<PAGE>
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, 1995
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 1-9859
PIONEER COMPANIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1215192
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4200 NATIONSBANK CENTER, 700 LOUISIANA STREET, HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(713) 225-3831
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
165 MASON STREET, GREENWICH, CT 06830
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /x/ No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of Common Shares outstanding at November 13, 1995: 7,883,593 of Class A
and 655,199 of Class B, both reflecting the one-for-four reverse stock split
effective April 27, 1995. Exhibit index located at sequential page No. 29.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I--FINANCIAL INFORMATION
Page
----
<S> <C> <C>
Item 1. Consolidated Financial Statements
/x/ Consolidated Balance Sheets -- September 30, 1995, December 31, 1994 and Predecessor
Company December 31, 1994 3
/x/ Consolidated Statements of Operations -- Three Months Ended September 30, 1995 and 1994,
Nine Months Ended September 30, 1995 and 1994 and Predecessor Company Three Months Ended
September 30, 1994 and Nine Months Ended September 30, 1994. 5
/x/ Consolidated Statements of Cash Flows -- Nine Months Ended September 30, 1995 and 1994 and
Predecessor Company Nine Months Ended September 30, 1994 6
/x/ Notes to Consolidated Financial Statements 8
Item 2. Management's Discussions and Analysis of Financial Condition and Results of Operations 22
PART II--OTHER INFORMATION
Item 2. Changes in Securities 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
PIONEER COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
| PREDECESSOR
| COMPANY
SEPTEMBER 30, DECEMBER 31, | DECEMBER 31,
1995 1994 | 1994
-------------- ------------- | -------------
<S> <C> <C> | <C>
Assets |
Current assets: |
Cash and cash equivalents $ 8,541 $ 880 | $ 3,310
Accounts receivable, less allowance |
for doubtful accounts of $1,476 and |
$2,037 at September 30, 1995 and |
December 31, 1994 (Predecessor Company) 34,292 -- | 26,169
Inventories 13,291 -- | 12,237
Prepaid expenses 3,230 -- | 1,845
-------- ----- | ---------
Total current assets 59,354 880 | 43,561
Property, plant and equipment: |
Land 1,711 -- | 11,203
Buildings and improvements 13,486 -- | 13,890
Machinery and equipment 60,695 71 | 107,857
Cylinders and tanks 4,460 -- | 4,337
Construction in progress 10,653 -- | 3,392
-------- ----- | ---------
91,005 71 | 140,679
Less accumulated depreciation (5,415) (39) | (56,267)
-------- ----- | ---------
85,590 32 | 84,412
|
Investment in Basic Investments, Inc. ("BII") |
and Victory Valley Land Company, L.P. ("VVLC") -- -- | 17,317
Other assets, net of accumulated |
amortization of $663 and $11,302 at |
September 30, 1995 and December 31, 1994 |
(Predecessor Company) 11,770 -- | 9,197
Excess cost over fair value of net assets |
acquired, net of accumulated amortization |
of $2,096 and $2,722 at September 30, 1995 |
and December 31, 1994 (Predecessor Company) 110,255 -- | 10,044
-------- ----- | ---------
Total assets $266,969 $ 912 | $ 164,531
======== ===== | =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
PIONEER COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
| PREDECESSOR
| COMPANY
SEPTEMBER 30, DECEMBER 31, | DECEMBER 31,
1995 1994 | 1994
------------- ------------- | ------------
<S> <C> <C> | <C>
Liabilities and stockholders' equity |
Current liabilities: |
Accounts payable $ 17,838 $ 20 | $ 13,104
Accrued liabilities 28,059 130 | 16,548
Returnable deposits 3,193 -- | 3,423
Future tax effects -- -- | 2,781
Current maturities of long-term |
debt -- -- | 12,056
-------- ------- | --------
Total current liabilities 49,090 150 | 47,912
|
Bank Credit Facility -- -- | --
13-3/8% Mortgage Notes due 2005 135,000 -- | --
Seller Notes 11,463 -- | --
Long-term debt -- -- | 36,757
Returnable deposits 3,856 -- | 3,788
Accrued pension and other employee |
benefits 13,712 -- | 10,794
Future tax effects -- -- | 19,799
Other long-term liabilities 13,215 -- | 13,327
|
Commitments and contingencies |
|
Redeemable preferred stock -- -- | 6,227
Redeemable stock put warrants -- -- | 2,825
Stockholders' equity: |
Preferred stock: $.01 par value, |
authorized 10,000,000 shares, none issued |
Common stock: |
Class A, $.01 par value, authorized |
46,000,000 shares, issued and |
outstanding 7,883,593 at September |
30, 1995 and 3,768,499 at |
December 31, 1994 79 38 | --
Class B, $.01 par value, authorized |
4,000,000 shares, issued and |
outstanding 655,199 at |
September 30, 1995 and 769,354 at |
December 31, 1994, convertible |
share-for-share into Class A shares 7 8 | --
Common stock, $.01 par value, authorized |
3,000,000 shares, issued and outstanding |
1,509,343 at December 31, 1994 -- -- | 15
Additional paid-in capital 38,256 1,869 | 4,186
Retained earnings (deficit) 2,291 (1,153) | 18,901
-------- ------- | --------
Total stockholders' equity 40,633 762 | 23,102
-------- ------- | --------
Total liabilities and stockholders' |
equity $266,969 $ 912 | $164,531
======== ======= | ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
PIONEER COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
| PREDECESSOR PREDECESSOR
| COMPANY COMPANY
| THREE NINE
THREE MONTHS ENDED NINE MONTHS ENDED | MONTHS MONTHS
SEPTEMBER 30, SEPTEMBER 30, | ENDED ENDED
------------------- ------------------ | SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994 | 1994 1994
--------- -------- --------- ------- | ------------- -------------
<S> <C> <C> <C> <C> | <C> <C>
Revenues $59,248 $ -- $95,653 $ -- | $49,087 $122,442
|
|
Costs and expenses: |
Cost of sales 39,972 -- 64,873 -- | 37,565 100,976
Cost of sales-acquisition related |
inventory step-up -- -- 1,671 -- | -- --
Selling, general and administrative 8,446 109 14,187 227 | 6,410 16,225
Interest expense, net 4,923 ( 5) 8,735 (10) | 1,671 4,916
Other income, net 45 -- 394 -- | 4,489 4,173
------- ------ ------- ------ | ------- --------
Income (loss) before tax 5,952 (104) 6,581 (217) | 7,930 4,498
Income tax provision 2,509 -- 3,137 -- | 3,141 1,917
------- ------ ------- ------ | ------- --------
|
Net income (loss) $ 3,443 $ (104) $ 3,444 $ (217) | $ 4,789 $ 2,581
======= ====== ======= ====== | ======= ========
|
Net income (loss) per share $.40 $( .02) $.50 $(.05) |
======= ====== ======= ====== |
|
Weighted average number of shares |
of common stock outstanding 8,539 4,538 6,928 4,538 |
======= ====== ======= ====== |
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
PIONEER COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
| PREDECESSOR
| COMPANY
NINE MONTHS ENDED | NINE MONTHS
SEPTEMBER 30, | ENDED
------------------- | SEPTEMBER 30,
1995 1994 | 1994
---------- ------- | --------------
<S> <C> <C> | <C>
Operating activities: |
Net income (loss) $ 3,444 $ (217) | $ 2,581
Adjustments to reconcile net income |
(loss) to net cash provided by |
(used in) operating activities: |
Depreciation and amortization 8,090 4 | 10,449
Provision for bad debts 255 -- | 862
Gain on disposal of property, plant |
and equipment -- -- | ( 205)
Provision for SARS -- -- | 968
Equity in earnings of BII & VVLC -- -- | ( 122)
Future tax effects -- -- | ( 1,975)
Utilization of NOL 1,838 -- | --
Changes in operating assets and |
liabilities (net of acquisition): |
Accounts receivable (3,839) 75 | ( 7,403)
Income taxes receivable -- -- | 2,738
Inventories 1,254 -- | ( 291)
Prepaid expenses ( 865) -- | 726
Other assets (2,907) 25 | ( 216)
Accounts payable (3,395) -- | 3,846
Accrued liabilities 13,072 (149) | 3,600
Returnable deposits 97 -- | 457
Other long-term liabilities ( 26) -- | 19
Accrued pension and other employee |
benefits 616 -- | 946
--------- ------ | --------
Total adjustments 14,190 (45) | 14,399
--------- ------ | --------
Net cash provided by (used in) |
operating activities 17,634 (262) | 16,980
Investing activities: |
Purchase of Predecessor Company (154,948) -- | ( 238)
Capital expenditures ( 7,221) -- | ( 3,541)
Proceeds from sale of property, plant -- -- | 665
and equipment --------- ------ | --------
Net cash used in investing activities (162,169) -- | ( 3,114)
Financing activities: |
Payments on revolving credit facility (27,500) -- | --
Proceeds from borrowings on revolving |
credit facility 18,500 -- | --
Proceeds from borrowings on 13-3/8% | --
Mortgage Notes due 2005 135,000 -- |
Payments on long-term debt -- -- | (66,005)
Proceeds from borrowings on long-term |
debt -- -- | 58,200
Proceeds from issuance of common stock 21,037 1,102 | 169
--------- ------ | --------
Net cash provided by (used in) |
financing activities 147,037 1,102 | ( 7,636)
--------- ------ | --------
Net increase in cash 2,502 840 | 6,230
Cash at beginning of period 6,039 104 | 1,769
--------- ------ | --------
Cash at end of period $ 8,541 $ 944 | $ 7,999
========= ====== | ========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
PIONEER COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
| PREDECESSOR
| COMPANY
NINE MONTHS ENDED | NINE MONTHS
SEPTEMBER 30, | ENDED
------------------ | SEPTEMBER 30,
1995 1994 | 1994
----------- ----- | --------------
<S> <C> <C> | <C>
Supplemental disclosures of cash flow |
information: |
Cash paid during the period for: |
Interest $ 32 $ -- | $2,894
========= ====== | ======
Income taxes $ 1,051 $ -- | $ 518
========= ====== | ======
Supplemental schedule of non cash |
investing and financing activities: |
The allocation of the purchase |
price is summarized as follows: |
Fair value of assets acquired $ 270,596 |
Cash paid for acquisition (154,948) |
Seller Notes issued (11,452) |
NOL benefit recognized (13,600) |
--------- |
Liabilities assumed $ 90,596 |
========= |
In May 1994, the Predecessor |
Company purchased all of the issued |
and outstanding stock of GPS Pool |
Supply, Inc. for $3,492 |
summarized as follows: |
Fair value of assets acquired | $3,336
Goodwill | 156
Cash paid for capital stock | ( 238)
| ------
Note balance | $3,254
| ======
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
PIONEER COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated balance sheet at September 30, 1995 and consolidated
statements of operations and cash flows for all periods are unaudited and
reflect all adjustments, consisting of normal recurring items, which management
considers necessary for a fair presentation. All dollar amounts (except per
share data) in the tabulations in the notes to the financial statements are
stated in thousands of dollars unless otherwise indicated. Operating results
for the 1995 interim periods are not necessarily indicative of results to be
expected for the year ending December 31, 1995.
On April 20, 1995, the Company purchased Pioneer Americas, Inc. ("Pioneer" or
the "Predecessor Company") which, through its subsidiaries, manufactures
chlorine, caustic soda and related products used in a variety of applications
including water treatment, plastics, detergents and agricultural chemicals. From
January 1, 1994 until April 20, 1995 the Company, which had previously sold its
businesses, was actively seeking acquisitions and had no other operations. The
consolidated balance sheet of the Predecessor Company at December 31, 1994
represents the balance sheet included in the audited historical financial
information of the Predecessor Company that appeared in the Form 8-K and Form 8-
K/A of Pioneer Companies, Inc. ("PCI" or the "Company") dated April 20,1995
reporting its acquisition of all of the outstanding stock and other common
equity interests of the Predecessor Company.
The financial information for the periods presented for the Predecessor
Company has been prepared by the Company from the accounting records of the
Predecessor Company applying the same methodology and assumptions as were
applied in the preparation of the audited historical financial information of
the Predecessor Company that appeared in the Company's Form 8-K and Form 8-K/A
dated April 20, 1995. See such filings for full disclosure of the Predecessor
Company's financial position for the periods presented.
Share and per share information has been retroactively restated to reflect the
one-for-four reverse stock split of the Company's Class A and Class B Common
Stock, effective April 27, 1995. Income (loss) per common share is computed
using the weighted average number of Class A and Class B common shares
outstanding during the period.
Basis of Presentation Effective April 20, 1995
On March 31, 1995, the registrant's shareholders approved a change in name
from GEV Corporation to Pioneer Companies, Inc. This name change was effected
in conjunction with the following acquisition:
On April 20, 1995, pursuant to a Stock Purchase Agreement, dated as of March
24, 1995 (the "Acquisition Agreement"), by and among PCI, Pioneer Americas
Acquisition Corp., a newly-formed wholly-owned subsidiary of PCI ("PAAC"),
and the holders of the outstanding common stock and other common equity
interests (the "Sellers") of the Predecessor Company, PAAC acquired all of
such stock and interests (the "Acquisition") for a purchase price equal to the
sum of approximately (i) $102 million, paid in cash, (ii) $11.5 million
aggregate principal amount of subordinated promissory notes of PCI (the
"Seller Notes") and (iii) certain amounts payable pursuant to a Contingent
Payment Agreement among PCI, PAAC and the Sellers ("Contingent Payment
Agreement") after the closing based upon earnings or proceeds attributable to
certain of Pioneer's direct and indirect real estate holdings ("Contingent
Payment Properties") which are not necessary for Pioneer's business. In
addition, as further consideration for the Acquisition, PAAC paid
approximately $51.7 million to retire all outstanding indebtedness of the
Predecessor Company, $5.0 million to redeem the Predecessor Company's
outstanding preferred stock and $6.3 million of transaction costs for a total
purchase price of $176.5 million.
In connection with the consummation of the Acquisition, (i) PAAC issued and
sold $135 million aggregate principal amount of 13-3/8% Mortgage Notes (the
"Initial Offering" or "Mortgage Notes"), (ii) PCI issued the Seller
Notes in exchange for certain of the outstanding shares of Pioneer, which PCI
contributed to PAAC, (iii) the Company issued and sold to Interlaken
Investment Partners, L.P., a Delaware limited partnership (the "Interlaken
Partnership"), 2,840,909 shares of Class A Common Stock of PCI for an
aggregate purchase price of $15 million (the "Interlaken Partnership
Purchase"), the proceeds of which were contributed to PAAC, (iv) PCI issued
and sold to certain employees and directors of the Predecessor Company
(collectively, the "Management Investors"), 1,136,363 shares of Class A Common
Stock of PCI for an aggregate
8
<PAGE>
PIONEER COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. BASIS OF PRESENTATION--(Continued)
purchase price of $6 million (the "Management Purchase"), the proceeds of
which were contributed to PAAC, and (v) Pioneer and its subsidiaries entered
into a new bank revolving credit facility (the "Bank Credit Facility")
providing for borrowings of up to $30 million. The net proceeds of the Initial
Offering, the Interlaken Partnership Purchase, the Management Purchase and a
borrowing under the Bank Credit Facility were used to pay the cash portion of
the purchase price of the Acquisition, to retire the outstanding Predecessor
Company indebtedness, to redeem the Predecessor Company's outstanding
preferred stock and to pay certain transaction costs associated with the
Acquisition.
The Acquisition has been accounted for by the purchase method of accounting.
The excess of the purchase price over the estimated fair value of the net
assets acquired of approximately $112 million will be amortized on a straight
line basis over periods of up to 25 years. The purchase price allocation is
based on preliminary estimates of the fair value of the net assets acquired
and liabilities assumed and is subject to adjustment as additional information
becomes available. Such information relates principally to appraisals of
plant, property and equipment which management expects to obtain as soon as is
practical.
The following pro forma financial data presents the consolidated financial
results of operations as if the Acquisition, the Initial Offering, the
Interlaken Partnership Purchase, the Management Purchase and the borrowing under
the Bank Credit Facility had occurred at the beginning of the periods presented
and does not purport to be indicative of either future results of operations or
results that would have occurred had the Acquisition actually been made as of
such dates.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1995 1994
--------- ----------
<S> <C> <C>
Revenue $153,501 $122,442
Depreciation and amortization 13,628 13,027
Interest expense, net 14,421 14,137
Income (loss) before income taxes
and extraordinary items 13,340 (5,160)
Income (loss) before extraordinary
item 7,528 (5,160)
Extraordinary item, early
extinguishment of debt (net of
income tax benefit of $2,140) 3,420 --
Net income (loss) 4,108 (5,160)
Weighted average number of shares of
common stock outstanding 8,534 8,277
Per Share Data
Income (loss) before extraordinary
item $ .88 $ ( .62)
Extraordinary item ( .40) --
Net income (loss) per share .48 ( .62)
</TABLE>
The pro forma combined statements of operations reflect the inclusion of the
Predecessor Company's results of operations for the period from January 1, 1995
through April 20, 1995 and for the nine months ended September 30, 1994 as
applicable, adjusted for: depreciation and amortization on property, plant and
equipment valuation increases of $0.3 million and $0.6 million, excess cost over
fair value of net assets acquired and financing costs of $1.6 million and $3.8
million; interest expense on financing in connection with the Acquisition of
$5.8 million and $14.1 million; adjustment of the income tax provision of $2.1
million and $1.9 million; and elimination of historical interest expense of $1.7
million and $4.9 million, amortization of excess cost over fair value of net
assets acquired and amortization of organization costs of $1.2 million and
9
<PAGE>
PIONEER COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. BASIS OF PRESENTATION--(Continued)
$1.9 million and equity income from certain real estate investments of $0.2
million and $0.1 million. The results of operations for the nine months ended
September 30, 1995 include the effects of an increase to cost of sales due to a
step-up in value of inventory in connection with the Acquisition of $1.7 million
($.09 per share.) The September 30, 1994 pro forma information also reflects the
elimination of the expense related to special appreciation rights granted to a
subordinated debt holder of $1.0 million and contingent bank fees of $1.4
million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Periods prior to April 1, 1995 include the accounts of PCI (formerly GEV
Corporation). The 1995 financial statements for periods beginning April 1, 1995
include the accounts and operations of PCI since April 1, 1995 and its direct
and indirect wholly owned subsidiaries, PAAC and Pioneer, since April 20, 1995.
All intercompany accounts and transactions have been eliminated.
Inventories
Inventories are valued at the lower of cost or market. Finished goods and
work-in-process costs are calculated under the average cost method, which
includes appropriate elements of material, labor and manufacturing overhead
costs, while the first-in, first-out method is utilized for raw materials,
supplies and parts. The results of operations for the nine months ended
September 30, 1995 include the effects of an increase to cost of sales due to a
step-up in value of inventory in connection with the Acquisition of $1.7 million
($0.11 per share).
Property, Plant and Equipment
Depreciation for financial reporting purposes is computed under the straight-
line method over the estimated remaining useful lives of the assets.
Other Assets
Other assets include amounts for organization costs and deferred financing
costs which are being amortized on a straight-line basis over their estimated
useful lives. Deferred financing costs are being amortized on a straight-line
basis over the term of the related debt. Amortization expense for other assets
was approximately $0.4 million and $0.7 million for the three months and nine
months ended September 30, 1995.
Excess Cost Over the Fair Value of Net Assets Acquired
Excess cost over the fair value of net assets acquired of approximately $112
million is amortized on a straight-line basis over periods of up to 25 years.
The carrying value of excess cost over the fair value of net assets acquired is
reviewed quarterly and if this review indicates that such excess cost will not
be recoverable, as determined based on the undiscounted cash flows of the entity
acquired over the remaining amortization period, the Company's carrying value of
excess cost over the fair value of net assets acquired will be reduced by the
estimated shortfall of cash flows. Amortization expense for excess cost over the
fair value of net assets acquired was approximately $1.3 million and $2.1
million for the three months and nine months ended September 30, 1995.
10
<PAGE>
PIONEER COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)
Concentration of Credit Risk
The Company manufactures and sells chlorine and caustic-based products to
companies in diverse industries. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not require
collateral. Sales are primarily to customers in the western and southeastern
regions of the United States.
Environmental Expenditures
Environment-related restoration and remediation costs are recorded as
liabilities and expensed when site restoration and environmental remediation and
clean-up obligations are either known or considered probable and the related
costs can be reasonably estimated. Other environmental expenditures, principally
maintenance or preventative in nature, are recorded when expended and are
expensed or capitalized as appropriate.
Returnable Deposits
Customers are required to pay a security deposit on cylinders, tanks and
containers. These deposits are refunded to the customer upon the termination of
service and return of cylinders, tanks and containers.
Income Taxes
The Company and its subsidiaries file a consolidated tax return. The Company
has entered into a tax sharing agreement with PAAC whereby PAAC will make tax
sharing payments to PCI with respect to federal cash income taxes reflecting the
consolidated cash tax liability of PCI. State income taxes are included in
income taxes payable.
Future Tax Effects
Future tax effects are computed under the provisions of SFAS No. 109
("Accounting for Income Taxes") and result from temporary differences in the
recognition of expenses for financial reporting and tax purposes. Temporary
differences include differences in methods of computing depreciation for
financial statement and tax purposes and differences in the financial statement
basis and tax basis of assets and liabilities acquired.
Per Share Information
Income (loss) per common share is computed using the weighted average number
of Class A and Class B common shares outstanding during the period.
11
<PAGE>
PIONEER COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
<S> <C> <C>
(IN THOUSANDS)
Raw materials, supplies, and parts $10,204 $ 9,112
Finished goods and work-in-process 3,087 3,125
------- -------
$13,291 $12,237
======= =======
</TABLE>
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1995 1994 1994
------------- ------------ ------------
<S> <C> <C> <C>
(IN THOUSANDS)
Exchanges payable $ 3,535 $ -- $ 1,492
Payroll, benefits and pension 4,718 -- 4,299
Interest and bank fees 8,831 -- 2,454
Other accrued liabilities 10,975 130 8,303
------- ----- -------
$28,059 $ 130 $16,548
======= ===== =======
</TABLE>
Exchanges payable result from product exchange transactions which are
entered into between the Company and other producers that manufacture
homogeneous products, whereby other producers ship product on behalf of the
Company to its customers. These exchanges, which are recorded as payables,
generally are settled by the Company's shipment of product to such producers'
customers.
5. PENSION AND OTHER EMPLOYEE BENEFITS
Annual pension costs and liabilities for the Company under its two defined-
benefit plans are determined by actuaries using various methods and assumptions.
For purposes of determining annual expenses and funding contributions, the
following assumptions were used for the year ended December 31, 1994:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
------------
<S> <C>
Rate of return on plan assets 8.0%
Discount rate 7.5%
Annual compensation increase 5.0%
</TABLE>
12
<PAGE>
PIONEER COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. PENSION AND OTHER EMPLOYEE BENEFITS--(CONTINUED)
Pension expense for 1994 was comprised of:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
--------------
(IN THOUSANDS)
<S> <C>
Service cost $ 571
Interest cost 770
Return on plan assets (537)
Amortization of prior service cost
and other 225
------
$1,029
======
</TABLE>
The actuarial present value of accumulated benefit obligations is:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
DECEMBER 31,
1994
--------------------
(IN THOUSANDS)
<S> <C>
Vested $ 7,919
Nonvested 1,444
-------
$ 9,363
=======
</TABLE>
The reconciliation of the funded status of the plans is:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
DECEMBER 31,
1994
-------
(IN THOUSANDS)
<S> <C>
Projected benefit obligation $11,420
Plan assets at fair value 7,340
-------
Projected benefit obligation in
excess of plan assets 4,080
Unrecognized gain 592
Unrecognized prior service cost (17)
-------
Pension obligation $ 4,655
=======
</TABLE>
Approximately $0.1 million and $0.1 million were contributed to defined-
contribution savings plans for the three months and nine months ended September
30, 1995.
In addition to providing pension benefits, one of the Company's subsidiaries
provides certain health care and life insurance benefits for retired employees.
Substantially all of the subsidiary's employees may become eligible for those
benefits if they reach normal retirement age while working for the subsidiary.
13
<PAGE>
PIONEER COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. PENSION AND OTHER EMPLOYEE BENEFITS--(CONTINUED)
The following table presents the plan's funded status reconciled with amounts
recognized in the Company's balance sheet:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
DECEMBER 31,
1994
--------------------
(IN THOUSANDS)
Accumulated post-retirement benefit
obligation:
<S> <C>
Retirees $1,843
Fully eligible active plan
participants 2,103
Other active plan participants 3,758
------
7,704
Unrecognized net loss ( 828)
Unrecognized transition obligation ( 385)
------
Accrued post-retirement benefit cost $6,491
======
Net periodic post-retirement benefit
cost includes the following
components:
Service cost $ 324
Interest cost 519
Amortization of transition
obligation over 20 years 32
------
Net periodic post-retirement benefit
cost $ 875
======
</TABLE>
The weighted-average annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is 10.5% for 1995 and is
assumed to decrease gradually to 6% for 2010 and remain at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amounts reported. For example, increasing the assumed health care cost
trend rates by one percentage point in each year would increase the accumulated
post-retirement benefit obligation as of December 31, 1994 by $633,000 and the
aggregate of the service and interest cost components of the net periodic
post-retirement benefit cost for 1994 by $82,000.
The weighted-average discount rate used in determining the accumulated
post-retirement benefit obligation was 7.5% at December 31, 1994.
As a result of the Acquisition, the unrecognized net loss and unrecognized
transition obligation were recognized.
6. BANK CREDIT FACILITY
In April 1995, Pioneer entered into a credit agreement, which provides for a
three year Bank Credit Facility with Bank of America, Illinois ("BAI") due April
20, 1998. Pioneer may borrow up to $30.0 million, subject to certain borrowing
base limitations. At September 30, 1995, no amounts were outstanding under the
Bank Credit Facility. The revolving loans bear interest at a rate equal to, at
Pioneer's option, (i) the reference rate set by BAI or (ii) the LIBOR Base Rate.
The Bank Credit Facility requires Pioneer to pay a fee equal to one-half of one
percent per annum on the total unused balance. Indebtedness outstanding under
the Bank Credit Facility is collateralized by a security interest in all of
Pioneer's inventory, accounts receivable and certain other assets. Up to $6
million of the Borrowing Base, as defined in the Bank Credit Facility, can be
utilized for letters of credit. The Borrowing Base at September 30, 1995 was
approximately $30.0 million. After consideration of the outstanding letters of
credit of approximately $2.9 million, the unused availability of the Borrowing
Base was approximately $27.1 million at September 30, 1995.
14
<PAGE>
PIONEER COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. BANK CREDIT FACILITY--(CONTINUED)
The Bank Credit Facility contains restrictive covenants that, among other
things and under certain conditions, limit the ability of Pioneer to incur
additional indebtedness, to acquire or dispose of assets or operations and to
pay dividends or redeem shares of stock.
7. 13-3/8% MORTGAGE NOTES DUE 2005
In April 1995, PAAC issued and sold $135 million of Mortgage Notes. Interest
is payable on April 1 and October 1 of each year. The Mortgage Notes are senior
secured obligations of PAAC, ranking senior in right of payment to all
subordinated indebtedness of PAAC (including the Seller Notes) and pari passu in
right of payment with each other and with all existing and future senior
indebtedness, including indebtedness under the Bank Credit Facility. On
September 14, 1995, the obligations of PAAC under the Mortgage Notes were
secured with first mortgage liens on certain Pioneer manufacturing facilities.
PAAC has filed a Registration Statement with the Securities and Exchange
Commission pursuant to which it proposes to offer to exchange (the "Exchange
Offer") up to $135 million aggregate principal amount of new 13-3/8% Mortgage
Notes due 2005 (the "Exchange Notes") for up to $135 million aggregate principal
amount of its outstanding Mortgage Notes. If the Registration Statement becomes
effective and PAAC proceeds with the Exchange Offer, the terms of the Exchange
Notes and Mortgage Notes will be substantially identical, except that the
Exchange Notes will be freely transferable subject to certain provisions. Since
the Registration Statement was not declared effective by August 13, 1995 and the
Exchange Offer was not consummated by September 12, 1995 (each, a "Registration
Default"), the interest rate borne by the Mortgage Notes was increased by 25
basis points per annum for the 90-day period following August 13, 1995. Such
interest rate will increase by an additional 25 basis points per annum at the
beginning of each subsequent 90-day period, up to a maximum aggregate increase
of 150 basis points per annum. PAAC does not expect that the Registration
Statement will be declared effective until after November 11, 1995, such that
from and after such date the interest rate borne by the Mortgage Notes will be
13-7/8% per annum. When the Registration Defaults are cured, the interest rate
borne by the Mortgage Notes will be reduced by the amount of the aggregate
increase.
The Mortgage Notes are redeemable at PAAC's option on and after April 1, 2000.
In addition, PAAC may also redeem at its option at any time prior to April 1,
1998 up to $35.0 million of the Mortgage Notes at 113% of the principal amount
thereof with funds raised in a public offering of common stock of PAAC or of
common stock of PCI to the extent such proceeds are contributed to PAAC. Upon a
change of control, as defined in the Mortgage Notes indenture, PAAC will be
required to offer to repurchase the Mortgage Notes at a purchase price equal to
101%.
The Mortgage Notes contain restrictive covenants that, among other things and
under certain conditions, limit the ability of PAAC to incur additional
indebtedness, to acquire or dispose of assets or operations and to pay dividends
or redeem shares of stock.
8. SELLER NOTES
At the Closing of the Acquisition, the Company delivered to the Sellers,
Seller Notes in the aggregate principal amount of $11.5 million, after
adjustments resulting from terms and conditions defined in the Acquisition
Agreement. Interest on the Seller Notes is payable at a rate of 8% per annum on
a quarterly basis. The principal is payable in five equal annual installments
commencing on April 20, 2001.
15
<PAGE>
PIONEER COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
Letters of Credit
At September 30, 1995, the Company had letters of credit and performance bonds
outstanding of approximately $2.9 million and $6.6 million, respectively. These
letters of credit and performance bonds were issued for the benefit of customers
under sales agreements securing delivery of products sold and as guarantees for
payment of certain utility and regulatory liabilities. The letters of credit
expire at various dates during 1995 and 1996.
Purchase Commitments
One of the Company's subsidiaries has committed to purchase electrical power
and transmission services for its chlor alkali plants through September 30,
2017. At the current base price, allocated capacity, and allocated energy per
the contract terms, this commitment would approximate $2.5 million for the last
three months of 1995; $2.5 million for each of the years 1996 through 2000; $1.3
million for each of the years 2001 through 2008; and $1.0 million for each of
the years 2009 through 2017. The allocated capacity is subject to adjustment for
other priority users. The subsidiary purchased approximately $5.8 million and
$9.4 million in electrical power and transmission services for the three months
and nine months ended September 30, 1995.
In addition, the subsidiary has committed to purchase salt used in the
production process under contracts which continue through December 31, 2003.
Based on the contract terms, a minimum of 139,000 tons of salt are to be
purchased in the last three months of 1995; 442,000 tons in 1996 and 1997;
279,000 tons in 1998; and 225,000 tons in years 1999 through 2003. The future
minimum salt commitments are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Period from October 1, 1995 through
December 31, 1995 $1,397
1996 4,172
1997 4,305
1998 2,377
1999 1,753
Thereafter 7,277
</TABLE>
The subsidiary purchased approximately $2.6 million and $4.2 million of salt
for the three months and nine months ended September 30, 1995.
Operating Leases
The Company and its subsidiaries lease certain of their manufacturing and
distribution facilities, computer equipment and administrative offices under
noncancelable leases. Minimum future rental payments on such leases with terms
in excess of one year in effect at September 30, 1995 are (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Period from October 1, 1995 through
December 31, 1995 $1,854
1996 6,291
1997 5,589
1998 4,556
1999 3,906
Thereafter 1,712
</TABLE>
Lease expense charged to operations for the three months and nine months ended
September 30, 1995 was approximately $2.1 million and $3.7 million,
respectively.
16
<PAGE>
PIONEER COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Sales Commitments
Pioneer has a sales contract with a customer which requires Pioneer to sell
and the customer to purchase amounts of chlorine and caustic soda of not less
than the percentage of the customer's use of chlorine and caustic soda supplied
by Pioneer in the 12-month period ended July 31, 1987 (base period). Pioneer
supplied approximately 91,000 tons of chlorine and 21,000 tons of caustic soda
in the base period. The contract, which expires on December 31, 1997, states
that the sales price will not be less than Pioneer's standard cost as calculated
based on 1987 amounts and adjusted thereafter for price changes for raw
materials and changes in other costs as reflected in the producer price index.
Litigation
Pioneer settled litigation with an insurance company in December 1992
relating to claims resulting from a chlorine release in 1991. In accordance with
the settlement, the insurance company paid Pioneer $2.1 million relating to
claims paid by Pioneer prior to November 1, 1992 and agreed to pay Pioneer (a)
upon proof of same, $100,000 relative to claims and expenses incurred after July
31, 1992 but prior to November 1, 1992 and (b) all claims after November 1, 1992
until an aggregate total of $3.8 million had been paid. As of April 20, 1995, a
total of approximately $3.8 million in claims had been paid. It is the opinion
of management, based on advice of counsel, that the ultimate resolution of this
contingency, to the extent not previously provided for, will not have a material
effect on the consolidated financial statements of the Company.
During 1993, one of Pioneer's subsidiaries, Imperial West, was awarded $1.38
million as the result of a breach of contract claim it asserted against the
lessor of one of Imperial West's plants. The judgment has been appealed and the
consolidated financial statements do not include any receivable for the award
that could result from the judgment. The lessor subsequently filed suit alleging
that Imperial West was required to remediate alleged contamination prior to the
termination of the lease in July 1995. The parties settled that action under
terms pursuant to which (i) Imperial West paid the lessor $900,000 upon the
termination of the lease in July 1995, and (ii) the lessor transferred title to
the property to Imperial West. In addition, Imperial West agreed to indemnify
the lessor against any future environmental liability with respect to the
property. The settlement did not affect the appeal pending with respect to the
breach of contract judgment. Certain insurers have agreed to pay a portion of
Imperial West's defense costs in connection with the subsequent lawsuit by the
lessor. Imperial West has initiated a claim for contribution from the insurers
with respect to the cost incurred in settling the action.
In October 1994, the trustee in the bankruptcy of a company which was a
customer of Pioneer filed suit against Pioneer, seeking the recovery of up to
$2.2 million in payments made to Pioneer on a basis which the trustee alleges
were preferential to other creditors' claims. Management has been advised by
counsel that the range of any loss which may be incurred as the result of the
suit will be substantially below the amount claimed, and Pioneer is vigorously
contesting the action. The Company has established a reserve consistent with its
estimate of its liability related to such transactions.
The Company and its subsidiaries are parties to other legal proceedings and
potential claims arising in the ordinary course of their businesses. In the
opinion of management, the Company and its subsidiaries have 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.
17
<PAGE>
PIONEER COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
SEPTEMBER 30, DECEMBER 31,
1995 1994
-------------- ------------
<S> <C> <C>
(IN THOUSANDS)
Deferred tax liabilities:
Book basis in excess of tax basis of
property, plant and equipment $20,882 $19,964
Investment in BII & VVLC -- 6,509
Other--net 1,795 5,585
------- -------
Total deferred tax liabilities 22,677 32,058
Deferred tax assets:
OPEB obligation 3,938 2,499
Pension liability 1,875 1,885
Bad debt provision 590 784
Net operating loss carry forward 24,045 --
Other accrued liabilities 5,035 4,310
------- -------
Total deferred tax assets 35,483 9,478
Valuation allowance for deferred tax
assets 12,806 --
------- -------
Net deferred tax assets 22,677 9,478
------- -------
Net deferred tax liabilities $ -- $22,580
======= =======
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1995
--------------
(IN THOUSANDS)
<S> <C>
Current:
Federal $ 561
State 1,062
-------
Total current 1,623
Deferred:
Federal 1,838
State ( 324)
-------
Total deferred 1,514
-------
$ 3,137
=======
</TABLE>
18
<PAGE>
PIONEER COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES--(CONTINUED)
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is presented below.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1995
---------------------
AMOUNT PERCENTAGE
-------- -----------
<S> <C> <C>
(IN THOUSANDS)
Tax at U.S. statutory rates $2,303 35%
State income taxes, net of federal tax
benefit 430 7
Amortization of excess cost over the
fair value of net assets acquired 734 11
Other, net ( 330) (5)
------ ---
$3,137 48%
====== ===
</TABLE>
At September 30, 1995, PCI had available to it on a consolidated tax return
basis approximately $77 million of net operating loss carryforward ("NOL") for
income tax reporting purposes (expiring 2003 to 2010). The NOL is available for
offset against future taxable income if generated during the carryforward
period.
The Internal Revenue Code limits the amount of a corporation's NOL that may be
used each year to offset future income after an "ownership change" (as defined).
PCI does not believe that either the reorganization resulting from certain
previous Chapter 11 proceedings or the Acquisition resulted in an ownership
change.
Upon adoption of Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes," PCI established a deferred tax asset based upon
the future utilization of the NOL. However, since PCI had no operating
subsidiaries at December 31, 1994 with which to generate taxable income, a 100%
valuation reserve was recorded against this asset. Due to the reorganization,
any future utilization of this NOL by PCI will be recognized as an increase to
additional paid-in capital. Approximately $13.6 million was recognized as an
increase to additional paid-in capital at April 20, 1995. An additional $1.8
million was recognized as an increase to additional paid-in capital for the
three months ended September 30, 1995.
11. OTHER LONG-TERM LIABILITIES--ENVIRONMENTAL
The Company's operations are subject to extensive environmental laws and
regulations related to protection of the environment, including those applicable
to waste management, discharge of pollutants into the air and water, clean-up
liability from historical waste disposal practices, and employee health and
safety. The Company believes that it is in substantial compliance with existing
governmental regulations.
In connection with the October, 1988, acquisition of the chlor alkali business
by the Predecessor Company, ICI Delaware Holdings, Inc. ("ICI") and ICI
Americas, Inc. ("ICI Americas") (such companies or their successors, the "ZENECA
Companies") agreed to indemnify the Predecessor Company for certain
environmental liabilities (the "ZENECA Indemnity"), including liabilities
associated with operations at the Company's plant located in Henderson, Nevada
(the "Henderson Plant"). In general, the ZENECA Companies agreed to indemnify
the Predecessor Company from environmental costs which arise from or relate to
pre-closing actions which involved disposal, discharge, or release of materials
resulting from non-chlor alkali manufacturing operations at the Henderson Plant
and at other properties within the same industrial complex. Payments under the
indemnity cannot exceed approximately $65 million.
Due to the Acquisition of the Predecessor Company by PAAC, the ZENECA
Indemnity will terminate on April 20, 1999, four years after consummation of the
Acquisition. The ZENECA Indemnity will continue to cover claims after the
expiration of the term of the indemnity provided that, prior to the expiration
of the indemnity, proper notice to the ZENECA Companies is given and the Company
has taken certain other actions. The Company believes that the ZENECA Companies
will continue to honor their obligations under the ZENECA Indemnity for claims
properly presented by the Company. It is possible,
19
<PAGE>
PIONEER COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. OTHER LONG-TERM LIABILITIES--ENVIRONMENTAL--(CONTINUED)
however, that disputes could arise between the parties and that the Company
would have to subject its claims for clean-up expenses, which could be
substantial, to the contractually established arbitration process.
In the Acquisition Agreement, the Sellers have agreed to indemnify PCI, PAAC
and their affiliates for certain environmental liabilities that result from
certain discharges of hazardous materials, or violations of environmental laws,
arising prior to April 20, 1995 (the "Closing Date") from or relating to the
Pioneer plant sites or arising before or after the Closing Date with respect to
certain environmental liabilities relating to the Contingent Payment Properties
("Sellers' Indemnity"). Amounts payable pursuant to the Sellers' Indemnity will
generally be payable as follows: (i) out of certain reserves established on
Pioneer's balance sheet at December 31, 1994; (ii) either by offset against the
amounts payable under the Seller Notes or from amounts held pursuant to the
Contingent Payment Agreement, and (iii) in certain circumstances and subject to
specified limitations, out of the personal assets of the Sellers. Subject to
certain exceptions and limitations set forth in the Acquisition Agreement, a
claim notice with respect to amounts payable pursuant to the Sellers' Indemnity
must generally be given within 15 years after the Closing Date. The Company is
required to reimburse the Sellers for amounts paid under the Sellers' Indemnity
with amounts recovered under the ZENECA Indemnity or from other third parties.
The Company and the Sellers have agreed that they will cooperate in matters
relating to the ZENECA Indemnity.
Liabilities related to environmental matters are recorded when site
restoration and environmental remediation and clean-up obligations are either
known or considered probable and are reasonably determinable. The liabilities
are based upon all available facts, existing technology, past experience and
cost-sharing arrangements, including the viability of other parties. Charges
made against income for recurring environmental matters, included in "cost of
sales" on the statements of operations, and capital expenditures for
environmental related matters at existing facilities were immaterial for the
three months and nine months ended September 30, 1995. Future environmental-
related capital expenditures will depend upon regulatory requirements, as well
as timing related to obtaining necessary permits and approvals.
Estimates of future environmental restoration and remediation costs are
inherently imprecise due to currently unknown factors such as the magnitude of
possible contamination, the timing and extent of such restoration and
remediation, the extent to which such costs are recoverable from third parties,
and the extent to which environmental laws and regulations may change in the
future. The Predecessor Company established a reserve of approximately $9.0
million at the time of its acquisition of its Henderson, Nevada and St. Gabriel,
Louisiana facilities with respect to potential remediation costs relating to
matters not covered by the ZENECA Indemnity, consisting primarily of remediation
costs that may be incurred by Pioneer for chlor alkali-related remediation of
the Henderson and St. Gabriel facilities. The recorded accrual includes certain
amounts related to anticipated closure and post-closure actions that may be
required when operation of the present chlor alkali plants ceases. However, a
complete analysis and study have not been completed and therefore additional
future charges may be recorded at the time a decision for closure is made.
In 1994, the Predecessor Company recorded an additional $3.2 million
environmental reserve related to pre-closing actions at sites that are the
responsibility of the ZENECA Companies. Other assets include an account
receivable of the same amount from the ZENECA Companies. Certain other
environmental matters exist for which the Company has not determined the
specific strategy for or cost of remediation. It is possible that additional
costs, depending on the final choice of remediation strategies, may be incurred
in the future. As additional information becomes available, changes in the
estimates of liabilities will be recorded. If such costs are incurred,
additional annual operating and maintenance costs may also be required. The
Company believes it will be reimbursed by the ZENECA Companies for substantially
all of such costs that are incurred at the Henderson Plant and other properties
within the same industrial complex. Additionally, certain other environmental
matters exist which have been assumed directly by the ZENECA Companies. No
assurance can be given that actual costs will not exceed accrued amounts or the
amounts currently estimated. The imposition of more stringent standards or
requirements under environmental laws or regulations, new developments or
changes respecting site cleanup costs, or a determination that the Company is
potentially responsible for the release of hazardous substances at other sites
could result in expenditures in excess of amounts currently estimated by the
Company to be required for such matters. Further, there can be no assurance that
additional environmental matters will not arise in the future.
20
<PAGE>
PIONEER COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. RELATED PARTY TRANSACTIONS
The Company has a 15% partnership interest in Saguaro Power Company
("Saguaro"), which owns a cogeneration plant located in Henderson, Nevada. The
Company sells certain services to and purchases steam from Saguaro at market
prices. Balances with Saguaro are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1995
-------------------
(IN THOUSANDS)
<S> <C>
Sales to Saguaro $563
Purchases from Saguaro 960
Due from Saguaro 100
Due to Saguaro 354
</TABLE>
The Company received distributions of partnership income of $187,500 and
$337,500 from Saguaro during the three months and nine months ended
September 30, 1995.
21
<PAGE>
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
financial statements and the notes thereto.
This item will discuss and analyze the financial condition of the Company at
September 30,1995 and the results of operations of the Company for the three
months and nine months ended September 30, 1995 and the Predecessor Company for
the three months and nine months ended September 30, 1994. For comparative
purposes the Company's results of operations for the nine months ended
September 30, 1995 include the Predecessor Company's operating results from
January 1, 1995 through April 20, 1995. The Predecessor Company's operating
results for both 1994 periods exclude $1.0 million of transaction costs related
to the Acquisition. The Company believes that this provides a meaningful basis
for comparison.
The following table sets forth certain operating data of the Company for the
periods indicated as adjusted for comparative purposes as discussed above.
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY PREDECESSOR
THREE COMPANY
THREE MONTHS ENDED MONTHS NINE MONTHS ENDED NINE MONTHS
SEPTEMBER 30, ENDED SEPTEMBER 30, ENDED
------------------- SEPTEMBER 30, ------------------ SEPTEMBER 30,
1995 1994 1994 1995 1994 1994
---------- ------- ------------- --------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues $59,248 $ -- $49,087 $153,501 $ -- $122,442
Cost of sales 39,971 -- 37,565 102,273 -- 100,976
Cost of sales--acquisition related
inventory step-up -- -- -- 1,671 -- --
Selling, general and administrative
expenses 8,446 109 6,410 21,234 227 16,225
Interest expense, net 4,923 ( 5) 1,671 10,401 ( 10) 4,916
Other income, net 44 -- 4,489 1,252 -- 4,173
------- ----- ------- -------- ----- --------
Income (loss) before income taxes
and extraordinary item 5,952 (104) 7,930 19,174 (217) 4,498
Income tax provision 2,509 -- 3,141 7,946 -- 1,917
------- ----- ------- -------- ----- --------
Net income (loss) before
extraordinary item 3,443 (104) 4,789 11,228 (217) 2,581
Extraordinary item -- -- -- 3,420 -- --
------- ----- ------- -------- ----- --------
Net income (loss) $ 3,443 $(104) $ 4,789 $ 7,808 $(217) $ 2,581
======= ===== ======= ======== ===== ========
</TABLE>
22
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1994
Revenues
Revenues increased by $31.1 million or 25% to $153.5 million for the 1995
period from $122.4 million for the 1994 period. This increase was primarily due
to a $30.0 million increase in chlor-alkali sales, a result of industry-wide
strengthening of electrochemical unit ("ECU") prices. The nine month average ECU
price during the 1995 period increased 47% over the same period in 1994.
Cost of Sales
Cost of sales as a percent of revenues decreased to 66.6% in the 1995 period
from 82.5% in 1994 principally due to a combination of increased revenues and
lower raw material costs. The dollar amount of cost of sales increased by
$2.9 million or 3% to $103.9 million during the 1995 period from $101.0 million
during the 1994 period. This increase represented primarily the $1.0 million
impact of an acquisition by the Predecessor Company in May 1994, annual
performance raises and associated benefits costs of $2.4 million, higher
operating and maintenance material costs of $2.0 million due to an increase in
non-critical scheduled maintenance, net of capitalized maintenance costs, $0.8
million of additional depreciation due to the Acquisition and additional
miscellaneous items. Additionally, $1.7 million was charged to cost of sales due
to the Acquisition related inventory step-up. These increases were partially
offset by $5.6 million of lower raw material costs, purchases and exchange
activity.
Selling, General and Administrative Expense
Selling, general and administrative expense increased by $5.0 million or 31%
to $21.2 million for the nine months ended September 30, 1995 from $16.2 million
for the comparable period in 1994. This increase was primarily the result of a
$1.3 million impact of an acquisition by the Predecessor Company in May 1994,
$1.5 million accrued pursuant to the Company's incentive compensation program,
$0.9 million in increased outside services and $1.7 million of increased
amortization as a result of the Acquisition.
Interest, Net
Interest expense increased by $5.5 million or 112% to $10.4 million for the
1995 period from $4.9 million for the 1994 period. This increase was a result
of debt incurred in connection with the Acquisition.
Other Income, Net
Other income decreased by $2.9 million or 69% to $1.3 million for the 1995
period from $4.2 million for the comparable 1994 period as a result of the
inclusion in the 1994 period of $3.2 million of insurance/arbitration
recoveries, $0.5 million of inventory adjustments and $0.6 million of dividends
from unconsolidated subsidiaries partially offset by additional miscellaneous
expense. The 1995 period includes $0.4 million of dividends from unconsolidated
subsidiaries, $0.5 million of land sales and $0.4 million of insurance
recoveries.
Income Before Taxes and Extraordinary Item
As a result of the above, net income before taxes and extraordinary expense
increased $14.7 million to $19.2 million of income for the nine months ended
September 30, 1995 from $4.5 million for the nine months ended September 30,
1994.
Extraordinary Item
An extraordinary expense of $3.4 million net of income taxes of $2.1 million
recorded during the 1995 period was due to costs incurred, and previously
capitalized costs written off, pertaining to debt refinanced by the Predecessor
Company in the 1995 period prior to the Acquisition.
23
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1994
Revenues
Revenues increased by $10.1 million or 21% to $59.2 million for the 1995
period from $49.1 million for the 1994 period. This increase was primarily due
to an $11.3 million increase in chlor-alkali sales, a result of industry-wide
strengthening of ECU prices. The three month average ECU price during the 1995
period increased 14% over the same period in 1994.
Cost of Sales
Cost of sales increased by $2.4 million or 6% to $40.0 million during the 1995
period from $37.6 million during the 1994 period. This increase was primarily a
result of $0.7 million of higher raw material costs, annual performance raises
and associated benefits costs of $0.3 million, higher maintenance and expense
projects of $0.5 million, higher amortization expense of $0.2 million as a
result of capitalized maintenance costs and additional miscellaneous items.
Selling, General and Administrative Expense
Selling, general and administrative expense increased by $2.0 million or 31%
to $8.4 million for the three months ended September 30, 1995 from $6.4 million
for the comparable 1994 period. This increase was primarily the result of $1.5
million accrued pursuant to the Company's incentive compensation program and
$0.7 million of increased amortization as a result of the Acquisition offset by
$0.5 million of lower bad debt expense.
Interest, Net
Interest expense increased $3.2 million or 188% to $4.9 million for the 1995
period from $1.7 million for the 1994 period. This increase was a result of
debt incurred in connection with the Acquisition.
Other Income, Net
Other income decreased by $4.4 million or 98% to $0.1 million for the 1995
period from $4.5 million for the 1994 period as a result of the inclusion in the
1994 period of $3.2 million of insurance/arbitration recoveries, $0.5 million of
inventory adjustments and $0.6 million of dividends from unconsolidated
subsidiaries.
Income Before Taxes and Extraordinary Item
Principally because of the decrease in other income, net income before taxes
and extraordinary expense decreased $1.9 million to $6.0 million for the three
months ended September 30, 1995 from $7.9 million for the three months ended
September 30, 1994.
Liquidity and Capital Resources
A subsidiary of the Company has entered into a Bank Credit Facility, which
provides for borrowings of up to $30.0 million subject to borrowing base
limitations that relate to the level of accounts receivable and inventory of the
Company's subsidiaries. The Bank Credit Facility is secured by the accounts
receivable and inventory of the Company's subsidiaries and certain other
collateral. It has a term of three years and bears interest at a rate equal to
at the Company's option (i) the reference rate set by the Bank or (ii) the LIBOR
Base Rate.
24
<PAGE>
The Company estimates that cash flow from current levels of operations,
together with the availability under the Bank Credit Facility, will be adequate
to make required payments of principal and interest on the outstanding
indebtedness as well as to fund capital expenditures.
The Company incurred $4.0 million and $7.2 million of capital expenditures
for the three months and nine months ended September 30, 1995, and anticipates
capital expenditures for all of 1995 to be approximately $12 million, including
approximately $4.5 million for environmental compliance matters.
Environmental Regulation
Liabilities are recorded when site restoration and environmental remediation
and clean-up obligations are either known or considered probable and are
reasonably determinable. The liabilities are based upon all available facts,
existing technology, past experience and cost-sharing arrangements, including
the viability of other parties. Charges made against income for recurring
environmental matters, included in "cost of sales" on the statements of
operations and capital expenditures for environmental related matters at
existing facilities were immaterial for the three months and nine months ended
September 30, 1995. Future environmental-related capital expenditures will
depend upon regulatory requirements, as well as timing related to obtaining
necessary permits and approvals.
25
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Effective as of September 14, 1995, the indenture with respect to the 13-3/8%
Mortgage Notes (the "Mortgage Notes") issued by Pioneer Americas Acquisition
Corp. ("PAAC") was supplemented for the purpose of providing for collateral for
the obligations of Pioneer Chlor Alkali Company, Inc. ("PCAC") under its
guarantee of the obligations of PAAC under the Mortgage Notes. Such collateral
consists of liens on PCAC's St. Gabriel, Louisiana and Henderson, Nevada plants.
In connection therewith, the indenture supplement also modified covenants,
provided additional indemnity to the trustee (United States Trust Company of New
York, as successor to IBJ Schroder Bank & Trust Company), and modified other
provisions of the indenture that relate to the collateral or that will or may be
impacted by the providing of the collateral.
Also on September 14, 1995, United States Trust Company of New York, as
trustee and collateral agent, Bank of America Illinois, as agent, PAAC, Pioneer
and PCAC entered into an Intercreditor and Collateral Agency Agreement, pursuant
to which United States Trust Company of New York agreed to hold the liens on the
PCAC plants as collateral agent for the pro rata benefit of the holders of the
Mortgage Notes and Bank of America Illinois, as agent for itself and the other
lenders under the Loan and Security Agreement, dated as of April 12, 1995, with
Pioneer Americas, Inc. and certain of its subsidiaries.
ITEM 5. OTHER INFORMATION
On September 13, 1995, Imperial West Chemical Company ("Imperial West"), a
subsidiary of PCI, entered into a letter of intent with Kemira Chemicals OY of
Finland ("Kemira"), pursuant to the terms of which a newly formed subsidiary of
PCI would acquire all of the outstanding capital stock of a United States
subsidiary of Kemira. While Imperial West may not have an economic interest in
Kemira's operations, if it is acquired by an affiliate, Imperial West will
acquire a license to use Kemira's water treatment technology to manufacture and
market water treatment products in the western United States, including
polyaluminum chlorides, sodium aluminate and ferric sulfate. The Company
believes that Imperial West has access to reliable supplies of the raw materials
which will be necessary to produce these major extensions of Imperial West's
product line. The funds to be used to effect the Kemira transaction would be
provided by Pioneer or its subsidiaries. There can be no assurance that the
Kemira transaction will be consummated.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1(a) First Supplemental Indenture, dated as of September 14, 1995, by and
among PAAC, the Subsidiary Guarantors parties thereto and United
States Trust Company of New York, as Trustee (incorporated by
reference to Exhibit 4.1(b) to the Registration Statement on Form S-4
(file no. 33-98828) filed by Pioneer Americas Acquisition Corp. on
October 30, 1995).
4.1(b) Mortgage, Assignment of Leases and Rents, Security Agreement, Fixture
Filing and Financing Statement by PCAC (St. Gabriel, Louisiana)
(incorporated by reference to Exhibit 4.2(a) to the Registration
Statement on Form S-4 (file no. 33-98828) filed by Pioneer Americas
Acquisition Corp. on October 30, 1995).
4.1(c) Deed of Trust, Assignment of Leases and Rents, Security Agreement,
Fixture Filing and Financing Statement by PCAC (Henderson, Nevada)
(incorporated by reference to Exhibit 4.2(b) to the Registration
Statement on Form S-4 (file no. 33-98828) filed by Pioneer Americas
Acquisition Corp. on October 30, 1995).
4.1(d) Intercreditor and Collateral Agency Agreement, dated as of September
14, 1995, by and among United States Trust Company of New York, as
Trustee and Collateral Agent, Bank of America Illinois, as Agent,
PAAC, Pioneer and PCAC (incorporated by reference to Exhibit 4.4 to
the Registration Statement on Form S-4 (file no. 33-98828) filed by
Pioneer Americas Acquisition Corp. on October 30, 1995).
26
<PAGE>
10.1 Tax Sharing Agreement, dated as of April 20, 1995, by and among the
Company (formerly GEV Corporation), PAAC and the Subsidiary Guarantors
(incorporated by reference to Exhibit 10.3 to the Registration
Statement on Form S-4 (file no. 33-98828) filed by Pioneer Americas
Acquisition Corp. on October 30, 1995).
10.2 Pioneer Companies, Inc. (formerly GEV Corporation) 1995 Stock
Incentive Plan (incorporated by reference to Exhibit 10.4 to the
Registration Statement on Form S-4 (file no. 33-98828) filed by
Pioneer Americas Acquisition Corp. on October 30, 1995).
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
September 30, 1995.
27
<PAGE>
SIGNATURE
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.
PIONEER COMPANIES, INC.
By: /s/ Philip J. Ablove
Date: November 14, 1995
Name: Philip J. Ablove
Title: Acting Chief Financial Officer
28
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NO. DOCUMENT PAGE
- --- -------- ----
<S> <C> <C>
4.1(a) First Supplemental Indenture, dated as of September 14, 1995, by --
and among PAAC, the Subsidiary Guarantors parties thereto and
United States Trust Company of New York, as Trustee (incorporated
by reference to Exhibit 4.1(b) to the Registration Statement
on Form S-4 (file no. 33-98828) filed by Pioneer Americas
Acquisition Corp. on October 30, 1995).
4.1(b) Mortgage, Assignment of Leases and Rents, Security Agreement, --
Fixture Filing and Financing Statement by PCAC (St. Gabriel,
Louisiana) (incorporated by reference to Exhibit 4.2(a) to the
Registration Statement on Form S-4 (file no. 33-98828) filed by
Pioneer Americas Acquisition Corp. on October 30, 1995).
4.1(c) Deed of Trust, Assignment of Leases and Rents, Security Agreement, --
Fixture Filing and Financing Statement by PCAC (Henderson,
Nevada) (incorporated by reference to Exhibit 4.2(b) to the
Registration Statement on Form S-4 (file no. 33-98828) filed
by Pioneer Americas Acquisition Corp. on October 30, 1995).
4.1(d) Intercreditor and Collateral Agency Agreement, dated as of --
September 14, 1995, by and among United States Trust Company
of New York, as Trustee and Collateral Agent, Bank of America
Illinois, as Agent, PAAC, Pioneer and PCAC (incorporated by
reference to Exhibit 4.4 to the Registration Statement on
Form S-4 (file no. 33-98828) filed by Pioneer Americas
Acquisition Corp. on October 30, 1995).
10.1 Tax Sharing Agreement, dated as of April 20, 1995, by and --
among the Company (formerly GEV Corporation), PAAC and the
Subsidiary Guarantors (incorporated by reference to Exhibit
10.3 to the Registration Statement on Form S-4 (file no.
33-98828) filed by Pioneer Americas Acquisition Corp. on
October 30, 1995).
10.2 Pioneer Companies, Inc. (formerly GEV Corporation) 1995 Stock --
Incentive Plan (incorporated by reference to Exhibit 10.4 to the
Registration Statement on Form S-4 (file no. 33-98828) filed by
Pioneer Americas Acquisition Corp. on October 30, 1995).
</TABLE>
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEETS, INCOME STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
<PERIOD-START> JAN-01-1995 JAN-01-1994
<PERIOD-END> SEP-30-1995 SEP-30-1994
<CASH> 8,541 880
<SECURITIES> 0 0
<RECEIVABLES> 35,768 0
<ALLOWANCES> (1,476) 0
<INVENTORY> 13,291 0
<CURRENT-ASSETS> 59,354 880
<PP&E> 91,005 71
<DEPRECIATION> (5,415) (39)
<TOTAL-ASSETS> 266,969 912
<CURRENT-LIABILITIES> 49,090 150
<BONDS> 135,000 0
<COMMON> 86 46
0 0
0 0
<OTHER-SE> 40,547 716
<TOTAL-LIABILITY-AND-EQUITY> 266,969 912
<SALES> 95,653 0
<TOTAL-REVENUES> 95,653 0
<CGS> 66,544 0
<TOTAL-COSTS> 80,731 227
<OTHER-EXPENSES> (394) 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 8,735 (10)
<INCOME-PRETAX> 6,581 (217)
<INCOME-TAX> 3,137 0
<INCOME-CONTINUING> 3,444 (217)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,444 (217)
<EPS-PRIMARY> .50 (.05)
<EPS-DILUTED> .50 (.05)
</TABLE>
