-----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, ONXYP7N+91arak6w2OtZXMs0S6kKlCjB+Qdmm3wAoo2EUzpAcG+lI3UDxmmtdbvO ljOFfoBgUJCQP46Mx3TPgA== 0000950123-02-004654.txt : 20020506 0000950123-02-004654.hdr.sgml : 20020506 ACCESSION NUMBER: 0000950123-02-004654 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020506 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLIANT CORP CENTRAL INDEX KEY: 0001049442 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS, FOIL & COATED PAPER BAGS [2673] IRS NUMBER: 870496065 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-40067 FILM NUMBER: 02634282 BUSINESS ADDRESS: STREET 1: 2755 EAST COTTONWOOD PARKWAY CITY: SALT LAKE CITY STATE: UT ZIP: 84121 BUSINESS PHONE: 8019938200 MAIL ADDRESS: STREET 1: 2755 EAST COTTONWOOD PARKWAY CITY: SALT LAKE CITY STATE: A1 ZIP: 84121 FORMER COMPANY: FORMER CONFORMED NAME: HUNTSMAN PACKAGING CORP DATE OF NAME CHANGE: 19971110 10-Q 1 y60300e10-q.txt PLIANT CORPORATION ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to __________ Commission file number 333-40067 PLIANT CORPORATION (Exact name of registrant as specified in its charter) Utah 87-0496065 - ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1515 Woodfield Road, Suite 600 Schaumburg, IL 60173 (847) 969-3300 (Address of principal executive offices and telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On May 2, 2002, there were 596,491 outstanding shares of the registrant's Common Stock. ================================================================================ PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2002 AND DECEMBER 31, 2001 (DOLLARS IN THOUSANDS) (UNAUDITED)
March 31, December 31, 2002 2001 ------------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 4,205 $ 4,818 Receivables, net of allowances of $2,273 and $2,438, respectively 134,536 125,436 Inventories 83,768 83,948 Prepaid expenses and other 3,233 3,026 Income taxes receivable 1,132 985 Deferred income taxes 3,748 2,563 -------------- ------------- Total current assets 230,622 220,776 PLANT AND EQUIPMENT, net 369,655 369,324 INTANGIBLE ASSETS, net 230,550 231,199 OTHER ASSETS 30,301 30,384 -------------- ------------- TOTAL ASSETS $ 861,128 $ 851,683 ============== ============= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Current portion of long-term debt $ 318 $ 17,767 Trade accounts payable 106,877 101,508 Accrued liabilities 42,174 43,097 -------------- ------------- Total current liabilities 149,369 162,372 LONG-TERM DEBT, including current portion refinanced with long-term debt 710,353 695,556 OTHER LIABILITIES 20,025 18,944 DEFERRED INCOME TAXES 27,429 26,156 -------------- ------------- Total liabilities 907,176 903,028 -------------- ------------- Minority Interest 235 271 REDEEMABLE PREFERRED STOCK - 200,000 shares authorized, 130,983 shares outstanding and designated as Series A, no par value, with a redemption and liquidation value of $1,000 per share 132,067 126,149 -------------- ------------- REDEEMABLE COMMON STOCK - no par value; 60,000 shares authorized; 53,996 shares outstanding as of March 31, 2002 and 53,996 outstanding as of December 31, 2001, net of related stockholders' notes receivable of $12,727 at March 31, 2002 and $12,720 at December 31, 2001 16,771 16,778 -------------- ------------- 148,838 142,927 STOCKHOLDERS' DEFICIT: Common stock - no par value; 10,000,000 shares authorized, 542,560 shares outstanding at March 31, 2002 and 542,571 at December 31, 2001 103,317 103,362 Warrants to purchase common stock 38,715 38,715 Accumulated deficit (329,670) (326,356) Stockholders' notes receivable (626) (616) Accumulated other comprehensive income (6,857) (9,648) -------------- ------------- Total stockholders' deficit (195,121) (194,543) -------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 861,128 $ 851,683 ============== =============
See notes to condensed consolidated financial statements. 2 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (IN THOUSANDS) (UNAUDITED)
Three Months Ended March 31, ----------------------------------------- 2002 2001 ------------- ------------- NET SALES $ 210,083 $202,659 COST OF SALES 164,504 160,696 ------------- ------------- Gross profit 45,579 41,963 ------------- ------------- OPERATING EXPENSES: Sales, General and Administrative 20,702 20,094 Stock-based compensation related to Administrative employees - 7,033 Research and Development 2,110 2,404 Plant Closing Costs 1,846 - ------------- ------------- Total operating expenses 24,658 29,531 ------------- ------------- OPERATING INCOME 20,921 12,432 INTEREST EXPENSE (16,855) (20,360) OTHER INCOME - Net 452 895 ------------- ------------- INCOME (LOSS) BEFORE INCOME TAXES 4,518 (7,033) INCOME TAX PROVISION (BENEFIT) 1,942 (2,309) ------------- ------------- NET INCOME (LOSS) $ 2,576 $ (4,724) ============= =============
See notes to condensed consolidated financial statements. 3 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (IN THOUSANDS) (UNAUDITED)
2002 2001 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 2,576 $ (4,724) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 11,343 10,089 Deferred income taxes 88 (2,015) Stock-based compensation related to administrative employees - 7,033 Loss on disposal of assets (63) 116 Changes in assets and liabilities: Receivables (9,100) 2,252 Inventories 180 (3,662) Prepaid expenses and other (207) (1,151) Income taxes payable/receivable (147) (311) Other assets 83 1,104 Trade accounts payable 5,369 (2,943) Accrued liabilities 746 7,777 Other liabilities 1,081 1,098 Other (36) - -------------- -------------- Net cash provided by operating activities 11,913 14,663 -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets - 7,914 Capital expenditures for plant and equipment (10,475) (15,310) -------------- -------------- Net cash used in investing activities (10,475) (7,396) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of stock and net change in related stockholders' notes receivables (34) (99) Principal payments on long-term debt (5,761) (8,251) Payment on revolving debt 3,109 (3,000) -------------- -------------- Net cash used in financing activities (2,686) (11,350) -------------- -------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 635 3,352 -------------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (613) (731) CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 4,818 3,060 -------------- -------------- CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 4,205 $ 2,329 ============== ============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid (received) during the period for: Interest $ 8,968 $ 6,820 Income taxes $ 318 $ (1,663) Other non-cash disclosure: Preferred Stock dividends accrued but not paid $ 5,581 $ 3,793
See notes to condensed consolidated financial statements. 4 PLIANT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE THREE MONTHS ENDED MARCH 31, 2002 (IN THOUSANDS) (UNAUDITED)
ACCUMULATED COMMON STOCK WARRANTS STOCKHOLDERS' OTHER -------------------- TO PURCHASE ACCUMULATED NOTES COMPREHENSIVE SHARES AMOUNT COMMON STOCK DEFICIT RECEIVABLE INCOME TOTAL -------------------- ------------ ----------- ------------- ------------- ----------- BALANCE, DECEMBER 31, 2001 543 $103,362 $38,715 $(326,356) $(616) $(9,648) $(194,543) Net income - - - 2,576 - - 2,576 Fair value change in interest rate derivatives classified as cash flow hedges - - - - - 1,669 1,669 Preferred stock dividend and Accretion - - - (5,890) - - (5,890) Repurchase of common stock - (45) - - - - (45) Amortization of discount on stockholder's note receivable - - - - (10) - (10) Foreign currency transaction Adjustment - - - - - 1,122 1,122 ---- -------- ------- ---------- ---------- -------- ---------- BALANCE, MARCH 31, 2002 543 $103,317 $38,715 $(329,670) $(626) $(6,857) $(195,121) ==== ======== ======= ========== ========== ======== ==========
See notes to condensed consolidated financial statements. 5 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements have been prepared, without audit, in accordance with U.S. generally accepted accounting principles and pursuant to the rules and regulations of the Securities and Exchange Commission. The information reflects all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the financial position, results of operations and cash flows of Pliant Corporation and its subsidiaries ("Pliant" or the "Company") as of the dates and for the periods presented. Results of operations for the period ended March 31, 2002 are not necessarily indicative of results of operations to be expected for the full fiscal year. Certain information in footnote disclosures normally included in financial statements presented in accordance with U.S. generally accepted accounting principles has been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. These statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2001 and the Company's Registration Statement on Form S-4 (File No. 333-86532). Certain reclassifications have been made to the condensed consolidated financial statements for the quarter ended March 31, 2002 for comparative purposes. 2. INVENTORIES Inventories are valued at the lower of cost (using the first-in, first-out method) or market value. Inventories as of March 31, 2002 and December 31, 2000 consisted of the following (in thousands):
March 31, December 31, 2002 2001 --------- ----------- Finished goods $51,250 $50,738 Raw materials 26,715 27,499 Work-in-process 5,803 5,711 ------- ------- Total $83,768 $83,948 ======= =======
3. PLANT CLOSING COSTS, OFFICE 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 6 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 the plant closure costs of $7.6 million accrued in 2000 was 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 Disposed of............................... $1,593 $8,913 $ 10,506 Estimated proceeds from disposal............ 1,200 1,749 2,949 ----- ----- Net write-off from disposal................. 393 7,164 7,557 Severance costs............................. 588 2,271 2,859 Other closure costs......................... 302 225 527 ------ ------ -------- Total closure costs......................... $1,283 $9,660 $ 10,943 ====== ====== ========
We do not anticipate the loss of any revenues or income from the closure of these facilities due to the fact that their respective sales volumes will be transferred to other facilities. As of March 31, 2002 the remaining reserves related to 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 March 31, 2002 is summarized below:
UTILIZED BALANCE ---------------- BALANCE 12/31/01 NON-CASH CASH REVERSAL 3/31/02 -------- -------- ---- -------- ------- Property and equipment reserves..................... $ 2,556 $ - $ - $ 2,556 Severance costs.............. - - - - Other costs.................. 233 - 170 63 -------- ------ ------ ------- Total........................ $ 2,789 $ - 170 $ 2,619 ======== ====== ====== ======= =======
As of March 31, 2002, 68 and 105 of the expected employee terminations had been completed at our Dallas and Birmingham facilities, respectively. As of March 31, 2002, 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 7 locations is being expensed to plant closing costs in the consolidated statements of operations. The Company incurred approximately $3.0 million for these relocation costs in 2001. During the three months ended March 31, 2002 the Company incurred approximately $1.8 million for these relocation costs. 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 was 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 leases................... 721 82 803 ------- ------ ----- ------ Total cost............... $ 2,940 $4,073 $ 103 $7,116 ======= ====== ===== ======
As of March 31, 2002, 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 March 31, 2002 is summarized below:
UTILIZED BALANCE ---------------- ADDITIONAL BALANCE 12/31/01 NON-CASH CASH ACCRUAL 3/31/02 -------- -------- ---- ------- ------- Leasehold improvements... $ - $ - $ - $ - $ - Severance cost........... 128 - 78 - 50 ------ ------- ------ ------ ------ Other costs related to leases................... 1,136 - 159 - 977 Total cost............... $1,264 $ - $ 237 $ - $1,027 ====== ======= ====== ====== ======
As of March 31, 2002, 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. REDEEMABLE COMMON STOCK Under the May 2000 stock purchase agreements, we have repurchase rights, which allow us to repurchase certain shares from the employees, if the individuals cease to be employees for any reason. The repurchase rights lapse as follows: (1) one-sixth on January 1, 2001, so long as the recipient is still our employee on such date and (2) the remainder in equal increments over a five-year period commencing on December 31, 2000 as follows: (a) in full if 100% or more of the 8 applicable target market value of equity is achieved as of the end of the applicable calendar year and (b) partial, if more than 90% of the applicable target market value of equity is achieved or (c) if the target market value of equity is not achieved, in full on December 31, 2009. The repurchase rights terminate in the event of certain acceleration events as defined in the agreement. The repurchase price per share is the original price paid by the employee plus interest compounded annually at 7% commencing on the 181st day after the date of termination of the employee through the date on which the shares are actually repurchased. In addition, under employment agreements, additional repurchase rights and put options were established. The repurchase rights allow the Company to repurchase shares, not already subject to the May 2000 stock purchase agreement repurchase rights, from the employee in the event of termination for any reason. The put options allow for the employees to require the Company to purchase all of the shares in the event of resignation for good reason, death, disability or retirement, subject to the restrictive provisions of any credit or other agreements. However, the put option related to 32,750 shares, in no event can be exercised until January 1, 2006. The price under the repurchase rights and the put options is the fair market value of the common stock, as determined in good faith. On December 27, 2000, we entered into a severance agreement with an employee. Under the agreement, we cancelled approximately $133,000 of accrued interest on a note receivable. We repurchased 6,211 shares of restricted stock for $483.13 per share and offset the purchase price against $3.0 million of note principal. In addition, on January 2, 2001, we repurchased an additional 539 shares of restricted stock for $483.13 per share and offset the purchase price against $260,000 of note principal. The Company's repurchase rights were changed on the remaining 7,423 shares of common stock owned by this individual, whereby the Company agreed not to repurchase the shares until February 28, 2003 at a repurchase price of the greater of the fair market value and $111.53 per share. Interest ceased to accrue on the remaining $787,000 balance of the note related to the sale of stock in 1999. Further, the put option was cancelled. As a result of these modifications, a $323,000 discount on the note receivable balance was recorded as compensation expense in 2000. The discount will be amortized to interest income over the remaining term of the note. In the event we determine to repurchase the stock from this individual at an amount that is: (1) greater than the fair value of the stock (i.e. the note balance is greater than the fair value) or (2) greater than the note balance as a result of future increases in fair value of the stock, we will record additional expense. On January 22, 2001, we entered into a severance agreement with another employee. Under this agreement, we cancelled approximately $85,000 of accrued interest on a note receivable. We repurchased 3,125 shares of restricted stock for $483.13 and offset the purchase price against $1.5 million of note principal. We further agreed to cease interest on the remaining $302,000 principal balance of the note receivable related to 625 shares and to cease interest on the $262,000 principal balance related to the sale of stock in 1999. As a result of these interest modifications, a $208,000 discount on the note receivable balance was recorded as compensation expense in the first quarter of 2001. The discount will be amortized to interest income over the remaining term of the note. In addition, the Company's repurchase rights and the individual's put option were changed on the remaining 2,832 shares of common stock owned by this individual. We agreed not to repurchase and the individual agreed not to exercise the put option on the shares until February 28, 2003. The repurchase price and the put option price were changed to be the greater of the fair value of the stock or the balance on the note receivable. Because the fair value of these shares was $483.13 per share on January 22, 2001, compensation expense of approximately $1.0 million was recorded in the first quarter of 2001, which represents the difference between the carrying amount and the fair value of the 2,622 shares common stock that are subject to the note receivable. On February 1, 2001, we amended the note agreements with another employee that were issued in connection with the sale of restricted stock in 1999 and 2000. Under the amended agreements, 9 interest ceases to accrue, effective December 31, 2000, on one note with a principal balance of $1.6 million and another note with a principal balance of $7.0 million. Further, the notes were modified to remove the full recourse provisions and modify the pledge agreement. As a result of these modifications, the sale of stock for notes will now be accounted for as stock options and will be subject to variable accounting. Accordingly, changes in the fair value of the common stock in excess of the note balance will be recorded as compensation expense until the note is paid in full. In addition, interest income will not be recorded on these notes. In connection with this modification we recorded compensation expense of $6.0 million, in the first quarter of 2001. Because of the modifications of these employee notes, in the first quarter of 2001 another employee's 2000 stock purchase will be accounted for as stock options, subject to variable accounting. In addition, interest income will not be recorded on this note with a principal balance of $3.7 million. 5. STOCK OPTION PLANS During the three months ended March 31, 2002, options to purchase 2,680 shares were forfeited due to employee terminations. 6. SUBSEQUENT EVENTS Effective April 2, 2002, we entered into an amendment of our credit facilities to, among other things, permit the offering of $100 million aggregate principal amount of our 13% Senior Subordinated Notes due 2010 (the "2002 Notes"). The amendment also adjusted certain financial covenants, including the leverage and interest coverage ratios and the permitted amount of capital expenditures. The amendment also allows us to borrow additional term loans in an aggregate principal amount of up to $85 million under an uncommitted incremental tranche B facility, the proceeds of which will be used to finance certain permitted acquisitions, if any, completed prior to March 31, 2003. We incurred an amendment fee of $1.3 million in connection with the amendment. We also incurred approximately $0.5 million of legal and administrative expenses in connection with negotiating the amendment. On April 10, 2002 we completed the private offering of the Notes at an issue premium of $3.75 million. The total cost of issuance is expected to be approximately $5.0 million. We used approximately $93.3 million of the net proceeds from the issuance of the 2002 Notes to repay indebtedness under our credit facilities, including a repayment of approximately $63.3 million on our revolving credit facility and a $30 million repayment on our term loans. Our credit facilities limit the use of the remaining net proceeds to repayments on our credit facilities or certain permitted acquisitions. We will be required to repay, on December 31, 2002, additional term loans in the amount by which $18 million exceeds the amount we invest in certain acquisitions. We and those of our subsidiaries that guaranteed the 2002 Notes have agreed to complete an exchange offer, pursuant to which we will offer to exchange the 2002 Notes for notes registered under the Securities Act of 1933. 7. DERIVATIVE INSTRUMENTS Effective January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137 and SFAS No. 138. 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 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. 10 At the adoption of this pronouncement, we had one interest rate cap agreement, which had been entered into during the fourth quarter of 2000. As a result, the initial adoption of this pronouncement did not result in a material effect to our financial statements. During 2001, we entered into four additional interest rate derivative agreements with financial institutions. During the three months ended March 31, 2002, we entered into an additional interest rate derivative agreement with a financial institution. 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 March 31, 2002 (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 Interest rate swap 50.0 LIBOR 3.90% 12/18/2005
* Three-month LIBOR, as defined; 1.94% as of March 31, 2002 ** 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 March 31, 2002 in other liabilities of approximately $1.3 million and in other assets of approximately $0.05 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 three months ended March 31, 2002 was 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. 8. OPERATING SEGMENTS Operating segments are components of our business for which separate financial information is available that is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and in assessing performance. This information is reported on the basis that it is used internally for evaluating segment performance. We have 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. 11 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 three months ended March 31, 2002 and 2001 are presented in the following table (in thousands):
DESIGN INDUSTRIAL SPECIALTY CORPORATE/ PRODUCTS FILMS FILMS OTHER TOTAL MARCH 31, 2002 Net sales to customers $48,858 $60,370 $100,855 $ - $210,083 Intersegment sales 736 2,347 1,620 (4,703) - --------- -------- --------- -------- ---------- Total net sales 49,594 62,717 102,475 (4,703) 210,083 Depreciation and amortization 2,618 1,976 3,678 3,071 11,343 Interest expense 494 124 5 16,232 16,855 Segment profit (loss) 6,723 12,493 22,822 (37,520) 4,518 Segment total assets 182,021 130,229 447,713 101,165 861,128 Capital expenditures 2,101 2,685 4,547 1,142 10,475 MARCH 31, 2001 Net sales to customers $53,369 $61,597 $ 87,693 $ - $202,659 Intersegment sales 2,004 1,539 2,269 (5,812) - --------- ------- -------- --------- ---------- Total net sales 55,373 63,136 89,962 (5,812) 202,659 Depreciation and amortization 2,509 1,976 2,793 2,811 10,089 Interest expense 887 (29) 6 19,496 20,360 Segment profit (loss) 9,220 11,019 18,766 (46,038) (7,033) Segment total assets 178,254 125,531 398,816 76,333 778,934 Capital expenditures 4,225 2,638 7,402 1,045 15,310
12 A reconciliation of the totals reported for the operating segments to our totals reported in the condensed consolidated financial statements is as follows (in thousands):
Three months ended March 31, --------- 2002 2001 ---- ---- PROFIT OR LOSS Total profit for reportable segments $ 42,038 $ 39,005 Stock-based compensation related to Administrative employees - (7,033) Plant Closing costs (1,846) - Unallocated amounts: Corporate expenses (19,442) (19,509) Interest expense (16,232) (19,496) --------- --------- Income (loss) before taxes $ 4,518 $ (7,033) ========= =========
March 31, 2002 March 31, 2001 -------------- -------------- ASSETS Total assets for reportable segments $ 759,963 $ 702,601 Intangible assets not allocated to segments 46,689 14,528 Other unallocated assets 54,476 61,805 --------- --------- Total consolidated assets $ 861,128 $ 778,934 ========= =========
9. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS The following condensed consolidating financial statements present, in separate columns, financial information for (i) Pliant (on a parent only basis), with its investment in its subsidiaries recorded under the equity method, (ii) guarantor subsidiaries (as specified in the Indenture, dated May 31, 2000 (the "2000 Indenture"), relating to Pliant's $220 million senior subordinated notes due 2010 (the "2000 Notes") and the Indenture, dated April 10, 2002 (the "2002 Indenture" and, together with the 2000 Indenture, the "Indentures"), relating to Pliant's $100 million senior subordinated notes due 2010 (the "2002 Notes" and, together with the 2000 Notes, the "Notes")) on a combined basis, with any investments in non-guarantor subsidiaries specified in the Indenture recorded under the equity method, (iii) direct and indirect non-guarantor subsidiaries on a combined basis, (iv) the eliminations necessary to arrive at the information for Pliant and its subsidiaries on a consolidated basis, and (v) Pliant on a consolidated basis, in each case as of March 31, 2002 and December 31, 2001 and for the three months ended March 31, 2002 and 2001. The Notes are fully and unconditionally guaranteed on a joint and several basis by each guarantor subsidiary and each guarantor subsidiary is wholly owned, directly or indirectly, by Pliant. There are no contractual restrictions limiting transfers of cash from guarantor and non-guarantor subsidiaries to Pliant. The condensed consolidating financial statements are presented herein, rather than separate financial statements for each of the guarantor subsidiaries because management believes that separate financial statements relating to the guarantor subsidiaries are not material to investors. 13 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET AS OF MARCH 31, 2002 (IN THOUSANDS) (UNAUDITED)
Pliant Corporation Combined Combined Consolidated (Parent Guarantor Non-Guarantor Pliant Only) Subsidiaries Subsidiaries Eliminations Corporation ----------- ------------ ------------ ------------ ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ -- $ 965 $ 3,240 $ -- $ 4,205 Receivables - net 104,326 8,588 21,622 -- 134,536 Inventories 66,074 8,133 9,561 -- 83,768 Prepaid expenses and other 2,177 531 525 -- 3,233 Income taxes receivable 148 (44) 1,028 -- 1,132 Deferred income taxes 5,757 -- (2,009) -- 3,748 --------- --------- --------- --------- --------- Total current assets 178,482 18,173 33,967 -- 230,622 PLANT AND EQUIPMENT - Net 298,558 22,198 48,899 -- 369,655 INTANGIBLE ASSETS - Net 210,367 3,545 16,638 -- 230,550 INVESTMENT IN SUBSIDIARIES 67,683 -- -- (67,683) -- OTHER ASSETS 27,033 182 3,086 -- 30,301 --------- --------- --------- --------- --------- TOTAL ASSETS $ 782,123 $ 44,098 $ 102,590 $ (67,683) $ 861,128 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current portion of long-term debt $ 318 $ -- $ -- $ -- $ 318 Trade accounts payable 88,573 3,490 14,814 -- 106,877 Accrued liabilities 34,054 1,571 6,549 -- 42,174 Due to (from) affiliates (14,979) 19,112 (4,133) -- -- --------- --------- --------- --------- --------- Total current liabilities 107,966 24,173 17,230 -- 149,369 LONG-TERM DEBT - Net of current portion 678,353 -- 32,000 -- 710,353 OTHER LIABILITIES 18,478 -- 1,547 -- 20,025 DEFERRED INCOME TAXES 23,749 1,260 2,420 -- 27,429 --------- --------- --------- --------- --------- Total liabilities 828,546 25,433 53,197 -- 907,176 --------- --------- --------- --------- --------- MINORITY INTEREST (140) -- 375 -- 235 REDEEMABLE STOCK: Preferred Stock 132,067 -- -- -- 132,067 Common Stock 16,771 -- -- -- 16,771 --------- --------- --------- --------- --------- REDEEMABLE STOCK 148,838 -- -- -- 148,838 --------- --------- --------- --------- --------- STOCKHOLDERS' EQUITY (DEFICIT): Common stock 103,317 14,020 29,616 (43,636) 103,317 Warrants 38,715 -- -- -- 38,715 Retained earnings accumulated (deficit) (329,670) 4,656 23,807 (28,463) (329,670) Stockholders' note receivable (626) -- -- -- (626) Accumulated other comprehensive loss (6,857) (11) (4,405) 4,416 (6,857) --------- --------- --------- --------- --------- Total stockholders' equity (deficit) (195,121) 18,665 49,018 (67,683) (195,121) --------- --------- --------- --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 782,123 $ 44,098 $ 102,590 $ (67,683) $ 861,128 ========= ========= ========= ========= =========
14 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2001 (IN THOUSANDS) (UNAUDITED)
PLIANT CORPORATION COMBINED COMBINED CONSOLIDATED (PARENT GUARANTOR NON-GUARANTOR PLIANT ONLY) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CORPORATION ----- ------------ ------------ ------------ ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ -- $ 967 $ 3,851 $ -- $ 4,818 Receivables, net 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 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: Current portion of long-term debt $ 81,099 $ 4,678 $ 15,731 $ -- $ 101,508 Trade accounts payable 36,541 1,703 4,853 -- 43,097 Accrued liabilities 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' EQUITY (DEFICIT) Common stock 103,362 14,020 29,616 (43,636) 103,362 Warrants to purchase common stock 38,715 -- -- -- 38,715 Retained earnings (accumulated deficit) (326,356) 3,500 21,215 (24,715) (326,356) Shareholder note receivable (616) -- -- -- (616) Accumulated other comprehensive income (loss) (9,648) (11) (5,503) 5,514 (9,648) --------- --------- --------- -------- -------- Total stockholders' equity (deficit) (194,543) 17,509 45,328 (62,837) (194,543) --------- --------- --------- -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 760,784 $ 47,662 $ 106,074 $ (62,837) $ 851,683 ========= ========= ========= ========= =========
15 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING INCOME STATEMENT FOR THE THREE MONTHS ENDED MARCH 31, 2002 (IN THOUSANDS) (UNAUDITED)
Pliant Corporation Combined Combined Consolidated (Parent Guarantor Non-Guarantor Pliant Only) Subsidiaries Subsidiaries Eliminations Corporation ----- ------------ ------------ ------------ ----------- SALES , Net $ 170,037 $ 10,739 $ 34,010 $ (4,703) $ 210,083 COST OF SALES 133,336 9,502 26,369 (4,703) 164,504 --------- --------- --------- --------- -------- GROSS PROFIT 36,701 1,237 7,641 - 45,579 OPERATING EXPENSES 21,194 84 3,380 - 24,658 --------- --------- --------- --------- -------- OPERATING INCOME 15,507 1,153 4,261 - 20,921 INTEREST EXPENSE (16,237) - (618) - (16,855) EQUITY IN EARNINGS OF SUBSIDIARIES 3,748 - - (3,748) - OTHER INCOME (EXPENSE), Net 14 3 435 - 452 --------- --------- --------- --------- -------- INCOME (LOSS) BEFORE INCOME TAXES 3,032 1,156 4,078 (3,748) 4,518 INCOME TAX PROVISION (BENEFIT) 456 - 1,486 - 1,942 --------- --------- --------- --------- -------- NET INCOME (LOSS) $ 2,576 $ 1,156 $ 2,592 $ (3,748) $ 2,576 ========= ========= ========= ======== ========
16 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING INCOME STATEMENT FOR THE THREE MONTHS ENDED MARCH 31, 2001 (IN THOUSANDS) (UNAUDITED)
Pliant Corporation Combined Combined Consolidated (Parent Guarantor Non-Guarantor Pliant Only) Subsidiaries Subsidiaries Eliminations Corporation ----- ------------ ------------ ------------ ----------- SALES, Net $170,938 $ 9,559 $27,974 $(5,812) $202,659 COST OF SALES 137,226 7,888 21,394 (5,812) 160,696 -------- -------- ------- -------- -------- GROSS PROFIT 33,712 1,671 6,580 - 41,963 OPERATING EXPENSES 26,859 90 2,582 - 29,531 -------- -------- ------- -------- -------- OPERATING INCOME 6,853 1,581 3,998 - 12,432 INTEREST EXPENSE (19,470) - (890) - (20,360) EQUITY IN EARNINGS OF SUBSIDIARIES 3,873 - - (3,873) - OTHER INCOME (EXPENSE), Net 418 165 312 - 895 -------- -------- ------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES (8,326) 1,746 3,420 (3,873) (7,033) INCOME TAX PROVISION (BENEFIT) (3,602) - 1,293 - (2,309) -------- -------- ------- -------- -------- NET INCOME (LOSS) $ (4,724) $ 1,746 $ 2,127 $(3,873) $ (4,724) ======== ======== ======= ======== =========
17 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2002 (IN THOUSANDS) (UNAUDITED) - -------------------------------------------------------------------------------
Pliant Corporation Combined Combined Consolidated (Parent Guarantor Non-Guarantor Pliant Only) Subsidiaries Subsidiaries Eliminations Corporation ----------- ------------ ------------- ------------ ------------ CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 14,991 $ (3,745) $ 667 - $ 11,913 -------- -------- --------- --------------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Asset transfers (4,805) 4,805 - - - Capital expenditures for plant and equipment (8,442) (1,328) (705) - (10,475) -------- -------- --------- --------------- -------- Net cash provided by investing activities (13,247) 3,477 (705) - (10,475) -------- -------- --------- --------------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock and net change in related stockholders' notes receivables (34) - - - (34) Principal payments on long-term debt (1,652) - (1,000) - (2,652) -------- -------- --------- --------------- -------- Net cash used in financing Activities (1,686) - (1,000) - (2,686) -------- -------- --------- --------------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (58) 266 427 - 635 -------- -------- --------- --------------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS - (2) (611) - (613) CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD - 967 3,851 - 4,818 -------- -------- --------- --------------- -------- CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ - $ 965 $ 3,240 $ - $ 4,205 ======== ======== ========= =============== ========
18 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2001 (IN THOUSANDS) (UNAUDITED) - -------------------------------------------------------------------------------
Pliant Combined Combined Consolidated Corporation Guarantor Non-Guarantor Pliant Parent Only Subsidiaries Subsidiaries Eliminations Corporation ----------- ------------ ------------ ------------ ----------- CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 21,192 $ (4,574) $ (1,955) -- $ 14,663 -------- -------- -------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets 2,966 4,948 -- -- 7,914 Capital expenditures for plant and equipment (12,378) (1,802) (1,130) -- (15,310) -------- -------- -------- --------- -------- Net cash provided by investing activities (9,412) 3,146 (1,130) -- (7,396) -------- -------- -------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock and net change in related stockholders' notes receivables (99) (99) Principal payments on long-term debt (10,146) -- (1,105) -- (11,251) -------- -------- -------- --------- -------- Net cash used in financing Activities (10,245) -- (1,105) -- (11,350) -------- -------- -------- --------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENT (1,994) 1,457 3,889 -- 3,352 -------- -------- -------- --------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (459) 29 (301) -- (731) CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 459 10 2,591 -- 3,060 -------- -------- -------- --------- -------- CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ -- $ 39 $ 2,290 $ -- $ 2,329 ======== ======== ======== ========= ========
19 10. POTENTIAL ACQUISITION On December 31, 2001 we signed an agreement to purchase substantially all of the assets of Decora Industries, Inc., a New York based manufacturer of printed, plastic films sold under the Con-Tact brand name. Decora is a debtor in possession in a voluntary case filed under chapter 11 of the United States Bankruptcy Code. Decora had 2001 revenue of approximately $49.8 million. The asset purchase agreement and the amendment are subject to certain conditions to closing,which are beyond our control, and must be approved by the United States Bankruptcy Court. As part of the asset purchase agreement and the on-going negotiations we have a $1.0 million deposit in escrow and a $2.2 million receivable for various sales of products to Decora. The deposit is included as part of Other Assets in the March 31, 2002 balance sheet. The receivable is included as part of the Receivables in the March 31, 2002 balance sheet. 11. NEW ACCOUNTING STANDARDS In July, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standards (SFAS) No. 141, "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets". SFAS requires that the purchase method of accounting be used for all business combinations completed after June 30, 2001, clarifies the recognition of intangible assets separately from goodwill and requires that unallocated negative goodwill be written off immediately as an extraordinary gain. SFAS No. 142, which was effective for fiscal years beginning after December 15, 2001, requires that ratable amortization of goodwill be replaced with periodic tests of goodwill impairment and that intangible assets, other than goodwill, which have determinable useful lives, be amortized over their useful lives. As required by SFAS 142 the company stopped amortizing goodwill effective January 1, 2002. The Company is currently evaluating any possible impairment of goodwill under SFAS 142 guidelines. The Company expects to complete this evaluation in the second or third quarter of 2002. The following is a reconciliation of net income and earnings per share between the amounts reported in the first quarter of 2001 and the adjusted amounts reflecting these new accounting rules:
Three months ended (Dollars in thousands) March 31, 2001 --------------------- Net income/(loss): Reported net income/(loss)..................... $ (4,724) Goodwill amortization.......................... 1,008 ------- Adjusted net income............................ $ (3,716) ========
20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of this section is to discuss and analyze our consolidated financial condition, liquidity and capital resources and results of operations. This analysis should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2001 (the "2000 10-K") and our Registration Statement on Form S-4 (file No. 333-86532). This section contains certain forward-looking statements within the meanings of federal securities laws that involve risks and uncertainties, including statements regarding our plans, objectives, goals, strategies and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under "Cautionary Statement for Forward-Looking Information" below and elsewhere in this report. GENERAL We generate our revenues, earnings and cash flows from the sale of film and flexible packaging products throughout the world. We manufacture these products at 26 facilities located in North America, Central America, Europe and Australia. Our sales have grown primarily as a result of strategic acquisitions made over the past several years, increased levels of production at acquired facilities, return on capital expenditures and the overall growth in the markets for film and flexible packaging products. 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. 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 the second quarter of 2001, we completed the implementation of a company-wide supply chain cost initiative. This initiative, which we began in the fourth quarter of 1999, focused on improving the efficiency of our operations through improvements to our procurement, logistics, planning and production processes. 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. 21 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 three months ended March 31, 2002 and 2001 (dollars in millions).
Three Months Ended March 31 --------------------------------- 2002 2001 -------------- -------------- % of % of $ Sales $ Sales ------ ------ ------ ------ Net sales $210.1 100.0% $202.7 100.0% Cost of sales 164.5 78.3 160.7 79.3 ----- ---- ----- ---- Gross profit 45.6 21.7 42.0 20.7 Total operating expenses 24.7 11.8 29.5 14.6 ---- ---- ---- ---- Operating income $20.9 9.9% $ 12.5 6.1% ===== ===== ====== =====
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001 Net Sales Net sales increased by $7.4 million, or 3.7%, to $210.1 million for the first quarter of 2002, from $202.7 million for the three months ended March 31, 2001. The increase was primarily due to a 13.1% increase in sales volume partially offset by a 8.4% decrease in our average selling price. In the markets we serve, the average selling price of our products generally increases or decreases as the price of resins, our primary raw material, increases or decreases. Average resin prices were significantly lower during the first quarter of 2002 compared to the first quarter of 2001 resulting in a significant decrease in our average selling prices. Gross Profit Gross profit increased by $3.6 million, or 8.6%, to $45.6 million for the first quarter of 2002, from $42.0 million for the three months ended March 31, 2001. The increase was primarily due to the increase in sales volumes. Total Operating Expenses Total operating expenses decreased by $4.8 million, or 16.3%, to $24.7 million for the first quarter of 2002 from $29.5 million for the three months ended March 31, 2001. The significant items contributing to most of this increase relate to two unusual items: $7.0 million of non-cash stock-based compensation expense related to administrative employees for the three month period ended March 31, 2001, and $1.8 million of plant closing costs related primarily to cost of moving production lines from the plants acquired and closed as a result of the Uniplast acquisition for the period ended March 31, 2002. Excluding the effect of these two unusual items total operating expenses increased $0.4 million or 1.7%. This increase was principally as a result of costs related to organizational changes and relocation of offices. 22 Operating Income Operating income increased by $8.4 million, or 67.2%, to $20.9 million for the three months ended March 31, 2002 from $12.5 million for the three months ended March 31, 2001, due to the factors discussed above. Excluding the unusual items described above from both periods, operating income would have been $22.7 million for the first quarter of 2002 as compared to $19.5 million for the first quarter of 2001. Interest Expense Interest expense decreased by $3.5 million, or 17.2%, to $16.9 million for the three months ended March 31, 2002, from $20.4 million for the three months ended March 31, 2001. This decrease was primarily due to the reduction in LIBOR which decreased the variable interest rate on our term debt. Other Income Other income decreased to income of $0.5 million for the three months ended March 31, 2002, from $0.9 million for the three months ended March 31, 2001, a decrease in income of $0.4 million. The decrease was primarily due to an insurance claim which was received during the first quarter of 2001 for an ice storm at the McAlester plant. Income Tax Expense (Benefit) Income tax expense for the three months ended March 31, 2002 was $1.9 million or 43.0% as compared to an income tax benefit of $2.3 million or 32.8%. The change in the effective income tax rate is primarily due to adjustments made to the net operating loss carried forward and the resulting deferred tax balances as a result of the completion of a recent IRS audit. OPERATING SEGMENT REVIEW General Operating segments are components of our company for which separate financial information is available that is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and in assessing performance. For more information on our operating segments see Note 8 to the unaudited condensed consolidated financial statements. THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 2001 Specialty Films Net Sales. The net sales of our specialty films segment increased $13.2 million, or 15.1%, to $100.9 million for the three months ended March 31, 2002 from $87.7 million for the three months ended March 31, 2001. This increase was primarily due to an 18.6% increase in sales volume partially offset by a 3.0% decrease in our average selling prices. The increase sales volume was primarily as a result of the Uniplast acquisition. Selling prices decreased principally due to the effects of a decrease in resin prices in the first quarter of 2002 as compared to the same period in 2001. Segment Profit.The specialty films segment profit increased $4.0 million, or 21.3%, to $22.8 million for the three months ended March 31, 2002 from $18.8 million for the three months ended March 31, 2002. The increase was primarily due to the increase in sales discussed above including the effect of the Uniplast acquisition and improved margins. 23 Segment Total Assets The specialty films segment total assets increased $48.9 million, or 12.3%, from $398.8 million as of March 31, 2001 to $447.7 million as of March 31, 2002. The increase was principally due to the acquisition of Uniplast, capital expenditures for capacity expansions and the reserve for plant closing cost for Harrington that was deducted from segment assets as of March 31, 2001 partially offset by depreciation expenses. Design Products Net Sales The net sales of our design products segment decreased $4.5 million, or 8.4%, to $48.9 million for the three months ended March 31, 2002 from $53.4 million for the three months ended March 31, 2001. This decrease was primarily due to a 8.3% decrease in our average selling prices. Sales volumes remained relatively stable for the three months ended March 31, 2002 as compared to the same period in 2001. Segment Profit The design products segment profit decreased $2.5 million, or 27.2%, to $6.7 million for the three months ended March 31, 2002 from $9.2 million for the three months ended March 31, 2001. This decrease was principally due to slightly lower margins and a partial settlement received from a potential customer received during the first quarter 2001. Segment Total Assets The design products segment total assets increased $3.7 million, or 2.1%, from $178.3 million as of March 31, 2001 to $182.0 million as of March 31, 2002. Capital expenditures for capacity additions were partially offset by depreciation expenses. Industrial Films Net Sales.The net sales in our industrial films segment decreased $1.2 million, or 1.9%, to $60.4 million for the three months ended March 31, 2002 from $61.6 million for the three months ended March 31, 2001. This decrease was due to a 12.8% increase in sales volumes primarily as a result of the Uniplast acquisition that was more than offset by a 13.2% decrease in selling prices. Selling prices decreased principally due to the effects of a decrease in resin prices and a change in sales mix. Segment Profit The industrial films segment profit increased $1.5 million, or 13.6%, to $12.5 million for the three months ended March 31, 2002 to $11.0 million for the three months ended March 31, 2001. This increase was principally due to the effect of higher sales volume from the acquisition of Uniplast partially offset by a decrease in margins. Segment Total Assets. The industrial films segment total assets increased $4.7 million, or 3.7%, from $125.5 million as March 31, 2001 to $130.2 million as of March 31, 2002. This increase was principally due to the addition of assets from the Uniplast acquisition and to capital expenditures for maintenance of business which were offset by depreciation expenses. In addition, segment total assets at March 31, 2001 reflected a deduction relating to a reserve for plant closing costs at our Harrington facility. A portion of this amount was credited back to segment total assets during 2001 as a result of our determination not to close the Harrington facility. UNALLOCATED CORPORATE EXPENSES Unallocated corporate expenses remained relatively stable at $19.4 million for the three months ended March 31, 2002 as compared to $19.5 million for the same period last year. 24 LIQUIDITY AND CAPITAL RESOURCES Net Cash Provided by Operating Activities Net cash provided by operating activities was $11.9 million for the three months ended March 31, 2002, a decrease of $2.8 million, or 18%, from the same period in 2001. This decrease was principally due to changes in working capital items partially offset by improved operating results in the first quarter of 2002 as compared to the first quarter of 2001. Net Cash Used in Investing Activities Net cash used in investing activities was $10.5 million for the three months ended March 31, 2002, as compared to $7.4 million for the same period in 2001. Capital expenditures were $10.5 million and $15.3 million for the periods ended March 31, 2002 and 2001, respectively. Capital expenditures in both periods were primarily for major expansion projects in all of our product lines. We expect capital expenditures to be at the same level as the first quarter for the remaining quarters in 2002. In 2001, we received $7.9 million as part of a sale-leaseback transaction of newly-acquired machinery and equipment. Net Cash Used in Financing Activities Net cash used in financing activities was $2.7 million for the three months ended March 31, 2002, compared to $11.4 million for the same period in 2001. The activity for both periods primarily represented principal payments on our term loans and borrowings and repayments under the revolving credit facility. Liquidity As of March 31, 2002, we had approximately $81.2 million of working capital and approximately $51.5 million available under our $100.0 million revolving credit facility. We had $5.9 million of letters of credit issued, which reduces the amount available for borrowings under our revolving credit facility. As of March 31, 2002, the debt under our credit facilities bore interest at a weighted average rate of 7.7%. As of March 31, 2002, we had $4.2 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 our outstanding senior subordinated notes and our credit facilities. For the three months ended March 31, 2002, our foreign operations generated net income from continuing operations of approximately $2.6 million. Effective April 2, 2002, we entered into an amendment of our credit facilities to, among other things, permit the offering of $100 million aggregate principal amount of our 13% Senior Subordinated Notes due 2010 (the "2002 Notes"). The amendment also adjusted certain financial covenants, including the leverage and interest coverage ratios and the permitted amount of capital expenditures. The amendment also allows us to borrow additional term loans in an aggregate principal amount of up to $85 million under an uncommitted incremental tranche B facility, the proceeds of which will be used to finance certain permitted acquisitions, if any, completed prior to March 31, 2003. We incurred an amendment fee of $1.3 million in connection 25 with the amendment. We also incurred approximately $0.5 million of legal and administrative expenses in connection with negotiating the amendment. On April 10, 2002 we completed the private offering of the 2002 Notes. We used approximately $93.3 million of the net proceeds from the issuance of the Notes to repay indebtedness under our credit facilities, including a repayment of approximately $63.3 million on our revolving credit facility and a $30 million repayment on our term loans. Our credit facilities limit the use of the remaining net proceeds to repayments on our credit facilities or certain permitted acquisitions. We will be required repay, on December 31, 2002, additional term loans in the amount by which $18 million exceeds the amount we invest in certain acquisitions. The following table sets forth the scheduled principal payments on the credit facilities, the $220 million principal amount Senior Subordinated Notes issued in May 2000 ( the "2000 Notes") and the 2002 Notes : Year Principal Payment - ------------------------------------------------ 2002 $ 0 2003 19,599,205 2004 51,469,041 2005 60,744,922 2006 34,186,832 Thereafter 583,200,000 Total Debt after issuance of the 2002 Notes and repayment of credit facilities on April 10, 2002 was $750.5 million. The foregoing table assumes a prepayment of term loans is not required on December 31, 2002, and does not give effect to up to $85 million in additional term loans that we may borrow under the uncommitted incremental tranche B facility permitted under the amendment to the credit facilities. In addition, we are required to make annual mandatory prepayments of the term loans under the credit facilities within 90 days following the end of each year in an amount equal to the amount by which 100% of excess cash flow for such year ( or 50% of excess cash flow if our leverage ratio at the end of such year is less than or equal to 4 to 1) exceeds the aggregate amount of voluntary prepayments made since the last excess cash flow payment, subject to the amount of voluntary prepayments made since the last excess cash flow payment, subject to certain adjustments. In addition, the term loan 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, in each case subject to certain exceptions. The interest expense and scheduled principal payments on our borrowings effect our future liquidity requirements. We expect that cash flows from operating activities and available borrowings under our revolving credit facility of $100 million available under the credit agreement will provide sufficient working capital to operate our business, to make expected capital expenditures and to meet foreseeable liquidity requirements. 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," 26 "plans," "intends," "believes" and variations of such words or similar expressions are intended to identify forward-looking statements. We may also make additional forward-looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, by us or on our behalf, are also expressly qualified by these cautionary statements. All forward-looking statements, including, without limitation, management's examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. But, there can be no assurance that management's expectations, beliefs and projections will result or be achieved. All forward-looking statements apply only as of the date made. We undertake no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in or contemplated by this report. These risks include, but are not limited to: general economic and business conditions, particularly an economic downturn; industry trends; increases in our leverage; interest rate increases; changes in our ownership structure; raw material costs and availability, particularly resin; competition; the loss of any of our significant customers; changes in the demand for our products; new technologies; changes in distribution channels or competitive conditions in the markets or countries in which we operate; costs of integrating any future acquisitions; loss of our intellectual property rights; foreign currency fluctuations and devaluations and political instability in our foreign markets; changes in our business strategy or development plans; availability, terms and deployment of capital; availability of qualified personnel; and increases in the cost of compliance with laws and regulations, including environmental laws and regulations. Each of these risks and certain other uncertainties are discussed in more detail in the 2001 10-K and in our Registration Statement on Form S-4 (file no. 333-86532), as amended, filed with the Securities and Exchange Commission. There may be other factors, including those discussed elsewhere in this report, that may cause our actual results to differ materially from the forward-looking statements. Any forward-looking statements should be considered in light of these factors. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to various interest rate and resin price risks that arise in the normal course of business. We finance our operations with borrowings comprised primarily of variable rate indebtedness. We enter into interest rate collar and swap agreements to manage interest rate market risks and commodity collar agreements to manage resin market risks. Our raw material costs are comprised primarily of resins. Significant increases in interest rates or the price of resins could adversely affect our operating margins, results of operations and ability to service our indebtedness. An increase of 1% in interest rates payable on our variable rate indebtedness would increase our annual interest expense by approximately $3.0 million, after accounting for the effect of our interest rate hedge agreements. As a result of the mandatory redemption features, as of March 31, 2002, the carrying value of the Preferred Stock has been increased by $1.7 million to reflect the accumulated accretion towards the $131.0 million redemption value at May 31, 2011, excluding accumulated dividends. As of March 31, 2002, we have accrued dividends of approximately $31.9 million, which is included as part of the liquidation value of the Preferred Stock. 27 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed with this report. 4.1 Indenture, dated as of April 10, 2002, among Pliant Corporation, the Note Guarantors party thereto and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.4 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-86532)). 4.2 Exchange and Registration Rights Agreement, dated as of April 10, 2002, among Pliant Corporation, the Note Guarantors party thereto, and J.P. Morgan Securities Inc. and Deutsche Bank Securities Inc., as Initial Purchasers (incorporated by reference to Exhibit 4.7 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-86532)). 10.1 Amendment No. 3, dated as of April 2, 2002, to the Credit Agreement dated as of September 30, 1997, as amended and restated as of May 31, 2000 (incorporated by reference to Exhibit 10.15 to Pliant Corporation's Registration Statement on Form S-4 (File No. 333-86532)). (b) No report on Form 8-K was filed during the quarter for which this report is filed. On April 8, 2002 subsequent to the end of the quarter, we filed a report on Form 8-K to report the sale of $100 million aggregate principal amount of 13% Senior Subordinated Notes due 2010. 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PLIANT CORPORATION /s/ BRIAN E. JOHNSON ------------------------------------------ BRIAN E. JOHNSON Executive Vice President and Chief Financial Officer (Authorized Signatory and Principal Financial and Accounting Officer) Date: May 3, 2002 29 -----END PRIVACY-ENHANCED MESSAGE-----