10-Q 1 f67197e10-q.txt PLIANT CORPORATION THIRD QUARTER REPORT 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to __________ Commission file number 333-40067 PLIANT CORPORATION (Exact name of registrant as specified in its charter) Utah 87-0496065 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2755 E. Cottonwood Parkway, Suite 400 Salt Lake City, Utah 84121 (801) 993-8200 (Address of principal executive offices and telephone number) Huntsman Packaging Corporation 500 Huntsman Way Salt Lake City, Utah 84108 (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On November 13, 2000, there were 574,006 outstanding shares of the registrant's Common Stock. ================================================================================ 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999 (DOLLARS IN THOUSANDS) (UNAUDITED) --------------------------------------------------------------------------------
September 30, December 31, 2000 1999 -------------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 13,192 $ 9,097 Receivables, net of allowances of $1,363 and $2,115, respectively 123,166 122,634 Inventories 78,686 78,199 Prepaid expenses and other 4,021 2,644 Income taxes receivable 10,089 2,691 Deferred income taxes 7,800 5,408 --------- --------- Total current assets 236,954 220,673 PLANT AND EQUIPMENT, net 332,484 314,452 INTANGIBLE ASSETS, net 208,102 214,956 OTHER ASSETS 29,975 18,942 --------- --------- TOTAL ASSETS $ 807,515 $ 769,023 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt 6,488 17,120 Trade accounts payable $ 88,538 $ 60,056 Accrued liabilities 45,000 34,936 Due to affiliates 4,715 --------- --------- Total current liabilities 140,026 116,827 LONG-TERM DEBT, net of current portion 678,158 493,262 OTHER LIABILITIES 23,130 13,983 DEFERRED INCOME TAXES 47,460 51,363 --------- --------- Total liabilities 888,774 675,435 --------- --------- REDEEMABLE COMMON STOCK - Class C nonvoting, no par value; 60,000 shares authorized; 49,511 shares outstanding, net of related stockholders' notes receivable of $2,795 in 1999 2,926 --------- --------- REDEEMABLE PREFERRED STOCK - 200,000 shares authorized, 100,000 shares outstanding and designated as Series A, no par value, with a redemption and liquidation value of $1,000 per share in 2000 80,512 --------- --------- STOCKHOLDERS' EQUITY (DEFICIT): Common stock - Class A voting, no par value; 1,200,000 shares authorized, 1,000,001 shares outstanding in 1999 63,161 Common stock - Class B voting, no par value; 10,000 shares authorized, 6,999 shares outstanding in 1999 515 Common stock - no par value; 10,000,000 shares authorized, 574,006 shares outstanding in 2000 108,656 Warrants 26,500 Retained earnings (deficit) (271,400) 32,042 Stockholders' notes receivable (19,440) (299) Cumulative foreign currency translation adjustment (6,087) (4,757) --------- --------- Total stockholders' equity (deficit) (161,771) 90,662 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 807,515 $ 769,023 ========= =========
See notes to condensed consolidated financial statements. 2 3 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED INCOME STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (IN THOUSANDS) (UNAUDITED) --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- --------------------------- 2000 1999 2000 1999 --------- --------- --------- --------- SALES - Net $ 202,842 $ 200,529 $ 619,327 $ 561,765 COST OF SALES 168,586 161,335 505,812 445,506 --------- --------- --------- --------- Gross profit 34,256 39,194 113,515 116,259 --------- --------- --------- --------- OPERATING EXPENSES: Administration and other 12,283 11,393 49,873 34,502 Sales and marketing 6,867 6,324 20,159 18,811 Research and development 1,212 1,367 3,419 4,228 Compensation and transaction costs related to recapitalization 2,405 9,031 Plant closing costs 2,497 2,497 --------- --------- --------- --------- Total operating expenses 22,767 21,581 82,482 60,038 --------- --------- --------- --------- OPERATING INCOME 11,489 17,613 31,033 56,221 INTEREST EXPENSE (21,087) (11,216) (46,935) (32,273) OTHER INCOME (EXPENSE) - Net (25) 514 (183) 323 --------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS (9,623) 6,911 (16,085) 24,271 INCOME TAX PROVISION (BENEFIT) (3,083) 2,790 (2,102) 10,721 --------- --------- --------- --------- INCOME (LOSS) BEFORE EXTRAORDINARY LOSS (6,540) 4,121 (13,983) 13,550 EXTRAORDINARY LOSS (net of income tax benefit of $7,500) (11,250) --------- --------- --------- --------- NET INCOME (LOSS) $ (6,540) $ 4,121 $ (25,233) $ 13,550 ========= ========= ========= =========
See notes to condensed consolidated financial statements. 3 4 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (IN THOUSANDS) (UNAUDITED) --------------------------------------------------------------------------------
2000 1999 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (25,233) $ 13,550 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 28,707 25,866 Deferred income taxes (4,209) 4,661 Reduction in provision for losses on accounts receivable (752) (960) Noncash compensation expense 1,223 270 Provision for write-down of long-term assets 1,370 Loss on disposal of assets 474 102 Extraordinary loss 11,250 Changes in assets and liabilities: Receivables 313 (25,884) Inventories (487) (11,285) Prepaid expenses and other (1,377) 643 Other assets 2,181 2,206 Trade accounts payable 28,482 9,435 Accrued liabilities 10,120 1,353 Due to affiliates (4,715) (2,270) Income taxes receivable (1,909) 3,786 Other liabilities 4,479 2,449 --------- --------- Net cash provided by operating activities 48,547 25,292 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets 40 Capital expenditures for plant and equipment (40,080) (25,719) --------- --------- Net cash used in investing activities (40,080) (25,679) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of capitalized loan fees (21,928) Payment of fees from tender offer (10,055) Redemption of common stock (314,034) Net proceeds from issuance of stock and net change in related stockholders' notes receivables 161,255 1,032 Principal payments on borrowings (517,494) (8,395) Proceeds from issuance of long-term debt 699,508 328 --------- --------- Net cash used in financing activities (2,748) (7,035) --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (1,624) 1,882 --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,095 (5,540) CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 9,097 19,217 --------- --------- CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 13,192 $ 13,677 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid (received) during the period for: Interest $ 34,661 $ 24,263 ========= ========= Income taxes $ 986 $ (2,906) ========= =========
See notes to condensed consolidated financial statements. 4 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 interim periods 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, 1999. 2. RECAPITALIZATION On March 31, 2000, we, together with our then existing stockholders, entered into an agreement (the "Recapitalization Agreement") with Chase Domestic Investments, L.L.C., a newly formed Delaware limited liability company ("Investor L.L.C."), and an affiliate of Chase Capital Partners ("CCP"), whereby Investor L.L.C. agreed to acquire majority ownership in the Company in a recapitalization transaction. 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. Investor L.L.C. 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 senior management (the "Management Investors") for approximately $101.8 million. Investor L.L.C. and certain other institutional investors also purchased (the "Investor Common Equity Contribution") shares of common stock directly from us for approximately $63.5 million. 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 Investor L.L.C. and certain other institutional investors a new series of senior cumulative exchangeable redeemable preferred stock (the "New Preferred Stock") and detachable warrants for our common stock (the "New Preferred Stock Warrants") for net consideration of approximately $98.5 million, of which approximately $80.0 was allocated to the New Preferred Stock and $18.5 million was allocated to the New Preferred Stock Warrants, based on the relative fair market values of the instruments. The foregoing transactions are collectively referred to as the "Recapitalization." The Recapitalization was consummated on May 31, 2000. The total consideration paid in the Recapitalization was approximately $1.1 billion, including transaction costs. At September 30, 2000, Investor L.L.C. owned approximately 55.3% of our outstanding common stock, certain other institutional investors owned approximately 4.3% of our outstanding common 5 6 stock, and the Trust, the Management Investors and certain of our officers owned approximately 40.4% of our outstanding common stock. We incurred $2.4 million and $9.0 million of fees and expenses in connection with the Recapitalization in the three and nine month periods ended September 30, 2000, respectively, and these fees and expenses are included in "compensation and transaction costs related to recapitalization" in the accompanying condensed consolidated statement of income. The accounting for the Recapitalization did not result in changes to the historical cost presentation of our assets and liabilities. In connection with the Recapitalization, we purchased all of our outstanding $125.0 million principal amount of 9-1/8% Senior Subordinated Notes due 2007 (the "9-1/8% Notes") pursuant to a tender offer (the "Tender Offer") and discharged our obligations under the related indenture. Upon closing of the Recapitalization, we issued 220,000 Units (the "Units") consisting of $220.0 million principal amount of 13% Senior Subordinated Notes due 2010 (the "Notes") and Warrants (the "Note Warrants") to purchase 18,532 shares of common stock. The Senior Subordinated 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 market values of each instrument. The discount and the amount allocated to the Note Warrants are being amortized over the life of the Notes. The Units were issued in a transaction exempt from the registration requirements under the Securities Act of 1933. The Notes are unsecured. The Notes are subordinated to all of our existing and future senior debt, rank equally with any future senior subordinated debt and rank senior to any future subordinated debt. The Notes are guaranteed by some of our subsidiaries. The Note Warrants became exercisable on August 29, 2000, and mature on June 1, 2010. Upon closing of the offering of the Units and the Recapitalization, we refinanced all amounts outstanding under our prior credit facility (the "Prior Credit Facility") and replaced the Prior Credit Facility with amended and restated senior secured credit facilities (the "New Credit Facilities") with The Chase Manhattan Bank, Bankers Trust Company, The Bank of Nova Scotia and a syndicate of banking institutions. The New Credit Facilities consist of a $200.0 million senior secured tranche A facility, $40.0 million of which was made available to our principal Mexican subsidiary (the "Tranche A Facility"), a $280.0 million senior secured tranche B facility (the "Tranche B Facility") and a $100.0 million revolving credit facility (the "Revolving Credit Facility"). Included in extraordinary loss is a $5.25 million charge (net of tax) for the write off of capitalized loan fees associated with the 9-1/8% Notes and the Prior Credit Facility and a $6.0 million charge (net of tax) for the Tender Offer payment to the holders of the 9-1/8% Notes. Long-term debt outstanding as of September 30, 2000 consists of the following (amounts in thousands):
New Credit Facilities: Tranche A Facility $ 196,000 Tranche B Facility 280,000 Notes (net of original issue discount and Note Warrants being amortized of $13,671) 206,329 Obligations under capital leases 405 Insurance obligations 1,912 --------- Total 684,646 Less current portion (6,488) --------- Long-term portion $ 678,158 =========
6 7 On October 9, 2000, we changed our name to Pliant Corporation, as required by the Recapitalization Agreement. 3. INVENTORIES Inventories are valued at the lower of cost (using the first-in, first-out method) or market value. Inventories as of September 30, 2000 and December 31, 1999 consisted of the following (in thousands):
September 30, December 31, 2000 1999 ------------- ------------ Finished goods $46,489 $41,408 Raw materials 24,366 28,910 Work-in-process 7,831 7,881 ------- ------- Total $78,686 $78,199 ======= =======
4. PLANT CLOSING COSTS During the nine months ended September 30, 1999, we announced our plan to cease operations at one of our facilities located in Mexico City, Mexico. Included in 1999 operating expenses is a $2.3 million charge, comprised of a $1.3 million write-off of impaired goodwill and fixed assets, and a $1.0 million charge for reduction of work force costs associated with the elimination of 110 full-time equivalent employees. In addition, we announced our plan to cease the production of one of our product lines at our Kent, Washington facility. Included in 1999 operating expenses is a $0.2 million charge for the write-off of impaired fixed assets and for reduction of work force costs associated with the elimination of 36 full-time equivalent employees. 5. COMPREHENSIVE INCOME (LOSS) The following table reports comprehensive income (loss) for the three and nine months ended September 30, 2000 and 1999 (in thousands).
Three Months Ended Nine Months Ended September 30, September 30, ------------------------- ------------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Net income (loss) $ (6,540) $ 4,121 $(25,233) $ 13,550 Foreign currency translation adjustments 730 1,364 (1,330) 1,824 -------- -------- -------- -------- Comprehensive income (loss) $ (5,810) $ 5,485 $(26,563) $ 15,374 ======== ======== ======== ========
6. OPERATING SEGMENTS Operating segments are components of the Company for which separate financial information is available that is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and in assessing performance. This information is reported on the same basis that is used internally for evaluating segment performance. 7 8 We have three reportable operating segments: specialty films, design products and industrial films. The specialty films segment produces converter films that are sold to other flexible packaging manufacturers for additional fabrication, barrier films used to package and protect food and other products, and other films used in the personal care, medical and agriculture industries. The design products segment produces printed rollstock, bags and sheets used to package products in the food and other industries. The industrial films segment produces stretch films, used for industrial unitizing and containerization, and PVC films, used to wrap meat, cheese and produce. Sales and transfers between our segments are eliminated in consolidation. We evaluate performance of the operating segments based on profit or loss before income taxes, not including nonrecurring gains or losses. Our reportable segments are managed separately with separate management teams, because each segment has different products, customer requirements, technology and marketing strategies. Segment profit or loss and segment assets as of and for the three months ended September 30, 2000 and 1999 are presented in the following table (in thousands):
DESIGN INDUSTRIAL SPECIALTY CORPORATE/ PRODUCTS FILMS FILMS OTHER TOTAL --------- --------- --------- --------- --------- 2000 Net sales to customers $ 53,626 $ 41,319 $ 107,897 $ $ 202,842 Intersegment sales 878 1,329 1,927 (4,134) --------- --------- --------- --------- --------- Total net sales 54,504 42,648 109,824 (4,134) 202,842 Depreciation and amortization 2,262 1,238 5,212 947 9,659 Interest expense 902 89 4,327 15,769 21,087 Segment profit (loss) 4,334 3,719 5,338 (20,609) (7,218) Transaction costs 2,405 2,405 Segment total assets 177,510 91,042 447,991 90,972 807,515 Capital expenditures 4,782 1,262 4,482 4,369 14,895 1999 Net sales to customers 43,534 38,765 118,230 200,529 Intersegment sales 2,881 1,425 1,360 (5,666) --------- --------- --------- --------- --------- Total net sales 46,415 40,190 119,590 (5,666) 200,529 Depreciation and amortization 2,078 1,148 4,764 983 8,973 Interest expense 895 88 3,486 6,747 11,216 Segment profit 1,739 2,893 14,919 (10,143) 9,408 Plant closing costs 2,497 2,497 Segment total assets 160,586 96,343 445,019 60,346 762,294 Capital expenditures 973 1,330 5,416 884 8,603
8 9 Segment profit or loss for the nine months ended September 30, 2000 and 1999 are presented in the following table (in thousands):
DESIGN INDUSTRIAL SPECIALTY CORPORATE/ PRODUCTS FILMS FILMS OTHER TOTAL --------- --------- --------- --------- --------- 2000 Net sales to customers $ 155,945 $ 122,119 $ 341,263 $ $ 619,327 Intersegment sales 3,655 4,051 6,100 (13,806) --------- --------- --------- --------- --------- Total net sales 159,600 126,170 347,363 (13,806) 619,327 Depreciation and amortization 6,699 3,747 15,539 2,722 28,707 Interest expense 2,681 263 12,204 31,787 46,935 Segment profit (loss) 10,849 12,845 27,230 (57,978) (7,054) Transaction costs 9,031 9,031 Capital expenditures 8,986 6,794 15,977 8,323 40,080 1999 Net sales to customers 122,017 110,046 329,702 561,765 Intersegment sales 5,356 2,265 3,918 (11,539) --------- --------- --------- --------- --------- Total net sales 127,373 112,311 333,620 (11,539) 561,765 Depreciation and amortization 5,929 3,417 14,029 2,491 25,866 Interest expense 2,473 262 10,265 19,273 32,273 Segment profit 5,740 11,600 43,093 (33,665) 26,768 Plant closing costs 2,497 2,497 Capital expenditures 4,958 4,724 13,307 2,730 25,719
A reconciliation of the totals reported for the operating segments to our totals reported in the consolidated condensed financial statements is as follows (in thousands):
2000 1999 ---- ---- 3 months 9 months 3 months 9 months --------- --------- --------- --------- PROFIT OR LOSS Total profit for reportable segments $ 13,391 $ 50,924 $ 19,551 $ 60,433 Transaction costs (2,405) (9,031) Plant closing costs (2,497) (2,497) Unallocated amounts: Corporate expenses (4,840) (26,191) (3,396) (14,392) Interest expense (15,769) (31,787) (6,747) (19,273) --------- --------- --------- --------- Income before taxes and extraordinary loss $ (9,623) $ (16,085) $ 6,911 $ 24,271 ========= ========= ========= =========
As of September 30, 2000 1999 --------- --------- ASSETS Total assets for reportable segments $ 716,543 $ 701,948 Intangible assets not allocated to segments 15,183 16,494 Other unallocated assets 75,789 43,852 --------- --------- Total consolidated assets $ 807,515 $ 762,294 ========= =========
9 10 7. 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, 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. Options covering a total of 8,902 shares issued under the 1998 Plan were "rolled-over" in 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 September 30, 2000, we had granted restricted stock covering 32,750 shares of common stock and options to acquire 15,435 shares of common stock. The options or restricted common stock will vest as follows: (1) one-sixth are "time-vested" options or shares, which will vest on January 1, 2001, so long as the recipient is still our employee on such date, and (2) the remainder are "performance vested" options or shares, which will vest in equal increments over a five-year period commencing on December 31, 2000 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. 8. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS The following condensed consolidating financial statements present, in separate columns, financial information for (i) Pliant (on a parent only basis), with its investment in its subsidiaries recorded under the equity method, (ii) guarantor subsidiaries (as specified in the Indenture, dated May 31, 2000 (the "Indenture") relating to Pliant's $220 million senior subordinated notes due 2010 (the "Notes")) on a combined basis, with any investments in non-guarantor subsidiaries specified in the Indenture recorded under the equity method, (iii) direct and indirect non-guarantor subsidiaries on a combined basis, (iv) the eliminations necessary to arrive at the information for Pliant and its subsidiaries on a consolidated basis, and (v) Pliant on a consolidated basis, in each case as of September 30, 2000 and December 31, 1999 and for the three and nine months ended September 30, 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. There are no contractual restrictions limiting transfers of cash from guarantor and non-guarantor subsidiaries to Pliant. 10 11 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET AS OF SEPTEMBER 30, 2000 (IN THOUSANDS) (UNAUDITED) --------------------------------------------------------------------------------
PLIANT COMBINED COMBINED CONSOLIDATED CORPORATION GUARANTOR NON-GUARANTOR PLIANT PARENT ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CORPORATION ----------- ------------ ------------ ------------ ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 7,090 $ 20 $ 6,082 $ 13,192 Receivables - net 79,548 25,966 17,652 123,166 Inventories 56,367 14,290 8,029 78,686 Income taxes receivable 10,436 136 (483) 10,089 Deferred income taxes 9,116 426 (1,742) 7,800 Prepaid expenses and other 2,513 505 1,003 4,021 --------- --------- --------- --------- Total current assets 165,070 41,343 30,541 236,954 PLANT AND EQUIPMENT - Net 201,693 84,988 45,803 332,484 INTANGIBLE ASSETS - Net 50,862 139,489 17,751 208,102 INVESTMENT IN SUBSIDIARIES 67,320 $ (67,320) OTHER ASSETS 27,562 144 2,269 29,975 --------- --------- --------- --------- --------- TOTAL ASSETS $ 512,507 $ 265,964 $ 96,364 $ (67,320) $ 807,515 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current portion of long-term debt 6,038 450 6,488 Trade accounts payable $ 61,573 $ 14,489 $ 12,476 $ 88,538 Accrued liabilities 36,669 2,679 5,652 45,000 Due to (from) affiliates (12,590) 18,804 (6,214) --------- --------- --------- --------- Total current liabilities 91,690 35,972 12,364 140,026 LONG-TERM DEBT - Net of current portion 454,704 184,000 39,454 678,158 OTHER LIABILITIES 20,309 1,431 1,390 23,130 DEFERRED INCOME TAXES 27,063 18,465 1,932 47,460 --------- --------- --------- --------- Total liabilities 593,766 239,868 55,140 888,774 --------- --------- --------- --------- REDEEMABLE PREFERRED STOCK 80,512 80,512 --------- --------- STOCKHOLDERS' EQUITY (DEFICIT): Common stock 108,656 20,377 29,241 $ (49,618) 108,656 Warrants 26,500 26,500 Retained earnings (deficit) (271,400) 5,730 16,554 (22,284) (271,400) Stockholders' note receivable (19,440) (19,440) Foreign currency translation adjustment (6,087) (11) (4,571) 4,582 (6,087) --------- --------- --------- --------- --------- Total stockholders' equity (deficit) (161,771) 26,096 41,224 (67,320) (161,771) --------- --------- --------- --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 512,507 $ 265,964 $ 96,364 $ (67,320) $ 807,515 ========= ========= ========= ========= =========
11 12 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 1999 (IN THOUSANDS) (UNAUDITED) --------------------------------------------------------------------------------
COMBINED PLIANT COMBINED NON- CONSOLIDATED CORPORATION GUARANTOR GUARANTOR PLIANT (PARENT ONLY) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CORPORATION ----------- ------------ ------------ ------------ ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,212 $ 536 $ 7,349 $ 9,097 Receivables, net 75,053 27,238 20,343 122,634 Inventories 56,646 13,560 7,993 78,199 Income taxes receivable 3,486 212 (1,007) 2,691 Deferred income taxes 6,715 426 (1,733) 5,408 Prepaid expenses and other 2,127 101 416 2,644 --------- --------- -------- --------- Total current assets 145,239 42,073 33,361 220,673 PLANT AND EQUIPMENT, net 184,444 83,742 46,266 314,452 INTANGIBLE ASSETS, net 52,676 143,836 18,444 214,956 INVESTMENT IN SUBSIDIARIES 61,533 $(61,533) OTHER ASSETS 16,593 144 2,205 18,942 --------- --------- --------- -------- --------- TOTAL ASSETS $ 460,485 $ 269,795 $ 100,276 $(61,533) $ 769,023 ========= ========= ========= ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt 13,464 3,656 17,120 Trade accounts payable $ 39,293 $ 10,780 $ 9,983 $ 60,056 Accrued liabilities 25,238 3,468 6,230 34,936 Due to (from) affiliates (19,737) 27,781 (3,329) 4,715 --------- --------- --------- --------- Total current liabilities 58,258 42,029 16,540 116,827 LONG-TERM DEBT, net of current portion 267,107 184,000 42,155 493,262 OTHER LIABILITIES 10,741 1,733 1,509 13,983 DEFERRED INCOME TAXES 30,791 18,465 2,107 51,363 --------- --------- --------- --------- Total liabilities 366,897 246,227 62,311 675,435 --------- --------- --------- --------- REDEEMABLE COMMON STOCK 2,926 2,926 --------- --------- STOCKHOLDERS' EQUITY: Common stock 63,676 20,377 29,241 $(49,618) 63,676 Retained earnings 32,042 3,184 11,949 (15,133) 32,042 Shareholder note receivable (299) (299) Cumulative foreign currency translation adjustments (4,757) 7 (3,225) 3,218 (4,757) --------- --------- --------- -------- --------- Total stockholders' equity 90,662 23,568 37,965 (61,533) 90,662 --------- --------- --------- -------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 460,485 $ 269,795 $ 100,276 $(61,533) $ 769,023 ========= ========= ========= ======== =========
12 13 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING INCOME STATEMENT FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 (IN THOUSANDS) (UNAUDITED) --------------------------------------------------------------------------------
Pliant Combined Combined Consolidated Corporation Guarantor Non-Guarantor Pliant (Parent Only) Subsidiaries Subsidiaries Eliminations Corporation ----------- ------------ ------------ ------------ ----------- SALES - Net $ 135,946 $ 43,083 $ 27,947 $ (4,134) $ 202,842 COST OF SALES 116,341 35,085 21,294 (4,134) 168,586 --------- --------- --------- --------- --------- Gross profit 19,605 7,998 6,653 34,256 OPERATING EXPENSES 16,209 3,836 2,722 22,767 --------- --------- --------- --------- OPERATING INCOME 3,396 4,162 3,931 11,489 INTEREST EXPENSE (15,775) (4,322) (990) (21,087) EQUITY IN EARNINGS OF SUBSIDIARIES 1,177 (1,177) OTHER INCOME (453) 16 412 (25) --------- --------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES (11,655) (144) 3,353 (1,177) (9,623) INCOME TAX PROVISION (BENEFIT) (5,115) 525 1,507 (3,083) --------- --------- --------- --------- --------- NET INCOME (LOSS) $ (6,540) $ (669) $ 1,846 $ (1,177) $ (6,540) ========= ========= ========= ========= =========
13 14 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING INCOME STATEMENT FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 (IN THOUSANDS) (UNAUDITED) --------------------------------------------------------------------------------
Pliant Combined Combined Consolidated Corporation Guarantor Non-Guarantor Pliant (Parent Only) Subsidiaries Subsidiaries Eliminations Corporation ----------- ------------ ------------ ------------ ----------- SALES - Net $ 136,714 $ 42,068 $ 27,413 $ (5,666) $ 200,529 COST OF SALES 115,376 30,860 20,765 (5,666) 161,335 --------- --------- --------- -------- --------- Gross profit 21,338 11,208 6,648 39,194 OPERATING EXPENSES 13,193 3,265 5,123 21,581 --------- --------- --------- -------- --------- OPERATING INCOME 8,145 7,943 1,525 17,613 INTEREST EXPENSE (6,780) (3,480) (956) (11,216) EQUITY IN EARNINGS OF SUBSIDIARIES 2,724 (2,724) OTHER INCOME 122 (24) 416 514 --------- --------- --------- -------- --------- INCOME BEFORE INCOME TAXES 4,211 4,439 985 (2,724) 6,911 INCOME TAX PROVISION 90 2,345 355 2,790 --------- --------- --------- -------- --------- NET INCOME $ 4,121 $ 2,094 $ 630 $ (2,724) $ 4,121 ========= ========= ========= ======== =========
14 15 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING INCOME STATEMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (IN THOUSANDS) (UNAUDITED) --------------------------------------------------------------------------------
Pliant Combined Combined Consolidated Corporation Guarantor Non-Guarantor Pliant (Parent Only) Subsidiaries Subsidiaries Eliminations Corporation ------------- ------------ ------------ ------------ ----------- SALES - Net $ 406,857 $ 145,029 $ 81,247 $ (13,806) $ 619,327 COST OF SALES 343,252 114,188 62,178 (13,806) 505,812 --------- --------- --------- ---------- --------- Gross profit 63,605 30,841 19,069 113,515 OPERATING EXPENSES 62,923 11,115 8,444 82,482 --------- --------- --------- --------- OPERATING INCOME 682 19,726 10,625 31,033 INTEREST EXPENSE (31,804) (12,185) (2,946) (46,935) EQUITY IN EARNINGS OF SUBSIDIARIES 7,401 (7,401) OTHER INCOME (EXPENSE) (796) (395) 1,008 (183) --------- --------- --------- ---------- --------- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS (24,517) 7,146 8,687 (7,401) (16,085) INCOME TAX PROVISION (BENEFIT) (10,534) 4,600 3,832 (2,102) --------- --------- --------- ---------- --------- INCOME (LOSS) BEFORE EXTRAORDINARY LOSS (13,983) 2,546 4,855 (7,401) (13,983) EXTRAORDINARY LOSS (11,250) (11,250) --------- --------- --------- ---------- --------- NET INCOME (LOSS) $ (25,233) $ 2,546 $ 4,855 $ (7,401) $ (25,233) ========= ========= ========= ========== =========
15 16 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING INCOME STATEMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (IN THOUSANDS) (UNAUDITED) --------------------------------------------------------------------------------
Pliant Combined Combined Consolidated Corporation Guarantor Non-Guarantor Pliant (Parent Only) Subsidiaries Subsidiaries Eliminations Corporation ------------- ------------ ------------ ------------ ----------- SALES - Net $ 382,863 $ 114,921 $ 75,520 $ (11,539) $ 561,765 COST OF SALES 316,822 83,418 56,805 (11,539) 445,506 --------- --------- --------- --------- --------- Gross profit 66,041 31,503 18,715 116,259 OPERATING EXPENSES 41,533 8,634 9,871 60,038 --------- --------- --------- --------- OPERATING INCOME 24,508 22,869 8,844 56,221 INTEREST EXPENSE (19,319) (10,241) (2,713) (32,273) EQUITY IN EARNINGS OF SUBSIDIARIES 10,356 (10,356) OTHER INCOME (EXPENSE) (308) (36) 667 323 --------- --------- --------- --------- --------- INCOME BEFORE INCOME TAXES 15,237 12,592 6,798 (10,356) 24,271 INCOME TAX PROVISION 1,687 6,460 2,574 10,721 --------- --------- --------- --------- --------- NET INCOME $ 13,550 $ 6,132 $ 4,224 $ (10,356) $ 13,550 ========= ========= ========= ========= =========
16 17 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (IN THOUSANDS) (UNAUDITED) --------------------------------------------------------------------------------
Pliant Combined Combined Consolidated Corporation Guarantor Non-Guarantor Pliant Parent Only Subsidiaries Subsidiaries Eliminations Corporation ----------- ------------ ------------ ------------ ----------- CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 32,163 $ 7,019 $ 9,365 $ 48,547 --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures for plant and equipment (30,262) (7,517) (2,301) (40,080) --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of capitalized loan fees (21,928) (21,928) Payment of fees from tender offer (10,055) (10,055) Redemption of common stock (314,034) (314,034) Proceeds from issuance of common stock and net change in related stockholders' notes receivables 161,255 161,255 Proceeds from issuance of (payments on) long-term debt 187,921 (5,907) 182,014 --------- --------- --------- Net cash provided by (used in) financing activities 3,159 (5,907) (2,748) --------- --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 818 (18) (2,424) (1,624) --------- --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,878 (516) (1,267) 4,095 CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 1,212 536 7,349 9,097 --------- --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 7,090 $ 20 $ 6,082 $ 13,192 ========= ========= ========= =========
17 18 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (IN THOUSANDS) (UNAUDITED) --------------------------------------------------------------------------------
Pliant Combined Combined Consolidated Corporation Guarantor Non-Guarantor Pliant Parent Only Subsidiaries Subsidiaries Eliminations Corporation ----------- ------------ ------------ ------------ ----------- CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 6,718 $ 15,147 $ 3,427 $ 25,292 -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets 32 8 40 Capital expenditures for plant and equipment (17,955) (5,428) (2,336) (25,719) -------- -------- -------- -------- Net cash used in investing activities (17,923) (5,420) (2,336) (25,679) -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 1,032 1,032 Proceeds from issuance of (payments on) long-term debt 3,820 (10,200) (1,687) (8,067) -------- -------- -------- -------- Net cash provided by (used in) financing activities 4,852 (10,200) (1,687) (7,035) -------- -------- -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (216) 2,098 1,882 -------- -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,569) (473) 1,502 (5,540) CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 7,381 525 11,311 19,217 -------- -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 812 $ 52 $ 12,813 $ 13,677 ======== ======== ======== ========
18 19 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, 1999 (the "1999 10-K") and our Registration Statement on Form S-4 (file no. 333-42008), which was declared effective by the Securities and Exchange Commission on August 29, 2000. This section contains certain "forward-looking statements" within the meaning of federal securities laws. These forward-looking statements 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 On May 31, 2000, we consummated a recapitalization (the "Recapitalization") pursuant to an agreement dated March 31, 2000 among us, our then existing shareholders and Chase Domestic Investments, L.L.C., an affiliate of Chase Capital Partners. The Recapitalization was valued at approximately $1.1 billion, including transaction costs. See Note 2 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. 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 24 facilities located in North 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 and the overall growth in the markets for our film and flexible packaging products. We intend to implement certain cost saving initiatives during the fourth quarter of 2000. These include closure of our Dallas, Texas facility, a reduction in production and workforce at our Harrington, Delaware and Birmingham, Alabama facilities, and a company-wide reduction in workforce of approximately 50 salaried positions. We estimate a restructure charge in the fourth quarter of 2000, of which we estimate approximately $5 million will consist of a cash charge. We estimate annual savings of approximately $12 million from these actions. RESULTS OF OPERATIONS The following table sets forth net sales and expenses, and such amounts as a percentage of net sales, for the three and nine months ended September 30, 2000 and 1999 (dollars in millions).
Three Months Ended September 30, Nine Months Ended September 30, ---------------------------------------------- ---------------------------------------------- 2000 1999 2000 1999 ------------------- ------------------- ------------------- ------------------- % of % of % of % of $ Sales $ Sales $ Sales $ Sales ------ ------ ------ ------ ------ ------ ------ ------ Sales-net $202.8 100.0% $200.5 100.0% $619.3 100.0% $561.8 100.0% Cost of sales 168.5 83.1 161.3 80.4 505.8 81.7 445.5 79.3 ------ ------ ------ ------ ------ ------ ------ ------ Gross profit 34.3 16.9 39.2 19.6 113.5 18.3 116.3 20.7 Total operating expenses 22.8 11.2 21.6 10.8 82.5 13.3 60.1 10.7 ------ ------ ------ ------ ------ ------ ------ ------ Operating income $ 11.5 5.7% $ 17.6 8.8% $ 31.0 5.0% $ 56.2 10.0% ====== ====== ====== ====== ====== ====== ====== ======
19 20 THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999 Net Sales Net sales increased by $2.3 million, or 1.1%, from $200.5 million, for the third quarter of 1999, to $202.8 million, for the three months ended September 30, 2000. The increase was the result of a 6.2% increase in our average selling prices, partially offset by a 4.8% decrease in sales volume. The average selling price increase was primarily due to the general pass-through to customers of increased resin costs, the primary raw material used to produce our films. For the three months ended September 30, 2000, we had total net trade sales volume of 192.7 million pounds, compared with 202.4 million pounds in the third quarter of 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 $4.9 million, or 12.5%, from $39.2 million, for the third quarter of 1999, to $34.3 million, for the three months ended September 30, 2000. 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, in part, to our inability to immediately pass-through and recover rising resin prices in 2000. Although resin prices began to decline during the third quarter, the third quarter results still reflect lower margins. Resin cost, as a percentage of sales, was 80 basis points higher for the third quarter of 2000, compared to the third quarter of 1999, as a result of both higher prices from suppliers and increased resin consumption by the Company. In addition, we experienced the secondary impact of lower volumes with less favorable product mix and associated line start up and changeover inefficiencies. Cash conversion cost was higher for the third quarter of 2000 than the third quarter of 1999, due to increases in direct labor, packaging, energy and indirect plant costs. Total Operating Expenses Total operating expenses increased by approximately $1.2 million, or 5.6%, from $21.6 million, for the third quarter of 1999, to $22.8 million, for the three months ended September 30, 2000. In 2000, we incurred $2.4 million of costs related to the Recapitalization, of which $1.9 million of these costs was incentive compensation accrued in accordance with the terms of a "stay" bonus plan. We had $2.5 million of costs due to plant closing costs during the third quarter of 1999. In addition, in 2000 we incurred $0.6 million of legal and administrative expenses associated with negotiating an amendment to our New Credit Facilities (see Liquidity and Capital Resources) and $0.4 million of fees and expenses associated with a company-wide supply chain improvement initiative. We began our supply chain initiative in the fourth quarter of 1999 with the assistance of A.T. Kearney, a management consulting firm. The project is focused on improving the efficiency of our operations. In March 2000, we began implementing specific improvement projects and currently expect that identified projects should be fully implemented by the end of 2001. Operating Income Operating income decreased by $6.1 million, or 34.7%, from $17.6 million, for the third quarter of 1999, to $11.5 million, for the three months ended September 30, 2000, as a result of the factors discussed above. 20 21 Interest Expense Interest expense increased by $9.9 million, or 88.4%, from $11.2 million, for the three months ended September 30, 1999, to $21.1 million, for the three months ended September 30, 2000. As a result of our May 31, 2000 Recapitalization, interest expense increased significantly compared to the prior year. Included in interest expense in the third quarter of 2000 is $1.4 million for an amendment fee representing 25 basis points on our outstanding New Credit Facilities at September 30, 2000. NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999 Net Sales Net sales increased by $57.5 million, or 10.2%, from $561.8 million, for the first nine months of 1999, to $619.3 million, for the nine months ended September 30, 2000. The increase was the result of a 10.2% increase in our average selling prices. The average selling price increase was primarily due to the general pass-through to customers of increased resin costs. For the nine months ended September 30, 2000, we had total net trade sales volume of 585.3 million pounds, compared with 584.9 million pounds in the comparable period in 1999. Gross Profit Gross profit decreased by $2.8 million, or 2.4%, from $116.3 million, for the first nine months of 1999, to $113.5 million for the nine months ended September 30, 2000. 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, in part, to our inability to immediately pass through and recover rising resin prices in 2000. Although resin prices began to decline during the third quarter of 2000, third quarter results still reflect lower margins. As a percentage of sales, raw material costs were 260 basis points higher in this period, as compared to the prior year. Total Operating Expenses Total operating expenses increased by $22.4 million, or 37.3%, from $60.1 million, for the first nine months of 1999, to $82.5 million, for the nine months ended September 30, 2000. Most of the increase resulted from three significant items, which accounted for $20.3 million of the $22.4 million increase. Excluding these three significant items, operating expenses as a percentage of net sales were 10.0%, for the first nine months of 2000, compared with 10.7%, for the first nine months of 1999. Costs relating to the Recapitalization constituted the first significant item affecting total operating expenses. We incurred $9.0 million of costs related to the Recapitalization. These costs consisted of long-term incentive compensation expense of $5.0 million, $2.5 million of incentive compensation under a "stay bonus" plan accrued to date, and transaction fees and expenses of $1.5 million. Under the provisions of our long-term incentive plans, certain incentive payments were due upon a "change of control" in our ownership. Because the Recapitalization was probable to occur and constituted a" change of control" under our long-term incentive plans, we accrued a liability for the long-term compensation due during the first quarter of 2000. These amounts were paid in the second quarter. The second significant item affecting total operating expenses was noncash stock-based compensation expense. We incurred noncash stock-based compensation expense of $1.2 million related to outstanding options to purchase our Class C common stock. As a result of the Recapitalization, the stock options fully vested and became exercisable upon the consummation of the Recapitalization. The $1.2 million noncash stock-based compensation expense recognizes the accelerated vesting of all performance-based stock options based on the estimated per share purchase price implied in the 21 22 Recapitalization. We incurred $0.3 million of noncash stock-based compensation expense in the first nine months of 1999. The third significant item affecting total operating expenses was our company-wide supply chain initiative discussed above. We incurred fees and expenses during the first nine months of 2000 totaling $10.1 million in connection with this initiative. Operating Income Operating income decreased by $25.2 million, or 44.8%, from $56.2 million, for the first nine months of 1999, to $31.0 million, for the nine months ended September 30, 2000, as a result of the factors discussed above. Excluding the three significant items described above, operating income decreased $4.9 million, or 8.7%, from $56.2 million for the first nine months of 1999, to $51.3 million for the first nine months of 2000. Interest Expense Interest expense increased by $14.6 million, or 45.2%, from $32.3 million, for the nine months ended September 30, 1999, to $46.9 million, for the nine months ended September 30, 2000. As a result of our May 31, 2000 Recapitalization, interest expense increased significantly compared to the prior year. Included in interest expense in 2000 is a $1.4 million amendment fee (representing 25 basis points) on our outstanding New Credit Facilities at September 30, 2000. LIQUIDITY AND CAPITAL RESOURCES Upon closing of the Recapitalization, we issued 220,000 Units (the "Units") consisting of $220.0 million principal amount of 13% Senior Subordinated Notes due 2010 (the "Notes") and Warrants (the "Note Warrants") to purchase 18,532 shares of common stock. The Notes were issued at a discount of approximately $5.9 million. 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. The Notes are unsecured. The Notes are subordinated to all of our existing and future senior debt, rank equally with any future senior subordinated debt and rank senior to any future subordinated debt. The Notes are guaranteed by some of our subsidiaries. The Note Warrants became exercisable on August 29, 2000, and mature on June 1, 2010. Upon closing of the offering of the Units and the Recapitalization, we purchased all of our outstanding $125.0 million principal amount of 9-1/8% Senior Subordinated Notes due 2007, refinanced all amounts outstanding under our prior credit facility (the "Prior Credit Facility") and replaced the Prior Credit Facility with amended and restated senior secured credit facilities (the "New Credit Facilities") with The Chase Manhattan Bank, Bankers Trust Company, The Bank of Nova Scotia and a syndicate of banking institutions. The New Credit Facilities consist of a $200.0 million senior secured tranche A facility, $40.0 million of which was made available to our principal Mexican subsidiary (the "Tranche A Facility"), a $280.0 million senior secured tranche B facility (the "Tranche B Facility") and a $100.0 million revolving credit facility (the "Revolving Credit Facility"). Effective September 30, 2000, we entered into an amendment of our New Credit Facilities. The amendment modified certain financial covenants contained in the New Credit Facilities, including the leverage and interest coverage ratios and the permitted amount of capital expenditures. We were in compliance with the amended covenants of our New Credit Facilities as of September 30, 2000. 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. 22 23 Loans under the Revolving Credit Facility and the Tranche A Facility bear interest, at our option, at either Adjusted LIBOR plus 3.25% or ABR (as defined below) plus 2.25%, in each case subject to certain adjustments. Loans under the Tranche B Facility bear interest, at our option, at either Adjusted LIBOR plus 3.75% or ABR plus 2.75%. We may elect interest periods of one, two, three or six months for Adjusted LIBOR borrowings. Interest is calculated on the basis of actual days elapsed in a year of 360 days (or 365 or 366 days, as the case may be, in the case of ABR loans based on the Prime Rate) and interest is payable at the end of each interest period and, in any event, at least every three months. ABR is the Alternate Base Rate, which is the higher of Bankers Trust Company's Prime Rate or the Federal Funds Effective Rate plus 1/2 of 1%. Adjusted LIBOR will at all times include statutory reserves. Our obligations under the New Credit Facilities are guaranteed by substantially all of our domestic subsidiaries and secured by substantially all of our domestic assets. The New Credit Facilities are also secured by a pledge of 65% of the capital stock of each of our foreign subsidiaries. The New Credit Facilities and the indenture relating to the Notes impose certain restrictions on us, including restrictions on our ability to incur indebtedness, pay dividends, make investments, grant liens, sell our assets and engage in certain other activities. In addition, the New Credit Facilities require us to maintain certain financial ratios. Indebtedness under the New Credit Facilities is secured by substantially all of our assets, including our real and personal property, inventory, accounts receivable, intellectual property, and other intangibles. Net Cash Provided by Operating Activities Net cash provided by operating activities was $48.5 million for the nine months ended September 30, 2000, an increase of $23.3 million from the same period in 1999. The increase resulted primarily from decreases in trade accounts receivable, lower inventories in 2000 compared to 1999, higher accounts payable, and non-cash income statement items. The increase was offset by a decrease in net income during the first half of 2000 and an increase in income tax receivable. Net Cash Used in Investing Activities Net cash used in investing activities was $40.1 million for the nine months ended September 30, 2000, compared to $25.7 million for the same period in 1999. In both periods, the expenditures were almost entirely for capital expenditures. Capital expenditures during the first nine months of 2000 were primarily for major expansion projects in our industrial films and specialty films product lines, for upgrading and installing equipment relocated from closed manufacturing facilities to other facilities, for upgrading our information systems, and for several new and carryover maintenance projects throughout our company. We expect capital expenditures to remain at approximately current levels for the next few quarters and then decline. Net Cash Provided by Financing Activities Net cash used in financing activities was $2.7 million for the nine months ended September 30, 2000, compared to $7.0 million for the same period in 1999. The activity in 2000 was higher as a result of the financial change caused by the Recapitalization. Liquidity As of September 30, 2000, we had approximately $96.9 million of net working capital and approximately $98.7 million available under our $100.0 million Revolving Credit Facility. As of September 30, 2000, the debt under the New Credit Facilities bore interest at a weighted average rate of 10.23%. 23 24 As of September 30, 2000, we had $13.2 million in cash and cash equivalents, including $6.1 million held by our foreign subsidiaries. The effective tax rate of repatriating this money and future foreign earnings to the United States varies from approximately 40% to 65%, depending on various U.S. and foreign tax factors, including each foreign subsidiary's country of incorporation. High effective repatriation tax rates may limit our ability to access cash and cash equivalents generated by our foreign operations for use in our United States operations, including to pay principal, premium, if any, and interest on the Notes and the New Credit Facilities. For the nine months ended September 30, 2000, our foreign operations generated net income from continuing operations of approximately $4.9 million. Interest expense on the New Credit Facilities and the Notes will significantly increase our liquidity requirements. We expect that cash flows from operating activities and available borrowings under the New Credit Facilities will provide sufficient working capital to operate our business, to make expected capital expenditures and to meet foreseeable liquidity requirements. If we were to engage in a significant acquisition transaction, however, it may be necessary for us to restructure our existing credit arrangements. CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION Certain information set forth in this report contains "forward-looking statements" within the meaning of federal securities laws. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends, and other information that is not historical information. When used in this report, the words "estimates," "expects," "anticipates," "forecasts," "plans," "intends," "believes" and variations of such words or similar expressions are intended to identify forward-looking statements. We may also make additional forward-looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, by us or on our behalf, are also expressly qualified by these cautionary statements. All forward-looking statements, including, without limitation, management's examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. But, there can be no assurance that management's expectations, beliefs and projections will result or be achieved. All forward-looking statements apply only as of the date made. We undertake no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in or contemplated by this report. These risks include, but are not limited to, our high degree of leverage and our ability to service indebtedness, restrictions under our New Credit Facilities and the indenture related to the Notes, fluctuations in the price of resins (our primary raw material), the availability of resin supplies, our ability to pass resin price increases through to our customers and to retain resin price decreases, competition, customer relationships, changes in demand for our products, risks associated with acquisitions and risks associated with international operations. These risks and certain other uncertainties are discussed in more detail in the 1999 10-K and in our Registration Statement on Form S-4 (file no. 333-42008), which was declared effective by the Securities and Exchange Commission on August 29, 2000. There may also 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. 24 25 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. As of September 30, 2000, we had no such agreements. However, under the provisions of our New Credit Facilities, we are required to obtain interest rate protection on 50% of our entire debt prior to December 31, 2000. We intend to have such interest rate protection in place by the end of the year. 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. 25 26 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed with this report. 10.1 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. 27 Financial Data Schedule. (b) No report on Form 8-K was filed during the quarter for which this report is filed. 26 27 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/ Scott K. Sorensen -------------------------------------------------- SCOTT K. SORENSEN Executive Vice President and Chief Financial Officer, Treasurer (Authorized Signatory and Principal Financial and Accounting Officer) Date: November 14, 2000 27 28 INDEX TO EXHIBITS Exhibits 10.1 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. 27 Financial Data Schedule. 28