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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, 1998
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)
<TABLE>
<S> <C>
DELAWARE 06-1215192
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4300 NATIONSBANK CENTER 77002
700 LOUISIANA STREET (Zip Code)
HOUSTON, TEXAS
(Address of principal executive offices)
</TABLE>
(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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
On October 26, 1998, there were outstanding 9,277,805 shares of the
Company's Class A Common Stock and 750,136 shares of Class B Common Stock.
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TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
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PAGE
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Item 1. Consolidated Financial Statements...........................
Consolidated Balance Sheets -- September 30, 1998 and
December 31, 1997......................................... 3
Consolidated Statements of Operations -- Three Months Ended
September 30, 1998 and 1997 and Nine Months Ended
September 30, 1998 and 1997............................... 4
Consolidated Statements of Cash Flows -- Nine Months Ended
September 30, 1998 and 1997............................... 5
Notes to Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 9
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 14
</TABLE>
Certain statements in this Form 10-Q regarding future expectations of the
Company's business and the Company's results of operations may be regarded as
"forward looking statements" within the meaning of the Securities Litigation
Reform Act. Such statements are subject to various risks, including the
Company's high financial leverage, the cyclical nature of the markets for many
of the Company's products and raw materials and other risks. Actual outcomes may
vary materially.
2
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PART I -- FINANCIAL INFORMATION
PIONEER COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 60,556 $ 51,887
Accounts receivable, less allowance for doubtful accounts
of $3,049 at September 30, 1998 and $3,602 at December
31, 1997............................................... 61,956 68,942
Inventories............................................... 28,157 25,379
Prepaid expenses.......................................... 3,123 1,831
-------- --------
Total current assets.............................. 153,792 148,039
Property, plant and equipment:
Land...................................................... 10,726 10,726
Buildings and improvements................................ 60,558 59,625
Machinery and equipment................................... 302,192 274,267
Construction in progress.................................. 31,365 32,309
-------- --------
404,841 376,927
Less accumulated depreciation............................. (67,948) (36,503)
-------- --------
336,893 340,424
Other assets, net of accumulated amortization of $7,197 at
September 30, 1998 and $4,649 at December 31, 1997........ 51,591 59,302
Excess cost over fair value of net assets acquired, net of
accumulated amortization of $20,942 at September 30, 1998
and $14,095 at December 31, 1997.......................... 203,822 205,907
-------- --------
Total assets...................................... $746,098 $753,672
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 29,943 $ 47,784
Accrued liabilities....................................... 41,453 36,372
Current portion of long-term debt......................... 2,675 2,598
-------- --------
Total current liabilities......................... 74,071 86,754
Long-term debt, less current portion........................ 584,837 586,866
Accrued pension and other employee benefits................. 27,256 21,068
Other long-term liabilities................................. 20,310 17,263
Commitments and contingencies
Redeemable preferred stock: $.01 par value, authorized
10,000 shares, 55 issued and outstanding.................. 5,500 5,500
Stockholders' equity:
Common stock:
Class A, $.01 par value, authorized 46,000 shares,
issued and outstanding: 9,278 at September 30, 1998
and 9,227 at December 31, 1997........................ 92 92
Class B, $.01 par value, authorized 4,000 shares,
issued and outstanding: 750 at September 30, 1998 and
December 31, 1997, convertible share-for-share into
Class A shares........................................ 8 8
Additional paid-in capital................................ 55,062 54,713
Retained deficit.......................................... (21,038) (18,592)
-------- --------
Total stockholders' equity........................ 34,124 36,221
-------- --------
Total liabilities and stockholders' equity........ $746,098 $753,672
======== ========
</TABLE>
See notes to consolidated financial statements.
3
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PIONEER COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1998 1997 1998 1997
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues......................................... $100,356 $72,329 $304,620 $172,362
Cost of sales.................................... 80,332 53,719 230,220 134,477
-------- ------- -------- --------
Gross profit..................................... 20,024 18,610 74,400 37,885
Selling, general and administrative expenses..... 12,096 9,235 40,150 25,411
Unusual charges.................................. 180 -- 687 --
-------- ------- -------- --------
Operating income................................. 7,748 9,375 33,563 12,474
Interest expense, net............................ (12,670) (6,962) (37,778) (17,102)
Other income (expense), net...................... (570) 452 2,192 879
-------- ------- -------- --------
Income (loss) before taxes and extraordinary
item........................................... (5,492) 2,865 (2,023) (3,749)
Income tax provision (benefit)................... (1,208) 2,147 423 (46)
-------- ------- -------- --------
Income (loss) before extraordinary item.......... (4,284) 718 (2,446) (3,795)
Extraordinary item from early extinguishment of
debt (net of income tax benefit of $12,439).... -- -- -- (18,658)
-------- ------- -------- --------
Net income (loss)................................ $ (4,284) $ 718 $ (2,446) $(22,453)
======== ======= ======== ========
Per Share Information:
Basic:
Income (loss) before extraordinary item..... $ (0.43) $ 0.07 $ (0.24) $ (0.38)
Extraordinary item, net of income tax....... -- -- -- (1.88)
-------- ------- -------- --------
Net income (loss)........................... $ (0.43) $ 0.07 $ (0.24) $ (2.26)
======== ======= ======== ========
Diluted:
Income (loss) before extraordinary item..... $ (0.43) $ 0.07 $ (0.24) $ (0.38)
Extraordinary item, net of income tax....... -- -- -- (1.88)
-------- ------- -------- --------
Net income (loss)........................... $ (0.43) $ 0.07 $ (0.24) $ (2.26)
======== ======= ======== ========
Weighted average number of common shares
outstanding:
Basic.......................................... 10,020 9,977 10,002 9,952
Diluted........................................ 10,020 10,553 10,002 9,952
</TABLE>
See notes to consolidated financial statements.
4
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PIONEER COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
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NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1998 1997
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Operating activities:
Net loss.................................................. $ (2,446) $ (22,453)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Extraordinary item (net of income tax)................. -- 18,658
Depreciation and amortization.......................... 37,166 16,650
Net change in deferred taxes........................... 3,013 (3,476)
Loss from foreign exchange rate changes................ 1,470 --
Net effect of changes in operating assets and
liabilities........................................... (4,897) (1,424)
-------- ---------
Net cash flows from operating activities.................... 34,306 7,955
-------- ---------
Investing activities:
Acquisition of business................................... -- (97,000)
Capital expenditures...................................... (21,869) (12,370)
-------- ---------
Net cash flows from investing activities.................... (21,869) (109,370)
-------- ---------
Financing activities:
Payments on long-term debt................................ (1,952) (162,353)
Proceeds from long-term debt.............................. -- 300,000
Debt issuance and related costs........................... -- (16,612)
Proceeds from issuance of Class A common stock............ 348 874
-------- ---------
Net cash flows from financing activities.................... (1,604) 121,909
-------- ---------
Effect of exchange rate changes on cash..................... (2,164) --
-------- ---------
Net increase in cash........................................ 8,669 20,494
Cash at beginning of period................................. 51,887 15,754
-------- ---------
Cash at end of period....................................... $ 60,556 $ 36,248
======== =========
</TABLE>
See notes to consolidated financial statements.
5
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PIONEER COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION
The consolidated balance sheet at September 30, 1998 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 1998 are not necessarily indicative of results to be
expected for the year ending December 31, 1998. The consolidated financial
statements include the accounts of Pioneer Companies, Inc. ("PCI") and its
subsidiaries (collectively referred to as the "Company"). All significant
intercompany balances and transactions have been eliminated in consolidation.
All dollar amounts in the tabulations in the notes to the consolidated financial
statements are stated in thousands of dollars unless otherwise indicated.
The consolidated balance sheet at December 31, 1997 is derived from the
December 31, 1997 audited consolidated financial statements, but does not
include all disclosures required by generally accepted accounting principles,
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, 1997.
Income (loss) per common share is computed using the weighted average
number of common shares outstanding during the period. Per share information for
1997 has been computed after giving retroactive effect to a 7% stock dividend on
Class A and Class B Common Stock to stockholders of record in December 1997.
2. SUPPLEMENTAL CASH FLOW INFORMATION
Net effect of changes in operating assets and liabilities (net of
acquisitions) are as follows:
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NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
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Accounts receivable......................................... $ 5,975 $(17,449)
Inventories................................................. (3,175) (1,727)
Prepaid expenses............................................ (1,321) 36
Other assets................................................ (3,788) (3,549)
Accounts payable............................................ (16,910) 13,240
Accrued liabilities......................................... 10,950 6,614
Other long-term liabilities................................. 3,372 1,411
-------- --------
Net change in operating assets and liabilities.... $ (4,897) $ (1,424)
======== ========
</TABLE>
6
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PIONEER COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following are supplemental disclosures of cash flow information:
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NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1997
------- --------
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Cash payments for:
Interest.................................................. $28,955 $ 17,458
Income taxes.............................................. 227 543
Investing activities, acquisition during the period:
Cash paid for acquisition................................. $ -- $ 97,000
Preferred stock issued.................................... -- 5,500
Liabilities assumed....................................... -- 2,955
------- --------
Fair value of assets acquired............................. -- $105,455
======= ========
</TABLE>
3. INVENTORIES
Inventories consist of the following:
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SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
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Raw materials, supplies and parts........................... $21,422 $21,068
Finished goods and work-in-process.......................... 7,513 7,188
Inventories under exchange agreements....................... (778) (2,877)
------- -------
$28,157 $25,379
======= =======
</TABLE>
4. 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 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
arrangements will be adequate to protect the Company from environmental
liabilities at these sites or that such third parties will perform their
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.
7
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PIONEER COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. EARNINGS PER SHARE
Computational amounts for earnings per share are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30,
------------------- -----------------
1998 1997 1998 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Income (loss) before extraordinary item........ $(4,284) $ 718 $(2,446) $(3,795)
======= ======= ======= =======
Basic Earnings per Share:
Weighted average number of common shares
outstanding............................... 10,020 9,977 10,002 9,952
------- ------- ------- -------
Income (loss) before extraordinary item per
share..................................... $ (0.43) $ 0.07 $ (0.24) $ (0.38)
======= ======= ======= =======
Diluted Earnings per Share:
Weighted average number of common shares
outstanding............................... 10,020 9,977 10,002 9,952
Effective of dilutive securities:
Preferred stock.............................. -- 471 -- --
Stock options................................ -- 105 -- --
------- ------- ------- -------
Weighted average number of common shares
outstanding, including dilutive
securities................................ 10,020 10,553 10,002 9,952
------- ------- ------- -------
Income (loss) before extraordinary item per
share..................................... $ (0.43) $ 0.07 $ (0.24) $ (0.38)
======= ======= ======= =======
</TABLE>
8
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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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Revenues
Revenues increased by $28.0 million or approximately 39% for the three
months ended September 30, 1998, as compared to the same period in 1997. The
increase in revenues was primarily attributable to additional sales volumes from
the acquisition of the business of PCI Chemicals Canada Inc. and PCI Carolina,
Inc. (together "PCI Canada") in October 1997. Partially offsetting this increase
were decreases in the average electrochemical unit ("ECU") prices during this
period, as compared to the same three-month period in 1997. Chlorine prices
decreased approximately 40% because of weakening vinyl industry demand, while
caustic soda prices rose, but not to the extent necessary to offset the chlorine
decrease. Revenues at the downstream operations of All-Pure Chemical Company,
Inc. ("All-Pure") decreased as the Company leased out its packaged household
bleach operations to focus on the bulk bleach business. Sales at Kemwater North
America Company ("Kemwater") decreased due to continued competitive conditions
in the iron chlorides business.
Cost of Sales
Cost of sales increased approximately $26.6 million or 50% for the three
months ended September 30, 1998, as compared to the three months ended September
30, 1997. The primary factor behind this increase was the sales volumes of the
acquired PCI Canada operations. Also, power costs rose at the Company's chlor-
alkali facility in Tacoma, Washington. Partially offsetting these increases was
lower cost of sales at All-Pure and Kemwater due to their lower sales volumes.
Gross Profit
Gross profit margin decreased to approximately 20% from 26%, primarily due
to the lower ECU sales prices and the increased power costs at the Tacoma
facility, partially offset by the profitability of the acquired PCI Canada
business.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $2.9 million for the
three-month period ended September 30, 1998 as compared to the same period in
1997, primarily as a result of the acquisition of the business of PCI Canada.
Offsetting this increase were lower profit sharing bonus accruals and lower
expenses at Kemwater and All-Pure resulting from cost-savings and consolidation
efforts.
Interest Expense, Net
Interest expense, net increased $5.7 million to $12.7 million during the
three months ended September 30, 1998 as compared to 1997. This increase was the
result of the debt incurred for the acquisition of the business of PCI Canada.
Other Income (Expense), Net
Other income (expense), net in 1998 includes a foreign currency translation
loss due to fluctuations in the currency exchange rates between the United
States and Canada.
9
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Net Income (Loss)
Due to the factors described above, the Company incurred a net loss of $4.3
million for the three months ended September 30, 1998, as compared to net income
of $0.7 million for the same period in 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Revenues
Revenues increased by $132.3 million or approximately 77% for the nine
months ended September 30, 1998, as compared to the same period in 1997. The
principal factors underlying the increase were the acquired operations of PCI
Canada and the acquired operations of a chlor-alkali facility in Tacoma,
Washington, which was purchased in June 1997. Partially offsetting these
increases were lower average ECU prices during this period, as compared to the
same nine-month period in 1997. Also, production volumes were impacted
negatively by two factors. First, revenue was hampered as a result of a lack of
railcar availability in the western United States due to continued Union Pacific
rail transportation problems. Second, production at the Company's Henderson
plant fell slightly in early 1998 due to a failed transformer, which is now
fully operational. Revenues at the Company's downstream operations decreased as
the Company leased out its packaged household bleach operations during the third
quarter. Also, competitive conditions and adverse weather conditions during the
early portions of the year resulted in revenue decreases in the downstream
businesses.
Cost of Sales
Cost of sales increased approximately $95.7 million, or 71% for the nine
months ended September 30, 1998, as compared to the nine months ended September
30, 1997. The primary factor for this increase was the sales volumes of the
acquired operations. In addition, production costs, principally power, were
higher during 1998. Partially offsetting these increases was lower cost of sales
at All-Pure and Kemwater due to lower sales volumes.
Gross Profit
Gross profit margin increased to approximately 24% from 22%, primarily due
to the profitability of the acquired businesses, despite lower ECU sales prices
and higher production costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $14.7 million for
the period ended September 30, 1998, primarily as a result of the acquisition of
the business of PCI Canada.
Unusual Charges
Unusual charges totaling $0.7 million in 1998 relate to the consolidation
and downsizing of certain administrative functions of All-Pure and Kemwater.
Interest Expense, Net
Interest expense, net increased $20.7 million to $37.8 million during the
first nine months of 1998. This increase was the result of the debt incurred for
the acquisitions of the Tacoma plant and the business of PCI Canada, partially
offset by lower interest expense from refinancing $135.0 million of the 13 3/8%
First Mortgage Notes at substantially lower interest rates.
Other Income, Net
Other income, net in 1998 includes a gain from the settlement of a lawsuit
for approximately $0.9 million, an accrual for a business interruption insurance
claim at the Henderson plant related to the failed transformer and a state
franchise tax refund.
10
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Extraordinary Item from Early Extinguishment of Debt
During 1997 the Company recognized an $18.7 million extraordinary item from
early extinguishment of the 13 3/8% First Mortgage Notes. The extraordinary loss
consisted primarily of the 20% premium paid on the face value of the notes and
the write-off of debt placement fees related to the notes (net of tax benefit of
$12.4 million).
Net Loss
Net loss for the first nine months of 1998 was $2.4 million, compared to
the $22.5 million loss for the same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Financial Leverage and Covenants. As of September 30, 1998, the Company had
outstanding $587.5 million of long-term debt. While most of the Company's debt
is due in 2006 and 2007, the Company is required to make certain scheduled
payments each year. The degree to which the Company is indebted could have
important consequences including, but not limited to: (i) limitations on the
ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions, general corporate purposes and other
purposes, if needed; (ii) the allocation of a substantial portion of cash flow
from operations to cover cash interest requirements, thereby limiting the funds
available for operations and any future business opportunities; and (iii)
increasing the Company's vulnerability to a downturn in its business or the
economy.
However, the Company believes that existing cash balances, cash flow from
current and anticipated future levels of operations and the availability under
its revolving credit facility, will be adequate to make the required payments of
principal and interest on outstanding indebtedness, as well as to fund its
future capital expenditures and working capital requirements. Annualized cash
interest of approximately $53.3 million will be payable on its long-term debt.
To the extent that the Company were to draw upon the commitments under the
revolving credit facility, due to adverse business conditions or to finance
acquisitions or for other corporate purposes, the Company's aggregate interest
expense would be increased.
The Company's belief that it will maintain sufficient cash for its
requirements is based upon the Company's existing cash balances and, among other
things, assumptions concerning (i) the Company's cash flows from its future
continuing operations; (ii) the Company's future investments in working capital
in accordance with prior practices; and (iii) the Company's future capital
expenditures in accordance with its business plan.
The Company's debt agreements contain restrictions on certain PCI
subsidiaries. Pioneer Americas, Inc. ("PAI"), PCI's subsidiary with most of the
Company's operations, is restricted in advancing funds to PCI or making certain
other investments to the sum of $5.0 million plus 50% of its cumulative
consolidated net income, as defined (or less 100% of cumulative consolidated net
loss, as defined, if PAI has a loss). In addition, to incur additional
indebtedness (with certain exceptions), PAI must maintain a 2.0 to 1.0 ratio of
consolidated cash flow to interest expense. Other restrictions within the debt
agreements limit PAI's ability to acquire or dispose of assets or operations and
to pay dividends or redeem shares of stock.
Revolving Facility. In November 1997, the Company entered into an agreement
with respect to an amended $65.0 million credit agreement that provides for a
five-year revolving loan and letter of credit facility (subject to borrowing
base limitations that relate to the level of accounts receivable and inventory)
(the "Revolving Facility").
The Revolving Facility provides for revolving loans (the "Revolving Loans")
and letters of credit in an aggregate principal amount up to $65.0 million and
includes a US $30.0 million Canadian sub-facility, which is also subject to
borrowing base limitations. As of September 30, 1998, the Company had letters of
credit outstanding of approximately $2.4 million and had the ability to draw up
to $62.6 million of additional indebtedness, subject to borrowing base
limitations. The Company had no Revolving Loans outstanding at September 30,
1998 and no amounts outstanding under the Canadian sub-facility. Borrowing under
the Revolving Facility is subject to a 1.1 to 1.0 required ratio of consolidated
cash flow to interest expense.
11
<PAGE> 12
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 may 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. While the first nine months of
1998 produced a net loss, included in the net loss were $37.2 million of
non-cash depreciation and amortization expenses, resulting in positive cash flow
from operations of $34.3 million.
Net Cash Flows from Investing Activities. Cash used in investing activities
during the first nine months of 1998 totaled $21.9 million, which was due to
capital expenditures related to property, plant and equipment.
Net Cash Flows from Financing Activities. Cash used in financing activities
during the first nine months of 1998 totaled $1.6 million due to debt payments,
offset partially by proceeds from issuances of common stock.
YEAR 2000 ISSUES
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of date-sensitive data by the Company's computerized
information systems. The year 2000 may be critical to these systems as many
computer programs were written using two digits rather than four to define the
applicable year. As a result, any of the Company's computer applications that
have date-sensitive programs may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failures in the
manufacturing area that could cause serious production-related issues. In
addition, miscalculations or system failures could result in a temporary
inability to process transactions, issue invoices, remit payments, communicate
with financial institutions and other entities electronically and update
internal accounting systems. If not corrected in a timely manner, such business
disruptions would be detrimental to the continuing operations of the Company.
The Company has initiated a program to prepare its computer systems and
applications for the year 2000. Based on present information, Management
believes that while many of the systems are already year 2000 compliant, other
systems will require modification or replacement with new programs. The Company
will utilize both internal and external resources to reprogram, replace and test
software for year 2000 compliance. The Company plans to complete the year 2000
conversion tasks well in advance of the end of 1999. The total project costs are
presently estimated not to exceed $1.0 million, to be obtained through working
capital, and will be expensed as incurred unless new software is purchased in
which case certain costs will be capitalized.
The Company is taking steps to identify year 2000 compliance issues that
may be created by key customers, suppliers and financial institutions with which
the Company does business. While no single customer represents greater than 10%
of the Company's revenues, the Company does have several larger customers who
each account for a sizable dollar amount of sales revenue. The Company's
significant vendors include electrical power companies, salt companies and
freight companies. The loss of any key customer or the inability of any of the
Company's key vendors to provide its goods and services to the Company would
have a negative impact on the Company's operations until those entities return
to normal operations.
The anticipated future costs of the year 2000 conversion project and the
date on which the Company anticipates project completion are based on
Management's best estimates, which were derived using numerous assumptions of
future events including the continued availability of certain resources, third
party modification plans and other factors. There can be no guarantee that these
estimates will be achieved and actual results could vary significantly from
current estimates.
12
<PAGE> 13
The Company will be developing a written contingency plan by early 1999 to
address the issues that could arise should the Company or any of its significant
suppliers, customers or financial institutions not be prepared to accommodate
year 2000 issues timely. The Company believes that in an emergency situation it
could revert to the use of manual systems that do not rely on computers. Through
these manual systems, the Company could perform the minimum functions required
to maintain the flow of goods and provide a minimum level of information
reporting to maintain a level of control over the business cycle. Should the
Company have to utilize manual systems, it is uncertain that it could maintain
current levels of operations and this could have a material adverse impact on
the business. The Company intends to maintain constant surveillance on the year
2000 issues and will adapt its plans as required.
ACCOUNTING CHANGES
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, Accounting for Costs of Computer
Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides
a framework for determining the accounting treatment of costs incurred to obtain
or develop computer software. The Company is required to adopt the provisions of
SOP 98-1 beginning in 1999, without adjustment to previously reported amounts.
In April 1998, the AICPA issued Statement of Position 98-5, Reporting on
the Costs of Start-Up Activities ("SOP 98-5"), which requires immediate
expensing of certain organization costs and start-up costs. The Company is
required to adopt the provisions of SOP 98-5 in 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and for hedging activities.
The Company is required to adopt the provisions of SFAS No. 133 in the third
quarter of 1999.
Management does not believe the adoption of the above-mentioned accounting
changes will have a material effect on the Company's financial statements.
13
<PAGE> 14
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
27 -- Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended September 30, 1998.
14
<PAGE> 15
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 COMPANIES, INC.
By: /s/ PHILIP J. ABLOVE
----------------------------------
Philip J. Ablove
Vice President and
Chief Financial Officer
(Principal Financial Officer)
November 3, 1998
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27 -- Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 60,556
<SECURITIES> 0
<RECEIVABLES> 65,005
<ALLOWANCES> 3,049
<INVENTORY> 28,157
<CURRENT-ASSETS> 153,792
<PP&E> 404,841
<DEPRECIATION> 67,948
<TOTAL-ASSETS> 746,098
<CURRENT-LIABILITIES> 74,071
<BONDS> 584,837
5,500
0
<COMMON> 100
<OTHER-SE> 34,024
<TOTAL-LIABILITY-AND-EQUITY> 746,098
<SALES> 304,620
<TOTAL-REVENUES> 304,620
<CGS> 230,220
<TOTAL-COSTS> 230,220
<OTHER-EXPENSES> 40,837
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,778
<INCOME-PRETAX> (2,023)
<INCOME-TAX> 423
<INCOME-CONTINUING> (2,446)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,446)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
