similarly, internal company surveys and management estimates, while we believe them to be reliable, have not been verified by any independent sources. While we are not aware of any misstatements regarding our industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the caption "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Statement for Forward-Looking Information" in this report. PRODUCTS, MARKETS AND CUSTOMERS Our products are sold into numerous markets for a wide variety of end uses and are offered through three operating segments: Specialty Films, Design Products and Industrial Films. Specialty Films Specialty Films accounted for 45.3%, 45.7% and 49.0% of our net sales in 2001, 2000 and 1999, respectively. Our Specialty Films include personal care films, medical films, converter films, barrier and custom films, and agricultural films. Our Specialty Film customers include Baxter, Becton-Dickinson, General Mills, Johnson & Johnson, Kimberly-Clark, Kraft/Nabisco, Lawson Mardon, Pechiney, Printpack, Ralston Foods, Sonoco and Tyco/Kendall Healthcare. Personal Care. We are a leading producer of personal care films used in disposable diapers, feminine care products and adult incontinence products. Personal care films must meet diverse and highly technical specifications. Many of these films must "breathe," allowing water vapors to escape. In some applications, the softness or "quietness" of the film is important, as in adult incontinence products. A significant portion of our Specialty Films business consists of the sale of personal care films to Kimberly-Clark Corporation and its affiliates. Kimberly-Clark Corporation is our largest customer and accounts for approximately 29% of our Specialty Films net sales and 13% of our 2001 consolidated net sales. We are one of North America's leading producers of personal care films, with an estimated market share of approximately 42%, based on sales dollars. Medical. We are a specialized niche manufacturer of medical films. Our medical films are used in disposable surgical drapes and gowns. We also produce protective packaging for medical supplies, such as disposable syringes and intravenous fluid bags. In addition, our products include packaging for disposable medical devices. Our medical films are manufactured in "clean-room" environments and must meet stringent barrier requirements. A sterile barrier is necessary to provide and assure the integrity of the devices and to prevent contamination and tampering. These films must also be able to withstand varied sterilization processes. Converter. Converter films are sold to converters of flexible packaging who laminate them to foil, paper or other films, print them, and ultimately fabricate them into the final flexible packaging product. Our converter films are a key component in a wide variety of flexible packaging products, such as fresh-cut produce packages, toothpaste tubes and stand-up pouches. Generally, our converter films add value by providing the final packaging product with specific performance characteristics, such as moisture, oxygen or odor barriers, ultraviolet protection or desired sealant properties. Because converter films are sold for their sealant, barrier or other properties, they must meet stringent performance specifications established by the converter, including gauge control, clarity, sealability and width accuracy. We are a leader in introducing new converter film products to meet flexible packaging industry trends and specific customer needs. We are North America's leading manufacturer of films sold to converters, with an estimated market share of approximately 39%. Barrier and Custom. We manufacture a variety of barrier and custom films, primarily for smaller, but profitable, niche segments in flexible packaging and industrial markets. For example, we are North America's second largest producer of films for cookie, cracker and cereal box liners, with an estimated market share of approximately 20%. We are also a leading manufacturer of barrier films for liners in multi-wall pet food bags, films for photoresist coatings for the electronics industry, and films for the protection and transportation of sheet molding compound, used in the manufacture of boats and automotive parts. Agricultural. We are a leading manufacturer of polyethylene mulch films that are sold to fruit and vegetable growers and to nursery operators. Our mulch films are used extensively in North America and Latin America. Commercial growers of crops like peppers, tomatoes, cucumbers and strawberries are the primary consumers of our mulch films. These crops are typically planted on raised beds that are tightly covered with mulch film. The mulch film eliminates or retards weed growth, significantly reduces the amount of water required by plants, controls soil bed temperatures for ideal growing conditions and allows easy application of fertilizer. We are one of North America's two largest producers of mulch films, with an estimated market share of approximately 36%. Design Products Design Products accounted for 25.4%, 25.5% and 22.5% of our net sales in 2001, 2000 and 1999, respectively. Our Design Products are primarily printed films and flexible packaging products. This reporting segment also includes our Mexican subsidiary, NEPSA, a leading producer of printed products for Mexico and other Latin American countries. NEPSA also produces personal care and barrier films for these markets. In 2001, approximately 23% of our Design Products sales were outside the United States, primarily in Mexico and Latin America. Our Design Products include printed rollstock, bags and sheets used to package food and consumer goods. Printed bags or rollstock are sold to bakeries, fresh and frozen food processors, manufacturers of personal care products, textile manufacturers and other dry goods processors. Bread and bakery bags represent a significant portion of our Design Products business. Our Design Products group produces approximately three billion bread and bakery bags each year. We are the leading manufacturer of films for the frozen foods market in North America, with an estimated market share of approximately 31%. In addition, we are the second largest manufacturer of films for the bread and bakery goods market in North America, with an estimated market share of approximately 24%. Our customers in this segment include IGA Fleming, Interstate Bakeries, Kimberly-Clark de Mexico, Mission Foods, Pepperidge Farm and Pictsweet. Industrial Films Our Industrial Films segment manufactures stretch and PVC films. Industrial Films accounted for 29.3%, 28.8% and 28.5% of our net sales in 2001, 2000 and 1999, respectively. In 2001, approximately 32% of our Industrial Films sales were outside the United States, primarily in Canada, Europe and Australia. Our customers in this segment include national distributors such as Bunzl, Unisource and xpedx, grocery chains, such as Albertson's, Kroger, Publix and Safeway, and end-users, such as General Mills and Wal-Mart. Stretch Films. Our stretch films are used to bundle, unitize and protect palletized loads during shipping and storage. Stretch films continue to replace more traditional packaging, such as corrugated boxes and metal strapping, because of stretch films' lower cost, higher strength, and ease of use. We are North America's fourth largest producer of stretch films, with an estimated market share of approximately 12%. PVC Films. Our PVC films are used by supermarkets, delicatessens and restaurants to wrap meat, cheese and produce. PVC films are preferred in these applications because of their clarity, elasticity and cling. We also produce PVC films for laundry and dry cleaning bags. Finally, we produce PVC films for companies that repackage the films in smaller cutterbox rolls for sale in retail markets in North America, Latin America and Asia. We are the second largest producer of PVC films in North America, with an estimated market share of approximately 27%. In addition, we are the leading producer of PVC films in Australia and the third largest producer in Europe, with estimated market shares of approximately 65% and 15%, respectively. SALES AND MARKETING Because of our broad range of product offerings and customers, our sales and marketing efforts are generally product or customer specific. We market in various ways, depending on both the customer and the product. However, most of our salespeople are dedicated to a specific product line and sometimes to specific customers. The majority of our Specialty Films are sold by our own direct sales force. These salespeople are supported by customer service and technical specialists assigned to each salesperson, and in some cases, to specific customers. Customer service representatives assist with order intake, scheduling and product information. Technical support personnel assist the salesperson and the customer with technical expertise, quality control and product development. We believe it is critical that our sales, marketing and technical support teams work together in order to meet our customers' product needs and provide meaningful product development. We sell some of our Specialty Films, such as our agricultural films, through regional distributors. In addition, certain of our personal care and barrier films are sold through brokers who have long-standing relationships with customers. Most of our Design Products are sold through brokers. National grocery chains and some smaller customer accounts are serviced by our own direct sales force. Generally, each Design Products salesperson is supported individually by a customer service specialist and by a group of technical specialists. Industrial Films are generally sold through distributors. We have an independent contract sales force that sells our stretch films to national and regional distributors. Our PVC films are sold by our own sales force to regional and national distributors, directly to national grocery chains, and directly to converters, who repackage the film into cutterbox rolls for sale in retail markets. MANUFACTURING We have a modern and efficient portfolio of manufacturing assets. Over the past three years, excluding acquisitions, we have invested a total of $157.8 million to expand, upgrade and maintain our asset base and information systems. With 26 plants and 212 extrusion lines, we are often able to allocate lines to specific products. This results in fewer change-overs and more efficient use of capacity, effectively expanding our production capacity. Our multiple manufacturing sites and varied production capabilities also allow us to offer multiple plant service to our national customers. In addition, our large, efficient plants allow overhead to be allocated over higher volumes, providing lower unit costs. Generally, our manufacturing plants operate 24 hours a day, seven days a week. We manufacture our film products using both blown and cast extrusion processes. In each process, thermoplastic resin pellets are combined with other resins, plasticizers or modifiers in a controlled, high-temperature, pressurized process to create films with specific performance characteristics. In the cast film process, molten resin is extruded through a horizontal die onto a chill roll, where the film is quickly cooled. Blown film is produced by extruding molten resin through a circular die and chilled air ring to form a bubble as large as 55 feet high. These two basic film manufacturing processes produce films with uniquely different performance characteristics. Cast films are generally clearer, softer and more uniform in thickness. Blown films offer enhanced physical properties, such as increased tear and puncture resistance and better barrier protection. We also produce a significant amount of printed films and bags. We employ both flexographic and rotogravure printing equipment in our printing operations. Flexographic printing uses flexible plates on a rotary letter press and is preferred for shorter runs. Rotogravure printing uses engraved cylinders and produces sharper images. TECHNOLOGY AND RESEARCH AND DEVELOPMENT We believe our technology base and research and development support are among the best in the film industry. Our Newport News, Virginia research and development center employs 38 engineers, technical specialists and operators who provide the latest resin and extrusion technology to our manufacturing facilities and test new resins and process technologies. This 54,000 square foot technical center has a pilot plant with a 10 million pound annual capacity, with four extrusion lines. These extrusion lines include two blown lines, including a seven-layer line installed in 1999, and two cast lines, including a five-layer line. These pilot lines are staffed with 28 operating and supervisory personnel. These capabilities allow the technical center to run commercial "scale-ups" for new products. We are able to use our broad product offerings and technology to transfer technological innovations from one market to another. For example, our expertise in co-extrusion technology, gained from the production of converter and barrier films, and our expertise in applications involving metallocene and other specialty resins, have helped us produce thinner and stronger films for food packaging. Many of our customers work in partnership with our technical representatives to develop new, more competitive products. We have enhanced our relationships with these customers by providing the technical service needed to support commercialization of new products and by helping customers improve operational efficiency and quality throughout a product's life cycle. These customers, in order to ensure product quality and consistency for their own customers, do not change suppliers often, because supplier changes can be expensive and time-consuming. Qualifying a new supplier may take up to a year to complete and can, in some cases, cost over $1 million. We spent $9.8 million, $8.6 million and $5.5 million on research and development in 2001, 2000 and 1999, respectively, before giving effect to revenues from pilot plant sales. INTELLECTUAL PROPERTY RIGHTS Patents, trademarks and licenses are significant to our business. We have patent protection on many of our products and processes, and we regularly apply for new patents on significant product and process developments. We have registered trademarks on many of our products. We also rely on unpatented proprietary know-how, continuing technological innovation and other trade secrets to develop and maintain our competitive position. In addition to our own patents, trade secrets and proprietary know-how, we license from third parties the right to use some of their intellectual property. Although we constantly seek to protect our patents, trademarks and other intellectual property, there can be no assurance that our precautions will provide meaningful protection against competitors or that the value of our trademarks will not be diluted. We routinely enter into confidentiality agreements to protect our trade secrets and proprietary know-how. We cannot assure you, however, that such agreements will not be breached, that they will provide meaningful protection, or that adequate remedies will be available to us if these confidentiality agreements are breached. On October 9, 2000, we changed our name to Pliant Corporation. We do not believe the name change has had a significant impact on our business. RAW MATERIALS Polyethylene, PVC, and other resins and additives constitute the major raw materials for our products. For the year ended December 31, 2001, resin costs comprised approximately 60% of our total manufacturing costs. The price of resins is a function of, among other things, manufacturing capacity, demand, and the price of crude oil and natural gas feedstocks. While temporary shortages of raw materials may occur from time to time, these items generally are considered to be readily available from numerous suppliers. Resin shortages or significant increases in the price of resin, however, could have a significant adverse effect on our business. Our major polyethylene resin suppliers are Chevron, Dow Chemical, Equistar and Exxon/Mobil. All resin is purchased at arm's length at prevailing market prices. Our major suppliers of PVC resin are OxyGeon and Shintech. EMPLOYEES As of February 28, 2002, we had approximately 3,500 employees, of which approximately 1,200 employees were subject to a total of 11 collective bargaining agreements that expire on various dates between March 1, 2002 and March 7, 2007. We are currently renegotiating the agreement that expired on March 1, 2002. We consider our current relations with our employees to be good. However, if major work disruptions were to occur, our business could be adversely affected. ENVIRONMENTAL MATTERS Our operations are subject to environmental laws in the United States and abroad, including those described below. Our capital and operating budgets include costs and expenses associated with complying with these laws, including the acquisition, maintenance and repair of pollution control equipment, and routine measures to prevent, contain and clean up spills of materials that occur in the ordinary course of our business. In addition, our production facilities require environmental permits that are subject to revocation, modification and renewal. We believe that we are in substantial compliance with environmental laws and our environmental permit requirements, and that the costs and expenses associated with such compliance are not material to our business. However, additional operating costs and capital expenditures could be incurred if, for example, additional or more stringent requirements relevant to our operations are promulgated. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), and similar state statutes, can impose liability for the entire cost of cleanup upon any of the current or former site owners or operators or parties who sent waste to the site, without regard to fault or the lawfulness of the original disposal activity. We were recently notified by the Georgia Environmental Protection Division (GAEPD) that a predecessor of the Company has been identified as a responsible party in a state Hazardous Site Response Act (HSRA) action. The state has conducted an emergency response to properly dispose of the wastes found at the site and to decommission the facility. After the completion of a comprehensive site investigation, the state will determine the scope and extent of remediation required. The state has identified approximately 2,000 responsible parties at this former solvent recovery operation. We do not expect our liability at this site to be material, based on the limited amount of waste that was sent to the site by our predecessor company and the large number of responsible parties. From time to time, contaminants from current or historical operations have been detected at some of our present and former sites, principally in connection with the removal or closure of underground storage tanks. The cost to remediate these sites has not been material, and we are not currently aware that any of our facility locations have material outstanding claims or obligations relating to contamination issues. In conjunction with the sale of a predecessor subsidiary's New Jersey polypropylene plant site in 1992, we agreed to indemnify the buyer for environmental losses of up to $5.0 million associated with conditions, if any, resulting from the predecessor subsidiary's operations at the plant site between January 1, 1988 and May 18, 1992. Pursuant to the sales agreement, the indemnity amount has been reduced by ten percent each year since May 12, 1997, and the indemnity expires altogether on May 8, 2002. Currently, we are not aware of any environmental issues at this site for which we will incur material liabilities under this indemnity. COMPETITION The markets in which we operate are highly competitive on the basis of service, product quality, product innovation and price. Small and medium-sized manufacturers that compete primarily in regional markets predominate film and flexible packaging markets, and there are relatively few large national manufacturers. In addition to competition from many smaller competitors, we face strong competition from a number of large film and flexible packaging companies, including AEP, Bemis, Pechiney, Printpack and Tredegar. Some of our competitors are substantially larger, are more diversified, and have greater financial, personnel and marketing resources than we have, and, therefore, may have certain competitive advantages. ITEM 2. PROPERTIES Our principal executive offices are located at 1515 Woodfield Road, Suite 600, Schaumburg, Illinois 60173. We also maintain a corporate office in Salt Lake City, Utah. We own most of the improved real property and other assets used in our operations. We lease all or part of six of the sites at which we have manufacturing operations. We also lease warehouse and office space at various locations. We consider the condition of our plants, warehouses and other properties and the other assets owned or leased by us to be generally good. Our principal manufacturing plants are listed below. Unless otherwise indicated, we own each of these properties. As part of our restructuring program announced in the fourth quarter of 2000, we closed our Dallas, Texas facility in December 2000 and sold it in March 2001. We closed our Birmingham, Alabama facility in the second quarter of 2001. In the third quarter of 2001, we closed the two facilities in Palmer, Massachusetts, acquired in the Uniplast acquisition. In the fourth quarter of 2001 we closed the facility in Columbus, Indiana, also acquired in the Uniplast acquisition. We believe that the capacities of our plants, after giving effect to these dispositions, are adequate to meet our current needs. We have an annual film production capacity of approximately one billion pounds. In 2001, we produced approximately 848 million pounds of films and flexible packaging products. SPECIALTY FILMS Bloomington, Indiana* Chippewa Falls, Wisconsin Dalton, Georgia Deerfield, Massachusetts Harrington, Delaware McAlester, Oklahoma Newport News, Virginia Odon, Indiana* Washington, Georgia Burrillville, Rhode Island DESIGN PRODUCTS Kent, Washington Langley, British Columbia* Macedon, New York+ Mexico City, Mexico (NESPA)* (two plants) Shelbyville, Indiana Porte Allegra, Brazil INDUSTRIAL FILMS Calhoun, Georgia Danville, Kentucky Lewisburg, Tennessee Orillia, Canada (two plants) Merced, California Phillipsburg, Germany Preston, Australia* Toronto, Canada - ------------------------- * Indicates a leased building. + Indicates a building that is approximately 95% owned and 5% leased. ITEM 3. LEGAL PROCEEDINGS We are involved in litigation from time to time in the ordinary course of our business. In our opinion, none of such litigation is material to our financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We did not submit any matters to a vote of security holders during the fourth quarter of 2001. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS At February 28, 2002, we had 596,556 shares of common stock outstanding and there were 41 holders of record of our common stock. There is no established trading market for the Company's common stock. On July 16, 2001, we issued 32,391 shares of our common stock to the selling shareholders of Uniplast Holdings, Inc. in connection with the acquisition of 100% of the outstanding shares of common stock of Uniplast. We continue to hold an additional 313 shares in accordance with a holdback arrangement pending resolution of outstanding issues relating to the value of certain Uniplast assets. See Item 1 "Business" for a description of the Uniplast acquisition. We believe that this issuance of our common stock was exempt from the registration requirements of the Securities Act of 1933, as amended pursuant to Section 4(2) thereof or Regulation D thereunder because this issuance did not involve a public offering or sale. No underwriters, brokers or finders were involved in this transaction. In connection with the acquisition of Uniplast, on July 16, 2001, we also issued 29,000 shares of our preferred stock and preferred stock warrants to purchase 29,436 shares of our common stock to our then existing holders of preferred stock and to an affiliate of a selling stockholder of Uniplast. 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 share of common stock. We received cash consideration of $29 million in the aggregate. We used the proceeds from this offering to pay a portion of the cost of the Uniplast acquisition. We believe that this issuance of our preferred stock and preferred stock warrants was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof or Regulation D thereunder because this issuance did not involve a public offering or sale. No underwriters, brokers or finders were involved in this transaction. Under our stockholders' agreement, we were required to make a preemptive rights offering of additional shares of preferred stock and preferred stock warrants to holders of our common stock as a result of the $29 million private placement of preferred stock and preferred stock warrants described above. In addition to the preemptive rights offering, we also offered preferred stock and preferred stock warrants to certain of our officers. On September 13, 2001, we completed the preemptive rights offering and the offering to our officers and sold 1,983 shares of preferred stock and preferred stock warrants to purchase approximately 2,012 shares of our common stock to certain holders of our common stock and certain of our officers. 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 received cash consideration of approximately $2.0 million in the aggregate. We used the proceeds from the preemptive rights offering and the offering to our officers to repay borrowings under our credit facility. We believe that this issuance of our preferred stock and preferred stock warrants was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof or Regulation D thereunder because this issuance did not involve a public offering or sale. No underwriters, brokers or finders were involved in this transaction. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data have been summarized from our consolidated financial statements and are qualified in their entirety by reference to, and should be read in conjunction with, such consolidated financial statements and the notes thereto included elsewhere in this report and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
YEARS ENDED DECEMBER 31, ---------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (DOLLARS IN MILLIONS) STATEMENT OF OPERATIONS DATA: Net sales...................................................... $840.4 $843.8 $813.7 $681.1 $468.9 Cost of sales.................................................. 665.1 696.7 655.7 561.6 410.8 ----- ----- ----- ----- ----- Gross profit................................................... 175.3 147.1 158.0 119.5 58.1 Total operating expenses(1).................................... 101.1 132.7 82.0 70.1 45.0 ----- ----- ---- ---- ---- Operating income............................................... 74.2 14.4 76.0 49.4 13.1 Interest expense............................................... (76.0) (68.5) (44.0) (37.5) (17.0) Other income (expense), net.................................... 6.5 0.3 0.4 (0.8) 0.7 ----- ----- ----- ----- ----- Income (loss) before income taxes, discontinued operations and extraordinary item ......................................... 4.7 (53.8) 32.4 11.1 (3.2) Income tax expense (benefit)................................... 6.8 (14.3) 14.1 8.6 (0.5) ----- ----- ----- ----- ----- Income (loss) before discontinued operations and extraordinary item (2.1) (39.5) 18.3 2.5 (2.7) Income from discontinued operations(2)......................... - - - 0.6 3.1 Gain on sale of discontinued operations(2)..................... - - - 5.2 - Extraordinary item(3).......................................... - (11.3) - - - ----- ----- ----- ----- ----- Net income (loss).............................................. $(2.1) $(50.8) $18.3 $8.3 $0.4 ====== ====== ===== ===== ===== OTHER FINANCIAL DATA: EBITDA(4)...................................................... $130.1 $76.2 $114.7 $80.6 $39.5 Cash flows from operating activities........................... 30.3 60.3 51.4 45.5 28.6 Cash flows from investing activities........................... (87.3) (65.6) (46.0) (314.8) (87.2) Cash flows from financing activities........................... 55.0 0.3 (16.7) 275.9 63.2 Depreciation and amortization.................................. 47.0 39.5 35.0 27.1 16.4 Plant closing costs, net(5).................................... (4.6) 19.4 2.5 4.9 9.3 Non-cash stock-based compensation expense...................... 7.0 2.6 0.8 - - Capital expenditures........................................... 56.4 65.6 35.7 52.1 17.9 Ratio of earnings to fixed charges(6).......................... 1.1x - 1.7x 1.3x - BALANCE SHEET DATA (AT PERIOD END): Cash and cash equivalents...................................... $4.8 $3.1 $9.1 $19.2 $12.4 Working capital................................................ 58.4 57.6 103.8 93.4 94.1 Total assets................................................... 851.7 785.0 769.0 734.3 400.4 Total debt..................................................... 713.3 687.4 510.4 524.9 250.5 Total liabilities.............................................. 903.0 885.9 675.4 662.5 337.4 Redeemable preferred stock(7).................................. 126.1 88.7 - - - Redeemable common stock........................................ 16.8 16.5 2.9 1.2 - Stockholders' equity (deficit)................................. (194.5) (206.0) 90.7 70.6 63.0
(1) Total operating expenses for 2000 include $10.8 million of costs related to the recapitalization and related transactions, $10.8 million of fees and expenses relating to our supply chain cost initiative, $19.6 million of plant closing costs, $7.1 million of costs related to the relocation of our corporate headquarters and a reduction in force, and $2.6 million of non-cash stock-based compensation expense. Total operating expenses for 2001 include $7.0 million of non-cash stock-based compensation expense, $3.0 million of plant closing costs, $4.0 million of costs related to the relocation of our corporate headquarters, $6.0 million of fees and expenses relating to our supply chain cost initiative, and a $3.0 million increase in depreciation expenses relating primarily to the purchase of a new computer system. (2) In 1998, we sold our entire interest in our foam products operations, which were operated exclusively in Europe. The financial position and results of operations of this separate business segment are reflected as discontinued operations for the applicable years presented. (3) In 2000, we refinanced most of our long-term debt and recorded an extraordinary loss to write-off unamortized deferred debt issuance costs. In addition, during 2000, we recorded an extraordinary loss related to our tender offer for our 9 1/8% senior subordinated notes due 2007. (4) EBITDA is defined as income before discontinued operations, extraordinary items, interest expense, income taxes, depreciation, amortization, plant closing costs and non-cash stock-based compensation expense. We believe EBITDA information enhances an investor's understanding of a company's ability to satisfy principal and interest obligations with respect to its indebtedness and to utilize cash for other purposes. In addition, EBITDA is used as a measure in the indenture in determining our compliance with certain covenants. However, the EBITDA as defined in the indenture for debt incurrence purposes is computed with additional adjustments not reflected in the above computation. EBITDA does not represent and should not be considered as an alternative to net income or cash flows from operating activities as determined by U.S. generally accepted accounting principles and may not be comparable to other similarly titled measures of other companies. In addition, there may be contractual, legal, economic or other reasons which may prevent us from satisfying principal and interest obligations with respect to our indebtedness and may require us to allocate funds for other purposes. (5) We incurred $3 million of plant closing costs in 2001 related primarily to the relocation of production lines acquired in connection with the Uniplast acquisition. Due to our decision not to proceed with our previously announced closure of our Harrington plant, approximately $7.6 million of the costs accrued for plant closures in 2000 was credited to plant closing costs in the statement of operations for 2001. (6) Earnings consist of income before income taxes plus fixed charges. Fixed charges consist of (i) interest, whether expensed or capitalized, (ii) amortization of debt issuance costs and (iii) an allocation of one-third of the rental expense from operating leases, which we consider to be a reasonable approximation of the interest factor of operating lease payments. In 2000 and 1997 earnings were insufficient to cover fixed charges by approximately $53.8 million, and $3.2 million, respectively. (7) The amount presented for 2000 includes proceeds of $100 million from the issuance of preferred stock, plus the accued and unpaid dividend of $8.4 million, less the unamortized value of preferred stock warrants of $18.2 million and unamortized issuance costs of $1.5 million. The amount presented for 2001 includes proceeds of $131.0 million from the issuance of preferred stock in 2000 and 2001, plus the accrued and unpaid dividend of $26.2 million less the unamortized value of preferred stock warrants of $29.6 million and unamortized issuance costs of $1.5 million. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of this section is to discuss and analyze our consolidated financial condition, liquidity and capital resources and results of operations. This analysis should be read in conjunction with the consolidated financial statements and notes which appear elsewhere in this report. This section contains certain "forward-looking statements" within the meaning of federal securities laws that involve risks and uncertainties, including statements regarding our plans, objectives, goals, strategies and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under "--Cautionary Statement for Forward-Looking Information" below and elsewhere in this report. GENERAL We derive our revenues, earnings and cash flows from the sale of film and flexible packaging products throughout the world. We manufacture these products at 26 facilities located in North America, Europe and Australia. Our net 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 market for film and flexible packaging products. Our most recent acquisitions include: o In July 2001, we acquired 100% of the outstanding stock of Uniplast Holdings Inc., a manufacturer of multi-layer packaging films, industrial films and cast-embossed films, with operations in the United States and Canada, for approximately $56.0 million. o In October 1999, we acquired the assets of KCL Corporation, including its plastic slider and zipper closure technology and its polyethylene bag making and printing facilities in Shelbyville, IN and Dallas, TX for approximately $11.5 million. In order to further benefit from these acquisitions, we ceased operations at certain less efficient manufacturing facilities and relocated equipment to more efficient facilities. In addition, we sold certain assets and restructured and consolidated our operations and administrative functions. As a result of these activities, we increased manufacturing efficiencies and product quality, reduced costs, and increased operating profitability. As part of this process, in 2001 and 2000 we undertook the following significant divestitures and closures of manufacturing facilities: o In 2001, in connection with the acquisition of Uniplast, we announced a plan to close three of Uniplast's six plants, move certain purchased assets to other locations and to terminate the sales, administration and technical employees of Uniplast. All three of these plants were closed in 2001 and we intend to sell all three plants. During 2001 we paid approximately $1.9 million in severance costs, which were part of the $3.0 million accrued for such costs in purchase accounting. In addition, we expensed approximately $3.0 million for the relocation of equipment and other closing costs, as part of plant closing costs, as reflected in the statement of operations for the year ended December 31, 2001. o In 2000, we announced our plan to close our Dallas, Texas, Birmingham, Alabama, and Harrington, Delaware facilities. On March 5, 2001, we sold our Dallas, Texas facility, which was formerly owned by KCL Corporation, to Tech Plastics and affiliated entities for approximately $1.4 million. We closed our Birmingham facility in the second quarter of 2001. In light of changes in customer demand and our acquisition of Uniplast, we reconsidered our plans to close the Harrington facility and instead downsized that facility. As part of our efforts to consolidate administrative functions and improve the efficiency of our operations, we began a company-wide supply chain cost initiative in the fourth quarter of 1999 with the assistance of A.T. Kearney, a management consulting firm. This initiative focused on improving efficiency through improvements to our procurement, logistics, planning and production processes. We began implementing specific improvement projects in March 2000, and all identified projects were fully implemented by the end of the second quarter of 2001. On May 31, 2000, we consummated the recapitalization pursuant to an agreement dated March 31, 2000 among us, our then existing stockholders and an affiliate of J.P. Morgan Partners, LLC. The recapitalization was valued at approximately $1.1 billion, including transaction costs. See Item 1. "Business" and Notes 1 and 6 to the consolidated financial statements included elsewhere in this report for a discussion of the transactions that occurred in connection with the recapitalization and the related financing thereof. Following the recapitalization, we implemented certain other cost saving initiatives during the fourth quarter of 2000. These included the following: o We announced the closure of certain facilities as discussed above and the relocation of our corporate headquarters from Salt Lake City, Utah to Schaumburg, Illinois. o We announced a company-wide reduction in workforce of approximately 50 salaried and nonsalaried positions. We incurred plant closing costs and additional administrative and other expenses due to the foregoing of approximately $26.7 million in the fourth quarter of 2000, of which approximately $10 million consisted of a cash charge. We realized annual savings of approximately $15 million from these cost initiatives. During 2001, we continued the transition of our corporate headquarters from Salt Lake City, Utah to Schaumburg, Illinois, and we made certain changes in our management. During the first quarter of 2001, we incurred non-cash stock-based compensation expense of approximately $7.0 million as a result of certain modifications to our senior management employment arrangements with two executive officers. See Note 10 to the consolidated financial statements included elsewhere in this report for a discussion of the components of this charge. CRITICAL ACCOUNTING POLICIES We have adopted accounting policies that require us to make estimates about the effect of matters that are uncertain and to make difficult, subjective and complex judgments. We believe that the following accounting policies are the most critical because they have the greatest impact on the presentation of our financial condition and results of operations. Accounts Receivable. We evaluate accounts receivable on a quarterly basis and review any significant customers with delinquent balances to determine future collectibility. We base our determinations on legal issues (such as bankruptcy status), past history, current financial and credit agency reports, and the experience of the credit representatives. We reserve accounts that we deem to be uncollectible in the quarter in which we make the determination. We maintain additional reserves based on our historical bad debt experience. Although there is a greater risk of uncollectibility in an economic downturn, we believe, based on past history and proven credit policies, that the net accounts receivable as of December 31, 2001 are of good quality. Retirement Plans. We value retirement plan assets and liabilities based on assumptions and valuations determined by an independent actuary. Although we review and concur with the actuary's assumptions, these assumptions are subject to the occurrence of future events, which are out of our control and could differ materially from the amounts currently reported. RESULTS OF OPERATIONS The following table sets forth net sales, expenses, and operating income, and such amounts as a percentage of net sales, for the years ended December 31, 2001, 2000 and 1999.
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------------------- 2001 2000 1999 --------------------- ---------------------- --------------------- (dollars in millions) Net sales $840.4 100.0% $843.8 100.0% $813.7 100.0% Cost of sales 665.1 79.2 696.7 82.6 655.7 80.6 ----- ---- ----- ---- ----- ---- Gross profit 175.3 20.8 147.1 17.4 158.0 19.4 Total operating expenses 101.1 12.0 132.7 15.7 82.0 10.1 ----- ---- ----- ---- ---- ---- Operating income $74.2 8.8% $14.4 1.7% $76.0 9.3% ===== ==== ===== === ===== ===
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2000 Net Sales. Net sales decreased by $3.4 million, or 0.4%, to $840.4 million for 2001 from $843.8 million for 2000. An increase in sales volume of 5.8% was more than offset by a decrease in selling prices of 5.9%. In the markets we serve, the average selling prices of our products generally increase or decrease as the price of resins, our primary raw material, increases or decreases. Average resin prices for the year ended December 31, 2001 were 13% lower than the average resin prices for the year ended December 31, 2000. The increase in sales volume for 2001 was primarily due to the Uniplast acquisition and increased sales volume of personal care film, medical film, agricultural film, printed film and stretch film. For 2001, we had total net trade sales volume of 819.8 million pounds, compared with 775.0 million pounds in 2000. Gross Profit. Gross profit increased by $28.2 million, or 19.2%, to $175.3 million for 2001 from $147.1 million for 2000. This increase was primarily due to increased margins and higher sales volumes discussed above. The margins increased principally due to decreases in raw material prices that were greater than the reduction in resulting selling prices to customers and changes in product mix. In addition, average conversion costs per pound at our plants were lower due to higher production and reductions in fixed conversion costs due to plant closures. Total Operating Expenses. Total operating expenses decreased by $31.6 million, or 23.8%, to $101.1 million for 2001 from $132.7 million for 2000. The decrease was due primarily to unusually high operating costs in 2000 and the reversal during 2001 of certain prior accruals for plant closure costs. Our operating costs were significantly higher in 2000 due primarily to five significant items: o $10.8 million of costs related to the recapitalization and related transactions; o $10.8 million of costs relating to our company-wide supply chain cost initiative; o $19.6 million of costs relating to plant closures; o $7.1 million of costs relating to the relocation of our corporate headquarters, the closure of our divisional office in Dallas, Texas and a company-wide reduction in force of approximately 50 positions; and o $2.6 million of non-cash compensation expense related to the vesting of performance-based stock options in connection with the recapitalization and related transactions. Due to our decision not to proceed with our previously announced closure of our Harrington plant, approximately $7.6 million of the costs accrued for plant closures in 2000 has been credited to plant closing costs in the statement of operations for the year ended December 31, 2001. As a percentage of net sales, operating expenses decreased to 12.0% for 2001, compared to 15.7% for 2000. Although operating expenses decreased significantly in 2001, operating expenses continued to represent a higher percentage of our net sales as compared to historical levels prior to 2000. This was due primarily to five significant items: o $7.0 million of non-cash stock-based compensation charges related to two executive officers during the first quarter of 2001; o $3.0 million of plant closing costs incurred during the fourth quarter of 2001, related primarily to the relocation of production lines as a result of the Uniplast acquisition; o $4.0 million of costs we continued to incur during the first quarter of 2001 in connection with the relocation of our corporate headquarters from Salt Lake City, Utah to Schaumburg, Illinois; o $6.0 million of fees and expenses we continued to incur in connection with our company-wide supply chain cost initiative, which was fully implemented by the end of the second quarter of 2001; and o $3.0 million increase in depreciation expenses due primarily to our purchase of a new computer system. The stock-based compensation charges for 2001 included a $1.0 million non-cash charge related to a severance agreement with an executive officer, which modified our right to repurchase shares of our common stock. In addition, we recorded $6.0 million of non-cash stock-based compensation expense in the first quarter of 2001 related to amendments to note agreements with another executive officer, which were entered into in connection with the sale of restricted stock in 1999 and 2000. Operating Income. Operating income increased by $59.8 million, or 413%, to $74.2 million for 2001 from $14.4 million for 2000, as a result of the factors discussed above. Interest Expense. Interest expense increased by $7.5 million, or 11%, to $76.0 million for 2001 from $68.5 million for 2000. This increase was principally a result of the recapitalization in May 2000. The increased interest expense attributable to increased borrowings was partially offset by a reduction in LIBOR which decreased the variable interest rate on our term debt. Income Tax Expense (Benefit). In 2001, our income tax expense was $6.8 million, compared to an income tax benefit of $14.2 million in 2000. These amounts represent effective tax rates of 143.8% and 26.5% for the years ended December 31, 2001 and 2000, respectively. The fluctuation in income tax expense (benefit) relates primarily to the fluctuation in our income (loss) before income taxes for the years presented. The fluctuation in the effective tax rate is principally the result of foreign tax rate differences and amortization of goodwill, which are relatively fixed and therefore have a greater impact on the effective rate in years in which our pre-tax income or loss is relatively low. Pretax income in 2001 was $4.7 million as compared to a pre-tax loss of $53.8 million in 2000. As of December 31, 2001, our deferred tax assets totaled approximately $46.0 million of which $30.6 million related to net operating loss carryforwards. Our deferred tax liabilities totaled $69.6 million. Future reversals of existing deferred tax liabilities are expected to generate sufficient taxable income to allow us to realize our deferred tax assets. Accordingly, no valuation allowance is required against our deferred tax assets. YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999 Net Sales. Net sales increased by $30.1 million, or 3.7%, to $843.8 million for 2000 from $813.7 million for 1999. The increase was the result of a 6.4% increase in our average selling prices partially offset by a 2.6% decrease in our sales volume. The average selling price increase was primarily due to the general pass-through to customers of increased resin costs. For 2000, we had total net trade sales volume of 775.0 million pounds, compared with 795.3 million pounds in 1999. This decrease in sales volume was primarily due to inventory de-stocking, product line rationalizations by our customers and insourcing by one of our most significant customers of a specific film product. Gross Profit. Gross profit decreased by $10.9 million, or 6.9%, to $147.1 million for 2000 from $158.0 million for 1999. This decrease was primarily due to reduced gross profit margins, which more than offset the increase in net sales for the period. The decrease in gross profit margins was due to a less favorable product mix and associated line start up and changeover inefficiencies. As a percentage of sales, raw material costs were 1.21% higher in 2000 than 1999. Gross margin was also impacted by cash conversion costs which were higher for 2000 than 1999 due to increases in direct labor, packaging, energy and indirect plant costs. Total Operating Expenses. Total operating expenses increased by $50.7 million, or 61.8%, to $132.7 million for 2000 from $82.0 million, for 1999. Most of the increase resulted from five significant items, which accounted for $47.4 million of the $50.7 million increase. Excluding these five significant items, operating expenses as a percentage of net sales were 10.1% for both 2000 and 1999. Costs relating to the recapitalization and related transactions constituted the first significant item affecting total operating expenses. We incurred $10.8 million of costs related to the transactions. These costs consisted of long-term incentive compensation expense of $5.0 million, $3.7 million of incentive compensation under a "stay bonus" plan, and transaction fees and expenses of $2.1 million. Under the provisions of our long-term incentive plans, certain incentive payments were due upon a "change of control" in our ownership. Both the "stay bonus" and long-term compensation were paid during 2000. The second significant item affecting total operating expenses was our company-wide supply chain cost initiative. We incurred fees and expenses during 2000 totaling $10.8 million in connection with this initiative. We began our supply chain initiative in the fourth quarter of 1999. The project focused on improving the efficiency of our operations and was fully implemented by the end of the second quarter of 2001. The third significant item affecting total operating expenses was plant closing costs. We incurred $19.6 million of closing costs in 2000 related to the closure of our Dallas, Texas facility and the announced closures of our Birmingham, Alabama and Harrington, Delaware facilities. This was partially offset by $0.2 million of reversals to previous accruals. We had plant closing costs of $2.5 million in 1999. The fourth significant item affecting total operating expenses was the announced closures of our headquarters facility in Salt Lake City, Utah, and our divisional office in Dallas, Texas, and a company-wide reduction in workforce of approximately 50 positions. These costs amounted to $7.1 million in 2000. The fifth significant item affecting total operating expenses was non-cash stock-based compensation expense. We incurred non-cash stock-based compensation expense of approximately $2.6 million related to outstanding options to purchase our common stock. As a result of the recapitalization and related transactions, the stock options fully vested and became exercisable upon the consummation of the transactions. The $2.6 million non-cash stock-based compensation expense recognizes the vesting of all performance-based stock options based on the estimated per share purchase price implied in the transactions. We incurred $0.8 million of non-cash stock-based compensation expense in 1999. Operating Income. Operating income decreased by $61.6 million, or 81.1%, to $14.4 million for 2000 from $76.0 million for 1999, as a result of the factors discussed above. Excluding the five significant items described above, operating income decreased $14.1 million, or 18.6%, to $61.9 million for 2000, from $76.0 million for 1999. Interest Expense. Interest expense increased by $24.5 million, or 55.7%, to $68.5 million for 2000 from $44.0 million for 1999. As a result of the recapitalization and related transactions, interest expense increased significantly compared to the prior year. Included in interest expense in 2000 is a $1.4 million amendment fee on our outstanding credit facilities. Income Tax Expense (Benefit). In 2000, our income tax (benefit) was ($14.3) million compared to income tax expense of $14.1 million in 1999. These amounts represent effective tax rates of 26.5% and 43.5%, respectively. The fluctuation in income tax expense (benefit) relates primarily to the fluctuation in our income (loss) from continuing operations between the years. The fluctuation in the effective tax rate is a result of legislated changes to the enacted tax rates in Germany as well as fluctuations in the taxable income of certain foreign operations and certain nondeductible costs related to our recapitalization. As of December 31, 2000, our deferred tax assets totaled approximately $45.5 million of which $27.4 million related to net operating loss carryforwards. Our deferred tax liabilities totaled $65.5 million. Future reversals of existing deferred tax liabilities are expected to generate sufficient taxable income to allow us to realize our deferred tax assets. Accordingly, no valuation allowance is required against our deferred tax assets. OPERATING SEGMENT REVIEW General Operating segments are our components for which separate financial information is available that is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and in assessing performance. For more information on our operating segments, see Note 14 to the consolidated financial statements included elsewhere in this report. Except as indicated, the segment profits and unallocated corporate expenses discussed below do not reflect plant closing costs and other unusual items. YEAR ENDED DECEMBER 31, 2001 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2000 SPECIALTY FILMS Net Sales The net sales of our specialty films segment decreased $5.2 million, or 1.3%, to $380.5 million in 2001 from $385.7 million in 2000. This decrease was principally due to a 3.6% decrease in selling prices, which was partially offset by a 2.4% increase in sales volumes. The increases in sales volume were primarily in the personal care, medical and agricultural film markets. Selling prices decreased primarily due to the effects of a decrease in resin prices. Segment Profit The segment profit of our specialty films segment increased $16.2 million, or 23.0%, to $86.7 million from $70.5 million in 2000. This increase was principally due to higher margins for our products and the increased sales volume discussed above. The margins increased principally due to decreases in raw material prices that were greater than the reduction in resulting selling prices to customers and changes in product mix. Segment Total Assets The specialty films segment total assets increased by $48.5 million, or 12.3%, in 2001 to $442.3 million from $393.8 million in 2000. The increase was primarily due to capital expenditures of approximately $31.7 million and $19.9 million of assets acquired in the Uniplast acquisition. In addition, the reversal of the plant closing accrual related to our Harrington, Delaware facility increased segment total assets in 2001. See Note 3 to the Consolidated Financial Statements. These increases were offset, in part, by 2001 depreciation. Capital expenditures related mainly to capacity expansion and to quality improvement projects, as well as ongoing capital improvements. DESIGN PRODUCTS Net Sales The net sales of our design products segment decreased $1.7 million, or 0.8%, to $213.7 million in 2001 from $215.4 million in 2000. This decrease was principally due to a 6.9% decrease in selling prices, which was partially offset by a 7.0% increase in sales volumes. Sales volume increased primarily due to increased sales in the printed film market. Selling prices decreased primarily due to a decrease in resin prices and a change in the product mix. Segment Profit The segment profit of our design products segment increased $9.4 million, or 35.2%, to $36.1 million from $26.7 million in 2000. This increase is principally due to a contract settlement payment from a potential customer during the second quarter of 2001. In addition, segment profits were favorably affected by the increase in sales volume, noted above, partially offset by lower margins due to a change in product mix. Segment Total Assets The design products segment total assets increased by $2.6 million, or 1.4%, in 2001 to $182.3 million from $179.7 million in 2000. The increase was due to 2001 capital expenditures of approximately $12.2 million. Depreciation and amortization expense offset these additions. INDUSTRIAL FILMS Net Sales The net sales of our industrial films segment increased $3.5 million, or 1.4%, to $246.1 million in 2001 from $242.6 million in 2000. This increase was principally due to a 9.4% increase in sales volumes, which was partially offset by a 7.2% decrease in selling prices. The sales volume increased due to the acquisition of the Uniplast business and increased sales from the stretch film segment. Selling prices decreased primarily due to the effects of a decrease in resin prices. Segment Profit The segment profit of our design products segment increased $8.1 million, or 22.6%, to $43.9 million in 2001 from $35.8 million in 2000. This increase was principally due to the increase in sales volume discussed above and a slight increase in margins. Segment Total Assets The industrial films segment total assets decreased by $2.0 million, or 1.5%, in 2001 to $126.9 million from $128.9 million in 2000. The decrease was primarily due to depreciation and amortization and the closure of our Birmingham facility, and was partially offset by capital expenditures of $7.3 million and the addition of $12.7 million of assets acquired in the Uniplast acquisition. UNALLOCATED CORPORATE EXPENSES Unallocated corporate expenses decreased by $5.2 million, or 5.6%, to $86.9 million for 2001 from $92.1 million for 2000. This decrease was primarily a result of lower costs incurred during 2001, compared to 2000, for office closing costs and our supply chain management initiative. Unallocated corporate expenses for 2001 reflect a $3.0 million increase in depreciation expense associated with a new computer system of $3.0 million discussed above. YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999 SPECIALTY FILMS Net Sales. The net sales of our specialty films segment decreased by $13.3 million, or 3.3%, in 2000 to $385.7 million from $399.0 million in 1999. Our specialty film volume decreased in 2000 by approximately 7.8% offset in part by a 4.9% increase in our average selling price. The volume decrease was due primarily to inventory de-stocking, product line rationalizations by our customers and insourcing by one of our most significant customers of a specific film product. The increase in sales prices was due to higher resin prices in 2000 compared to 1999. Segment Profit. The specialty films segment profit decreased by $15.3 million, or 17.8%, in 2000 to $70.5 million from $85.8 million in 1999. The decrease was due to lower sales volume and a less favorable product mix and associated line start up and changeover inefficiencies. As a percentage of sales, raw material costs were 2.1% higher in 2000 than 1999. In addition, cash conversion costs were higher for 2000 than 1999, due to increases in direct labor, packaging, energy and indirect plant costs. Segment Total Assets. The specialty films segment total assets decreased by $11.3 million, or 2.8%, in 2000 to $393.8 million from $405.1 million in 1999. The decrease was primarily due to the write-off of fixed assets due to the announced closing of our Harrington, Delaware facility, a significant decrease in accounts receivable, decreases in our inventory, and amortization of goodwill and intangible costs. These decreases were offset by capital expenditures of approximately $22.8 million offset, in part, by 2000 depreciation. Capital expenditures related mainly to capacity expansion and to quality improvement projects, as well as ongoing capital improvements. DESIGN PRODUCTS Net Sales. The design products segment net sales increased by $32.1 million, or 17.5%, in 2000 to $215.4 million from $183.3 million in 1999. This increase was primarily due to a 12.1% increase in sales volumes and a 4.8% increase in our selling prices. Approximately 6.7% of the increase in volumes relates to a full year of activity in plants that were purchased from KCL during 1999. The additional sales volume increase is due to additional production capacity added over the last two years in our design products production facilities. The increase in sales prices is due to higher resin prices in 2000 compared to 1999 and a slight change in our mix of products to higher priced products. Segment Profit. The design products segment profit increased by $5.3 million, or 24.8%, in 2000 to $26.7 million from $21.4 million in 1999. The increase was due to increased production efficiency as compared to 1999 and a slightly improved mix in the products we sold. Significant increases in production capacity have occurred over the past 3 years in the design segment. In 2000, we were better able to efficiently use those resources. In addition, due to the rapid increases in resin prices during 1999, we were unable to increase our selling prices as quickly as resin prices increased in 1999. We were better able to maintain these margins during 2000. Segment profit excludes nonrecurring plant closing costs. The 1999 plant closing costs of $2.5 million relates entirely to the design products operating segment. See Note 14 to the consolidated financial statements included in this report. Segment Total Assets. The design products segment total assets increased by $3.8 million, or 2.2%, in 2000 to $179.7 million from $175.9 million in 1999. The increase was due to capital expenditures in 2000 of approximately $18.6 million. Depreciation expense, amortization expense, and a reduction in cash balances offset these additions. The reduction in the cash balances during 2000 was due to our Mexican subsidiary loaning $3.8 million to us at December 31, 2000. This amount was repaid on January 4, 2001. We periodically borrow cash from our foreign subsidiaries on a short-term basis in order to increase our cash balances without incurring the costs of repatriating cash held by our foreign subsidiaries. Capital expenditures were for capacity expansion at our Mexican facility, new production lines in our Shelbyville, Indiana facility and other ongoing capital improvements. INDUSTRIAL FILMS Net Sales. The net sales of our industrial films segment increased by $11.2 million, or 4.8%, in 2000 to $242.6 million from $231.4 million in 1999. The increase in sales was due entirely to an increase in our average selling prices as our sales volumes decreased by 1.4% in 2000 as compared to 1999. The increase in sales prices is due to higher resin prices in 2000 compared to 1999 and a change in our mix of products to higher priced products. Segment Profit. The industrial films segment profit decreased by $0.2 million, or 0.6%, in 2000 to $35.8 million from $36.0 million in 1999. The decrease was due to a decrease in volume of 7.2 million pounds at our Birmingham facility which was offset by a change in our mix to a higher margin product and our ability to pass price increases to our customers more efficiently in 2000 compared to 1999. Segment Total Assets. The industrial films segment total assets increased by $2.4 million, or 1.9%, in 2000 to $128.9 million from $126.5 million in 1999. The increase was due to capital expenditures of approximately $11.2 million and increases in accounts receivable and inventories reduced by the write-off of fixed assets due to plant closing costs at our Birmingham, Alabama facility and depreciation. The capital expenditures were for ongoing capital improvements, as well as a new production line installed in one of our stretch film plants. UNALLOCATED CORPORATE EXPENSES Unallocated corporate expenses increased by $24.0 million, or 35.3%, to $92.1 million for 2000 from $68.1 million in 1999. Most of the increase resulted from three significant items which accounted for $20.5 million of the $24.0 million increase. Excluding these significant items, unallocated corporate expenses as a percentage of net sales were 8.5% in 2000 and 8.4% in 1999. The first significant item affecting unallocated corporate expenses was our company-wide supply chain cost initiative. We incurred fees and expenses during 2000 totaling $10.8 million in connection with this initiative. We began our supply chain initiative in the fourth quarter of 1999 with the assistance of a management consulting firm. The project focused on improving the efficiency of our operations. In March 2000, we began implementing specific improvement projects and all identified projects were fully implemented in 2001. The second significant item affecting unallocated corporate expenses was the announced closures of our headquarters facility in Salt Lake City, Utah, and our office in Dallas, Texas, and a company-wide reduction in workforce of approximately 50 positions. These costs amounted to $7.1 million in 2000. The third significant item affecting unallocated corporate expenses was non-cash stock-based compensation expense. We incurred non-cash stock-based compensation expense of approximately $2.6 million related to outstanding options to purchase our common stock. As a result of the recapitalization and related transactions, the stock options fully vested and became exercisable upon the consummation of the transactions. The $2.6 million non-cash stock-based compensation expense recognized the vesting of all performance-based stock options based on the estimated per share purchase price implied in the recapitalization and related transactions. We incurred $0.8 million of non-cash stock-based compensation expense in 1999. LIQUIDITY AND CAPITAL RESOURCES Upon closing of the recapitalization and related transactions, we issued 220,000 units consisting of $220.0 million principal amount of Old Notes and note warrants to purchase 18,532 shares of common stock. The units were issued at a discount of approximately $5.9 million and mature on June 1, 2010. The units were issued in a transaction exempt from the registration requirements under the Securities Act. On August 29, 2000, our registration statement relating to the exchange of the Old Notes for Notes registered under the Securities Act was declared effective by the SEC, and, as a result, the Old Notes and the note warrants became separated. We consummated an exchange offer and issued $220.0 million of registered Notes for all of the Old 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. Loans under the revolving credit facility and the tranche A facility bear interest, at our option, at either Adjusted LIBOR plus 3.25% or 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% 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. Adjusted LIBOR will at all times include statutory reserves. Upon closing of the offering of the units and the transactions, 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, and replaced the prior credit facility with amended and restated senior secured credit facilities with JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), Bankers Trust Company, The Bank of Nova Scotia and a syndicate of banking institutions. The 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, a $280.0 million senior secured tranche B facility and a $100.0 million revolving credit facility. Effective September 30, 2000, we entered into an amendment of our credit facilities. The amendment modified certain financial covenants contained in the 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 credit facilities as of September 30, 2000 and continued to be in compliance as of December 31, 2001. In connection with the amendment, we incurred an amendment fee of $1.4 million, which was included in interest expense for 2000. We also incurred $0.6 million of legal and administrative expenses during 2000 in connection with negotiating the amendment. On July 16, 2001, we acquired 100% of the outstanding stock of Uniplast Holdings Inc. for approximately $56.0 million, consisting of the assumption of approximately $40.3 million of debt and the issuance of shares of our common stock valued at approximately $15.7 million to the selling shareholders of Uniplast. At the closing of the acquisition, we refinanced approximately $37 million of assumed debt with the proceeds from the July 16, 2001 sale of $29 million of our preferred stock and preferred stock warrants 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. We also incurred $0.5 million of legal and administrative expenses in connection with negotiating the amendment. 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 holders of common stock and our employees. The following table sets forth the principal payments on the tranche A and B facilities, for the years 2002 through 2006, and thereafter through their maturity in 2008:
YEAR PRINCIPAL PAYMENT ---- ----------------- 2002.............. $16,400,000 2003.............. 30,800,000 2004.............. 55,300,000 2005.............. 62,800,000 2006.............. 35,300,000 Thereafter........ 263,200,000
In addition, we are required to make annual mandatory prepayments of the tranche A and B facilities under the credit facilities in an amount equal to 50% of excess cash flow within 90 days following the end of each year, commencing with the year ended December 31, 2000. As a part of the amendment dated September 30, 2000 the mandatory repayments were increased to 100% of excess cash flow, as defined, until a certain leverage ratio, as defined, was achieved. In addition, the tranche A and B facilities are subject to mandatory prepayments in an amount equal to (a) 100% of the net cash proceeds of equity and debt issuances by us or any of our subsidiaries and (b) 100% of the net cash proceeds of asset sales or other dispositions of property by us or any of our subsidiaries, in each case subject to certain exceptions. We incurred premium and consent fees, plus accrued and unpaid interest on the 9 1/8% senior subordinated notes in connection with the tender offer and consent solicitation, of $11.4 million in connection with the transactions. In addition, approximately $22.3 million, principally relating to financing fees and expenses associated with the transactions, has been capitalized and is being amortized over the terms of the Notes and the credit facilities. Our obligations under the credit facilities are guaranteed by substantially all of our domestic subsidiaries and secured by substantially all of our domestic assets, including our real and personal property, inventory, accounts receivable, intellectual property, and other intangibles. The credit facilities are also secured by a pledge of 65% of the capital stock of each of our foreign subsidiaries. The 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 credit facilities require us to maintain certain financial ratios. Net Cash Provided by Operating Activities Net cash provided by operating activities was $30.3 million for the year ended December 31, 2001, a decrease of $30 million, or 49.8% from $60.3 million in 2000. The decrease was primarily due to changes in working capital items. During the year ended December 31, 2000, our accounts payable increased $48.9 million, primarily due to extended terms with our suppliers. During the year ended December 31, 2001, accounts payable decreased $15.0 million principally due to the decrease in resin prices and early payments to obtain discounts. In addition, net results for 2001 improved over the net loss for 2000. Net Cash Used in Investing Activities Net cash used in investing activities was $87.3 million for the year ended December 31, 2001, compared to $65.6 million for the same period in 2000. Capital expenditures were $56.4 million and $65.6 million for the years ended December 31, 2001 and 2000, respectively. Capital expenditures in both periods were primarily for major expansion projects in all of our product lines, costs for upgrading our information systems, and for 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. In addition, the net cash cost of the Uniplast acquisition in 2001 was $38.8 million. Net Cash Provided by Financing Activities Net cash provided by financing activities was $55.0 million in 2001, as compared with $0.3 million in 2000. The activity in 2001 represents the net proceeds from the issuance of shares of preferred stock and preferred stock warrants for the Uniplast acquisition of approximately $31.0 million, net borrowings and repayments under our revolving credit facility for working capital purposes and to fund the Uniplast acquisition, and scheduled repayments of term debt. The 2000 activity represents the effect of the recapitalization and normal borrowings and repayments of or revolving credit facility and the revolving line of credit. Liquidity As of December 31, 2001, we had approximately $58.4 million of working capital and approximately $55.0 million available under our $100.0 million revolving credit facility. We had $5.3 million of letters of credit issued, which reduces the amount available for borrowings under our revolving credit facility. As of December 31, 2001, the debt under the credit facilities bore interest at a weighted average rate of approximately 8.4%. As of December 31, 2001, we had approximately $4.8 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 credit facilities. In 2001, 2000 and 1999, our foreign operations generated net income from continuing operations of approximately $7.5 million, $5.2 million and $8.3 million, respectively. We expect that our total capital expenditures will be approximately $42.0 million in each of 2002 and 2003. Of these amounts, we currently estimate that a minimum range of $13.0 million to $15.0 million of ongoing maintenance capital expenditures will be required each year. Interest expense and scheduled principal payments on our borrowings under the credit facilities and the Notes have significantly increased our future liquidity requirements since the 2000 recapitalization. We expect that cash flows from operating activities and available borrowings under the 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. The following table sets forth our total contractual cash obligations as of December 31, 2001 (in thousands):
PAYMENTS DUE BY PERIOD --------------------------------------------------------- LESS THAN CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS ----------------------- ----- ------ --------- --------- ------------- Long-term debt (including capital lease obligations) $713,323 $17,767 $86,769 $98,503 $510,284 Operating leases 38,963 8,009 12,366 9,412 9,176 ------ ----- ------ ----- ----- Total contractual cash obligations $752,286 $25,776 $99,135 $107,915 $519,460 ======= ====== ====== ======= =======
OTHER MATTERS Accounting Standards adopted in 2001 Effective January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138. In accordance with the statements, we recognize the fair value of derivatives as either assets or liabilities in the balance sheet. To the extent the derivatives qualify as a hedge, gains or losses associated with the effective portion are recorded as a component of other comprehensive income, while the ineffective portion is recognized in income. At the adoption of this pronouncement, we had one interest rate cap agreement, which had been entered into during the fourth quarter of 2000. As a result, the initial adoption of this pronouncement did not have a material effect on our consolidated financial statements. During 2001, we entered into four additional interest rate derivative agreements with financial institutions. We use our interest rate derivatives to manage interest rate risk associated with future interest payments on variable rate borrowings under our credit facilities. Our interest rate derivative agreements are considered cash flow hedges and consisted of the following as of December 31, 2001 (dollars in millions):
Notional Variable Fixed Maturity Type Amount Rate* Rate ** Dates - -------------------------- ------------ ---------------- --------------------- ------------------ Interest rate cap $128.0 LIBOR 10.00% 12/31/2003 Interest rate cap 30.0 LIBOR 7.25% 02/09/2004 Interest rate collar 40.0 LIBOR 4.15% - 7.25% 02/13/2004 Interest rate swap 60.0 LIBOR 5.40% 02/13/2004 Interest rate swap 50.0 LIBOR 4.32% 12/20/2004
* Three-month LIBOR, as defined; 1.88% as of December 31, 2001 ** Strike for caps; floor and strike for collar; fixed LIBOR for swap agreements. The fair value of our interest rate derivative agreements is reported on our consolidated balance sheet at December 31, 2001 as "Other Liabilities" of approximately $3.0 million, and as "Other Assets" of approximately $0.1 million. The effective portion of the changes in fair value of these instruments is reported as "Other Comprehensive Income." As the hedged contract matures, the gain or loss is recorded as interest expense in the consolidated statement of operations. We monitor the effectiveness of these contracts each quarter. Any changes in fair value of the ineffective portion of the instruments is reported as interest expense in the consolidated statement of operations. The ineffective portion for the years ended December 31, 2001 and 2000 were not material. 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 (file no. 333-65754), as amended, which was 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 elsewhere in this report, that may cause our actual results to differ materially from the forward-looking statements. Any forward-looking statements should be considered in light of these factors. Substantial Leverage We are highly leveraged, particularly in comparison to some of our competitors that are publicly owned. Our relatively high degree of leverage may materially limit or impair our ability to obtain additional financing in the future for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes. In addition, a substantial portion of our cash flow from operations must be dedicated to the payment of principal and interest on our indebtedness, and is not available for other purposes, including our operations, capital expenditures and future business opportunities. Certain of our borrowings, including borrowings under our credit facilities are at variable rates of interest, exposing us to the risk of increased interest rates. Our leveraged position and the covenants contained in our debt instruments may also limit our flexibility to adjust to changing market conditions and our ability to withstand competitive pressures, thus putting us at a competitive disadvantage. We may be vulnerable in a downturn in general economic conditions or in our business or be unable to carry out capital spending that is important to our growth and productivity improvement programs. Ability to Service Indebtedness Our ability to make scheduled payments or to refinance our debt obligations depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. These include fluctuations in interest rates, unscheduled plant shutdowns, increased operating costs, raw material and product prices and regulatory developments. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness. We cannot assure you that any such alternative measures would be successful or would permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our credit facilities and the indenture restrict our ability to dispose of assets and use the proceeds therefrom. We may not be able to consummate such dispositions or to obtain the proceeds which we could realize therefrom or that such proceeds would be adequate to meet any debt service obligations then due. Interest Rate Fluctuations Certain of our borrowings, including borrowings under our credit facilities, are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income would decrease. Our estimated annual debt service in 2002 is approximately $81.8 million, consisting of a $17.8 million of scheduled mandatory principal payments and approximately $64.0 million of interest payments. An increase of 1.0% in the interest rates payable on our variable rate indebtedness would increase our 2002 estimated annual debt service requirements by approximately $3.5 million, after accounting for the effect of our interest rate hedge agreement. Accordingly, an increase in interest rates from current levels could cause our annual debt service obligations to increase significantly. However, we have five interest rate derivative instruments that reduce the impact of increases in our variable rate indebtedness. (See Quantitative and Qualitative Disclosures About Market Risk above and Note 6 to the Consolidated Financial Statements). Default on Obligations If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness (including covenants in the indenture and our credit facilities), we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under the credit facilities could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. For the third quarter ended September 30, 2000, we entered into an amendment to our credit facilities to avoid being in default under our leverage ratio covenant. If our operating performance declines, we may in the future need to obtain waivers from the required lenders under our credit facilities to avoid being in default. If we breach our covenants under the credit facilities and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under the credit facilities and the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation. Exposure to Fluctuations in Resin Prices and Dependence on Resin Supplies We use large quantities of polyethylene, PVC and other resins in manufacturing our products. For the year ended December 31, 2001, resin costs comprised approximately 60% of our total manufacturing costs. Significant increases in the price of resins would increase our costs, reduce our operating margins and impair our ability to service our debt unless we were able to pass all of the increase on to our customers. The price of resins is a function of, among other things, manufacturing capacity, demand, and the price of crude oil and natural gas feedstocks. Since the resins used by us are produced from petroleum and natural gas, the instability in the world markets for petroleum and natural gas could adversely affect the prices of our raw materials and their general availability. We may not be able to pass such increased costs on to customers. In addition, we rely on certain key suppliers of resin for most of our resin supply, some of which resin has characteristics proprietary to the supplier. The loss of a key source of supply, our inability to obtain resin with desired proprietary characteristics, or a delay in shipments could adversely affect our revenues and profitability and force us to purchase resin in the open market at higher prices. We may not be able to make such open market purchases at prices that would allow us to remain competitive. Competition We face significant competition in the markets in which we operate. Competition in our industry is based upon a number of considerations, such as service, product quality, product innovation and price. In addition to competition from many smaller competitors, we face strong competition from a number of large film and flexible packaging companies, including AEP, Bemis, Pechiney, Printpack and Tredegar. Some of our competitors are substantially larger, more diversified and have greater financial, personnel and marketing resources than we have and therefore may have certain competitive advantages. Although we have broad product lines and are continually developing our products and printing capabilities, our current customers may not continue to purchase our products, which could lead to reduced revenues and loss of market share. Customer Relationships We are dependent upon a limited number of large customers with substantial purchasing power for a majority of our sales, many of which are reducing their number of suppliers. Our top ten customers accounted for approximately 34% of our net sales in 2001. In particular, Kimberly-Clark accounted for approximately 13% of our 2001 consolidated net sales. The loss of Kimberly-Clark or one or more other major customers, or a material reduction in sales to Kimberly-Clark or these other customers, would have a material adverse effect on our results of operations and on our ability to service our indebtedness. Risks Associated with Intellectual Property Rights Patents, trademarks and licenses are significant to our business. We also rely on unpatented proprietary know-how, continuing technological innovation and other trade secrets to develop and maintain our competitive position. In addition to our own patents, trade secrets and proprietary know-how, we license from third parties the right to use some of their intellectual property. Although we constantly seek to protect our patents, trademarks and other intellectual property, there can be no assurance that our precautions will provide meaningful protection against competitors or that the value of our trademarks will not be diluted. We routinely enter into confidentiality agreements to protect our trade secrets and proprietary know-how. We cannot assure you, however, that such agreements will not be breached, that they will provide meaningful protection or that adequate remedies will be available to us if these confidentiality agreements are breached. Risks Associated with Future Acquisitions We have completed a number of acquisitions, and as part of our strategy, we expect to continue to make acquisitions as opportunities arise. There can be no assurance that our efforts to integrate any businesses acquired in the future will result in increased sales or profits. Difficulties encountered in any transition and integration process for newly acquired companies could have a material adverse effect on our financial condition, results of operations or cash flows. Risks Associated with International Operations We operate facilities and sell products in several countries outside the United States. Operations outside the U.S. include plants and sales offices in Mexico, Canada, Germany, Australia and Brazil. As a result, we are subject to risks associated with selling and operating in foreign countries. These risks include devaluations and fluctuations in currency exchange rates, unstable political conditions, imposition of limitations on conversion of foreign currencies into U.S. dollars and remittance of dividends and other payments by foreign subsidiaries. The imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries, hyperinflation in certain foreign countries, and imposition or increase of investment and other restrictions by foreign governments could also have a negative effect on our business and profitability. Risks Associated with Labor Relations As of February 28, 2002, we had approximately 3,500 employees, of which approximately 1,200 employees were subject to a total of 11 collective bargaining agreements that expire on various dates between March 1, 2002 and March 7, 2007. We are currently renegotiating the agreement that expired on March 1, 2002. We have had one labor strike in our history, which occurred at our Chippewa Falls, Wisconsin plant in March 2000 and lasted approximately two weeks. In October 2001, we entered into a five year agreement with the union representing the approximately 150 employees at our Chippewa Falls, Wisconsin manufacturing plant. We consider our current relations with our employees to be good. However, if major work disruptions were to occur, our business could be adversely affected by, for instance, a loss of revenues, increased costs or reduced profitability. Risks Associated with Environmental Matters Complying with existing and future environmental laws and regulations that affect our business could impose material costs and liabilities on us. Our manufacturing operations are subject to certain federal, state, local and foreign laws, regulations, rules and ordinances relating to pollution, the protection of the environment and the generation, storage, handling, transportation, treatment, disposal and remediation of hazardous substances and waste materials. In the ordinary course of business, we are subject to periodic environmental inspections and monitoring by governmental enforcement authorities. We could incur substantial costs, including fines and civil or criminal sanctions as a result of actual or alleged violations of environmental laws. In addition, our production facilities require environmental permits that are subject to revocation, modification and renewal. Violations of environmental permits can also result in substantial fines and civil or criminal sanctions. We believe we are in substantial compliance with applicable environmental laws and environmental permits. The ultimate costs under environmental laws and the timing of such costs, however, are difficult to predict and potentially significant expenditures could be required in order to comply with environmental laws that may be adopted or imposed in the future. Other Uncertainties In addition to the factors described above, we face a number of uncertainties, including: (1) general economic and business conditions, particularly an economic downturn; (2) industry trends; (3) changes in demand for our products; (4) potential legislation and regulatory changes; (5) new technologies; (6) changes in distribution channels or competitive conditions in the markets or countries where we operate; and (7) changes in our business strategy or development plans. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to various interest rate and resin price risks that arise in the normal course of business. We enter into interest rate collar and swap agreements to manage interest rate market risks and commodity collar agreements to manage resin market risks. However, significant increases in interest rates or the price of resins could adversely affect our operating margins, results of operations and ability to service our indebtedness. We finance our operations with borrowings comprised primarily of variable rate indebtedness. Market risk arises from changes in interest rates. An increase of 1% in interest rates payable on our variable rate indebtedness would increase our annual interest expense by approximately $5.0 million. In December 2000, we purchased an interest rate cap agreement to reduce the impact of changes in interest rates on our floating-rate, long-term debt. The agreement has a notional amount of $128.0 million and expires on December 31, 2003. The agreement entitles us to receive amounts from the counterparty (a bank) if the three-month LIBOR interest rate, as defined in the agreement, exceeds 10%. As of December 31, 2001, the defined three-month LIBOR interest rate was 1.88%. During the year ended December 31, 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 floating rate debt. See Note 6 to the consolidated financial statements. The fair value of our interest rate derivative agreements is reported on our consolidated balance sheet at December 31, 2001 in "Other Liabilities" at approximately $3.0 million and in "Other Assets" at approximately $0.1 million. Our raw material costs are comprised primarily of resins. Our resin costs comprised approximately 60% of our total manufacturing costs in 2001. Market risk arises from changes in resin prices. Although the average selling prices of our products generally increase or decrease as the price of resins increases or decreases, the impact of a change in resin prices is more immediately reflected in our raw material costs than in our selling prices. From time to time we enter into commodity collar agreements to manage resin market risks. At December 31, 2001, we did not have any commodity collar agreements outstanding. Fluctuations in exchange rates may also adversely affect our financial results. The functional currencies for our foreign subsidiaries are the local currency. As a result, certain of our assets and liabilities, including certain bank accounts, accounts receivable and accounts payable, exist in non US dollar-denominated currencies, which are sensitive to foreign currency exchange rate fluctuations. We enter into certain transactions denominated in foreign currencies but, because of the relatively small size of each individual currency exposure, we do not employ hedging techniques designed to mitigate foreign currency exposures. Gains and losses from these transactions as of December 31, 2001 have been immaterial and are reflected in the results of operations. We are exposed to credit losses in the event of nonperformance by the counterparty to a financial instrument to which we are a party. We anticipate, however, that each of the counterparties to the financial instruments to which we are a party will be able to fully satisfy its obligations under the contract. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements and supplementary data required by this Item 8 are set forth at the pages indicated in Item 14(a) below. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES During 2001, 2000 and 1999 and through the date of this report, the Company's independent public accountants have been the accounting firm of Arthur Andersen LLP. There have been no disagreements between the Company and Arthur Andersen LLP on accounting and financial disclosure matters. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain information about our executive officers and directors is presented in the table below. Pursuant to the stockholders' agreement among us, the holders of our common stock and the holders of warrants to purchase our common stock, our board of directors currently consists of seven members, four of whom are designated by our institutional common stockholders and warrantholders, two of whom are designated by the The Christena Karen H. Durham Trust, or the Trust, and one of whom is appointed by our board of directors and must be a member of our senior management.
NAME AGE POSITION - ---- --- -------- Richard P. Durham........................... 37 Chairman of the Board and Chief Executive Officer Jack E. Knott II............................ 47 President and Chief Operating Officer and Director Brian E. Johnson............................ 46 Executive Vice President and Chief Financial Officer Stanley B. Bikulege......................... 38 Executive Vice President Operations Douglas W. Bengtson......................... 54 Executive Vice President Sales Donald J. Hofmann, Jr....................... 44 Director Timothy J. Walsh............................ 38 Director John M. B. O'Connor......................... 47 Director Edward A. Lapekas........................... 58 Director Albert (Pat) MacMillan...................... 58 Director
RICHARD P. DURHAM became our Chief Executive Officer in March 1997 and became the Chairman of our board of directors on May 31, 2000. From March 1997 through March 2001, Mr. Durham also served as our President. Mr. Durham has been with various Huntsman affiliates since 1987. Prior to becoming our President, Mr. Durham served as Co-President and Chief Financial Officer of Huntsman Corporation, where, in addition to being responsible for finance, tax, legal, human resources, public affairs, purchasing, research and development, and information systems, he also was responsible for our operations. Mr. Durham is also a director of Huntsman Corporation. Mr. Durham is a graduate of The Wharton School of Business at the University of Pennsylvania. Pursuant to the stockholders' agreement, Mr. Durham is one of the Trust's designees to the board. JACK E. KNOTT II became our President in March 2001 and has been our Chief Operating Officer since September 1, 1997. From September 1997 through March 2001, Mr. Knott also served as our Executive Vice President. Prior to joining us, Mr. Knott was a member of the board of directors of Rexene Corporation and held the position of Executive Vice President of Rexene Corporation and President of Rexene Products. Mr. Knott served in various capacities at Rexene from 1985 to 1997, including Executive Vice President-Sales and Market Development, Executive Vice President, and President of CT Film, a division of Rexene Corporation. Prior to joining Rexene Corporation, Mr. Knott worked for American National Can. Mr. Knott received a B.S. degree in Chemical Engineering and an M.B.A. degree from the University of Wisconsin. Mr. Knott also holds nine patents. Pursuant to the stockholders' agreement, Mr. Knott is the board of directors' appointee to the board from our senior management. BRIAN E. JOHNSON became our Executive Vice President and Chief Financial Officer on July 17, 2001. Mr. Johnson joined Pliant in April 2001 as Senior Vice President and Chief Financial Officer. Prior to joining us, Mr. Johnson was Vice President and Chief Financial Officer of Geneer Corporation. His former positions include Executive Vice President at Lawson Mardon Packaging and Vice President and General Manager of Sengewald USA Inc. Mr. Johnson received a B.S. degree in Finance from the University of Illinois, and a Master in Management from Kellogg School of Business at Northwestern University. STANLEY B. BIKULEGE became our Executive Vice President Operations on July 17, 2001. Mr. Bikulege's prior positions with Pliant include Senior Vice President and General Manager, Industrial Films Division; Vice President, Stretch Films; General Manager-Castflex; Managing Director-Europe; Managing Director PVC Films-Europe; Director of Manufacturing; and Plant Manager. Prior to joining us in 1992, Mr. Bikulege held numerous positions in Goodyear Tire and Rubber Company's Films Division. Mr. Bikulege received a B.S. degree in Chemical Engineering from Youngstown State University and an M.B.A. degree from Georgia State University. DOUGLAS W. BENGTSON became our Executive Vice President Sales on July 17, 2001. Mr. Bengtson joined Pliant in September 1997 as Senior Vice President and General Manager, Performance Films Division. Prior to joining us, Mr. Bengtson was Vice President of Sales and Marketing for Food Packaging at American National Can. His former positions include Vice President, Sales and Marketing at CT Film and Vice President, Sales and Marketing, Rexene Products Division. Mr. Bengtson received a B.S. degree in Business/Marketing from Colorado State University. DONALD J. HOFMANN, JR. became one of our directors on May 31, 2000. Since 1992, Mr. Hofmann has been a Partner of J.P. Morgan Partners, LLC (formerly, Chase Capital Partners), a global private equity organization with over $20.0 billion under management. J.P. Morgan Partners, LLC provides equity and mezzanine debt financing for management buyouts and recapitalizations, growth equity and capital. Mr. Hofmann is also a director of Advanced Accessory Systems, LLC, Berry Plastics Corporation, BPC Holding Corporation, the parent company of Berry Plastics Corporation, and United Auto Group, Inc. Mr. Hofmann received a B.A. degree from Hofstra University and an M.B.A. degree from the Harvard Business School. Pursuant to the stockholders' agreement, Mr. Hofmann is one of the designees to the board by our institutional common stockholders and warrantholders. TIMOTHY J. WALSH became one of our directors on May 31, 2000. Since 1999, Mr. Walsh has been a Partner of J.P. Morgan Partners, LLC (formerly, Chase Capital Partners), a global private equity organization with over $20.0 billion under management. J.P. Morgan Partners, LLC provides equity and mezzanine debt financing for management buyouts and recapitalizations, growth equity and capital. From 1993 to 1999, Mr. Walsh held various positions with J.P. Morgan Partners, LLC in Europe and North America. Prior to 1993, he was a Vice President of J.P. Morgan Chase & Co. (formerly, The Chase Manhattan Corporation). Mr. Walsh is also a director of Better Minerals & Aggregates Company. Mr. Walsh received a B.S. degree from Trinity College and an M.B.A. from the University of Chicago. Pursuant to the stockholders' agreement, Mr. Walsh is one of the designees to the board by our institutional common stockholders and warrantholders. JOHN M. B. O'CONNOR became one of our directors on May 31, 2000. Mr. O'Connor joined J.P. Morgan Partners (formerly, Chase Capital Partners) in 1995 and is an Executive Partner. J.P. Morgan Partners, LLC is a global private equity organization with over $20.0 billion under management. J.P. Morgan Partners, LLC provides equity and mezzanine debt financing for management buyouts and recapitalizations, growth equity and capital. Prior to 1995, Mr. O'Connor was a Managing Director of Chemical Securities, Inc. Mr. O'Connor received his B.A. degree from Tulane University and an M.B.A. degree from the Columbia University Graduate School of Business. Pursuant to the stockholders' agreement, Mr. O'Connor is one of the designees to the board by our institutional common stockholders and warrantholders. EDWARD A. LAPEKAS became one of our directors on December 19, 2001. Mr. Lapekas was Executive Chairman of Packtion Corporation, an e-commerce venture, from October 2000 until June 2001. From May 1996 until July 2000, Mr. Lapekas was employed by American National Can Group, Inc., last serving as Chairman and Chief Executive officer. Prior to that, Mr. Lapekas served as Deputy Chairman and Chief Operating Officer of Schmalbach-Lubeca AG. From 1971 until 1991, Mr. Lapekas was employed by Continental Can Company, where he served in various strategy, planning, operating and marketing capacities. He received a B.A. from Albion College and an M.B.A. from Wayne State University. Pursuant to the stockholders' agreement, Mr. Lapekas is one of the Trust's designees to the board. ALBERT (PAT) MACMILLAN became one of our directors on December 19, 2001. Mr. MacMillan is the founder and CEO of Team Resources, a consulting firm with offices in the United States, Venezuela, Peru, Chile, and Mexico. Founded in 1980, Team Resources provides client services in the areas of strategy, building team-based organizations, and designing leadership development strategies. He also serves on the Board of Directors for Unum/Provident and the Metokote Corporation, as well as several foundations and non-profit organizations. He received a B.A. in Business and an M.B.A. from the University of Washington. Pursuant to the stockholders' agreement, Mr. MacMillan is one of the designees to the board by our institutional common stockholders and warrantholders. ITEM 11. EXECUTIVE COMPENSATION The following summary compensation table sets forth information about compensation earned in the fiscal years ended December 31, 2001, 2000 and 1999 by the chief executive officer and the five other executive officers of Pliant (as of the end of the last fiscal year) (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION(1) LONG TERM COMPENSATION(2) ------------------- ---------------------- SECURITIES UNDERLYING LTIP ALL OTHER SALARY BONUS OPTIONS/SARS PAYOUTS COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($) ($) - --------------------------- ---- ------- ------- ------------ ------- ------------- Richard P. Durham.......................... 2001 500,000 381,024 - - 5,100(3) Chairman and Chief Executive Officer 2000 500,000 245,568 - - 136,350(4) 1999 450,000 327,325 - - 29,800(5) Jack E. Knott II........................... 2001 337,500 163,428 - - 5,100(3) President and Chief Operating Officer 2000 316,667 104,274 - - 1,031,469(6) 1999 285,421 140,622 - - 4,800(7) Brian E. Johnson........................... 2001 179,333 44,470 5,000 - 5,100(3) Executive Vice President 2000 - - - - - and Chief Financial Officer(12) 1999 - - - - - Stanley B. Bikulege........................ 2001 203,125 66,245 250 - 56,931(8) Executive Vice President Operations 2000 182,250 60,304 1,030 298,521 52,600(9) 1999 160,000 85,056 - - 4,800(7) Douglas W. Bengtson........................ 2001 204,583 66,245 250 - 5,100(3) Executive Vice President Sales 2000 190,000 121,293 1,030 517,122 52,600(9) 1999 182,500 163,352 - - 4,800(7) Dale A. Brockman........................... 2001 194,167 47,945 250 - 3,741(10) Executive Vice President Technical 2000 181,667 41,458 1,030 212,961 52,600(9) and Marketing(13) 1999 164,293 47,945 - - 4,072(11)
(1) Perquisites and other personnel benefits, securities or property, in the aggregate, are less than either $50,000 or 10% of the total annual salary and bonus reported for the applicable Named Executive Officer. (2) At December 31, 2001, the number of shares of restricted stock held by Messrs. Durham and Knott were 14,500 and 7,750 respectively. The value of such shares of restricted stock at December 31, 2001 has not been reported as compensation because it did not exceed the consideration paid by the applicable Named Executive Officer. See "-- Stock Options and Restricted Stock." (3) Consists of $5,100 for employer's 401(k) contributions. (4) Consists of (a) a $125,000 retention bonus, which is also discussed in "Item 13. Certain Relationships and Related Transactions - Transactions with Management", (b) employer's 401(k) contributions of $5,100 and (c) a $6,250 director's fee, which is also discussed in "-- Compensation of Directors." (5) Consists of (a) a $25,000 director's fee, which is also discussed in "-- Compensation of Directors" and (b) employer's 401(k) contributions of $4,800. (6) Consists of (a) $836,785 gross-up payment of taxes payable for the exercise of options in connection with the recapitalization, (b) relocation expense reimbursement of $108,334, (c) a $81,250 retention bonus, which is also discussed in "Item 13. Certain Relationships and Related Transactions - Transactions with Management" and (d) employer's 401(k) contributions of $5,100. (7) Consists of employer's 401(k) contributions of $4,800. (8) Consists of employer's 401(k) contributions of $5,100 and relocation expense reimbursement of $51,831. (9) Consists of a $47,500 retention bonus and employer's 401(k) contributions of $5,100. (10) Consists of employer's 401(k) contributions of $3,741. (11) Consists of employer's 401(k) contributions of $4,072. (12) Mr. Johnson joined Pliant in April 2001. (13) Mr. Brockman resigned as Executive Vice President Technical and Marketing on March 10, 2002. STOCK OPTIONS AND RESTRICTED STOCK During 1998, our board of directors adopted the 1998 Pliant Corporation Stock Option Plan. The 1998 plan authorized grants of nonqualified stock options covering up to 41,956 shares of our nonvoting Class C common stock. During 1998, we granted options covering a total of 41,956 shares under the 1998 plan. Options covering 5,244 shares were subsequently canceled. In addition, as described below, outstanding options covering 26,223 shares under the 1998 plan were canceled on February 22, 1999 in connection with the sale of 26,223 shares of Class C common stock to certain members of our senior management. Approximately one-half of these shares were "rolled-over" as common stock in connection with the recapitalization. Options covering a total of 8,902 shares issued under the 1998 plan were "rolled-over" by Mr. Knott in connection with the recapitalization. Pursuant to the recapitalization, we adopted a 2000 stock-based incentive compensation plan. The 2000 plan became effective as of the consummation of the recapitalization and authorizes grants to our management employees as designated by the compensation committee of our board of directors of nonqualified stock options or restricted stock covering 51,010 shares of our common stock. As of December 31, 2001, we had granted restricted stock covering 22,875 shares of common stock and options to acquire 34,837 shares of common stock under the 2000 plan. The following table provides information related to options to purchase shares of our common stock granted to the Named Executive Officers during the last fiscal year pursuant to the 2000 Plan. We have never granted any freestanding stock appreciation rights. OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL INDIVIDUAL GRANTS RATES OF STOCK PRICE APPRECIATION FOR OPTION TERMS(3)(4) - --------------------------------------------------------------------------------------- ------------------------- NUMBER OF % OF TOTAL SECURITIES OPTIONS/SARS UNDERLYING GRANTED TO EXERCISE OR OPTIONS/SARS EMPLOYEES IN BASE PRICE(1) EXPIRATION NAME GRANTED (#) FISCAL YEAR ($/SH) DATE(2) 5%($) 10%($) - ---- ----------- ------------ --- ------- ----------- ----- ------ Brian E. Johnson 5,000 40.5 483.13 April 16, 2011 1,519,189 3,849,924 Stanley B. Bikulege 250 2.0 483.13 May 29, 2011 75,959 192,496 Douglas W. Bengtson 250 2.0 483.13 June 18, 2011 75,959 192,496 Dale A. Brockman 250 2.0 483.13 May 11, 2011 75,959 192,496
- ------------------------------ (1) Fair market value on date of grant. The fair market value was assumed to be the price per share paid in the recapitalization. (2) Subject to earlier termination under certain circumstances. (3) Potential realizable value is calculated based on an assumption that the price of our common stock appreciates at the annual rates shown (5% and 10%), compounded annually, from the date of grant of the option until the end of the option term. The value is net of the exercise price but is not adjusted for the taxes that would be due upon exercise. The 5% and 10% assumed rates of appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent our estimate or projection of future stock values. Actual gains, if any, upon future exercise of any of these options will depend upon the actual value of our common stock. (4) All of the options granted to the Named Executive Officers during 2001 are subject to vesting requirements. All of the options granted to each Named Executive Officer vest in equal increments over a 5-year period beginning December 31, 2001, provided that we have achieved a specified market value of equity applicable to such increment. Our market value of equity is determined pursuant to a formula based upon our adjusted earnings. The following table provides information as to the value of options held by each of the Named Executive Officers at the end of 2001, measured in terms of the fair market value of our common stock on December 31, 2001 ($483.13 per share, which was the per share price paid in the recapitalization). None of the Named Executive Officers exercised any options under the 1998 plan or the 2000 plan during the last fiscal year. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
VALUE OF UNEXERCISED SHARES NUMBER OF SECURITIES UNDERLYING IN-THE-MONEY OPTIONS/SARS AT ACQUIRED ON VALUE UNEXERCISED OPTIONS/SARS AT FY-END FY-END ($) NAME EXERCISED (#) REALIZED (#) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE ---- ------------ -------- ---------------------------------- ---------------------------- Jack E. Knott II - - 8,902/0 3,410,623/0 Brian E. Johnson - - 1,000/4,000 0/0 Stanley B. Bikulege - - 393/887 0/0 Douglas W. Bengtson - - 393/887 0/0 Dale A. Brockman - - 393/887 0/0
The options or restricted common stock granted pursuant to the 2000 plan vest as follows: (1) one-sixth were "time-vested" options or shares, which vested on January 1, 2001, so long as the recipient was still our employee on such date, and (2) the remainder are "performance vested" options or shares, which vest in equal increments over a five-year period commencing on December 31, 2001 as follows: (a) vesting in full, if 100% or more of the applicable target market value of equity is achieved as of the end of the applicable calendar year and (b) partial vesting if more than 90% of the applicable target market value of equity is achieved as of the end of the applicable calendar year. Moreover, all performance vested options or shares not previously vested in accordance with the preceding sentence will vest automatically in full on December 31, 2009 so long as the recipient is still our employee on such date. Outstanding options under the 1998 plan were subject to time and performance vesting requirements. One-half of the outstanding options were time vested options, which became exercisable in equal increments over a five-year period commencing January 1, 1998, and the remaining one-half of the outstanding options were performance vested options, which vested in equal increments over a five-year period commencing January 1, 1998, provided we had achieved a specific market value of equity applicable to such increment. For purposes of the performance vested options, our adjusted market value of equity was determined pursuant to a formula based upon our adjusted earnings. The option agreement also provided for accelerated vesting in the event of a change of control. The recapitalization and related transactions accelerated the vesting of these options, and the shares underlying these options were part of the management equity rollover or the investor share purchase. On February 22, 1999, 26,223 outstanding options under the 1998 plan were canceled in connection with the sale of 26,223 shares of Class C common stock to certain members of our senior management. The 26,223 shares were purchased by certain of our then executive officers for $100 per share, the estimated fair market value of the shares on the date of purchase, pursuant to the terms of an option cancellation and restricted stock purchase agreement between us and such officers. Richard P. Durham our Chief Executive Officer purchased 15,734 shares, Scott K. Sorensen, our then Chief Financial Officer, purchased 7,867 shares and Ronald G. Moffitt, our then Executive Vice President and General Counsel, purchased 2,622 shares. We loaned the funds necessary to purchase the stock to each of such executive officers. See "Item 13. Certain Relationships and Related Transactions - Transactions with Management." All of such shares were subject to vesting requirements similar to the canceled options. Accordingly, one-half of the shares purchased by each such executive officer were time vested shares, which vested in equal increments over a five-year period commencing January 1, 1998, and the remaining one-half of the shares purchased by each such executive officer were performance vested shares, which vested in equal increments over a five-year period commencing January 1, 1998, provided we had achieved a specified market value of equity applicable to such increment. For purposes of the performance vested shares, our market value of equity was determined pursuant to a formula based upon our adjusted earnings. The restricted stock purchase agreements provided for accelerated vesting in the event of a change of control. The recapitalization and related transactions accelerated the vesting of the restricted stock, and these shares of restricted stock were part of the management equity rollover or the investor share purchase. PENSION PLANS The following table shows the estimated annual benefits payable under our tax-qualified defined benefit pension plan in specified final average earnings and years of service classifications. PLIANT CORPORATION PENSION PLAN TABLE
YEARS OF BENEFIT SERVICE AT RETIREMENT ---------------------------------------------------------------------------- FINAL AVERAGE COMPENSATION 10 15 20 25 30 35 40 -------------------------- ------ ------ ------ ------ ------ ------ ------ $100,000 $16,000 $24,000 $32,000 $40,000 $48,000 $56,000 $64,000 125,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 150,000 24,000 36,000 48,000 60,000 72,000 84,000 96,000 175,000 27,200 40,800 54,400 68,000 81,600 95,200 108,800 200,000 27,200 40,800 54,400 68,000 81,600 95,200 108,800
Our current pension plan benefit is based on the following formula: 1.6% of final average compensation multiplied by years of credited service, minus 1.5% of estimated Social Security benefits multiplied by years of credited service (with a maximum of 50% of Social Security benefits). Final average compensation is based on the highest average of three consecutive years of compensation. Covered compensation for purposes of the pension plan includes compensation earned with our former affiliates. The Named Executive Officers were participants in the pension plan in 2001. The final average compensation for purposes of the pension plan in 2001 for each of the Named Executive Officers is $170,000, which is the maximum that can be considered for the 2001 plan year under federal regulations. Federal regulations also provide that the maximum annual benefit paid from a qualified defined benefit plan cannot exceed $140,000 as of January 1, 2001. Benefits are calculated on a straight life annuity basis. The benefit amounts under the pension plan are offset for Social Security as described above. The number of completed years of credit service as of December 31, 2001 under our pension plan for the Named Executive Officers participating in the plan were as follows:
YEARS OF CREDITED NAME SERVICE ---- ----------------- Richard P. Durham(1)................................. 16 Jack E. Knott II(1).................................. 16 Brian E. Johnson..................................... - Stanley B. Bikulege.................................. 9 Douglas W. Bengtson(2)............................... 4 Dale A. Brockman..................................... 8
(1) The years of credited service under the pension plan include 12 years of service credited with affiliates of Pliant for Mr. Durham and 12 years of service credited with affiliates of Pliant for Mr. Knott. The benefit calculation upon retirement under our pension plan is calculated by multiplying years of credited service by a fraction representing that part of total credited service for which services were provided to us. (2) In addition to the 4 years of credited service with Pliant, Mr. Bengtson has a frozen benefit as a result of his service with Rexene Corporation, which was purchased by the predecessor to Huntsman Packaging and Pliant. By agreement Mr. Bengtson will be provided a pay update on the calculation of the Rexene formula. This payment is a non-qualified payment which will be paid out of our general assets as a lump sum. EMPLOYMENT AGREEMENTS On May 31, 2000, we entered into five-year employment agreements with each of Richard P. Durham, Jack E. Knott II, Scott K. Sorensen and Ronald G. Moffitt. The employment agreements provide for the payment of a base salary, plus a bonus, at least four weeks paid vacation per year, participation in our leased car program and participation in our other employee benefit programs, including our management incentive program, and include non-disclosure of confidential information provisions and a non-compete provision for one year following the executive officer's termination of employment with us (unless termination is due to the term expiring). Each executive officer agreed in his respective employment agreement that any inventions, improvements, technical or software developments, trademarks, patents and similar information relating to us or our business, products or services conceived, developed or made by such executive officer while employed by us belong to us. In addition, if the executive officer's employment with us terminates for any reason, we will have the right under the employment agreements to repurchase the shares of our common stock owned by such executive officer at a purchase price equal to their fair market value. Similarly, we will also be required to repurchase all of the shares of common stock owned by such executive officer at their option if the executive officer's employment is terminated because of death, disability, retirement or resignation for good reason, so long as we are permitted to do so at the time under the covenants contained in our financing agreements. On February 1, 2001, we amended the employment agreement with Mr. Durham to, among other things, specify the duties he will perform as our Chairman and Chief Executive Officer and eliminate our right to repurchase his shares upon termination of employment. We also agreed to repurchase all of the shares of common stock owned by Mr. Durham at his option if Mr. Durham's employment with us is terminated without cause. In addition, pursuant to the employment agreement amendment, we agreed to modify the terms of Mr. Durham's secured and unsecured notes with us. For a description of these amended note terms, see "Item 13. Certain Relationships and Related Transactions - Transactions with Management." Following management's decision to relocate its principal executive offices from Salt Lake City to Chicago, each of Scott K. Sorensen and Ronald G. Moffitt chose not to relocate and to resign their positions with Pliant. On December 27, 2000, we entered into a severance agreement with Mr. Sorensen, who resigned from his position as our Executive Vice President, Chief Financial Officer and Treasurer effective immediately after February 28, 2001. Such resignation was treated as a "termination without cause" under Mr. Sorensen's employment agreement. We also entered into a stock redemption agreement with Mr. Sorensen to repurchase all of the 6,750 shares of restricted common stock issued to him. Under the terms of Mr. Sorensen's severance agreement, he received the pro rata portion of his base salary for the two months of services provided in 2001, the first quarterly 2001 payment under our management incentive plan and payment of his base salary and continued participation in certain of our employee benefit plans for one year after February 28, 2001. In addition, we agreed to defer our right to repurchase Mr. Sorensen's remaining shares of common stock until February 28, 2003; changed the repurchase price from fair market value to the greater of fair market value and $111.53 per share; modified the terms of Mr. Sorensen's secured and unsecured promissory notes with us; and agreed to reimburse Mr. Sorensen for any federal and state income taxes payable as a result of the cancellation of interest indebtedness on the amended secured promissory note. Furthermore, Mr. Sorensen agreed to defer his right to cause us to repurchase his shares of common stock until February 28, 2003. For a description of the amended note terms and stock redemptions, see "Item 13. Certain Relationships and Related Transactions - Transactions with Management." On January 22, 2001, we entered into a severance agreement with Mr. Moffitt, who resigned from his position as our Executive Vice President, General Counsel and Secretary effective immediately after February 28, 2001. Such resignation was treated as a "resignation for good reason" under Mr. Moffitt's employment agreement. We also entered into a stock redemption agreement with Mr. Moffitt to repurchase 3,125 performance shares of restricted common stock issued to him. Under the terms of Mr. Moffitt's severance agreement, he received the pro rata portion of his base salary for the two months of services provided in 2001, the first quarterly 2001 payment under our management incentive plan and payment of his base salary and continued participation in certain of our employee benefit plans for one year after February 28, 2001. In addition, we agreed to defer our right to repurchase Mr. Moffitt's remaining shares of common stock until February 28, 2003; changed the repurchase price from fair market value to the greater of the fair market value as of March 31, 2003 and $167.15 per share; granted Mr. Moffitt the right to purchase his leased company vehicle from us at the end of the lease for the residual value; modified the terms of Mr. Moffitt's secured and unsecured promissory notes with us; and agreed to reimburse Mr. Moffitt for any federal and state income taxes payable as a result of the cancellation of interest indebtedness on the amended secured promissory note. Furthermore, Mr. Moffitt agreed to defer his right to cause us to repurchase his shares of common stock until February 28, 2003. For a description of the amended note terms and stock redemptions, see "Item 13. Certain Relationships and Related Transactions - Transactions with Management." On March 30, 2001, we entered into a five year employment agreement with Brian E. Johnson, our Executive Vice President and Chief Financial Officer. The employment agreement provides for the payment of a base salary, a grant of a stock option to purchase 5,000 shares of our common stock, at least three weeks paid vacation per year, participation in our leased car program, payment of his present country club membership dues and participation in our other employee benefit programs, including our management incentive program, and includes non-disclosure of confidential information provisions and a non-compete provision for one year following termination of employment with us (unless termination is due to the term expiring). Mr. Johnson has agreed in his employment agreement that any inventions, improvements, technical or software developments, trademarks, patents and similar information relating to us or our business, products or services conceived, developed or made by such executive officer while employed by us belong to us. If Mr. Johnson's employment is terminated without cause or he resigns for good reason, he will be entitled to receive severance payments and continue to participate in our medical and dental plans for one year. In addition, if Mr. Johnson's employment with us terminates for any reason, we will have the right under the employment agreement to repurchase the shares of our common stock owned by him at a purchase price equal to their fair market value. Similarly, we will also be required to repurchase all of the shares of common stock owned by Mr. Johnson at his option if his employment is terminated because of death, disability, retirement or resignation for good reason, so long as we are permitted to do so at the time under the covenants contained in our financing agreements. COMMITTEES OF THE BOARD OF DIRECTORS Our board of directors has an executive committee, a compensation committee, an audit committee and an environmental health and safety committee. The executive committee is able to exercise all of the authority of the board of directors to the maximum extent permitted by Utah law and our charter and bylaws. The members of the executive committee are Richard P. Durham, Jack E. Knott and Timothy J. Walsh. The compensation committee evaluates our compensation policies, determines compensation for our executive officers and administers our stock option plans. The members of the compensation committee are Richard P. Durham, Albert (Pat) MacMillan and Timothy J. Walsh. The audit committee maintains oversight responsibilities with respect to our accounting, auditing, financial reporting and internal control processes generally. The members of the audit committee are Richard P. Durham, John M. B. O'Connor and Edward A. Lapekas. The members of the environmental health and safety committee are Jack E. Knott, Donald J. Hofmann, Jr. and Edward A. Lapekas. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to May 31, 2000, our board of directors had designated an executive committee, which was comprised of Jon M. Huntsman and Richard P. Durham, to perform the duties of a compensation committee for us. Richard P. Durham was our President and Chief Executive Officer and Jon M. Huntsman was our Chairman of the Board. As of May 31, 2000, Richard P. Durham and Timothy J. Walsh comprised the compensation committee and perform such duties. Richard P. Durham serves as a director of Huntsman Corporation, but is not one of the people who performs the duties of a member of the compensation committee of Huntsman Corporation. COMPENSATION OF DIRECTORS Prior to May 31, 2000, each director received an annual fee of $25,000. As of May 31, 2000, each director who is not an employee of Pliant or a Partner of J.P. Morgan Partners, LLC will receive an annual fee of $25,000. Currently, there are two directors of Pliant who receive director fees. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information with respect to the ownership of our common stock as of February 28, 2002 by o each person known to own beneficially more than 5% of the common stock, o each of our directors, o each of our Named Executive Officers, and o all of our executive officers and directors as a group. The amounts set forth in the table and footnotes below do not include shares of restricted common stock issued under the 2000 plan that remain subject to performance vesting requirements that have not been met as of February 28, 2002. Notwithstanding the beneficial ownership of common stock presented below, the stockholders' agreement governs the stockholders' exercise of their voting rights with respect to election of directors and certain other material events. The parties to the stockholders' agreement have agreed to vote their shares to elect the board of directors as set forth therein. See "Certain Relationships and Related Transactions." The amounts and percentages of shares beneficially owned are reported on the basis of SEC regulations governing the determination of beneficial ownership of securities. Under SEC rules, a person is deemed to be a "beneficial owner" of a security if that person has or shares voting power or investment power, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Securities that can be so acquired are deemed to be outstanding for purposes of computing such person's ownership percentage, but not for purposes of computing any other person's percentage. Under these rules, more than one person may be deemed to be a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest. Except as otherwise indicated in these footnotes, each of the beneficial owners listed has, to our knowledge, sole voting and investment power with respect to the indicated shares of common stock.
NUMBER OF SHARES OF COMMON STOCK PERCENT NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS - ------------------------ ------------------ -------- J.P. Morgan Partners (BHCA), L.P.(1)........................................... 362,229 52.8% The Christena Karen H. Durham Trust(2)......................................... 158,917 23.2% Perry Acquisition Partners L.P.(3).............................................. 34,527 5.0% Richard P. Durham(4)........................................................... 34,373 5.0% Jack E. Knott II(5)............................................................ 11,717 1.7% Donald J. Hofmann, Jr.(6)...................................................... - * Timothy J. Walsh(6)............................................................ - * John M. B. O'Connor(6)........................................................ - * Edward A. Lapekas.............................................................. - * Albert (Pat) MacMillan......................................................... - * Brian E. Johnson............................................................... 1,011 * Stanley B. Bikulege............................................................ 610 * Douglas W. Bengtson............................................................ 645 * Dale Brockman.................................................................. 432 * All directors and executive officers as a group (11 persons)................... 48,788 7.1%
- ---------------------- * Less than 1%. (1) The address of J.P. Morgan Partners (BHCA), L.P. is 1221 Avenue of the Americas, New York, New York 10020. Includes (i) 317,306 shares of common stock held by Southwest Industrial Films, LLC, which is controlled by J.P. Morgan Partners (BHCA), L.P., as managing member, (ii) 44,816 shares of common stock which are issuable upon exercise of the preferred stock warrants held by Flexible Films, LLC, which is controlled by J.P. Morgan Partners (BHCA) L.P. and (iii) 107 shares of common stock which are issuable upon exercise of the 1,264 note warrants held by Southwest Industrial Films, LLC, which is controlled by J.P. Morgan Partners (BHCA), L.P., as managing member. (2) The address of The Christena Karen H. Durham Trust is c/o Wells Fargo Bank, Private Client Services, MAC S4733-025, 3800 Howard Hughes Parkway, Second Floor, Las Vegas, Nevada 89109. Attention: Mark Dreschler. The Trust was established for the benefit of Christena H. Durham and her children. Christena H. Durham is the wife of Richard P. Durham. Richard P. Durham disclaims beneficial ownership of the shares of common stock owned by the Trust. (3) The address of Perry Acquisition Partners-2, L.P. is 599 Lexington Avenue , New York, New York 10022. Includes 4,060 shares of common stock which are issuable upon exercise of preferred stock warrants held by an affiliate. (4) Does not include 9,667 shares of restricted common stock issued under the 2000 plan that do not vest until the performance conditions discussed under "Item 11. Executive Compensation - Stock Options and Restricted Stock" are met. (5) Includes 8,902 shares of common stock issuable upon exercise of 1998 options that are immediately exercisable. Does not include 5,167 shares of restricted common stock issued under the 2000 plan that do not vest until the performance conditions discussed under "Item 11. Executive Compensation - Stock Options and Restricted Stock" are met. (6) Each of Messrs. Hofmann, Walsh and O'Connor may be deemed the beneficial owner of the shares of common stock and preferred stock warrants owned by Southwest Industrial Films, LLC and Flexible Films, LLC, respectively, due to their status as executive officers of JPMP Capital Corp., which is a subsidiary of J.P. Morgan Chase & Co. and the general partner of the general partner of J.P. Morgan Partners (BHCA), L.P. J.P. Morgan Partners (BHCA), L.P. controls both Southwest Industrial Films, LLC and Flexible Films, LLC, as their managing member. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSACTIONS WITH MANAGEMENT On May 31, 2000, we issued restricted stock under the terms of our 2000 plan to each of our executive officers serving at that time in the following amounts: (a) Richard P. Durham - 2,417 time-vested shares and 12,083 performance-vested shares in exchange for a secured promissory note of $7,005,389; (b) Jack E. Knott II - 1,292 time-vested shares and 6,458 performance-vested shares in exchange for a secured promissory note of $3,744,260; (c) Scott K. Sorensen - 1,125 time-vested shares and 5,625 performance-vested shares in exchange for a secured promissory note of $3,261,129; and (d) Ronald G. Moffitt - 625 time-vested shares and 3,125 performance-vested shares in exchange for a secured promissory note of $1,811,739. Except as modified below, each secured promissory note bears interest at 7% per annum and principal on such secured promissory note is payable in three equal annual installments beginning on May 31, 2006. Interest payable on each secured promissory note from May 31, 2000 to May 31, 2006 is payable in three equal installments beginning on May 31, 2006. Interest accruing from May 31, 2006 to May 31, 2007 is payable on May 31, 2007 in cash and interest accruing from May 31, 2007 to May 31, 2008 must be paid in cash at maturity on May 31, 2008. Each secured promissory note is fully recourse to the executive officer and is secured by the shares of restricted stock owned by such executive officer. On April 1, 2001, we amended the original terms of Mr. Knott's secured promissory note so that (a) no interest would accrue after December 31,2000 and (b) our sole recourse against Mr. Knott with respect to his obligations under the promissory note would be the 7,750 shares of restricted stock pledged as collateral. In connection with the amendment to Mr. Durham's employment agreement in February 2001, we amended the original terms of his secured promissory note so that (a) no interest would accrue after December 31, 2000 and (b) our sole recourse against Mr. Durham with respect to his obligations under the promissory note would be the 14,500 shares of restricted common stock pledged as collateral. Messrs. Sorensen and Moffitt resigned from their positions in February 2001 as part of the severance arrangements with Messrs. Sorensen and Moffitt, we amended the original terms of their secured promissory notes so that (a) interest would cease to accrue from December 27, 2000, in the case of Mr. Sorensen, and February 1, 2001, in the case of Mr. Moffitt, and (b) all accrued interest on their secured promissory notes was cancelled as of February 28, 2001, which, in the case of Mr. Sorensen amounted to approximately $132,000, and, in the case of Mr. Moffitt amounted to approximately $85,500. We also entered into stock redemption agreements with each of Messrs. Sorensen and Moffitt pursuant to which we repurchased all 6,750 time and performance vested shares of restricted stock from Mr. Sorensen and the 3,125 performance vested shares of restricted stock from Mr. Moffitt. In each case, we repurchased the shares at a price per share equal to $483.13, which repurchase price was set-off against the principal amount of their respective secured promissory notes. As of December 31, 2001, the amount outstanding under Mr. Durham's secured promissory note, including accrued interest, was $7,292,898, the amount outstanding under Mr. Knott's secured promissory note, including accrued interest, was $3,960,400, the amount outstanding under Mr. Moffitt's secured promissory note was $301,956; and Mr. Sorensen's secured promissory note was no longer outstanding. In connection with our split-off from Huntsman Corporation, we issued 7,000 shares of our Class C common stock to Richard P. Durham, our President and Chief Executive Officer and a director, in exchange for a $700,000 promissory note. This promissory note bears interest at 7% per annum and is payable over approximately 51 months. The balance on this note was completely paid as of December 31, 2001. On February 22, 1999, we sold 26,223 shares of Class C common stock to certain members of our senior management. 15,734 of these shares were issued to Richard P. Durham, our President and Chief Executive Officer in exchange for a $1,573,400 promissory note; 7,867 of these shares were sold to Scott K. Sorensen, our then Executive Vice President, Chief Financial Officer and Treasurer, in exchange for a $786,700 promissory note; and 2,622 shares were sold to Ronald G. Moffitt, our then Senior Vice President and General Counsel, Secretary, in exchange for a $262,200 promissory note. All of such notes bear interest at 7% per annum and were originally payable in three annual installments beginning in February 2002. Pursuant to the recapitalization agreement, each of these promissory notes receivable was amended on May 31, 2000 to provide that they are payable in three annual installments beginning on May 31, 2006. In connection with the amendment to Mr. Durham's employment agreement, we modified the terms of his amended promissory note so that no interest on such note would accrue after December 31, 2000. As part of the severance arrangements with Messrs. Sorensen and Moffitt, we modified the terms of their amended promissory notes so that interest on such notes ceased to accrue on February 28, 2001. As of December 31, 2001, the amount outstanding under Mr. Durham's amended promissory note was $1,637,974; the amount outstanding under Mr. Moffitt's amended promissory note was $275,877; and the amount outstanding under Mr. Sorensen's amended promissory note was $896,838. TRANSACTIONS BETWEEN PLIANT AND NEW STOCKHOLDERS Common Stock Registration Rights Agreement Pursuant to the registration rights agreement entered into on May 31, 2000, we granted to our institutional common stockholders and warrantholders certain "demand" and "piggyback" registration rights for the registration under the Securities Act of the shares of common stock owned by them. Under the registration rights agreement, upon request of holders holding in excess of 50% of the shares of common stock held by our institutional investors and their transferees and affiliates (the "Requisite Investor Stockholders"), we are required to use our best efforts to register the shares. The Requisite Investor Stockholders will be entitled to request two demand registrations. Also, if we are not a public company or sold to a third party prior to May 31, 2005, the Trust and its transferees and affiliates will be entitled to request one demand registration. Further, at any time 60 days after our initial public offering, holders holding in excess of 60% of the shares of common stock underlying the preferred stock warrants and holders holding in excess of 60% of the shares of common stock underlying the note warrants will each be entitled to exercise one demand registration. At any time after we have qualified for use of Form S-3, all parties to the registration rights agreement will have the right to request that we effect a registration under the Securities Act of their shares of common stock, subject to customary "blackout" and "cutback" provisions. The stockholders and holders of the preferred stock warrants and note warrants party to the registration rights agreement also may request that we use our best efforts to register shares of common stock held by them in other registrations initiated by us on our own behalf or on behalf of any other stockholder. We must pay all reasonable out-of-pocket costs and expenses, other than underwriting discounts and commissions, of any registration under the registration rights agreement. The registration rights agreement also contains customary provisions with respect to registration procedures, underwritten offerings and indemnification and contribution rights in connection with the registration of common stock on behalf of the stockholders, holders of the preferred stock warrants and holders of the note warrants party to the registration rights agreement. The above summary of certain provisions of the registration rights agreement does not purport to be complete and is qualified in its entirety by reference to all of the provisions of the registration rights agreement, a copy of which has been incorporated by reference as an exhibit to this report. The Stockholders' Agreement The stockholders' agreement entered into on May 31, 2000, as amended as of July 16, 2001 and December 19, 2001, governs the exercise of voting rights by our stockholders, including holders of our preferred stock warrants who exercise their warrants for common stock, with respect to the election of directors and certain other material events. The parties to the stockholders' agreement agreed initially to vote their shares of common stock to elect (i) four directors designated by the Requisite Investor Stockholders, (ii) two directors designated by the Trust and (iii) one director appointed by our board of directors, who must be a member of our senior management. At the request of the Requisite Investor Stockholders, the size of our board of directors may be increased from seven to nine. If so increased, one of the two additional directors will be designated by the Requisite Investor Stockholders and the other will be our chief executive officer. The provisions of the stockholders' agreement also govern: o restrictions on the transfer of shares of common stock and the preferred stock warrants; o preemptive rights for holders of our common stock and preferred stock warrants to purchase certain equity securities to be issued by us in the amounts required to maintain their percentage ownership; o stockholder or company rights of first refusal to purchase certain shares of our common stock to be sold by other stockholders; o agreement by stockholders and holders of the preferred stock warrants to consent to the sale of all of, or a controlling interest in, us to a third party, if such sale is approved by our board of directors, and to sell their shares of common stock and preferred stock warrants if so required; o rights of stockholders and holders of the preferred stock warrants to participate in certain sales of the shares of our common stock by other stockholders; and o rights of holders of our common stock and preferred stock warrants to receive certain financial and other information. The above summary of certain provisions of the stockholders' agreement ,as amended, does not purport to be complete and is qualified in its entirety by reference to all of the provisions of the stockholders' agreement, a copy of which has been incorporated by reference as an exhibit to this report. Credit Facilities JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank) is the syndication agent, and its affiliate, J.P. Morgan Chase & Co. (formerly The Chase Manhattan Corporation), is a lender under our credit facilities. Both JPMorgan Chase Bank and J.P. Morgan Chase & Co. receive customary fees under the credit facilities for acting in such capacities. Each of JPMorgan Chase Bank, J.P. Morgan Chase & Co. and J.P. Morgan Securities Inc. are affiliates of Southwest Industrial Films, LLC, which owns approximately 53% of our outstanding common stock and currently has the right under the stockholders' agreement to appoint four of our directors, and of Flexible Films, LLC, which owns approximately 57% of our preferred stock. Southwest Industrial Films, LLC and Flexible Films, LLC are subsidiaries of J.P. Morgan Partners (BHCA), L.P. Donald J. Hofmann, Jr., Timothy J. Walsh and John M.B. O'Connor, who serve as our directors, are executive officers of J.P. Morgan Partners, LLC, which serves as investment advisor to J.P. Morgan Partners (BHCA), L.P., and JPMP Capital Corp., a subsidiary of J.P. Morgan Chase & Co., which is the general partner of the general partner of J.P. Morgan Partners (BHCA), L.P. PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) PLIANT CORPORATION AND SUBSIDIARIES FINANCIAL STATEMENTS: Index to Financial Statements and Financial Statement Schedule F-1 Report of Independent Public Accountants F-2 Consolidated Balance Sheets as of December 31, 2001 and 2000 F-3 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2001, 2000 F-5 and 1999 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 F-6 Notes to Consolidated Financial Statements F-8 (a)(2) FINANCIAL STATEMENT SCHEDULE: Schedule II - Valuation and Qualifying Accounts S-1 (a)(3) The following exhibits are filed herewith or incorporated by reference:
2.1 Recapitalization Agreement, dated as of March 31, 2000 (the "Recapitalization Agreement"), among Pliant Corporation, Chase Domestic Investments, L.L.C., Richard P. Durham as Representative, and the shareholders of Pliant Corporation signatory thereto (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by Pliant Corporation on April 12, 2000). 2.2 Amendment No. 1, dated as of April 3, 2000, to the Recapitalization Agreement (incorporated by reference to Exhibit 2.2 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 2.3 Amendment No. 2, dated as of May 31, 2000, to the Recapitalization Agreement (incorporated by reference to Exhibit 2.3 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 3.1 Third Amended and Restated Articles of Incorporation of Pliant Corporation (incorporated by reference to Exhibit 3.1 to Pliant Corporation's Registration Statement of Form S-4 (File No. 333-42008)). 3.2 Articles of Amendment of Third Amended and Restated Articles of Incorporation of Pliant Corporation (incorporated by reference to Exhibit 3.2 to Pliant Corporation's Annual Report on Form 10-K for the year ended December 31, 2000 filed on April 2, 2001). 3.3 Articles of Amendment of Third Amended and Restated Articles of Incorporation of Pliant Corporation (incorporated by reference to Exhibit 3.2 to Pliant Corporation's Registration Statement on Form S-1 (File No. 333-65754)). 3.4 Amended and Restated Bylaws of Pliant Corporation (incorporated by reference to Exhibit 3.10 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 4.1 Indenture, dated as of May 31, 2000, among Pliant Corporation, the Note Guarantors party thereto and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 4.2 Form of New Notes (incorporated by reference to Exhibit B to Exhibit 4.1). 4.3 First Supplemental Indenture, dated as of July 16, 2001, among Pliant Corporation, the New Note Guarantors party thereto, the existing Note Guarantors party thereto and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.3 to Pliant Corporation's Registration Statement on Form S-1 (File No. 333-65754)). 4.4 Exchange and Registration Rights Agreement, dated as of May 31, 2000, among Pliant Corporation, the Note Guarantors party thereto, and Chase Securities, Inc. and Deutsche Bank Securities Inc., as Initial Purchasers (incorporated by reference to Exhibit 4.3 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.1 Note Warrant Agreement, dated as of May 31, 2000, among Pliant Corporation and The Bank of New York, as Warrant Agent, relating to the 220,000 Note Warrants (incorporated by reference to Exhibit 10.1 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.2 Stockholders' Agreement, dated as of May 31, 2000, among Pliant Corporation, Chase Domestic Investments, L.L.C. and each of the stockholders and warrantholders listed on the signature pages thereto (incorporated by reference to Exhibit 10.2 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.3 Amendment No. 1 and Waiver dated as of July 16, 2001 to the Stockholder's Agreement, dated as of May 31, 2000, among Pliant Corporation, Chase Domestic Investments, L.L.C. and each of the stockholders and warrantholders listed on the signature pages thereto (incorporated by reference to Exhibit 10.3 to Pliant Corporation's Registration Statement on Form S-1 (File No. 333-65754)). 10.4* Amendment No. 2 dated as of December 19, 2001 to the Stockholder's Agreement, dated as of May 31, 2000, among Pliant Corporation, Chase Domestic Investments, L.L.C. and each of the stockholders and warrantholders listed on the signature pages thereto. 10.5 Registration Rights Agreement, dated as of May 31, 2000 (the "Registration Rights Agreement"), among Pliant Corporation, Chase Domestic Investments, L.L.C. and each of the stockholders and warrantholders listed on the signature pages thereto (incorporated by reference to Exhibit 10.3 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.6 Amendment No. 1, dated as of June 13, 2000, to the Registration Rights Agreement (incorporated by reference to Exhibit 10.4 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.7 Securities Purchase Agreement, dated as of May 31, 2000, among Pliant Corporation and each of the purchasers of Pliant Corporation's preferred stock listed on the signature pages thereto (incorporated by reference to Exhibit 10.5 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.8 Amendment No. 1 and Waiver dated as of July 16, 2001 to the Securities Purchase Agreement dated as of May 31, 2000 among Pliant Corporation, and each of the purchasers of Pliant Corporation's preferred stock listed on the signature pages thereto ((incorporated by reference to Exhibit 10.7 to Pliant Corporation's Registration Statement on Form S-1 (File No. 333-65754)). 10.9 Warrant Agreement, dated as of May 31, 2000, among Pliant Corporation and Chase Domestic Investments, L.L.C. (incorporated by reference to Exhibit 10.6 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.10 Amendment No. 1 dated as of July 16, 2001 to the Warrant Agreement dated as of May 31, 2000 among Pliant Corporation and the initial warrantholders listed in Schedule I thereto (incorporated by reference to Exhibit 10.9 to Pliant Corporation's Registration Statement on Form S-1 (File No. 333-65754)). 10.11 Securities Purchase Agreement dated as of July 16, 2001 among Pliant Corporation and the purchasers of Pliant Corporation's preferred stock listed on the schedules thereto (incorporated by reference to Exhibit 10.10 to Pliant Corporation's Registration Statement on Form S-1 (File No. 333-65754)). 10.12 Credit Agreement, dated as of September 30, 1997, as amended and restated as of May 31, 2000, among Pliant Corporation, the subsidiary guarantors party thereto, the various lenders from time to time party thereto (the "Lenders"), Bankers Trust Company, as Administrative Agent and Collateral Agent, and The Chase Manhattan Bank, as Syndication Agent, and The Bank of Nova Scotia, as the Documentation Agent (incorporated by reference to Exhibit 10.7 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.13 Amendment No. 1, dated as of September 30, 2000, to Credit Agreement dated as of September 30, 1997, as amended and restated as of May 31, 2000 (incorporated by reference to Exhibit 10.1 to Pliant Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). 10.14 Amendment No. 2, dated as of July 10, 2001, to the Credit Agreement dated as of September 30, 1997, as amended and restated as of May 31, 2000 (incorporated by reference to Exhibit 10.13 to Pliant Corporation's Registration Statement on Form S-1 (File No. 333-65754)). 10.15 Guarantee Agreement, dated as of September 30, 1997, as amended and restated as of May 31, 2000, among the subsidiary guarantors party thereto and Bankers Trust Company, as Collateral Agent (incorporated by reference to Exhibit 10.8 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.16 Supplement No. 1, dated as of July 19, 2001, to the Guarantee Agreement, dated as of September 30, 1997, as amended and restated as of May 31, 2000, among Pliant Corporation, each of the subsidiaries listed on Schedule I thereto and Bankers Trust Company, as Administrative Agent (incorporated by reference to Exhibit 10.15 to Pliant Corporation's Registration Statement on Form S-1 (File No. 333-65754)). 10.17 Security Agreement, dated as of September 30, 1997, as amended and restated as of May 31, 2000, among the subsidiary guarantors party thereto and Bankers Trust Company, as Collateral Agent (incorporated by reference to Exhibit 10.9 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.18 Supplement No. 1, dated as of July 19, 2001, to the Security Agreement, dated as of September 30, 1997, as amended and restated as of May 31, 2000, among Pliant Corporation, each of the subsidiaries listed on Schedule I thereto and Bankers Trust Company, as Collateral Agent (incorporated by reference to Exhibit 10.17 to Pliant Corporation's Registration Statement on Form S-1 (File No. 333-65754)). 10.19 Pledge Agreement, dated as of September 30, 1997, as amended and restated as of May 31, 2000, among the subsidiary guarantors party thereto and Bankers Trust Company, as Collateral Agent (incorporated by reference to Exhibit 10.10 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.20 Supplement No. 1, dated as of July 19, 2001, to the Pledge Agreement, dated as of September 30, 1997, as amended and restated as of May 31, 2000, among Pliant Corporation, each of the subsidiaries listed on Schedule I thereto and Bankers Trust Company, as Collateral Agent (incorporated by reference to Exhibit 10.19 to Pliant Corporation's Registration Statement on Form S-1 (File No. 333-65754)). 10.21 Indemnity, Subrogation and Contribution Agreement, dated as of September 30, 1997, as amended and restated as of May 31, 2000, among the subsidiary guarantors party thereto and Bankers Trust Company, as Collateral Agent (incorporated by reference to Exhibit 10.11 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.22 Supplement No. 1, dated as of July 19, 2001, to the Indemnity, Subrogation and Contribution Agreement, dated as of September 30, 1997, as amended and restated as of May 31, 2000, among Pliant Corporation, each of the subsidiaries listed on Schedule I thereto and Bankers Trust Company, as Collateral Agent (incorporated by reference to Exhibit 10.21 to Pliant Corporation's Registration Statement on Form S-1 (File No. 333-65754)). 10.23 Employment Agreement, dated as of May 31, 2000, between Pliant Corporation and Richard P. Durham (incorporated by reference to Exhibit 10.12 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.24 Amendment No. 1, dated as of February 1, 2001, to the Employment Agreement, dated as of May 31, 2000, between Pliant Corporation and Richard P. Durham (incorporated by reference to Exhibit 10.14 to Pliant Corporation's Annual Report on Form 10-K for the year ended December 31, 2000 filed on April 2, 2001). 10.25 Employment Agreement, dated as of May 31, 2000, between Pliant Corporation and Jack E. Knott (incorporated by reference to Exhibit 10.13 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.26 Employment Agreement, dated as of May 31, 2000, between Pliant Corporation and Scott K. Sorensen (incorporated by reference to Exhibit 10.14 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.27 Letter Agreement, dated as of December 27, 2000, terminating the Employment Agreement, dated as of May 31, 2000, between Pliant Corporation and Scott K. Sorensen (incorporated by reference to Exhibit 10.17 to Pliant Corporation's Annual Report on Form 10-K for the year ended December 31, 2000 filed on April 2, 2001). 10.28 Employment Agreement, dated as of May 31, 2000, between Pliant Corporation and Ronald G. Moffitt (incorporated by reference to Exhibit 10.15 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.29 Letter Agreement, dated as of January 22, 2001, terminating the Employment Agreement, dated as of May 31, 2000, between Pliant Corporation and Ronald G. Moffitt (incorporated by reference to Exhibit 10.19 to Pliant Corporation's Annual Report on Form 10-K for the year ended December 31, 2000 filed on April 2, 2001). 10.30* Employment Agreement, dated as of March 30, 2001, between Pliant Corporation and Brian E. Johnson. 10.31 Restricted Stock Agreement, dated as of May 31, 2000, between Pliant Corporation and Richard P. Durham (incorporated by reference to Exhibit 10.16 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.32 Restricted Stock Agreement, dated as of May 31, 2000, between Pliant Corporation and Jack E. Knott (incorporated by reference to Exhibit 10.17 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.33 Restricted Stock Agreement, dated as of May 31, 2000, between Pliant Corporation and Scott K. Sorensen (incorporated by reference to Exhibit 10.18 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.34 Stock Redemption Agreement, dated as of December 27, 2000, between Pliant Corporation and Scott K. Sorensen (incorporated by reference to Exhibit 10.23 to Pliant Corporation's Annual Report on Form 10-K for the year ended December 31, 2000 filed on April 2, 2001). 10.35 Restricted Stock Agreement, dated as of May 31, 2000, between Pliant Corporation and Ronald G. Moffitt (incorporated by reference to Exhibit 10.19 Pliant Corporation's Registration Statement on (Form S-4 (File No. 333-42008)) 10.36 Stock Redemption Agreement, dated as of February 1, 2001, between Pliant Corporation and Ronald G. Moffitt (incorporated by reference to Exhibit 10.25 to Pliant Corporation's Annual Report on Form 10-K for the year ended December 31, 2000 filed on April 2, 2001). 10.37 Pledge Agreement, dated as of May 31, 2000, in favor of Pliant Corporation made by Richard P. Durham (incorporated by reference to Exhibit 10.20 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.38 Amendment No. 1, dated as of March 1, 2001, to the Pledge Agreement dated as of May 31, 2000, among Pliant Corporation and Richard P. Durham (incorporated by reference to Exhibit 10.35 to Post-Effective Amendment No. 2 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.39 Pledge Agreement, dated as of May 31, 2000, in favor of Pliant Corporation made by Jack E. Knott (incorporated by reference to Exhibit 10.21 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.40 Amendment No. 1, dated as of April 1, 2001, to the Pledge Agreement dated as of May 31, 2000, among Pliant Corporation and Jack E. Knott (incorporated by reference to Exhibit 10.36 to Post-Effective Amendment No. 2 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.41 Pledge Agreement, dated as of May 31, 2000, in favor of Pliant Corporation made by Scott K. Sorensen (incorporated by reference to Exhibit 10.22 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.42 Pledge Agreement, dated as of May 31, 2000, in favor of Pliant Corporation made by Ronald G. Moffitt (incorporated by reference to Exhibit 10.23 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.43 1998 Pliant Corporation Stock Option Plan (incorporated by reference to Exhibit 10.10 to Pliant Corporation's Annual Report on Form 10-K for the year ended December 31, 1998). 10.44 Pliant Corporation Management Incentive Plan for Senior Divisional Management (1999) (incorporated by reference to Exhibit 10.1 to Pliant Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000). 10.45 Pliant Corporation 2000 Stock Incentive Plan (incorporated by reference to Exhibit 10.26 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.46 Second Amended and Restated Stock Option Agreement, dated as of May 31, 2000 between Pliant Corporation and Jack E. Knott (incorporated by reference to Exhibit 10.27 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.47 Pliant Corporation Management Incentive Plan (2000) (incorporated by reference to Exhibit 10.2 to Pliant Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000). 10.48* Pliant Corporation Management Incentive Plan (2001). 10.49* Pliant Corporation Management Incentive Plan (2002). 12.1* Statement re: computation of ratios of earning to fixed charges. 21.1* Subsidiaries of Pliant Corporation. 99.1* Letter of Pliant Corporation regarding Arthur Andersen LLP. - ----- * Filed with this report. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of 2001. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 19, 2002. PLIANT CORPORATION By /s/ Richard P. Durham ---------------------------------------------- Richard P. Durham, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 19, 2002 by the following persons on behalf of the Registrant and in the capacities indicated. By /s/ Richard P. Durham ---------------------------------------------- Richard P. Durham, Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) By /s/ Jack E. Knott II ---------------------------------------------- Jack E. Knott II, President, Chief Operating Officer and Director By /s/ Brian E. Johnson ---------------------------------------------- Brian E. Johnson, Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) By /s/ Donald J. Hofmann, Jr. ---------------------------------------------- Donald J. Hofmann, Jr., Director By /s/ Timothy J. Walsh ---------------------------------------------- Timothy J. Walsh, Director By /s/ John M.B. O'Connor ---------------------------------------------- John M.B. O'Connor, Director By /s/ Edward A. Lapekas ---------------------------------------------- Edward A. Lapekas, Director By /s/ Albert MacMillan ---------------------------------------------- Albert MacMillan, Director INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PLIANT CORPORATION AND SUBSIDIARIES FINANCIAL STATEMENTS: Report of Independent Public Accountants F-2 Consolidated Balance Sheets as of December 31, 2001 and 2000 F-3 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 F-4 Consolidated Statements of Stockholders' Equity/(Deficit) for the years ended December 31, 2001, 2000 F-5 and 1999 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 F-6 Notes to Consolidated Financial Statements F-8 FINANCIAL STATEMENT SCHEDULE: Schedule II - Valuation and Qualifying Accounts S-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Pliant Corporation: We have audited the accompanying consolidated balance sheets of Pliant Corporation and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2001. These financial statements and schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pliant Corporation and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Chicago, Illinois January 28, 2002 PLIANT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2001 AND 2000 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - --------------------------------------------------------------------------------
2001 2000 ASSETS CURRENT ASSETS: Cash and cash equivalents............................................................................ $4,818 $3,060 Receivables: Trade accounts, net of allowances of $ 2,438 and $2,166, respectively.............................. 111,768 104,247 Other.............................................................................................. 13,668 10,811 Inventories.......................................................................................... 83,948 79,151 Prepaid expenses and other........................................................................... 3,026 1,983 Income taxes receivable.............................................................................. 985 2,758 Deferred income taxes................................................................................ 2,563 12,992 ------- ------- Total current assets........................................................................... 220,776 215,002 ------- ------- PLANT AND EQUIPMENT, net: 369,324 333,083 ------- ------- GOODWILL AND INTANGIBLE ASSETS, net..................................................................... 231,199 205,870 ------- ------- OTHER ASSETS............................................................................................ 30,384 31,079 ------- ------- Total assets................................................................................... $851,683 $785,034 ======= ======= LIABILITIES AND STOCKHOLDERS' (DEFICIT) CURRENT LIABILITIES: Trade accounts payable............................................................................... $101,508 $109,018 Accrued liabilities: Interest payable................................................................................. 10,392 4,453 Customer rebates................................................................................. 7,571 8,602 Other............................................................................................ 25,134 25,957 Current portion of long-term debt.................................................................... 17,767 9,362 ------ ----- Total current liabilities...................................................................... 162,372 157,392 LONG-TERM DEBT, net of current portion.................................................................. 695,556 678,031 OTHER LIABILITIES....................................................................................... 18,944 17,385 DEFERRED INCOME TAXES................................................................................... 26,156 33,060 ------- ------- Total liabilities.............................................................................. 903,028 885,868 ------- ------- MINORITY INTEREST COMMITMENTS AND CONTINGENCIES (Notes 6, 7, 10 and 12) .................................................. 271 - REDEEMABLE STOCK: Preferred stock - 200,000 shares authorized, 130,983 shares outstanding as of December 31, 2001; 100,000 share outstanding as of December 31, 2000 and designated as Series A, no par value with a redemption and liquidation value of $1,000 per share................................................................ 126,149 88,721 ------- ------- Common stock - 60,000 shares authorized, no par value; 53,996 shares outstanding as of December 31, 2001 and 57,121 outstanding as of December 31, 2000 net of related stockholders' notes receivable of $12,720 at December 31, 2001 and $14,551 at December 31, 2000 ........................................................................ 16,778 16,456 ------- ------- Total redeemable stock......................................................................... 142,927 105,177 ------- ------- STOCKHOLDERS' (DEFICIT): Common stock - no par value; 10,000,000 shares authorized, 542,571 and 510,674 shares outstanding as of December 31,2001 and December 31,2000, respectively............................................... 103,362 87,989 Warrants to purchase common stock.................................................................... 38,715 26,500 Retained (deficit)................................................................................... (326,356) (312,414) Stockholders' notes receivable....................................................................... (616) (825) Accumulated other comprehensive (loss)............................................................... (9,648) (7,261) Total stockholders' (deficit).................................................................. (194,543) (206,011) ------- ------- Total liabilities and stockholders' (deficit).................................................. $851,683 $785,034 ======= =======
See notes to consolidated financial statements. F-3 PLIANT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
2001 2000 1999 ---- ---- ---- NET SALES............................................................................. $840,360 $843,797 $813,730 COST OF SALES......................................................................... 665,092 696,716 655,752 ------- ------- ------- Gross profit................................................................. 175,268 147,081 157,978 ------- ------- ------- OPERATING EXPENSES: Selling, general and administrative ............................................... 88,821 93,937 73,976 Research and development........................................................... 9,821 8,596 5,514 Stock-based compensation related to administrative employees....................... 7,033 - - Compensation and transaction costs related to recapitalization..................... - 10,754 - Plant closing costs, net........................................................... (4,588) 19,368 2,497 ------- ------- ------- Total operating expenses..................................................... 101,087 132,655 81,987 ------- ------- ------- OPERATING INCOME...................................................................... 74,181 14,426 75,991 INTEREST EXPENSE...................................................................... (75,988) (68,534) (44,028) OTHER INCOME , net.................................................................... 6,525 332 435 ------- ------- ------- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS................................................ 4,718 (53,776) 32,398 ------- ------- ------- INCOME TAX EXPENSE (BENEFIT): Current............................................................................ 4,204 4,144 6,829 Deferred........................................................................... 2,582 (18,387) 7,258 ------- ------- ------- Total income tax expense (benefit)........................................... 6,786 (14,243) 14,087 ------- ------- ------- INCOME (LOSS) BEFORE EXTRAORDINARY LOSS.............................................. (2,068) (39,533) 18,311 EXTRAORDINARY LOSS (net of income tax benefit of $7,500).............................. - (11,250) - ------- ------- ------- NET INCOME (LOSS)..................................................................... $ (2,068) $(50,783) $18,311 ======= ======= =======
See notes to consolidated financial statements. F-4 PLIANT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS) - --------------------------------------------------------------------------------
Warrants to Class A Class B Purchase Retained Common Stock Common Stock Common Stock Common Earnings Total Shares Amount Shares Amount Shares Amount Stock (Deficit) ----- ------------- -------------- -------------- -------- --------- Balance, December 31, 1998 70,587 1,000 63,161 7 515 13,731 Net income............. 18,311 18,311 Foreign currency translation adjustments.......... 1,629 Payments received on stockholder note receivable............. 135 ----------- ------ -------- ------- -------- ------ ---------- ---------- ---------- Balance, December 31, 1999 90,662 1,000 63,161 7 515 32,042 Net loss............... (50,783) (50,783) Foreign currency translation adjustments.......... (2,504) Recapitalization transaction............ (231,762) (1,000)(63,161) (7) (515) 508 86,932 18,550 (272,979) Issuance of warrants to purchase common stock with senior notes...... 7,950 7,950 Preferred stock dividends and accretion (8,771) (8,771) Increase to redemption value of redeemable common stock........... (11,923) (11,923) Issuance of stock to management in exchange for promissory notes... 7 3,261 Discount on stockholder note receivable........ 323 Issuance of stock to management............. 797 2 797 Repurchase of common stock from management and cancellation of note................... (6) (3,001) ----------- ------ -------- ------- -------- ------ ---------- ---------- ---------- Balance, December 31, 2000 (206,011) 511 87,989 26,500 (312,414) Net loss.................. (2,068) (2,068) Stock-based compensation Related to administrative Employees............. 7,033 7,033 Fair value change in interest rate Derivatives classified as cash Flow hedges............ (2,944) Preferred stock dividend and Accretion (18,907) (18,907) Issuance of stock as a result of Uniplast acquisition............ 15,735 33 15,735 Issuance of warrants with preferred stock 12,215 12,215 Repurchase of common stock and cancellation of notes from Management..... (111) (1) (362) Amortization of discount on Stockholder's note receivable.............. (42) Foreign currency translation Adjustment........... 557 ----------- ------ -------- ------- -------- ------ ---------- ---------- ---------- Balance, December 31, 2001..................... $(194,543) 543 $103,362 $38,715 $(326,356) =========== ====== ======== ======= ======== ====== ========== ========== ==========
Accumulated Stockholder' Other Notes Comprehensive Receivable Income ----------- ------------- Balance, December 31, 1998 (434) (6,386) Net income............. Foreign currency translation adjustments.......... 1,629 Payments received on stockholder note receivable............. 135 ----------- ------------ Balance, December 31, 1999 (299) (4,757) Net loss............... Foreign currency translation adjustments.......... (2,504) - Recapitalization transaction............ (589) Issuance of warrants to purchase common stock with senior notes...... Preferred stock dividends and accretion Increase to redemption value of redeemable common stock........... Issuance of stock to management in exchange for promissory notes... (3,261) Discount on stockholder note receivable........ 323 Issuance of stock to management............. Repurchase of common stock from management and cancellation of note................... 3,001 ----------- ------------ Balance, December 31, 2000 (825) (7,261) Net loss................... Stock-based compensation Related to administrative Employees.............. Fair value change in interest rate Derivatives classified as cash Flow hedges............. (2,944) Preferred stock dividend and Accretion.............. Issuance of stock as a result of Uniplast acquisition Issuance of warrants with preferred stock Repurchase of common stock and cancellation of notes from Management..... 251 Amortization of discount on Stockholder's note receivable................. (42) Foreign currency translation Adjustment..... 557 ----------- ------------ Balance, December 31, 2001.... $(616) $(9,648) =========== ============
See notes to consolidated financial statements. F-5 PLIANT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
2001 2000 1999 ---- ---- ---- Cash flows from operating activities: Net income (loss).................................................................. $(2,068) $(50,783) $18,311 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.................................................... 47,017 39,546 35,019 Deferred income taxes............................................................ 2,980 (18,387) 7,137 Change in provision for losses on accounts receivable............................ 272 (156) (455) Non-cash compensation expense related to stock options........................... 7,033 2,641 770 Discount on stockholder note receivable.......................................... 323 - Non-cash plant closing costs..................................................... (7,615) - - Write-down of impaired plant and equipment....................................... 14,801 1,370 Loss on disposal of assets....................................................... (433) 514 86 Extraordinary loss (net of income taxes)......................................... 11,250 - Minority Interest 271 - - Changes in operating assets and liabilities - net of effects of acquisitions: Trade accounts receivable...................................................... (182) 4,886 (26,278) Other receivables.............................................................. (2,857) 2,055 (3,070) Inventories.................................................................... 2,249 (952) (7,829) Prepaid expenses and other..................................................... (651) 661 1,411 Intangible assets and other assets............................................. 1,090 1,930 7,145 Trade accounts payable......................................................... (15,023) 48,962 16,870 Accrued liabilities............................................................ (2,988) 4,355 (4,012) Due to affiliates.............................................................. - (4,715) (2,285) Income taxes payable/receivable................................................ 1,733 (67) 4,674 Other liabilities.............................................................. (484) 3,402 2,589 ------------- ------------- ----------- Net cash provided by operating activities.................................. 30,344 60,266 51,453 ------------- ------------- ----------- Cash flows from investing activities: Capital expenditures for plant and equipment....................................... (56,418) (65,644) (35,723) Payment for purchase of certain net assets of KCL Corporation, net of cash acquired.................................................................... - - (11,498) Uniplast acquisition, net of cash acquired.................................................... (38,778) - - Proceeds from sale of assets....................................................... 7,914 - 1,191 ------------- ------------- ----------- Net cash used in investing activities (87,282) (65,644) (46,030) ------------- ------------- ----------- Cash flows from financing activities: Payment of capitalized loan fees................................................... (1,932) (22,303) - Payment of fees from tender offer.................................................. - (10,055) - Redemption of common stock......................................................... - (314,034) - Net proceeds from issuance of common and preferred stock .......................... 30,991 161,820 - (Payments)/Borrowings on long-term debt............................................ 25,930 (507,002) (17,850) Proceeds from issuance of Class C nonvoting common stock........................... - - 986 Payments received from stockholder on note receivable.............................. - 165 135 Proceeds from issuance of long-term debt........................................... - 691,684 - ------------- ------------- ----------- Net cash provided by (used in) financing activities........................ $54,989 $275 $(16,729) ------------- ------------- -----------
See notes to consolidated financial statements. F-6 PLIANT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
2001 2000 1999 ---- ---- ---- Effect of exchange rate changes on cash and cash equivalents.......................... $3,707 $(934) $1,186 ----- ----- ----- Net increase (decrease) in cash and cash equivalents.................................. 1,758 (6,037) (10,120) Cash and cash equivalents, beginning of the year...................................... 3,060 9,097 19,217 ----- ----- ------ Cash and cash equivalents, end of the year............................................ $4,818 $3,060 $9,097 ===== ===== ===== Supplemental disclosures of cash flow information: Cash paid (received) during the year for: Interest......................................................................... $69,503 $62,781 $43,179 ====== ====== ====== Income taxes..................................................................... $(1,594) $(4,160) $(361) ====== ====== ====== Supplemental schedule of non-cash investing and financing activities: A capital lease obligation of $353 was incurred during 1999 for new equipment. On October 18, 1999, certain assets were acquired and certain liabilities were assumed of KCL Corporation for cash of $11,498. As part of the acquisition, liabilities assumed were as follows: Fair value of assets acquired (including goodwill of $2,651)................... $15,500 Cash paid...................................................................... (11,498) ------ Liabilities assumed............................................................ $4,002 ======
On July 16, 2001, certain assets were acquired and certain liabilities were assumed of Uniplast Films Corporation for a total purchase price of approximately $56,000. The purchase price was paid through a cash payment of approximately $40,300 to discharge pre-acquisition debt and the issuance of Pliant common stock of approximately $15,700 to the shareholders of Uniplast. See notes to consolidated financial statements. F-7 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS - Pliant Corporation (formerly Huntsman Packaging Corporation) and its subsidiaries (collectively "Pliant") produce polymer-based (plastic), value-added films for flexible packaging, personal care, medical, agricultural and industrial applications. Our manufacturing facilities are located in North America, Germany and Australia. RECAPITALIZATION - On May 31, 2000, we consummated a recapitalization pursuant to an agreement dated March 31, 2000 (the "Recapitalization Agreement") among us, our then existing stockholders and an affiliate of J.P. Morgan Partners, LLC, whereby J.P. Morgan Partners, LLC acquired majority control of our common stock. Pursuant to the Recapitalization Agreement, we redeemed all of the shares of our common stock held by Jon M. Huntsman, our founder, then majority stockholder and then Chairman of the Board (the "Equity Redemption") for approximately $314.0 million. An affiliate of J.P. Morgan Partners, LLC purchased approximately one-half of the shares of our common stock held collectively by The Christena Karen H. Durham Trust (the "Trust") and by members of our current and former senior management (the "Management Investors") for approximately $101.8 million. An affiliate of J.P. Morgan Partners, LLC and certain other institutional investors also purchased (the "Investor Common Equity Contribution") shares of common stock directly from us for approximately $63.5 million ($62.6 million net of offering costs). The Trust and the Management Investors retained approximately one-half of the shares of our common stock collectively owned by them prior to the recapitalization. In addition, we issued to another affiliate of J.P. Morgan Partners, LLC and to certain other institutional investors a new series of senior cumulative exchangeable redeemable preferred stock (the "Preferred Stock") and detachable warrants for our common stock (the "Preferred Stock Warrants") for net consideration of approximately $98.5 million. The foregoing transactions are collectively referred to as the "Recapitalization." The total consideration paid in the Recapitalization was approximately $1.1 billion, including transaction costs. Immediately following the Recapitalization, approximately 55.5% of our total common stock was owned by an affiliate of J.P. Morgan Partners, LLC approximately 4.3% of our total common stock was owned by certain other institutional investors, and approximately 40.2% of our total common stock was owned collectively by the Trust and the Management Investors. J.P. Morgan Partners, LLC owns our common stock through its Flexible Film, LLC subsidiary and owns our preferred stock through its Southwest Industrial Films, LLC subsidiary. The accounting for the Recapitalization did not result in changes to the historical cost presentation of our assets and liabilities. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of Pliant Corporation and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION - Sales revenue is recognized upon shipment of product in fulfillment of a customer order. ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK - We are dependent upon a limited number of large customers with substantial purchasing power for a significant portion of our sales. Approximately 39% and 29% of the consolidated trade accounts receivable before allowances at December 31, 2001 and 2000, respectively were represented by twenty customers. One customer represented approximately 9% and 10% of consolidated receivables at December 31, 2001 and 2000, respectively. INVENTORIES - Inventories consist principally of finished film products and the raw materials necessary to produce them. Inventories are carried at the lower of cost (on a first-in, first-out basis) or market value. Resin costs comprise the majority of our total manufacturing costs. Resin shortages or significant increases in the price of resin could have a significant adverse effect on our business. F-8 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- PLANT AND EQUIPMENT - Plant and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated economic useful lives of the assets as follows:
Land improvements............................................. 20 years Buildings and improvements.................................... 20 years Computer Equipment and Software 3-7 years Machinery and equipment....................................... 7-15 years Furniture, fixtures and vehicles.............................. 3-7 years Leasehold improvements........................................ 10-20 years
Maintenance and repairs are charged to expense as incurred and costs of improvements and betterments are capitalized. Upon disposal, related costs and accumulated depreciation are removed from the accounts and resulting gains or losses are reflected in operations. Costs incurred in connection with the construction or major rebuild of equipment are capitalized as construction in progress. No depreciation is recognized on these assets until placed in service. INTANGIBLE ASSETS - Intangible assets are stated at cost. Amortization is computed using the straight-line method over the estimated economic useful lives of the assets as follows:
Cost in excess of fair value of net assets acquired .......... 10-40 years Other intangible assets....................................... 2-15 years
CARRYING VALUE OF LONG-LIVED ASSETS - We evaluate the carrying value of long-lived assets, including intangible assets, based upon current and expected undiscounted cash flows, and recognize an impairment when the estimated cash flows are less than the carrying value of the asset. Measurement of the amount of impairment, if any, is based upon the difference between the asset's carrying value and fair value. As of December 31, 2001, we believe that none of our long-lived assets are impaired. However, should significant customers be lost or industry market conditions materially deteriorate, and as a result our estimates of cash flows decline in the near term, we may be required to record an impairment loss which could be material to our results of operations and financial position. OTHER ASSETS - Other assets consist primarily of deferred debt issuance costs, deposits, spare parts and the cash surrender values of key-person life insurance policies. Major spare parts are depreciated from the purchase date using the straight-line method over the useful lives of the related machinery and equipment. CASH AND CASH EQUIVALENTS - For the purpose of the consolidated statements of cash flows, we consider short-term highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash generated outside of the United States is generally subject to taxation if repatriated. INCOME TAXES - We use the asset and liability method of accounting for income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial and tax reporting purposes. DERIVATIVE FINANCIAL INSTRUMENTS - As of December 31, 2001, we had five interest rate derivative contracts (see Note 6). For the year ended December 31, 2000 we realized a reduction in raw material inventory costs of $0.5 million from commodity collar agreements. There are no such agreements in place as of December 31, 2001. RECENT ACCOUNTING PRONOUNCEMENTS - 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 was adopted by F-9 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- the Company on January 1, 2002. We expect that the adoption of these accounting standards will have the impact of reducing amortization of goodwill . In August 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 provides the accounting requirements for retirement obligations associated with tangible long lived assets. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and discontinued operations. We are currently evaluating the impact of these pronouncements to determine the effect, if any, they may have on the consolidated financial position and the results of operations. In 2000, Emerging Issues Task Force issued certain bulletins that were applicable to the Company for the year ended December 31, 2001. These bulletins included EITF 00-14 "Accounting for Sales Incentives," EITF 00-22 "Accounting for Points and Certain Other Time Based and Volume Based Sales Incentive Offers and Offers for Free Products or Services to be Delivered in the Future" and EITF 00-25 "Vendor Income Statement Characterization of Consideration paid to a Reseller of the Vendors Products." The Company evaluated these bulletins and concluded that the Company was in compliance. Therefore, no reclassifications have been made to conform to the provisions of these bulletins. FOREIGN CURRENCY TRANSLATION - The accounts of our foreign subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and an average exchange rate for each month for revenues, expenses, gains and losses. Transactions are translated using the exchange rate at each transaction date. Where the local currency is the functional currency, translation adjustments are recorded as a separate component of stockholders' equity (deficit). Where the U.S. dollar is the functional currency, translation adjustments are recorded in other income within current operations. RECLASSIFICATIONS - Certain reclassifications have been made to the consolidated financial statements for comparative purposes. 2. INVENTORIES INVENTORY BALANCES - Inventories consisted of the following at December 31, 2001 and 2000 (in thousands):
2001 2000 ---- ---- Finished goods....................... $50,738 $46,760 Raw materials and other.............. 27,499 24,158 Work-in-process...................... 5,711 8,233 ------ ------ Total................................ $83,948 $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. During the third quarter of 2001, we 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 revised our plans to close that facility. During the first six months of 2001, $1.1 million was incurred to downsize the Harrington facility. The remaining balance of F-10 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- the plant closure costs of $7.6 million accrued in 2000 has been credited to plant closing costs in the consolidated statement of operations for the year ended December 31, 2001. The following is a summary of the key elements of the 2000 exit plan, excluding Harrington as management revised their closure plans for that facility in 2001:
DALLAS BIRMINGHAM TOTAL ------ ---------- ----- Number of employees to be terminated... 68 105 173 Book value of property and equipment to be $1,593 $8,913 $10,506 Disposed of.......................... 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 December 31, 2001, the remaining reserves related to severance costs and other costs are included in other accrued liabilities in the accompanying consolidated balance sheets 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 December 31, 2001 is summarized below:
BALANCE UTILIZED BALANCE 12/31/00 NON-CASH CASH REVERSAL 12/31/01 -------- -------- ------ -------- -------- Property and equipment reserves $13,801 $5,001 $ - $ $2,556 - 6,244 Severance costs.............. 4,371 - - 1,201 - 3,170 Other costs.................. 585 - - 170 233 --- ---- ------- --- --- 182 Total........................ $18,757 $5,001 $ 3,352 $7,615 $2,789 ======= ====== ======== ====== ======
As of December 31, 2001, 68 and 105 of the expected employee terminations had been completed at our Dallas and Birmingham facilities, respectively. As of December 31, 2001, all planned employee terminations had been completed at the Harrington facility. There were no reserves remaining for the Harrington facility closure as of December 31, 2001. As a part of the Uniplast acquisition the Company approved a plan to close three Uniplast production facilities and reduce the sales and administrative personnel. As of December 31, 2001 the closure of the production plants and reduction of sales and administrative personnel were complete. Severance costs of this plan of $3.0 million were accrued as a part of the cost of the acquisition. The cost of relocating production lines to existing company locations was expensed to plant closing costs in the consolidated statement of operations for 2001. The Company incurred approximately $3.0 million for these relocation costs in 2001. OFFICE CLOSING COSTS AND WORKFORCE REDUCTION - During the fourth quarter of 2000, we approved and announced a cost saving initiative resulting in a company-wide workforce reduction, relocation of the corporate office from Salt Lake City, Utah to the Chicago, Illinois area and closure of the Dallas, Texas divisional office. As a result of this initiative we recorded a pre-tax charge of $7.1 million, which is included as part of selling, general and administrative expenses in the accompanying consolidated statements of operations for the year ended December 31, 2000. The major actions relating to this initiative included a reduction in workforce due to consolidation of duties, and closing the offices in Dallas, Texas and Salt Lake City, Utah. We completed the workforce reduction of 52 employees and the closure of the office in Dallas, Texas during the first quarter of 2001, as well as the Salt Lake City office closure during the second quarter of 2001. The following is a summary of the key elements of this plan:
WORKFORCE RELOCATION OF CLOSURE OF REDUCTION CORPORATE OFFICE DALLAS OFFICE TOTAL --------- ---------------- ------------- ----- Number of employees...... 52 36 2 90 Leasehold improvements... $1,000 $1,000 Severance cost........... $2,940 2,352 $21 5,313 Other costs related to 721 82 803 leases................... Total cost............... $2,940 $4,073 $103 $7,116 ====== ====== ==== ======
As of December 31, 2001, the remaining reserves related to severance costs and other costs related to leases. These reserves are included in other accrued liabilities in the accompanying consolidated balance sheets, while the reserve for impairment related to leasehold improvements has been recorded as a reduction of the net property and equipment balance. In the fourth quarter of 2001 an additional $0.9 million was accrued to revise the estimate of future non-cancelable lease costs in excess of income from subleasing. Utilization of these reserves during the period ended December 31, 2001 is summarized below: F-11 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - --------------------------------------------------------------------------------
BALANCE UTILIZED ADDITIONAL BALANCE 12/31/00 NON-CASH CASH ACCRUAL 12/31/01 -------- ---------------- ---------- -------- Leasehold improvements... $1,000 1,000 - $ - Severance cost........... 3,254 210 $2,916 128 Other costs related to 803 - 545 $878 1,136 ------ ------ ------ ---- ------ leases................... Total cost............... $5,057 $1,210 $3,461 $878 $1,264 ====== ====== ====== ==== ======
As of December 31, 2001, 52, 35 and 2 of the expected employee terminations had been completed of the workforce reduction, closure of the Salt Lake City and the closure of the Dallas offices respectively. 4. PLANT AND EQUIPMENT The cost and the related accumulated depreciation at December 31, 2001 and 2000 is as follows (in thousands ) :
2001 2000 ----- ---- Land and improvements.............................................................. $8,136 $7,219 Buildings and improvements......................................................... 66,960 59,446 Machinery and equipment............................................................ 378,513 308,326 Computer equipment and software.................................................... 30,018 16,354 Furniture, fixtures and vehicles................................................... 6,204 6,057 Leasehold improvements............................................................. 2,201 1,236 Construction in progress........................................................... 12,955 32,435 -------- ------ 504,987 431,073 Less accumulated depreciation and amortization..................................... (135,663) (97,990) -------- ------ Plant and equipment, net........................................................... $369,324 $333,083 ======== =======
5. GOODWILL AND INTANGIBLE ASSETS The cost of Goodwill and intangible assets and related accumulated amortization at December 31, 2001 and 2000 is as follows (in thousands):
2001 2000 ---- ---- Goodwill.................................................. $234,795 $216,141 Intangible assets......................................... 47,832 30,514 -------- -------- 282,627 246,655 Less accumulated amortization............................. (51,428) (40,785) -------- -------- Goodwill and Intangible assets, net....................... $231,199 $205,870 ======== ========
Amortization expense for goodwill and intangible assets was approximately $10.6 million, $9.2 million and $9.0 million for the years ended December 31, 2001, 2000 and 1999, respectively. 6. LONG-TERM DEBT F-12 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- Long-term debt as of December 31, 2001 and 2000 consists of the following (in thousands):
2001 2000 -------- -------- Credit Facilities: Revolver, variable interest, 6.7% as of December 31, 2001.............................................. $ 39,511 $ 3,000 Tranche A and B term loans, variable interest at a weighted average rate of 6.4% as of December 31, 2001.................................................... 463,800 476,000 Senior subordinated notes, interest at 13.0% (net of original issue discount and warrants being amortized of $12,747).. 207,253 206,501 Obligations under capital leases (see Note 7)................ 2,090 370 Insurance financing, interest at 6.1% as of December 31, 2001........................................................ 588 1,522 Other financing.............................................. 81 - -------- -------- Total................................... 713,323 687,393 Less current portion......................................... (17,767) (9,362) -------- -------- Long-term portion............................................ $695,556 $678,031 ======== ========
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 at an exercise price of $0.01 per share. The Notes were issued at a discount of approximately $5.9 million and we allocated approximately $8.0 million to Note Warrants and approximately $206.1 million to Notes based on the relative fair values of each instrument. The Units were issued in a 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. Prior to June 1, 2003, the Company may, on one or more occasions, redeem up to a maximum of 35% of the original aggregate principal amount of the Notes with the net cash proceeds of one or more equity offerings by the Company at a redemption price equal to 113% of the principal amount thereof, plus accrued and unpaid interest. Otherwise, the Company may not redeem the Notes prior to June 1, 2005. On or after that date, the Company may redeem the Notes, in whole or in part, at a redemption price (expressed as percentages of principal amount), (plus accrued and unpaid interest) multiplied by the following percentages: 106.5% if redeemed prior to June 1, 2006; 104.333% if redeemed prior to June 1, 2007; 102.167% if redeemed prior to June 1, 2008. The 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 expire 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 pursuant to a tender offer, refinanced all amounts outstanding under our prior credit facilities (the "Prior Credit Facilities") and replaced the Prior Credit Facility with the amended and restated senior secured credit facilities (the "New Credit Facilities") with JPMorgan Chase Bank (formerly known as 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"). As of December 31, 2001, we had available borrowing capacity of $55.2 million on the Revolving Credit Facility. Loans under the Revolving Credit Facility and the Tranche A Facility bear interest, at our option, at either Adjusted LIBOR plus a margin or ABR (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%.) plus a margin in each case. These margins are subject to adjustment based on the leverage ratio for the most recent four quarters. These margins are currently 2.5% on Adjusted LIBOR borrowings and 2.0% ABR borrowings. 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. Adjusted LIBOR will at all times include statutory reserves. 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 F-13 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- 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. We are required to make annual mandatory prepayments of the Tranche A and B Facilities under the New Credit Facilities in an amount equal to 50% of excess cash flow, as defined, within 90 days following the end of each year, which commenced with the year ended December 31, 2000. As a part of the amendment dated September 30, 2000 discussed below the mandatory repayment was increased to 100% of excess cash flow, as defined, until a certain leverage ratio, as defined, was achieved. In addition, the Tranche A and B Facilities are subject to mandatory prepayments in an amount equal to (a) 100% of the net cash proceeds of equity and debt issuances by us or any of our subsidiaries and (b) 100% of the net cash proceeds of asset sales or other dispositions of property by us or any of our subsidiaries, in each case subject to certain exceptions. We are not required to make any mandatory prepayments for the year ended December 31, 2001. Our extraordinary loss for 2000 consisted of a $6.0 million charge (net of tax) for the payment made to tender our 9 1/8 % senior subordinated notes and a $5.25 million charge (net of tax) for the write off of capitalized loan fees associated with the early retirement of the various debt facilities. The 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. 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 December 31, 2001. In connection with the amendment, we incurred an amendment fee of $1.4 million, which has been included in interest expense. We also incurred $0.6 million of legal and administrative expenses in connection with negotiating the amendment. In addition, on July 16, 2001 we entered into a further amendment to our New Credit Facilities to permit the Uniplast acquisition. 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. 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. We pay a quarterly commitment fee on the unused amount of the Revolver at an annual rate of 0.50%. The interest rate margins and the commitment fee are subject to reduction if we achieve certain financial ratios. As of December 31, 2001, we had outstanding letters of credit of approximately $5.3 million. The scheduled maturities of long-term debt by year as of December 31, 2001 are as follows (in thousands):
Year Ending December 31, ------------------------ 2002........................... $17,767 2003........................... 31,253 2004........................... 55,516 2005........................... 62,989 2006........................... 35,514 Thereafter..................... 510,284 ------- Total.......................... $713,323 =======
Certain of our borrowings, including borrowings under the New Credit Facilities, are at variable rates of interest, exposing us to the risk of increased interest rates. Our leveraged position and the covenants contained in our debt instruments may also limit our flexibility to adjust to changing market conditions and our ability to withstand competitive pressures, thus putting us at a competitive disadvantage. We may be vulnerable to a downturn in general economic conditions or in our business or be unable to carry out capital spending that is important to our growth and productivity improvement programs. Effective January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137 and SFAS No. 138. In accordance with the statements, we recognize the fair value of derivatives as either assets or liabilities in the balance sheet. To the extent that the derivatives qualify a hedge, gains or losses associated with the effective portion are recorded as a component of other comprehensive income while the ineffective portion is recognized in income. At the adoption of this pronouncement, we had one interest rate cap agreement, which had been entered into during the fourth quarter of 2000. As a result, the initial adoption of this pronouncement did not result in a material effect to our financial statements. F-14 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- During 2001, we entered into four additional interest rate derivative agreements with financial institutions. We use our interest rate derivatives to manage interest rate risk associated with future interest payments on variable rate borrowings under our Credit Facilities. Our interest rate derivative agreements are considered cash flow hedges and consisted of the following as of December 31, 2001 (dollars in millions):
Notional Variable Fixed Maturity Amount Rate* Rate ** Dates ------------ ---------------- --------------------- ------------------ Type ---------- Interest rate cap $128.0 LIBOR 10.00% 12/31/2003 Interest rate cap 30.0 LIBOR 7.25% 02/09/2004 Interest rate collar 40.0 LIBOR 4.15% - 7.25% 02/13/2004 Interest rate swap 60.0 LIBOR 5.40% 02/13/2004 Interest rate swap 50.0 LIBOR 4.32% 12/20/2004
* Three-month LIBOR, as defined; 1.88% as of December 31, 2001 ** Strike for caps; floor and strike for collar; fixed LIBOR for swap agreements. The fair value of our interest rate derivative agreements is reported on our consolidated balance sheet at December 31, 2001 in other liabilities of approximately $3.0 million and in other assets of approximately $0.1 million. The effective portion of the changes in fair value of these instruments is reported in other comprehensive income. As the hedged contract matures, the gain or loss is recorded as interest expense in the consolidated statement of operations. We monitor the effectiveness of these contracts each quarter. Any changes in fair value of the ineffective portion of the instruments is reported as interest expense in the consolidated statement of operations. The ineffective portion for the years ended December 31, 2001 and 2000 were not material. We are exposed to credit losses in the event of nonperformance by the counter-party to the financial instrument. We anticipate, however, that the counter-party will be able to fully satisfy its obligations under the contract. Market risk arises from changes in interest rates. 7. LEASES CAPITAL LEASES - We have acquired certain land, building, machinery and equipment under capital lease arrangements that expire at various dates through 2007. At December 31, 2001 and 2000, the gross amounts of plant and equipment and related accumulated amortization recorded under capital leases were as follows (in thousands):
2001 2000 ---- ---- Land and building............................ $ 442 $309 Machinery and equipment...................... 2,375 353 ----- --- Total assets held under capital leases....... 2,817 662 Less accumulated amortization................ (381) (187) ---- --- $2,436 $475 ===== ===
OPERATING LEASES - We have non-cancelable operating leases, primarily for vehicles, equipment, warehouse, and office space that expire after 2006, as well as month-to-month leases. The total expense recorded under all operating lease agreements in the accompanying consolidated statements of operations is approximately $7.8 million, $6.7 million and $6.6 million for the years ended December 31, 2001, 2000 and 1999, respectively. F-15 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- Future minimum lease payments under operating leases and the present value of future minimum capital lease payments (with interest rates between 7.5% and 10.25%) as of December 31, 2001 are as follows (in thousands):
OPERATING CAPITAL Year Ending December 31, LEASES LEASES ------------------------ --------- ------- 2002..................................................... $8,009 $953 2003..................................................... 6,858 552 2004..................................................... 5,508 287 2005..................................................... 4,982 238 2006..................................................... 4,430 242 Thereafter............................................... 9,176 291 ------ ----- Total minimum lease payments $38,963 2,563 Amounts representing interest ====== (473) Present value of net minimum capital lease payments (see Note 6) $2,090 =====
During the year ended December 31, 2001 the Company entered into a transaction where production lines were sold for approximately $7.9 million and leased back to the Company under an operating lease agreement. The production lines were sold for their carrying values, thus no gain or loss was recorded on the transactions. F-16 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- 8. INCOME TAXES The following is a summary of domestic and foreign provisions for current and deferred income taxes and a reconciliation of the U.S. statutory income tax rate to the effective income tax rate. The provisions (benefits) for income taxes for the years ended December 31, 2001, 2000 and 1999 are as follows (in thousands):
2001 2000 1999 ------ -------- ------- Current: Federal.......................................... $23 $(112) $1,581 State............................................ 111 266 770 Foreign.......................................... 4,070 3,990 4,478 ------ -------- ------- Total current........................... 4,204 4,144 6,829 ------ -------- ------- Deferred: Federal.......................................... 2,021 (18,401) 6,975 State............................................ 179 18 71 Foreign.......................................... 382 (4) 212 ------ -------- ------- Total deferred.......................... 2,582 (18,387) 7,258 ------ -------- ------- Total income tax expense (benefit) (excluding income taxes applicable to the extraordinary item)............................................ $6,786 $(14,243) $14,087 ====== ======== =======
The effective income tax rate reconciliations for the years ended December 31, 2001, 2000 and 1999 are as follows (in thousands):
2001 2000 1999 ------ -------- ------ Income (loss) before income taxes and extraordinary item............................................. $4,718 $(53,776) $32,398 ====== ======== ======= Expected income tax provision (benefit) at U.S. statutory rate of 35%............................ $1,652 $(18,822) $11,339 Increase (decrease) resulting from: Goodwill......................................... 1,726 1,636 1,625 State taxes...................................... 188 137 547 Adjustment of tax attributes..................... 1,078 (174) (912) Foreign rate difference and other, net........... 2,142 1,099 1,488 Costs related to recapitalization................ -- 1,881 ------ -------- ------- Total income tax expense (benefit) (excluding income taxes applicable to the extraordinary item) $6,786 $(14,243) $14,087 ====== ======== ======= Effective income tax rate.......................... 143.8% 26.5% 43.5% ====== ======== =======
F-17 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- Components of net deferred income tax assets and liabilities as of December 31, 2001 and 2000 are as follows (in thousands):
2001 2000 ---- ---- Deferred income tax assets: Net operating loss carryforwards............................... $30,627 $27,412 AMT and foreign tax credit carryforwards....................... 2,478 2,478 Accrued pension costs not deducted for tax..................... 4,893 8,125 Accrued employee benefits...................................... 6,114 2,858 Plant closing costs not deducted for tax....................... 834 2,979 Allowance for doubtful trade accounts receivable............... 103 508 Inventory related costs not deducted for tax................... 642 571 Other.......................................................... 350 552 ------ ------ Total deferred income tax assets................ 46,041 45,483 ------ ------ Deferred income tax liabilities: Tax depreciation in excess of book depreciation................ (62,595) (58,525) Amortization of intangibles.................................... (5,123) (6,058) Other.......................................................... (1,916) (968) ------ ------- Total deferred income tax liabilities........... (69,634) (65,551) -------- ------- Net deferred income tax liability................................ $(23,593) $(20,068) ========= ======= As reported on consolidated balance sheets: Net current deferred income tax asset.......................... $2,563 $12,992 Net non-current deferred income tax liability.................. (26,156) (33,060) -------- ------- Net deferred income tax liability.............................. $(23,593) $(20,068) ========= =======
The net operating loss carryforwards for federal tax purposes are approximately $77.8 million expiring in 2020 and $9.8 million expiring in 2021. 9. EMPLOYEE BENEFIT PLANS DEFINED CONTRIBUTION PLAN - We sponsor a salary deferral plan covering substantially all of our non-union domestic employees. Plan participants may elect to make voluntary contributions to this plan up to 15% of their compensation. We contribute 1% of the participants' compensation and also match employee contributions up to 2% of the participants' compensation. We expensed approximately $2.6 million, $2.6 million and $2.2 million as our contribution to this plan for the years ended December 31, 2001, 2000 and 1999, respectively. DEFINED BENEFIT PLANS - We sponsor three noncontributory defined benefit pension plans (the "United States Plans") covering domestic employees with 1,000 or more hours of service. We fund the actuarially computed retirement cost. Contributions are intended to not only provide for benefits attributed to service to date but also for those expected to be earned in the future. We also sponsor a defined benefit plan in Germany (the "Germany Plan"). The consolidated accrued net pension expense for the years ended December 31, 2001, 2000 and 1999 includes the following components (in thousands):
United States Plans 2001 2000 1999 ---- ---- ---- Service cost - benefits earned during the period.............................. $3,707 $4,098 $4,056 Interest cost on projected benefit obligation............................... 4,101 4,192 3,659 Expected return on assets................................................... (4,183) (4,348) (3,913) Other....................................................................... (273) (185) 100 ----- ----- ------ Total accrued pension expense................................................. $3,352 $3,757 $3,902 ===== ====== ====== Germany Plan Service cost - benefits earned during the period.............................. $66 $62 $63 Interest cost on projected benefit obligation............................... 61 62 62 ----- ------ ------
F-18 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - --------------------------------------------------------------------------------
United States Plans 2001 2000 1999 ---- ---- ---- Total accrued pension expense................................................. $127 $124 $125 ==== ==== ====
The following table sets forth the funded status of the United States Plans and the Germany Plan as of December 31, 2001, 2000 and 1999 and the amounts recognized in the consolidated balance sheets at those dates (in thousands):
United States Plans 2001 2000 1999 ------ ------ ------ Change in benefit obligation: Obligation at January 1..................................................... $58,036 $50,405 $52,348 Service cost................................................................ 3,707 4,098 4,056 Interest cost............................................................... 4,101 4,192 3,659 Plan amendments............................................................. 544 219 Transfer of liability from Huntsman Corporation plan........................ 138 Actuarial (gain) loss....................................................... (3,602) 942 (7,781) Benefits paid............................................................... (2,080) (1,958) (1,877) ------ ------ ------ Obligation at December 31..................................................... $60,706 $58,036 $50,405 ====== ====== ====== Change in plan assets: Fair value of assets at January 1........................................... $46,964 $49,290 $44,001 Actual return on plan assets................................................ (4,378) (505) 6,603 Transfer of assets from Huntsman Corporation plan........................... 138 Employer contributions...................................................... 1,367 563 Benefit payments............................................................ (2,081) (1,958) (1,877) ------ ------ ------ Fair value of plan assets at December 31...................................... $41,872 $46,965 $49,290 ====== ====== ====== Underfunded status at December 31............................................. $18,833 $11,071 $1,115 Unrecognized net actuarial (gain)loss......................................... (333) 5,011 11,103 Unrecognized prior service cost............................................... (2,017) (1,584) (1,477) ------ ----- ------ Accrued long-term pension liability included in other liabilities............. $16,483 $14,498 $10,741 ====== ====== ======
For the above calculations, increases in future compensation ranging from 4.0% to 4.5% were used for the non-union plan. The benefit payments under the two union plans are not based on future compensation. For the 2001 calculations, discount rates range from 7.25% to 7.5% and expected rates of return on plan assets of 9.0% were used for all plans. For the 2000 calculations, discount rates range from 7.5% to 7.75% and expected rates of return on plan assets of 9.0% were used for all plans. For the 1999 calculations, the discount rate was 6.75% and expected rates of return on plan assets of 9.0% were used for all plans.
Germany Plan 2001 2000 ------ ------ Change in benefit obligation: Obligation at January 1................................................... $1,168 $1,090 Service cost.............................................................. 66 62 Interest cost............................................................. 61 62 Benefits paid............................................................. (11) (4) Change due to exchange rate............................................... (142) (42) ------ ------ Obligation at December 31................................................... $1,142 $1,168 ------ ------ Fair value of plan assets at December 31.................................... None None ------ ------ Underfunded status at December 31........................................... $1,142 $1,168 Unrecognized net actuarial loss............................................. 85 44 ------ ------ Accrued long-term pension liability included in other liabilities........... $1,227 $1,212 ====== ======
F-19 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- Increases in future compensation ranging from 2.0% to 3.5% and discount rates ranging from 6.0% to 7.0% were used in determining the actuarially computed present value of the projected benefit obligation of the Germany Plan. The cash surrender value of life insurance policies for Germany Plan participants included in other assets in the consolidated balance sheets is approximately $0.5 million as of December 31, 2001 and 2000. FOREIGN PLANS OTHER THAN GERMANY - Employees in other foreign countries are covered by various post employment arrangements consistent with local practices and regulations. Such obligations are not significant and are included in the consolidated financial statements in other liabilities. OTHER PLANS - As part of the acquisition of Blessings Corporation (see Note 13), we assumed two supplemental retirement plans covering certain former employees of Blessings Corporation. The liability for these plans included in other liabilities at December 31, 2001 was approximately $0.9 million. This liability was frozen at the time of the acquisition. 10. REDEEMABLE STOCK CLASS C COMMON STOCK AND COMMON STOCK - During 1999 and 1998, we sold a total of 50,611 shares of Class C nonvoting common stock to employees for $100 per share, the estimated fair market value. As consideration, we received cash of $2.5 million and notes receivable of $2.6 million. During 1999 and 1998, we redeemed a total of 1,100 shares for $100 per share. Of the total 49,511 shares outstanding at December 31, 1999, 26,223 shares were subject to repurchase rights of the Company. In addition, the stockholders had the right, following three years from the purchase date, to put any or all of the shares to Pliant for repurchase. Pursuant to the Recapitalization the 49,511 shares of Class C nonvoting common stock were exchanged for the same number of common shares and the original repurchase rights and put options were cancelled. Also, as part of the Recapitalization, 17,967 of these shares were redeemed (see Note 1). In connection with employment agreements entered into with four of these employees as part of the Recapitalization, new repurchase rights and put options were established. The new repurchase rights allow Pliant to repurchase these shares from the employee in the event of termination for any reason. The new put options allow 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. The price under the repurchase rights and the put options is the fair market value of the common stock, as determined in good faith. The $2.6 million notes receivable have secured promissory notes, bear interest at 7% per annum and were originally payable in three annual installments beginning in February 2002. Pursuant to the Recapitalization, the promissory notes were amended to provide that they are payable in three annual installments beginning on May 31, 2006. In May 2000, we sold 32,750 shares of additional restricted common stock to the same four employees for $483.13 per share, the estimated fair market value. We received, as consideration, notes receivable totaling $15.8 million. The notes receivable are full recourse, secured promissory notes, bear interest at 7% per annum and require the payment of principal and accrued interest in three equal annual installments beginning on May 31, 2006. Under the May 2000 restricted stock purchase agreements related to the restricted common stock, 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, if the recipient was still our employee on such date and (2) the remainder in equal increments over a five-year period commencing on December 31, 2001 as follows: (x) Based on a defined earnings target for the year ended December 31, 2001. These shares were declared vested in January 2002 based on the financial results for the year ended December 31, 2001. (y) For the periods thereafter the vesting is reviewed at the end of each calendar quarter as follows: (a) vesting in full if 100% or more of the applicable target market value of equity is achieved as of the end of the applicable calendar quarter and (b) partial vesting if more than 90% of the applicable target market of equity is achieved as of the end of the applicable calendar quarter. If the applicable targets are below 90% each year, vesting will automatically occur in full on December 31, 2009. The repurchase rights 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, as previously noted under the same 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 the 32,750 shares, in no event can be F-20 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- 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 one of the employees. Under the agreement, we cancelled approximately $133,000 of accrued interest on a note receivable. We repurchased 6,211 shares of restricted stock for $483.13 per share and offset the purchase price against $3.0 million of note principal. In addition, we agreed on January 2, 2001, to repurchase an additional 539 shares of restricted stock for $483.13 per share and offset the purchase price against $260,000 of note principal. The Company's repurchase rights were changed on the remaining 7,423 shares of common stock owned by 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 or the balance on the note receivable. Interest ceases 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. 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 one of the employees. 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 charging interest on the remaining $302,000 principal balance of the note receivable related to 625 shares and to cease charging interest on the $262,000 principal balance related to 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 $1.0 million was recorded in the first quarter of 2001, which represents the difference between the carrying amount and the fair value of the 2,622 shares common stock that are subject to the note receivable. On February 1, 2001, we amended the note receivable with a third employee that were issued in connection with the sale of restricted stock in 1999 and 2000. Under the amended notes receivable, interest ceased to accrue, effective December 31, 2000, on one note with a principal balance of $1.6 million and another note with a principal balance of $7.0 million. Further, the notes were modified to remove the full recourse provisions and modify the 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. As a result of these modifications, a compensation expense of $6.0 million was recorded in the first quarter of 2001. Because of the modifications to three of the four employee notes, in the first quarter of 2001 the fourth 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. As of December 31, 2001, there were a total of 53,996 common shares subject to put options as described above, of which 12,765 shares were acquired by the employees for cash from 1997 through 1999. As a result of the put options, the carrying value of all shares subject to put options will be adjusted to fair value at each reporting period with a corresponding offset to shareholders' equity for amounts related to the 12,765 shares and compensation expense for amounts related to the remaining shares until the notes receivable are paid in full. PREFERRED STOCK - We are authorized to issue up to 200,000 shares of preferred stock. As of December 31, 2001, 130,983 shares have been issued and are designated as Series A Cumulative Exchangeable Redeemable Preferred Stock (the "Preferred Stock"). In connection with the Recapitalization, we sold 100,000 shares of Preferred Stock and detachable warrants to purchase 43,242 shares of common stock for net consideration of $98.5 million, net of issuance costs of $1.5 million. We allocated approximately $80.0 million to Preferred Stock and $18.5 million to the warrants based on the relative fair values of the instruments. In connection with the Uniplast acquisition we issued 30,983 shares of Preferred stock (including 1,983 shares to employees) and detachable warrants to purchase shares of common stock for a consideration of $31.0 million, net of issue costs. We allocated $18.6 million to Preferred Stock, and $12.4 million to the warrants based on the relative fair values of the instruments. The common stock warrants have an exercise price of $0.01 per share and expire on May 31, 2011. F-21 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- Dividends on Preferred Stock accrue at an annual rate of 14%. We have the option to pay dividends in cash or to have the dividends accrue and compound quarterly. After May 31, 2005, however, the annual dividend rate increases to 16% unless we pay dividends in cash. The annual dividend rate also increases to 16% if we fail to comply with certain of our obligations or upon certain events of bankruptcy. The Preferred Stock is our most senior class of capital stock. We may, at our option, exchange the Preferred Stock for 14% senior subordinated exchange notes so long as such exchange and the associated debt incurrence is permitted by our existing debt instruments. We must redeem the Preferred Stock at a price equal to its liquidation preference of $1,000 per share, plus accumulated dividends, on May 31, 2011. On or after May 31, 2003, we may redeem the Preferred Stock at our option, in whole or in part, at a redemption price equal to the sum of the liquidation preference plus accrued and unpaid dividends multiplied by the following percentages: 107% if redeemed prior to May 31, 2004; 103% if redeemed on or after May 31, 2004 and prior to May 31, 2005; and 100% if redeemed at any time on or after May 31, 2005. As a result of the mandatory redemption features, as of December 31, 2001, the carrying value of the Preferred Stock has been increased by $1.3 million to reflect accretion towards the $131.0 million redemption value at May 31, 2011. In addition, the preferred stock balance as of December 31, 2001 includes $26.3 million for accrued dividends. 11. STOCK OPTION PLANS Pursuant to the Recapitalization, we adopted a 2000 stock incentive plan, which allows us to grant to employees nonqualified options to purchase up to 51,010 shares of common stock. The option price must be no less than fair market value on the date of grant. Unvested options are forfeited upon the employee's termination of employment. Vested options are forfeited, if not exercised 90 days after the employee's termination of employment. The plan is administered by the board of directors who determines the quantity, terms and conditions of an award, including any vesting conditions. The plan expires on either May 31, 2010 or a date which the board of directors, in its sole discretion, determines that the plan will terminate. Prior to the adoption of the 2000 plan, we had adopted the 1998 Huntsman Packaging Corporation Stock Option Plan which allowed for grant of options to purchase Class C common stock. All options that were outstanding under that plan as of the date of the Recapitalization (consisting of 8,902 options) were exchanged for options to purchase common stock under the 2000 stock incentive plan. There was no modification to the exercise price or the number of shares subject to option at the date of exchange. With the change of control that occurred with the Recapitalization, in accordance with the 1998 stock option plan, these options became 100% vested. A summary of stock option activity under the 1998 and 2000 plans is as follows:
WEIGHTED AVERAGE OPTION SHARES EXERCISE PRICE ------------- -------------- Outstanding at December 31, 1998.... 39,334 100.00 Forfeited or cancelled............ (28,845) 100.00 ------- Outstanding at December 31, 1999.... 10,489 100.00 Granted........................... 15,435 483.13 Exercised......................... (1,587) 100.00 Forfeited or cancelled............ (1,635) 483.13 ------- Outstanding at December 31, 2000 22,702 332.90 Granted........................... 12,865 483.13 Exercised......................... Forfeited or cancelled............ (730) 483.13 ------- Outstanding at December 31, 2001 34,837 385.22 ======= Exercisable at December 31, 2001.... 11,414 $184.32 =======
The weighted average remaining contractual life of the options is 7.7 years at December 31, 2001. Options to purchase 25,935 shares vest as follows: (1) 2,512 vested on January 1, 2001 and (2) 23,423 vest in equal increments over a five-year period commencing on December 31, 2001 as follows: (x) Based on a defined earnings target for the year ended December 31, 2001. These F-22 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- options were declared vested in January 2002 based on the financial results for the year ended December 31, 2001. (y) For the periods thereafter the vesting is reviewed at the end of each calendar quarter as follows: (a) vesting in full if 100% or more of the applicable target market value of equity is achieved as of the end of the applicable calendar quarter and (b) partial vesting if more than 90% of the applicable target market of equity is achieved as of the end of the applicable calendar quarter. If the applicable targets are below 90% each year, vesting will automatically occur in full on December 31, 2009. Subsequent to year end, unvested options to purchase 966 shares were forfeited as a result of employee terminations and vested options to purchase 454 shares will be forfeited if not exercised within 90 days from the termination date. ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS - We apply Accounting Principles Board Opinion No. 25 and related interpretations in accounting for stock-based compensation plans as they relate to employees and directors. Some of the options issued under the 1998 plan were performance-based options and required variable plan accounting. For the years ended December 31, 2001, 2000 and 1999, the Company recorded compensation expense of $7.0 million, $2.6 million and $0.8 million, respectively, related to these options. As a result of the Recapitalization, the remaining performance-based options became 100% vested. However, under employment agreements entered into with the Recapitalization, the shares contained a put option (see Note 10). As a result, the Company accounts for the 8,902 options as variable until exercised. Had compensation cost been determined in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," our income (loss) from continuing operations for the years ended December 31, 2001, 2000 and 1999 would have been the following pro forma amounts (in thousands):
2001 2000 1999 ------ ------- ------ As reported $(2,068) $(39,533) $18,311 Pro forma 5,407 (37,214) 18,978
The fair market value of each option is estimated on the date of grant using the Black-Scholes option-pricing model based on the following assumptions for 2001, 2000 and 1998 grants, respectively: risk free rate of return of 6.02% to 6.75%; expected life of 9 years to 10 years; dividend yield of 0% and 0%; and volatility of 0% and 0%. The weighted average fair value of the options as determined by the Black-Scholes option-pricing model was $202 per share for 2001 and 2000 grants and $49 per share for the 1998 grants. 12. COMMITMENTS AND CONTINGENCIES ENVIRONMENTAL CONTINGENCIES - Our operations are subject to extensive environmental laws and regulations concerning emissions to the air, discharges to surface and subsurface waters, and the generation, handling, storage, transportation, treatment, and disposal of waste materials, as adopted by various governmental authorities in the jurisdictions in which we operate. We make every reasonable effort to remain in full compliance with existing governmental laws and regulations concerning the environment. As part of a sale of a plant site in 1992, we agreed to indemnify environmental losses of up to $5 million which may have been created at the plant site between January 1, 1988 and May 18, 1992. This indemnity expires on May 8, 2002 and reduces ten percent each year beginning May 12, 1997. We believe that the ultimate liability, if any, resulting from this indemnification will not be material to our financial position or results of operations, as such no amount has been recorded in the financial statements related to this matter. ROYALTY AGREEMENTS - We have entered into royalty agreements (the "Agreements") for the right to use certain patents in the production of our Winwrap stretch film. We paid a fee of $450,000 to the patent holder for the first 2,250,000 pounds of film produced in North America. The Agreements require us to pay the patent holder a fee of $.10 for each pound of Winwrap produced in excess of 2,250,000 pounds but less than 37,500,000 pounds and $.05 per pound for each pound of Winwrap produced in excess of 37,500,000 pounds in North America. The Agreements require us to pay certain fees to obtain the rights to sell Winwrap outside of North America. The Agreements also require us to pay $.075 per pound of Winwrap sold outside of North America. We have the option to maintain these rights in subsequent years for certain agreed-upon fees. The Agreements terminate upon the expiration of the related patents in 2009. During the years ended December 31,2001, 2000 and 1999, we paid royalties of $1.6 million, $1.1 million and $0.7 million, respectively, under the Agreements. LITIGATION - We are subject to litigation and claims arising in the ordinary course of business. We believe, after consultation with legal counsel, that any liabilities arising from such litigation and claims will not have a material adverse effect on our financial position or results of operations. 13. ACQUISITIONS KCL CORPORATION - On October 18, 1999, we acquired certain assets and assumed certain liabilities of KCL Corporation and subsidiaries for cash of approximately $11.5 million. The acquisition was accounted for using the purchase method of accounting. F-23 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- Accordingly, results of operations have been included in the accompanying consolidated financial statements from the date of acquisition. We recorded goodwill of approximately $2.7 million, which is being amortized on a straight-line basis over 10 years. In connection with the purchase of KCL, we announced a plan to eliminate 32 full-time equivalent employees, move certain purchased assets and install them at desired locations, cease certain purchased operations, and write-off related impaired plant equipment and inventory. The purchase price allocation includes $0.7 million for severance costs, $0.4 million for asset removal and relocation and $0.1 million for the write-off of inventory. Our pro forma results of operations for the years ended December 31, 1999 and 1998 (assuming the significant acquisitions had occurred as of January 1, 1998) are as follows (in thousands):
1999 1998 -------- -------- Revenues......................................... $813,730 $720,547 Income (loss) from continuing operations......... 18,311 (1,267)
UNIPLAST HOLDINGS - On July 16, 2001, we acquired 100% of the outstanding stock of Uniplast Holdings, Inc. ( "Uniplast") for approximately $56.0 million, consisting of the assumption of approximately $40.3 million of debt and the issuance of shares of our common stock valued at approximately $15.7 million to the selling shareholders of Uniplast. We believe that this acquisition resulted in significant synergies to the combined operations and increased the market share in a number of our market segments. At the closing of the acquisition, we refinanced approximately $37.0 million of assumed debt with the proceeds from a private placement of 29,000 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 $18.6 million as goodwill as a result of this acquisition. The intangible assets are being amortized over 15 years while the goodwill is not being amortized. The operating results for Uniplast from July 16, 2001 are included in the statement of operations for the year ended December 31, 2001. The purchase price of $56.0 million has been allocated on a preliminary basis to assets and liabilities as follows:
(in millions) Current Assets $19.3 Property Plant and Equipment 20.6 Intangible Assets 14.4 Goodwill 18.6 Current Liabilities (13.1) Long-term Liabilities (3.8) ----- Total Purchase Price $56.0 =====
Our pro forma results of operations for the year ended December 31, 2001 (assuming the Uniplast acquisition had occurred as of January 1, 2001) are as follows (in thousands):
2001 -------- Revenues......................................... $882,860 Net income (loss)................................ (424)
F-24 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- 14. OPERATING SEGMENTS Operating segments are components of our business for which separate financial information is available that is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and in assessing performance. This information is reported on the basis that it is used internally for evaluating segment performance. We have three reportable operating segments: design products, industrial films and specialty films. 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. The specialty films segment produces converter films that are sold to other flexible packaging manufacturers for additional fabrication, barrier films that contain and protect food and other products, and other films used in the personal care, medical, agriculture and horticulture industries. Disclosures for each product line within operating segments are not required because amounts of net revenues are impracticable to obtain. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. Sales and transfers between our segments are eliminated in consolidation. We evaluate performance of the operating segments based on profit or loss before income taxes, not including plant closing costs and other nonrecurring gains or losses. Our reportable segments are managed separately with separate management teams, because each segment has differing products, customer requirements, technology and marketing strategies. Segment profit or loss and segment assets as of and for the years ended December 31, 2001, 2000 and 1999 are presented in the following table (in thousands). Certain reclassifications have been made to the prior year amounts to be consistent with the 2001 presentation.
DESIGN INDUSTRIAL SPECIALTY CORPORATE/ PRODUCTS FILMS FILMS OTHER TOTAL -------- ---------- ------------------- ----- 2001 Net sales to customers......... $213,688 $246,127 $380,545 $ -- $840,360 Intersegment sales............. 4,810 7,123 7,398 (19,331) -- ------- ------- ------- ------ ------- Total net sales................ 218,498 253,250 387,943 (19,331) 840,360 Depreciation and amortization.. 11,258 8,057 12,726 14,976 47,017 Interest expense............... 3,012 242 107 72,627 75,988 Segment profit................. 36,077 43,889 86,682 (161,930) 4,718 Segment total assets........... 182,255 126,890 442,263 100,275 851,683 Capital expenditures........... 12,243 7,278 31,712 5,185 56,418 2000 Net sales to customers......... $215,439 $242,621 $385,737 $ -- $843,797 Intersegment sales............. 4,531 6,664 6,211 (17,406) ------- ------- ------- ------ ------- Total net sales................ 219,970 249,285 391,948 (17,406) 843,797 Depreciation and amortization.. 10,779 7,540 10,850 10,377 39,546 Interest expense............... 3,545 351 25 64,613 68,534 Segment profit................. 26,725 35,802 70,523 (186,826) (53,776) Segment total assets........... 179,692 128,928 393,754 82,660 785,034 Capital expenditures........... 18,607 11,207 22,789 13,041 65,644 1999 Net sales to customers......... $183,341 $231,418 $398,971 $ -- $813,730 Intersegment sales............. 7,189 5,456 3,969 (16,614) ------- ------- ------- ------- ------- Total net sales................ 190,530 236,874 402,940 (16,614) 813,730 Depreciation and amortization.. 8,095 7,030 10,822 9,072 35,019 Interest expense............... 3,397 351 27 40,253 44,028 Segment profit................. 21,350 36,044 85,814 (110,810) 32,398 Segment total assets........... 175,924 126,531 405,076 61,492 769,023 Capital expenditures........... 6,885 10,215 15,192 3,431 35,723
F-25 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- A reconciliation of the totals reported for the operating segments to the totals reported in the consolidated financial statements is as follows (in thousands):
2001 2000 1999 -------- -------- -------- PROFIT OR LOSS Total profit for reportable segments.... $166,648 $133,050 $143,208 -------- -------- -------- Stock based compensation related to administrative employees................ (7,033) Compensation and transaction costs related to recapitalization............ (10,754) Plant closing costs..................... 4,588 (19,368) (2,497) Unallocated amounts: Corporate expenses................... (86,858) (92,091) (68,060) Interest expense.................... (72,627) (64,613) (40,253) Other income/expense................ -- -- -- --------- -------- -------- Total Corporate/Other (161,930) (186,826) (110,810) Income (loss) from continuing operations before taxes............ $ 4,718 $(53,776) $ 32,398 ========= ======== ======== ASSETS Total assets for reportable segments.... $751,408 $702,374 $707,531 Intangible assets not allocated to segments.............................. 46,973 14,856 16,166 Other unallocated assets................ 53,302 67,804 45,326 --------- -------- -------- Total consolidated assets............... $ 851,683 $785,034 $769,023 ========= ======== ========
Our sales to Kimberly-Clark Corporation and its affiliates represented approximately 13%, 12% and 13% of consolidated net sales in 2001, 2000 and 1999, respectively. Substantially all of the sales to Kimberly-Clark are from the specialty films and design products operating segments. No other customers accounted for more than 10% of consolidated net sales during 2001, 2000 and 1999. The loss of Kimberly-Clark Corporation or a material reduction in sales to such customer would have a material adverse effect on our results of operations and our ability to service our indebtedness. 15. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. In the case of cash and cash equivalents, the carrying amount is considered a reasonable estimate of fair value. The fair value of floating rate debt in 2001 and 2000 was obtained from market quotes. The fair value of fixed rate debt is estimated by discounting estimated future cash flows through the projected maturity using market discount rates that reflect the approximate credit risk, operating cost, and interest rate risk potentially inherent in fixed rate debt. Fair value estimates are made at a specific point in time. Because no market exists for a significant portion of our financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments, interest rate levels, and other factors. These estimates are subjective in nature and involve uncertainties and matters of judgment and therefore cannot be determined or relied on with any degree of certainty. Changes in assumptions could significantly affect the estimates. Below is a summary of our financial instruments' carrying amounts and estimated fair values as of December 31, 2001 and 2000 (in thousands):
2001 2000 ------------------------ ------------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- Financial assets - cash and cash equivalents........................... $ 4,818 $ 4,818 $ 3,060 $ 3,060 ======== ======== ======== ======== Financial liabilities: Floating rate debt................... 503,311 503,311 $479,370 $418,633 Fixed rate debt...................... 210,012 228,800 208,023 129,120 -------- -------- -------- -------- Total financial liabilities............. $713,323 $732,111 $687,393 $547,753 ======== ======== ======== ========
F-26 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- 16. RELATED-PARTY TRANSACTIONS The accompanying consolidated financial statements for the years ended December 31, 2000 and 1999 include the following transactions with companies affiliated with Jon M. Huntsman, our majority stockholder prior to our Recapitalization (in thousands). All related-party transactions have been recorded at estimated fair market values for the related products and services.
2000 1999 With Huntsman Corporation and affiliates (HC) ---- ---- Inventory purchases........................................... $20,363 $ 21,124 Rent expense under operating lease............................ 377 396 Administrative expenses....................................... 796 2,831 Charitable contribution....................................... - 1,000 Sales of film products........................................ - 258
INSURANCE COVERAGE - Prior to the Recapitalization, we obtained most of our insurance coverage under policies of HC. Reimbursement payments to HC are based on premium allocations, which are determined in cooperation with an independent insurance broker and are not included in the above amounts. ADMINISTRATIVE EXPENSES - Administrative expenses were allocated to us under a cancelable services agreement which was cancelled upon completion of the Recapitalization. RENT EXPENSE - We were obligated to pay rent calculated as a pro rata portion (based on our percentage occupancy) of the mortgage principal and interest payments related to the HC headquarters facility. In November 2000, we relocated and paid no further rent payments. STOCKHOLDERS' NOTES RECEIVABLE - Notes receivable were issued to various employees in connection with the sale of stock (see Note 10). J.P. MORGAN PARTNER AND AFFILIATES - JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank) is the syndication agent, and its affiliate, J.P. Morgan Chase & Co. (formerly The Chase Manhattan Corporation), is a lender under our credit facilities. Both JPMorgan Chase Bank and J.P. Morgan Chase & Co. receive customary fees under the credit facilities for acting in such capacities including approximately $0.6 million in 2001. JPMorgan Chase Bank was also a lender under our prior credit facility, and as a result, received a portion of the proceeds from the financing for the Transactions. Chase Securities Inc. was one of the initial purchasers in the offering of the $220.0 million aggregate principal amount of 13% senior subordinated notes due 2010, and was also the dealer manager for the debt tender offer and consent solicitation relating to our 9 1/8% senior subordinated notes due 2007 and received customary fees for acting in such capacities. Each of JPMorgan Chase Bank, J.P. Morgan Chase & Co. and Chase Securities Inc. are affiliates of Southwest Industrial Films, LLC, which owns approximately 53% of our outstanding common stock and currently has the right under the stockholders' agreement to appoint four of our directors, and of Flexible Films, LLC, which owns approximately 57% of our Preferred Stock. 17. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS The following condensed consolidating financial statements present, in separate columns, financial information for (i) Pliant Corporation (on a parent only basis) with its investment in its subsidiaries recorded under the equity method, (ii) guarantor subsidiaries (as specified in the Indenture dated May 31, 2000 (the "Indenture") relating to Pliant Corporation's $220 million senior subordinated notes (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 Corporation and its subsidiaries on a consolidated basis, and (v) Pliant Corporation on a consolidated basis, in each case as of December 31, 2001 and 2000 and for the years ended December 31, 2001, 2000 and 1999. The Notes are fully and unconditionally guaranteed on a joint and several basis by each guarantor subsidiary and each guarantor subsidiary is wholly owned, directly or indirectly, by Pliant Corporation. There are no contractual restrictions limiting transfers of cash from guarantor and non-guarantor subsidiaries to Pliant Corporation. 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. F-27 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- On January 1, 1999, two of our guarantor subsidiary companies, Huntsman Deerfield Films Corporation and Huntsman United Films Corporation, were merged with and into Pliant. In addition, during the first quarter of 2001, our Blessings subsidiary was merged with and into Pliant. Accordingly, these former guarantor subsidiary companies are now included as part of the "Pliant Corporation Parent Only" column for all periods presented. F-28 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2001 (IN THOUSANDS)
PLIANT CONSOLIDATED CORPORATION COMBINED COMBINED PLIANT PARENT ONLY GUARANTORS NON-GUARANTORS ELIMINATIONS CORPORATION ----------- ------------ -------------- ------------ ------------- ASSETS Current assets: Cash and cash equivalents.................. $ - $967 $3,851 $ - $4,818 Receivables................................ 94,163 7,321 23,952 - 125,436 Inventories................................ 65,135 9,087 9,726 - 83,948 Prepaid expenses and other................. 1,856 398 772 - 3,026 Income taxes receivable.................... 361 7 617 - 985 Deferred income taxes...................... 4,670 (314) (1,793) - 2,563 ------- ------ ------- ------ ------- Total current assets.................... 166,185 17,466 37,125 - 220,776 Plant and equipment, net...................... 293,628 26,386 49,310 - 369,324 Goodwill and intangible assets, net........... 210,946 3,628 16,625 - 231,199 Investment in subsidiaries.................... 62,837 - - (62,837) - Other assets.................................. 27,188 182 3,014 - 30,384 ------- ------ ------- ------ ------- Total assets.................................. $760,784 $47,662 $106,074 $(62,837) $851,683 ======= ====== ======= ====== ======= LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT) Current liabilities: Trade accounts payable..................... $81,099 $4,678 $15,731 $ - $101,508 Accrued liabilities........................... 36,541 1,703 4,853 - 43,097 Current portion of long-term debt.......... 17,767 - - - 17,767 Due to (from) affiliates................... (24,978) 22,147 2,831 - - ------- ------ ------- ------ ------- Total current liabilities................ 110,429 28,528 23,415 - 162,372 Long-term debt, net of current portion........ 662,556 - 33,000 - 695,556 Other liabilities............................. 17,411 - 1,533 - 18,944 Deferred income taxes......................... 22,108 1,625 2,423 - 26,156 ------- ------ ------- ------ ------- Total liabilities........................ 812,504 30,153 60,371 - 903,028 ======= ====== ======= ====== ======= Minority interest..................................... (104) - 375 - 271 Redeemable stock: Preferred stock.................................... 126,149 - - - 126,149 Common stock.................................... 16,778 - - - 16,778 ------- ------ ------- ------ ------- Redeemable stock............................. 142,927 - - - 142,927 ------- ------ ------- ------ ------- Stockholders' (deficit): Common stock............................... 103,362 14,020 29,616 (43,636) 103,362 Warrants to purchase common stock............ 38,715 - - - 38,715 Retained earnings (deficit)....................... (326,356) 3,500 21,215 (24,715) (326,356) Stockholders' notes receivable............. (616) - - - (616) Accumulated other comprehensive loss....... (9,648) (11) (5,503) 5,514 (9,648) ------- ------ ------- ------ ------- Total stockholders' (deficit)............ (194,543) 17,509 45,328 (62,837) (194,543) ------- ------ ------- ------ ------- Total liabilities and stockholders' (deficit). $760,784 $47,662 $106,074 $(62,837) $851,683 ======= ====== ======= ====== =======
F-29 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 (IN THOUSANDS)
PLIANT CONSOLIDATED CORPORATION COMBINED COMBINED PLIANT PARENT ONLY GUARANTORS NON-GUARANTORS ELIMINATIONS CORPORATION ----------- ---------- -------------- ------------ ------------- Net sales..................................... $687,349 $45,088 $127,254 $(19,331) $840,360 Cost of sales................................. 546,541 38,423 99,459 (19,331) 665,092 ------ ------ ------- ------ ------- Gross profit.................................. 140,808 6,665 27,795 - 175,268 Total operating expenses...................... 89,117 690 11,280 - 101,087 ------ ------ ------- ------ ------- Operating income.............................. 51,691 5,975 16,515 - 74,181 Interest expense.............................. (72,563) (82) (3,343) - (75,988) Equity in earnings of subsidiaries............ 12,756 - - (12,756) - Other income (expense), net................... 8,382 1,464 (3,321) - 6,525 ------ ------ ------ ------ ------- Income (loss) before income taxes and extraordinary loss....................... 266 7,357 9,851 (12,756) 4,718 Income tax expense............................ 2,334 - 4,452 - 6,786 ------ ----- ------ ------ ------- Net income (loss) ............................ $(2,068) $7,357 $5,399 $(12,756) $(2,068) ======= ===== ===== ====== ======
F-30 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2001 (IN THOUSANDS)
PLIANT CONSOLIDATED CORPORATION COMBINED COMBINED PLIANT PARENT ONLY GUARANTORS NON-GUARANTORS ELIMINATIONS CORPORATION ----------- ---------- -------------- ------------ ------------ Cash flows from operating activities:.......... $3,574 $13,290 $13,480 - $30,344 ------ ------ ------- ------- ------- Cash flows from investing activities: Proceeds from sale of assets................ 2,966 4,948 - - 7,914 Uniplast acquisition, net of cash acquired................. (14,945) (14,020) (9,813) - (38,778) Capital expenditures for plant and equipment (49,640) (3,490) (3,288) - (56,418) ------ ------ ------- ------- ------- Net cash used in investing activities..... (61,619) (12,562) (13,101) - (87,282) ------ ------ ------- ------- ------- Cash flows from financing activities: Payment of capitalized fees................. (1,932) - - - (1,932) (Payment) receipt of dividends.............. 150 - (150) - - Net proceeds from issuance of common and preferred stock........................... 30,991 - - - 30,991 Borrowings / (payments) on long-term debt... 29,035 - (3,105) - 25,930 ------ ------ ------- ------- ------- Net cash provided by (used in) financing activities.............................. 58,244 - (3,255) - 54,989 ------ ------ ------- ------- ------- Effect of exchange rate changes on cash and cash equivalents................................. (658) 229 4,136 - 3,707 ------ ------ ------- ------- ------- Net (decrease)/ increase in cash and cash equivalents................................. (459) 957 1,260 - 1,758 ------ ------ ------- ------- ------- Cash and cash equivalents at beginning of the year........................................ 459 10 2,591 - 3,060 ------ ------ ------- ------- ------- Cash and cash equivalents at end of the year... $ - $967 $3,851 - $4,818 ====== ====== ======= ======= =======
F-31 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2000 (IN THOUSANDS)
PLIANT CONSOLIDATED CORPORATION COMBINED COMBINED PLIANT PARENT ONLY GUARANTORS NON-GUARANTORS ELIMINATIONS CORPORATION ----------- ---------- -------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents.................. $459 $10 $2,591 $3,060 Receivables................................ 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: Trade accounts payable..................... $87,970 $5,730 $15,318 $109,018 Accrued liabilities........................ 32,068 1,201 5,743 39,012 Current portion of long-term debt.......... 8,312 1,050 9,362 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............................. 15,828 1,557 17,385 Deferred income taxes......................... 30,206 497 2,357 33,060 ------- ------ ------ ------- ------- Total liabilities........................ 807,360 20,870 57,638 885,868 ------- ------ ------ ------- ------- Redeemable stock.............................. 105,177 105,177 ------- ------ ------ ------- ------- 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 (deficit)................ (312,414) (3,857) 15,966 (12,109) (312,414) Stockholders' notes receivable............. (825) (825) Accumulated other comprehensive 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 ======= ====== ====== ======= =======
F-32 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 (IN THOUSANDS)
PLIANT CONSOLIDATED CORPORATION COMBINED COMBINED PLIANT PARENT ONLY GUARANTORS NON-GUARANTORS ELIMINATIONS CORPORATION ----------- ---------- -------------- ------------ ------------ Net sales..................................... $707,218 $40,670 $113,315 $(17,406) $843,797 Cost of sales................................. 587,281 39,628 87,213 (17,406) 696,716 ------- ------ ------ ------- ------- Gross profit.................................. 119,937 1,042 26,102 147,081 Total operating expenses...................... 108,386 9,489 14,780 132,655 ------- ------ ------ ------- ------- Operating income (loss)....................... 11,551 (8,447) 11,322 14,426 Interest expense.............................. (64,638) 27 (3,923) (68,534) Equity in earnings of subsidiaries............ 1,209 (1,209) Other income (expense), net................... (6,601) 5,580 1,353 332 ------- ------ ------ ------- ------- Income (loss) before income taxes and extraordinary item....................... (58,479) (2,840) 8,752 (1,209) (53,776) Income tax expense (benefit).................. (18,946) 718 3,985 (14,243) ------- ------ ------ ------- ------- Income (loss) before extraordinary item....... (39,533) (3,558) 4,767 (1,209) (39,533) Extraordinary loss............................ (11,250) (11,250) ------- ------ ------ ------- ------- Net income (loss) ............................ $(50,783) $(3,558) $4,767 $(1,209) $(50,783) ======= ====== ====== ======= =======
F-33 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2000 (IN THOUSANDS)
PLIANT CONSOLIDATED CORPORATION COMBINED COMBINED PLIANT PARENT ONLY GUARANTORS NON-GUARANTORS ELIMINATIONS CORPORATION ----------- ---------- -------------- ------------ ------------ Cash flows from operating activities:......... $38,398 $4,895 $16,973 - $60,266 ------- ------ ------ ------- ------- Cash flows from investing activities: Capital expenditures for plant and equipment (52,042) (6,506) (7,096) - (65,644) ------- ------ ------ ------- ------- Net cash used in investing activities.... (52,042) (6,506) (7,096) - (65,644) ------- ------ ------ ------- ------- Cash flows from financing activities: Payment of capitalized fees................ (22,303) - - - (22,303) Payment of fees for tender offer........... (10,055) - - - (10,055) Proceeds from issuance of stock............ 161,820 - - - 161,820 (Payment) receipt of dividends............. 750 - (750) - Redemption of common stock................. (314,034) - - - (314,034) Payments received from stockholder on note receivable............................... 165 - - - 165 Proceeds from long-term debt............... 691,684 - - - 691,684 Principal payments on borrowings........... (497,296) - (9,706) - (507,002) ------- ------ ------ ------- ------- Net cash provided by (used in) financing activities............................. 10,731 - (10,456) - 275 ------- ------ ------ ------- ------- Effect of exchange rate changes on cash and cash equivalents................................ 2,141 1,104 (4,179) - (934) ------- ------ ------ ------- ------- Net decrease in cash and cash equivalents..... (772) (507) (4,758) - (6,037) Cash and cash equivalents at beginning of the year....................................... 1,231 517 7,349 - 9,097 ------- ------ ------ ------- ------- Cash and cash equivalents at end of the year.. $459 $10 $2,591 - $3,060 ======= ====== ====== ======= =======
F-34 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS)
PLIANT CONSOLIDATED CORPORATION COMBINED COMBINED PLIANT PARENT ONLY GUARANTORS NON-GUARANTORS ELIMINATIONS CORPORATION ----------- ---------- -------------- ------------ ------------ Net sales..................................... $696,431 $24,637 $109,276 $(16,614) $813,730 Cost of sales................................. 566,564 23,177 82,625 (16,614) 655,752 ------- ------ ------ ------- ------- Gross profit.................................. 129,867 1,460 26,651 - 157,978 Total operating expenses...................... 59,228 7,572 15,187 - 81,987 ------- ------ ------ ------- ------- Operating income.............................. 70,639 (6,112) 11,464 - 75,991 Interest expense.............................. (40,307) - (3,721) - (44,028) Equity in earnings of subsidiaries............ 3,892 - - (3,892) Other income (expense), net................... (6,069) 6,081 423 - 435 ------- ------ ------ ------- ------- Income before income taxes.................... 28,155 (31) 8,166 (3,892) 32,398 Income tax expense............................ 9,844 (235) 4,478 - 14,087 ------- ------ ------ ------- ------- Net income ................................... $18,311 $204 $3,688 $(3,892) $18,311 ======= ====== ====== ======= =======
F-35 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS)
PLIANT CONSOLIDATED CORPORATION COMBINED COMBINED PLIANT PARENT ONLY GUARANTORS NON-GUARANTORS ELIMINATIONS CORPORATION ----------- ---------- -------------- ------------ ------------ Cash flows from operating activities:......... $50,310 $(332) $1,475 - $51,453 ------- ------ ------ ------- ------- Cash flows from investing activities: Proceeds from sale of assets............... 98 1,093 - - 1,191 Payments for acquisitions.................. (11,812) 314 - - (11,498) Capital expenditures for plant and equipment (31,280) (585) (3,858) - (35,723) ------- ------ ------ ------- ------- Net cash used in investing activities.... (42,994) (822) (3,858) - (46,030) ------- ------ ------ ------- ------- Cash flows from financing activities: Proceeds from issuance of common stock..... 986 - - - 986 Payments received form stockholders' notes receivable............................... 135 - - - 135 Payments on long-term debt................. (15,319) - (2,531) - (17,850) ------- ------ ------ ------- ------- Net cash used in financing activities.... (14,198) - (2,531) - (16,729) ------- ------ ------ ------- ------- Effect of exchange rate changes on cash and cash equivalents................................ 216 18 952 - 1,186 Net increase (decrease) in cash and cash equivalents................................ (6,666) 508 (3,962) - (10,120) Cash and cash equivalents at beginning of the year....................................... 7,897 9 11,311 - 19,217 ------- ------ ------ ------- ------- Cash and cash equivalents at end of the year.. $1,231 $517 $7,349 - $9,097 ======= ====== ====== ======= =======
18. OTHER INCOME Other income for the year ended December 31, 2001 includes the proceeds and assets received from a settlement with a potential new customer and other less significant items. F-36 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- PLIANT CORPORATION AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGED TO BALANCE DESCRIPTION BEGINNING COSTS AND AT END OF YEAR EXPENSES OTHER OF YEAR ALLOWANCE FOR DOUBTFUL ACCOUNTS: --------- ---------- ------ ------- 2001 $2,166 $155 $117 (1)(2) $2,438 2000 2,115 51 (1) 2,166 1999 2,570 518 (973)(1) 2,115
(1) Represents the net of accounts written off against the allowance and recoveries of previous write-offs. (2) Represents allowance acquired in the Uniplast acquisition. S-1 INDEX TO EXHIBITS EXHIBIT NUMBER ------- 2.1 Recapitalization Agreement, dated as of March 31, 2000 (the "Recapitalization Agreement"), among Pliant Corporation, Chase Domestic Investments, L.L.C., Richard P. Durham as Representative, and the shareholders of Pliant Corporation signatory thereto (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by Pliant Corporation on April 12, 2000). 2.2 Amendment No. 1, dated as of April 3, 2000, to the Recapitalization Agreement (incorporated by reference to Exhibit 2.2 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 2.3 Amendment No. 2, dated as of May 31, 2000, to the Recapitalization Agreement (incorporated by reference to Exhibit 2.3 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 3.1 Third Amended and Restated Articles of Incorporation of Pliant Corporation (incorporated by reference to Exhibit 3.1 to Pliant Corporation's Registration Statement of Form S-4 (File No. 333-42008)). 3.2 Articles of Amendment of Third Amended and Restated Articles of Incorporation of Pliant Corporation (incorporated by reference to Exhibit 3.2 to Pliant Corporation's Annual Report on Form 10-K for the year ended December 31, 2000 filed on April 2, 2001). 3.3 Articles of Amendment of Third Amended and Restated Articles of Incorporation of Pliant Corporation (incorporated by reference to Exhibit 3.2 to Pliant Corporation's Registration Statement on Form S-1 (File No. 333-65754)). 3.4 Amended and Restated Bylaws of Pliant Corporation (incorporated by reference to Exhibit 3.10 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 4.1 Indenture, dated as of May 31, 2000, among Pliant Corporation, the Note Guarantors party thereto and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 4.2 Form of New Notes (incorporated by reference to Exhibit B to Exhibit 4.1). 4.3 First Supplemental Indenture, dated as of July 16, 2001, among Pliant Corporation, the New Note Guarantors party thereto, the existing Note Guarantors party thereto and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.3 to Pliant Corporation's Registration Statement on Form S-1 (File No. 333-65754)). 4.4 Exchange and Registration Rights Agreement, dated as of May 31, 2000, among Pliant Corporation, the Note Guarantors party thereto, and Chase Securities, Inc. and Deutsche Bank Securities Inc., as Initial Purchasers (incorporated by reference to Exhibit 4.3 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.1 Note Warrant Agreement, dated as of May 31, 2000, among Pliant Corporation and The Bank of New York, as Warrant Agent, relating to the 220,000 Note Warrants (incorporated by reference to Exhibit 10.1 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.2 Stockholders' Agreement, dated as of May 31, 2000, among Pliant Corporation, Chase Domestic Investments, L.L.C. and each of the stockholders and warrantholders listed on the signature pages thereto (incorporated by reference to Exhibit 10.2 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.3 Amendment No. 1 and Waiver dated as of July 16, 2001 to the Stockholder's Agreement, dated as of May 31, 2000, among Pliant Corporation, Chase Domestic Investments, L.L.C. and each of the stockholders and warrantholders listed on the signature pages thereto (incorporated by reference to Exhibit 10.3 to Pliant Corporation's Registration Statement on Form S-1 (File No. 333-65754)). 10.4* Amendment No. 2 dated as of December 19, 2001 to the Stockholder's Agreement, dated as of May 31, 2000, among Pliant Corporation, Chase Domestic Investments, L.L.C. and each of the stockholders and warrantholders listed on the signature pages thereto. Exhibit Number ------ 10.5 Registration Rights Agreement, dated as of May 31, 2000 (the "Registration Rights Agreement"), among Pliant Corporation, Chase Domestic Investments, L.L.C. and each of the stockholders and warrantholders listed on the signature pages thereto (incorporated by reference to Exhibit 10.3 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.6 Amendment No. 1, dated as of June 13, 2000, to the Registration Rights Agreement (incorporated by reference to Exhibit 10.4 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.7 Securities Purchase Agreement, dated as of May 31, 2000, among Pliant Corporation and each of the purchasers of Pliant Corporation's preferred stock listed on the signature pages thereto (incorporated by reference to Exhibit 10.5 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.8 Amendment No. 1 and Waiver dated as of July 16, 2001 to the Securities Purchase Agreement dated as of May 31, 2000 among Pliant Corporation, and each of the purchasers of Pliant Corporation's preferred stock listed on the signature pages thereto ((incorporated by reference to Exhibit 10.7 to Pliant Corporation's Registration Statement on Form S-1 (File No. 333-65754)). 10.9 Warrant Agreement, dated as of May 31, 2000, among Pliant Corporation and Chase Domestic Investments, L.L.C. (incorporated by reference to Exhibit 10.6 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.10 Amendment No. 1 dated as of July 16, 2001 to the Warrant Agreement dated as of May 31, 2000 among Pliant Corporation and the initial warrantholders listed in Schedule I thereto (incorporated by reference to Exhibit 10.9 to Pliant Corporation's Registration Statement on Form S-1 (File No. 333-65754)). 10.11 Securities Purchase Agreement dated as of July 16, 2001 among Pliant Corporation and the purchasers of Pliant Corporation's preferred stock listed on the schedules thereto (incorporated by reference to Exhibit 10.10 to Pliant Corporation's Registration Statement on Form S-1 (File No. 333-65754)). 10.12 Credit Agreement, dated as of September 30, 1997, as amended and restated as of May 31, 2000, among Pliant Corporation, the subsidiary guarantors party thereto, the various lenders from time to time party thereto (the "Lenders"), Bankers Trust Company, as Administrative Agent and Collateral Agent, and The Chase Manhattan Bank, as Syndication Agent, and The Bank of Nova Scotia, as the Documentation Agent (incorporated by reference to Exhibit 10.7 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.13 Amendment No. 1, dated as of September 30, 2000, to Credit Agreement dated as of September 30, 1997, as amended and restated as of May 31, 2000 (incorporated by reference to Exhibit 10.1 to Pliant Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). 10.14 Amendment No. 2, dated as of July 10, 2001, to the Credit Agreement dated as of September 30, 1997, as amended and restated as of May 31, 2000 (incorporated by reference to Exhibit 10.13 to Pliant Corporation's Registration Statement on Form S-1 (File No. 333-65754)). 10.15 Guarantee Agreement, dated as of September 30, 1997, as amended and restated as of May 31, 2000, among the subsidiary guarantors party thereto and Bankers Trust Company, as Collateral Agent (incorporated by reference to Exhibit 10.8 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.16 Supplement No. 1, dated as of July 19, 2001, to the Guarantee Agreement, dated as of September 30, 1997, as amended and restated as of May 31, 2000, among Pliant Corporation, each of the subsidiaries listed on Schedule I thereto and Bankers Trust Company, as Administrative Agent (incorporated by reference to Exhibit 10.15 to Pliant Corporation's Registration Statement on Form S-1 (File No. 333-65754)). 10.17 Security Agreement, dated as of September 30, 1997, as amended and restated as of May 31, 2000, among the subsidiary guarantors party thereto and Bankers Trust Company, as Collateral Agent (incorporated by reference to Exhibit 10.9 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.18 Supplement No. 1, dated as of July 19, 2001, to the Security Agreement, dated as of September 30, 1997, as amended and restated as of May 31, 2000, among Pliant Corporation, each of the subsidiaries listed on Schedule I thereto and Bankers Trust Company, as Collateral Agent (incorporated by reference to Exhibit 10.17 to Pliant Corporation's Registration Statement on Form S-1 (File No. 333-65754)). Exhibit Number ------ 10.19 Pledge Agreement, dated as of September 30, 1997, as amended and restated as of May 31, 2000, among the subsidiary guarantors party thereto and Bankers Trust Company, as Collateral Agent (incorporated by reference to Exhibit 10.10 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.20 Supplement No. 1, dated as of July 19, 2001, to the Pledge Agreement, dated as of September 30, 1997, as amended and restated as of May 31, 2000, among Pliant Corporation, each of the subsidiaries listed on Schedule I thereto and Bankers Trust Company, as Collateral Agent (incorporated by reference to Exhibit 10.19 to Pliant Corporation's Registration Statement on Form S-1 (File No. 333-65754)). 10.21 Indemnity, Subrogation and Contribution Agreement, dated as of September 30, 1997, as amended and restated as of May 31, 2000, among the subsidiary guarantors party thereto and Bankers Trust Company, as Collateral Agent (incorporated by reference to Exhibit 10.11 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.22 Supplement No. 1, dated as of July 19, 2001, to the Indemnity, Subrogation and Contribution Agreement, dated as of September 30, 1997, as amended and restated as of May 31, 2000, among Pliant Corporation, each of the subsidiaries listed on Schedule I thereto and Bankers Trust Company, as Collateral Agent (incorporated by reference to Exhibit 10.21 to Pliant Corporation's Registration Statement on Form S-1 (File No. 333-65754)). 10.23 Employment Agreement, dated as of May 31, 2000, between Pliant Corporation and Richard P. Durham (incorporated by reference to Exhibit 10.12 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.24 Amendment No. 1, dated as of February 1, 2001, to the Employment Agreement, dated as of May 31, 2000, between Pliant Corporation and Richard P. Durham (incorporated by reference to Exhibit 10.14 to Pliant Corporation's Annual Report on Form 10-K for the year ended December 31, 2000 filed on April 2, 2001). 10.25 Employment Agreement, dated as of May 31, 2000, between Pliant Corporation and Jack E. Knott (incorporated by reference to Exhibit 10.13 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.26 Employment Agreement, dated as of May 31, 2000, between Pliant Corporation and Scott K. Sorensen (incorporated by reference to Exhibit 10.14 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.27 Letter Agreement, dated as of December 27, 2000, terminating the Employment Agreement, dated as of May 31, 2000, between Pliant Corporation and Scott K. Sorensen (incorporated by reference to Exhibit 10.17 to Pliant Corporation's Annual Report on Form 10-K for the year ended December 31, 2000 filed on April 2, 2001). 10.28 Employment Agreement, dated as of May 31, 2000, between Pliant Corporation and Ronald G. Moffitt (incorporated by reference to Exhibit 10.15 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.29 Letter Agreement, dated as of January 22, 2001, terminating the Employment Agreement, dated as of May 31, 2000, between Pliant Corporation and Ronald G. Moffitt (incorporated by reference to Exhibit 10.19 to Pliant Corporation's Annual Report on Form 10-K for the year ended December 31, 2000 filed on April 2, 2001). 10.30* Employment Agreement, dated as of March 30, 2001, between Pliant Corporation and Brian E. Johnson. 10.31 Restricted Stock Agreement, dated as of May 31, 2000, between Pliant Corporation and Richard P. Durham (incorporated by reference to Exhibit 10.16 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.32 Restricted Stock Agreement, dated as of May 31, 2000, between Pliant Corporation and Jack E. Knott (incorporated by reference to Exhibit 10.17 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.33 Restricted Stock Agreement, dated as of May 31, 2000, between Pliant Corporation and Scott K. Sorensen (incorporated by reference to Exhibit 10.18 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). Exhibit Number ------ 10.34 Stock Redemption Agreement, dated as of December 27, 2000, between Pliant Corporation and Scott K. Sorensen (incorporated by reference to Exhibit 10.23 to Pliant Corporation's Annual Report on Form 10-K for the year ended December 31, 2000 filed on April 2, 2001). 10.35 Restricted Stock Agreement, dated as of May 31, 2000, between Pliant Corporation and Ronald G. Moffitt (incorporated by reference to Exhibit 10.19 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.36 Stock Redemption Agreement, dated as of February 1, 2001, between Pliant Corporation and Ronald G. Moffitt (incorporated by reference to Exhibit 10.25 to Pliant Corporation's Annual Report on Form 10-K for the year ended December 31, 2000 filed on April 2, 2001). 10.37 Pledge Agreement, dated as of May 31, 2000, in favor of Pliant Corporation made by Richard P. Durham (incorporated by reference to Exhibit 10.20 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.38 Amendment No. 1, dated as of March 1, 2001, to the Pledge Agreement dated as of May 31, 2000, among Pliant Corporation and Richard P. Durham (incorporated by reference to Exhibit 10.35 to Post-Effective Amendment No. 2 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.39 Pledge Agreement, dated as of May 31, 2000, in favor of Pliant Corporation made by Jack E. Knott (incorporated by reference to Exhibit 10.21 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.40 Amendment No. 1, dated as of April 1, 2001, to the Pledge Agreement dated as of May 31, 2000, among Pliant Corporation and Jack E. Knott (incorporated by reference to Exhibit 10.36 to Post-Effective Amendment No. 2 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.41 Pledge Agreement, dated as of May 31, 2000, in favor of Pliant Corporation made by Scott K. Sorensen (incorporated by reference to Exhibit 10.22 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.42 Pledge Agreement, dated as of May 31, 2000, in favor of Pliant Corporation made by Ronald G. Moffitt (incorporated by reference to Exhibit 10.23 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.43 1998 Pliant Corporation Stock Option Plan (incorporated by reference to Exhibit 10.10 to Pliant Corporation's Annual Report on Form 10-K for the year ended December 31, 1998). 10.44 Pliant Corporation Management Incentive Plan for Senior Divisional Management (1999) (incorporated by reference to Exhibit 10.1 to Pliant Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000). 10.45 Pliant Corporation 2000 Stock Incentive Plan (incorporated by reference to Exhibit 10.26 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.46 Second Amended and Restated Stock Option Agreement, dated as of May 31, 2000 between Pliant Corporation and Jack E. Knott (incorporated by reference to Exhibit 10.27 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-42008)). 10.47 Pliant Corporation Management Incentive Plan (2000) (incorporated by reference to Exhibit 10.2 to Pliant Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000). 10.48* Pliant Corporation Management Incentive Plan (2001). 10.49* Pliant Corporation Management Incentive Plan (2002). 12.1* Statement re: computation of ratios of earning to fixed charges. 21.1* Subsidiaries of Pliant Corporation. 99.1* Letter of Pliant Corporation regarding Arthur Andersen LLP. - -------- * Filed with this report. EX-10.4 3 y58490ex10-4.txt AMENDMENT NO. 2 TO THE STOCKHOLDER'S AGREEMENT EXHIBIT 10.4 AMENDMENT NO. 2 dated as of December 19, 2001 (this "Amendment"), to the STOCKHOLDERS' AGREEMENT dated as of May 31, 2000 (as amended by Amendment No. 1 and Waiver thereto dated July 12, 2001, the "Original Agreement"), among PLIANT CORPORATION f/k/a Huntsman Packaging Corporation, a Utah corporation (the "Company"), and certain of the stockholders of the Company signatory thereto. By executing and delivering this Amendment, the undersigned signatories hereto hereby agree as set forth below. Capitalized terms used but not defined herein shall have the respective meanings ascribed to them in the Original Agreement. SECTION 1. Amendments. (a) Section 9.14(a) of the Original Agreement is hereby amended and restated in its entirety as set forth below: "(a) Unless otherwise covered in the Management Stockholders' written employment agreement with the Company, in the event that a Management Stockholder's employment with the Company is terminated for whatever reason, the Company or its designee shall have the right (but not the obligation), upon delivery of a Repurchase Notice to the Management Stockholder, to repurchase from such Management Stockholder and (each of his or her Permitted Transferees) all or any part of the Stockholder Shares owned by such Management Stockholder (and each of his or her Permitted Transferees) at any time. The price per Stockholder Share to be paid by the Company shall be the greater of: (i) the Fair Market Value as of the last day of the calendar quarter ending on, or immediately before, the date the Management Stockholder's employment with the Company was terminated, or (ii) the Fair Market Value as of the last day of the calendar quarter ending on, or immediately before, the date the Company repurchases the Stockholder Shares. The purchase price to be paid by the Company for any repurchase of Stockholder Shares pursuant to this Section 9.14 shall be paid in cash." (b) Section 4.1(b) of the Original Agreement is hereby amended and restated in its entirety as set forth below: "(b) [Intentionally omitted]" SECTION 2. No other Amendments or Waivers. Except as modified by this Amendment, the Original Agreement shall remain in full force and effect, enforceable in accordance with its terms. This Amendment is not a consent to any waiver or modification of any other terms or conditions of the Original Agreement or any of the instruments or documents referred to in the Original Agreement and shall not prejudice any right or rights which the parties thereto may now or hereafter have under or in connection with the Original Agreement or any of the instruments or documents referred to therein. SECTION 3. Effectiveness. This Amendment shall be effective upon the execution hereof by the requisite Persons party to the Original Agreement in accordance with Section 7.1 of the Original Agreement. SECTION 4. Counterparts. This Amendment may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by the Company, the Requisite Trust Holders and the Requisite Investor Holders, it being understood that all of the foregoing need not sign the same counterpart. Any counterpart or other signature to this Amendment that is delivered by facsimile shall be deemed for all purposes as constituting good and valid execution and delivery by such party of this Amendment. SECTION 5. Governing Law. This Amendment shall be governed by and construed and enforced in accordance with the laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether in the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. ******* IN WITNESS WHEREOF, the parties have duly executed this Amendment No.1 and Waiver to the Stockholders' Agreement as of the date first above written. PLIANT CORPORATION f/k/a Huntsman Packaging Corporation By: ------------------------------------------ Name: Title: SOUTHWEST INDUSTRIAL FILMS, LLC By: J.P. Morgan Partners (BHCA), L.P. its Member By: JPMP Master Fund Manager, L.P., its General Partner By: JPMP Capital Corp., its General Partner By: ------------------------------------------ Name: Title: FIRST UNION CAPITAL PARTNERS, LLC By: ------------------------------------------ Name: Title: NEW YORK LIFE CAPITAL PARTNERS, L.P. By: NYLCAP Manager LLC, its Investment Manager By: ------------------------------------------ Name: Title: THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY By: ------------------------------------------ Name: Title: Its Authorized Representative THE CHRISTENA KAREN H. DURHAM TRUST By: ------------------------------------------ Name: Title: EX-10.30 4 y58490ex10-30.txt EMPLOYMENT AGREEMENT EXHIBIT 10.30 March 28, 2001 PERSONAL AND CONFIDENTIAL Mr. Brian E. Johnson 1750 Henly, Unit 18 Glenview, Illinois 60025 Dear Brian: We have been extremely pleased with our discussions to date and are delighted you are seriously considering a leadership career with Pliant Corporation. The purpose of this letter is to confirm our various discussions to date and to present to you a formal offer. By accepting a position with Pliant Corporation, you are expected to conduct yourself in an honest and ethical manner at all times consistent with management's desire to operate its business on the highest level of business standards. You will join the company in the position of Executive Vice President - Chief Financial Officer, and report to me as President & Chief Operating Officer. The organizational groups of finance and information technology will report to you. As you learn our organization and operations, we will look to your leadership and guidance to help us achieve our current projected goals and beyond. Your initial base salary for the first year will be at the monthly rate of $21,666.67. Your base salary will be reviewed annually thereafter. You will be eligible for our Management Incentive Plan, which has a target bonus of 50% of your base salary, paid quarterly. The maximum bonus is not capped. On your first day of employment, you will be granted 5,000 stock options. You will have the option of participating in our standard automobile policy. The company will reimburse you for monthly dues in your present country club membership, and any direct business related expenses. You will be granted three (3) weeks of vacation per year until your earned vacation based on your years of service coincides with the company policy. Thereafter, your vacation shall be in accordance with our standard vacation policy. You are expected to schedule your vacation so as not to interfere with your responsibilities and to be consistent with good business judgment. You will participate in the company's normal benefit plans for similarly situated employees. In the event of involuntary termination of your employment for reasons other than cause or a change of control, you will be eligible for one year's severance. In the event such involuntary termination occurs within the first year of employment, you will receive one year's severance plus salary continuation from the effective date of termination through the first anniversary of your employment. You will be required to take and pass our standard pre-employment physical and drug test. All of these terms are covered in detail in the attached employment agreement and stock option plan. Given that the terms and conditions of these documents are satisfactory, we would ask you to indicate your acceptance by signing and returning this Offer Letter by April 6, 2001 (FAX is acceptable - 847-969-3338), and to resign your current position on or about April 2, 2001. Furthermore, within the bounds of professional business conduct, we ask that you make every effort to begin your employment with Pliant Corporation as soon as possible, but no later that April 23, 2001. Brian, we hope this has accurately captured the intent of our various conversations to date. If you have any questions please call Larry Shepler, Vice President Human Resources, at 847-969-3357. We look forward to your acceptance of this offer and to a long and mutually beneficial relationship. Sincerely, PLIANT CORPORATION /s/ Jack E. Knott Jack E. Knott President and Chief Operating Officer Accepted by: /s/ Brian E. Johnson 3/30/01 ------------------------------------------------ Brian E. Johnson Date EMPLOYMENT AGREEMENT dated as of March [ ], 2001, between PLIANT CORPORATION, a Utah corporation (the "Company"), and BRIAN JOHNSON (the "Executive"). Each of the Company and its Subsidiaries is engaged in the business (the "Business") of producing and distributing polymer-based, value-added films and flexible packaging products for food, personal care, medical, agricultural, industrial and other applications. The Company desires to employ the Executive, and the Executive desires to accept such employment, on the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as set forth below. SECTION 1. EMPLOYMENT. The Company hereby employs the Executive, and the Executive accepts employment with the Company, upon the terms and conditions set forth in this Agreement for the period beginning on April 16, 2001 (the "Commencement Date") and ending on the Termination Date determined pursuant to Section 4(a) (the "Employment Period"). SECTION 2. BASE SALARY AND BENEFITS. (a) During the Employment Period, the Executive's base salary shall be $260,000 per annum (the "Base Salary"), which salary shall be payable in such installments as is customary for senior executives of the Company. In addition, during the Employment Period, the Executive shall be entitled to participate in all employee benefit programs for which other senior executives of the Company are generally eligible, and the Executive shall be eligible to participate in all insurance plans available generally to other senior executives of the Company. The Executive shall be entitled to take three weeks of paid vacation annually, or any greater amount of paid vacation to which he is entitled under the Company's vacation policy as in effect during the Employment Period. The Board shall conduct a review of the Executive's Base Salary on an annual or more frequent basis. (b) The Executive shall be entitled to participate in the Company's stock option program. The Executive understands that the stock option program is a discretionary program that may or may not result in additional compensation to the Executive in any particular year, and that the Company may modify or revoke the stock option program at any time (although the Executive would be entitled to participate in any program adopted to replace the stock option program). (c) On the Commencement Date, the Company will grant the Executive 5,000 options to acquire Common Stock pursuant to the terms of an option agreement in the form of Exhibit A attached hereto (the "Option Agreement"). (d) The Executive shall be entitled to participate in the Company's Management Incentive Plan, as amended, revised or replaced from time to time. The Executive understands that the Management Incentive Plan is a discretionary program that may or may not result in additional compensation to the Executive in any particular year, and that the Company may modify or revoke the Management Incentive Plan at any time (although the Executive would be entitled to participate in any program adopted to replace the Management Incentive Plan). Notwithstanding the foregoing, the parties agree that the Executive's bonus target for any calendar year will be 50% of Base Salary. (e) The Executive will be covered under the terms of the Company's leased car program, which covers the cost of his annual lease, car insurance, gasoline and maintenance. The Executive will be eligible for reimbursement by the Company for membership at one country club. The Executive will continue to be eligible for benefits under the Company's relocation program, should he experience an eligible relocation. The Executive will be entitled to participate in all other perquisite programs offered by the Company to senior executives of the Company. (f) The Company shall reimburse the Executive for all reasonable expenses incurred by him in the course of performing his duties under this Agreement which are consistent with the Company's policies in effect from time to time with respect to travel, entertainment and other business expenses, subject to the Company's requirements with respect to reporting and documentation of such expenses. (g) The Company shall deduct from any payments to be made by it to the Executive under this Agreement any amounts required to be withheld in respect of any federal, state or local income or other taxes. SECTION 3. POSITION AND DUTIES. (a) The Company employs the Executive as Senior Vice President and Chief Financial Officer. His responsibilities and duties will be commensurate with the title of his position, and will include those duties and responsibilities normally performed by the Senior Vice President and Chief Financial Officer of a private corporation in the Business. The Executive will report directly to the President. The Executive will perform his duties from the Chicago, Illinois location. (b) The Executive acknowledges and agrees to discharge his duties and otherwise act in a manner consistent with the best interests of the Company and its Subsidiaries. During the Employment Period, the Executive shall devote his best efforts, on a full-time basis, to the performance of his duties and responsibilities under this Agreement (except for vacations to which he is entitled pursuant to Section 2(a), illness or incapacity or other personal investment activities that do not interfere with his full and timely performance of his duties and responsibilities under this Agreement). During the Employment Period, the Executive shall not -2- engage in any business activity which, in the reasonable judgment of the Board, materially conflicts with his duties under this Agreement, whether or not such activity is pursued for gain, profit or other pecuniary advantage. SECTION 4. TERMINATION. (a) Termination Date. The Executive's employment under this Agreement shall terminate upon the earliest to occur (the date of such occurrence being the "Termination Date") of (i) the fifth anniversary of the Commencement Date (an "Expiration"), (ii) the effective date of the Executive's resignation (a "Resignation"), (iii) the effective date of the Executive's Resignation for Good Reason, (iv) the Executive's death, (v) the Executive's Disability (as later defined), (vi) the Executive's Retirement (as later defined), (vii) the effective date of a termination of the Executive's employment for Cause by the Board (a "Termination for Cause"), and (viii) the effective date of a termination of the Executive's employment by the Board for reasons that do not constitute Cause (a "Termination Without Cause"). The effective date of the Executive's Resignation or the Executive's Retirement shall be as determined under Section 4(b); the effective date of a Resignation for Good Reason shall be as determined under Section 4(c); the effective date of the Executive's Disability shall be the date specified in a notice delivered to the Executive by the Company; and the effective date of a Termination for Cause or a Termination Without Cause shall be the date specified in a notice delivered to the Executive by the Company of such termination. (b) Resignation or Retirement. The Executive shall give the Company and the Board at least ninety (90) days' prior written notice of a Resignation or Retirement, with the effective date of such Resignation or Retirement specified therein. The Board may, in its discretion, accelerate the effective date of the Resignation, but not of a Retirement. (c) Resignation for Good Reason. The Executive will give the Company and the Board at least thirty (30) days' prior written notice of a Resignation for Good Reason. SECTION 5. EFFECT OF TERMINATION; SEVERANCE. (a) In the event of a Termination Without Cause or a Resignation for Good Reason, the Executive or his beneficiaries or estate shall receive the following: (i) the unpaid portion of the Base Salary, computed on a pro rata basis to the Termination Date; (ii) (A) in the event that the Termination Date occurs prior to the second anniversary of the Commencement Date, the greater of (x) the unpaid portion of the Base Salary for the period beginning on the Termination Date and ending on the second anniversary of the Commencement Date and (y) the unpaid portion of the Base Salary for the period beginning on the Termination Date and ending on the first anniversary of the Termination Date, or (B) in the event that the Termination Date occurs after the second anniversary of the Commencement Date, the unpaid portion of the Base Salary for the period beginning on the Termination Date and ending on the first anniversary of the Termination Date, in the case of clauses (A) and (B), payable in the same amounts and at the same intervals as the Base Salary was paid immediately prior to -3- the Termination Date; provided, however, that in the event of a breach by the Executive of Sections 7, 8, 9, or 10 on or after the Termination Date, the provisions of Section 12 shall apply; (iii) the quarterly bonus payment(s) that would have been payable to the Executive under the quarterly portion of the Company's Management Incentive Plan, as amended, revised or replaced from time to time for all senior executives of the Company, plus an amount equal to the annual portion of the bonus that was paid or is payable to the Executive for the year preceding the calendar year in which the Termination Date occurs, multiplied by a fraction, the numerator of which is the number of days of the then-current calendar year that elapse before the Termination Date, and the denominator of which is 365; (iv) reimbursement for any expenses for which the Executive shall not have been previously reimbursed, as provided in Section 2(f); and (v) continued participation in the Company's comprehensive medical and dental plan for the period beginning on the Termination Date and ending on the first anniversary of the Termination Date, with the COBRA continuation coverage qualifying event, connected with the Executive's termination occurring when he loses coverage at the end of that one-year period. If it is unable to obtain the consent of its medical and/or dental plan insurer to provide coverage under this clause (v), the Company may instead pay the full premium cost of other medical and dental insurance that provides comparable coverage for the required one-year period, and require the Executive to pay an amount equal to the then-current COBRA continuation premium for the period after the one-year period during which the Executive would be entitled to COBRA continuation coverage (with the Executive and his dependents being treated for all notice, election, coverage entitlement and other administrative purposes the same as other COBRA qualified beneficiaries under the Company's medical and dental plan). The parties agree that the Executive's entitlement to medical and dental coverage during the first year after the Termination Date will end on the date he becomes eligible for comprehensive medical and dental coverage under a plan of his successor employer, if he becomes so eligible before the first anniversary of the Termination Date. (b) In the event of the Executive's death, Disability, Retirement, or Resignation, or an Expiration, the Executive or his beneficiaries or estate shall have the right to receive the following: (i) the unpaid portion of the Base Salary, computed on a pro rata basis to the Termination Date; (ii) the quarterly bonus payment(s) that would have been payable to the Executive under the quarterly portion of the Company's Management Incentive Plan, as amended, revised or replaced from time to time for all senior executives of the Company, plus an amount equal to the annual portion of the bonus that was paid or is payable to the Executive for the year preceding the calendar year in which the Termination Date occurred, multiplied by a fraction, the numerator of which is the -4- number of days of the then-current calendar year that elapse before the Termination Date, and the denominator of which is 365; (iii) reimbursement for any expenses for which the Executive shall not have been previously reimbursed, as provided in Section 2(f); and (iv) in the event of a termination due to Disability, such Executive's Base Salary will continue until such time as the Executive first receives benefits under the Company's then-effective long-term disability plan. (c) In the event of a Termination for Cause, the Executive or his beneficiaries or estate shall have the right to receive the following: (i) the unpaid portion of the Base Salary, computed on a pro rata basis to the Termination Date; and (ii) reimbursement for any expenses for which the Executive shall not have been previously reimbursed, as provided in Section 2(f); and (d) Notwithstanding any other term of this Agreement to the contrary, upon termination of the Executive's employment for any reason, the Executive will in all events receive, when they would otherwise be then due and owing, any amounts he will have accrued and vested in under the Company's qualified and nonqualified retirement plans, all statutory rights to receive or purchase welfare benefits, reimbursement for un-reimbursed expenses in accordance with the policies of the Company in effect as of the Termination Date, accrued vacation pay, and any other employee benefits owing to him, all as determined in accordance with the applicable terms of the plans themselves and the laws applicable to them. No provision of this Agreement will be deemed to curtail or reduce the Executive's rights under any Company employee benefit plan, program or arrangement. SECTION 6. REPURCHASE OF SHARES. (a) In the event that the Executive's employment with the Company or any of its Subsidiaries is terminated for whatever reason, the Company or its designee shall have the right (but not the obligation) to repurchase from (i) the Executive, (ii) each member of his Family Group, (iii) his Permitted Transferees (as defined in the Stockholders' Agreement) and (iv) any investment vehicle owning shares attributable to the Executive or through which the Executive otherwise owns, or has a beneficial interest in, Shares (all of the persons referred to in the foregoing clauses (i), (ii) (iii) and (iv) hereinafter collectively referred to as the "Executive Group") all or any part of the Shares owned by the Executive Group. (b) The repurchase right of the Company or its designee under this Section 6 may be exercised by written notice on one occasion (the "Repurchase Notice"), specifying the number of Shares to be repurchased, and given to the Executive within 120 days of the Termination Date (or, if the Company shall not have assigned its rights under this Section 6 and shall be legally prevented (whether by contract or statutorily) from making such repurchase during the foregoing 120-day period, then the Repurchase Notice may be delivered by the Company within forty-five (45) days after the date on which it shall be legally permitted to make such repurchase), but in no -5- event shall the Company be permitted to make such election after the third anniversary of the Termination Date. Upon the delivery of a Repurchase Notice to the Executive, each member of the Executive Group shall be obligated to sell or cause to be sold to the Company or its designee the Shares specified in such Repurchase Notice. (c) In the event of the Executive's (w) Resignation for Good Reason, (x) death, (y) Disability or (z) Retirement, the Executive, or his estate, as applicable shall have the right (but not the obligation) to cause the Company to repurchase all (but not less than all) of the Shares owned by the Executive Group; provided, however, that the Executive, or his estate, as applicable, provides the Company with prior written notice (the "Put Notice") of an intent to exercise the rights hereunder and such notice is delivered to the Company not later than 120 days after the Termination Date, or, in the event of the Executive's death or the Executive's Disability resulting in legal incapacity, not later than 120 days after an executor or other legally empowered representative has been appointed to administer the Executive's estate or affairs. The Company's obligation to repurchase Shares under this Section 6(c) shall be subject to any financing or other restrictive covenants to which the Company is subject at the time of the proposed repurchase. (d) The price per Share to be paid under this Section 6 shall be the Fair Market Value of as of the last day of the calendar month ending on or immediately before the Termination Date. The purchase price to be paid for any repurchase of Shares pursuant to this Section 6 shall be paid in cash. (e) The purchasers of any Shares pursuant to this Section 6 will be entitled to require all of the sellers of Shares to provide representations and warranties from each such seller regarding (i) such seller's power, authority and legal capacity to enter into such sale and to transfer valid right, title and interest in such Shares, (ii) such seller's ownership of such Shares and the absence of any liens, pledges, and other encumbrances on such Shares and (iii) the absence of any violation, default, or acceleration of any agreement or instrument pursuant to which such seller or the assets of such seller are bound as the result of such sale. (f) Should the Company or any of its designees elect to exercise the repurchase rights pursuant to this Section 6 and any seller fails to deliver such Shares in accordance with the terms hereof, the purchaser of such Shares hereunder may, at its option, in addition to all other remedies it may have, deposit the repurchase price in an escrow account administered by an independent third party (to be held for the benefit of and payment over to such seller in accordance herewith), whereupon the Company shall by written notice to such seller (i) cancel on its books the certificates(s) representing such Shares registered in the name of such seller and (ii) issue to the purchaser, in lieu thereof, new certificate(s) representing such Shares registered in the purchaser's name, and all of the seller's right, title, and interest in and to such Shares shall terminate in all respects. SECTION 7. NONDISCLOSURE AND NONUSE OF CONFIDENTIAL INFORMATION. The Executive will not disclose or use at any time, either during the Employment Period or thereafter, any Confidential Information (as later defined) of which the Executive is or becomes aware, whether or not such information is developed by him, except to the extent that -6- such disclosure or use is directly related to and required by the Executive's performance of duties assigned to the Executive by the Company. SECTION 8. INVENTIONS AND PATENTS. The Executive agrees that all Work Product (as later defined) belongs to the Company. The Executive will perform all actions reasonably requested by the Board (whether during or after the Employment Period) to establish and confirm such ownership (including, without limitation, the execution and delivery of assignments, consents, powers of attorney and other instruments) and to provide reasonable assistance to the Company in connection with the prosecution of any applications for patents, trademarks, trade names, service marks or reissues thereof or in the prosecution or defense of interferences relating to any Work Product. SECTION 9. NON-COMPETE, NON-SOLICITATION, NON-DISPARAGEMENT. The Executive acknowledges and agrees that during the course of the Executive's association with the Company or any of its Subsidiaries, the Executive will have the opportunity to develop relationships with employees, customers and other business associates of the Company and its Subsidiaries which relationships constitute goodwill of the Company and its Subsidiaries, and the Company and its Subsidiaries would be irreparably damaged if the Executive were to take actions that would damage or misappropriate such goodwill. Accordingly, from and after the Commencement Date, the Executive covenants and agrees to comply with the terms and provisions set forth in this Section 9. (a) The Executive acknowledges that the Company and its Subsidiaries currently conduct the Business throughout the world (the "Territory"). Accordingly, during the period (the "Non-Compete Period") commencing on the Commencement Date and ending on (x) in the case of a termination for any reason except Expiration, the first anniversary of the Termination Date, or (y) in the case of an Expiration, the Termination Date, the Executive shall not, directly or indirectly, enter into, engage in, assist, give or lend funds to or otherwise finance, be employed by or consult with, or have a financial or other interest in, any business which competes with the Business, whether for or by himself or as an independent contractor, agent, stockholder, partner or joint venturer for any other Person. To the extent that the covenant provided for in this Section 9(a) may later be deemed by a court to be too broad to be enforced with respect to its duration or with respect to any particular activity or geographic area, the court making such determination shall have the power to reduce the duration or scope of this Section 9(a), and to add or delete specific words or phrases. This Section 9(a) as modified shall then be enforced. (b) The Executive covenants and agrees that during the Non-Compete Period, the Executive will not, directly or indirectly, either for himself or for any other Person (i) solicit any employee of the Company or any of its Subsidiaries to terminate his or her employment with the Company or any of its Subsidiaries, (ii) solicit any customer of the Company or any of its Subsidiaries to purchase products or services of or on behalf of the Executive or such other Person that are competitive with the products or services provided by the Company or any of its Subsidiaries or (iii) take any action intended to cause injury to the relationships between the Company or any of its Subsidiaries or any of their employees and any lessor, lessee, vendor, supplier, customer, distributor, employee, consultant or other business associate of the Company -7- or any of its Subsidiaries as such relationship relates to the Company's or any of its Subsidiaries' conduct of their business. (c) The Executive understands that the foregoing restrictions may limit his ability to earn a livelihood in a business similar to the business of the Company and any of its Subsidiaries, but he nevertheless believes that he has received and will receive sufficient consideration and other benefits under this Agreement and the Option Agreement, to clearly justify such restrictions which, in any event, he does not believe would prevent him from otherwise earning a living. SECTION 10. DELIVERY OF MATERIALS UPON TERMINATION OF EMPLOYMENT. The Executive shall deliver to the Company at the termination of the Employment Period or at any time the Company may request all memoranda, notes, plans, records, reports, computer tapes and software and other documents and data (and copies thereof) relating to the Confidential Information or Work Product which he may then possess or have under his control regardless of the location or form of such material and, if requested by the Company, will provide the Company with written confirmation that all such materials have been delivered to the Company. SECTION 11. INSURANCE. The Company may, for its own benefit, maintain "keyman" life and disability insurance policies covering the Executive. The Executive will cooperate with the Company and provide such information or other assistance as the Company may reasonably request in connection with the Company's obtaining and maintaining such policies. SECTION 12. ENFORCEMENT. Because the Executive's services are unique and because the Executive has access to Confidential Information and Work Product, the parties hereto agree that money damages would be an inadequate remedy for any breach of this Agreement. Therefore, in the event of a breach or threatened breach of this Agreement, the Company or its successors or assigns may, in addition to other rights and remedies existing in their favor, apply to any court of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce, or prevent any violations of, the provisions hereof (without posting a bond or other security). In addition to the foregoing, and not in any way in limitation thereof, or in limitation of any right or remedy otherwise available to the Company, if the Executive violates any provision of the foregoing Sections 7, 8, 9 or 10, any payments then or thereafter due from the Company to the Executive pursuant to Section 5(a)(ii) shall be terminated forthwith and the Company's obligation to pay and the Executive's right to receive such payments shall terminate and be of no further force or effect, in each case without limiting or affecting the Executive's obligations under such Sections 7, 8, 9 and 10 or the Company's other rights and remedies available at law or equity. -8- SECTION 13. REPRESENTATIONS. Each party hereby represents and warrants to the other party that the execution, delivery and performance of this Agreement by such party does not and will not conflict with, breach, violate or cause a default under any agreement, contract or instrument to which such party is a party or any judgment, order or decree to which such party is subject. In addition, the Executive represents and warrants to the Company that the Executive is not a party to or bound by any employment agreement, consulting agreement, non-compete agreement, confidentiality agreement or similar agreement with any Person other than the Company or one of its affiliates. SECTION 14. DEFINITIONS. "Board" shall mean the board of directors of the Company, excluding the Executive if he should be a member of the Board. "Business Day" shall mean any day that is not (a) a Saturday, Sunday or legal holiday or (b) a day in which banks are not required to be open in New York, New York. "Cause" shall mean: (a) the conviction of the Executive of a crime involving his fraud, theft or dishonesty; (b) the material and willful breach by the Executive of his responsibilities under this Agreement or willful failure to comply with reasonable directives or policies of the Board, but only if the Company has given Executive written notice specifying the breach or failure to comply, demanding that the Executive remedy the breach or failure to comply and giving the Executive an opportunity to be heard in connection with the breach or failure to comply, and the Executive either (i) failed to remedy the alleged breach or failed to comply within thirty days after receipt of the written notice or (ii) failed to take all reasonable steps to that end during the thirty days after he received the notice; (c) the continued use of alcohol or drugs by the Executive to an extent that, in the good faith determination of the Board, such use interferes with the performance of the Executive's duties and responsibilities; or (d) the conviction of the Executive for violating any law constituting a felony (including the Foreign Corrupt Practices Act of 1977). "Common Stock" means the common stock of the Company. "Confidential Information" means information that is not known to the public, that is used, developed or obtained by the Company or any of its Subsidiaries in connection with the Business, and that the Executive learns in the course of performing services for the Company or any of its Subsidiaries, including, but not limited to, (a) information, observations, procedures and data obtained by the Executive while employed by the Company (including those obtained prior to the date of this Agreement) concerning the business or affairs of the Company or any of its Subsidiaries, (b) products or services of the Company or any of its Subsidiaries, (c) costs and -9- pricing structures of the Company or any of its Subsidiaries, (d) analyses of the Company or any of its Subsidiaries, (e) drawings, photographs and reports of the Company or any of its Subsidiaries, (f) computer software, including operating systems, applications and program listings of the Company or any of its Subsidiaries, (g) flow charts, manuals and documentation of the Company or any of its Subsidiaries, (h) data bases of the Company or any of its Subsidiaries, (i) accounting and business methods of the Company or any of its Subsidiaries, (j) inventions, devices, new developments, methods and processes, whether patentable or unpatentable and whether or not reduced to practice of the Company or any of its Subsidiaries, (k) customers and customer lists of the Company or any of its Subsidiaries, (l) other copyrightable works of the Company or any of its Subsidiaries, (m) all production methods, processes, technology and trade secrets of the Company or any of its Subsidiaries, and (n) all similar and related information of the Company or any of its Subsidiaries in whatever form. Confidential Information will not include any information that is now or later becomes part of the public domain, without breach of this Agreement by the Executive. Confidential Information will not be deemed to be in the public domain merely because individual portions of the information have been separately published, but only if all material features comprising such information have been published in combination. "Disability" shall means a condition or disease of the Executive that would cause him to be considered "disabled" within the meaning of the Company's long-term disability plan as in effect at the relevant time, as determined by the Company's long-term disability insurance carrier. "Fair Market Value" shall mean, with respect to any Share, as of any date of determination, the fair value of each Share (or, with respect to a warrant or option, the fair value of each Share obtainable upon exercise thereof net of the exercise price), determined in accordance with the terms hereof. At any time that the Fair Market Value shall be required to be determined hereunder, the Board shall make a good faith determination (the "Board's Determination") of the fair market value of each Share within thirty (30) days of the delivery (i) by the Company of the Repurchase Notice or (ii) by the Executive of the Put Notice (in each case, without taking into account that the Shares may be "restricted securities" and without any discount for the minority position represented by the Shares) and shall provide within such 30-day period to each member of the Executive Group with respect to whose Shares such determination is being made, a written notice thereof which notice shall set forth supporting data in respect of such calculation (the "Determination Notice"). Each member of the Executive Group shall have thirty (30) days following receipt of the Determination Notice within which to deliver to the Company a written notice (the "Objection Notice") of an objection, if any, to the Board's Determination, which Objection Notice shall set forth such member of the Executive Group's good faith determination (the "Shareholder's Determination") of the fair value of each Share. The failure by such member of the Executive Group to deliver the Objection Notice within such 30-day period shall constitute such Person's acceptance of the Board's Determination as conclusive. In the event of the timely delivery of an Objection Notice, the Company and applicable members of the Executive Group shall attempt in good faith to arrive at an agreement with respect to the Fair Market Value, which agreement shall be set forth in writing within fifteen (15) days following delivery of the Objection Notice. If the Company and the applicable members of the Executive Group are unable to reach an agreement within such 15-day period, the matter shall be promptly referred for determination to a regionally or nationally recognized -10- investment banking or valuation firm (the "Valuer") reasonably acceptable to the Company and the applicable members of the Executive Group. The Company and the applicable members of the Executive Group will cooperate with each other in good faith to select such Valuer. The Valuer may select the Board's Determination or the Shareholder's Determination as the Fair Market Value or may select any other number or value (determined without taking into account that the Shares may be "restricted securities" and without any discount for the minority position represented by such Shares). The Valuer's selection will be furnished to the Company and the applicable members of the Executive Group in writing and will be conclusive and binding upon the Company and the applicable members of the Executive Group. The fees and expenses of the Valuer shall be borne equally by the Company, on the one hand, and the applicable members of the Executive Group (on a pro rata basis based on the number of Shares being purchased), on the other. "Family Group" means (a) the Executive's spouse and descendants (whether natural or adopted) and (b) any trust solely for the benefit of such individual and/or the individual's spouse or descendants. "Person" means any individual, firm, corporation, partnership or other entity, and shall include and successor (by merger or otherwise) of such entity. "Resignation for Good Reason" occurs if the Executive terminates his employment with the Company and its Subsidiaries because, without Executive's express written consent, any of the events described below occurs during the Employment Period. (a) The Company significantly diminishes the Executive's assigned duties and responsibilities from the level or extent at which they existed on the Commencement Date, including, without limitation, if the Company removes Executive's title or materially diminishes the powers associated with the Executive's title. The Executive must deliver written notice to the Company specifying the diminution in assigned duties and responsibilities that he believes constitutes Good Reason, and the Company must fail to reverse the same or to take all reasonable steps to that end within thirty days after receiving the notice. (b) The Company reduces the Executive's Base Salary below that in effect on the Commencement Date. (c) The Company requires the Executive to, or assigns duties to the Executive which would reasonably require him to, relocate his principal business office more than fifty (50) miles from where it is located on the Commencement Date. (d) The Company fails to continue in effect any cash or stock-based incentive or bonus plan, retirement plan, welfare benefit plan, or other benefit plan, program or arrangement that applied to the Executive on the Commencement Date, unless the aggregate value (as computed by an independent employee benefits consultant selected by the Company) of all such compensation, retirement and benefit plans, programs and arrangements provided to the Executive is not materially less than their aggregate value as of the Commencement Date. -11- "Retirement" means a separation from the service of the Company that would be treated as a normal retirement or early retirement under the Pliant Corporation Defined Benefit Pension Plan. "Shares" means (a) shares of any Common Stock purchased or otherwise acquired by the Executive (including, without limitation, any shares of Common Stock purchased upon exercise of an option to acquire Common Stock or acquired upon the consummation of a merger), (b) shares of any equity securities issued or issuable directly or indirectly with respect to the Common Stock referred to in clause (a) above by way of stock dividend or stock split or in connection with a combination of shares, exchange of capital stock, recapitalization, merger, consolidation or other reorganization and (c) any other shares of capital stock of the Company purchased or otherwise acquired by the Executive. "Stockholders' Agreement" means the Stockholders' Agreement dated as May 31, 2000, among the Company and the stockholders of the Company from time to time, as amended, modified or supplemented from time to time. "Subsidiary" of a Person means any corporation or other Person fifty percent or more of whose outstanding equity interests are directly or indirectly owned by the first Person. "Work Product" shall mean all inventions, innovations, improvements, technical information, systems, software developments, methods, designs, analyses, drawings, reports, service marks, trademarks, tradenames, logos and all similar or related information (whether patentable or unpatentable) which relates to the Company's or any of its Subsidiaries' business, research and development or existing or future products or services and which are conceived, developed or made by the Executive (whether or not during usual business hours and whether or not alone or in conjunction with any other Person) while employed by the Company or any of its Subsidiaries (including those conceived, developed or made prior to the date of this Agreement) together with all patent applications, letters patent, trademark, tradename and service mark applications or registrations, copyrights and reissues thereof that may be granted for or upon any of the foregoing. SECTION 15. GENERAL PROVISIONS. (a) Severability. It is the desire and intent of the parties hereto that the provisions of this Agreement be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision of this Agreement shall be adjudicated by a court of competent jurisdiction to be invalid, prohibited or unenforceable for any reason, such provision, as to such jurisdiction, shall be ineffective, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. Notwithstanding the foregoing, if such provision could be more narrowly drawn so as not to be invalid, prohibited or unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. -12- (b) Notices. All notices, requests, demands, claims and other communications hereunder shall be in writing and sufficient if (i) delivered personally, (ii) delivered by certified United States Post Office mail, return receipt requested, (iii) telecopied or (iv) sent to the recipient by a nationally-recognized overnight courier service (charges prepaid) and addressed to the intended recipient as set forth below: (i) if to the Executive, to him at: Brian Johnson 1750 Henly, Unit 18 Glenview, Illinois 60025 Telephone: 847-910-0896 (ii) if to the Company, to: Pliant Corporation 1515 Woodfield Road Suite 600 Schaumburg, IL 60173 Telecopier: (847) 969-3338 Telephone: (847) 969-3357 Attention to: Larry Shepler with copies to: Southwest Industrial Films, LLC c/o J.P. Morgan Partners, LLC 1221 Avenue of the Americas, 40th Floor New York, New York 10020 Telephone: (212) 899-3400 Telecopier: (212) 899-3401 Attention: Timothy J. Walsh; and O'Sullivan Graev & Karabell, LLP 30 Rockefeller Plaza, 41st Floor New York, New York 10112 Telephone: (212) 408-2400 Telecopier: (212) 408-2420 Attention: Ilan S. Nissan, Esq.; or such other address as the recipient party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. Any such communication shall deemed to have been delivered and received (i) in the case of personal delivery, on the date of such delivery, (ii) in the case of delivery by mail, on the date received, (iii) if telecopied, on the date -13- telecopied as evidenced by confirmed receipt, and (iv) in the case of delivery by nationally-recognized, overnight courier, on the Business Day following dispatch. (c) Entire Agreement. This Agreement and the documents expressly referred to herein embody the complete agreement and understanding among the parties and, with respect to the subject matter of this Agreement, supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. (d) Counterparts and Facsimile Execution. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered (by facsimile or otherwise) to the other party, it being understood that all parties need not sign the same counterpart. Any counterpart or other signature to this Agreement that is delivered by facsimile shall be deemed for all purposes as constituting good and valid execution and delivery by such party of this Agreement. (e) Successors and Assigns. Except as otherwise provided herein, this Agreement shall bind and inure to the benefit of and be enforceable by the Executive and the Company and their respective successors, assigns, heirs, representatives and estate, as the case may be; provided, however, that the obligations of the Executive under this Agreement shall not be assigned without the prior written consent of the Company. (f) Amendment and Waiver. The provisions of this Agreement may be amended and waived only with the prior written consent of the Company and the Executive, and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement or any provision hereof. (g) Governing Law. This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Illinois without giving effect to any choice or conflict of law provision or rule that would cause the application of the laws of any jurisdiction other than the State of Illinois. (h) Waiver of Jury Trial. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT. (i) Mutual Contribution. The parties to this Agreement and their counsel have mutually contributed to its drafting. Consequently, no provision of this Agreement shall be construed against any party on the ground that one party drafted the provision or caused it to be drafted. (j) Descriptive Headings; Nouns and Pronouns. Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice-versa. -14- (k) Effectiveness. This Agreement shall not be deemed effective until the Commencement Date. -15- IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the date first written above. PLIANT CORPORATION By: /s/ Jack Knott ----------------------- Name: Jack Knott Title: President EXECUTIVE: /s/ Brian E. Johnson ----------------------- Brian Johnson EXHIBIT A [Form of Option Agreement] OPTION AGREEMENT dated as of April 16, 2001 (this "Agreement"), between PLIANT CORPORATION, a Utah corporation (the "Corporation"), and BRIAN JOHNSON (the "Optionee"). The Corporation, acting through its Board of Directors (the "Board") or a committee thereof, has granted to the Optionee, effective as of the date of this Agreement, an option under the Pliant Corporation 2000 Stock Incentive Plan, as amended, restated, modified or supplemented (the "Plan"), to purchase Common Stock, on the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and of the mutual agreements contained in this Agreement, the parties hereby agree as set forth below. SECTION 1. DEFINITIONS. As used in this Agreement, the following capitalized terms have the meanings set forth below. "Acceleration Event" has the meaning given to such term in Section 5(g). "Acquisition" has the meaning given to such term in Section 5(c). "Adjusted EBITDA" has the meaning given to such term in Section 5(c). "Adjusted Net Debt" has the meaning given to such term in Section 5(c). "Agreement" has the meaning given to such term in the caption. "Board" has the meaning given to such term in the recital. "Common Stock Equivalent" has the meaning given to such term in Section 5(c). "Corporation" has the meaning given to such term in the caption. "Divestiture" has the meaning given to such term in Section 5(c). "EBITDA" has the meaning given to such term in Section 5(c). "Exercise Notice" has the meaning given to such term in Section 6. "MVPSE" has the meaning given to such term in Section 5(c). "Net Debt" has the meaning given to such term in Section 5(c). "Option" has the meaning given to such term in Section 3. "Optionee" has the meaning given to such term in the caption. "Option Price" has the meaning given to such term in Section 3. "Option Shares" has the meaning given to it in Section 3. "Option Term" has the meaning given to such term in Section 4. "Plan" has the meaning given to such term in the recital. "Preferred Value" has the meaning given to such term in Section 5(c). "Retirement" means a separation from the service of the Corporation that would be treated as a normal retirement or early retirement under the Pliant Corporation Defined Benefit Pension Plan. "Target Date" has the meaning given to such term in Section 5(b)(i). "Target MVPSE" has the meaning given to such term in Section 5(b)(i). "Vested Shares" means the Option Shares with respect to which the Option is exercisable at any particular time, in accordance with Section 5. "Vesting Date" means the date on which an Option vests. SECTION 2. THE PLAN. The terms and provisions of the Plan are hereby incorporated into this Agreement as if set forth herein in their entirety. Unless otherwise explicitly stated herein, in the event of a conflict between any provision of this Agreement and the Plan, the provisions of the Plan shall govern. Capitalized terms used herein and not otherwise defined shall have the respective meanings assigned in the Plan. A copy of the Plan may be obtained from the Corporation by the Optionee at any time upon request. SECTION 3. OPTION; OPTION PRICE; TYPE OF OPTIONS. On the terms and subject to the conditions of this Agreement, the Optionee shall have the option (the "Option") to purchase up to 5,000 shares of Common Stock (the "Option Shares") at the price of $483.13 per share of Common Stock (the "Option Price"). The Option is not intended to qualify for federal income tax purposes as an "incentive stock option" within the meaning of Section 422 of the Code. 2 SECTION 4. TERM. The term of the Option (the "Option Term") shall commence on the date hereof and expire on the tenth anniversary of the date hereof, unless the Option shall theretofore have been terminated in accordance with the terms of the Plan or this Agreement. SECTION 5. TIME OF EXERCISE. (a) If the Optionee is employed by the Corporation at the time of the Optionee's death, Disability or Retirement, all of the Options shall automatically vest on the effective date of the termination of employment related thereto. (b) The Options shall automatically vest in installments as follows: (i) if the "Market Value Per Share of Equity" or MVPSE (as defined in Section 5(c)) is at least $550.50 (such amount, and each such amount specified in subsections (ii) through (vi) below, the "Target MVPSE") on December 31, 2001 (such date, and each such date specified in subsections (ii) through (vi) below, a "Target Date"), one-fifth of the Options shall vest; (ii) if the MVPSE is at least $687.50 on December 31, 2002, one-fifth of the Options shall vest; (iii) if the MVPSE is at least $859.40 on December 31, 2003, one-fifth of the Options shall vest; (iv) if the MVPSE is at least $1,074.20 on December 31, 2004, one-fifth of the Options shall vest; and (v) if the MVPSE is at least $1,342.77 on December 31, 2005, one-fifth of the Options shall vest. (c) Market Value Per Share of Equity. The "Market Value Per Share of Equity" ("MVPSE") on any given date shall equal (I) other than in connection with an Acceleration Event, the quotient obtained by dividing (x) the difference between (A) the product of (1) Adjusted EBITDA and (2) 8.0 and (B) Adjusted Net Debt by (y) the number of outstanding Common Stock Equivalents or (II) in connection with an Acceleration Event, the price (whether payable in cash or property) per Common Stock Equivalent paid to stockholders or other securityholders of the Corporation in connection with such Acceleration Event, where, in each case of (I) and (II): "Common Stock Equivalent" means, at any time, one share of Common Stock or the right to acquire, whether or not such right is immediately exercisable, one share of Common Stock, whether evidenced by an option, warrant or convertible security; 3 "EBITDA" equals earnings from operations before interest expense, taxes, depreciation and amortization on the applicable date, determined in accordance with generally accepted accounting principles, consistently applied ("GAAP"), calculated on a trailing twelve (12) month basis; "Adjusted EBITDA" equals the Corporation's EBITDA, as adjusted below, on the applicable date; "Net Debt" equals the Corporation's total indebtedness on the applicable date plus the Preferred Value minus balance sheet "Cash and Cash Equivalents" as of such date, determined in accordance with GAAP; "Preferred Value" equals, at the time of determination, the sum of (x) with respect to the Corporation's Series A Preferred Stock, the Series A Liquidation Amount and (y) with respect to any other series of the Corporation's preferred stock, the amount to be paid by the Corporation to the holders of such series of preferred stock upon a liquidation of the Corporation or similar event in accordance with the terms of the Restated Charter, if any. "Restated Charter" means the amended and restated certificate or articles of incorporation of the Corporation, as in effect at the time of determination, including any certificates of designation or articles of amendment. "Series A Liquidation Amount" has the meaning set forth in the Restated Charter. "Adjusted Net Debt" equals Net Debt, as adjusted below, on the applicable date. Adjusted EBITDA and Adjusted Net Debt shall be determined by making the following adjustments to the Corporation's EBITDA and to Net Debt: (i) if the Corporation completes a material acquisition (an "Acquisition") during any of the first three quarters of a calendar year, the EBITDA of the acquired entity or business for the portion of the calendar year prior to the Acquisition shall be included in Adjusted EBITDA; (ii) if the Corporation completes a material divestiture (a "Divestiture") during any of the first three quarters of a calendar year, the EBITDA of the divested assets or business for the portion of the calendar year prior to the Divestiture shall be excluded from Adjusted EBITDA; (iii) if the Corporation engages in an Acquisition during the fourth quarter of a calendar year, an amount equal to the total of (x) all debt incurred with respect to the Acquisition and (y) all transaction costs associated with the Acquisition shall be excluded from Adjusted Net Debt; and 4 (iv) if the Corporation engages in a Divestiture during the fourth quarter of a calendar year, (x) the total amount of the proceeds received by the Corporation with respect to the Divestiture shall be included in Adjusted Net Debt, and (y) the total amount of the budgeted EBITDA for the divested assets or business for all periods of the calendar year subsequent to the Divestiture shall be included in Adjusted EBITDA. For purposes of this Agreement only, the MVPSE shall be determined within ninety (90) days after the end of each calendar year or at such other date as may be necessary to calculate MVPSE for purposes of this Agreement. (d) Vesting Percentage. If the MVPSE is, as of a Target Date, less than the applicable Target MVPSE, but is greater than ninety percent (90%) of the applicable Target MVPSE as of such Target Date, a percentage of the Options available for vesting as of such Target Date shall vest according to the following proportionate release schedule:
Actual MVPSE as a Percentage of Performance Percentage of Target MVPSE Vested Shares 90.0% 0% 92.5% 25% 95.0% 50% 97.5% 75% 100% 100%.
The percentage of Options vesting shall be prorated for one-half percentage increases between the MVPSE percentages shown (e.g., if the MVPSE is at least 90.5%, but less than 91.0%, of Target MVPSE, 5% of the Options available for vesting as of the Target Date would vest). (e) "Clawback" Rights. Notwithstanding any other provision of this Section 5, if the MVPSE is less than the applicable Target MVPSE on any Target Date (a "Prior Unsatisfied Target"), but thereafter the MVPSE equals or exceeds the applicable Target MVPSE on any subsequent Target Date on or prior to December 31, 2005, all Options which have not vested in any prior year with respect to all Prior Unsatisfied Targets occurring on or prior to such subsequent Target Date shall thereupon vest. As an example, if 0% and 0% of the Vested Shares have vested as of December 31, 2001 and 2002, respectively, and the MVPSE was equal to $860.00 on December 31, 2003, then (A) 100% of the Vested Shares scheduled to vest as of December 31, 2003, would vest; and (B) 100% of the Vested Shares scheduled to vest as of December 31, 2001 and 2002, would vest. As a further example, if 0% and 0% of the Vested Shares have vested as of December 31, 2001 and 2002, respectively, and the MVPSE was equal to $795.00 on December 31, 2003, then (A) 25% of the Vested Shares scheduled to vest as of December 31, 2003, would vest and (B) no additional Vested Shares scheduled to vest as of December 31, 2001 or 2002, would vest. 5 (f) Automatic Vesting. Any Options that have not vested according to the foregoing provisions of this Section 5 shall automatically vest on December 31, 2009, so long as Optionee is an employee of the Corporation on such date. (g) Acceleration Event. (i) An "Acceleration Event" shall occur in the event of Change of Control of the Corporation, as such term is defined in the Indenture dated as of the date hereof between the Corporation and The Bank of New York, as trustee, as amended, modified or supplemented from time to time. (iii) If an Acceleration Event occurs on or before December 31, 2005, some or all of the Options which have not vested (because the Target Dates and/or Target MVPSE have not yet been reached) shall vest immediately prior to the Acceleration Event in an amount equal to the average percentage of Options that have vested up to the date of the Acceleration Event multiplied by the total number of unvested Options, taking into account the effect of Section 5(e). Further, for purposes of calculating the MVPSE in connection with an Acceleration Event, Target MVPSE shall be prorated to the end of the calendar month immediately prior to the Acceleration Event. For example, if the Optionee had vested of 0% and 80% of the Options as of December 31, 2001 and 2002, respectively, and an Acceleration Event occurred in July, 2003, and the actual MVPSE was equal to $734.77, then (A) the Target MVPSE would be prorated to June 30, 2003, pursuant to this Section 5(g) ($687.50 + [.50 x ($859.40 - $687.50)] = $773.45); (B) the June 30, 2003, actual MVPSE as a percentage of the prorated Target MVPSE as of December 31, 2003, would be 95%; (C) therefore, 50% of the Options scheduled to vest as of December 31, 2003, would vest, pursuant to Section 5(d), immediately prior to the Acceleration Event; and (D) immediately prior to the Acceleration Event, 43.33% [(0 + 80 + 50) / 3 = 43.33] of the Options scheduled to vest based on the MVPSE as of December 31, 2004 and 2005, would vest, all for the immediate benefit of the Optionee. As a further example, if 0% and 0% of the Options have vested as of December 31, 2001 and 2002, respectively, and an Acceleration Event occurs on or before June 30, 2003, and the actual MVPSE was equal to $796.65, then (A) the Target MVPSE would be prorated to June 30, 2003, pursuant to this Section 5(g) ($773.45); (B) the June 30, 2003, actual MVPSE as a percentage of the prorated Target MVPSE as of December 31, 2003, would be 103%; (C) 100% of the Options scheduled to vest as of December 31, 2003, would vest pursuant to Section 5(d), immediately prior to the Acceleration Event; and (D) taking into account the effect of Section 5(e), and immediately prior to the Acceleration Event, 100% of the Options scheduled to vest based on the MVPSE as of December 31, 2001, 2002, 2004 and 2005, would vest, all for the immediate benefit of the Optionee. If an Acceleration Event occurs after December 31, 2005, no additional Options shall vest pursuant to this Section 5(g). 6 (h) Fractional Shares. Notwithstanding any other provisions of this Agreement, no fractional shares shall vest until a number of such fractional shares accumulate to equal one share. (i) The Options shall remain exercisable in accordance with the terms and conditions of this Agreement and the Plan. Notwithstanding anything contained in Section 5 to the contrary, Option Shares that do not constitute Vested Shares on the date the Optionee's employment with the Corporation terminates for any reason shall not become Vested Shares at any time after such date. SECTION 6. PROCEDURE FOR EXERCISE. (a) The Option may be exercised with respect to Vested Shares, from time to time, in whole or in part (but for the purchase of whole shares only), by delivery of a written notice in the form attached hereto as Exhibit A (the "Exercise Notice") from the Optionee to the Secretary of the Corporation, which Exercise Notice shall state, or be accompanied by, as the case may be: (i) that the Optionee elects to exercise the Option; (ii) the number of Vested Shares with respect to which the Optionee is exercising the Option; (iii) any representations of the Optionee required under Section 8; (iv) the date upon which the Optionee desires to consummate the purchase of such Vested Shares (which date must be prior to the termination of the Option); (v) the method of payment for such Vested Shares; (vi) payment for such Vested Shares; and (vii) comply with such further provisions consistent with the Plan as the Committee may reasonably require. (b) The Corporation shall be entitled to require as a condition of delivery of the Vested Shares that the Optionee remit or, in appropriate cases, agree to remit when due an amount in cash sufficient to satisfy all current or estimated future federal, state and local income tax withholding and the Optionee's portion of any employment or payroll taxes, if any, relating thereto. SECTION 7. NO RIGHTS AS A HOLDER OF COMMON STOCK. The Optionee shall not have any rights or privileges of a shareholder of Common Stock with respect to any Option until the date of receipt of payment by the Corporation for such shares pursuant to the exercise of such Option. 7 SECTION 8. ADDITIONAL PROVISIONS RELATED TO EXERCISE. In the event of the exercise of the Option at a time when there is not in effect a Registration Statement relating to the Option, the Optionee hereby represents and warrants, and by virtue of such exercise shall be deemed to represent and warrant, to the Corporation that the Option and any Vested Shares purchased hereunder are being acquired for investment only and not with a view to the distribution thereof. The Optionee shall provide the Corporation with such further representations and warranties as the Board may require in order to ensure compliance with applicable federal and state securities, "blue sky" and other laws. No Vested Shares shall be purchased upon the exercise of the Option unless and until the Corporation and/or the Optionee shall have complied with all applicable federal or state or provincial registration, listing and/or qualification requirements and all other requirements of law or of any regulatory agencies having jurisdiction. Each of the Corporation and the Optionee shall use reasonable efforts to comply with all applicable federal or state registration, listing and/or qualification requirements and all other requirements of law or of any regulatory agencies having jurisdiction in connection with the exercise of the Option. SECTION 9. OPTIONEE'S EMPLOYMENT. Nothing in the Option shall confer upon the Optionee any right to be employed by the Corporation or any of its Subsidiaries or interfere in any way with the right of the Corporation or its Subsidiaries or equity holders, as the case may be, to terminate the Optionee's employment or to increase or decrease the Optionee's compensation at any time, as applicable. SECTION 10. NOTICES. All notices, claims, certificates, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given and delivered if personally delivered or if sent by nationally-recognized overnight courier, by telecopy, or by registered or certified mail, return receipt requested and postage prepaid, addressed as follows: (a) if to the Corporation, to it at: Pliant Corporation 1515 Woodfield Road Suite 600 Schaumburg, IL 60173 Attention: Larry Shepler Facsimile: (847) 969-3338 Telephone: (847) 969-3357 with a copy to: O'Sullivan Graev & Karabell, LLP 30 Rockefeller Plaza, 41st Floor 8 New York, New York 10112 Attention: Ilan S. Nissan, Esq. Facsimile: 212-408-2420 Telephone: 212-408-2400; and (b) if to the Optionee, at the address (or facsimile number, if any) set forth on the signature page hereto; or to such other address as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. Any such notice or communication shall be deemed to have been received (a) in the case of personal delivery, on the date of such delivery (or if such date is not a business day, on the next business day after the date sent), (b) in the case of nationally-recognized overnight courier, on the next business day after the date sent, (c) in the case of facsimile transmission, when received (or if not sent on a business day, on the next business day after the date sent), and (d) in the case of mailing, on the third business day after the date on which the piece of mail containing such communication is posted. SECTION 11. WAIVER OF BREACH. The waiver by either party of a breach of any provision of this Agreement must be in writing and shall not operate or be construed as a waiver of any other or subsequent breach. SECTION 12. OPTIONEE'S UNDERTAKING. The Optionee hereby agrees to take whatever additional actions and execute whatever additional documents (including, but not limited to, a joinder to the Stockholders' Agreement agreeing to be bound thereto as a Management Stockholder (as defined in the Stockholders' Agreement)) the Corporation may in its reasonable judgment deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on the Optionee pursuant to the express provisions of this Agreement and the Plan. SECTION 13. MODIFICATION OF RIGHTS. The rights of the Optionee are subject to modification and termination as provided in this Agreement and the Plan. SECTION 14. GOVERNING LAW. THIS AGREEMENT IS EXECUTED AND DELIVERED IN, AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF, THE STATE OF UTAH WITHOUT GIVING EFFECT TO ANY CHOICE OR CONFLICTS OF LAW PROVISIONS (WHETHER IN THE STATE OF UTAH OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF UTAH. 9 SECTION 15. MUTUAL WAIVER OF JURY TRIAL. THE PARTIES HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY DOCUMENTS RELATED HERETO. SECTION 16. COUNTERPARTS AND FACSIMILE EXECUTION. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered (by facsimile or otherwise) to the other party, it being understood that all parties need not sign the same counterpart. Any counterpart or other signature hereupon delivered by facsimile shall be deemed for all purposes as constituting good and valid execution and delivery of this Agreement by such party. SECTION 17. ENTIRE AGREEMENT; THE PLAN. This Agreement and the Plan constitute the entire agreement between the parties with respect to the subject matter hereof and supersede all prior written or oral negotiations, commitments, representations and agreements with respect thereto. SECTION 18. SEVERABILITY. In the event any one or more of the provisions of this Agreement should be held invalid, illegal or unenforceable in any respect in any jurisdiction, such provision or provisions shall be automatically deemed amended, but only to the extent necessary to render such provision or provisions valid, legal and enforceable in such jurisdiction, and the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. SECTION 19. ACKNOWLEDGMENT. The Optionee hereby acknowledges receipt of a copy of the Plan. * * * * 10 IN WITNESS WHEREOF, the parties hereto have executed this Option Agreement as of the date first written above. PLIANT CORPORATION By: /s/ Jack Knott ------------------------------------ Name: Jack Knott Title: President OPTIONEE /s/ Brian E. Johnson ---------------------------------------- Brian Johnson Address: 1750 Henly, Unit 18 Glenview, IL 60025 Telephone: 847-910-0896 Exhibit A [Form of Exercise Notice] [Date] VIA CERTIFIED MAIL - ------------------ Pliant Corporation 2755 East Cottonwood Parkway Suite 400 Salt Lake City, Utah 84121 Attention: Secretary Dear Sir or Madam: Reference is hereby made to the Option Agreement dated [ ] (the "Option Agreement"), between Pliant Corporation, a Utah corporation (the "Corporation"), and Brian Johnson (the "Optionee"). Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Option Agreement. Pursuant to the terms of the Option Agreement, the undersigned Optionee hereby elects to exercise the Optionee's right to purchase [ ] shares of Common Stock at an Option Price per share equal to $483.13. The date of the exercise of the Options hereunder shall be [ ]. In connection with the foregoing, please find enclosed [cash or personal or certified check] in an amount equal to $[ ]. Sincerely, ---------------------------------------- Brian Johnson EX-10.48 5 y58490ex10-48.txt MANAGEMENT INCENTIVE PLAN (2001) EXHIBIT 10.48 PLIANT CORPORATION MANAGEMENT INCENTIVE PLAN ("MIP") (2001) ===================================== ===================================== Purpose To provide an attractive and competitive at-risk incentive that recognizes the achievements of individuals and team work groups in the attainment of corporate financial and operating goals. ================================================================ Eligibility Officers of Pliant Corporation (the "Company"), Directors, and Plant Managers ("Participants"). At the option of the Chief Executive Officer ("CEO"), other employees not normally eligible for this program, may be included. Bonus Target Payment Levels for the plan are as follows: CEO 75% of Base Salary President & COO 50% of Base Salary Executive Vice President 40% of Base Salary Senior Vice President 35% of Base Salary Vice President 25% of Base Salary Director/Plant Manager 15% of Base Salary
================================================================ Summary The 2001 Management Incentive Plan ("MIP") is designed to provide incentive compensation based on the alignment and combination of three factors: achievement of individual goals, the Team Work Group Goal, and Company EBITDA goals. The 2001 Company Operational Plan is the result of the collective input of the MIP Participants' individual goals and Team Work Group Goals. Each Participant's individual goals and Team Work Group Goal have been extracted from the Operational Plan and are shown on Exhibit A (see "Individual Goals and Team Work Group Goal for 2001"). Also shown on Exhibit B are the Company's EBITDA goals (see "2001 EBITDA Goals"). In order to receive an award under the MIP a Participant must first be able to demonstrate achievement of his/her individual goals. The Participant and his/her supervisor should meet monthly, and after the end of the calendar quarter, to discuss achievements of the goals outlined under the "Individual Goals and Team Work Group Goal for 2001" portion of Exhibit A. A form will be provided, on which the Participant's monthly achievements and a short narrative of the results, can be written. If these goals have not been met, the Participant will not be eligible to receive an award under the MIP. Management Incentive Plan (MIP) 2001 Page 2- Once the Participant has established achievement of the individual goals, the MIP award will be determined by the Company's level of achievement relative to the EBITDA goals for the quarter. Awards will be paid at the Participant's Bonus Target Payment Level when the EBITDA Target Level has been reached. IF THE COMPANY'S EBITDA TARGET LEVEL IS NOT MET, NO BONUS AWARDS WILL BE PAID. Additional percentages will be added to the Bonus Award for levels above the Target. Exhibit B outlines these increases in the Participant's Bonus Award percentages when achievements greater than the EBITDA Target Level are reached. Awards under the Plan will be distributed on a quarterly basis. An additional component to the Bonus Award is the achievement of the Team Work Group Goal. Individual goals and the Team Work Group Goal are combined to comprise the percentage of the Participant's Bonus Award according to the Bonus Target Payment Level shown below: DIRECTOR/PLANT MANAGER LEVEL
- ------------------------------------------------------------------------------------------------------------- % EMPHASIS X TARGET BONUS LEVEL PERCENT OF BONUS AWARD PERCENTAGE = - ------------------------------------------------------------------------------------------------------------- INDIVIDUAL GOALS + 50 15 7.5 - ------------------------------------------------------------------------------------------------------------- TEAM WORK GROUP GOAL = 50 15 7.5 - ------------------------------------------------------------------------------------------------------------- TOTAL 100 15 15 - -------------------------------------------------------------------------------------------------------------
VICE PRESIDENT LEVEL
- ------------------------------------------------------------------------------------------------------------- % EMPHASIS X TARGET BONUS LEVEL PERCENT OF BONUS AWARD PERCENTAGE = - ------------------------------------------------------------------------------------------------------------- INDIVIDUAL GOALS + 25 25 6.25 - ------------------------------------------------------------------------------------------------------------- TEAM WORK GROUP GOAL = 75 25 18.75 - ------------------------------------------------------------------------------------------------------------- TOTAL 100 25 25 - -------------------------------------------------------------------------------------------------------------
SR. VICE PRESIDENT AND ABOVE LEVEL*
- ------------------------------------------------------------------------------------------------------------- % EMPHASIS X TARGET BONUS LEVEL PERCENT OF BONUS AWARD PERCENTAGE = - ------------------------------------------------------------------------------------------------------------- INDIVIDUAL GOALS + 0 35 0 - ------------------------------------------------------------------------------------------------------------- TEAM WORK GROUP GOAL = 100 35 35 - ------------------------------------------------------------------------------------------------------------- TOTAL 100 35 35 - -------------------------------------------------------------------------------------------------------------
* At the EVP level this is 40%; The COO and CEO levels are based on achievement of EBITDA targets. Management Incentive Plan (MIP), 2001 Page 3- Once the EBITDA Target Level is reached a Participant may receive a Bonus Award based on achievement of Individual Goals, if they are met, but may not receive a Bonus Award on the Team Work Group Goal, if that goal is not met. Lack of achievement under the "Individual Goals and Team Work Group Goal for 2001" portion of the plan during one quarter of the year will not preclude a Bonus Award being paid during subsequent calendar quarters of the year if the individual goals and Team Work Group Goal are met during those quarters. However, there are no "clawback rights" for quarters where achievement is not reached. ================================================================ Plan Term The MIP for 2001 shall be in effect from January 1, 2001 to December 31, 2001 (the "Plan Term"). ================================================================ Distribution Quarterly Bonus Award distributions will be paid within 45 days of the close of the calendar quarter. ================================================================ Separations Except as set forth below, in order to be eligible to receive Bonus Awards under the MIP, a Participant must be employed by the Company on the last day of the calendar quarter for which an award is payable to receive a Quarterly Bonus Award. If a Participant retires during the Plan Term (and qualifies for an immediate pension under the Pliant Corporation Defined Benefit Pension Plan), dies, or becomes disabled (as defined under the Company's Long Term Disability Plan), he/she will receive a pro rata portion of the MIP Bonus Award on the actual days worked during the Plan Term. Distributions will be made at the same time as for all other Participants in the MIP. If a Participant's employment is terminated at any time prior to the end of the quarter or the Plan Term, by the employee or by the Company, with or without cause, for any reason other than retirement, death, or disability, the Participant shall not be eligible to participate in the MIP, shall not receive any MIP Award for such calendar quarter or thereafter, and shall forfeit any rights he/she may have had in the MIP. ================================================================ Management Incentive Plan (MIP), 2001 Page 4- General Provisions 1. Job Change. Eligible officers and executives who become eligible to participate in the MIP by reason of a job change will be eligible for a prorated bonus Award based on the actual days worked during the Plan Term. In the case of job changes involving a change in the Bonus Target Payment level, the Participant will receive the new level based on the actual days worked during the Plan Term at the new level. 2. Disciplinary Action. In order to participate in the MIP, the Participant must not have been subject to any disciplinary action during the Plan Term. 3. No Employment Right. Participation in the MIP shall not confer on a Participant any right to continue in the employment of the Company, nor shall it interfere with the Company's right to terminate the employment of a Participant at any time, for any reason. 4. Non-transferability. A Participant shall not have any right to assign, transfer, pledge, or hypothecate any benefits or payments under the MIP, other than by will or by the laws of descent and distribution. 5. Creditors. Award payments held by the Company before distribution shall not be subject to execution, attachment or similar process at law or in equity. 6. Withholding. The Company will deduct and withhold all federal, state, and local taxes, and any employee benefit related withholdings, required to be withheld with respect to the payment of any award. Management Incentive Plan (MIP), 2001 Page 5- 7. Definitions. EBITDA Earnings calculated in accordance with GAAP, before interest expense, income taxes, depreciation and amortization (and after accruals for Awards paid under the MIP). Team Work A goal assigned to members of a Group Goal particular work group. This goal is a part of the Company's overall Operational Plan. ================================================================ Modification The Company may modify, supplement, suspend, or terminate the of the MIP MIP at any time without the authorization of Participants, to the extent allowed by the law. No modification, suspension, or termination shall adversely alter or affect any right or obligation under the MIP that existed prior to such modification, supplement, suspension or termination. The Company's Board of Directors will determine the effect on incentives of any such event and make adjustments and/or payments as it, in its sole discretion, determines appropriate. ================================================================ Other Subject to the control of the Executive Committee of the Board of Directors, the Company's CEO will exercise exclusive control over the MIP. The CEO will have sole discretion to calculate and adjust EBITDA amounts used in calculating MIP Bonus Awards. The MIP shall be governed by and construed under the laws of the State of Utah. EX-10.49 6 y58490ex10-49.txt MANAGEMENT INCENTIVE PLAN (2002) EXHIBIT 10.49 November 19, 2001 PLIANT CORPORATION MANAGEMENT INCENTIVE PLAN ("MIP") (2002) ===================================== ===================================== Purpose To provide an attractive and competitive at-risk incentive that recognizes the achievements of individuals and team work groups in the attainment of corporate financial and operating goals. ================================================================ Eligibility Officers of Pliant Corporation (the "Company"), Directors, and Plant Managers ("Participants"). At the option of the Chief Executive Officer ("CEO"), other employees not normally eligible for this program, may be included. Bonus Plan Payment Levels for the plan are as follows: President & COO 100% of Base Salary Executive Vice President 65% of Base Salary Senior Vice President 55% of Base Salary Vice President 45% of Base Salary Director/Plant Manager 35% of Base Salary
================================================================ Summary The 2002 Management Incentive Plan ("MIP") is designed to provide incentive compensation based on the alignment and combination of three factors: achievement of individual goals, the Team Work Group Goal, and Company EBITDA goals. The 2002 Company Operational Plan is the result of the collective input of the MIP Participants' individual goals and Team Work Group Goals. Each Participant's individual goals and Team Work Group Goal have been extracted from the Operational Plan, are developed by the Plan Participant and his/her supervisor and are approved by the President and COO. The goals are submitted for approval prior to the beginning of the Plan Term and will be referred to as Exhibit A (see "Individual Goals and Team Work Group Goal for 2002"). Also shown on Exhibit B are the Company's EBITDA goals (see "2002 EBITDA Goals"). In order to receive an award under the MIP a Participant must first be able to demonstrate achievement of his/her individual goals. The Participant and his/her supervisor should meet monthly, and after the end of the calendar quarter, to discuss achievements of the goals outlined under the "Individual Goals and Team Work Group Goal for 2002" portion of Exhibit A. If these goals have not been met, the Participant will not be eligible to receive an award under the MIP. Once the Participant has established achievement of the individual goals, the MIP award will be determined by the Company's level of achievement Management Incentive Plan (MIP) 2002 Page 2- relative to the EBITDA goals for the quarter. Awards will be paid at the Participant's Bonus Threshold Payment Level when the EBITDA Threshold Level has been reached. IF THE COMPANY'S EBITDA THRESHOLD LEVEL IS NOT MET, NO BONUS AWARDS WILL BE PAID. Additional percentages will be added to the Bonus Award for levels above the Threshold. Exhibit B outlines these increases in the Participant's Bonus Award percentages when achievements greater than the EBITDA Threshold Level are reached. Awards under the Plan will be distributed on a quarterly basis. An additional component to the Bonus Award is the achievement of the Team Work Group Goal. Individual goals and the Team Work Group Goal are combined to comprise the percentage of the Participant's Bonus Award according to the Bonus Threshold Payment Level shown below: DIRECTOR/PLANT MANAGER LEVEL AT 100% OF PLAN
- ------------------------------------------------------------------------------------------------------------- % EMPHASIS X PLAN BONUS LEVEL PERCENT OF BONUS AWARD PERCENTAGE = - ------------------------------------------------------------------------------------------------------------- INDIVIDUAL GOALS + 50 * 35 17.5 - ------------------------------------------------------------------------------------------------------------- TEAM WORK GROUP GOAL = 50 * 35 17.5 - ------------------------------------------------------------------------------------------------------------- TOTAL 100 35 35 - -------------------------------------------------------------------------------------------------------------
VICE PRESIDENT LEVEL AT 100% OF PLAN
- ------------------------------------------------------------------------------------------------------------- % EMPHASIS X PLAN BONUS LEVEL PERCENT OF BONUS AWARD PERCENTAGE = - ------------------------------------------------------------------------------------------------------------- INDIVIDUAL GOALS + 25 * 45 11.25 - ------------------------------------------------------------------------------------------------------------- TEAM WORK GROUP GOAL = 75 * 45 33.75 - ------------------------------------------------------------------------------------------------------------- TOTAL 100 45 45 - -------------------------------------------------------------------------------------------------------------
SR. VICE PRESIDENT AND ABOVE LEVEL AT 100% OF PLAN
- ------------------------------------------------------------------------------------------------------------- % EMPHASIS X PLAN BONUS LEVEL PERCENT OF BONUS AWARD PERCENTAGE = - ------------------------------------------------------------------------------------------------------------- INDIVIDUAL GOALS + 0 55** 0 - ------------------------------------------------------------------------------------------------------------- TEAM WORK GROUP GOAL = 100 55** 55 - ------------------------------------------------------------------------------------------------------------- TOTAL 100 55** 55 - -------------------------------------------------------------------------------------------------------------
*The emphasis for the Director level may be 50% individual and 50% team or 75% individual and 25% team. For the Vice President level the emphasis may be 25%/75%; 50%/50% or 75%/25%. The emphasis level will be determined by the Participant's supervisor and included on Exhibit A when submitted prior to the beginning of the Plan Term. Management Incentive Plan (MIP), 2002 Page 3- **At the EVP level this payment is 65%; The COO level is based on achievement of EBITDA threshold and the payment level at 100% of plan is 100%.. Once the EBITDA Threshold Level is reached a Participant may receive a Bonus Award based on achievement of Individual Goals, if they are met, but may not receive a Bonus Award on the Team Work Group Goal, if that goal is not met. Lack of achievement under the "Individual Goals and Team Work Group Goal for 2002" portion of the plan during one quarter of the year will not preclude a Bonus Award being paid during subsequent calendar quarters of the year if the individual goals and Team Work Group Goal are met during those quarters. However, there are no "clawback rights" for quarters where achievement is not reached. Upon achievement of 100% or greater of the 2002 full year Plan EBITDA including any adjustments due to acquisitions, divestitures or other changes approved by the Board of Directors, an additional payment will be made to Participants equal to the individual payment made to the Participant for the quarter during which the greatest percentage of Plan EBITDA was achieved in 2002. Any Participant that did not receive a payment during the quarter used to determine this additional payment (due to not achieving his/her goals or to not being a participant in that quarter) will not be eligible of this additional payment. ================================================================ Plan Term The MIP for 2002 shall be in effect from January 1, 2002 to December 31, 2002 (the "Plan Term"). ================================================================ Distribution Quarterly Bonus Award distributions will be paid within 45 days of the close of the calendar quarter. ================================================================ Separations Except as set forth below, in order to be eligible to receive Bonus Awards under the MIP, a Participant must be employed by the Company on the last day of the calendar quarter for which an award is payable to receive a Quarterly Bonus Award. If a Participant retires during the Plan Term (and qualifies for an immediate pension under the Pliant Corporation Defined Benefit Pension Plan), dies, or becomes disabled (as defined under the Company's Long Term Disability Plan), he/she will receive a pro rata portion of the MIP Bonus Award on the actual days worked during the Plan Term. Distributions will be made at the same time as for all other Participants in the MIP. If a Participant's employment is terminated at any time prior to the end of the quarter or the Plan Term, by the employee or by the Company, with or without cause, for any reason other than Management Incentive Plan (MIP), 2002 Page 4- retirement, death, or disability, the Participant shall not be eligible to participate in the MIP, shall not receive any MIP Award for such calendar quarter or thereafter, and shall forfeit any rights he/she may have had in the MIP. ================================================================ General Provisions 1. Job Change. Eligible officers and executives who become eligible to participate in the MIP by reason of a job change will be eligible for a prorated bonus Award based on the actual days worked during the Plan Term. In the case of job changes involving a change in the Bonus Plan Payment level, the Participant will receive the new level based on the actual days worked during the Plan Term at the new level. 2. Disciplinary Action. In order to participate in the MIP, the Participant must not have been subject to any disciplinary action during the Plan Term. 3. No Employment Right. Participation in the MIP shall not confer on a Participant any right to continue in the employment of the Company, nor shall it interfere with the Company's right to terminate the employment of a Participant at any time, for any reason. 4. Non-transferability. A Participant shall not have any right to assign, transfer, pledge, or hypothecate any benefits or payments under the MIP, other than by will or by the laws of descent and distribution. 5. Creditors. Award payments held by the Company before distribution shall not be subject to execution, attachment or similar process at law or in equity. 6. Withholding. The Company will deduct and withhold all federal, state, and local taxes, and any employee benefit related withholdings, required to be withheld with respect to the payment of any award. Management Incentive Plan (MIP), 2002 Page 5- 7. Definitions. EBITDA Earnings calculated in accordance with GAAP, before interest expense, income taxes, depreciation and amortization (and after accruals for Awards paid under the MIP). Team Work A goal assigned to members of a Group Goal particular work group. This goal is a part of the Company's overall Operational Plan. ================================================================ Modification The Company may modify, supplement, suspend, or terminate the of the MIP MIP at any time without the authorization of Participants, to the extent allowed by the law. No modification, suspension, or termination shall adversely alter or affect any right or obligation under the MIP that existed prior to such modification, supplement, suspension or termination. The Company's Board of Directors will determine the effect on incentives of any such event and make adjustments and/or payments as it, in its sole discretion, determines appropriate. ================================================================ Other Subject to the control of the Executive Committee of the Board of Directors, the Company's CEO will exercise exclusive control over the MIP. The CEO will have sole discretion to calculate and adjust EBITDA amounts used in calculating MIP Bonus Awards. The MIP shall be governed by and construed under the laws of the State of Illinois. EX-12.1 7 y58490ex12-1.txt STATEMENT RE: COMPUTATION OF RATIOS OF EARNINGS Exhibit 12.1
Earnings to Fixed Charges (In Millions) 1997 1998 1999 2000 2001 Income before Taxes (3.2) 11.1 32.0 (53.8) 4.7 Interest Expense (a) 17.0 37.5 44.0 68.5 76.0 1/3 Rental Expense (b) 1.0 1.9 2.2 2.2 2.6 Fixed Charges (a+b) 18.0 39.4 46.2 70.8 78.6 Earnings 14.8 50.5 78.6 17.0 83.3 Ratio 0.8 1.3 1.7 0.24 1.1
EX-21.1 8 y58490ex21-1.txt SUBSIDIARIES EXHIBIT 21.1 PLIANT CORPORATION LIST OF SUBSIDIARIES AND STATES OF INCORPORATION OR ORGANIZATION
COMPANY NAME JURISDICTION OF INCORPORATION/ORGANIZATION Pliant Solutions Corporation (1) Utah Pliant Corporation International (1) Utah Pliant Film Products of Mexico, Inc. (1) Utah Pliant Corporation of Canada Ltd. (1) Canada Pliant Corporation Pty. Ltd. (1) Australia Pliant Film Products GmbH (1) Germany Pliant Packaging of Canada, LLC (1) Utah limited liability company Pliant Investment, Inc. (1) Utah Pliant Film Products UK, Limited (2) U.K. ASPEN Industrial, S.A. de C.V. (3) Mexico Mexicana de Tintas, S.A. (4) Mexico Nespa de Mexico, S.A. de C.V. (4) Mexico Uniplast Holdings Inc. (1) Delaware Uniplast U.S., Inc. (5) Delaware Turex, Inc. (6) Rhode Island Pierson Industries, Inc. (6) Massachusetts Uniplast Midwest, Inc. (6) Indiana Uniplast Industries Co. (5) Nova Scotia, Canada Uniplast Films, Inc. (7) Ontario, Canada 1292789 Ontario Inc. (7) Ontario, Canada
(1) Owned by Pliant Corporation (2) Owned by Pliant Corporation International (3) Owned by Pliant Corporation ((greater than) 99%) and Pliant Corporation International ((less than) 1%) (4) Owned by ASPEN Industrial, S.A. de C.V. ((greater than) 99%) and Pliant Corporation ((less than) 1%) (5) Owned by Uniplast Holdings Inc. (6) Owned by Uniplast U.S., Inc. (7) Owned by Uniplast Industries Co. EX-99.1 9 y58490ex99-1.txt LETTER OF PLIANT CORP RE ARTHUR ANDERSEN LLP Exhibit 99.1 PLIANT CORPORATION 1515 Woodfield Road Schaumburg, IL 60173 March 19, 2002 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Ladies and Gentlemen: Pliant Corporation, a Utah corporation (the "Company"), has received a representation letter from Arthur Andersen LLP ("Andersen"), the Company's independent public accountants, in connection with the issuance of Andersen's audit report included within this filing on Form 10-K. In its letter, Andersen has represented to us that its audits of the consolidated balance sheets of the Company and its subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2001, were subject to Andersen's quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagements were conducted in compliance with professional standards, that there was appropriate continuity of Andersen personnel working on the audits, availability of national office consultation and availability of personnel at foreign affiliates of Andersen to conduct relevant portions of the audits. Very truly yours, /s/ Brian E. Johnson Brian E. Johnson Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----