10-Q 1 form10q_51005.txt FORM 10-Q ================================================================================ 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, 2005 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 333-40067 PLIANT CORPORATION (Exact name of registrant as specified in its charter) UTAH 87-0496065 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1475 WOODFIELD ROAD, SUITE 700 SCHAUMBURG, IL 60173 (847) 969-3300 (Address of principal executive offices and telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes |_| No |X| APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On May 9, 2005, there were 571,711 outstanding shares of the registrant's Common Stock. ================================================================================ PLIANT CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 3 2005 AND DECEMBER 31, 2004 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR 4 THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR 5 THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' 6 DEFICIT FOR THE THREE MONTHS ENDED MARCH 31, 2005 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 23 FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 31 ITEM 4. CONTROLS AND PROCEDURES 31 PART II. OTHER INFORMATION 32 ITEM 1. LEGAL PROCEEDINGS 32 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, AND USE OF PROCEEDS 32 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 32 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 32 ITEM 5. OTHER INFORMATION 32 ITEM 6. EXHIBITS 32 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2005 (UNAUDITED) AND DECEMBER 31, 2004 (DOLLARS IN THOUSANDS)
MARCH 31, 2005 DECEMBER 31, 2004 ------------------- ---------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 4,080 $ 5,580 Receivables, net of allowances of $4,476 and $4,489 respectively 133,534 125,395 Inventories (Note 2) 102,741 94,300 Prepaid expenses and other 3,962 4,032 Income taxes receivable, net 558 361 Deferred income taxes 10,283 11,961 ------------------- ---------------------- Total current assets 255,158 241,629 PLANT AND EQUIPMENT, net 294,238 297,145 GOODWILL 182,226 182,237 INTANGIBLE ASSETS, net 16,420 17,076 OTHER ASSETS 37,935 39,005 ------------------- ---------------------- TOTAL ASSETS $ 785,977 $ 777,092 =================== ====================== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Trade accounts payable $ 101,051 $ 96,282 Accrued liabilities: Interest payable 17,212 12,985 Customer rebates 6,364 8,391 Other 40,429 43,462 Current portion of long-term debt 1,300 1,994 ------------------- ---------------------- Total current liabilities 166,356 163,114 LONG-TERM DEBT, net of current portion 864,462 840,354 OTHER LIABILITIES 28,655 26,454 DEFERRED INCOME TAXES 29,524 31,433 SHARES SUBJECT TO MANDATORY REDEMPTION (Note 11) 239,217 229,910 ------------------- ---------------------- Total Liabilities 1,328,214 1,291,265 ------------------- ---------------------- MINORITY INTEREST -- 33 REDEEMABLE PREFERRED STOCK Series B - 720 shares authorized, no par value, 672 and 720 shares outstanding as of March 31, 2005 and December 31, 2004, respectively 109 117 ------------------- ---------------------- REDEEMABLE COMMON STOCK - no par value; 60,000 shares authorized; 10,873 shares outstanding as of March 31, 2005 and December 31, 2004, respectively, net of related stockholders' notes receivable of $1,827 at March 31, 2005 and December 31, 2004, respectively 6,645 6,645 ------------------- ---------------------- STOCKHOLDERS' DEFICIT: Common stock - no par value; 10,000,000 shares authorized, 542,638 shares outstanding at March 31, 2005 and December 31, 2004 103,376 103,376 Warrants to purchase common stock 39,133 39,133 Accumulated deficit (676,402) (650,974) Stockholders' notes receivable (660) (660) Accumulated other comprehensive loss (14,438) (11,843) ------------------- ---------------------- Total stockholders' deficit (548,991) (520,968) ------------------- ---------------------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 785,977 $ 777,092 =================== ====================== See notes to condensed consolidated financial statements.
3 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, -------------------------------- 2005 2004 NET SALES $ 262,888 $ 236,799 COST OF SALES 228,938 198,466 ---------------- --------------- Gross profit 33,950 38,333 OPERATING EXPENSES: Sales, General and Administrative 20,115 19,903 Research and Development 2,010 1,832 Restructuring and Other Costs (Note 3) 132 -- ---------------- --------------- Total operating expenses 22,257 21,735 ---------------- --------------- OPERATING INCOME 11,693 16,598 INTEREST EXPENSE-Current and Long-term debt (Note 5, 9) (26,384) (34,594) INTEREST EXPENSE-Dividends and accretion on Redeemable Preferred Stock (Note 11) (9,306) (8,367) OTHER INCOME(EXPENSE) - Net (206) (138) ---------------- --------------- LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (24,203) (26,501) INCOME TAX EXPENSE 887 1,652 ---------------- --------------- LOSS FROM CONTINUING OPERATIONS (25,090) (28,153) ---------------- --------------- LOSS FROM DISCONTINUED OPERATIONS (338) (2,606) ---------------- --------------- NET LOSS $ (25,428) $ (30,759) ================ ===============
See notes to condensed consolidated financial statements. 4 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (IN THOUSANDS) (UNAUDITED)
2005 2004 ---------------- ----------------- CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES: Net loss $ (25,428) $ (30,759) Adjustments to reconcile net loss to net cash (used in)/ provided by continuing operating activities: Depreciation and amortization 10,134 11,035 Amortization of deferred financing costs and accretion of debt discount 8,052 12,227 Deferred dividends and accretion on preferred shares 9,306 8,367 Deferred income taxes (209) 715 Loss from discontinued operations 338 2,606 Gain or loss on disposal of assets 91 48 Changes in assets and liabilities: Receivables (7,614) (11,250) Inventories (8,366) 3,470 Prepaid expenses and other 60 695 Income taxes payable/receivable (488) 767 Other assets 226 (32) Trade accounts payable 4,873 (868) Accrued liabilities (452) 3,160 Other liabilities 2,136 243 Other (33) (59) ---------------- ----------------- Net cash (used in) / provided by continuing operating activities (7,374) 365 ---------------- ----------------- CASH FLOWS FROM CONTINUING INVESTING ACTIVITIES: Proceeds from sale of assets 378 -- Capital expenditures for plant and equipment (8,954) (3,047) ---------------- ----------------- Net cash used in continuing investing activities (8,576) (3,047) ---------------- ----------------- CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES: Repurchase of preferred stock (5) -- Net proceeds from issuance of senior secured discount notes -- 225,299 Payment of financing fees (107) (8,664) Repayments of term debt and revolver -- (219,575) Repayment of capital leases and other, net (1,080) (470) Proceeds from revolving debt - net 17,400 8,300 ---------------- ----------------- Net cash provided by/(used in) continuing financing activities 16,208 4,890 ---------------- ----------------- CASH USED IN DISCONTINUED OPERATIONS (195) (1,636) ---------------- ----------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (1,563) (534) ---------------- ----------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,500) 38 CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 5,580 3,308 ---------------- ----------------- CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 4,080 $ 3,346 ================ ================= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid (received) during the period for: Interest $ 14,150 $ 20,854 Income taxes 1,179 819 Other non-cash disclosure: Preferred Stock dividends accrued but not paid $ 8,770 $ 7,922
See notes to condensed consolidated financial statements. 5 PLIANT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE THREE MONTHS ENDED MARCH 31, 2005 (IN THOUSANDS) (UNAUDITED)
ACCUMULATED COMMON STOCK WARRANTS STOCKHOLDERS' OTHER -------------------- TO PURCHASE ACCUMULATED NOTES COMPREHENSIVE SHARES AMOUNT COMMON STOCK DEFICIT RECEIVABLE LOSS TOTAL --------- ---------- ------------------ ------------------- ------------------ --------------- ------------- BALANCE, DECEMBER 31, 2004 543 $ 103,376 $ 39,133 $ (650,974) $ (660) $ (11,843) $ (520,968) Net loss (25,428) (25,428) Foreign currency translation adjustment (2,595) (2,595) --------- ---------- ------------------ ------------------- ------------------ --------------- ------------- BALANCE, MARCH 31, 2005 543 $ 103,376 $ 39,133 $ (676,402) $ (660) $ (14,438) $ (548,991) ========= ========== ================== =================== ================== =============== =============
See notes to condensed consolidated financial statements. 6 PLIANT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements have been prepared, without audit, in accordance with U.S. generally accepted accounting principles and pursuant to the rules and regulations of the Securities and Exchange Commission. The information reflects all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the financial position, results of operations and cash flows of Pliant Corporation and its subsidiaries ("Pliant," the "Company" or "we") as of the dates and for the periods presented. Results of operations for the period ended March 31, 2005 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, 2004 and the Company's Registration Statement on Form S-4, as amended (File No 333-114608) filed on April 20, 2004. Certain reclassifications have been made to the condensed consolidated financial statements for the periods ended March 31, 2004 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, 2005 and December 31, 2004 consisted of the following (in thousands): MARCH 31, 2005 DECEMBER 31, 2004 -------------------- --------------------- Finished goods $ 55,530 $ 47,259 Raw materials 36,377 37,595 Work-in-process 10,834 9,446 -------------------- --------------------- Total $ 102,741 $ 94,300 ==================== ===================== 3. RESTRUCTURING AND OTHER COSTS Restructuring and other costs include plant closing costs (including costs related to relocation of manufacturing equipment), office closing costs and other costs related to workforce reductions. The following table summarizes restructuring and other costs for the three months ended March 31 (in thousands): THREE MONTHS ENDED MARCH 31, -------------------------- 2005 2004 -------------------------- PLANT CLOSING COSTS: Severance $ 67 $ -- Other plant closure costs 65 -- -------------------------- TOTAL RESTRUCTURING AND OTHER COSTS $ 132 $ -- ========================== 7 The following table summarizes the roll-forward of the reserve from December 31, 2004 to March 31, 2005:
ACCRUALS FOR THE THREE MONTHS ENDED MARCH 31, 2005 -------------------------------------- 12/31/2004 OTHER 3/31/2005 -------------------- PLANT PAYMENTS --------------------- # EMPLOYEES ACCRUAL ADDITIONAL CLOSURE / # EMPLOYEES ACCRUAL TERMINATED BALANCE EMPLOYEES SEVERANCE COSTS TOTAL CHARGES TERMINATED BALANCE ----------- ------- --------- ---------- ------- ----- -------- ----------- -------- PLANT CLOSING COSTS: Merced 54 $ 1,000 -- -- -- $ -- $ -- 54 $ 1,000 Shelbyville 8 1,087 -- -- -- -- (130) 8 957 Leases -- 1,614 -- -- -- -- (167) -- 1,447 Rhode Island 49 14 -- 67 65 132 (125) 49 21 ----------- ------- --------- ---------- ------- ----- -------- ----------- -------- 111 $ 3,715 -- 67 65 $ 132 $ (422) 111 $ 3,425 ----------- ------- --------- ---------- ------- ----- -------- ----------- -------- OFFICE CLOSING AND WORKFORCE REDUCTION COSTS: Leases -- $ 610 -- -- -- $ -- $ (84) -- $ 526 Severance 114 84 -- -- -- -- -- 114 84 Singapore -- 127 -- -- -- -- -- 127 ----------- ------- --------- ---------- ------- ----- -------- ----------- -------- 114 $ 821 -- -- -- $ -- $ (84) 114 737 ----------- ------- --------- ---------- ------- ----- -------- ----------- -------- TOTAL PLANT & OFFICE CLOSING 225 $ 4,536 -- 67 65 $ 132 $ (506) 225 $ 4,162 FIXED ASSET IMPAIRMENTS RELATED TO PLANT CLOSING $ -- -- -- $ -- ----------- ------- --------- ---------- ------- ----- -------- ----------- -------- TOTAL 225 $ 4,536 -- 67 65 $ 132 $ (506) 225 $ 4,162 =========== ======= ========= ========== ======= ===== ======== =========== ========
PLANT CLOSING COSTS 2005 - During the first quarter of 2005, we incurred $0.1 million of security, severance and other plant closure costs associated with our Harrisville, Rhode Island facility. 2004 - During the third quarter of 2004, we closed our Harrisville, Rhode Island facility and moved its production to more modern and efficient facilities. This restructuring plan resulted in a workforce reduction of 49 positions. All restructuring plan costs are attributable to our Engineered Films segment and are anticipated to total $2.7 million, consisting primarily of fixed asset impairment of $1.4 million, equipment relocation costs of $0.4 million, severance and other personnel related costs of $ 0.3 million and other costs of $0.6 million. 2003 - During 2003, we accrued the present value of future lease payments on three buildings we no longer occupied. As of March 31, 2005 $1.4 million of these accruals are remaining. OFFICE CLOSING AND WORKFORCE REDUCTION COSTS 2002 - During 2002, we implemented four workforce reduction programs whereby 111 employees were terminated. Total severance costs including benefits, for these terminations was included as part of restructuring and other costs in our consolidated statement of operations for 2002. The accruals remaining at March 31, 2005 and December 31, 2004 was $0.1 million. 8 4. DISCONTINUED OPERATIONS On September 30, 2004, we sold substantially all of the assets of our wholly-owned subsidiary, Pliant Solutions Corporation. Pliant Solutions, previously reported as a separate operating segment, manufactured decorative and surface coverings through the conversion of various films into consumer packaged goods. These products were sold through retailers to consumers for a wide range of applications, including shelf-lining, decorative accents, glass coverings, surface repair, resurfacing and arts and crafts projects. In accordance with SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS, Pliant Solutions is being accounted for as a discontinued operation and, accordingly, its operating results are segmented and reported as discontinued operations in the accompanying condensed consolidated statement of operations. Net sales for the three month period ended March 31, 2004 were $7.4 million. No tax benefits were recorded on the losses from discontinued operations or the loss on sale of discontinued operations as realization of these tax benefits is not certain. 5. INTEREST EXPENSE - CURRENT AND LONG-TERM DEBT Interest expense - current and long-term debt in the statement of operations for the three months ended March 31, 2005 and 2004 is as follows (in thousands):
THREE MONTHS ENDED MARCH 31, --------------------------------------- 2005 2004 ------------------- ------------------- Interest expense accrued, net $ 25,205 $ 23,328 Recurring amortization of financing fees 1,179 1,148 Write-off of previously capitalized financing fees and interest rate derivatives costs(a) -- 10,118 ------------------- ------------------- TOTAL $ 26,384 $ 34,594 =================== =================== Cash interest payments $ 14,150 $ 20,854 =================== ===================
----------------- (a) This write-off resulted from the repayment of our previous credit facilities in February 2004, from the net proceeds from the issuance of the senior secured discount notes and borrowings under our revolving credit facility. 6. EQUITY STOCK OPTION PLANS During the three months ended March 31, 2005, options to purchase 1,835 shares of our common stock were forfeited in connection with employee terminations. We apply Accounting Principles Board Opinion No. 25 and related interpretations in accounting for stock-based compensation plans as they relate to employees and directors. We did not have compensation expense related to stock options for the three month periods ended March 31, 2005 and March 31, 2004. Had the compensation cost for all the outstanding options been determined in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," our net income (loss) for the three month periods ended March 31, 2005 and 2004 would have been the following pro forma amounts (in thousands):
THREE MONTHS ENDED MARCH 31, ------------------------------------ 2005 2004 ------------------ ---------------- As reported $ (25,428) $ (30,759) Pro forma stock compensation expense (249) (200) ------------------ ---------------- Pro forma $ (25,677) $ (30,959) ================== ================
9 In December 2004, the FASB issued SFAS 123(R) (revised December 2004), "SHARE-BASED PAYMNET", which is a revision of SFAS 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION", and supersedes APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES". This statement requires that the fair value at the grant date resulting from all share-based payment transactions be recognized in the financial statements. Further, SFAS 123(R) requires entities to apply a fair-value based measurement method in accounting for these transactions. The minimum value method currently used by the Company is not allowed and the Company will be required to adopt the prospective method as proscribed by SFAS 123(R). This value is recorded over the service period, which typically is the vesting period. This statement is effective no later than the beginning of the first fiscal year beginning after June 15, 2005. We are currently evaluating the provisions of SFAS 123(R), and the impact on our consolidated financial position and results of operations. RESTRICTED STOCK On September 24, 2004, we adopted a 2004 Restricted Stock Incentive Plan, pursuant to which we sold shares of a newly-created, non-voting Series B Redeemable Preferred Stock for a cash purchase price of $162 per share to our President and Chief Executive Officer and selected additional officers of the Company. The purchase price was considered to approximate fair value. These shares were issued in private transactions with officers of the Company and therefore were exempt from the registration requirements of the Securities Act of 1933. The Series B Preferred Stock will be automatically converted into common equity of the Company upon the consummation of a Qualified Public Offering, defined as a sale in an underwritten public offering registered under the Securities Act of shares of capital stock of the Company resulting in aggregate proceeds (net of underwriters discounts and commissions) to the Company of not less than $100 million. During the first quarter of 2005, 48 of the total 720 shares issued to management were repurchased for $162 per share. 7. INCOME TAXES For the three months ended March 31, 2005, income tax expense was $0.9 million on pretax losses from continuing operations of $24.2 million as compared to income tax expense of $1.7 million on pretax loss from continuing operations of $26.5 million for the three months ended March 31, 2004. Income tax benefits related to net operating losses in the United States are offset by a valuation allowance as the realization of these tax benefits is not certain. Therefore, the income tax expense in the statements of operations primarily reflects foreign income taxes. No income taxes are included in the loss from discontinued operations of $0.4 million and $2.6 million for the three months ended March 31, 2005 and March 31, 2004, respectively. 8. COMPREHENSIVE LOSS Other comprehensive loss for the three months ended March 31, 2005 and 2004 was ($28.0) million and ($29.3) million, respectively. The components of other comprehensive loss are net income (loss), the change in cumulative unrealized losses on derivatives recorded in accordance with Statement of Financial Accounting Standards No. 133 and foreign currency translation. 10 9. REVOLVING CREDIT FACILITY AND ISSUANCE OF SENIOR SECURED DISCOUNT NOTES DUE 2009 Long-term debt as of March 31, 2005 and December 31, 2004 consists of the following (in thousands):
MARCH 31, DECEMBER 31, 2005 2004 ---------------- ----------------- Credit Facilities: Revolving credit facility $ 41,400 $ 24,000 Senior secured discount notes at 11 1/8%, net of unamortized issue discount 254,514 247,641 Senior secured notes, interest at 11 1/8% 250,000 250,000 Senior subordinated notes, interest at 13.0% (net of unamortized issue discount, premium and discount related to warrants) 313,435 313,214 Obligations under capital leases 6,413 6,778 Insurance financing -- 715 ---------------- ----------------- Total 865,762 842,348 Less current portion (1,300) (1,994) ---------------- ----------------- Long-term portion $ 864,462 $ 840,354 ================ =================
REVOLVING CREDIT FACILITY On February 17, 2004, we entered into a revolving credit facility providing up to $100 million (subject to the borrowing base and other limitations described below). The revolving credit facility includes a $15 million letter of credit sub-facility, with letters of credit reducing availability under the revolving credit facility. The revolving credit facility is secured by a first priority security interest in substantially all our inventory, receivables and deposit accounts, 100% of the capital stock of, or other equity interests in existing and future domestic subsidiaries and foreign subsidiaries that are note guarantors, 65% of the capital stock of, or other equity interests in existing and future first-tier foreign subsidiaries, investment property and certain other assets of the Company and the note guarantors (the "Second - Priority Collateral") and a second-priority security interest in our real property, fixtures, equipment, intellectual property and other assets ("First - Priority Collateral"). The revolving credit facility matures on February 17, 2009. The interest rates are at LIBOR plus 2.5% to 3.0% or ABR plus 1.5% to 2.0%. The average rate on borrowings outstanding during the first quarter of 2005 was 6.95%. The commitment fee for the unused portion of the revolving credit facility is 0.50% per annum. The borrowings under the revolving credit facility may be limited to a reduced availability. Reduced Availability is defined as: if the borrowing base is less than $110,000,000 and the Fixed Charge Coverage Ratio (FCCR) is less than 1.1, the reduced availability is the borrowing base minus $10,000,000. Furthermore, if the FCCR is less than that prescribed in our credit agreement, RA is the lessor of the commitment or the borrowing base minus $15,000,000. As of March 31, 2005, we had approximately $49.7 million available for borrowing under our revolving credit agreement. ISSUANCE OF 11 1/8% SENIOR SECURED DISCOUNT NOTES DUE 2009 On February 17, 2004 we completed the sale of $306 million ($225.3 million of proceeds) principal amount at maturity of 11 1/8% Senior Secured Discount Notes due 2009. The proceeds of this offering and the borrowing under the new revolving credit facility (discussed above) were used to repay and terminate the credit facilities that existed at December 31, 2003. The Senior Secured Discount Notes are secured by a first priority security interest in the First-Priority Collateral and a second priority security interest in the Second - Priority Collateral. The Senior Secured Discount Notes are guaranteed by our existing and future domestic restricted subsidiaries and certain foreign subsidiaries. Unless we elect to pay cash interest as described below, and except under certain limited circumstances, the notes will accrete from the date of issuance at the rate of 11 1/8% until December 15, 2006, compounded semiannually on each June 15 and December 15, commencing June 15, 2004, to an aggregate principal amount of $1,000 per note ($306.0 million in the aggregate assuming no redemption or other repayments). Commencing on December 15, 2006, interest on the notes will accrue at the rate of 11 1/8% per annum and will be payable in cash semiannually on June 15 and December 15, commencing on June 15, 2007. 11 On any interest payment date prior to December 15, 2006, we may elect to commence paying cash interest (from and after such interest payment date) in which case (i) we will be obligated to pay cash interest on each subsequent interest payment date, (ii) the notes will cease to accrete after such interest payment date and (iii) the outstanding principal amount at the stated maturity of each note will equal the accreted value of such note as of such interest payment date. On or after June 15, 2007, we may redeem some or all of the notes at the following redemption prices (expressed as a percentage of principal amount), plus accrued and unpaid interest: 105.563% if redeemed prior to June 15, 2008; 102.781% if redeemed prior to June 15, 2009; and 100% if redeemed on or after June 15, 2009. Prior to such date, we may not redeem the notes except as described in the following paragraph. At any time prior to June 15, 2007, we may redeem up to 35% of the accreted value of the notes with the net cash proceeds of certain equity offerings by us at a redemption price equal to 111.125% of the accreted value thereof plus accrued interest, so long as (i) at least 65% of the accreted value of the notes remains outstanding after such redemption and (ii) any such redemption by us is made within 120 days after such equity offering. 10. 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 four operating segments: Engineered Films, Performance Films, Industrial Films and Specialty Products Group. Sales and transfers between our segments are eliminated in consolidation. We evaluate the performance of our operating segments based on net sales (excluding inter-company sales) and segment profit. The segment profit reflects income before interest expense, income taxes, depreciation, amortization, restructuring costs and other non-cash charges and net adjustments for certain unusual items. Our reportable segments are managed separately with separate management teams, because each segment has differing products, customer requirements, technology and marketing strategies. Segment profit and segment assets as of and for the periods ended March 31, 2005 and 2004 are presented in the following table (in thousands). Certain reclassifications have been made to the prior year amounts to be consistent with the 2005 presentation.
SPECIALTY ENGINEERED PERFORMANCE INDUSTRIAL PRODUCTS CORPORATE/ FILMS FILMS FILMS GROUP OTHER TOTAL ------------ ------------- -------------- ------------- ----------- ------------ THREE MONTHS ENDED MARCH 31, 2005 Net sales to customers $ 59,600 $ 25,027 $ 72,795 $ 102,826 $ 2,640 $ 262,888 Intersegment sales 1,617 558 3,378 1,511 (7,064) -- ------------ ------------- -------------- ------------- ----------- ------------ Total net sales 61,217 25,585 76,173 104,337 (4,424) 262,888 Depreciation and amortization 1,766 848 1,759 4,661 1,100 10,134 Interest expense 163 5 86 1,317 34,119 35,690 Segment profit 8,141 3,644 6,351 11,284 (7,667) 21,753 Capital expenditures 794 1,253 1,180 4,913 814 8,954 Segment assets 129,767 69,216 112,544 379,356 95,094 785,977 THREE MONTHS ENDED MARCH 31, 2004 Net sales to customers $ 55,385 $ 25,783 $ 58,277 $ 96,089 $ 1,265 $ 236,799 Intersegment sales 1,445 43 924 2,948 (5,360) 0 ------------ ------------- -------------- ------------- ----------- ------------ Total net sales 56,830 25,826 59,201 99,037 (4,095) 236,799 Depreciation and amortization 1,663 849 1,316 4,726 2,481 11,035 Interest expense 158 4 0 778 42,021 42,961 Segment profit 9,887 4,413 6,715 13,402 (6,920) 27,495 Capital expenditures 336 102 808 1,555 246 3,047 AS OF DECEMBER 31, 2004 Segment assets 140,799 68,190 105,543 375,033 87,527 777,092
12 A reconciliation of the totals reported for the operating segments to the totals reported in the consolidated financial statements for the three months ended March 31, 2004 and 2005 and as of March 31, 2005 and December 31, 2004 is as follows (in thousands):
THREE MONTHS ENDED MARCH 31, -------------------------------- 2005 2004 ---------------- --------------- PROFIT OR LOSS Total segment profit $ 21,753 $ 27,495 Depreciation and amortization (10,134) (11,035) Restructuring and other costs (132) -- Interest expense (35,690) (42,961) ---------------- --------------- Income (loss) from continuing operations before income taxes $ (24,203) $ (26,501) ================ =============== MARCH 31, DECEMBER 31, 2005 2004 ---------------- --------------- ASSETS Total assets for reportable segments 690,883 689,565 Other unallocated assets 95,094 87,527 ---------------- --------------- Total consolidated assets $ 785,977 $ 777,092 ================ =============== Net sales and long-lived assets of our US and foreign operations are as follows: THREE MONTHS ENDED MARCH 31, -------------------------------- 2005 2004 ---------------- --------------- Net Sales United States $ 210,560 $ 191,690 Foreign countries(a) 52,328 45,109 ---------------- --------------- Total $ 262,888 $ 236,799 ================ =============== MARCH 31, DECEMBER 31, 2005 2004 ---------------- --------------- Long-lived assets United States 438,209 434,645 Foreign countries 58,249 61,813 ---------------- --------------- Total $ 496,458 $ 496,458 ================ =============== Total assets United States 666,307 655,885 Foreign countries 119,670 121,207 ---------------- --------------- Total $ 785,977 $ 777,092 ================ ===============
(a) Foreign countries include Australia, Canada, Germany and Mexico, none of which individually represents 10% of consolidated net sales or long-lived assets. 13 11. SHARES SUBJECT TO MANDATORY REDEMPTION The Company adopted Statement of Financial Accounting Standard No. 150 ( "SFAS 150"), ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY, effective January 1, 2004. As a result, our redeemable preferred stock, which contains an unconditional mandatory redemption feature, is reflected as a liability on the balance sheet and the associated dividends and accretion are included as a part of interest expense in the statement of operations. In addition, as a result of adopting SFAS 150, the Company's redeemable common shares that have been put for redemption by a shareholder are reflected as a liability at fair value. The fair value was computed using the agreed upon price of the redemption times the number of shares put by the shareholder. The shares subject to mandatory redemption are as follow (in thousands):
AS OF MARCH 31, AS OF DECEMBER 31, 2005 2004 ----------------- ----------------- Redeemable Preferred Shares 167,000 shares authorized, 140,973 shares $ 232,855 $ 223,548 outstanding as of March 31, 2005 and 2004, designated as Series A, no par value with a redemption value of $1,000 per share plus accumulated dividends. 18,200 Redeemable Common Shares that have been put for redemption by a shareholder, net of a shareholder note of $2,431 6,362 6,362 ----------------- ----------------- Total shares subject to mandatory redemption $ 239,217 $ 229,910 ================= =================
The maximum cash settlement at the redemption date of June 1, 2011 (assuming no cash dividends are paid through the redemption date) is $ 680.6 million for the redeemable preferred shares and $ 6.4 million (net of the note receivable of $ 2.4 million) for the redeemable common shares that have been put for redemption by the shareholder. 12. DEFINED BENEFIT PLANS The company sponsors three noncontributory defined benefit pension plans (the "United States Plans") covering domestic employees with 1,000 or more hours of service. The company funds these in accordance with the funding requirements of the Employee Retirement Income Security Act of 1974. Contributions are intended to not only provide for benefits attributed to service to date but also for those expected to be earned in the future. We also sponsor a defined benefit plan in Germany (the "Germany Plan"). For information on the Germany Plan please refer to the Company's Form 10-K for the year ended December 31, 2004. In the second quarter of 2004, the Company redesigned its retirement programs which led to the curtailment and "freeze" of the pension plan for U.S. salaried employees effective June 30, 2004. The consolidated accrued net pension expense for the three months ended March 31, 2005 and 2004 includes the following components (in thousands):
THREE MONTHS ENDED MARCH 31, 2005 2004 ----------------- ---------------- UNITED STATES PLANS Service cost-benefits earned during the period $ 104 $ 1,189 Interest cost on projected benefit obligation 1,195 1,374 Expected return on assets (1,286) (1,105) Other 28 184 ----------------- ---------------- Total accrued pension expense $ 41 $ 1,642 ----------------- ----------------
14 13. CONTINGENCIES LITIGATION We are involved in various litigation matters from time to time in the ordinary course of our business, including matters described in previous filings. In our opinion, none of such litigation is material to our financial condition or results of operations. 14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS The following condensed consolidating financial statements present, in separate columns, financial information for (i) Pliant Corporation (on a parent only basis) with its investment in its subsidiaries recorded under the equity method, (ii) guarantor subsidiaries (as specified in the Indenture dated May 31, 2000 (the "2000 Indenture") relating to Pliant's $220 million senior subordinated notes due 2010 (the "2000 Notes"), the Indenture dated April 10, 2002 (the "2002 Indenture" and, together with the 2000 Indentures 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 Indentures recorded under the equity method, (iii) direct and indirect non-guarantor subsidiaries on a combined basis, (iv) the eliminations necessary to arrive at the information for Pliant Corporation and its subsidiaries on a consolidated basis, and (v) Pliant Corporation on a consolidated basis, in each case as of March 31, 2005 and December 31, 2004 and for the three months ended March 31, 2005 and 2004. The Notes are fully and unconditionally guaranteed on a joint and several basis by each guarantor subsidiary and each guarantor subsidiary is wholly owned, directly or indirectly, by Pliant Corporation. There are no contractual restrictions limiting transfers of cash from guarantor and non-guarantor subsidiaries to Pliant Corporation, within the meaning of Rule 3-10(h)(1) of Regulation S-X. There are no contractual restrictions limiting transfers of cash from guarantor and non-guarantor subsidiaries to Pliant Corporation. The condensed consolidating financial statements are presented herein, rather than separate financial statements for each of the guarantor subsidiaries, because management believes that separate financial statements relating to the guarantor subsidiaries are not material to investors 15 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET AS OF MARCH 31, 2005 (IN THOUSANDS) (UNAUDITED)
PLIANT COMBINED COMBINED ELIMINATIONS CONSOLIDATED CORPORATION GUARANTOR NON-GUARANTOR PLIANT (PARENT ONLY) SUBSIDIARIES SUBSIDIARIES CORPORATION --------------- ---------------- ---------------- ---------------- ---------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ -- $ 845 $ 3,235 $ -- $ 4,080 Receivables - net 101,320 7,624 24,590 -- 133,534 Inventories 82,110 8,439 12,192 -- 102,741 Prepaid expenses and other 2,552 645 765 -- 3,962 Income taxes receivable (payable) 120 (54) 492 -- 558 Deferred income taxes 10,663 -- (380) -- 10,283 --------------- ---------------- ---------------- ---------------- ---------------- Total current assets 196,765 17,499 40,894 -- 255,158 PLANT AND EQUIPMENT, Net 241,579 16,074 36,585 -- 294,238 GOODWILL 167,583 13,331 1,312 -- 182,226 INTANGIBLE ASSETS, Net 4,966 11,404 50 -- 16,420 INVESTMENT IN SUBSIDIARIES (33,344) -- -- 33,344 -- OTHER ASSETS 34,620 -- 3,315 -- 37,935 --------------- ---------------- ---------------- ---------------- ---------------- TOTAL ASSETS $ 612,169 $ 58,308 $ 82,156 33,344 $ 785,977 =============== ================ ================ ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Trade accounts payable $ 83,418 $ 6,219 $ 11,414 $ -- $ 101,051 Accrued liabilities 56,802 3,510 3,693 -- 64,005 Current portion of long-term debt 1,300 -- -- -- 1,300 Due to (from) affiliates (138,906) 73,915 64,991 -- -- --------------- ---------------- ---------------- ---------------- ---------------- Total current liabilities 2,614 83,644 80,098 166,356 LONG-TERM DEBT - Net of current portion 864,462 -- -- -- 864,462 OTHER LIABILITIES 25,852 -- 2,803 -- 28,655 DEFERRED INCOME TAXES 22,261 4,085 3,178 -- 29,524 SHARES SUBJECT TO MANDATORY REDEMPTION 239,217 -- -- -- 239,217 --------------- ---------------- ---------------- ---------------- ---------------- Total Liabilities 1,154,406 87,729 86,079 -- 1,328,214 --------------- ---------------- ---------------- ---------------- ---------------- REDEEMABLE STOCK: Preferred Stock 109 -- -- -- 109 Common Stock 6,645 -- -- -- 6,645 --------------- ---------------- ---------------- ---------------- ---------------- Total redeemable stock 6,754 -- -- -- 6,754 --------------- ---------------- ---------------- ---------------- ---------------- STOCKHOLDERS' EQUITY (DEFICIT): Common stock 103,376 -- -- -- 103,376 Additional paid-in capital -- 14,020 29,302 (43,322) -- Warrants 39,133 -- -- -- 39,133 Retained earnings (deficit) (676,402) (44,861) (25,341) 70,202 (676,402) Stockholders' note receivable (660) -- -- -- (660) Accumulated other comprehensive loss (14,438) 1,420 (7,884) 6,464 (14,438) --------------- ---------------- ---------------- ---------------- ---------------- Total stockholders' equity (deficit) (548,991) (29,421) (3,923) 33,344 (548,991) --------------- ---------------- ---------------- ---------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 612,169 $ 58,308 $ 82,156 $ 33,344 $ 785,977 =============== ================ ================ ================ ================
16 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2004 (IN THOUSANDS) (UNAUDITED)
PLIANT CONSOLIDATED CORPORATION COMBINED COMBINED PLIANT PARENT ONLY GUARANTORS NON-GUARANTORS ELIMINATIONS CORPORATION --------------- ---------------- ---------------- ---------------- ---------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ -- $ 704 $ 4,876 $ -- $ 5,580 Receivables - net 95,439 7,861 22,095 -- 125,395 Inventories 74,672 7,411 12,217 -- 94,300 Prepaid expenses and other 2,764 370 898 -- 4,032 Income taxes receivable 138 223 -- -- 361 Deferred income taxes 12,741 -- (780) -- 11,961 --------------- ---------------- ---------------- ---------------- ---------------- Total current assets 185,754 16,569 39,306 -- 241,629 PLANT AND EQUIPMENT, Net 240,599 17,127 39,419 -- 297,145 GOODWILL 167,583 13,331 1,323 -- 182,237 INTANGIBLE ASSETS, Net 5,328 11,692 56 -- 17,076 INVESTMENT IN SUBSIDIARIES (28,793) -- -- 28,793 -- OTHER ASSETS 35,588 -- 3,417 -- 39,005 --------------- ---------------- ---------------- ---------------- ---------------- TOTAL ASSETS $ 606,059 $ 58,719 $ 83,521 $ 28,793 $ 777,092 =============== ================ ================ ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Trade accounts payable $ 76,515 $ 5,848 $ 13,919 $ -- $ 96,282 Accrued liabilities 56,639 3,554 4,645 -- 64,838 Current portion of long-term debt 1,994 -- -- -- 1,994 Due to (from) affiliates (133,109) 75,190 57,919 -- -- --------------- ---------------- ---------------- ---------------- ---------------- Total current liabilities 2,039 84,592 76,483 -- 163,114 LONG-TERM DEBT, Net of current portion 840,354 -- -- -- 840,354 OTHER LIABILITIES 23,608 -- 2,846 -- 26,454 DEFERRED INCOME TAXES 24,354 3,938 3,141 -- 31,433 SHARES SUBJECT TO MANDATORY REDEMPTION 229,910 -- -- -- 229,910 --------------- ---------------- ---------------- ---------------- ---------------- Total liabilities 1,120,265 88,530 82,470 -- 1,291,265 --------------- ---------------- ---------------- ---------------- ---------------- MINORITY INTEREST -- -- 33 -- 33 REDEEMABLE STOCK: Preferred stock 117 -- -- -- 117 Common stock 6,645 -- -- -- 6,645 --------------- ---------------- ---------------- ---------------- ---------------- Total redeemable stock 6,762 -- -- -- 6,762 --------------- ---------------- ---------------- ---------------- ---------------- STOCKHOLDERS' (DEFICIT): Common stock 103,376 14,020 29,302 (43,322) 103,376 Warrants to purchase common stock 39,133 -- -- -- 39,133 Retained earnings (deficit) (650,974) (45,237) (22,767) 68,004 (650,974) Stockholders' notes receivable (660) -- -- -- (660) Accumulated other comprehensive loss (11,843) 1,406 (5,517) 4,111 (11,843) --------------- ---------------- ---------------- ---------------- ---------------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (520,968) (29,811) 1,018 28,793 (520,968) --------------- ---------------- ---------------- ---------------- ---------------- Total liabilities and stockholders' (deficit) $ 606,059 $ 58,719 $ 83,521 $ 28,793 $ 777,092 =============== ================ ================ ================ ================
17 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING INCOME STATEMENT FOR THE THREE MONTHS ENDED MARCH 31, 2005 (IN THOUSANDS) (UNAUDITED)
PLIANT COMBINED COMBINED CONSOLIDATED CORPORATION GUARANTOR NON-GUARANTOR PLIANT (PARENT ONLY) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CORPORATION ---------------- --------------- ------------------ --------------- --------------- SALES , Net $ 219,268 $ 16,706 $ 34,012 $ (7,098) $ 262,888 COST OF SALES 188,438 14,901 32,697 (7,098) 228,938 ---------------- --------------- ------------------ --------------- --------------- GROSS PROFIT 30,830 1,805 1,315 -- 33,950 OPERATING EXPENSES 19,395 660 2,202 -- 22,257 ---------------- --------------- ------------------ --------------- --------------- OPERATING INCOME 11,435 1,145 (887) -- 11,693 INTEREST EXPENSE (34,210) (163) (1,317) -- (35,690) EQUITY IN EARNINGS OF SUBSIDIARIES (2,198) -- -- 2,198 -- OTHER INCOME (EXPENSE), Net (112) (68) (26) -- (206) ---------------- --------------- ------------------ --------------- --------------- NET INCOME (LOSS) BEFORE INCOME TAXES (25,085) 914 (2,230) 2,198 (24,203) INCOME TAX PROVISION 5 538 344 -- 887 ---------------- --------------- ------------------ --------------- --------------- INCOME (LOSS) FROM CONTINUING OPERATIONS (25,090) 376 (2,574) 2,198 (25,090) LOSS FROM DISCONTINUED OPERATIONS (338) -- -- -- (338) ---------------- --------------- ------------------ --------------- --------------- NET INCOME (LOSS) $ (25,428) $ 376 $ (2,574) $ 2,198 $ (25,428) ================ =============== ================== =============== ===============
18 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING INCOME STATEMENT FOR THE THREE MONTHS ENDED MARCH 31, 2004 (IN THOUSANDS) (UNAUDITED)
PLIANT COMBINED COMBINED CONSOLIDATED CORPORATION GUARANTOR NON-GUARANTOR PLIANT (PARENT ONLY) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CORPORATION ---------------- ---------------- ---------------- ---------------- ---------------- SALES , Net $ 194,065 $ 20,034 $ 28,169 $ (5,469) $ 236,799 COST OF SALES 160,059 17,090 26,786 (5,469) 198,466 ---------------- ---------------- ---------------- ---------------- ---------------- GROSS PROFIT 34,006 2,944 1,383 -- 38,333 OPERATING EXPENSES 19,034 284 2,417 -- 21,735 ---------------- ---------------- ---------------- ---------------- ---------------- OPERATING INCOME 14,972 2,660 (1,034) -- 16,598 INTEREST EXPENSE (42,025) (158) (778) -- (42,961) EQUITY IN EARNINGS OF SUBSIDIARIES (3,272) -- -- 3,272 -- OTHER INCOME (EXPENSE), Net (305) 6 161 -- (138) ---------------- ---------------- ---------------- ---------------- ---------------- INCOME (LOSS) BEFORE INCOME TAXES (30,630) 2,508 (1,651) 3,272 (26,501) INCOME TAX PROVISION (BENEFIT) 129 779 744 -- 1,652 ---------------- ---------------- ---------------- ---------------- ---------------- INCOME (LOSS) FROM CONTINUING OPERATIONS (30,759) 1,729 (2,395) 3,272 (28,153) ---------------- ---------------- ---------------- ---------------- ---------------- LOSS FROM DISCONTINUED OPERATIONS -- (2,606) -- -- (2,606) ---------------- ---------------- ---------------- ---------------- ---------------- NET INCOME (LOSS) $ (30,759) $ (877) $ (2,395) $ 3,272 $ (30,759) ================ ================ ================ ================ ================
19 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2005 (IN THOUSANDS) (UNAUDITED)
PLIANT COMBINED COMBINED CONSOLIDATED CORPORATION GUARANTOR NON-GUARANTOR PLIANT TABLE BE UPDATED (PARENT ONLY) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CORPORATION --------------- --------------- --------------- --------------- --------------- CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (7,552) $ 834 $ (656) $ -- $ (7,374) --------------- --------------- --------------- --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets -- 378 -- -- 378 Capital expenditures for plant and equipment (8,233) (143) (578) -- (8,954) --------------- --------------- --------------- --------------- --------------- Net cash used in investing activities (8,233) 235 (578) -- (8,576) --------------- --------------- --------------- --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of financing fees (107) -- -- -- (107) Repayment of capital leases and other, net (1,080) -- -- -- (1,080) Proceeds from revolving debt, net 17,400 -- -- -- 17,400 Proceeds from issuance (repurchase) of preferred stock (5) -- -- -- (5) --------------- --------------- --------------- --------------- --------------- Net cash provided by (used in) financing activities 16,208 -- -- 16,208 --------------- --------------- --------------- --------------- --------------- CASH TO DISCONTINUED OPERATIONS (195) -- -- -- (195) --------------- --------------- --------------- --------------- --------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (228) (928) (407) -- (1,563) --------------- --------------- --------------- --------------- --------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS -- 141 (1,641) -- (1,500) CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD -- 704 4,876 -- 5,580 --------------- --------------- --------------- --------------- --------------- CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ -- $ 845 $ 3,235 $ -- $ 4,080 =============== =============== =============== =============== ===============
20 PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2004 (IN THOUSANDS) (UNAUDITED)
PLIANT COMBINED COMBINED CONSOLIDATED CORPORATION GUARANTOR NON-GUARANTOR PLIANT (PARENT ONLY) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CORPORATION --------------- --------------- --------------- --------------- --------------- CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (27,096) $ 350 $ 27,111 $ -- $ 365 --------------- --------------- --------------- --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures for plant and equipment (1,705) (59) (1,283) -- (3,047) --------------- --------------- --------------- --------------- --------------- Net cash used in investing activities (1,705) (59) (1,283) -- (3,047) --------------- --------------- --------------- --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of senior discount notes 225,299 -- -- -- 225,299 Payment of financing fees (8,664) -- -- -- (8,664) Repayment of capital leases and other, net (470) -- -- -- (470) Borrowings under revolver 8,300 -- -- -- 8,300 Repayment of term debt and revolver (195,412) -- (24,163) -- (219,575) --------------- --------------- --------------- --------------- --------------- Net cash provided by (used in) financing 29,053 -- (24,163) -- 4,890 activities --------------- --------------- --------------- --------------- --------------- CASH TO DISCONTINUED OPERATIONS -- (1,636) -- -- (1,636) --------------- --------------- --------------- --------------- --------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (252) 380 (662) -- (534) --------------- --------------- --------------- --------------- --------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS -- (965) 1,003 -- 38 CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD -- 1,192 2,116 -- 3,308 --------------- --------------- --------------- --------------- --------------- CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ -- $ 227 $ 3,119 $ -- $ 3,346 =============== =============== =============== =============== ===============
14. SUBSEQUENT EVENTS ALLIANT JOINT VENTURE On January 5, 2005, we terminated our joint venture with Supreme Plastics Group PLC by purchasing all of the equity interests in the joint venture Supreme Plastics Group PLC owned for $400,000. As of January 5, 2005, Alliant Company LLC became a wholly-owned subsidiary of the Company. On April 13, 2005, Pliant Corporation sold the intellectual property, working capital, and equipment assets used in the Alliant operation to an independent third party for a purchase price of $6.3 million, subject to certain adjustments with $4.6 million paid in cash at closing, $0.6 million paid 10 days after closing and $0.5 million to be paid within 70 days of closing. The remaining purchase price of $0.63 million will be paid in equal installments twelve and twenty-four months after closing. Net sales and net loss for this business during the three months ended March 31, 2005 were $0.6 million and $0.3 million, respectively, and net sales and net loss for the three months ended March 31, 2004 were $0.7 million and $0.3 million, respectively. CONSENT SOLICITATION - 11 1/8% SENIOR SECURED DISCOUNT NOTES DUE 2009 On April 8, 2005, Pliant Corporation commenced a consent solicitation relating to its 11 1/8% Senior Secured Discount Notes due 2009 seeking consents, among other things, to (i) eliminate the current requirement to pay cash interest on the notes beginning in 2007 and, in lieu thereof, pay non-cash interest in the form of additional notes through maturity and (ii) increase the interest rate and redemption prices of the notes for which consents are received. On May 6, 2005, the Company consummated this solicitation as consents to the proposed amendments were delivered with respect to $298.2 million aggregate principal amount at maturity of the notes, all of which were accepted by the company. 21 As of May 6, 2005, the aggregate principal amount of the amended notes was approximately $250.6 million and equaled their accreted value immediately prior to such consummation. In addition, $7.8 million aggregate principal amount at maturity of notes with respect to which consents were not delivered remain outstanding. The company, certain of its subsidiaries and the trustee also executed an amended and restated indenture governing the amended notes and the notes with respect to which consents were not delivered. The company, certain of its subsidiaries and J.P. Morgan Securities Inc., the solicitation agent for the consent solicitation, executed a registration rights agreement with respect to the amended notes. As a result of the amendments approved in the consent solicitation, the interest rate of the amended notes was increased from 11 1/8% per annum to 11 5/8% per annum. The amended notes no longer require payment of cash interest beginning in 2007. Instead, they require payment of non-cash interest in the form of additional notes through maturity. The amendments also increased the redemption prices of the amended notes. In addition, the amended and restated indenture eliminates substantially all the restrictive covenants contained in the indenture, as they relate to holders of the notes with respect to which consents were not delivered. In conjunction with these consents, the Company paid aggregate consideration of approximately $4.8 million to the consenting noteholders. The notes for which we receive the holder's consent to the proposed amendments will not be registered under the Securities Act of 1933, as amended, or any state securities laws and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and any applicable state securities laws. 22 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, 2004 (the "2004 10-K") and our Registration Statement on Form S-4, as amended (file No. 333-114608) filed on April 20, 2004. This section contains certain forward-looking statements within the meaning of federal securities laws that involve risks and uncertainties, including statements regarding our plans, objectives, goals, strategies and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under "Cautionary Statement for Forward-Looking Information" below and elsewhere in this report. GENERAL We generate our revenues, earnings and cash flows from the sale of film and flexible packaging products throughout the world. We manufacture these products at 24 facilities located in the United States, Australia, Canada, Germany and Mexico. Our sales have grown primarily as a result of strategic acquisitions made over the past several years, increased levels of production at acquired facilities, return on capital expenditures and the overall growth in the markets for film and flexible packaging products. OVERVIEW We recorded sales of $262.9 million in the first quarter of 2005. This is a 11.0% increase from sales of $236.8 million in the first quarter of 2004, stated on a comparable basis excluding the results of the Pliant Solutions segment (which was sold during the third quarter of 2004 and accounted for as a discontinued operation) for both periods. First quarter 2005 sales measured in pounds were 213.7 million, which represents a 3.3% decrease from the first quarter of 2004. Total segment profit was $21.7 million for the first quarter of 2005, compared to $27.5 million for the first quarter of 2004, presented on a comparable basis excluding the results of the Pliant Solutions segment (which was sold during the third quarter of 2004 and accounted for as a discontinued operation) for both periods. Segment profit, presented in accordance with generally accepted accounting principles (GAAP), reflects income from continuing operations adjusted for interest expense, income taxes, depreciation, amortization, and restructuring charges. The decrease in segment profit of $5.8 between periods is primarily attributable to the impact of resin price increases, a decline in sales volume, increased freight costs and an unfavorable shift in product sales mix. Average sales price ("ASP") for the three months ended March 31, 2005 was $1.230 per pound as compared to $1.073 per pound for the three months ended March 31, 2004. This 14.7% increase generated approximately $35 million in incremental sales. However, our raw material costs, of which 60% are resin related, increased approximately $34 million. Furthermore, while our waste in absolute terms declined nearly 25% due to internal waste reduction programs, waste in dollars increased approximately $3 million due to higher resin costs. The sales volume decline between periods yielded approximately $1 million less segment profit. Freight costs increased approximately $1 million between periods due to suppliers passing along energy cost increases. Finally, product mix shifts to more commodity based products contributed approximately $2 million to the decline in segment profit. RAW MATERIAL COSTS The primary raw materials used in the manufacture of most of our products are polypropylene resin, polyethylene resin and PVC resin. The prices of these materials are primarily a function of the price of crude oil and natural gas liquids. Prices for these commodities have risen dramatically over the last year and could continue to rise in the second quarter of 2005 and beyond. We have not historically hedged our exposure to raw material increases, but have attempted to move more customer programs to cost-plus type contracts, which would allow us to pass through any cost increases in raw materials. Raw material costs as a percentage of sales have increased to 58.9% for the first quarter of 2005, from 50.3% for the comparable period of 2004. To the extent we are not able to pass along price increases of raw materials, or to the extent any such price increases are delayed, our cost of goods sold would continue to increase and our gross profit and operating income would correspondingly decrease. Significant increases in raw material prices that cannot be passed on to customers could have a material adverse effect on our results of operations and financial condition. 23 RESULTS OF OPERATIONS The following table sets forth net sales, operating expenses, and operating income, and such amounts as a percentage of net sales, for the three months ended March 31, 2005 and 2004 (dollars in millions).
THREE MONTHS ENDED MARCH 31, ----------------------------------------------------------- 2005 2004 ------------------------------ ---------------------------- $ % OF $ % OF SALES SALES -------------- -------------- ----------- --------------- Net sales $ 262.9 100.0% $ 236.8 100.0% Cost of sales 228.9 87.1 198.5 83.8 -------------- -------------- ----------- --------------- Gross profit 34.0 12.9 38.3 16.2 Operating expenses before restructuring and other costs 22.2 8.4 21.7 9.2 Restructuring and other costs 0.1 -- -- -- -------------- -------------- ----------- --------------- Total operating expenses 22.3 8.4 21.7 9.2 -------------- -------------- ----------- --------------- Operating income $ 11.7 4.5% $ 16.6 7.0% -------------- -------------- ----------- ---------------
THREE MONTHS ENDED MARCH 31, 2005 COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 2004 NET SALES Net sales increased by $26.1 million, or 11.0%, to $262.9 million for the first quarter of 2005 from $236.8 million for the three months ended March 31, 2005. The increase consisted of a 3.3% decrease in our in sales volume and a 14.7% increase in our average selling prices. See "Operating Segment Review" below for a detailed discussion of sales volumes and selling prices by segment and division. GROSS PROFIT Gross profit decreased by $4.3 million, or 11.2%, to $34.0 million for the first quarter of 2005, from $38.3 million for the first quarter of 2004. This decrease was primarily due to selling price increasing at rates that were insufficient to compensate for increased resin prices, decreased sales volumes, and mix change in customer purchasing to more commodity based products. See "Operating Segment Review" below for a detailed discussion of the margin variances by segment. TOTAL OPERATING EXPENSES BEFORE RESTRUCTURING AND OTHER COSTS Total operating expenses before restructuring and other costs increased $0.5 million, or 2.3%, to $22.2 million for the first quarter of 2005, from $21.7 million for the first quarter of 2004. This increase was attributable to a $0.2 million, or 1.1% increase in selling and administrative expenses and $0.2 million, or 9.7% increase in research and development costs. 24 RESTRUCTURING AND OTHER COSTS Restructuring and other costs were $0.1 million for the first quarter of 2005, compared to none for the first quarter of 2004. The costs for the first quarter of 2005 included $0.1 million of period costs related to the closure of our Harrisville, Rhode Island plant. OPERATING INCOME Operating income decreased by $ 4.9 million, to $11.7 million for the first quarter of 2005, from $ 16.6 million for the first quarter of 2004, due to the factors discussed above. INTEREST EXPENSE Interest expense on current and long-term debt decreased by $8.2 million, or 23.7%, to $26.4 million for the first quarter of 2004, from $34.6 million for the first quarter of 2004. This decrease was principally due to a charge of $10.1 million in the first quarter of 2004 for the write-off of previously capitalized financing fees and interest rate derivative costs. Excluding this prior year write-off interest expense increased $1.9 million due to higher interest costs resulting from the accretion of the issue discount associated with our senior secured discount notes issued in February 2004 used to repay bank debt that carried a lower interest rate. Interest expense on preferred stock for the first quarter of 2005 and 2004 of $9.3 million and $8.4 million, respectively, reflects the dividends and accretion on our redeemable preferred stock of the Company that are classified as interest expense pursuant to SFAS 150. INCOME TAX EXPENSE Income tax expense for the first quarter of 2005 was $0.9 million on pretax losses of $24.2 million, compared to income tax expense of $1.7 million on pretax losses of $26.5 million for the same period in 2004. Income tax benefits related to net operating losses in the United States were offset by a valuation allowance as the realization of these tax benefits is not certain. The income tax expense in the statements of operations primarily reflects foreign income taxes. LOSS FROM CONTINUING OPERATIONS Loss from continuing operations decreased by $3.0 million to $25.1 million for the first quarter of 2005, from $28.1 million for the first quarter of 2004, due to the factors discussed above. DISCONTINUED OPERATIONS On September 30, 2004, we sold substantially all of the assets of our wholly-owned subsidiary, Pliant Solutions Corporation. Losses from these discontinued operations for the three months ended March 31, 2005 and March 31, 2004 were $0.4 million and $2.6 million, respectively. 25 OPERATING SEGMENT REVIEW GENERAL We evaluate the performance of our operating segments based on net sales (excluding inter-company sales) and segment profit. The segment profit reflects income from continuing operations adjusted for interest expense, income taxes, depreciation, amortization, restructuring and other costs and other non-cash charges (principally the impairment of goodwill, intangible assets and fixed assets). For more information on our operating segments, including a reconciliation of segment profit to income before taxes, see Note 10 to the condensed consolidated financial statements included elsewhere in this report. We have four reporting segments: Engineered Films, Performance Films, Industrial Films and Specialty Products Group. Summary of segment information (in millions of dollars):
SPECIALTY ENGINEERED PERFORMANCE INDUSTRIAL PRODUCTS CORPORATE/ FILMS FILMS FILMS GROUP OTHER TOTAL ------------ ------------- -------------- ------------- ----------- ------------ THREE MONTHS ENDED MARCH 31, 2005 Total net sales $ 59.6 $ 25.0 $ 72.8 $ 102.8 $ 2.7 $ 262.9 Segment profit 8.1 3.6 6.4 11.3 (7.6) 21.8 THREE MONTHS ENDED MARCH 31, 2004 Total net sales $ 55.4 $ 25.8 $ 58.3 $ 96.1 $ 1.2 $ 236.8 Segment profit 9.9 4.4 6.7 13.4 (6.9) 27.5
THREE MONTHS ENDED MARCH 31, 2005 COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 2004 ENGINEERED FILMS NET SALES. Net sales in Engineered Films increased by $4.2 million, or 7.6%, to $59.6 million for the quarter ended March 31, 2005 from $55.4 million for 2004. This increase was due to an increase in our average selling prices of 14.7%, principally due to the pass-through of raw material price increases and improvements in our sales mix, offset by a 6.2% decrease in sales volume, primarily in our converter films and Canadian markets. SEGMENT PROFIT. The Engineered Films segment profit was $8.1 million for the quarter ended March 31, 2005, as compared to $9.9 million for the same period in 2004. This decrease in segment profit was primarily due to lower gross margins from sales volume declines and compression between our average selling price and average raw material costs related to contractual customers and the competitive environment with customers who are not parties to purchase agreements. PERFORMANCE FILMS NET SALES. The net sales of our Performance Films segment decreased $0.8 million, or 3.1%, to $25.0 million for the quarter ended March 31, 2005 from $25.8 million for 2004. This decrease was principally due to a decrease in our sales volumes of 10.8%, primarily in our custom and industrial films markets due to competitive pressures. This volume decrease was partially offset by an increase in our average selling prices of 8.8%, primarily due to the pass through of resin price increases to customers. SEGMENT PROFIT. Performance Films segment profit was $3.6 million for the quarter ended March 31, 2005, as compared to $4.4 million for the same period in 2004. This decrease in segment profit was primarily due to sales volume declines and lower gross margins from compression between our average selling price and average raw material costs to contractual customers. 26 INDUSTRIAL FILMS NET SALES. The net sales of our Industrial Films segment increased by $14.5 million, or 24.9%, to $72.8 million for the quarter ended March 31, 2005 from $58.3 million for the quarter ended March 31, 2004. This increase was principally due to an increase in our sales volumes of 4.6% and an increase in our average selling prices of 19.5%, primarily due to the pass through of raw material price increases and increased sales of value added products. SEGMENT PROFIT. The Industrial Films segment profit was $6.4 million for the quarter ended March 31, 2005, as compared to $6.7 million for the same period in 2004. This $0.3 million decrease in segment profit was due to increased labor and freight costs associated with volume increases and higher commission costs. SPECIALTY PRODUCTS GROUP NET SALES. The net sales of our Specialty Products Group segment increased $6.7 million, or 7.0% to $102.8 million for the quarter ended March 31, 2005 from $96.1 million for the quarter ended March 31, 2004. This increase reflects a 14.7 % increase in our average selling prices, offset by a sales volume decrease of 6.7%. Net sales in our Specialty Films division increased $2.3 million, or 4.9%, to $49.9 million for the quarter ended March 31, 2005 from $47.6 million for the quarter ended March 31, 2004. This increase reflects an increase in our average selling prices of 12.1% offset by a decrease in sales volume of 6.4% as a result of market share loss of a major client and Asian competition. Net sales in our Printed Products Films division increased $4.4 million, or 9.1%, to $52.9 million for the quarter ended March 31, 2005 from $48.5 million for the quarter ended March 31, 2004. This increase reflects an increase in our average selling prices of 17.4% offset by a decrease in sales volume of 7.0% primarily in our Mexican plant, and as a result of competitive pricing in our flexible products markets. SEGMENT PROFIT. The Specialty Products Group segment profit was $11.3 million for the quarter ended March 31, 2005, as compared to $13.4 million for the quarter ended March 31, 2004. This $2.1 million decrease is primarily attributable to sales volume decline and increased labor and freight costs. CORPORATE/OTHER Corporate/Other includes our corporate headquarters and our research and development facility in Newport News, Virginia. Unallocated corporate expenses increased by $0.7 million to $7.6 million for the quarter ended March 31, 2005, from $6.9 million for the quarter ended March 31, 2004. This increase was primarily due to an increase of $0.5 million in payroll related costs. 27 LIQUIDITY AND CAPITAL RESOURCES SOURCES OF CAPITAL Our principal sources of funds are cash generated by our operations and borrowings under our revolving credit facility. As of March 31, 2005, our outstanding long-term debt consisted of: $41.4 million of borrowings under our revolving credit facility; $313.4 million of our 13% Senior Subordinated Notes; $250.0 million of our 11 1/8% Senior Secured Notes; and $254.5 million of our 11 1/8% Senior Secured Discount Notes. REVOLVING CREDIT FACILITY On February 17, 2004, we entered into a revolving credit facility providing up to $100 million (subject to the borrowing base and other limitations described below). The revolving credit facility includes a $15 million letter of credit sub-facility, with letters of credit reducing availability under the revolving credit facility. The revolving credit facility is secured by a first priority security interest in substantially all our inventory, receivables and deposit accounts, 100% of the capital stock of, or other equity interests in, our existing and future domestic subsidiaries and foreign subsidiaries that are note guarantors, 65% of the capital stock of, or other equity interests in existing and future first-tier foreign subsidiaries, investment property and certain other assets of the Company and the note guarantors (the "Second - Priority Collateral") and a second-priority security interest in our real property, fixtures, equipment, intellectual property and other assets ("First - Priority Collateral"). The revolving credit facility matures on February 17, 2009. The interest rates are at LIBOR plus 2.5% to 3.0% or ABR plus 1.5% to 2.0%. The average rate on borrowings outstanding during the first quarter of 2005 was 6.95%. The commitment fee for the unused portion of the revolving credit facility is 0.50% per annum. The borrowings under the revolving credit facility may be limited to a reduced availability. Reduced Availability is defined as: if the borrowing base is less than $110,000,000 and the Fixed Charge Coverage Ratio (FCCR) is less than 1.1, the reduced availability is the borrowing base minus $10,000,000. Furthermore, if the FCCR is less than that prescribed in our credit agreement, RA is the lessor of the commitment or the borrowing base minus $15,000,000. As of March 31, 2005, we had approximately $49.7 million available for borrowing under our revolving credit agreement. SENIOR SECURED DISCOUNT NOTES DUE 2009 The Senior Secured Discount Notes mature on June 15, 2009 and are secured by a first-priority security interest in the First-Priority Collateral and a second-priority security interest in the Second-Priority Collateral. The Senior Secured Discount Notes are guaranteed by our existing and future domestic restricted subsidiaries and certain foreign subsidiaries. Unless we elect to pay cash interest as described below, and except under certain limited circumstances, the Senior Secured Discount Notes will accrete from the date of issuance at the rate of 11 1/8% until December 15, 2006, compounded semiannually on each June 15 and December 15 commencing June 15, 2004, to an aggregate principal amount of $1,000 per note ($306.0 million in the aggregate assuming no redemption or other repayments). Commencing on December 15, 2006, interest on the Senior Secured Discount Notes will accrue at the rate of 11 1/8% per annum and will be payable in cash semiannually on June 15 and December 15, commencing on June 15, 2007. On any interest payment date prior to December 15, 2006, we may elect to commence paying cash interest (from and after such interest payment date) in which case (i) we will be obligated to pay cash interest on each subsequent interest payment date, (ii) the notes will cease to accrete after such interest payment date and (iii) the outstanding principal amount at the stated maturity of each note will equal the accreted value of such note as of such interest payment date. At any time prior to June 15, 2007, we may redeem up to 35% of the accreted value of the Senior Secured Discount Notes with the net cash proceeds of certain equity offerings by us at a redemption price equal to 111.125% of the accreted value thereof plus accrued interest, so long as (i) at least 65% of the accreted value of the notes remains outstanding after such redemption and (ii) any such redemption by us is made within 120 days after such equity offering. 28 11 1/8% SENIOR SECURED NOTES DUE 2009 The 11 1/8% Senior Secured Notes due 2009 rank equally with our existing and future senior debt and rank senior to our existing and future subordinated indebtedness, including the 13% Senior Subordinated Notes due 2010. The 11 1/8% Senior Secured Notes due 2009 are secured by a first priority security interest in the First Priority Collateral and a second priority security interest in the Second Priority Collateral. The 11 1/8% Senior Secured Notes due 2009 are guaranteed by some of our subsidiaries. Prior to June 1, 2007, we may, on one or more occasions, redeem up to a maximum of 35% of the original aggregate principal amount of the 11 1/8% Senior Secured Notes due 2009 with the net cash proceeds of one or more equity offerings by us at a redemption price equal to 111.125% of the principal amount thereof, plus accrued and unpaid interest. Otherwise, we may not redeem the 11 1/8% Senior Secured Notes due 2009 prior to June 1, 2007. On or after that date, we may redeem some or all of the 11 1/8% Senior Secured Notes due 2009 at the following redemption prices (expressed as a percentage of principal amount), plus accrued and unpaid interest: 105.563% if redeemed prior to June 1, 2008; 102.781% if redeemed prior to June 1, 2009; and 100% if redeemed on or after June 1, 2009. 13% SENIOR SUBORDINATED NOTES DUE 2010 The 13% Senior Subordinated Notes due 2010 are subordinated to all of our existing and future senior debt, rank equally with any future senior subordinated debt, and rank senior to any future subordinated debt. The 13% Senior Subordinated Notes due 2010 are guaranteed by some of our subsidiaries. The 13% Senior Subordinated Notes due 2010 are unsecured. PREFERRED STOCK We have approximately $232.9 million of Series A Cumulative Exchangeable Redeemable Preferred Stock outstanding. The Series A preferred stock accrues dividends at the rate of 14% per annum; however, our board of directors has never declared or paid any dividends on the Series A preferred stock. Unpaid dividends accumulate and are added to the liquidation amount of the Series A preferred stock. After May 31, 2005 the annual dividend rate increases to 16% unless we pay dividends in cash. The dividend rate also increases to 16% if we fail to comply with certain of our obligations or upon certain events of bankruptcy. The Series A preferred stock is mandatorily redeemable on May 31, 2011. In addition, we have $0.1 million of Series B Redeemable Preferred Stock outstanding. During 2004, we adopted a 2004 Restricted Stock Incentive Plan, pursuant to which we sold to our President and Chief Executive Officer and selected additional officers of the Company, all 720 shares of a newly-created, non-voting Series B Redeemable Preferred Stock (the "Series B Preferred Stock") for a cash purchase price of $162 per share. These shares of Series B Preferred Stock were issued in private transactions with officers of the Company and therefore were exempt from the registration requirements of the Securities Act of 1933. On February 14, 2005, the remaining 48 authorized shares of Series B Preferred Stock were repurchased from an officer for $162 per share. NET CASH PROVIDED BY/USED IN OPERATING ACTIVITIES Net cash used in operating activities was $7.4 million for the three months ended March 31, 2005, a decrease of $7.8 million, compared to net cash provided by operating activities of $0.4 million for the same period in 2004. This increase was due primarily to reductions in working capital items of $5.8 million. NET CASH USED IN INVESTING ACTIVITIES Net cash used in investing activities increased $5.5 million to $8.6 million for the three months ended March 31, 2005, from $3.1 million for the three months ended March 31, 2004 primarily due to an increase in capital expenditures of $5.9 million. NET CASH PROVIDED BY/USED IN FINANCING ACTIVITIES Net cash provided by financing activities was $16.2 million for the three months ended March 31, 2005, compared to net cash provided by financing activities of $4.9 million for the three months ended March 31, 2004. The activity for the first three months of 2005 include borrowings under the revolving credit facility of $17.4 million, offset by payments of $0.1 million in financing fees and $1.1 million repayments of capital lease and insurance financing. The activity for the first three months of 2004 includes the net proceeds from the issuance of senior secured discount notes of $225.3 million net of financing fees paid of $8.7 million, the repayment of the old credit facilities of $ 219.6 million and repayment of capital leases and insurance financing of $0.5 million. 29 Liquidity As of March 31, 2005, we had $90.1 million of working capital, excluding current maturities of long term debt. As of March 31, 2005, we had $49.7 million available for borrowings under our revolving credit facility, with $41.4 million of outstanding borrowings under this agreement and approximately $6.7 million of letters of credit issued under our revolving credit facility. Daily borrowings outstanding under the revolving credit facility averaged $32.6 million during the first quarter. Our outstanding borrowings under our revolving credit facility fluctuate significantly during each quarter as a result of the timing of payments for raw materials, capital and interest, as well as the timing of customer collections. As of March 31, 2005, we had approximately $4.1 million in cash and cash equivalents. A portion of this amount was held by our foreign subsidiaries. Repatriation tax rates may limit our ability to access cash and cash equivalents generated by our foreign operations for use in our U.S. operations, including to pay principal and interest on outstanding borrowings. We expect that our total capital expenditures will be approximately $35 million in each of 2005 and 2006. These expenditures will consist primarily of ongoing capital expenditures for operating improvements and limited capacity additions. Our revolving credit facility and the indentures relating to our outstanding notes impose certain restrictions on us, including restrictions on our ability to incur indebtedness, pay dividends, make investments, grant liens, sell our assets and engage in certain other activities. In an attempt to manage our liquidity needs, we and our affiliates are analyzing and formulating potential strategic alternatives to reduce our leverage. In this regard, we or our affiliates may repurchase all or a portion of our Notes, through an exchange offer, a tender offer or open-market or privately-negotiated purchases, or through a combination of any of these or other alternatives. The funds for any such repurchases may be raised by selling additional equity, seeking additional capital contributions from our existing equity holders or by other means. There can be no assurance that any plan to reduce our indebtedness, if commenced, would be successfully completed. Based on our current level of operations, we believe that cash flow from operations and available cash, together with available borrowings under our revolving credit facility, will be adequate to meet liquidity needs and fund planned capital expenditures for the next 12 months. However, our ability to borrow under our revolving credit facility at any time will be subject to the borrowing base in effect at that time (which will vary depending upon the value of our accounts receivable and inventory). Our ability to make borrowings under our revolving credit facility will also be conditioned upon our compliance with other covenants in our revolving credit agreement, including financial covenants that apply when our borrowings exceed certain amounts. In addition, the terms of our indentures currently limit the amount we may borrow under our revolving credit facility. Changes in raw material costs can significantly affect the amount of cash provided by our operating activities, which can affect our liquidity. Over the past year, we have experienced a period of extreme uncertainty with respect to resin supplies and prices. High crude oil and natural gas pricing have had a significant impact on the price and supply of resins. During the same period, many major suppliers of resin have announced price increases to cover their increases in feedstock costs. While the prices of our products generally fluctuate with the prices of resins, certain of our customers have contracts that limit our ability to pass the full cost of higher resin pricing through to our customers immediately. Further, competitive conditions in our industry may make it difficult for us to sufficiently increase our selling prices for all customers to reflect the full impact of increases in raw material costs. If this period of high resin pricing continues, we may be unable to pass on the entire effect of the price increases to our customers, which would adversely affect our profitability and working capital. In addition, further increases in crude oil and natural gas prices could make it difficult for us to obtain an adequate supply of resin from manufacturers affected by these factors. If (a) we are not able to increase prices to cover historical and future raw materials cost increases, (b) we are unable to obtain adequate supply of resin, (c) volume growth does not continue as expected, or (d) we experience any significant negative effects to our business, we may not have sufficient available cash and borrowing capacity in the near term to operate our business, make expected capital expenditures or meet foreseeable liquidity requirements. In that event, we would have to seek modifications to our credit agreements, raise other debt or equity capital, sell assets, or take other steps to create additional working capital. There is no assurance, however, that these efforts would be successful and, if they were not, these working capital limitations could constrain the scope of our business operations and have a significant negative effect on our business and results of operations. Further, we may need to refinance all or a portion of the principal amount of our long-term debt and/or revolving credit facility borrowings, on or prior to maturity, to meet liquidity needs in later years. If it is determined that refinancing is necessary, and we are unable to secure such financing on acceptable terms, we may have insufficient liquidity to carry on our operations and meet our obligations at such time. CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION Certain information set forth in this report contains "forward-looking statements" within the meaning of federal securities laws. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends, and other information that is not historical information. When used in this report, the words "estimates," "expects," "anticipates," "forecasts," "plans," "intends," "believes" and variations of such words or similar expressions are intended to identify forward-looking statements. We may also make additional forward-looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, by us or on our behalf, are also expressly qualified by these cautionary statements. All forward-looking statements, including, without limitation, management's examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. But, there can be no assurance that management's expectations, beliefs and projections will result or be achieved. All forward-looking statements apply only as of the date made. We undertake no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in or contemplated by this report. These risks include, but are not limited to: general economic and business conditions, particularly an economic downturn; industry trends; increases in our leverage; interest rate increases; changes in our ownership structure; raw material costs and availability, particularly resin; competition; the loss of any of our significant customers; changes in the demand for our products; new technologies; changes in distribution channels or competitive conditions in the markets or countries in which we operate; costs of integrating any future acquisitions; loss of our intellectual property rights; operational difficulties at any of our plants; foreign currency fluctuations and devaluations and political instability in our foreign markets; changes in our business strategy or development plans; availability, terms and deployment of capital; availability of qualified personnel; and increases in the cost of compliance with laws and regulations, including environmental laws and regulations. Each of these risks and certain other uncertainties are discussed in more detail in the 2004 Form 10-K and in our Registration Statement on Form S-4 (file no. 333-114608), as amended, filed with the Securities and Exchange Commission on April 20, 2004. There may be other factors, including those discussed elsewhere in this report that may cause our actual results to differ materially from the forward-looking statements. Any forward-looking statements should be considered in light of these factors. 30 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to resin price risks that arise in the normal course of business. Significant increases in the price of resins could adversely affect our operating margins, results of operations and ability to service our indebtedness. We may be limited in our ability to pass increases in resin price on to certain of our customers due to provisions in our contracts with those customers. Since the repayment of $219.6 million of variable rate term debt with the proceeds of our Senior Secured Discount Notes and borrowings under our new revolving credit facility on February 17, 2004 our interest rate risk has decreased substantially. Our revolving credit facility is at a variable rate of interest. An increase of 1% in interest rates would result in an additional $100,000 of annual interest expense for each $10.0 million in borrowings under our revolving credit facility. We will thus continue to be exposed to interest rate risk to the extent of our borrowings under the revolving credit facility. ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. This information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, including our principal executive officer and our principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in alerting them on a timely basis to material information required to be disclosed in our periodic filings. CHANGES IN INTERNAL CONTROLS There were no significant changes in our internal controls during the quarter or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in the foregoing paragraph. 31 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS (a) The following exhibits are filed with this report. 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32 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/ Harold Bevis ----------------------------------------------- HAROLD BEVIS Chief Financial Officer (Authorized Signatory and Principal Financial and Accounting Officer) Date: May 10, 2005 33 INDEX TO EXHIBITS EXHIBITS ------------- 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 34