10-Q 1 h93152ae10-q.txt PIONEER CORPORATION OF AMERICA - SEPTEMBER 30 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER 33-98828 PIONEER CORPORATION OF AMERICA (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 06-1420850 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 700 LOUISIANA STREET, SUITE 4300, HOUSTON, TEXAS 77002 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (713) 570-3200 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) 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 [ ] On December 1, 2001, there were outstanding 1,000 shares of the Registrant's Common Stock, $.01 par value. All of such shares are owned by Pioneer Companies, Inc. PIONEER CORPORATION OF AMERICA TABLE OF CONTENTS
PART I--FINANCIAL INFORMATION Page ---- Item 1. Consolidated Financial Statements Consolidated Balance Sheets--September 30, 2001 and December 31, 2000 3 Consolidated Statements of Operations--Three Months Ended September 30, 2001 and 2000 and 4 Nine Months Ended September 30, 2001 and 2000 Consolidated Statements of Cash Flows--Nine Months Ended September 30, 2001 and 2000 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 PART II--OTHER INFORMATION Item 3. Defaults Upon Senior Securities 19 Item 6. Exhibits and Reports on Form 8-K 19
Statements regarding the Company's ability to complete its bankruptcy reorganization proceedings timely, the outcome of the reorganization plan, the Company's ability to sustain current operations during the of the reorganization including its ability to maintain normal relationships with customers, the ability of the Company to establish normal terms and conditions with suppliers and vendors, costs of the reorganization process, the adequacy of financing arrangements during the reorganization period, future market prices, operating results, future operating efficiencies, cost savings and other statements which are not historical facts contained in this Quarterly Report on Form 10-Q are "forward looking statements" within the meaning of the Securities Litigation Reform Act. The words "expect", "project", "estimate", "believe", "anticipate", "plan", "intend", "could", "should", "may", "predict" and similar expressions are also intended to identify forward looking statements. Such statements involve risks, uncertainties and assumptions, including, without limitation, the results of the bankruptcy proceedings, court decisions and actions, the negotiating positions of various constituencies, the results of negotiations, market factors, the effect of economic conditions, the ability of the Company to realize planned cost savings and other factors detailed in this and other filings with the Securities and Exchange Commission. Should one of more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially. 2 PART I --FINANCIAL INFORMATION PIONEER CORPORATION OF AMERICA (DEBTOR-IN-POSSESSION) CONSOLIDATED BALANCE SHEETS (UNAUDITED, IN THOUSANDS OF DOLLARS)
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ ASSETS Current assets: Cash and cash equivalents $ 1,099 $ 5,000 Accounts receivable, net of allowance for doubtful accounts of $1,302 at September 30, 2001 and $1,392 at December 31, 2000 55,887 49,563 Inventories 22,728 25,067 Derivative asset (Note 2) 188,691 -- Prepaid expenses 2,435 2,302 --------- --------- Total current assets 270,840 81,932 Property, plant and equipment: Land 10,622 10,622 Buildings and improvements 61,540 61,334 Machinery and equipment 351,437 348,695 Construction in progress 20,362 15,137 --------- --------- 443,961 435,788 Less: accumulated depreciation (160,466) (135,404) --------- --------- 283,495 300,384 Due from affiliates 3,035 3,939 Derivative asset (Note 2) 116,742 -- Other assets, net of accumulated amortization of $6,700 at September 30, 2001 and $12,004 at December 31, 2000 7,264 27,216 Excess cost over fair value of net assets acquired, net of accumulated amortization of $46,523 at September 30, 2001 and $39,945 at December 31, 2000 172,981 179,560 --------- --------- Total assets $ 854,357 $ 593,031 ========= ========= LIABILITIES AND STOCKHOLDER'S DEFICIT Current liabilities: Accounts payable $ 12,020 $ 43,738 Accrued liabilities 7,324 43,847 Derivative liability (Note 2) 180,414 -- Current portion of long-term debt 2,251 Debtor-in-possession credit facility 11,780 586,252 --------- --------- Total current liabilities 213,789 673,837 Long-term debt, less current portion 3,742 4,086 Accrued pension and other employee benefits 14,892 14,984 Derivative liability (Note 2) 218,159 -- Other long-term liabilities 8,438 12,257 Liabilities subject to compromise under reorganization proceedings: Secured debt 366,183 Unsecured debt 177,716 Unsecured accounts payable and other liabilities 99,888 Commitments and contingencies Stockholder's deficit: Common stock, $.01 par value, 1,000 shares authorized, issued and outstanding 1 1 Additional paid-in capital 65,483 65,483 Retained deficit (313,858) (177,541) Accumulated other comprehensive income (76) (76) --------- --------- Total stockholder's equity deficit (248,450) (112,133) --------- --------- Total liabilities and stockholder's deficit $ 854,357 $ 593,031 ========= =========
See notes to consolidated financial statements. 3 PIONEER CORPORATION OF AMERICA (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ------------------------- 2001 2000 2001 2000 -------- -------- --------- --------- Revenues $ 78,701 $ 86,224 $ 254,736 $ 254,495 Cost of sales 65,287 83,029 217,744 228,690 -------- -------- --------- --------- Gross profit 13,414 3,195 36,992 25,805 Selling, general and administrative expenses 10,076 9,925 30,321 31,565 Change in fair value of derivatives 63,377 -- 93,140 -- Unusual items 2,368 (561) 9,220 225 -------- -------- --------- --------- Operating income (loss) (62,407) (6,169) (95,689) (5,985) Interest expense (Contractual interest expense: $13,858 and $43,736 for the three months and nine months ended September 30, 2001, respectively) (5,107) (14,579) (34,985) (40,607) Reorganization items (1,897) -- (1,897) -- Other income (expense), net 408 (17,158) 1,241 (13,218) -------- -------- --------- --------- Loss before taxes (69,003) (37,906) (131,330) (59,810) Income tax expense (benefit) 2,812 (14,496) 4,987 (21,543) -------- -------- --------- --------- Net loss $(71,815) $(23,410) $(136,317) $ (38,267) ======== ======== ========= ========= Net Loss per share - basic and diluted $(71,815) $(23,410) $(136,317) $ (38,267) Weighted average number of common shares outstanding: Basic and diluted 1 1 1 1
See notes to consolidated financial statements. 4 PIONEER CORPORATION OF AMERICA (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 2001 2000 --------- -------- Operating activities: Net loss $(136,317) $(38,267) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization 35,521 37,454 Net change in deferred taxes 4,803 (21,449) Change in fair value of derivatives 93,140 -- Gain on disposal of assets (60) 14,859 Foreign exchange (gain) loss (663) 768 Net effect of changes in operating assets and liabilities 24,698 13,936 --------- -------- Net cash flows from operating activities 21,122 7,301 --------- -------- Investing activities: Capital expenditures (8,293) (12,746) Proceeds received from disposals of assets 119 4,825 --------- -------- Net cash flows from investing activities (8,174) (7,921) --------- -------- Financing activities: Debtor-in-possession credit facility, net 11,780 -- Pre-petition revolving credit borrowings, net (27,581) 4,997 Payments on long-term debt (514) (1,855) --------- -------- Net cash flows from financing activities (16,315) 3,142 --------- -------- Effect of exchange rate on cash (534) (1,570) --------- -------- Net change in cash and cash equivalents (3,901) 952 Cash and cash equivalents at beginning of period 5,000 2,903 --------- -------- Cash and cash equivalents at end of period $ 1,099 $ 3,855 ========= ========
See notes to consolidated financial statements. 5 PIONEER CORPORATION OF AMERICA (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ACCOUNTING POLICIES BASIS OF PRESENTATION AND MANAGEMENT PLANS The consolidated balance sheet at September 30, 2001 and the consolidated statements of operations and cash flows for the periods presented are unaudited and reflect all adjustments, consisting of normal recurring items, which management considers necessary for a fair presentation. Operating results for the first nine months of 2001 are not necessarily indicative of results to be expected for the year ending December 31, 2001. The consolidated financial statements include the accounts of Pioneer Corporation of America ("Pioneer") and its consolidated subsidiaries (collectively referred to as the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. Pioneer is a wholly-owned subsidiary of Pioneer Companies, Inc. ("PCI"). All dollar amounts in the tabulations in the notes to the consolidated financial statements are stated in thousands of dollars unless otherwise indicated. Certain amounts have been reclassified in prior years to conform to the current year presentation. The consolidated balance sheet at December 31, 2000 is derived from the December 31, 2000 audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America ("GAAP"), since certain information and disclosures normally included in the notes to the financial statements have been condensed or omitted as permitted by the rules and regulations of the Securities and Exchange Commission. The accompanying unaudited financial statements should be read in conjunction with the financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 2000. On July 31, 2001, PCI and each of its direct and indirect wholly-owned subsidiaries filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code") in Houston, Texas. On the same day, a parallel filing under the Canadian Companies' Creditors Arrangements Act was filed in Superior Court in Montreal, Canada, by Pioneer's Canadian subsidiary, PCI Chemicals Canada Inc. The Company is managing its business as a debtor-in-possession pursuant to the Bankruptcy Code. Certain terms of the Company's proposed plan of reorganization, as amended (the "Proposed Plan"), were pre-negotiated between PCI and certain of its senior secured creditors. The Proposed Plan was confirmed by the United States Bankruptcy Court, Southern District of Texas, Houston Division on November 28, 2001. The reorganization proceedings are expected to be completed within Pioneer's fiscal year ending December 31, 2001. The Proposed Plan provides that, upon emergence, approximately $552 million of outstanding indebtedness (plus accrued interest) will be exchanged for $200 million of new debt and 97% of the common stock of the reorganized company. Unsecured creditors will hold the remaining 3% of the common stock of the reorganized company. All of PCI's current outstanding common stock and preferred stock will be cancelled, and the holders of those shares will not share in the value of the reorganized company. The Company has applied the accounting principles provided for in the American Institute of Certified Public Accountants' Statement of Position 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7") for the period since July 31, 2001. Accordingly, pre-petition liabilities subject to compromise have been segregated in the accompanying consolidated balance sheet, unamortized debt issuance costs related to debt that is subject to compromise have been reclassified against the related debt balances, and reorganization costs have been excluded from operating income. Contractual interest amounting to $8.8 million has not been recorded in the accompanying financial statements as it is not expected to be paid. Pursuant to the provisions of the Bankruptcy Code, all actions to collect upon any of the Company's liabilities as of the petition date or to enforce pre-petition contractual obligations were automatically stayed. Absent approval from the Bankruptcy Court, the Company is prohibited from paying pre-petition obligations. The Bankruptcy Court has approved payment of certain pre-petition obligations such as employee wages and benefits, taxes, customer claims and rebates, and amounts owed certain critical vendors. Additionally, the Bankruptcy Court has approved the retention of various legal, financial and other professionals. As a debtor-in-possession, the Company has the right, subject to Bankruptcy Court approval and certain other conditions, to assume or reject pre-petition executory contracts and unexpired leases. 6 The accompanying unaudited consolidated financial statements have been prepared on the going-concern basis of accounting, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business. As a result of the Chapter 11 filing, such realization of assets and satisfaction of liabilities is subject to uncertainty. Further, implementation of the Proposed Plan will materially change the amounts reported in the consolidated financial statements. These financial statements do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that will be necessary as a consequence of implementing the Proposed Plan. The ability of the Company to continue as a going concern is dependent upon, among other things, emergence from bankruptcy, the ability to generate sufficient cash from operations and financing sources to meet obligations and ultimately, its return to future profitable operations. Additionally, the accompanying unaudited condensed consolidated financial statements do not include any adjustments that would be required were the Company were to be liquidated. Prior to filing for bankruptcy protection, the Company delayed making payments on various debt obligations due to insufficient liquidity. As a result, the Company was not in compliance with the terms of certain of its debt agreements. The Company entered into a debtor-in-possession financing agreement (the "DIP Facility") which, as approved by the Bankruptcy Court in August 2001, provides for up to $50 million of revolving borrowings as a source of liquidity during the reorganization. Availability under the DIP Facility was reduced by the remaining amounts outstanding under the pre-petition revolving credit facility. The DIP Facility matures on the earlier of September 24, 2002, or when a plan of reorganization becomes effective. The interest rates on borrowings under the DIP Facility are at 1 1/4% per annum in excess of the US prime rate as to US dollar loans and 2% per annum in excess of the Canadian prime rate as to Canadian dollar loans. The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts as well as certain disclosures. The Company's financial statements include amounts that are based on management's best estimates and judgements. Actual results could differ from those estimates. 2. DERIVATIVE INSTRUMENTS The Company adopted the accounting and reporting standards of Statement of Financial Accounting Standard 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS 137 and SFAS 138, and as interpreted by the Financial Accounting Standards Board's ("FASB") Derivatives Implementation Group ("DIG"), collectively hereafter referred to as "SFAS 133", as of January 1, 2001. This statement establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133 requires a company to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The change in the fair value of derivatives that are not hedges must be recognized currently as a gain or loss in the statement of operations. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is settled. Under hedge accounting, the ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Based upon the contracts in effect at January 1, 2001, the adoption of SFAS 133 had no effect on the consolidated financial statements at that date. The Colorado River Commission ("CRC") supplies power to the Company's Henderson facility pursuant to three basic contracts covering hydro-generated power, power requirements in excess of hydro-power, and power transmission and supply balancing services. CRC is a state agency established in 1940 to manage federal hydro-power contracts with utilities and other customers, including the Company's Henderson facility, in Southern Nevada. Since the low cost hydro-power supplied by CRC does not entirely meet Henderson's power demands and those of its other customers, CRC purchases supplemental power from various sources and resells it to the Company and other customers. Effective as of March 13, 2001, the Company and CRC entered into a supplemental electric power supply services contract (the "supplemental power contract") under which CRC was to provide any needed electric power including that which exceeded the power provided to the Company's Henderson facility from hydroelectric sources. CRC maintains that it has entered into various derivative positions, as defined by SFAS 133, under the supplemental power contract, including forward purchases and sales of electricity as well as options that have been purchased or written for electric power. The Company maintains that CRC has engaged in speculative trading that was not in accordance with the supplemental power contract, that CRC did not obtain proper approval for most of the trades in accordance with procedures agreed upon by the Company and CRC and that the trades entered into by CRC purportedly on the Company's behalf were excessive in relation to the Company's electric power requirements. 7 At September 30, 2001, the Company recorded a net unrealized loss of $93.1 million for various derivative positions executed by CRC purportedly for the benefit of the Company under the supplemental power contract. Of the net liability, $30.7 million is attributed to five forward purchase contracts and three option contracts executed by CRC and approved by the Company in accordance with procedures agreed upon by the Company and CRC. In September 2001, CRC presented to the Company a confirmation (the "global confirmation") that included numerous trades allegedly made on behalf of the Company by CRC under the supplemental power contract. Although a representative of the Company signed the global confirmation, the Company is currently disputing that these derivative positions are its responsibility. The Company has recorded a net liability of $62.4 million associated with these derivative positions, because the ultimate outcome of its dispute with CRC cannot be predicted at this time. The Company intends to vigorously dispute the claim by CRC that these contracts are the Company's responsibility. CRC has also allocated derivative positions to the Company that were not approved, either individually or collectively, by the Company. The net unrealized loss for these unapproved positions exceeded $30 million at September 30, 2001. The Company believes that CRC has no legal basis for its allocation of these derivative positions to the Company. The Company intends to vigorously dispute CRC's claims and believes that it will ultimately be successful in its assertion that these derivative positions are not its responsibility. Accordingly, the Company has not recorded these derivative positions in its consolidated financial statements as of September 30, 2001. The derivative positions include many types of contracts with varying strike prices and maturity dates (extending through 2006). The fair value of the derivative positions was determined by the Company using available market information and appropriate valuation methodologies. Considerable judgement, however, is necessary to interpret market data and develop the related estimates of fair value. Accordingly, the estimates for the fair value of the derivative positions are not necessarily indicative of the amounts that could currently be realized upon disposition of the derivative positions or the ultimate amount that would be paid or received when the positions are settled. The use of different market assumptions and/or estimation methodologies would result in different fair values. The fair value of the instruments will vary over time based upon market circumstances. Management of the Company believes that the market information, methodologies and assumptions used to fair value the derivative positions produces a reasonable estimation of the fair value of its derivative positions at September 30, 2001. Notional amounts, presented in the table below, represent the total purchase or sale price of the units of the commodity covered by the derivative in financial trades. It does not represent the price at which the derivative instrument could be bought or sold, which the fair value process determines. The information in the tables below presents the electricity futures and options positions outstanding as of September 30, 2001 ($ in thousands, except per mwh amounts, and volumes in megawatt hours ("mwh")), whether approved or disputed.
APPROVED DISPUTED* ------------- ------------- Electricity Futures Contracts: Contract volume (mwh) 1,097,338 23,525,100 Range of expirations (years) .25 to 5.00 .25 to 5.00 Weighted average years until expiration 4.01 2.73 Weighted average contract price (per mwh) $ 48.99 $ 61.59 Notional amount $ 53,759 $ 1,448,951 Weighted average fair value (per mwh) $ 29.74 $ 58.15 Unrealized gain(loss) $ (21,128) $ (81,030) Electricity Options Contracts: Notional amount $ 36,820 $ 395,971 Range of expirations (years) 0.25 to 5.00 0.25 to 5.00 Weighted average years until expiration 4.21 2.84 Weighted average strike price $ 50.00 $ 64.60 Unrealized gain(loss) $ (9,577) $ 18,595
* Represents trades included in the global confirmation. 8 3. SUPPLEMENTAL CASH FLOW INFORMATION Net effects of changes in operating assets and liabilities are as follows:
NINE MONTHS ENDED SEPTEMBER 30, ------------------------ 2001 2000 -------- ------- Accounts receivable $ 6,882) $ 1,545 Due from affiliates 904 (1,584) Inventories 1,975 (2,344) Prepaid expenses (150) 1,402 Other assets (848) 6,266 Pre-petition accounts payable and other liabilities 10,370 8,651 Post-petition accounts payable and other liabilities 19,329 -- -------- ------- Net change in operating assets and liabilities $ 24,698 $13,936 ======== =======
Following are supplemental disclosures of cash flow information:
NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 2001 2000 -------- -------- Cash payments for: Interest $ 2,846 $ 33,196 Income taxes 210 11
Non-Cash financing activity: In accordance with SOP 90-7, $12.4 million of unamortized debt issuance costs related to compromised debt has been reclassified against the related debt balance in the Company's consolidated balance sheet. 4. INVENTORIES Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ Raw materials, supplies and parts $ 13,615 $ 14,329 Finished goods and work-in-process 9,302 9,391 Inventories under exchange agreements (189) 1,347 -------- -------- $ 22,728 $ 25,067 ======== ========
5. COMMITMENTS AND CONTINGENCIES The Company and its operations are subject to extensive United States and Canadian federal, state, provincial and local laws, regulations, rules and ordinances relating to pollution, the protection of the environment and the release or disposal of regulated materials. The operation of any chemical manufacturing plant and the distribution of chemical products entail certain obligations under current environmental laws. Present or future laws may affect the Company's capital and operating costs relating to compliance, may impose cleanup requirements with respect to site contamination resulting from past, present or future spills and releases and may affect the markets for the Company's products. The Company believes that its operations are currently in general compliance with environmental laws and regulations, the violation of which could result in a material adverse effect on the Company's business, properties or results of operations on a consolidated basis. There can be no assurance, however, that material costs will not be incurred as a result of instances of noncompliance or new regulatory requirements. The Company relies on indemnification from the previous owners in connection with certain environmental liabilities at its chlor-alkali plants and other facilities. There can be no assurance, however, that such indemnification agreements will be adequate to protect the Company from environmental liabilities at these sites or that such third parties will perform their 9 obligations under the respective indemnification arrangements, in which case the Company would be required to incur significant expenses for environmental liabilities, which would have a material adverse effect on the Company. The Company is subject to various legal proceedings and potential claims arising in the ordinary course of its business. In the opinion of management, the Company has adequate legal defenses and/or insurance coverage with respect to these matters and management does not believe that they will materially affect the Company's operations or financial position. 6. PCI CHEMICALS CANADA INC. Pioneer is a holding company with no operating assets or operations. PCI Chemicals Canada Inc. ("PCI Canada"), a subsidiary of Pioneer, has outstanding $175.0 million of 9 1/4% Senior Secured Notes, due October 15, 2007. These notes are fully and unconditionally guaranteed on a joint and several basis by Pioneer and Pioneer's other direct and indirect wholly-owned subsidiaries. Together, PCI Canada and the subsidiary note guarantors comprise all of the direct and indirect subsidiaries of Pioneer. Summarized financial information of PCI Canada and the guarantors of these notes are as follows:
PCI NOTE INTERCOMPANY CONSOLIDATED CANADA GUARANTORS ELIMINATIONS COMPANY ------------ ---------- ------------ ------------ AS OF SEPTEMBER 30, 2001: Current assets $ 20,931 $ 249,909 $ -- $ 270,840 Non-current assets 201,981 447,555 (66,019) 583,517 Current liabilities 16,001 197,788 -- 213,789 Non-current liabilities 5,348 305,902 (66,019) 245,231 Liabilities subject to compromise 182,788 460,999 643,787 FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001: Revenues $ 35,288 $ 63,931 $(20,518) $ 78,701 Gross profit 9,316 4,098 -- 13,414 Net income (loss) 2,837 (74,652) -- (71,815) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001: Revenues $110,231 $ 208,567 $(64,062) $ 254,736 Gross profit 29,460 7,122 410 36,992 Net income (loss) 5,483 (142,210) 410 (136,317) AS OF DECEMBER 31, 2000: Current assets $ 21,976 $ 59,956 $ -- $ 81,932 Non-current assets 196,832 355,615 (41,348) 511,099 Current liabilities 217,136 456,701 -- 673,837 Non-current liabilities 4,932 67,743 (41,348) 31,327 FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000: Revenues $ 35,194 $ 69,904 $(18,874) $ 86,224 Gross profit (loss) 6,077 (2,744) (138) 3,195 Net loss (259) (23,013) (138) (23,410) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000: Revenues $ 98,502 $ 207,334 $(51,341) $ 254,495 Gross profit 15,440 10,728 (363) 25,805 Net loss (3,739) (34,165) (363) (38,267)
Separate financial statements of PCI Canada and the guarantors of the PCI Canada notes are not included as management believes that separate financial statements of these entities are not material to investors. 10 7. UNUSUAL ITEMS In March 2001, the Company announced a fifty percent curtailment in the capacity of its Tacoma plant due to an inability to obtain sufficient power at reasonable prices. The Tacoma curtailment resulted in the termination of 55 employees, for which $1.9 million of accrued severance expense was recorded prior to March 31, 2001. Additionally, in connection with an organizational restructuring undertaken by Pioneer, $1.6 million of severance expense was accrued prior to March 31, 2001 relating to terminations of 19 employees at other locations, all whom were terminated prior to June 30, 2001. Severance payments of approximately $1.6 million were made during the nine months ended September 30, 2001, resulting in accrued severance of $1.9 million at September 30, 2001. The $2.4 million of unusual items recorded during the quarter ended September 30, 2001, and $5.7 million of the $9.2 million of unusual items recorded during the nine-months ended September 30, 2001 are primarily comprised of professional fees related to the Company's financial reorganization incurred prior to the Chapter 11 filing on July 31, 2001. 8. LONG-TERM DEBT Long-term debt (pre-petition amounts shown are net of unamortized debt issue costs) consisted of the following:
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ Debtor-in-possession credit facility, variable interest rates based on U.S. prime rate plus 1 1/4% and Canadian prime rate plus 2%.... $ 11,780 $ -- Revolving credit facility; variable interest rates based on U.S. prime rate plus 1/2% and Canadian prime rate plus 1 1/4%.......... -- $ 27,581 9 1/4% Senior Secured Notes, due June 15, 2007....................... 195,950 200,000 9 1/4% Senior Secured Notes, due October 15, 2007.................... 170,233 175,000 June 1997 term facility, due in quarterly installments of $250 with the balance due 2006; variable interest rate based on LIBOR plus 250 basis points or base rate plus 125 basis points.......... 95,013 96,750 November 1997 term facility, due in quarterly installments of $250 with the balance due 2006; variable interest rate based on LIBOR plus 287.5 basis points or base rate plus 162.5 basis points...... 78,203 80,000 Other notes, maturing in various years through 2014, with various installments, at various interest rates........................... 10,493 11,007 ---------- ---------- Total...................................................... 561,672 590,338 Long-term debt subject to compromise................................. (543,899) -- Current portion of long-term debt.................................... (14,031) (586,252) ----------- ---------- Long-term debt, less current portion....................... $ 3,742 $ 4,086 ========== ==========
See Note 1 for discussion of the filings by PCI and its subsidiaries for protection under Chapter 11 of the U.S. Bankruptcy Code and the filing by Pioneer's Canadian subsidiary under the Canadian Companies' Creditors Arrangements Act in Superior Court in Montreal. Effective December 15, 2000, the Company suspended payments of interest on the $200 million of Senior Secured Notes which, after a 30 day grace period, created a default under the indenture. Additionally, the Company did not make principal payments under its June 1997 term facility and the November 1997 term facility that were due on December 28, 2000, which created an event of default under the terms of the facilities. Accordingly, the default interest rate, which is the non-default rate plus 2%, is in effect for the term facilities. When the Company defaulted on the $200 million Senior Secured Notes, it constituted an event of default under the indenture for the $175 million Senior Secured Notes. In September 1999, the Company entered into a $50 million three-year revolving credit facility (the "Revolving Facility") that provided for revolving loans in an aggregate amount up to $50 million, subject to borrowing base limitations related to the level of accounts receivable and inventory, which, together with certain other collateral, secured borrowings under the facility. Effective July 31, 2001, the Company entered into a Ratification and Amendment Agreement that converted the Revolving Facility into the DIP Facility. The DIP Facility continues to provide for revolving loans in an aggregate amount of up to $50 million, subject to borrowing base limitations related to the level of accounts receivable and inventory, which, together with certain other collateral, secure borrowings under the facility. The interest rates on borrowings under the DIP Facility are at 1 1/4% per annum in excess of the US prime rate as to US dollar loans and 2% per annum in excess of the 11 Canadian prime rate as to Canadian dollar loans. The reserve of $5 million under the Revolving Facility was replaced with a reserve of $1 million under the DIP Facility, which increased borrowing availability by $4 million. The borrowing base at September 31, 2001 was $46.9 million, subject to a reserve of $1 million. As of September 30, 2001, there were letters of credit outstanding of $4.5 million and loans outstanding of $11.8 million. The Company's long-term debt agreements contain various restrictions which, among other things, limit the ability of the Company to incur additional indebtedness and to acquire or dispose of assets or operations. The Company is restricted in paying dividends to PCI and providing cash to the unrestricted subsidiaries, as defined, to the sum of $5.0 million plus 50% of the cumulative consolidated net income of the Company since June 1997. As of September 30, 2001, no additional distributions were allowable under the debt covenants. The Company's ability to incur additional new indebtedness is restricted by a covenant requiring an interest coverage ratio of at least 2.0 to 1.0 for the prior four fiscal quarters. As of September 30, 2001, the Company did not meet this requirement and accordingly, additional new indebtedness, other than borrowing available under the DIP Facility, was not allowed. Additional new indebtedness was also restricted by the Bankruptcy Court. 9. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". The statements will change the accounting for business combinations and goodwill in two significant ways. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interest method will be prohibited. SFAS No. 142 requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. The statement also provides that goodwill should not be amortized, but must be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. Existing goodwill will continue to be amortized through the remainder of fiscal 2001 at which time amortization will cease and the Company will perform a transitional goodwill impairment test. SFAS No. 142 is effective for fiscal periods beginning after December 15, 2001. The Company is currently evaluating the impact of the new accounting standards on existing goodwill and other intangible assets. While the ultimate impact of the new accounting standards has yet to be determined, goodwill amortization expense for the nine months ended September 30, 2001 was $6.6 million. In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which is effective for fiscal years beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of SFAS No. 143 will not have a material impact on the Company's financial position, results of operations, or cash flows. In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long- Lived Assets", which is effective for fiscal years beginning after December 15, 2001. SFAS No. 144 addresses accounting and reporting for the impairment or disposal of a segment of a business. The adoption of SFAS No. 144 will not have a material impact on the Company's financial position, results of operations or cash flows. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the consolidated financial statements and the related notes thereto. LIQUIDITY AND CAPITAL RESOURCES On July 31, 2001, PCI and each of its direct and indirect wholly-owned subsidiaries filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code") in the U.S. Bankruptcy Court in Houston, Texas. On the same day, a parallel filing under the Canadian Companies' Creditors Arrangements Act was filed in Superior Court in Montreal, Canada, by Pioneer's Canadian subsidiary, PCI Chemicals Canada Inc. The Company is managing its business as a debtor-in-possession pursuant to the Bankruptcy Code. Certain terms of the Company's proposed plan of reorganization, as amended (the "Proposed Plan"), were pre-negotiated between the Company and certain of its senior secured creditors. The Proposed Plan was confirmed by the United States Bankruptcy Court, Southern District of Texas, Houston Division, on 12 November 28, 2001. The reorganization proceedings are expected to be completed within Pioneer's fiscal year ending December 31, 2001. The Proposed Plan provides that, upon emergence, approximately $552 million of outstanding indebtedness (plus accrued interest) will be exchanged for $200 million of new debt and 97% of the common stock of the reorganized company. Unsecured creditors will receive the remaining 3% of the common stock of the reorganized company. All of PCI's outstanding common stock and preferred stock will be cancelled, and the holders of those shares will not share in the value of the reorganized company. As of the petition date, actions to collect pre-petition indebtedness are stayed, and other contractual obligations may not be enforced against the Company. In addition, the Company may reject executory contracts and lease obligations, and parties affected by these rejections may file claims with the Bankruptcy Court in accordance with the reorganization process. Substantially all liabilities as of the petition date are subject to compromise under the Proposed Plan. The Company entered into a debtor-in-possession financing agreement (the "DIP Facility") which, as approved by the Bankruptcy Court in August 2001, provides for up to $50 million of revolving borrowings as a source of liquidity during the reorganization. Availability under the DIP Facility was reduced by the remaining amounts outstanding under the pre-petition revolving credit facility. The DIP Facility continues to provide for revolving loans in an aggregate amount of up to $50 million, subject to borrowing base limitations related to the level of accounts receivable and inventory, which, together with certain other collateral, secure borrowings under the facility. The terms of the DIP Facility provide the Company with $4 million more financing than was available under the previous revolving credit facility. The DIP Facility matures on the earlier of September 24, 2002, or when a plan of reorganization becomes effective. The interest rates on borrowings under the DIP Facility are at 1 1/4% per annum in excess of the US prime rate as to US dollar loans and 2% per annum in excess of the Canadian prime rate as to Canadian dollar loans. On November 30, 2001 unused available borrowing capacity under the DIP Facility was $25.6 million. The Company believes that the DIP Facility will provide adequate financing to meet the Company's working capital and operational needs during the reorganization. The sufficiency of the Company's liquidity and capital resources is dependent upon the Company's emerging from Chapter 11, the ability to comply with debtor-in-possession agreements, generating sufficient positive cash from operations and financing sources to meet obligations, and ultimately, its return to future profitable operations. Now that the Proposed Plan has been confirmed, The Company believes the Proposed Plan will be implemented in a timely manner. The Company's capital expenditures for fiscal 2001 are expected to approximate $15 million, primarily for environmental, safety and production replacement projects. Foreign Operations and Exchange Rate Fluctuations. The Company has operating activities in Canada and engages in export sales to various countries. International operations and exports to foreign markets are subject to a number of risks, including currency exchange rate fluctuations, trade barriers, exchange controls, political risks and risks of increases in duties, taxes and governmental royalties, as well as changes in laws and policies governing foreign-based companies. In addition, earnings of foreign subsidiaries and intracompany payments are subject to foreign taxation rules. A portion of the Company's sales and expenditures are denominated in Canadian dollars, and accordingly, the Company's results of operations and cash flows have been and may continue to be affected by fluctuations in the exchange rate between the United States dollar and the Canadian dollar. Currently, the Company is not engaged in forward foreign exchange contracts, but may enter into such hedging activities in the future. Net Cash Flows from Operating Activities. During the first nine months of 2001, the Company generated cash of $21.1 million from operating activities. The cash flow was primarily attributable to changes in working capital. Net Cash Flows from Investing Activities. Cash used in investing activities during the first nine months of 2001 totaled $8.2 million, which was primarily attributable to capital expenditures. Net Cash Flows from Financing Activities. Cash used in financing activities during the first nine months of 2001 totaled approximately $16.3 million due to net repayments on the Revolving Facility of $27.6 million offset by borrowings under the DIP Facility of $11.8 million. Working Capital. The Company's working capital was $57.1 million at September 30, 2001 compared to a deficiency of 13 $591.9 million at December 31, 2000. This $649.0 million increase in working capital was primarily due to the reclassification of liabilities subject to compromise in the Company's consolidated balance sheet. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 Revenues. Revenues decreased by $7.5 million, or approximately 9%, to $78.7 million for the three months ended September 30, 2001, as compared to the three months ended September 30, 2000. The decrease in revenues was primarily attributable to lower sales volumes, particularly at the Tacoma chlor-alkali facility, and the sale of the operations of Kemwater North America Company ("KNA") in 2000 which resulted in a $0.6 million decrease from 2000 to 2001. Additionally, The Company's average electrochemical unit ("ECU") price during the third quarter of 2001 decreased $11 from a year ago to $319. Cost of Sales. Cost of sales decreased $17.7 million, or approximately 21%, for the three months ended September 30, 2001, as compared to the same period in 2000. The decrease was primarily due to lower power costs, lower sales volumes and an $0.8 million decrease due to the KNA sale. Gross Profit. Gross profit margin increased to 17% in 2001 from 4% in 2000 primarily as a result of decreased power costs. Change in Fair Value of Derivatives. Effective as of March 13, 2001, the Company and CRC entered into a supplemental electric power supply services contract (the "supplemental power contract") under which CRC was to provide any needed electric power including that which exceeded the power provided to the Company's Henderson facility from hydroelectric sources. CRC maintains that it has entered into various derivative positions, as defined by SFAS 133, under the supplemental power contract, including forward purchases and sales of electricity as well as options that have been purchased or written for electric power. The Company maintains that CRC has engaged in speculative trading that was not in accordance with the supplemental power contract, that CRC did not obtain proper approval for most of the trades in accordance with procedures agreed upon by both parties and that the trades entered into by CRC purportedly on the Company's behalf were excessive in relation to the Company's electric power requirements. For the three months ended September 30, 2001, the change in fair value of the derivative positions was an unrealized loss of $63.4 million principally because market power rates decreased substantially. Of the $63.4 million, $62.4 million related to transactions included under the global confirmation that are being disputed by the Company. The remaining $1.0 million related to transactions approved by the Company. See discussion in Note 2 of the Consolidated Financial Statements. Unusual Items. Unusual items for the three months ended September 30, 2001 of $2.4 million were primarily comprised of professional fees related to the Company's reorganization, incurred prior to the Chapter 11 filings. Unusual items for the three months ended September 30, 2000 related to the KNA sale. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $0.2 million, or approximately 2%, for the three months ended September 30, 2001. This increase was primarily comprised of bad debt expense of $0.5 million, offset by a $0.3 million decrease due to the KNA sale. Interest Expense, Net. Interest expense, net decreased in 2001 as a result of contractual interest expense of $8.8 million on debt subject to compromise in the Chapter 11 proceedings not being recorded in accordance with SOP 90-7. Interest cost decreased $0.7 million for the three months ended September 30, 2001, primarily as a result of lower average debt outstanding under the revolving credit facility. Reorganization Items. Reorganization items for the three months ended September 30, 2001 were comprised of professional fees related to the Company's reorganization incurred subsequent to the Chapter 11 filings. Other Income (Expense), Net. Other income, net of $0.4 million for the quarter ended September 30, 2001 was primarily comprised of a foreign exchange gain. Other expense, net in 2000 of $17.2 represented a non-cash related party receivable write-down, in connection with an affiliate of the Company selling its coagulant business. 14 Income Tax Expense (Benefit). Income tax expense for the quarter ended September 30, 2001 was $2.8 million, reflecting foreign tax expense on the income of the Company's Canadian operations. Due to recurring losses of the Company's U.S. operations and uncertainty as to the effect of the Company's reorganization on the availability and use of its U.S. net operating loss carryforwards, a 100% valuation allowance amounting to $61.9 million was recorded in connection with the Company's U.S. deferred tax assets at December 31, 2000. During the quarter ended June 30, 2001 the Company recorded a valuation allowance in an amount equal to the benefit from income taxes generated by the losses from its U.S. operations. An income tax benefit of $14.5 million was recorded for the quarter ended September 30, 2000. Net Loss. Due to the factors described above, net loss for the three months ended September 30, 2001 was $71.8 million, compared to a net loss of $23.4 million for the same period in 2000. NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000 Revenues. Revenues for the nine months ended September 30, 2001 were $254.7, or $0.2 million greater than the comparable period in the prior year. The increase attributable to higher electrochemical unit ("ECU") prices was partially offset by lower sales volumes, particularly at the Tacoma chlor-alkali facility. The average ECU price during the nine months ended September 30, 2001 was $350, a $31 increase from a year ago. In addition, the sale of the operations of KNA in 2000 resulted in a $2.4 million decrease in revenues for the nine months ended September 30, 2001 as compared to the same period in 2000. Cost of Sales. Cost of sales decreased $10.9 million, or approximately 5%, for the nine months ended September 30, 2001, as compared to the same period in 2000. The decrease was primarily due to lower power costs, lower sales volumes and a $3.4 million decrease due to the KNA sale. Gross Profit. Gross profit margin increased to 15% in 2001 compared with 10% in 2000. Change in Fair Value of Derivatives. For the nine months ended September 30, 2001, the change in fair value of the derivative positions was a net unrealized loss of $93.1 million. Of the $93.1 million, $62.4 million related to transactions included under the global confirmation that are being disputed by the Company. The remaining $30.7 million related to transactions approved by the Company. See discussion in Note 2 of the Consolidated Financial Statements. Unusual Items. Unusual items for the nine months ended September 30, 2001 of $9.2 million were primarily comprised of severance expense and professional fees related to the Company's reorganization. Unusual items for the nine months ended September 31, 2000 were related to the KNA sale. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $1.2 million, or approximately 4%, for the nine months ended September 30, 2001. This decrease was comprised of a $1.0 million decrease due to the KNA sale, with the remainder primarily attributable to cost savings resulting from the organizational restructuring, offset somewhat by increases in bad debt expense. Interest Expense, Net. Interest expense, net decreased in 2001 as a result of contractual interest expense of $8.8 million on debt subject to compromise in the Chapter 11 proceedings not being recorded in accordance with SOP 90-7. Interest cost increased $3.2 million for the nine months ended September 30, 2001 as a result of higher interest rates and higher average borrowing levels. The interest rates related to the DIP Facility are greater than the rates that had been in effect under the previous revolving facility. Reorganization Items. Reorganization items for the nine months ended September 31, 2001 were comprised of professional fees related to the Company's reorganization incurred subsequent to the Chapter 11 filings. Other Income, Net. Other income for the nine months ended September 30, 2001 of $1.2 million was primarily comprised of a sales tax refund of $0.5 million, and a gain of $0.1 million on an asset sale, with the remainder attributable to foreign exchange gain. In 2000, other expense, net was comprised of a $17 million non-cash related party receivable write-down partially offset by a $3.3 million gain from the sale of certain excess property. Income Tax Expense (Benefit). Income tax expense for the nine months ended September 30, 2001 was $5.0 million, reflecting foreign tax expense on the income of the Company's Canadian operations. Due to recurring losses of the Company's U.S. operations and uncertainty as to the effect of the Company's restructuring on the availability and use of its 15 U.S. net operating loss carryforwards, a 100% valuation allowance amounting to $61.9 million was recorded in connection with the Company's U.S. deferred tax assets at December 31, 2000. During the nine months ended September 30, 2001 the Company recorded a valuation allowance in an amount equal to the benefit from income taxes generated by the losses from its U.S. operations. An income tax benefit of $21.5 million was recorded for the nine months ended September 30, 2000. Net Loss. Due to the factors described above, net loss for the nine months ended September 30, 2001 was $136.3 million, compared to a net loss of $38.3 million for the same period in 2000. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". The statements will change the accounting for business combinations and goodwill in two significant ways. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interest method will be prohibited. SFAS No. 142 requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. The statement also provides that goodwill should not be amortized, but must be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. Existing goodwill will continue to be amortized through the remainder of fiscal 2001 at which time amortization will cease and the Company will perform a transitional goodwill impairment test. SFAS No. 142 is effective for fiscal periods beginning after December 15, 2001. The Company is currently evaluating the impact of the new accounting standards on existing goodwill and other intangible assets. While the ultimate impact of the new accounting standards has yet to be determined, goodwill amortization expense for the nine months ended September 30, 2001 was $6.6 million. In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which is effective for fiscal years beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of SFAS No. 143 will not have a material impact on the Company's financial position, results of operations, or cash flows. In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long- Lived Assets", which is effective for fiscal years beginning after December 15, 2001. SFAS No. 144 addresses accounting and reporting for the impairment or disposal of a segment of a business. The adoption of SFAS No. 144 will not have a material impact on the Company's financial position, results of operations or cash flows. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company adopted the accounting and reporting standards of Statement of Financial Accounting Standard 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS 137 and SFAS 138, and as interpreted by the Financial Accounting Standards Board's ("FASB") Derivatives Implementation Group ("DIG"), collectively, hereafter referred to as "SFAS 133", as of January 1, 2001. This statement establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133 requires a company to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The change in the fair value of derivatives that are not hedges must be recognized currently as a gain or loss in the statement of operations. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is settled. Under hedge accounting, the ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Based upon the contracts in effect at January 1, 2001, the adoption of SFAS 133 had no effect on the consolidated financial statements at that date. The Colorado River Commission ("CRC") supplies power to the Company's Henderson facility pursuant to three basic contracts covering hydro-generated power, power requirements in excess of hydro-power, and power transmission and supply balancing services. CRC is a state agency established in 1940 to manage federal hydro-power contracts with utilities and other customers, including the Company's Henderson facility, in Southern Nevada. Since the low cost hydro-power supplied by CRC does not entirely meet Henderson's power demands and those of its other customers, CRC purchases supplemental power from various sources and resells it to the Company and other customers. 16 Effective as of March 13, 2001, the Company and CRC entered into a supplemental electric power supply services contract (the "supplemental power contract") under which CRC was to provide any needed electric power including that which exceeded the power provided to the Company's Henderson facility from hydroelectric sources. CRC maintains that it has entered into various derivative positions, as defined by SFAS 133, under the supplemental power contract, including forward purchases and sales of electricity as well as options that have been purchased or written for electric power. The Company maintains that CRC has engaged in speculative trading that was not in accordance with the supplemental power contract, that CRC did not obtain proper approval for most of the trades in accordance with procedures agreed upon by the Company and CRC and that the trades entered into by CRC purportedly on the Company's behalf were excessive in relation to the Company's electric power requirements. At September 30, 2001, the Company recorded a net unrealized loss of $93.1 million for various derivative positions executed by CRC purportedly for the benefit of the Company under the supplemental power contract. Of the net unrealized loss, $30.7 million is attributed to five forward purchase contracts and three option contracts executed by CRC and approved by the Company in accordance with procedures agreed upon by the Company and CRC. In September 2001, CRC presented to the Company a confirmation (the "global confirmation") that included numerous trades allegedly made on behalf of the Company by CRC under the supplemental power contract. Although a representative of the Company signed the global confirmation, the Company is currently disputing that these derivative positions are its responsibility. The Company has recorded a net liability of $62.4 million associated with these derivative positions, because the ultimate outcome of its dispute with CRC cannot be predicted at this time. The Company intends to vigorously dispute the claim by CRC that these contracts are the Company's responsibility. CRC has also allocated derivative positions to the Company that were not approved, either individually or collectively, by the Company. The net liability for these unapproved positions exceeded $30 million at September 30, 2001. The Company believes that CRC has no legal basis for its allocation of these derivative positions to the Company. The Company intends to vigorously dispute CRC's claims and believes that it will ultimately be successful in its assertion that these derivative positions are not its responsibility. Accordingly, the Company has not recorded these derivative positions in its consolidated financial statements as of September 30, 2001. The derivative positions include many types of contracts with varying strike prices and maturity dates (extending through 2006). The fair value of the derivative positions was determined by the Company using available market information and appropriate valuation methodologies. Considerable judgement, however, is necessary to interpret market data and develop the related estimates of fair value. Accordingly, the estimates for the fair value of the derivative positions are not necessarily indicative of the amounts that could currently be realized upon disposition of the derivative positions or the ultimate amount that would be paid or received when the positions are settled. The use of different market assumptions and/or estimation methodologies would result in different fair values. The fair value of the instruments will vary over time based upon market circumstances. Management of the Company believes that the market information, methodologies and assumptions used to fair value the derivative positions produces a reasonable estimation of the fair value of its derivative positions at September 30, 2001. 17 Notional amounts, presented in the following tables, represent the total purchase or sale price of the units of the commodity covered by the derivative in financial trades. It does not represent the price at which the derivative instrument could be bought or sold, which the fair value process determines. The information in the tables below presents the electricity futures and options positions outstanding as of September 30, 2001 ($ in thousands, except per mwh amounts, and volumes in megawatt hours ("mwh")), whether approved or disputed (see Note 2 to the Consolidated Financial Statements for amounts of "Approved" and "Disputed" derivative positions). Electricity Futures Contracts: Contract volume (mwh) 24,622,438 Range of expirations (years) .25 to 5.00 Weighted average years until expiration 2.79 Weighted average contract price (per mwh) $ 61.03 Notional amount $ 1,502,710 Weighted average fair value (per mwh) $ 56.88 Unrealized gain/(loss) $ (102,158) Electricity Option Contracts: Notional amount $ 432,791 Range of expirations (years) 0.25 to 5.00 Weighted average years until expiration 2.99 Weighted average strike price $ 63.04 Unrealized gain/(loss) $ 9,018
The information in the tables below presents the electricity futures and options positions outstanding as of September 30, 2001 allocated over the lives of the contracts ($ in thousands, except per mwh amounts, and volumes in megawatt hours ("mwh")), whether approved or disputed.
EXPECTED MATURITY ------------------------------------------------------------------------------ FOURTH QUARTER FISCAL FISCAL FISCAL FISCAL FISCAL 2001 2002 2003 2004 2005 2006 ------------------------------------------------------------------------------ Electricity Futures Contracts: Contract volume (mwh) 2,975,639 7,006,360 2,798,110 3,947,843 3,947,243 3,947,243 Weighted average contract price (per mwh) $ 68.51 $ 79.47 $ 56.39 $ 49.44 $ 49.35 $ 49.35 Notional amount $ 203,870 $ 556,786 $ 157,272 $ 195,176 $ 194,803 $ 194,803 Weighted average fair value (per mwh) $ 68.43 $ 80.43 $ 47.93 $ 41.45 $ 41.87 $ 43.15 Unrealized gain/(loss) $ (245) $ 6,768 $ (23,148) $ (31,527) $ (29,517) $ (24,489) Electricity Option Contracts Notional amount $ -- $ 163,643 $ 23,721 $ 81,809 $ 81,809 $ 81,809 Weighted average strike price $ -- $ 95.21 $ 51.04 $ 52.42 $ 52.42 $ 52.42 Unrealized gain/(loss) $ -- $ 3,772 $ (1,047) $ 2,080 $ 2,103 $ 2,110
Other than noted above, the Company's market risk disclosures set forth in PCI's Annual Report on Form 10-K for the year ended December 31, 2000 have not changed significantly through the nine months ended September 30, 2001. 18 PART II - OTHER INFORMATION ITEM 3. DEFAULTS UPON SENIOR SECURITIES Prior to the filing by Pioneer and its subsidiaries for protection under Chapter 11 of the U.S. Bankruptcy Code on July 31, 2001, and the concurrent filing by Pioneer's Canadian subsidiary under the Canadian Companies' Creditors Arrangements Act in Superior Court in Montreal, the Company had suspended payments of interest and principal under various debt agreements, which created an event of default under Pioneer's Senior Secured Notes, term loans, and certain other indebtedness. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K None 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 hereunto duly authorized. PIONEER CORPORATION OF AMERICA December 28, 2001 By: /s/ Philip J. Ablove ----------------------------- Philip J. Ablove Executive Vice President and Chief Financial Officer 19