<PAGE> 1
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 MARCH 31, 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)
DELAWARE 06-1215192
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4300 NATIONSBANK CENTER, 700 LOUISIANA STREET
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(713) 570-3200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
On April 17, 1998, there were outstanding 9,170,606 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
Page
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets--March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations--Three Months Ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows--Three Months Ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
</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
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------------ -------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 59,861 $ 51,887
Accounts receivable, less allowance for doubtful accounts of $3,417 at
March 31, 1998 and $3,602 at December 31, 1997 58,516 68,942
Inventories 28,869 25,379
Prepaid expenses 1,205 1,831
--------- ---------
Total current assets 148,451 148,039
Property, plant and equipment:
Land 10,726 10,726
Buildings and improvements 59,891 59,625
Machinery and equipment 278,461 274,267
Construction in progress 32,464 32,309
--------- ---------
381,542 376,927
Less accumulated depreciation (45,345) (36,503)
--------- ---------
336,197 340,424
Other assets, net of accumulated amortization of $4,520 at March 31, 1998
and $4,649 at December 31, 1997 57,816 59,302
Excess cost over fair value of net assets acquired, net of accumulated
amortization of $16,358 at March 31, 1998 and $14,095 at December 31, 1997 204,093 205,907
--------- ---------
Total assets $ 746,557 $ 753,672
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 32,752 $ 47,784
Accrued liabilities 39,744 36,372
Current portion of long-term debt 2,598 2,598
--------- ---------
Total current liabilities 75,094 86,754
Long-term debt, less current portion 586,212 586,866
Accrued pension and other employee benefits 21,576 21,068
Other long-term liabilities 19,177 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 9,236 at March 31, 1998 and 9,227 at December 31, 1997 92 92
Class B, $.01 par value, authorized 4,000 shares, issued and outstanding
750 at March 31, 1998 and 750 at December 31, 1997, convertible
share-for-share into Class A shares 8 8
Additional paid-in capital 54,714 54,713
Retained deficit (15,816) (18,592)
--------- ---------
Total stockholders' equity 38,998 36,221
--------- ---------
Total liabilities and stockholders' equity $ 746,557 $ 753,672
========= =========
See notes to consolidated financial statements.
</TABLE>
3
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PIONEER COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Revenues $ 101,325 $ 46,046
Cost of sales 71,974 36,339
--------- ---------
Gross profit 29,351 9,707
Selling, general and administrative expenses 14,086 8,405
--------- ---------
Operating income 15,265 1,302
Interest expense, net (12,914) (4,774)
Other income, net 3,088 229
--------- ---------
Income (loss) before taxes 5,439 (3,243)
Income tax provision (benefit) 2,663 (789)
--------- ---------
Net income (loss) $ 2,776 $ (2,454)
========= =========
Net income (loss) per common share:
Basic $ 0.28 $ (0.25)
========= ==========
Diluted $ 0.25 $ (0.25)
========= ==========
Weighted average number of common shares outstanding:
Basic 9,984 9,902
Diluted 11,096 9,902
</TABLE>
See notes to consolidated financial statements.
4
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PIONEER COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1998 1997
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<S> <C> <C>
Operating activities:
Net income (loss) $ 2,776 $ (2,454)
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization 12,123 4,904
Net change in deferred taxes 2,923 (438)
Foreign exchange loss (186) --
Net effect of changes in operating assets and liabilities (4,631) (181)
---------- ----------
Net cash flows from operating activities 13,005 1,831
---------- ----------
Investing activities:
Capital expenditures (4,581) (2,363)
---------- ----------
Net cash flows from investing activities (4,581) (2,363)
---------- ----------
Financing activities:
Payments on long-term debt (654) (32)
Issuance of Class A common stock -- 874
---------- ----------
Net cash flows from financing activities (654) 842
---------- ----------
Effect of exchange rate changes on cash 204 --
---------- -----------
Net increase in cash 7,974 310
Cash at beginning of period 51,887 15,754
---------- ----------
Cash at end of period $ 59,861 $ 16,064
========== ==========
</TABLE>
See notes to consolidated financial statements.
5
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PIONEER COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
The consolidated balance sheet at March 31, 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 three 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. 1997 per share
information has been computed after giving retroactive effect to a 7% stock
dividend on Class A and Class B Common Stock of record in December 1997.
2. SUPPLEMENTAL CASH FLOW INFORMATION
Net effects of changes in operating assets and liabilities are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1998 1997
------------- ------------
<S> <C> <C>
Accounts receivable $ 10,524 $ 930
Inventories (3,442) (2,147)
Prepaid expenses 623 516
Other assets (963) 61
Accounts payable (15,130) (516)
Accrued liabilities 3,297 1,072
Other long-term liabilities 460 (97)
----------- ------------
Net change in operating assets and liabilities $ (4,631) $ (181)
=========== ============
</TABLE>
Following are supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1998 1997
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<S> <C> <C>
Cash payments for:
Interest $ 4,691 $ 835
Income taxes -- 138
</TABLE>
6
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3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------------- ---------------
<S> <C> <C>
Raw materials, supplies and parts $ 20,336 $ 21,068
Finished goods and work-in-process 10,292 7,188
Inventories under exchange agreements (1,759) (2,877)
------------ -------------
$ 28,869 $ 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.
5. EARNINGS PER SHARE
Computational amounts for earnings per share are as follows:
<TABLE>
<CAPTION>
SHARES FOR
EPS
SHARES FOR ASSUMING
INCOME BASIC EPS DILUTION
(NUMERATOR) (DENOMINATOR) (DENOMINATOR)
--------- ----------- -----------
FOR THE THREE MONTHS ENDED MARCH 31, 1998
-----------------------------------------
<S> <C> <C> <C>
Net income $ 2,776 -- --
===========
Weighted average shares of common stock
outstanding 9,984 9,984
Preferred stock -- 471
Stock options -- 641
------------ ------------
Denominator for EPS 9,984 11,096
============ ============
Net income per share $ 0.28 $ 0.25
============ ============
FOR THE THREE MONTHS ENDED MARCH 31, 1997
-----------------------------------------
Net loss $ (2,454)
===========
Weighted average shares of common stock
outstanding 9,902 9,902
============ ============
Net loss per share $ (0.25) $ (0.25)
============ ============
</TABLE>
7
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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 MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenues
Revenues increased by $55.3 million or approximately 120% to $101.3
million for the three months ended March 31, 1998. The increase in revenues was
primarily attributable to additional sales volumes from the Pioneer Chlor Alkali
Co., Inc. ("PCAC") acquisition of a chlor-alkali plant in Tacoma, Washington in
June 1997 and the acquisition of the business of PCI Chemicals Canada Inc. and
PCI Carolina, Inc. (together "PCI Canada") in October 1997. In addition, PCAC
average electrochemical unit ("ECU") prices increased approximately 11%.
Partially offsetting these increases were decreased sales due to lower
production volumes at PCAC's Henderson and Tacoma plants in early 1998, due to a
failed transformer at Henderson, which is now fully operational, and a lack of
railcar availability in the western United States due to Union Pacific rail
transportation problems. Revenues at Kemwater North America Company ("Kemwater")
decreased approximately 12% from the first quarter of 1997, due to competitive
conditions in the iron chlorides business. Revenues at All-Pure Chemical
Company, Inc. ("All-Pure") decreased slightly due to the adverse weather
conditions on the West Coast.
Cost of Sales
Cost of sales increased $35.6 million, or almost 100%, for the three
months ended March 31, 1998, principally because of the sales volumes of the
acquired operations. Cost of sales at Kemwater and All-Pure decreased somewhat
as a result of decreased sales volumes.
Gross Profit
Gross profit margin increased to 29% in 1998 from 21% as a result of
the revenues and cost of sales fluctuations described above.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $5.7 million
for the three months ended March 31, 1998, primarily due to the PCI Canada
acquisition. Also, during 1998 "pay-for-performance" award accruals were made in
excess of the 1997 first quarter accruals.
Interest Expense, Net
Interest expense, net increased $8.1 million to $12.9 million for the
first three 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 13
3/8% First Mortgage Notes at substantially lower interest rates.
Other Income, Net
Other income for the first three months of 1998 includes a gain from
the settlement of a lawsuit of approximately $0.9 million, an accrual for a
business interruption insurance claim at PCAC's Henderson plant related to the
failed transformer, and a state franchise tax refund.
Net Income.
Due to the factors described above, net income for the first quarter of
1998 was $2.8 million, compared to a net loss of $2.5 million for the same
period of 1997.
LIQUIDITY AND CAPITAL RESOURCES
Financial Leverage and Covenants. As of March 31, 1998, the Company had
outstanding $588.8 million of long-term debt. While the majority 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
8
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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, to a lesser extent, 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 generate sufficient cash flow for its
requirements is based, among other things, on the assumptions that: (i) the
Company's cash flow will be positive as a result of the continuing operating
activities; (ii) the Company will invest in working capital in accordance with
prior practices; and (iii) the Company will not incur any material capital
expenditures in excess of its business plan.
Revolving Facility. In November 1997, the Company entered into 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 also includes a US$30.0 million Canadian sub-facility, which is also
subject to borrowing base limitations. As of March 31, 1998, the Company had
letters of credit outstanding of approximately $2.9 million and had the ability
to draw up to $62.1 million of additional indebtedness, subject to borrowing
base limitations. The Company had no Revolving Loans outstanding at March 31,
1998 and no amounts outstanding under the Canadian sub-facility.
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. During the first three months of
1998, the Company generated $13.0 million in cash from operating activities,
attributable to the net income for the period plus the impact of depreciation
and amortization, partially offset by an increase in working capital.
Net Cash Flows from Investing Activities. Cash used in investing activities
during the first three months of 1998 totaled $4.6 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 three months of 1998 totaled $0.7 million for debt payments.
9
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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 March 31, 1998.
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.
April 27, 1998 By: /s/ Philip J. Ablove
---------------------------------
Philip J. Ablove
Vice President and
Chief Financial Officer
(Principal Financial Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 59,861
<SECURITIES> 0
<RECEIVABLES> 61,933
<ALLOWANCES> 3,417
<INVENTORY> 28,869
<CURRENT-ASSETS> 148,451
<PP&E> 381,542
<DEPRECIATION> 45,345
<TOTAL-ASSETS> 746,557
<CURRENT-LIABILITIES> 75,094
<BONDS> 586,212
5,500
0
<COMMON> 100
<OTHER-SE> 38,898
<TOTAL-LIABILITY-AND-EQUITY> 746,557
<SALES> 101,325
<TOTAL-REVENUES> 101,325
<CGS> 71,974
<TOTAL-COSTS> 71,974
<OTHER-EXPENSES> 14,086
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,914
<INCOME-PRETAX> 5,439
<INCOME-TAX> 2,663
<INCOME-CONTINUING> 5,439
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,439
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.25
</TABLE>
