<PAGE> 1
PROSPECTUS
[PIONEER LOGO]
PCI CHEMICALS CANADA INC.
OFFER TO EXCHANGE $1,000 IN PRINCIPAL AMOUNT OF 9 1/4% SERIES B SENIOR SECURED
NOTES DUE 2007
FOR EACH $1,000 IN PRINCIPAL AMOUNT OF OUTSTANDING 9 1/4% SERIES A SENIOR
SECURED NOTES DUE 2007
---------------------
PCI Chemicals Canada Inc., a New Brunswick, Canada company ("PCI Canada" or
"the Issuer"), hereby offers to exchange (the "Exchange Offer") up to
$175,000,000 in aggregate principal amount of its 9 1/4% Series B Senior Secured
Notes Due 2007 (the "Exchange Notes") for up to $175,000,000 in aggregate
principal amount of its outstanding 9 1/4% Series A Senior Secured Notes Due
2007 issued in reliance upon an exemption from registration under the Securities
Act of 1933, as amended (the "Original Notes" and, together with the Exchange
Notes, the "Notes").
The terms of the Exchange Notes will be substantially identical in all
respects (including principal amount, interest rate, maturity and ranking) to
the terms of the Original Notes for which they may be exchanged pursuant to the
Exchange Offer, except that (i) the Exchange Notes will be freely transferable
by holders thereof (except as provided below) and (ii) the Exchange Notes will
be issued without any covenant of the Registrants (as defined) regarding
registration. The Exchange Notes will be issued under the indenture governing
the Original Notes. The Exchange Notes will be, and the Original Notes are,
senior obligations of the Issuer and will be and are fully and unconditionally
guaranteed on a senior basis by Pioneer Americas Acquisition Corp. ("PAAC" and
together with its subsidiaries, the "Company"), Pioneer Americas, Inc., the
direct parent of the Issuer ("PAI"), and the other subsidiaries of PAAC
(collectively, the "Guarantors", and together with the Issuer, the
"Registrants"). The Exchange Notes will be, and the Original Notes are, secured
by pari passu first priority liens on the Collateral (as defined), consisting of
certain assets acquired in the PCI Canada Acquisition (as defined). The Exchange
Notes will rank pari passu with all other existing and future Senior
Indebtedness (as defined) of the Issuer and senior to all subordinated
Indebtedness of the Issuer. The Exchange Notes and the obligations of the
Guarantors under their guarantees of the Exchange Notes will be effectively
subordinated to secured Senior Indebtedness of the Issuer and the Guarantors,
respectively, with respect to the assets securing such Indebtedness. As of
September 30, 1997, on a pro forma basis after giving effect to the Offering,
the other Financings (as defined) and the PCI Canada Acquisition, the Issuer and
the Guarantors would have had $557.8 million of outstanding secured Senior
Indebtedness. For a complete description of the terms of the Exchange Notes,
including provisions relating to the ability of the Registrants to create
indebtedness that is senior or pari passu to the Exchange Notes, see
"Description of the Notes." There will be no cash proceeds to the Registrants
from the Exchange Offer.
The Notes will bear interest from and including their respective dates of
issuance. Holders whose Original Notes are accepted for exchange will receive
accrued interest thereon to, but not including, the date of issuance of the
Exchange Notes, such interest to be payable with the first interest payment on
the Exchange Notes, but will not receive any payment in respect of interest on
the Original Notes accrued after the issuance of the Exchange Notes.
The Original Notes were originally issued and sold on November 5, 1997 in a
transaction not registered under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon the exemption provided in Section 4(2) of
the Securities Act and Rule 144A of the Securities Act (the "Initial Offering").
Accordingly, the Original Notes may not be reoffered, resold or otherwise
pledged, hypothecated or transferred in the United States unless so registered
or unless an applicable exemption from the registration requirements of the
Securities Act is available. Based upon interpretations by the Staff (the
"Staff") of the Securities and Exchange Commission (the "Commission") issued to
third parties, the Registrants believe that the Exchange Notes issued pursuant
to the Exchange Offer in exchange for the Original Notes may be offered for
resale, resold and otherwise transferred by holders thereof (other than any
holder which is (i) an "affiliate" of the Registrants within the meaning of Rule
405 under the Securities Act, (ii) a broker-dealer who acquired Original Notes
directly from the Registrants or (iii) a broker-dealer who acquired Original
Notes as a result of market making or other trading activities) without
compliance with the registration and prospectus delivery provisions of the
Securities Act provided that such Exchange Notes are acquired in the ordinary
course of such holders' business and such holders are not engaged in, and do not
intend to engage in, and have no arrangement or understanding with any person to
participate in, a distribution of such Exchange Notes. Each broker-dealer that
receives Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. Broker-dealers
who acquired Original Notes as a result of market making or other trading
activities may use this Prospectus, as supplemented or amended, in connection
with resales of the Exchange Notes. The Registrants have agreed that, for a
period not to exceed 180 days after the Exchange Date (as defined), they will
make this Prospectus available to any broker-dealer for use in connection with
any such resale. Any holder that cannot rely upon such interpretations must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction.
The Original Notes and the Exchange Notes constitute new issues of
securities with no established trading market. Any Original Notes not tendered
and accepted in the Exchange Offer will remain outstanding. To the extent that
Original Notes are tendered and accepted in the Exchange Offer, a holder's
ability to sell untendered, and tendered but unaccepted, Original Notes could be
adversely affected. Following consummation of the Exchange Offer, the holders of
Original Notes will continue to be subject to the existing restrictions on
transfer thereof and the Registrants will have no further obligation to such
holders to provide for the registration under the Securities Act of the Original
Notes except under certain limited circumstances. (See "Original Notes
Registration Rights.") No assurance can be given as to the liquidity of the
trading market for either the Original Notes or the Exchange Notes.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Original Notes being tendered for exchange. The Exchange Offer will
expire at 5:00 p.m., New York City time, on February 9, 1998, unless extended
(the "Expiration Date"). The date of acceptance for exchange of the Original
Notes (the "Exchange Date") will be the first business day following the
Expiration Date, upon surrender of the Original Notes. Original Notes tendered
pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date; otherwise such tenders are irrevocable.
---------------------
SEE "RISK FACTORS" ON PAGE 16 FOR A DESCRIPTION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
The date of this Prospectus is January 9, 1998
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[Map of portions of the United States and Canada depicting the locations of
the Company's facilities]
<PAGE> 3
<TABLE>
<S> <C> <C>
PRODUCTION FACILITIES
Annual Production
Location Products Capacity (tons)
---------------------------------------------------------------------------------------------------------------
o Pioneer Chlor Alkali Company, Inc.
Tacoma, WA Chlorine 225,000
-----------------------------------------------------------
Caustic Soda 247,500
-----------------------------------------------------------
Hydrochloric Acid 44,000
-----------------------------------------------------------
Calcium Chloride 8,800
---------------------------------------------------------------------------------------------------------------
Henderson, NV Chlorine 152,000
-----------------------------------------------------------
Caustic Soda 167,200
-----------------------------------------------------------
Hydrochloric Acid 130,000
-----------------------------------------------------------
Bleach 5,100
---------------------------------------------------------------------------------------------------------------
St. Gabriel, LA Chlorine 197,000
-----------------------------------------------------------
Caustic Soda 216,700
---------------------------------------------------------------------------------------------------------------
o PCI CHEMICALS CANADA INC.
Becancour, Quebec Chlorine 340,000
-----------------------------------------------------------
Caustic Soda 383,000
-----------------------------------------------------------
Hydrochloric Acid 150,000
-----------------------------------------------------------
Bleach 16,000
---------------------------------------------------------------------------------------------------------------
Dalhousie, New Brunswick Chlorine 36,000
-----------------------------------------------------------
Caustic Soda 40,000
-----------------------------------------------------------
Sodium Chlorate 22,000
---------------------------------------------------------------------------------------------------------------
Cornwall, Ontario Hydrochloric Acid 11,000
-----------------------------------------------------------
Bleach 222,000
-----------------------------------------------------------
Cereclor(R) (Chlorinated Paraffin) 7,500
-----------------------------------------------------------
PSR-2000(R) 31,000
-----------------------------------------------------------
IMPAQT(R) 4,400
---------------------------------------------------------------------------------------------------------------
Charlotte, NC IMPAQT(R) 4,000
---------------------------------------------------------------------------------------------------------------
o ALL-PURE CHEMICAL CO.
City of Industry, CA Bleach 262,000
---------------------------------------------------------------------------------------------------------------
Santa Fe Springs, CA Bleach 262,000
---------------------------------------------------------------------------------------------------------------
Tracy, CA Bleach 262,000
---------------------------------------------------------------------------------------------------------------
Kalama, WA Bleach 52,500
---------------------------------------------------------------------------------------------------------------
Tacoma, WA Bleach 105,000
---------------------------------------------------------------------------------------------------------------
o KEMWATER NORTH AMERICA COMPANY
Antioch, CA Aluminum Sulfate 30,000
---------------------------------------------------------------------------------------------------------------
Mojave, CA Iron Chlorides 130,000
-----------------------------------------------------------
Bleach 13,000
---------------------------------------------------------------------------------------------------------------
Pittsburg, CA Iron Chlorides 30,000
---------------------------------------------------------------------------------------------------------------
Savannah, GA Poly Aluminum Chlorides 45,000
-----------------------------------------------------------
Alum 25,000
-----------------------------------------------------------
Sodium Aluminate 15,000
-----------------------------------------------------------
Ferric Sulfate Solution 18,000
---------------------------------------------------------------------------------------------------------------
Spokane, WA Aluminum Sulfate 30,000
---------------------------------------------------------------------------------------------------------------
O TERMINAL/WAREHOUSE FACILITIES
Fresno, CA Spokane, WA Cape Girardeau, MO Richmond, CA Bayonne, NJ
Tampa, FL Wilmington, CA Albany, OR Wilmington, DE Point Tupper, Nova Scotia
O RESEARCH FACILITY
Mississauga, Ontario
</TABLE>
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AVAILABLE INFORMATION
The Issuer and the Guarantors have filed with the Commission a Registration
Statement on Form S-4 (the "Registration Statement," which term shall include
all amendments, exhibits, annexes and schedules thereto) pursuant to the
Securities Act, and the rules and regulations promulgated thereunder, covering
the Exchange Notes being offered hereby. This Prospectus does not contain all
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document referred to in the Registration Statement are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports and other information required
by the Commission. Periodic reports and other information filed by the Company
with the Commission may be inspected at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, or at its regional offices located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, Suite 1300, New York, New York 10048. The Commission maintains a Web
site that contains reports, proxy and information statements and other
information regarding companies that file electronically with the Commission.
The address of such site is http://www.sec.gov. Copies of such material can also
be obtained from the Company upon request. Any such request should be directed
to the Secretary of the Company at 4300 NationsBank Center, 700 Louisiana
Street, Houston, Texas 77002, telephone number (713) 225-3831.
The Company's obligation to file periodic reports with the Commission
pursuant to the Exchange Act may be suspended if the Notes are held of record by
fewer than 300 holders at the beginning of any fiscal year of the Company, other
than the fiscal year in which the Exchange Offer Registration Statement (as
defined) or any Shelf Registration Statement (as defined) becomes effective. The
Company has agreed that, whether or not it is required to do so by the rules and
regulations of the Commission, for so long as any of the Notes remain
outstanding, it will furnish to the holders of the Notes and submit to the
Commission (unless the Commission will not accept such materials) (i) all
quarterly and annual financial information that would be required to be
contained in filings with the Commission on Forms 10-Q and 10-K if the Company
were required to file such forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual information only, a report thereon by the Company's certified
independent accountants, and (ii) all reports that would be required to be filed
with the Commission on Form 8-K if the Company were required to file such
reports. In addition, for so long as any of the Notes remain outstanding, the
Company has agreed to make available upon request to any prospective purchaser
of, or beneficial owner of Notes in connection with any offer or sale thereof,
the information required by Rule 144A(d)(4) under the Securities Act.
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE ISSUER OR THE GUARANTORS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE EXCHANGE NOTES IN
ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE ISSUER OR THE GUARANTORS SINCE THE DATE HEREOF.
ii
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
AVAILABLE INFORMATION...................... ii
EXCHANGE CONTROLS.......................... iv
ENFORCEABILITY OF CIVIL LIABILITIES........ iv
PROSPECTUS SUMMARY......................... 1
RISK FACTORS............................... 16
Consequences of Failure to Exchange...... 16
Financial Leverage....................... 16
Industry Cyclicality..................... 17
Environmental Regulation................. 17
Operating Hazards and Uninsured Risks.... 21
Limitations on Security Interest......... 21
No Assurance of Realizable Value from
Collateral............................. 21
Potential Environmental Liability of
Secured Lenders........................ 22
Competition.............................. 22
Dependence on Key Customers and Key
Suppliers.............................. 22
Ranking of the Notes and Guarantees...... 23
Fraudulent Conveyance Issues............. 23
Tax Matters.............................. 23
Change of Control........................ 24
Control by Certain Stockholders.......... 24
Forward-Looking Statements............... 24
Lack of Public Market for the Notes...... 25
USE OF PROCEEDS............................ 25
THE EXCHANGE OFFER......................... 26
Purpose of the Exchange Offer............ 26
Terms of the Exchange.................... 26
Expiration Date; Extensions; Termination;
Amendments............................. 27
How to Tender............................ 28
Terms and Conditions of the Letter of
Transmittal............................ 29
Withdrawal Rights........................ 30
Acceptance of Original Notes for
Exchange; Delivery of Exchange Notes... 30
Conditions to the Exchange Offer......... 31
Exchange Agent........................... 31
Solicitation of Tenders; Expenses........ 31
Appraisal Rights......................... 32
Federal Income Tax Consequences.......... 32
Other.................................... 32
THE ACQUISITION............................ 33
The Acquisition.......................... 33
Use of Proceeds from Initial Offering.... 34
THE COMPANY AND PIONEER.................... 35
The Company.............................. 35
Pioneer.................................. 36
CAPITALIZATION............................. 37
PRO FORMA FINANCIAL
INFORMATION.............................. 38
SUPPLEMENTAL ANALYSIS OF ADJUSTED EBITDA... 53
SELECTED HISTORICAL FINANCIAL DATA......... 54
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................... 57
BUSINESS................................... 64
General.................................. 64
Industry Overview........................ 64
</TABLE>
<TABLE>
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<S> <C>
Strategy................................. 67
Operating Units.......................... 68
Facilities............................... 75
Other Investments........................ 79
Competition.............................. 80
Employees................................ 80
Environmental and Safety Regulation...... 81
Insurance................................ 90
Legal Proceedings........................ 90
MANAGEMENT................................. 91
Directors and Executive Officers of
PAAC................................... 91
Executive Compensation................... 93
Pension Plan............................. 96
Employment Agreements and Severance and
Change-in-Control Arrangements......... 96
Compensation of Directors................ 97
Compensation Committee Interlocks and
Insider Participation.................. 98
CERTAIN TRANSACTIONS....................... 98
STOCK OWNERSHIP............................ 100
DESCRIPTION OF OTHER INDEBTEDNESS.......... 101
New Credit Facilities.................... 101
Existing Term Facility................... 102
Senior Secured Notes..................... 102
Other.................................... 103
DESCRIPTION OF THE NOTES................... 104
General.................................. 104
Payment Terms............................ 104
Ranking.................................. 104
Guarantees............................... 105
Security................................. 106
Intercreditor Agreements................. 106
Certain Bankruptcy Considerations........ 107
Additional Amounts....................... 109
Optional Redemption...................... 110
Redemption for Changes in Canadian
Withholding Taxes...................... 110
Change of Control........................ 111
Certain Covenants........................ 113
Release of Collateral.................... 124
Certain Definitions...................... 124
Defaults and Remedies.................... 134
Transfer and Exchange.................... 135
Amendment, Supplement and Waiver......... 135
Legal Defeasance and Covenant
Defeasance............................. 136
Enforceability of Judgements with Respect
to the Notes........................... 137
Consent to Jurisdiction and Service...... 138
The Trustee.............................. 138
Governing Law............................ 138
Book-entry; Delivery; Form and
Transfer............................... 139
ORIGINAL NOTES REGISTRATION RIGHTS......... 142
CERTAIN TAX CONSEQUENCES................... 144
PLAN OF DISTRIBUTION....................... 147
LEGAL MATTERS.............................. 148
EXPERTS.................................... 148
CHANGE IN INDEPENDENT PUBLIC AUDITORS...... 148
INDEX TO FINANCIAL STATEMENTS.............. F-1
</TABLE>
iii
<PAGE> 6
EXCHANGE CONTROLS
The Issuer has been advised by Stewart McKelvey Stirling Scales and
Stikeman Elliott, a general partnership, respective Canadian counsel, that there
are no governmental laws, decrees or regulations in the provinces of New
Brunswick, Nova Scotia, Ontario or Quebec or the laws of Canada applicable
thereto which restrict the export or import of capital and that there are no
limitations on the right of non-resident or foreign owners to hold or vote the
Notes.
ENFORCEABILITY OF CIVIL LIABILITIES
The Issuer is a New Brunswick corporation. Certain of its directors,
officers and experts named herein are residents of Canada. All or a substantial
portion of the assets of such persons and the Issuer are located outside the
United States. As a result, it may be difficult for investors to effect service
of process within the United States upon such directors, officers and experts or
to realize in the United States upon judgments of courts of the United States
predicated upon civil liability under the federal securities laws of the United
States. The Issuer has been advised that there is doubt as to the enforceability
against such persons in Canada of a judgment of a United States court predicated
solely upon civil liability under the federal securities laws of the United
States. The Issuer has also been advised that an action may be brought against
the Issuer or against its directors, officers and experts in a court of
competent jurisdiction in New Brunswick in the first instance on the basis of
civil liability predicated solely upon the federal securities laws of the United
States only if their acts or evaluations would be actionable if they had
occurred in New Brunswick, and if they would be liable under the federal
securities laws of the United States in an action brought in the United States.
iv
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless the
context otherwise requires, (i) the terms PCI Canada and Issuer refer to PCI
Chemicals Canada Inc., (ii) the term PAAC refers to Pioneer Americas Acquisition
Corp., (iii) the terms PAI and Predecessor Company refer to Pioneer Americas,
Inc. and its subsidiaries, (iv) the term Company means PAAC and its subsidiaries
and (v) the term Pioneer refers to Pioneer Companies, Inc., the parent company
of PAAC. "Pro forma net sales" for Pioneer Chlor Alkali Company, Inc. gives
effect to the June 17, 1997 acquisition of a chlor-alkali production facility
and related business (the "Tacoma Facility") located in Tacoma, Washington (the
"Tacoma Acquisition"). "Pro forma net sales" for All-Pure Chemical Co. gives
effect to the acquisition of T.C. Products, Inc. ("T.C. Products"), a regional
producer of bleach and related products that was acquired in July 1996. "Pro
forma net sales" and "pro forma EBITDA" for the PCI Canada Business (as defined)
gives effect to the acquisition of substantially all of the assets and
properties of the Forest Products Division of ICI Canada Inc. and ICI Americas
Inc. consummated as of October 31, 1997 (the "PCI Canada Acquisition"). "Pro
forma net sales" and "pro forma EBITDA" for the Company gives effect to each of
these transactions. See "The Company and Pioneer." Dollar amounts are in United
States dollars unless otherwise indicated.
THE COMPANY
The Company manufactures and markets chlorine and caustic soda and several
related downstream water treatment products. The Company conducts its business
primarily through its subsidiaries: Pioneer Chlor Alkali Company, Inc. ("PCAC"),
with pro forma net sales of $196.5 million for the twelve months ended September
30, 1997, and All-Pure Chemical Co. ("All-Pure"), with pro forma net sales of
$52.6 million for such period. The Company also owns a 50% unconsolidated joint
venture interest in Kemwater North America Company ("Kemwater"). In October
1997, the Company acquired substantially all of the assets and properties of the
North American chlor-alkali business of ICI Canada Inc. ("ICI Canada") and ICI
Americas Inc. ("ICI Americas"), with pro forma net sales of $162.5 million for
the twelve months ended September 30, 1997. For the twelve months ended
September 30, 1997, the Company's pro forma net sales and pro forma EBITDA (as
defined) were $411.4 million and $121.5 million, respectively.
Chlorine and caustic soda are the seventh and sixth most commonly produced
chemicals, respectively, in the United States, based on volume, and are used in
a wide variety of applications and chemical processes. Chlorine and caustic soda
are co-products, concurrently produced in a ratio of 1 to 1.1, through the
electrolysis of salt water. A chlor-alkali electrochemical unit ("ECU") consists
of 1 ton of chlorine and 1.1 tons of caustic soda. During the twelve months
ended September 30, 1997, after giving pro forma effect to the PCI Canada
Acquisition and the Tacoma Acquisition, the Company produced approximately
886,000 tons of chlorine and 1,001,000 tons of caustic soda.
Chlorine is used in the manufacture of over 15,000 products, comprising
approximately 60% of all commercial chemistry, 85% of all pharmaceutical
chemistry and 95% of all crop protection chemistry. Products manufactured with
chlorine as a raw material include water treatment chemicals, plastics,
detergents, pharmaceuticals, disinfectants and agricultural chemicals. Chlorine
is also used directly in water disinfection applications. In the United States
and Canada, virtually all public drinking water is made safe to drink by
chlorination, and a significant portion of industrial and municipal waste water
is treated with chlorine or chlorine derivatives to kill water-borne pathogens
and remove solids.
Caustic soda is a versatile chemical alkali used in a diverse range of
manufacturing processes, including metal smelting, petroleum production and
refining, pulp and paper production and paint manufacturing. Caustic soda is
combined with chlorine and water to produce bleach and is used as an active
ingredient in a wide variety of other end use products, including detergents,
rayon and cellophane.
The Company has expanded into the eastern Canadian and eastern United
States chlor-alkali markets with the acquisition of the North American
chlor-alkali business of ICI Canada and ICI Americas.
1
<PAGE> 8
Headquartered in Montreal, Quebec, the PCI Canada Business includes the business
now conducted by PCI Canada and its affiliates (the "PCI Canada Business"), a
leading eastern Canadian merchant chlor-alkali manufacturer, serving primarily
the pulp and paper industry. The PCI Canada Business produces chlorine and
caustic soda for sale in the merchant markets and for use as raw materials in
downstream products. The PCI Canada Acquisition is consistent with the Company's
strategy to strengthen its North American chlor-alkali merchant market position.
The PCI Canada Business operates two chlor-alkali production facilities, at
Becancour, Quebec and Dalhousie, New Brunswick, with aggregate production
capacity of approximately 376,000 ECUs, as well as additional downstream
production units at Cornwall, Ontario. Management believes that the production
costs for the primary production facility, Becancour, are among the lowest in
North America.
Following the PCI Canada Acquisition, the Company owns and operates five
chlor-alkali production facilities, located in St. Gabriel, Louisiana;
Henderson, Nevada; Tacoma, Washington; Becancour, Quebec and Dalhousie, New
Brunswick, with aggregate production capacity of approximately 950,000 ECUs.
Management believes the Company's competitive position has been significantly
strengthened by recent acquisitions, providing the Company with low-cost,
well-maintained and world scale production capacity plants. Following the PCI
Canada Acquisition, approximately 60% of the Company's sources of electricity is
hydro-power based, the cheapest source in North America. In addition, over 22%
of the Company's ECU capacity employs membrane cell technology, the most
efficient available technology. Management believes that following the PCI
Canada Acquisition, the Company is the fifth largest chlor-alkali producer in
North America and the third largest North American chlor-alkali merchant
manufacturer/marketer, with approximately 6% of North American production
capacity.
Primary markets for the Company's products include water treatment for
industrial, municipal and consumer applications, polyvinyl chloride ("PVC") and
other plastics, pulp and paper, detergents and agricultural chemicals. The
Company believes that the chlorine and caustic soda currently produced at its
Henderson and Tacoma facilities provide a significant source of supply for the
West Coast region, where the Company is also the largest supplier of chlorine
and bleach for water treatment purposes and where Kemwater is the largest
producer of iron chlorides. The Company believes the St. Gabriel and Tacoma
facilities are leading suppliers of premium, low-salt grade caustic soda in
their respective regions. The Company believes the strong regional presence of
the PCI Canada Business in eastern Canada and the eastern United States enhances
the competitiveness of the Company's other operations.
THE PCI CANADA ACQUISITION
On October 31, 1997, Pioneer, and PCI Canada and PCI Carolina, Inc. ("PCI
Carolina"), newly formed subsidiaries of PAAC, and Imperial Chemical Industries
PLC ("ICI") and its subsidiaries, ICI Canada and ICI Americas, consummated the
PCI Canada Acquisition. Pursuant to the Asset Purchase Agreement (the "Purchase
Agreement"), dated as of September 22, 1997, the Company acquired substantially
all of the assets and properties used by ICI Canada and ICI Americas in their
North American chlor-alkali business. For the twelve months ended September 30,
1997, the PCI Canada Business generated pro forma net sales and pro forma EBITDA
of $162.5 million and $51.9 million, respectively. The purchase price consisted
of approximately $235.6 million, payable in cash, and the assumption of certain
obligations related to the acquired chlor-alkali business.
Management believes that the PCI Canada Acquisition presented an attractive
opportunity to further extend and diversify the Company's geographic and product
focus while helping to manage the intrinsic cyclicality of the chlor-alkali
business. By acquiring a low-cost operation with complementary product
offerings, the Company believes it will improve its ability to market to
merchant chlor-alkali customers. Specific benefits include the following:
- The acquisition substantially expands the Company's presence in the
merchant market for chlorine and caustic soda, especially in markets
contiguous to existing markets in the southeastern United States where
the Company already conducts significant operations.
2
<PAGE> 9
- The Company expects that the pulp and paper expertise and product
offerings of the PCI Canada Business will strengthen the Company's
existing market position in the pulp and paper industry in the western
United States and Canada.
- The PCI Canada Business will benefit from the Company's experience in
marketing to industrial customers.
- The experienced management team of the PCI Canada Business has
historically operated the business as a stand-alone entity within ICI
Canada and has demonstrated an ability to improve the operating
performance and cost structure of the business. Since 1992, management
has reduced fixed costs by approximately $9.6 million and initiated
productivity improvements and various other restructuring initiatives
that resulted in a 30% reduction in workforce over such period. As a
result, the Company intends to continue to operate the PCI Canada
Business with existing management.
- The PCI Canada Business has been successful in developing markets for
downstream products, such as bleach, hydrochloric acid and chlorinated
paraffins, whose steady demand for chlorine and caustic soda has helped
maintain high operating rates at its chlor-alkali facilities, which in
turn has improved overall profitability. Over the last several years, the
PCI Canada Business has operated at approximately full capacity.
- In April 1997, the PCI Canada Business completed a $21.2 million
expansion and upgrade of its Becancour facility by installing modern
membrane cells, which increased Becancour's net chlor-alkali capacity by
36,000 tons, or 12%.
At the closing of the PCI Canada Acquisition the Company and ICI entered
into certain related agreements. Pursuant to a Noncompetition Agreement, ICI
agreed not to engage in any production or sales of caustic soda until 2002 in
designated areas of North America. Pursuant to a Lease Agreement, the PCI Canada
Business leased certain facilities at the Cornwall site from ICI Canada.
Pursuant to a License Agreement, the PCI Canada Business received a license from
ICI and its affiliates for the non-exclusive use of certain intellectual
property. Pursuant to a Transition Services Agreement, ICI Canada and certain of
its affiliates agreed to provide transition services to the Company.
The purchase price is subject to adjustment based on the difference between
base working capital and actual working capital (each as defined in the Purchase
Agreement) on the closing date. The Purchase Agreement also provides certain
environmental indemnifications from ICI Canada and ICI Americas, subject to
certain thresholds and limitations, which obligations will be guaranteed by ICI.
See "Risk Factors -- Environmental Regulation" and "Business -- Environmental
and Safety Regulation."
See "The Acquisition" for the structure of Pioneer and its operating
subsidiaries following the PCI Canada Acquisition.
3
<PAGE> 10
BUSINESS STRATEGY
The Company's management team is pursuing a business strategy designed to
capitalize on its marketing, production and distribution expertise and its
geographic focus. The Company seeks to manage effectively the intrinsic
cyclicality of the chlor-alkali industry while continuing to grow and improve
profitability by pursuing a strategy which includes the following principal
elements:
- Focusing on the Merchant Chlor-Alkali Market. The Company is dedicated to
serving the merchant chlor-alkali market, acting as a reliable source of
supply of chlorine and caustic soda. The Company is committed to being
flexible and responsive in periods of volatile chlor-alkali demand,
making it the preferred supplier for many of its customers. Unlike its
major competitors, the Company does not compete with its PVC customers
and, as a result, is viewed as a preferred, non-competing source of raw
materials.
- Optimizing Plant Efficiencies through High Capacity Utilization. The
Company seeks to maximize profitability by achieving a constant flow of
product through its plants. The Company strives to maintain a steady
demand for its output through (i) programs aimed primarily at growing
markets such as PVC and water treatment; (ii) renewable contracts with
major customers and a Chlorine Purchase Agreement with OCC Tacoma; (iii)
direct linkage with major customers via pipelines, including a seven-mile
liquid chlorine pipeline from the St. Gabriel facility (the "Pipeline
Project") expected to be completed in 1998; and (iv) captive demand for
chlorine and caustic soda through its downstream water treatment
operations.
- Improving Cost Efficiency. The Company continually seeks to improve its
cost competitiveness through a combination of productivity enhancements,
strict operating cost controls, capital improvements and maintenance of
high capacity utilization rates. Despite inflation, the Company's cash
production costs per ECU decreased by 5% from 1990 through 1996, while
ECU production per employee increased by 20%. In addition, the Company
seeks to reduce distribution costs and improve plant operating efficiency
through the efficient use of its strategic locations with deep water port
facilities, direct pipeline connections to customers and opportunistic
product exchanges with chlor-alkali producers in other regions.
- Focusing on Geographic Diversity and Market Penetration. The Company's
products are manufactured and sold in a number of markets, providing a
wide base for future growth and distribution to help mitigate the effects
of regional and economic fluctuations. Following the PCI Canada
Acquisition, the Company has major chlor-alkali facilities in three
states (Louisiana, Nevada and Washington) and two Canadian provinces
(Quebec and New Brunswick) and downstream plants producing a range of
products such as bleach, hydrochloric acid, iron chlorides and
chlorinated paraffins. The Company is well-positioned to direct its
chlor-alkali output to customers while more efficiently supplying the
growth in its own downstream operations. Through recent expansion, the
Company is creating substantial new regional strength in areas west of
the Rocky Mountains and eastern Canada and the eastern United States,
while maintaining its traditionally strong presence in the Gulf Coast
region.
- Expanding Product Offerings. The Company has developed water treatment
chemical businesses whose steady requirements for chlorine and caustic
soda help maintain high operating rates at the Company's chlor-alkali
facilities which, in turn, decreases unit production costs. In addition
to serving as a source of demand, these growing businesses service
diverse product markets and regions and can offset industry cyclicality
in the chlorine and caustic soda markets by providing a more stable
downstream source of revenue. The PCI Canada Acquisition allows the
Company to expand into related product offerings for the pulp and paper
market, including sodium chlorate and proprietary additives such as PSR
2000(R) and IMPAQT(R).
- Growing through Product Line Extensions and Strategic
Acquisitions. Management believes that there are significant
opportunities to continue the Company's growth both internally and
through strategic acquisitions. The Company focuses its product
development efforts on areas identified by its customers as being of
major commercial importance. For example, in the area of water treatment,
the Company
4
<PAGE> 11
has developed or acquired rights to a number of innovative coagulant
products which help provide cost effective, advanced waste water
treatment solutions. In addition, the Company is constantly reviewing
acquisitions in related markets and since 1990 has consummated five
downstream acquisitions, which provide attractive product offerings and
geographic coverage.
RECENT INDUSTRY TRENDS
The chlorine and caustic soda markets are cyclical markets that are
sensitive to relative changes in supply and demand, which are in turn affected
by general economic conditions, capacity additions and other factors. Over the
last five years, the market for PVC, the largest use of chlorine in the United
States, has experienced steady growth, resulting in strong demand for chlorine.
However, the use of chlorine as a bleaching agent in the pulp and paper industry
and as feedstock in the production of chlorofluorocarbons ("CFCs") has been
reduced significantly due to regulatory pressures. As a result of these factors
and a general decline in economic growth in the early 1990s, the North American
chlor-alkali industry experienced declining prices, as ECU prices fell by over
52% from $389 per ECU in the fourth quarter of 1989 to $185 per ECU in the
second quarter of 1993. After a significant improvement in domestic economic
growth, in early 1994 chlor-alkali markets experienced increased levels of
demand. Limited new capacity was added during this time, resulting in greater
capacity utilization and higher domestic and export prices for chlor-alkali
products. These conditions continued in 1995 and the increase in demand enabled
the Company and the industry in general to increase selling prices significantly
at a time when operating costs generally did not increase, with prices
eventually exceeding $400 per ECU at the peak of the cycle in 1995. Toward the
end of 1995 and continuing through 1996, however, ECU prices began to decrease
as strengthening demand for chlorine was offset by an oversupply of caustic
soda. As a result, prices decreased to approximately $335 to $345 per ECU by the
end of 1996, even as chlorine prices remained strong due to steady demand growth
from the PVC industry. For the third quarter of 1997, prices have ranged from
$310 to $345 per ECU. Demand for chlorine has been relatively stable, while
increasing demand for caustic soda has recently strengthened pricing, as
evidenced by several recent announced price increases. The industry has
continued to operate at full capacity and management does not anticipate a
significant increase in capacity over the next several years. The Company
therefore believes that the previous volatility in ECU prices should moderate
over such period.
RECENT DEVELOPMENTS
Tacoma Acquisition
On June 17, 1997, Pioneer, the Company and OCC Tacoma, Inc. ("OCC Tacoma"),
a subsidiary of Occidental Chemical Corporation ("OxyChem"), consummated the
acquisition by the Company of substantially all the assets and properties used
by OCC Tacoma in the chlor-alkali business at Tacoma, Washington, including the
Tacoma Facility. The purchase price consisted of (i) $97.0 million, paid in
cash, (ii) 55,000 shares of Convertible Redeemable Preferred Stock, par value
$.01 per share, of Pioneer (the "Pioneer Preferred Stock"), having a liquidation
preference of $100 per share, and (iii) the assumption of certain obligations
related to the acquired chlor-alkali business.
The Tacoma Acquisition has provided the Company with an expanded presence
in the western United States. The Tacoma Facility, with an aggregate production
capacity of 225,000 ECUs, is a well-maintained chlor-alkali production facility
with diaphragm and modern membrane cell technologies and a location contiguous
to the Company's previous customer base. By acquiring a low-cost facility in the
Pacific Northwest, the Company is well-positioned to market in outlying areas
while efficiently supplying the All-Pure and Kemwater downstream operations,
principally in the western and northwestern United States. During the third
quarter of 1997, the Company completed the integration of the Tacoma Facility
with its existing business.
5
<PAGE> 12
THE COMPANY AND PIONEER
PCI Canada is an indirect wholly-owned subsidiary of PAAC. PAAC is a direct
wholly-owned subsidiary of Pioneer, a publicly-traded company that immediately
prior to the acquisition of PAI in April 1995 had no operations. Pioneer has an
available net operating loss carryforward for federal income tax reporting
purposes which it believes was approximately $54.9 million at September 30,
1997, which includes the impact of the extraordinary loss due to early
extinguishment of debt during the second quarter of 1997.
Interlaken Investment Partners, L.P., a Delaware limited partnership (the
"Interlaken Partnership"), beneficially owns approximately 34.9% of the voting
power of Pioneer, and William R. Berkley, Chairman of Pioneer and PAAC (who may
be deemed to beneficially own all shares of Pioneer common stock held by the
Interlaken Partnership), may be deemed to beneficially own approximately 59.9%
of the voting power of Pioneer. See "Stock Ownership."
THE FINANCINGS
In connection with the PCI Canada Acquisition, the Company consummated a
series of related transactions (the "Financings") on November 5, 1997, comprised
of (i) the Initial Offering, (ii) borrowings of $83.0 million in term loans to
PAI under a new senior secured term loan facility (the "Term Facility") and
(iii) the amendment of PAAC's existing senior revolving loan and letter of
credit facility to increase availability to $65.0 million (the "Revolving
Facility"). See "Description of Other Indebtedness -- New Credit Facilities."
Term Facility
The Company entered into the Term Facility, pursuant to which PAI borrowed
new term loans (the "Term Loans") in an aggregate principal amount of $83.0
million. The Term Loans are guaranteed by PAAC and its subsidiaries (other than
PAI) and are secured on a pari passu basis with the Collateral (as defined)
securing the Notes.
Revolving Facility
The Company has entered into the Revolving Facility, to provide for
revolving loans (the "Revolving Loans") in an aggregate principal amount up to
$65.0 million, subject to borrowing base limitations, of which a portion will be
available for the issuance of letters of credit, and to include a Canadian
sub-facility. The Company did not incur Revolving Loans at closing but had $2.9
million in letters of credit outstanding at such time under the Revolving
Facility.
6
<PAGE> 13
THE EXCHANGE OFFER
The Exchange Offer......... The Issuer and the Guarantors are offering to
exchange (the "Exchange Offer") up to $175,000,000
aggregate principal amount of 9 1/4% Series B
Senior Secured Notes due 2007 (the "Exchange
Notes") for up to $175,000,000 aggregate principal
amount of its outstanding 9 1/4% Series A Senior
Secured Notes due 2007 issued in reliance upon an
exemption from registration under the Securities
Act (the "Original Notes"). The terms of the
Exchange Notes will be substantially identical in
all respects (including principal amount, interest
rate, maturity and ranking) to the terms of the
Original Notes for which they may be exchanged
pursuant to the Exchange Offer, except that (i) the
Exchange Notes will be freely transferable by
holders thereof except as provided herein (see "The
Exchange Offer -- Terms of the Exchange" and
"-- Terms and Conditions of the Letter of
Transmittal") and (ii) the Exchange Notes will be
issued without any covenant regarding registration
under the Securities Act.
Exchange Notes issued pursuant to the Exchange
Offer in exchange for the Original Notes may be
offered for resale, resold and otherwise
transferred by holders thereof (other than any
holder which is (i) an "affiliate" of the
Registrants within the meaning of Rule 405 under
the Securities Act, (ii) a broker-dealer who
acquired Original Notes directly from a Registrant
or (iii) broker-dealers who acquired Original Notes
as a result of market making or other trading
activities) without compliance with the
registration and prospectus delivery provisions of
the Securities Act provided that such Exchange
Notes are acquired in the ordinary course of such
holders' business and such holders are not engaged
in, and do not intend to engage in, and have no
arrangement or understanding with any person to
participate in, a distribution of such Exchange
Notes.
Minimum Condition.......... The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Original
Notes being tendered for exchange.
Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New
York City time, on February 9, 1998 unless extended
(the "Expiration Date").
Exchange Date.............. The first date of acceptance for exchange for the
Original Notes will be the first business day
following the Expiration Date.
Conditions to the Exchange
Offer...................... The obligation of the Registrants to consummate the
Exchange Offer is subject to certain conditions.
See "The Exchange Offer -- Conditions to the
Exchange Offer." The Registrants reserve the right
to terminate or amend the Exchange Offer at any
time prior to the Expiration Date upon the
occurrence of any such condition.
Withdrawal Rights.......... Tenders may be withdrawn at any time prior to the
Expiration Date. Any Original Notes not accepted
for any reason will be returned without expense to
the tendering holders thereof as promptly as
practicable after the expiration or termination of
the Exchange Offer.
Procedures for Tendering
Original Notes........... See "The Exchange Offer -- How to Tender."
7
<PAGE> 14
Federal Income Tax
Consequences............. The exchange of Original Notes for Exchange Notes
by holders will not be a taxable exchange for
federal income tax purposes, and holders should not
recognize any taxable gain or loss or any interest
income as a result of such exchange.
Effect on Holders of
Original Notes............. As a result of the making of this Exchange Offer,
and upon acceptance for exchange of all validly
tendered Original Notes pursuant to the terms of
this Exchange Offer, the Registrants will have
fulfilled a covenant contained in the terms of the
Original Notes and the Exchange and Registration
Rights Agreement (the "Registration Rights
Agreement") dated as of November 5, 1997 between
the Issuer, the Guarantors, Donaldson, Lufkin &
Jenrette Securities Corporation and Salomon
Brothers Inc, as initial purchasers (the "Initial
Purchasers"), and, accordingly, the holders of the
Original Notes will have no further registration or
other rights under the Registration Rights
Agreement, except under certain limited
circumstances. See "Original Notes Registration
Rights." Holders of the Original Notes who do not
tender their Original Notes in the Exchange Offer
will continue to hold such Original Notes and will
be entitled to all the rights and limitations
applicable thereto under the Indenture, dated as of
October 30, 1997, among the Issuer, the Guarantors
and United States Trust Company of New York, as
Trustee and Collateral Agent (the "Trustee"),
relating to the Original Notes and the Exchange
Notes (the "Indenture"). All untendered, and
tendered but unaccepted, Original Notes will
continue to be subject to the restrictions on
transfer provided for in the Original Notes and the
Indenture. To the extent that Original Notes are
tendered and accepted in the Exchange Offer, the
trading market, if any, for the Original Notes
could be adversely affected. See "Risk
Factors -- Consequences of Failure to Exchange."
TERMS OF THE NOTES
The Exchange Offer applies to $175,000,000 aggregate principal amount of
the Original Notes. The form and terms of the Exchange Notes are the same as the
form and terms of the Original Notes for which they may be exchanged except that
the Exchange Notes have been registered under the Securities Act and, therefore,
will not bear legends restricting the transfer thereof. The Exchange Notes will
evidence the same debt as the Original Notes and will be entitled to the
benefits of the Indenture. See "Description of the Notes."
Notes Offered.............. $175,000,000 aggregate principal amount of 9 1/4%
Series B Senior Secured Notes due 2007.
Maturity................... October 15, 2007.
Interest Payment Dates..... April 15 and October 15 of each year, commencing
April 15, 1998.
Ranking.................... The Notes are senior obligations of the Issuer, and
rank pari passu with all existing and future Senior
Indebtedness of the Issuer and senior to all
Subordinated Indebtedness of the Issuer. The Notes
and the Term Loans are effectively secured by pari
passu first priority liens on and security
interests in the Collateral. The Notes and the
obligations of the
8
<PAGE> 15
Guarantors under their guarantees of the Notes are
effectively subordinated to secured Senior
Indebtedness of the Issuer and the Guarantors,
respectively, with respect to the assets securing
such Indebtedness. As of September 30, 1997, after
giving pro forma effect to the Offering and the
other Financings, the Issuer and the Guarantors
would have had outstanding approximately $557.8
million aggregate principal amount of secured
Senior Indebtedness. In addition, PAAC and its
Subsidiaries may incur up to $50.0 million of
Senior Indebtedness which will be secured on a pari
passu basis with the Senior Secured Notes and the
Existing Term Facility (each as defined). As of
September 30, 1997, the Company and its
Subsidiaries would have had, subject to certain
restrictions (including borrowing base
limitations), the ability to draw up to $62.1
million of additional secured Senior Indebtedness
under the Revolving Facility. See "Risk
Factors -- Ranking of the Notes and Guarantees,"
"Description of Other Indebtedness" and
"Description of the Notes -- Ranking."
Security................... The Notes are effectively secured by the Collateral
(as defined). Pursuant to an Intercreditor and
Collateral Agency Agreement, dated as of October
30, 1997, (the "Intercreditor Agreement") by and
among the Issuer, the Trustee under the Indenture,
the agent under the Term Facility (the "Term Loan
Agent") and the Collateral Agent, the Collateral
Agent will hold the Collateral securing the Notes
and the Term Loans for the equal and ratable
benefit of the Trustee, the holders of the Notes,
the Term Loan Agent and the holders of the Term
Loans. The Collateral is generally limited to first
priority liens on and security interests in the
Issuer's owned and leased facilities (including
real property, buildings, fixtures and certain
equipment at Becancour, Quebec; Dalhousie, New
Brunswick; Cornwall, Ontario; Mississauga, Ontario;
and Point Tupper, Nova Scotia). The Intercreditor
Agreement provides generally that the holders of a
majority of the obligations secured by the
Collateral may direct the Collateral Agent with
respect to certain matters. The security interest
in the Collateral will be a first priority lien,
subject to certain exceptions. See "Risk
Factors -- Limitations on Security Interest." The
Indenture provides that any release of Collateral,
including Trust Moneys, will be subject to the
provisions of Section 314(d) of the Trust Indenture
Act (as defined) relating to, among other things,
the delivery of a certificate or an opinion of an
engineer, appraiser or other expert as to the fair
value of Collateral being released from the liens
of the Security Documents. See "Description of the
Notes -- Security" and "-- Intercreditor
Agreement."
Guarantees................. The Notes are fully and unconditionally guaranteed
on a senior basis by the Guarantors (which are PAAC
and its direct and indirect subsidiaries, other
than the Issuer). The Guarantee of each Guarantor
ranks pari passu with all existing and future
Senior Indebtedness of such Guarantor and senior to
all Subordinated Indebtedness, if any, of such
Guarantor. The Guarantees are effectively
subordinated to secured Senior Indebtedness of the
Guarantors with respect to the assets securing such
Indebtedness. See "Description of the
Notes -- Ranking" and "Description of Other
Indebtedness." The Guarantees are joint and several
obligations of the Guarantors. See "Description of
the Notes -- Guarantees."
9
<PAGE> 16
Optional Redemption........ The Notes are redeemable in cash at the option of
the Issuer, in whole or in part, at any time or
from time to time on or after October 15, 2002, at
the redemption prices set forth herein, together
with accrued and unpaid interest and Liquidated
Damages, if any, to the date of redemption. In
addition, the Issuer may also redeem in cash at its
option at any time prior to October 15, 2000 up to
35% of the aggregate principal amount of the Notes
originally issued at a purchase price of 109.25% of
the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, to
the date of redemption, with the net proceeds of
(i) an Equity Offering by the Issuer or (ii) an
Equity Offering by Pioneer or PAAC, but only to the
extent that Pioneer or PAAC contributes such net
proceeds to the Issuer as a capital contribution;
provided that at least 65% of the aggregate
principal amount of the Notes originally issued
remains outstanding immediately after giving effect
to such redemption. See "Description of the
Notes -- Optional Redemption."
Additional Amounts......... All payments with respect to the Notes will be made
without withholding or deduction for Canadian taxes
unless required by law or the interpretation or
administration thereof, in which case the Issuer
will pay, subject to certain limited exceptions,
such Additional Amounts (as defined) as may be
necessary so that the net amount received by each
holder of the Notes after such withholding or
deduction will not be less than the amount that
would have been received in the absence of such
withholding or deduction. See "Description of the
Notes -- Additional Amounts."
Redemption for Changes in
Canadian Withholding
Taxes.................... The Notes are redeemable in cash at the option of
the Issuer, in whole but not in part, at any time
at 100% of the principal amount thereof together
with accrued and unpaid interest and Liquidated
Damages, if any, to the date of redemption in the
event the Issuer has become or would be obligated
to pay, on any date on which any amount would be
payable on the Notes, any Additional Amounts. See
"Description of the Notes -- Redemption for Changes
in Canadian Withholding Taxes."
Change of Control.......... Upon a Change of Control, the Issuer will be
required to make a Change of Control Offer (as
defined) to purchase all of the Notes outstanding
at a purchase price equal to 101% of the principal
amount thereof plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of
repurchase. The Issuer's ability to repurchase the
Notes may be limited by, among other things, the
Issuer's financial resources at the time of
repurchase. See "Risk Factors -- Change of Control"
and "Description of the Notes -- Change of
Control."
Certain Covenants.......... The indenture governing the Notes (the "Indenture")
contains certain covenants with respect to the
Issuer, PAAC and their subsidiaries which restrict,
among other things, (a) the incurrence of
additional indebtedness, (b) the payment of
dividends and other restricted payments, (c) the
creation of certain liens, (d) the use of proceeds
from sales of assets and subsidiary stock, (e) sale
and leaseback transactions and (f) transactions
with affiliates. The Indenture also restricts the
Issuer's or any Guarantor's ability to consolidate
or merge with or into, or to transfer all or
substantially all of its assets to, another person.
These
10
<PAGE> 17
restrictions and requirements are subject to a
number of important qualifications and exceptions.
See "Description of the Notes -- Certain
Covenants."
Exchange Offer;
Registration Rights........ Pursuant to the Registration Rights Agreement, the
Issuer and the Guarantors agreed to file by the
30th day following the date of closing of the
Initial Offering (the "Closing Date") a
registration statement (the "Exchange Offer
Registration Statement") with respect to an offer
to exchange the Original Notes for the Exchange
Notes, which will be registered under the
Securities Act with terms (other than restrictions
on transfer as set forth in "Notices to Investors")
substantially identical to those of the Original
Notes and to use their best efforts to cause such
registration statement to become effective by the
150th day following the Closing Date and, upon
becoming effective, to commence the Exchange Offer
and cause the same to remain open for acceptance
for not less than 20 business days after the date
of commencement. If the Exchange Offer is not
permitted by applicable law or if certain holders
of the Original Notes are not permitted to
participate in, or do not receive the benefit of,
the Exchange Offer, the Issuer and the Guarantors
will file and use their best efforts to cause to be
declared effective a shelf registration statement
with respect to resales of the Original Notes from
time to time and will use their best efforts to
keep such registration statement effective until
two years after the effective date thereof or such
shorter period ending when all of the Original
Notes have been sold thereunder.
If the applicable registration statement is not
filed or declared effective or ceases to be
effective or the Exchange Offer is not consummated
within the applicable time periods related thereto
(each, a "Registration Default"), the Issuer and
the Guarantors will be required to pay Liquidated
Damages to each holder of the Original Notes, in
the amount of $.05 per week per $1,000 principal
amount of Original Notes for the initial 90-day
period following such Registration Default. The
amount of such Liquidated Damages will increase by
an additional $.05 per week per $1,000 principal
amount of Original Notes at the beginning of each
subsequent 90-day period, up to a maximum amount of
$.50 per week per $1,000 principal amount of
Original Notes; provided, that the Issuer and the
Guarantors shall in no event be required to pay
Liquidated Damages for more than one Registration
Default at any given time. If, subsequently, such
Registration Default is cured, the accrual of
Liquidated Damages will cease. See "Original Notes
Registration Rights."
Use of Proceeds............ There will be no proceeds to the Registrants from
the exchange pursuant to the Exchange Offer. The
net proceeds from the Initial Offering, together
with borrowings under the Term Facility, were used
to pay the purchase price of the PCI Canada
Acquisition and for working capital and general
corporate purposes. See "The Acquisition."
Transfer Restrictions...... The Original Notes have not been registered under
the Securities Act or under the securities laws of
any state and may not be offered or sold within the
United States or to, or for the benefit of, U.S.
persons except pursuant to an exemption from, or in
a transaction not subject to, the
11
<PAGE> 18
registration requirements of the Securities Act or
applicable state securities laws. See "Plan of
Distribution."
Risk Factors............... Holders of Original Notes should carefully consider
the matters set forth under the caption "Risk
Factors" prior to making a decision with respect to
the Exchange Offer. See "Risk Factors."
12
<PAGE> 19
SUMMARY CONSOLIDATED FINANCIAL DATA
The following financial data of the Company should be read in conjunction
with "Pro Forma Financial Information," "Supplemental Analysis of Adjusted
EBITDA," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Selected Historical Financial Data" and the audited
and unaudited historical financial statements of the Company and the PCI Canada
Business and the respective notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PRO FORMA(4)
------------------------
PREDECESSOR TWELVE
COMPANY COMBINED NINE MONTHS NINE MONTHS MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, SEPT. 30,
1994(1) 1995(2) 1996(3) 1996 1997 1996 1997(5)
------------ ------------ ------------ ------------- ------------- ------------ ---------
(DOLLARS IN THOUSANDS, EXCEPT RATIOS AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.................. $167,217 $200,756 $183,326 $140,835 $150,073 $431,485 $411,441
Cost of sales............. 134,556 135,575 126,739 98,600 112,553 296,913 292,771
-------- -------- -------- -------- -------- -------- --------
Gross profit.............. 32,661 65,181 56,587 42,235 37,520 134,572 118,670
Selling, general and
administrative
expenses................ 22,529 26,883 23,528 19,142 19,580 41,126 38,098
-------- -------- -------- -------- -------- -------- --------
Operating income.......... 10,132 38,298 33,059 23,093 17,940 93,446 80,572
Equity in net income
(loss) of unconsolidated
subsidiary.............. 183 204 (2,607) (912) (2,552) (2,607) (4,247)
Interest expense, net..... 6,407 14,570 17,290 12,766 16,189 49,882 50,347
Other income, net......... 4,480 318 1,684 507 882 3,296 1,065
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary items..... 8,388 24,250 14,846 9,922 81 44,253 27,043
Income tax provision
(benefit)............... 3,242 11,017 6,735 4,868 1,779 16,682 11,511
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item...... 5,146 13,233 8,111 5,054 (1,698) $ 27,571 $ 15,532
======== ========
Extraordinary item, net of
applicable tax(6)....... -- 3,420 -- -- (18,658)
-------- -------- -------- -------- --------
Net income (loss)......... $ 5,146 $ 9,813 $ 8,111 $ 5,054 $(20,356)
======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Depreciation and
amortization............ $ 13,595 $ 16,764 $ 15,695 $ 13,558 $ 14,792 $ 41,061 $ 39,847
Capital expenditures...... 5,681 17,003 17,121 15,796 10,977 36,079 34,417
ADDITIONAL INFORMATION:
Cash flow from
operations.............. $ 22,419 $ 30,899 $ 32,453 $ 27,393 $ 10,803
Cash flow from investing
activities.............. (4,987) (169,263) (29,225) (23,691) (110,467)
Cash flow from financing
activities.............. (15,891) 146,272 (757) (489) 121,046
EBITDA(7)................. 28,207 55,380 50,438 37,158 33,614
Pro forma EBITDA.......... $137,803 $121,484
Adjusted EBITDA(8)........ 145,690 125,546
Ratio of pro forma EBITDA
to pro forma interest... 2.8x 2.4x
Ratio of pro forma net
debt to pro forma
EBITDA.................. 3.8x 4.3x
OPERATING DATA:
Average ECU price......... $ 327 $ 414 $ 385 $ 403 $ 367 $ 370 $ 351
ECU production (in
thousands).............. 321.1 327.9 345.7 258.5 306.1 888.9 885.6
Chlor-alkali operating
rate.................... 101% 100% 100% 99% 94% 97% 95%
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
------------------------
ACTUAL PRO FORMA(4)
-------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 34,925 $ 55,499
Total assets................................................ 463,851 742,803
Total debt.................................................. 306,533 564,533
Common stockholder's equity................................. 59,242 59,242
</TABLE>
(see footnotes on following page)
13
<PAGE> 20
- ---------------
(1) GPS Pool Supply, Inc. ("GPS") was acquired in May 1994 and therefore the
results of operations for the year ended December 31, 1994 include the
results of operations from the date of acquisition in May 1994 through
December 31, 1994. GPS generated third party sales during such partial
period of $9.4 million.
(2) For comparative purposes the combined results of operations for the year
ended December 31, 1995 include the Company's operating results for the
period from March 6, 1995 ("Inception") through December 31, 1995 and the
Predecessor Company's operating results from January 1, 1995 through April
20, 1995. The Company believes that this provides a meaningful basis for
comparison.
(3) Kemwater was formed in connection with the acquisition of Kemira Water
Treatment, Inc. ("KWT") in February 1996 to continue the business activities
previously conducted by Imperial West Chemical Co. ("Imperial West") and,
accordingly, the results of operations for the year ended December 31, 1996
include the results of operations of Imperial West only for the month of
January 1996. Since the acquisition, 50% of Kemwater's results of operations
are included as equity in net income (loss) of unconsolidated subsidiary.
Prior to the formation of Kemwater, the financial statements of Imperial
West were consolidated with the Company's consolidated financial statements.
(4) The pro forma statement of income data for the year ended December 31, 1996
gives effect to the Initial Offering, the other Financings, the PCI Canada
Acquisition, the Tacoma Acquisition and related refinancings and the
acquisition of T.C. Products as if they had occurred on January 1, 1996. The
pro forma statement of income data for the twelve months ended September 30,
1997 gives effect to the Initial Offering, the other Financings, the PCI
Canada Acquisition, the Tacoma Acquisition and related refinancings and the
acquisition of T.C. Products as if they had occurred on July 1, 1996. The
pro forma balance sheet data as of September 30, 1997 gives effect to the
Initial Offering, the other Financings and the PCI Canada Acquisition as if
they had occurred on September 30, 1997. The pro forma financial data is not
necessarily indicative of either future results of operations or the results
that might have occurred if the foregoing transactions had been consummated
on the indicated date.
(5) The pro forma financial information for the twelve months ended September
30, 1997 is calculated by subtracting the pro forma nine months ended
September 30, 1996 from the pro forma year ended December 31, 1996 and
adding the pro forma nine months ended September 30, 1997.
(6) An extraordinary item of $3.4 million in 1995, net of an income tax benefit
of $2.1 million, was due to costs incurred and previously capitalized costs
written off, pertaining to debt refinanced by the Predecessor Company prior
to the PAI Acquisition. An extraordinary item of $18.7 million in 1997, net
of an income tax benefit of $12.4 million, was due to costs incurred and
previously capitalized costs written off, pertaining to debt refinanced by
the Company concurrent with the Tacoma Acquisition.
(7) EBITDA is defined as earnings before interest, income taxes, depreciation
and amortization, extraordinary items and equity in net income (loss) of
unconsolidated subsidiaries and is presented because the Company believes
that it provides useful information regarding its ability to service and/or
incur debt. EBITDA should not be considered in isolation or as a substitute
for net income, cash flows from operating activities and other combined
income or cash flow statement data prepared in accordance with generally
accepted accounting principles or as a measure of the Company's
profitability or liquidity. The Company's calculation of EBITDA may not be
consistent with similarly captioned amounts used by other Companies.
(8) The Company believes it is important to present a supplemental analysis of
its Adjusted EBITDA in order to reflect a recent change in the PCI Canada
Business. In April 1997, the PCI Canada Business completed a $21.2 million
expansion and upgrade of its Becancour facility by installing additional
modern membrane cell capacity, which increased Becancour's net chlor-alkali
capacity by 36,000 tons, or 12%. The information presented reflects an
analysis of operating results had this increase in capacity been available
for these historical periods. Reference should be made to "Pro Forma
Financial Information" and "Supplemental Analysis of Adjusted EBITDA"
presented elsewhere herein.
The Company believes that this information is a useful adjunct to net
income, cash flows and other GAAP measurements. However, this supplemental
information should not be construed as an alternative
14
<PAGE> 21
to net income or any other GAAP measure of performance as an indicator of the
Company's current or future performance or to GAAP-defined cash flows generated
by operating, investing and financing activities as an indicator of cash flows
or a measure of liquidity.
The adjustments to obtain Adjusted EBITDA relate to increased margin as a
result of using the increased capacity to meet customer demands. During the
periods presented, the PCI Canada Business purchased for resale chlorine
and caustic soda at market prices. Margin on the resulting resales was
minimal. Had the additional Becancour capacity been available during the
indicated periods, the Company believes portions of historical volumes
purchased for resale would have been produced internally and sold at higher
margins. Certain assumptions, including those of average sales prices,
average manufacturing costs and capacity utilization rates, were made based
on actual PCI Canada Business operating data for existing facilities during
the periods presented. There can be no assurance that such operating
results would have been achieved had such additional capacity been
available.
15
<PAGE> 22
RISK FACTORS
In addition to the other information contained in this Prospectus, before
tendering their Original Notes for the Exchange Notes offered hereby, holders of
Original Notes should consider carefully the following factors, which may be
generally applicable to the Original Notes as well as the Exchange Notes:
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Original Notes who do not exchange their Original Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Original Notes as set forth in the legend
thereon as a consequence of the issuance of the Original Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Original Notes may not be offered or sold unless registered under
the Securities Act and applicable state securities laws, or pursuant to an
exemption therefrom. Except under certain limited circumstances, the Registrants
do not intend to register the Original Notes under the Securities Act. In
addition, any holder of Original Notes who tenders in the Exchange Offer for the
purpose of participating in a distribution of the Exchange Notes may be deemed
to have received restricted securities and, if so, will be required to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. To the extent Original Notes are
tendered and accepted in the Exchange Offer, the trading market, if any, for the
Original Notes not tendered could be adversely affected. See "The Exchange
Offer" and "Original Notes Registration Rights."
FINANCIAL LEVERAGE
As of September 30, 1997, after giving pro forma effect to the Initial
Offering, the other Financings and the PCI Canada Acquisition, the Company would
have had approximately $564.5 million of indebtedness and $59.2 million of
stockholder's equity. See "Capitalization."
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including the following: (i) the Company
has significant cash interest expense for the Notes and other debt; (ii) the
Company's significant degree of leverage could make it vulnerable to changes in
industry and general economic conditions; and (iii) the Company's ability to
obtain additional financings for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired.
In addition, the Company's operating flexibility with respect to certain
business matters is limited by covenants contained in the Company's debt
instruments, including the Indenture and the New Credit Facilities. Among other
things, these covenants limit the ability of the Company to incur additional
indebtedness, create liens upon assets, apply the proceeds from disposal of
assets, make dividend payments and other distributions on capital stock and
redeem any capital stock. There can be no assurance that such covenants will not
adversely affect the Company's ability to finance its future operations or
capital needs or to engage in other business activities which may be in the
interest of the Company. See "Description of Other Indebtedness" and
"Description of the Notes -- Certain Covenants."
The Company expects to generate sufficient cash flow from operations to
meet its debt service obligations. However, the ability of each of PCI Canada
and the Company to satisfy its obligations, including its obligations on the
Notes, will be dependent upon the future performance of the Company and will be
subject to financial, business and other factors affecting the business and
operations of the Company, including factors beyond its control, such as
prevailing economic conditions and regulatory matters. See "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
INDUSTRY CYCLICALITY
Substantially all of the Company's revenues are attributable to the sale of
chlorine, caustic soda and other chemicals that use chlorine or caustic soda as
a primary raw material. The chlorine and caustic soda markets are cyclical
markets that are sensitive to relative changes in supply and demand, which are
in turn affected by general economic conditions, capacity additions and other
factors. Over the last five years, the market for
16
<PAGE> 23
PVC, the largest use of chlorine in the United States, has experienced steady
growth, resulting in strong demand for chlorine. However, the use of chlorine as
a bleaching agent in the pulp and paper industry and as a raw material for
chemical intermediaries used in the production of CFCs has been reduced
significantly due to regulatory pressures. As a result of these factors and a
general decline in economic growth in the early 1990s, the North American
chlor-alkali industry experienced declining prices, as ECU prices fell by over
52% from $389 per ECU in the fourth quarter of 1989 to $185 per ECU in the
second quarter of 1993. After a significant improvement in domestic economic
growth in early 1994, chlor-alkali markets experienced increased levels of
demand. Limited new capacity was added during this time, resulting in greater
capacity utilization and higher domestic and export prices for chlor-alkali
products. These conditions continued in 1995 and the increase in demand enabled
the Company and the industry in general to increase selling prices significantly
at a time when operating costs generally did not increase, with prices
eventually exceeding $400 per ECU at the peak of the cycle in 1995. Toward the
end of 1995 and continuing through 1996, however, ECU prices began to decrease
as strengthening demand for chlorine was offset by an oversupply of caustic
soda. As a result, prices decreased to approximately $335 to $345 per ECU by the
end of 1996, even as chlorine prices remained strong due to steady demand growth
from the PVC industry. For the third quarter of 1997, prices have ranged from
$310 to $345 per ECU. Demand for chlorine has been relatively stable, while
increasing demand for caustic soda has recently strengthened pricing, as
evidenced by several recent announced price increases. There can be no assurance
that demand for the Company's products will be sustained or that the Company
will keep pace with unanticipated capacity additions or that other events which
may adversely affect the supply/demand balance for chlorine and caustic soda
will not occur.
ENVIRONMENTAL REGULATION
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, and present or future laws may affect the
Company's capital and operating costs relating to compliance, impose cleanup
requirements with respect to site contamination resulting from past, present or
future spills and releases and 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. See
"Business -- Environmental and Safety Regulation -- Indemnities."
Cleanup Costs. Environmental laws and regulations also impose liability for
the cleanup of contamination, even if the contamination resulted from historical
activities that were in compliance with applicable legal requirements at the
time they occurred. Such costs may arise at facilities owned or operated by the
Company or at off-site facilities to which the Company sent wastes for
treatment, storage or disposal. As a result of historical activities, incidental
spills or other releases, many of the facilities owned or operated by the
Company are known to be, or could be, affected by contamination of soil or
groundwater. The Company, along with other parties with an interest in the
Henderson, Nevada industrial complex, has entered into a consent agreement with
the State of Nevada, pursuant to which the Company has submitted a "Phase I
Environmental Conditions Assessment." The Company has also executed a "Phase II
Consent Agreement," which covers additional investigation of the plant site,
including sampling. The Company is also aware of certain claims that have been
asserted with respect to off-site facilities, which claims could lead to
liability for the Company. See
17
<PAGE> 24
"Business -- Environmental and Safety Regulation -- Superfund" and
"-- Remediation Matters." Such investigation and cleanup activities have not had
a material adverse effect on the operations or financial results of the Company
to date. There can be no assurance, however, that the Company is aware of all
such site contamination issues, that regulatory authorities will not require
cleanup in the future for sites that are not currently being remediated, or that
remedial standards will not become more stringent. Accordingly, no assurance can
be given that such activities will not have a material adverse effect on the
operations or financial results of the Company in the future.
Environmental Regulation of Products. Environmental regulations can
directly or indirectly affect the markets for the Company's products by
regulating the uses of the Company's products or the chemicals or materials made
from those products. Certain environmental groups and international commissions
have urged the restriction or ban of chlorine-related processes and products,
based on concerns that the products or by-products from these applications might
cause damage to human health or the environment. Such pressures may stimulate
regulatory initiatives which could have the effect of reducing the use of
chlorine by customers in the Company's markets or could have the effect of
increasing competition from other chlorine producers with respect to the
Company's markets. Each such effect was experienced by the Company from 1990 to
1992 following increased regulation of the use of CFCs, although during that
period demand for chlorine from other market segments more than offset the loss
of demand from reduced production of CFCs. The Company is working with other
industry representatives to advocate a risk-based scientific approach for
evaluating the alleged health and environmental risks of chlorine and
chlorinated compounds, which are used in a broad range of consumer products,
including water, plastics, detergents, agricultural chemicals and
pharmaceuticals. See "Business -- Environmental and Safety Regulation."
Environmental Cost Summary. The Company's operating expenses relating to
environmental matters totaled $1.7 million during the year ended December 31,
1996 and $1.3 million for the nine months ended September 30, 1997. Capital
expenditures for environmental related matters were $4.3 million during the year
ended December 31, 1996 and are expected to be approximately $5.6 million in
1997. Capital expenditures and, to a lesser extent, costs and operating expenses
relating to environmental matters for years after 1997 will be subject to
evolving regulatory requirements and will depend to a great degree on the types
of procedures that may be approved by various federal and state governmental
agencies with respect to environmental clean-up.
Henderson Remediation Matters; ZENECA Indemnity; PAI Sellers'
Indemnity. The Company's plant in Henderson, Nevada is located within an area
known as the "Basic Complex" that was originally owned by and constructed under
the direction of the United States government in the 1940s and since that time
has been used for chemical manufacturing by several companies. Soil and
groundwater contamination have been identified within and adjoining the land
owned by the Company. See "Business -- Environmental and Safety
Regulation -- Remediation Matters."
Certain of the Company's environmental liabilities in connection with the
Henderson facility are addressed by indemnifications provided by the previous
owner of the Henderson facility, and by the sellers under the PAI Acquisition
Agreement (as defined). The Henderson plant was acquired by the Company in
October 1988 in connection with the purchase of Stauffer Chlor Alkali Company,
Inc. from ICI Delaware Holdings, Inc. ("ICI Delaware"), a subsidiary of ICI
Americas. Under the acquisition agreement relating to such acquisition, ICI
Delaware indemnified the Company for certain environmental liabilities that
might be incurred by the Company as a result of actions occurring prior to the
closing date, including actions (other than chlor-alkali related actions) at the
Henderson property and liabilities for actions at other sites in the Basic
Complex and liabilities arising in connection with off-site disposal sites. See
"Business -- Environmental and Safety Regulation -- Indemnities." The Company
has been advised by ZENECA Delaware Holdings, Inc. and ZENECA, Inc.
(collectively, the "ZENECA Companies") that the indemnity obligations of ICI
Delaware and ICI Americas under the acquisition agreement have been assumed by
the ZENECA Companies. As a result of the PAI Acquisition, the ZENECA Companies
indemnity (the "ZENECA Indemnity") will terminate in accordance with its terms
on April 20, 1999, except with respect to claims as to which PAI has satisfied
the contractual requirements for extending the indemnity. See "Business --
Environmental and Safety Regulation -- Indemnities."
18
<PAGE> 25
In April 1995, pursuant to a Stock Purchase Agreement, dated as of March
24, 1995 (the "PAI Acquisition Agreement"), PAAC acquired PAI (the "PAI
Acquisition"). In the PAI Acquisition Agreement, the sellers agreed to indemnify
Pioneer, PAAC and their affiliates for certain environmental liabilities that
result from certain discharges of hazardous materials, or violations of
environmental laws, arising prior to the PAI Acquisition. See "Business -- Other
Investments." Amounts payable pursuant to such indemnification obligations (the
"PAI Sellers' Indemnity") will generally be payable as follows: (i) out of
certain reserves established on PAI's balance sheet at December 31, 1994; (ii)
either by offset against the amounts payable under the Pioneer Seller Notes or
from amounts held in an account (the "Contingent Payment Account") established
under the related Contingent Payment Agreement; and (iii) in certain
circumstances and subject to specified limitations, out of the personal assets
of the sellers. The Company is required to reimburse the sellers with amounts
recovered under the ZENECA Indemnity or from other third parties. To the extent
that liabilities exceed amounts realized from sales of Contingent Payment
Properties, the Company would be limited, for a ten-year period, principally to
its rights of offset against the Pioneer Seller Notes (and to amounts available
under the ZENECA Indemnity, to the extent then in effect) to cover such
liabilities.
The Company believes that the remediation costs relating to its Henderson
chlor-alkali facilities will not be material and that the Company will be
reimbursed by the ZENECA Companies, under the PAI Sellers' Indemnity or from
other responsible parties for substantially all of the non-chlor-alkali related
remediation costs it may incur in connection with the Henderson, Nevada
facility. No assurance can be given, however, that the Company will not be
required to incur significant expenses for remedial and other liabilities under
environmental laws in connection with the Henderson facility or operations,
whether at or near the Henderson facility or at off-site locations, or that such
expenses will be reimbursed under the ZENECA Indemnity or the PAI Sellers'
Indemnity or by other responsible parties. No assurance can be given that the
sellers will have the financial resources to perform their personal obligations
under the PAI Sellers' Indemnity, that the sellers will promptly pay any
liability for which they are responsible or that the Company will be able to
recover funds or assets from the sellers or that the Company will not be
required to incur significant costs for environmental conditions not covered by
the ZENECA Indemnity or the PAI Sellers' Indemnity. In addition, because the
sellers may recognize certain economic benefits from the sale of real property
adjoining some of the Company's facilities, there can be no assurance that
conflicts will not arise between the interests of sellers who are directors or
officers of the Company or its subsidiaries and the Company.
Tacoma Remediation Matters; OCC Tacoma Indemnity. The Tacoma Facility is
located adjacent to the Hylebos Waterway, which is connected to Commencement
Bay. The Hylebos Waterway is one of the study areas included in the Commencement
Bay Nearshore/Tideflats site which has been placed on the National Priorities
List for remediation under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"). OxyChem is a member of the Hylebos
Cleanup Committee ("HCC"), which has entered into a consent agreement with the
Environmental Protection Agency ("EPA") under which the HCC will prepare a
pre-remedial design for cleanup of the Hylebos Waterway. OxyChem is
participating in a voluntary, non-binding mediation under which an arbitrator
will allocate liability for the waterway among approximately 30 participating
Potentially Responsible Parties ("PRPs"). The aggregate costs of the cleanup of
the Hylebos Waterway will depend upon cleanup levels established by the EPA.
Cleanup levels have been selected by the EPA, and a remediation plan is being
prepared but has not yet been finalized or approved by the EPA. The Company
believes that a remediation plan based upon the final EPA cleanup levels may be
completed within five years, and that the voluntary mediation will be completed
prior to that date. However, the Company cannot presently determine the amount
of cleanup costs that will ultimately be allocated to OxyChem, or the timing of
such final allocation.
The Tacoma Facility has a federal Resource Conservation and Recovery Act
("RCRA") treatment, storage, and disposal facility permit which requires the
plant to investigate groundwater contamination at the site and to treat the
groundwater to standards established in the permit. Pursuant to this
requirement, the plant has installed a groundwater extraction, treatment and
injection system (not included in the Tacoma Acquisition), which withdraws the
groundwater, removes volatile organic compounds and returns the treated water to
the subsurface through wells that are designed to control off-site migration of
contamination. Certain other areas at and near the Tacoma Facility are currently
being investigated by OCC Tacoma under the
19
<PAGE> 26
oversight of the Washington Department of Ecology ("DOE") or the EPA. See
"Business -- Environmental and Safety Regulation -- Indemnities."
OCC Tacoma agreed to indemnify the Company for certain pre-closing
environmental conditions. The OCC Tacoma indemnity is subject to limitations as
to dollar amount and duration, as well as certain other conditions. After the
applicable period of OCC Tacoma's indemnification, the Company will indemnify
OCC Tacoma for remaining liabilities other than those from hazardous materials
present as a result of pre-closing releases in the non-Hylebos area of
Commencement Bay, public, private or commercial disposal facilities upland of
the waterways and natural resource damages arising under state or federal
statutes, for which liability will be retained by OCC Tacoma. The Company has
reviewed the time frames currently estimated for remediation of the known
environmental conditions associated with Commencement Bay, the Hylebos Waterway,
the plant and adjacent properties and the Company presently believes that it
should have no material liability upon the termination of OCC Tacoma's
indemnity. There can be no assurance that such indemnity will be adequate to
protect the Company, that remediation will proceed on the present schedule, that
it will involve the presently anticipated remedial methods, or that
unanticipated conditions will not be identified. If these or other changes
occur, the Company could incur a material liability for which it is not insured
or indemnified. See "Business -- Environmental and Safety
Regulation -- Indemnities."
PCI Canada Acquisition Indemnity. In the Purchase Agreement, ICI and its
affiliates (the "ICI Indemnitors") have agreed to indemnify the Company for
certain liabilities associated with environmental matters arising from
pre-closing operations of the PCI Canada Business. In particular, the ICI
Indemnitors will retain unlimited responsibility for environmental liabilities
associated with the Cornwall site, liabilities arising out of the discharge of
contaminants into rivers and marine sediments and liabilities arising out of
off-site disposal sites (the "Retained Environmental Liabilities"). The ICI
Indemnitors will also provide a general environmental indemnity for other
pre-closing environmental matters. This indemnity will terminate ten years after
the closing date, and will be subject to a limit of $25 million. The Company may
not recover under the environmental indemnity until it has incurred cumulative
costs of $1 million, at which point the Company may recover costs in excess of
$1 million.
With respect to the Becancour and Dalhousie facilities, the ICI Indemnitors
will be responsible under the general environmental indemnity for 100% of the
costs incurred in the first five years after the closing date and for a
decreasing percentage of such costs in the following five years. Thereafter, the
Company will be responsible for environmental liabilities (other than the
Retained Environmental Liabilities) at such facilities.
The Company will indemnify ICI for environmental liabilities arising out of
post-closing operations and for liabilities arising out of pre-closing
operations that are not indemnified by the ICI Indemnitors.
The Company believes that the indemnities provided by the ICI Indemnitors
will be adequate to address the known environmental liabilities at the acquired
facilities, and that any residual liabilities incurred by the Company will not
be material. However, no assurance can be given that the indemnity will be
adequate in the event that new facts or conditions are identified, new or
different statutory or regulatory requirements are imposed, substantial changes
in remedial or disposal techniques or costs occur, or the anticipated timing of
remedial requirements is changed. Further, no assurance can be given that ICI or
its guarantor affiliates will promptly pay for liabilities covered by the
indemnity as they arise, or that ICI and its guarantor affiliates will have the
financial resources to provide such indemnity. If these or other changes occur,
the Company could incur a material liability for which it is not insured or
indemnified. See "Business -- Environmental and Safety
Regulation -- Indemnities."
OPERATING HAZARDS AND UNINSURED RISKS
The Company's operations are subject to risks inherent in the chemical
industry, such as explosions, fires, chemical spills or releases, pollution and
other environmental risks. Any significant interruption of operations at the
Company's principal facilities could have a material adverse effect on the
Company. The Company has in the past experienced chlorine releases at its
plants. In 1991, there was a release of approximately 42 tons of chlorine from
the Henderson facility. The Company has resolved substantially all of the
personal injury, property damage and regulatory claims relating to this release,
and certain of the costs incurred as a result of
20
<PAGE> 27
the accident were recovered under applicable insurance policies. See
"Business -- Environmental and Safety Regulation." The Company maintains general
liability insurance and property and business interruption insurance with
coverage limits it believes are adequate. Because of the nature of industry
hazards, it is possible that liabilities for pollution and other damages arising
from a major occurrence could exceed insurance coverage or policy limits or that
such insurance may not be available at reasonable rates in the future. Any such
liabilities, which could arise due to injury and loss of life, severe damage to
and destruction of property and equipment, pollution and other environmental
damage and suspension of operations, could have a material adverse effect on the
Company. See "Business -- Insurance."
LIMITATIONS ON SECURITY INTEREST
The Notes are effectively secured by the Collateral more fully described
under "Description of the Notes -- Security." Such security interest generally
is limited to first priority liens (subject to certain exceptions) on and
security interests in the Issuer's owned and leased facilities (including real
property, buildings, fixtures and certain equipment at Becancour, Quebec;
Dalhousie, New Brunswick; Cornwall, Ontario; Mississauga, Ontario; and Point
Tupper, Nova Scotia). Upon a default on indebtedness secured by the Collateral,
including the Notes, and a declaration of acceleration of the Notes as a result
thereof, the Trustee may, subject to the provisions of the Intercreditor
Agreement, cause the Collateral Agent to take such action as it may deem
advisable to protect and enforce the rights of the Trustee and the holders in
the Collateral, including causing any Collateral to be sold and the proceeds to
be applied to the pro rata payment of the indebtedness secured by the Collateral
including the Notes, before such proceeds are applied to debts of other
creditors of the Issuer, except to the extent that certain liens, including
landlord's, warehousemen's and materialmen's liens and certain tax liens, may,
as a matter of law, have priority over the liens and security interests granted
to the Collateral Agent in the Collateral. The ability of the Collateral Agent
to cause any Collateral to be sold may be delayed or otherwise subject to
certain conditions or any Bankruptcy Laws (as defined) and fraudulent conveyance
limitations if the Issuer is the subject of any bankruptcy or receivership
proceedings. The Indenture permits the release of Collateral without
substitution of Collateral of equal value under certain circumstances. See
"Description of the Notes -- Release of Collateral."
The Company and its subsidiaries may incur up to $50.0 million of Senior
Indebtedness which will be secured on a pari passu basis with the Senior Secured
Notes and the Existing Term Facility. In addition, the Indenture permits the
Company and its subsidiaries, under certain circumstances, to incur additional
Indebtedness, including Indebtedness secured by assets that do not constitute
Collateral. See "Description of the Notes -- Certain Covenants."
NO ASSURANCE OF REALIZABLE VALUE FROM COLLATERAL
In connection with the granting of liens on the Collateral, the Company
made no representation as to the value or sufficiency of such Collateral.
Accordingly, there can be no assurance that the proceeds of sale of any
Collateral pursuant to the Indenture and the Security Documents (as defined)
following a declaration of acceleration of the Notes will be sufficient to
satisfy any payment of principal of, or accrued and unpaid interest, if any, on,
the Notes. Any deficiency claim would rank pari passu in right of payment with
all other unsecured senior indebtedness of the Issuer. In addition, the ability
of the Collateral Agent to realize upon the Collateral may be inhibited or
impaired by applicable Bankruptcy Law. See "Description of the Notes -- Certain
Bankruptcy Considerations.
POTENTIAL ENVIRONMENTAL LIABILITY OF SECURED LENDERS
United States Considerations. Lenders that hold a security interest in real
property may, in certain specific circumstances, be held liable under certain
environmental laws for the cost of remediating or preventing releases or
threatened releases of hazardous substances at the real property. While lenders
that neither foreclose on nor participate in the management of the mortgaged
property (as interpreted under applicable law) generally have not been subject
to such liability, currently, the law is unclear with respect to lenders that
take possession of a property or that participate in the management of a
property. In this regard, the Collateral Agent, the Trustee or the holders of
the Notes would need to evaluate the impact of these
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potential liabilities before determining to foreclose on the properties securing
such Notes and exercising other available remedies. In addition, the Collateral
Agent or the Trustee, as the case may be, may decline to foreclose upon the
properties or exercise remedies available to the extent that they do not receive
indemnification to their satisfaction from the holders of the Notes. See
"Description of the Notes -- Security."
Canadian Considerations. The Collateral may be subject to known and
unforeseen environmental risks under applicable provincial and Canadian federal
environmental laws and regulations, and while there are no specific provisions
governing the responsibility of lenders or their agents, under the general
provisions thereof, a secured lender may be held liable in certain limited
circumstances either penally or for the cost of remediating or preventing
releases or threatened releases of hazardous substances at a charged property.
Such liability could be based on the lender having become sufficiently involved
in the operations of the borrower so that the lender may be said to be partly
responsible for a source of contamination, or the lender having counselled,
encouraged or invited the borrower to commit a violation of an applicable
environmental law or on the lender being the owner or having had the custody or
control of the charged property or the offending substances. This liability
would not necessarily be discharged after the sale of the charged property to a
third party purchaser.
In the event of insolvency or bankruptcy, Canadian case law, which is quite
recent and undeveloped in this area, has generally held that a receiver, whether
court-appointed or private, or a trustee is bound to comply with environmental
remediation orders issued against property under its administration up to the
full extent of the value of the property under administration notwithstanding
the existence or ranking of any security interests in such property held by
creditors. Canadian law generally protects trustees in bankruptcy statutorily
from personal liability for environmental remediation orders in respect of
environmental conditions arising prior to a trustee's appointment or during its
administration except where the condition arises as a result of its failure to
exercise due diligence. Canadian courts have tended to offer court-appointed
receivers similar protection.
COMPETITION
The industries in which the Company operates are highly competitive. Many
of the Company's competitors are larger and have greater financial resources
than the Company. Among the Company's competitors are two of the world's largest
chemical companies, OxyChem and The Dow Chemical Company. Because of their
greater financial resources, these companies may be better able than the Company
to withstand severe price competition and volatile market conditions. In
addition, as a result of the reduced demand for chlorine by the pulp and paper
industry and in the production of CFCs, certain competitors may rely on price
competition to capture market share. See "Business -- Competition."
DEPENDENCE ON KEY CUSTOMERS AND KEY SUPPLIERS
Novartis Crop Protection Inc. ("Novartis") accounted for approximately 13%
of the Company's net sales for the year ended December 31, 1996 and was the only
customer that accounted for more than 10% of the Company's sales during such
period. Novartis would have accounted for approximately 6% of the Company's pro
forma net sales for the twelve months ended September 30, 1997. The loss of
Novartis or a number of other significant customers would have a material
adverse effect on the Company's financial condition, results of operations and
cash flows. In connection with the Tacoma Acquisition, the Company, OxyChem and
OCC Tacoma entered into certain agreements with respect to the sale of chlorine
and caustic soda for specified periods. There can be no assurance that the
Company will be able to replace chlorine sales under such agreements with sales
to alternative customers in the future. There can be no assurance that the
historical levels of business from these customers will be maintained in the
future.
The production of chlor-alkali products principally requires salt,
electricity and water as raw materials, and if the supply of such materials were
limited or a significant supplier were unable to meet its obligations under the
current supply arrangements, the Company could be forced to incur increased
costs. Additional raw materials purchased by the Company include scrap iron,
aluminum oxide compounds and sulfuric acid. Any
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significant interruption in supply or increase in prices for raw materials could
have a material adverse effect on the Company's financial condition, results of
operation or cash flows.
RANKING OF THE NOTES AND GUARANTEES
The Notes are senior obligations of the Issuer and rank pari passu with all
existing and future Senior Indebtedness of the Issuer and senior to all
Subordinated Indebtedness of the Issuer. However, the Notes and the obligations
of the Guarantors under their guarantees of the Notes are effectively
subordinated to secured Senior Indebtedness of the Issuer and the Guarantors,
respectively, with respect to the assets securing such Indebtedness. See
"Description of Other Indebtedness" and "Description of the Notes -- Ranking."
As of September 30, 1997, after giving pro forma effect to the Offering,
the other Financings and the PCI Canada Acquisition, the Issuer and the
Guarantors would have had outstanding approximately $557.8 million aggregate
principal amount of secured Senior Indebtedness (including $300.0 million of
secured Senior Indebtedness in addition to the Notes and the Term Loans). At
September 30, 1997, the Issuer and the Guarantors would have had, subject to
certain restrictions (including borrowing base limitations), the ability to draw
up to $62.1 million of additional secured Senior Indebtedness under the
Revolving Facility. In addition, PAAC and its Subsidiaries may incur up to $50.0
million of Senior Indebtedness which will be secured on a pari passu basis with
the Senior Secured Notes and the Existing Term Facility.
Pursuant to the Indenture governing the Notes, the Issuer and the
Guarantors may incur additional secured and unsecured Indebtedness, or provide
guarantees of Indebtedness, in certain circumstances. See "Description of Other
Indebtedness" and "Description of the Notes -- Ranking" and "-- Certain
Covenants."
FRAUDULENT CONVEYANCE ISSUES
The Notes are obligations of the Issuer and are unconditionally guaranteed,
jointly and severally, by the Guarantors. Under applicable provisions of the
United States Bankruptcy Code, the Bankruptcy and Insolvency Act (Canada) and
comparable provisions of state and provincial fraudulent conveyance and
fraudulent preference laws, if it were found that a Guarantor had incurred the
indebtedness represented by its obligations under the Guarantee with an intent
to hinder, delay or defraud creditors or had received less than a reasonably
equivalent value for such indebtedness and such Guarantor (i) was insolvent on
the date of the execution of the Guarantee or (ii) was rendered insolvent by
reason of the Guarantee, the obligations of such Guarantor under the Guarantee
could be avoided. A legal defense of the Guarantee on fraudulent preference
grounds could, among other things, focus on the benefits, if any, realized by
such Guarantor as a result of the issuance by the Issuer of the Notes. To the
extent that the Guarantee were held to be unenforceable as a fraudulent
preference or for any other reason, the holder of a Note would cease to have any
direct claim in respect of such Guarantor, and would be solely a creditor of the
Issuer and any Guarantor whose obligations under its Guarantee were not avoided
or held unenforceable.
TAX MATTERS
Pioneer has an available net operating loss carryforward ("NOL") for
federal income tax reporting purposes which it believes was approximately $54.9
million at September 30, 1997, which includes the impact of the extraordinary
loss due to early extinguishment of debt during the second quarter of 1997. The
NOL would be available for offset against future federal taxable income,
including income of PAI (except PAI "built-in" gain recognized during the
five-year period following the acquisition of PAI as provided by section 384 of
the Internal Revenue Code of 1986, as amended (the "Code")), if generated during
the carryforward period, which expires between 2003 to 2012. See "The Company
and Pioneer -- Pioneer."
Tax benefits arising from net operating loss carryforwards are subject to
challenge by the Internal Revenue Service and may not be available. In
particular, the use of the NOL may be reduced or eliminated if (a) an ownership
change within the meaning of Code section 382 has occurred or occurs after the
Offering with respect to Pioneer, (b) a subsidiary of Pioneer that in prior
years generated a significant portion of the NOL was not permitted to file a
consolidated return with Pioneer or (c) Code section 269 (applicable to
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certain transactions the principal purpose of which is tax avoidance) applies to
PAAC's acquisition of PAI. If challenged by the Internal Revenue Service,
Pioneer believes that it can present adequate proof of these facts and prevail
with respect to these legal issues to the satisfaction of the Internal Revenue
Service or in litigation. If Pioneer is unable to establish such facts and
prevail with respect to such legal issues, its ability to use the NOL may be
substantially restricted, and Pioneer's after-tax cash flow may be materially
adversely affected.
CHANGE OF CONTROL
Upon the occurrence of a "Change of Control", as defined in the Indenture,
the Issuer will be required to make a Change of Control Offer to purchase all of
the Notes outstanding at a purchase price in cash in an amount equal to 101% of
the principal amount thereof, plus accrued and unpaid interest. The indenture
governing the Senior Secured Notes contains the same requirement with respect to
PAAC. The Issuer's ability to redeem Notes may be limited by the availability of
sufficient funds, restrictions imposed by any other debt obligations (including
the New Credit Facilities, the Existing Term Facility and the Senior Secured
Notes) that may then be in effect and compliance with applicable securities
laws. The Existing Term Facility and the Term Facility require a mandatory
prepayment of the loans thereunder at 100% of the principal amount thereof, plus
accrued and unpaid interest, with respect to a change of control under such
facility. The Revolving Facility may prohibit the Issuer from repurchasing Notes
if at the time of such repurchase an event of default under the Revolving
Facility exists or would be caused thereby. The occurrence of a Change of
Control may cause an event of default under the New Credit Facilities, the
Existing Term Facility, the Senior Secured Notes or other indebtedness of the
Company, upon which event of default all amounts outstanding under such
indebtedness may become due and payable. After giving effect to the Initial
Offering, the other Financings and the PCI Canada Acquisition, the Issuer does
not currently have, and no assurance can be given that the Issuer will have,
sufficient funds available to purchase all of the outstanding Notes were they to
be tendered in response to an offer made as a result of a Change of Control.
Further, the provisions of the Indenture may not afford holders of Notes
protection in the event of a highly leveraged transaction, reorganization,
restructuring, merger or similar transaction involving Pioneer, PAAC or the
Issuer that may adversely affect holders of Notes, if such transaction does not
result in a Change of Control. See "Description of the Notes -- Change of
Control."
CONTROL BY CERTAIN STOCKHOLDERS
William R. Berkley, Chairman of Pioneer and PAAC (who may be deemed to
beneficially own all shares of Pioneer common stock held by the Interlaken
Partnership), may be deemed to beneficially own approximately 59.9% of Pioneer's
outstanding voting power. Pioneer, in turn, owns all of the outstanding common
stock of PAAC, which owns all of the outstanding stock of PAI, which owns all of
the outstanding stock of PCI Canada. As a result, Mr. Berkley is able to control
the election of PAAC's Board of Directors and thereby direct the management and
policies of PAAC, PAI and its subsidiaries, including PCI Canada. See "Stock
Ownership."
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward-looking
statements." Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of PCI Canada or the Company or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions, both
domestic and foreign; industry capacity; demographic changes; existing
government regulations and changes in, or the failure to comply with, government
regulations; legislative proposals concerning pollution, protection of the
environment and the release or disposal of regulated materials; liability and
other claims asserted against the Company; competition; the loss of any
significant customers; changes in operating strategy or development plans; the
ability to attract and retain qualified personnel; the significant indebtedness
of the Company after the PCI Canada Acquisition; the
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successful integration of the acquired businesses following the PCI Canada
Acquisition and the Tacoma Acquisition; the availability and terms of capital to
fund the expansion of the Company's business; and other factors referenced in
this Prospectus. Certain of these factors are discussed in more detail elsewhere
in this Prospectus, including, without limitation, under the captions
"Prospectus Summary," "Risk Factors," "Supplemental Analysis of Adjusted
EBITDA," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Business." Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such factors or
to publicly announce the result of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
LACK OF PUBLIC MARKET FOR THE NOTES
The Notes constitute a new issue of securities with no established trading
market, and there can be no assurance as to (i) the liquidity of any such market
that may develop, (ii) the ability of holders of Notes to sell their Notes or
(iii) the price at which the holders of Notes would be able to sell their Notes.
If such a market were to exist, the Notes could trade at prices that may be
higher or lower than their principal amount or purchase price, depending on many
factors, including prevailing interest rates, the market for similar notes and
the financial performance of the Company. The Issuer has been advised by the
Initial Purchasers that they presently intend to make a market in the Original
Notes and the Exchange Notes. However, the Initial Purchasers are not obligated
to do so, and any market-making activity with respect to the Original Notes or
the Exchange Notes may be discontinued at any time without notice. In addition,
such market-making activity will be subject to the limits imposed by the
Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and may be limited during such exchange offer or the pendency
of an applicable shelf registration statement. See "Original Notes Registration
Rights." There can be no assurance that even following registration of the
Original Notes or the Exchange Notes, as the case may be, an active trading
market will exist for the Original Notes or the Exchange Notes, as the case may
be, or that any such trading market will be liquid.
USE OF PROCEEDS
There will be no proceeds to the Registrants from the exchange pursuant to
the Exchange Offer. The net proceeds to the Issuer from the issuance of the
Original Notes in the Initial Offering were approximately $170.1 million. The
net proceeds received by the Company, together with borrowings under the Term
Facility, were used to pay the cash portion of the purchase price of the PCI
Canada Acquisition and for working capital and general corporate purposes. See
"The Acquisition -- Use of Proceeds from Initial Offering."
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Original Notes were originally issued and sold on November 5, 1997.
Such sales were not registered under the Securities Act in reliance upon the
exemption provided by Section 4(2) of the Securities Act and Rule 144A of the
Securities Act. Pursuant to the Registration Rights Agreement, the Issuer and
the Guarantors have agreed to file by the 30th day following the Closing Date of
the Initial Offering, a registration statement (the "Exchange Offer Registration
Statement") with respect to an offer to exchange the Original Notes for the
Exchange Notes and to use their best efforts to cause such registration
statement to become effective by the 150th day following the Closing Date and,
upon becoming effective, to commence the Exchange Offer and cause the same to
remain open for acceptance for not less than 20 business days after the date of
commencement. If the Exchange Offer is not consummated within 30 days following
the date the Exchange Offer Registration Statement is declared effective or,
under certain circumstances, the Initial Purchasers so request, the Issuer and
the Guarantors will file and use their best efforts to cause to be declared
effective a shelf registration statement with respect to resales of the Original
Notes and the Guarantees from time to time and will use their best efforts to
keep such registration statement effective until three years after the effective
date thereof. If the applicable registration statement is not filed or declared
effective or ceases to be effective or the Exchange Offer is not consummated
within the applicable time periods related thereto (each, a "Registration
Default"), the Issuer will be required to pay Liquidated Damages to each holder
of the Original Notes, in the amount of $.05 per week per $1,000 principal
amount of Original Notes for the initial 90-day period following such
Registration Default. The amount of such Liquidated Damages will increase by an
additional $.05 per week per $1,000 principal amount of Original Notes at the
beginning of each subsequent 90-day period, up to a maximum amount of $.50 per
week per $1,000 principal amount of Original Notes. If, subsequently, such
Registration Default is cured, the accrual of Liquidated Damages will cease. See
"Original Notes Registration Rights."
The sole purpose of the Exchange Offer is to fulfill the obligations of the
Issuers with respect to the Registration Rights Agreement.
TERMS OF THE EXCHANGE
The Registrants hereby offer to exchange, upon the terms and subject to the
conditions set forth herein and in the Letter of Transmittal accompanying this
Prospectus (the "Letter of Transmittal"), $1,000 in principal amount of Exchange
Notes for each $1,000 in principal amount of the Original Notes. The terms of
the Exchange Notes are identical in all respects to the terms of the Original
Notes for which they may be exchanged pursuant to this Exchange Offer, except
that the Exchange Notes will generally be freely transferable by holders
thereof, and the holders of the Exchange Notes (as well as remaining holders of
any Original Notes) will not be entitled to registration rights under the
Registration Rights Agreement. See "Original Notes Registration Rights." The
Exchange Notes will evidence the same debt as the Original Notes and will be
entitled to the benefits of the Indenture. See "Description of the Notes."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Original Notes being tendered for exchange.
Based on interpretations by the Staff set forth in no-action letters issued
to third parties, the Registrants believe that Exchange Notes issued pursuant to
the Exchange Offer in exchange for the Original Notes may be offered for resale,
resold and otherwise transferred by holders thereof (other than any holder which
is (i) an "affiliate" of the Issuers within the meaning of Rule 405 under the
Securities Act, (ii) a broker-dealer who acquired Original Notes directly from
the Issuer or (iii) broker-dealers who acquired Original Notes as a result of
market making or other trading activities) without compliance with the
registration and prospectus delivery provisions of the Securities Act provided
that such Exchange Notes are acquired in the ordinary course of such holders'
business, and such holders are not engaged in, and do not intend to engage in,
and have no arrangement or understanding with any person to participate in, a
distribution of such Exchange Notes. Each broker-dealer that receives Exchange
Notes pursuant to the Exchange Offer must acknowledge that it
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will deliver a prospectus in connection with any resale of such Exchange Notes.
The Letter of Transmittal states that by so acknowledging, and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. Broker-dealers who
acquired Original Notes as a result of market making or other trading activities
may use this Prospectus, as supplemented or amended, in connection with resales
of the Exchange Notes. The Registrants have agreed that, for a period not to
exceed 180 days after the Exchange Date, they will make this Prospectus
available to any broker-dealer for use in connection with any such resale. Any
holder that cannot rely upon such interpretations must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction.
Tendering holders of Original Notes will not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Original Notes
pursuant to the Exchange Offer.
The Exchange Notes will bear interest from and including their respective
dates of issuance. Holders whose Original Notes are accepted for exchange will
receive accrued interest thereon to, but not including, the date of issuance of
the Exchange Notes, such interest to be payable with the first interest payment
on the Exchange Notes, but will not receive any payment in respect of interest
on the Original Notes accrued after the issuance of the Exchange Notes.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer expires on the Expiration Date. The term "Expiration
Date" means 5:00 p.m., New York City time, on February 9, 1998, unless the
Registrants in their sole discretion extend the period during which the Exchange
Offer is open, in which event the term "Expiration Date" means the latest time
and date on which the Exchange Offer, as so extended by the Registrants,
expires. The Registrants reserve the right to extend the Exchange Offer at any
time and from time to time prior to the Expiration Date by giving written notice
to United States Trust Company of New York (the "Exchange Agent") and by timely
public announcement communicated, unless otherwise required by applicable law or
regulation, by making a release to the Dow Jones News Service. During any
extension of the Exchange Offer, all Original Notes previously tendered pursuant
to the Exchange Offer will remain subject to the Exchange Offer.
The initial Exchange Date will be the first business day following the
Expiration Date. The Registrants expressly reserve the right to (i) terminate
the Exchange Offer and not accept for exchange any Original Notes for any
reason, including if any of the events set forth below under "-- Conditions to
the Exchange Offer" shall have occurred and shall not have been waived by the
Registrants and (ii) amend the terms of the Exchange Offer in any manner,
whether before or after any tender of the Original Notes. If any such
termination or amendment occurs, the Registrants will notify the Exchange Agent
in writing and will either issue a press release or give written notice to the
holders of the Original Notes as promptly as practicable. Unless the Registrants
terminate the Exchange Offer prior to 5:00 p.m., New York City time, on the
Expiration Date, the Registrants will exchange the Exchange Notes for the
Original Notes on the Exchange Date.
If the Registrants waive any material condition to the Exchange Offer, or
amend the Exchange Offer in any other material respect, and if at the time that
notice of such waiver or amendment is first published, sent or given to holders
of Original Notes in the manner specified above, the Exchange Offer is scheduled
to expire at any time earlier than the expiration of a period ending on the
fifth business day from, and including, the date that such notice is first so
published, sent or given, then the Exchange Offer will be extended until the
expiration of such period of five business days.
This Prospectus and the related Letter of Transmittal and other relevant
materials will be mailed by the Registrants to record holders of Original Notes
and will be furnished to brokers, banks and similar persons whose names, or the
names of whose nominees, appear on the lists of holders for subsequent
transmittal to beneficial owners of Original Notes.
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HOW TO TENDER
The tender to the Registrants of Original Notes by a holder thereof
pursuant to one of the procedures set forth below will constitute an agreement
between such holder and the Registrants in accordance with the terms and subject
to the conditions set forth herein and in the Letter of Transmittal.
General Procedures. A holder of an Original Note may tender the same by (i)
properly completing and signing the Letter of Transmittal or a facsimile thereof
(all references in this Prospectus to the Letter of Transmittal shall be deemed
to include a facsimile thereof) and delivering the same, together with the
certificate or certificates representing the Original Notes being tendered and
any required signature guarantees (or a timely confirmation of a book-entry
transfer (a "Book-Entry Confirmation") pursuant to the procedure described
below), to the Exchange Agent at its address set forth on the back cover of this
Prospectus on or prior to the Expiration Date or (ii) complying with the
guaranteed delivery procedures described below.
If tendered Original Notes are registered in the name of the signer of the
Letter of Transmittal and the Exchange Notes to be issued in exchange therefor
are to be issued (and any untendered Original Notes are to be reissued) in the
name of the registered holder, the signature of such signer need not be
guaranteed. In any other case, the tendered Original Notes must be endorsed or
accompanied by written instruments of transfer in form satisfactory to the
Registrants and duly executed by the registered holder and the signature on the
endorsement or instrument of transfer must be guaranteed by a firm (an "Eligible
Institution") that is a member of a recognized signature guarantee medallion
program (an "Eligible Program") within the meaning of Rule 17Ad-15 under the
Exchange Act. If the Exchange Notes and/or Original Notes not exchanged are to
be delivered to an address other than that of the registered holder appearing on
the note register for the Original Notes, the signature on the Letter of
Transmittal must be guaranteed by an Eligible Institution.
Any beneficial owner whose Original Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender Original Notes should contact such holder promptly and instruct such
holder to tender Original Notes on such beneficial owner's behalf. If such
beneficial owner wishes to tender such Original Notes himself, such beneficial
owner must, prior to completing and executing the Letter of Transmittal and
delivering such Original Notes, either make appropriate arrangements to register
ownership of the Original Notes in such beneficial owner's name or follow the
procedures described in the immediately preceding paragraph. The transfer of
record ownership may take considerable time.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Original Notes, where such Original Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
Book-Entry Transfer. The Exchange Agent will make a request to establish an
account with respect to the Original Notes at The Depository Trust Company (the
"Book-Entry Transfer Facility") for purposes of the Exchange Offer within two
business days after receipt of this Prospectus, and any financial institution
that is a participant in the Book-Entry Transfer Facility's systems may make
book-entry delivery of Original Notes by causing the Book-Entry Transfer
Facility to transfer such Original Notes into the Exchange Agent's account at
the Book-Entry Transfer Facility in accordance with the Book-Entry Transfer
Facility's procedures for transfer. However, although delivery of Original Notes
may be effected through book-entry transfer at the Book-Entry Transfer Facility,
the Letter of Transmittal, with any required signature guarantees and any other
required documents, must, in any case, be transmitted to and received by the
Exchange Agent at the address specified on the back cover page of this
Prospectus on or prior to the Expiration Date or the guaranteed delivery
procedures described below must be complied with.
THE METHOD OF DELIVERY OF ORIGINAL NOTES AND ALL OTHER DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER INSURANCE BE
OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE
TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION DATE.
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Guaranteed Delivery Procedures. If a holder desires to accept the Exchange
Offer and time will not permit a Letter of Transmittal or Original Notes to
reach the Exchange Agent before the Expiration Date, a tender may be effected if
the Exchange Agent has received at its office listed on the back cover hereof on
or prior to the Expiration Date a letter, telegram or facsimile transmission
from an Eligible Institution setting forth the name and address of the tendering
holder, the names in which the Original Notes are registered and, if possible,
the certificate numbers of the Original Notes to be tendered, and stating that
the tender is being made thereby and guaranteeing that within five New York
Stock Exchange trading days after the date of execution of such letter, telegram
or facsimile transmission by the Eligible Institution, the Original Notes, in
proper form for transfer, will be delivered by such Eligible Institution
together with a properly completed and duly executed Letter of Transmittal (and
any other required documents). Unless Original Notes being tendered by the
above-described method (or a timely Book-Entry Confirmation) are deposited with
the Exchange Agent within the time period set forth above (accompanied or
preceded by a properly completed Letter of Transmittal and any other required
documents), the Issuers may, at their option, reject the tender. Copies of a
Notice of Guaranteed Delivery which may be used by Eligible Institutions for the
purposes described in this paragraph are being delivered with this Prospectus
and the related Letter of Transmittal.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Original Notes (or a timely Book-Entry Confirmation) is
received by the Exchange Agent. Issuances of Exchange Notes in exchange for
Original Notes tendered pursuant to a Notice of Guaranteed Delivery or letter,
telegram or facsimile transmission to similar effect (as provided above) by an
Eligible Institution will be made only against deposit of the Letter of
Transmittal (and any other required documents) and the tendered Original Notes
(or a timely Book-Entry Confirmation).
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Original Notes will be
determined by the Registrants, whose determination will be final and binding.
The Registrants reserve the absolute right to reject any or all tenders not in
proper form or the acceptances for exchange of which may, in the opinion of
counsel to the Registrants, be unlawful. The Registrants also reserve the
absolute right to waive any of the conditions of the Exchange Offer or any
defect or irregularities in tenders of any particular holder whether or not
similar defects or irregularities are waived in the case of other holders. None
of the Registrants, the Exchange Agent or any other person will be under any
duty to give notification of any defects or irregularities in tenders or shall
incur any liability for failure to give any such notification. The Registrants'
interpretation of the terms and conditions of the Exchange Offer (including the
Letter of Transmittal and the instructions thereto) will be final and binding.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Original Notes for exchange (the "Transferor")
exchanges, assigns and transfers the Original Notes to the Registrants and
irrevocably constitutes and appoints the Exchange Agent as the Transferor's
agent and attorney-in-fact to cause the Original Notes to be assigned,
transferred and exchanged. The Transferor represents and warrants that it has
full power and authority to tender, exchange, assign and transfer the Original
Notes and to acquire Exchange Notes issuable upon the exchange of such tendered
Original Notes, and that, when the same are accepted for exchange, the
Registrants will acquire good and unencumbered title to the tendered Original
Notes, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim. The Transferor also warrants that it will,
upon request, execute and deliver any additional documents deemed by the
Registrants to be necessary or desirable to complete the exchange, assignment
and transfer of tendered Original Notes. The Transferor further agrees that
acceptance of any tendered Original Notes by the Registrants and the issuance of
Exchange Notes in exchange therefor shall constitute performance in full by the
Registrants of its obligations under the Registration Rights Agreement and that
the Registrants shall have no further obligations or liabilities thereunder
(except in certain limited circumstances). All authority conferred by the
Transferor will survive
29
<PAGE> 36
the death or incapacity of the Transferor and every obligation of the Transferor
shall be binding upon the heirs, legal representatives, successors, assigns,
executors and administrators of such Transferor.
By tendering Original Notes, the Transferor certifies (a) that it is not an
"affiliate" of the Registrants within the meaning of Rule 405 under the
Securities Act, that it is not a broker-dealer that owns Original Notes acquired
directly from the Registrants or an affiliate of the Registrants, that it is
acquiring the Exchange Notes offered hereby in the ordinary course of such
Transferor's business and that such Transferor has no arrangement with any
person to participate in the distribution of such Exchange Notes or (b) that it
is an "affiliate" (as so defined) of the Registrants or of the Initial
Purchasers in the Initial Offering of the Original Notes, and that it will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable to it.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Original Notes, where such Original Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
WITHDRAWAL RIGHTS
Original Notes tendered pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date.
For a withdrawal to be effective, a written or facsimile transmission
notice of withdrawal must be timely received by the Exchange Agent at its
address set forth on the back cover of this Prospectus. Any such notice of
withdrawal must specify the person named in the Letter of Transmittal as having
tendered Original Notes to be withdrawn, the certificate numbers of Original
Notes to be withdrawn, the principal amount of Original Notes to be withdrawn
(which must be an authorized denomination), a statement that such holder is
withdrawing his election to have such Original Notes exchanged, and the name of
the registered holder of such Original Notes, and must be signed by the holder
in the same manner as the original signature on the Letter of Transmittal
(including any required signature guarantees) or be accompanied by evidence
satisfactory to the Registrants that the person withdrawing the tender has
succeeded to the beneficial ownership of the Original Notes being withdrawn. The
Exchange Agent will return the properly withdrawn Original Notes promptly
following receipt of notice of withdrawal. All questions as to the validity of
notices of withdrawals, including time of receipt, will be determined by the
Registrants, and such determination will be final and binding on all parties.
ACCEPTANCE OF ORIGINAL NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of Original Notes validly tendered and not withdrawn and
the issuance of the Exchange Notes will be made on the Exchange Date. For the
purposes of the Exchange Offer, the Registrants shall be deemed to have accepted
for exchange validly tendered Original Notes when, as and if the Registrants
have given written notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of Original
Notes for the purposes of receiving Exchange Notes from the Registrants and
causing the Original Notes to be assigned, transferred and exchanged. Upon the
terms and subject to the conditions of the Exchange Offer, delivery of Exchange
Notes to be issued in exchange for accepted Original Notes will be made by the
Exchange Agent promptly after acceptance of the tendered Original Notes.
Original Notes not accepted for exchange by the Registrants will be returned
without expense to the tendering holders (or in the case of Original Notes
tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the procedures described above, such
non-exchanged Original Notes will be credited to an account maintained with such
Book-Entry Transfer Facility) promptly following the Expiration Date or, if the
Registrants terminate the Exchange Offer prior to the Expiration Date, promptly
after the Exchange Offer is so terminated.
30
<PAGE> 37
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Issuers will not be required to issue Exchange Notes
in respect of any properly tendered Original Notes not previously accepted and
may terminate the Exchange Offer (by oral or written notice to the Exchange
Agent and by timely public announcement communicated, unless otherwise required
by applicable law or regulation, by making a release to the Dow Jones News
Service) or, at its option, modify or otherwise amend the Exchange Offer, if (a)
there shall be threatened, instituted or pending any action or proceeding
before, or any injunction, order or decree shall have been issued by, any court
or governmental agency or other governmental regulatory or administrative agency
or commission, (i) seeking to restrain or prohibit the making or consummation of
the Exchange Offer or any other transaction contemplated by the Exchange Offer,
(ii) assessing or seeking any damages as a result thereof, or (iii) resulting in
a material delay in the ability of the Issuers to accept for exchange or
exchange some or all of the Original Notes pursuant to the Exchange Offer; (b)
any statute, rule, regulation, order or injunction shall be sought, proposed,
introduced, enacted, promulgated or deemed applicable to the Exchange Offer or
any of the transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government, governmental authority, agency
or court, domestic or foreign, that in the sole judgment of the Registrants
might directly or indirectly result in any of the consequences referred to in
clauses (a)(i) or (ii) above or, in the sole judgment of the Registrants, might
result in the holders of Exchange Notes having obligations with respect to
resales and transfers of Exchange Notes which are greater than those described
in the interpretations of the Commission referred to on the cover page of this
Prospectus, or would otherwise make it inadvisable to proceed with the Exchange
Offer; or (c) a material adverse change shall have occurred in the business,
condition (financial or otherwise), operations, or prospects of the Issuers.
The foregoing conditions are for the sole benefit of the Registrants and
may be asserted by them with respect to all or any portion of the Exchange Offer
regardless of the circumstances (including any action or inaction by the
Registrants) giving rise to such condition or may be waived by the Registrants
in whole or in part at any time or from time to time in their sole discretion.
The failure by the Registrants at any time to exercise any of the foregoing
rights will not be deemed a waiver of any such right, and each right will be
deemed an ongoing right which may be asserted at any time or from time to time.
In addition, the Registrants have reserved the right, notwithstanding the
satisfaction of each of the foregoing conditions, to terminate or amend the
Exchange Offer.
Any determination by the Registrants concerning the fulfillment or
non-fulfillment of any conditions will be final and binding upon all parties.
In addition, the Registrants will not accept for exchange any Original
Notes tendered and no Exchange Notes will be issued in exchange for any such
Original Notes, if at such time any stop order shall be threatened or in effect
with respect to the Registration Statement of which this Prospectus constitutes
a part or qualification of the Indenture under the Trust Indenture Act of 1939
(the "Trust Indenture Act").
EXCHANGE AGENT
United States Trust Company of New York has been appointed as the Exchange
Agent for the Exchange Offer. Letters of Transmittal must be addressed to the
Exchange Agent at its address set forth on the back cover page of this
Prospectus.
Delivery to an address other than as set forth herein, or transmissions of
instructions via a facsimile or telex number other than the ones set forth
herein, will not constitute a valid delivery.
SOLICITATION OF TENDERS; EXPENSES
The Registrants have not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer. The
Registrants will, however, pay the Exchange Agent reasonable and customary fees
for its services
31
<PAGE> 38
and will reimburse it for reasonable out-of-pocket expenses in connection
therewith. The Registrants will also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding tenders for their customers. The expenses to be incurred in
connection with the Exchange Offer, including the fees and expenses of the
Exchange Agent and printing, accounting and legal fees, will be paid by the
Company and are estimated at approximately $250,000.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Registrants. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Registrants since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Original Notes in any jurisdiction in
which the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Registrants may, at
their discretion, take such action as it may deem necessary to make the Exchange
Offer in any such jurisdiction and extend the Exchange Offer to holders of
Original Notes in such jurisdiction. In any jurisdiction the securities laws or
blue sky laws of which require the Exchange Offer to be made by a licensed
broker or dealer, the Exchange Offer is being made on behalf of the Registrants
by one or more registered brokers or dealers which are licensed under the laws
of such jurisdiction.
APPRAISAL RIGHTS
HOLDERS OF ORIGINAL NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL
RIGHTS IN CONNECTION WITH THE EXCHANGE OFFER.
FEDERAL INCOME TAX CONSEQUENCES
The exchange of Original Notes for Exchange Notes by holders will not be a
taxable exchange for federal income tax purposes, and holders should not
recognize any taxable gain or loss or any interest income as a result of such
exchange.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Original Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Original Notes pursuant to the terms of this Exchange Offer,
the Registrants will have fulfilled a covenant contained in the terms of the
Original Notes and the Registration Rights Agreement. Holders of the Original
Notes who do not tender their certificates in the Exchange Offer will continue
to hold such certificates and will be entitled to all the rights, and
limitations applicable thereto, under the Indenture, except for any such rights
under the Registration Rights Agreement, which by their terms terminate or cease
to have further effect as a result of the making of this Exchange Offer. See
"Description of the Notes." All untendered Original Notes will continue to be
subject to the restriction on transfer set forth in the Indenture. To the extent
that Original Notes are tendered and accepted in the Exchange Offer, the trading
market, if any, for the Original Notes could be adversely affected. See "Risk
Factors -- Consequences of Failure to Exchange."
The Registrants may in the future seek to acquire untendered Original Notes
in open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Registrants have no present plan to acquire any
Original Notes which are not tendered in the Exchange Offer.
32
<PAGE> 39
THE ACQUISITION
THE ACQUISITION
On October 31, 1997, Pioneer, and PCI Canada and PCI Carolina, newly-formed
subsidiaries of PAAC, and ICI and its subsidiaries, ICI Canada and ICI Americas,
consummated the PCI Canada Acquisition. Pursuant to the Purchase Agreement, the
Company acquired substantially all of the assets and properties used by ICI
Canada and ICI Americas in their North American chlor-alkali business. For the
twelve months ended September 30, 1997, the PCI Canada Business generated pro
forma net sales and pro forma EBITDA of $162.5 million and $51.9 million,
respectively. The purchase price consisted of approximately $235.6 million,
payable in cash, and the assumption of certain obligations related to the
acquired chlor-alkali business.
Management believes that the PCI Canada Acquisition presented an attractive
opportunity to further extend and diversify the Company's geographic and product
focus while helping to manage the intrinsic cyclicality of the chlor-alkali
business. By acquiring a low-cost operation with a leading market share and
complementary product offerings, the Company believes it will improve its
ability to market to merchant chlor-alkali customers. Specific benefits include
the following:
- The acquisition substantially expands the Company's presence in the
merchant market for chlorine and caustic soda, especially in markets
contiguous to existing markets in the southeastern United States where
the Company already conducts significant operations.
- The Company expects that the pulp and paper expertise and product
offerings of the PCI Canada Business will strengthen the Company's
existing market position in the pulp and paper industry in the western
United States and Canada.
- The PCI Canada Business will benefit from the Company's experience in
marketing to industrial customers.
- The experienced management team of the PCI Canada Business has
historically operated the business as a stand-alone entity within ICI
Canada and has demonstrated an ability to improve the operating
performance and cost structure of its business. Since 1992, management
has reduced fixed costs by approximately $9.6 million and initiated
productivity improvements and various other restructuring initiatives
that resulted in a 30% reduction in workforce over such period. As a
result, the Company intends to continue to operate the PCI Canada
Business with existing management.
- The PCI Canada Business has been successful in developing markets for
downstream products, such as bleach, hydrochloric acid and chlorinated
paraffins, whose steady demand for chlorine and caustic soda has helped
maintain high operating rates at its chlor-alkali facilities which in
turn improves overall profitability. Over the last several years, the PCI
Canada Business has operated at approximately full capacity.
- In April 1997, the PCI Canada Business completed a $21.2 million
expansion and upgrade of its Becancour facility by installing modern
membrane cells, which increased Becancour's net chlor-alkali capacity by
36,000 tons, or 12%.
At the closing of the PCI Canada Acquisition, the Company and ICI entered
into certain related agreements. Pursuant to a Noncompetition Agreement, ICI
agreed not to engage in any production or sales of caustic soda until 2002 in
designated areas of North America. Pursuant to a Lease Agreement, the PCI Canada
Business leased certain facilities at the Cornwall site from ICI Canada.
Pursuant to a License Agreement, the PCI Canada Business received a license from
ICI and its affiliates for the non-exclusive use of certain intellectual
property. Pursuant to a Transition Services Agreement, ICI Canada and certain of
its affiliates agreed to provide transition services to the Company.
The purchase price is subject to adjustment based on the difference between
base working capital and the actual working capital (each as defined in the
Purchase Agreement) on the closing date. The Purchase Agreement also provides
certain environmental indemnifications from ICI Canada and ICI Americas, subject
33
<PAGE> 40
to certain thresholds and limitations, which obligations will be guaranteed by
ICI. See "Risk Factors -- Environmental Regulation" and
"Business -- Environmental and Safety Regulation."
The following chart sets forth the structure of Pioneer and its operating
subsidiaries following the PCI Canada Acquisition.
[ORGANIZATIONAL CHART]
USE OF PROCEEDS FROM INITIAL OFFERING
The net proceeds from the sale of the Original Notes, of approximately
$170.1 million, together with borrowings of $83.0 million under the Term
Facility, were used to pay the purchase price for the PCI Canada Business of
$235.6 million and $17.5 million for working capital and general corporate
purposes.
34
<PAGE> 41
THE COMPANY AND PIONEER
THE COMPANY
The Predecessor Company was formed in October 1988 to acquire two existing
chlor-alkali plants. Subsequently, the Company acquired several businesses
engaged in municipal, industrial and commercial water treatment, and in June
1997 acquired the Tacoma Facility as its third chlor-alkali plant. The Company
conducts its business primarily through PCAC and All-Pure. The Company also owns
a 50% unconsolidated joint venture interest in Kemwater (which effective in
February 1996 succeeded to the operations of Imperial West). Pioneer owns the
remaining 50% joint venture interest in Kemwater. The Company intends to operate
the PCI Canada Business as a stand-alone entity following the PCI Canada
Acquisition.
PCAC. PCAC owns and operates three chlor-alkali production facilities,
located in St. Gabriel, Louisiana; Henderson, Nevada; and Tacoma, Washington.
These facilities produce chlorine and caustic soda for sale in the merchant
markets and for use as raw materials by PCAC, All-Pure and Kemwater in the
manufacture of downstream products. The Henderson facility also produces
hydrochloric acid, and the Tacoma Facility also produces hydrochloric acid and
calcium chloride. PCAC also has an indirect 15% equity interest in Saguaro Power
Company LP ("Saguaro Power"), which owns and operates a 90-megawatt cogeneration
facility located on approximately six acres of the Henderson property.
PCAC acquired the Tacoma Facility in June 1997. The purchase price
consisted of (i) $97.0 million, paid in cash, (ii) 55,000 shares of Pioneer
Preferred Stock, having a liquidation preference of $100 per share, and (iii)
the assumption of certain obligations related to the acquired chlor-alkali
business.
PCI Canada. In October 1997, PCI Canada, the Issuer of the Notes, pursuant
to the PCI Canada Acquisition, acquired substantially all of the Canadian assets
and properties used by ICI Canada in its North American chlor-alkali business.
PCI Canada is an indirect wholly-owned subsidiary of PAAC.
PCI Canada maintains its headquarters at 630 West Rene-Levesque Boulevard,
Montreal, Quebec H3B 1S6, and the telephone number is (514) 397-6100. PCI Canada
was incorporated in the province of New Brunswick, Canada on September 17, 1997.
All-Pure. The Company believes that All-Pure is the largest distributor of
packaged chlor-alkali products in the region of the United States west of the
Rocky Mountains and the only full-line marketer of bleach in the region.
All-Pure manufactures bleach and repackages chlorine and hydrochloric acid and
distributes these products along with caustic soda and related products to
municipalities, swimming pool supply distributors and selected commercial and
retail markets. In July 1996, All-Pure acquired T.C. Products, which is engaged
in the manufacture and marketing of bleach and related products from its plant
in Tacoma, Washington. All-Pure purchases substantially all of its chlorine and
caustic soda and a substantial portion of its hydrochloric acid from PCAC.
Because bleach contains a high percentage of water, freight costs and logistics
are an important competitive factor. All-Pure's production plants and
distribution facilities are strategically located in or near most of the largest
population centers of the West Coast.
PCI Carolina. In October 1997, PCI Carolina, pursuant to the PCI Canada
Acquisition, acquired substantially all of the U.S. assets and properties used
by ICI Americas in its North American chlor-alkali business. PCI Carolina is an
indirect wholly-owned subsidiary of PAAC. PCI Carolina will purchase chlor-
alkali products manufactured by PCI Canada for sale to customers in the United
States.
PCI Carolina was incorporated in the State of Delaware on September 19,
1997.
Kemwater. Kemwater, a 50% owned joint venture, manufactures and supplies
iron chlorides to the potable and waste water markets in the region of the
United States west of the Rocky Mountains, supplying municipal customers such as
the cities of Los Angeles, Sacramento and San Diego. Iron chlorides are used
primarily to remove solids from waste water streams and to control hydrogen
sulfide emissions. Kemwater also manufactures and markets polyaluminum chlorides
for markets in the southeastern United States, as well as aluminum sulfate for
the potable and waste water and industrial water treatment industries, sodium
aluminate for the production of catalysts and paint ingredients, and bleach for
municipal water disinfection. Kemwater
35
<PAGE> 42
has exclusive licenses to use the existing and future advanced water treatment
technology of Kemira Oy of Finland ("Kemira") in the development and sale of
products and services for the potable water, waste water and industrial water
treatment markets in the United States (other than the northeastern United
States) and the Caribbean, and nonexclusive access to the use of the technology
for the Canadian and Mexican markets, with an option to acquire an exclusive
license for those markets in the future. For the year ended December 31, 1996,
Kemwater purchased all of its chlorine and caustic soda requirements and a
substantial portion of its hydrochloric acid requirements from PCAC, and it is
anticipated that in the future PCAC will continue to provide Kemwater with a
substantial amount of its raw materials.
PIONEER
PAAC is a wholly-owned subsidiary of Pioneer, a publicly-traded company
that immediately prior to the acquisition of PAI had no operations. Pioneer has
an available net operating loss carryforward for federal income tax reporting
purposes which it believes was approximately $54.9 million at September 30,
1997, which includes the impact of the extraordinary loss due to early
extinguishment of debt during the second quarter of 1997. In April 1995, PAAC
acquired PAI for a purchase price, including the retirement of debt and the
redemption of preferred stock, of approximately $152.3 million in cash and $11.5
million of subordinated promissory notes of Pioneer, as well as certain amounts
payable after the closing based on certain of PAI's real estate holdings.
The Interlaken Partnership beneficially owns approximately 34.9% of the
voting power of Pioneer, and William R. Berkley, Chairman of Pioneer and PAAC
(who may be deemed to beneficially own all shares of Pioneer common stock held
by the Interlaken Partnership), may be deemed to beneficially own approximately
59.9% of the voting power of Pioneer. See "Stock Ownership."
Each of Pioneer and PAAC maintains its headquarters at 4300 NationsBank
Center, 700 Louisiana Street, Houston, Texas 77002, and the telephone number is
(713) 225-3831. PAAC was incorporated in the State of Delaware in March 1995.
36
<PAGE> 43
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997, and as adjusted to reflect the Initial Offering, the other
Financings and the PCI Canada Acquisition. See "The Acquisition." The table
should be read in conjunction with the historical financial information of the
Company and the PCI Canada Business and the respective notes thereto and the
unaudited pro forma information of the Company and the notes thereto appearing
elsewhere in this Prospectus. See also "Description of the Notes."
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
------------------------
ACTUAL AS ADJUSTED
--------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 35,799 $ 44,173
======== ========
Short-term debt:
Current portion of long-term debt......................... $ 1,163 $ 2,163
-------- --------
Total short-term debt............................. 1,163 2,163
-------- --------
Long-term debt:
New Credit Facilities(1).................................. -- 82,000
9 1/4% Senior Secured Notes due October 15, 2007.......... -- 175,000
Existing Term Loans....................................... 98,750 98,750
9 1/4% Senior Secured Notes due June 15, 2007............. 200,000 200,000
Long-term debt............................................ 6,620 6,620
-------- --------
Total long-term debt.............................. 305,370 562,370
-------- --------
Stockholder's equity:
Common Stock(2)........................................... 1 1
Additional paid in capital................................ 66,624 66,624
Retained deficit(3)....................................... (7,383) (7,383)
-------- --------
Total stockholder's equity........................ 59,242 59,242
-------- --------
Total capitalization.............................. $365,775 $623,775
======== ========
</TABLE>
- ------------
(1) Represents borrowings of $83.0 million in Term Loans by PAI. The Company did
not incur Revolving Loans at closing in connection with the PCI Canada
Acquisition but had $2.9 million in letters of credit outstanding and
borrowing availability of $62.1 million, subject to certain borrowing base
limitations, at such time under the Revolving Facility. See "Description of
Other Indebtedness -- New Credit Facilities."
(2) Par value $.01 per share, 1,000 shares authorized, issued and outstanding.
(3) Includes the impact in June 1997 of the extraordinary loss of $18.6 million,
net of an income tax benefit of $12.4 million, from the early extinguishment
of debt associated with the repurchase of the $135.0 million of 13 3/8%
First Mortgage Notes due 2005. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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<PAGE> 44
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information (the "Pro Forma
Financial Information") of the Company has been derived from and should be read
in conjunction with (i) the historical consolidated financial statements of the
Company and the related notes thereto included elsewhere herein (ii) the
historical financial statements of the PCI Canada Business and the related notes
thereto included elsewhere herein, and (iii) the historical financial statements
of the Tacoma Plant and the related notes thereto included elsewhere herein. The
Pro Forma Financial Information has been prepared to illustrate the effects of
the Initial Offering, the other Financings, the PCI Canada Acquisition, the
Tacoma Acquisition and related refinancings and the acquisition of T.C.
Products. This pro forma financial information does not necessarily present the
results of operations as they would have been if the companies involved had
constituted one entity for the periods presented. See "Prospectus Summary -- The
PCI Canada Acquisition" and "The Acquisition."
The pro forma balance sheet as of September 30, 1997 gives effect to the
Initial Offering, the other Financings and the PCI Canada Acquisition as if they
had occurred on September 30, 1997. The pro forma statement of operations for
the year ended December 31, 1996 gives effect to the Initial Offering, the other
Financings, the PCI Canada Acquisition, the Tacoma Acquisition and related
refinancings and the acquisition of T.C. Products as if they had occurred on
January 1, 1996. The pro forma statement of operations for the nine months ended
September 30, 1997 gives effect to the Initial Offering, the other Financings,
the PCI Canada Acquisition, and the Tacoma Acquisition and related refinancings
as if they had occurred on January 1, 1997. The pro forma statement of
operations for the nine months ended September 30, 1996 gives effect to the
Initial Offering, the other Financings, the PCI Canada Acquisition, the Tacoma
Acquisition and related refinancings and the acquisition of T.C. Products as if
they had occurred on January 1, 1996. The Tacoma Acquisition was effective June
17, 1997 and was accounted for using the purchase method. The acquisition of
T.C. Products was effective July 1, 1996 and was accounted for using the
purchase method. The Pro Forma Financial Information is not necessarily
indicative of either future results of operations or the results that might have
occurred if the foregoing transactions had been consummated on the indicated
date.
The PCI Canada Acquisition was effective October 31, 1997 and was accounted
for using the purchase method. The total purchase price of the PCI Canada
Acquisition is allocated to the assets and liabilities of the PCI Canada
Business based upon the estimated fair value of the assets and liabilities being
acquired. The pro forma adjustments reflected in the Pro Forma Financial
Information are based upon a preliminary purchase price allocation and upon
evaluations and estimates of fair values at the time of closing of the PCI
Canada Acquisition. Management believes adjustments to the preliminary
allocation, if any, are not expected to be material. Accordingly, there can be
no assurance that the actual adjustments will not differ significantly from the
pro forma adjustments reflected in the Pro Forma Financial Information. No
assurance can be given that such plans will be implemented as now contemplated
or that such assumptions will prove to be accurate.
38
<PAGE> 45
PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
PCI CANADA
BUSINESS US GAAP
CANADIAN ADJUSTMENTS, US GAAP, US GAAP, PRO FORMA
GAAP, $CDN(1) $CDN(2) $CDN US$ ADJUSTMENTS(3)
------------- ------------ -------- -------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets
Cash.................................... $ 8,374(d)
Accounts receivable..................... $ 31,455 $31,455 $22,680 2,782(e)
Due from parent.........................
Inventories............................. 9,754 9,754 7,033
Prepaid expenses........................ 302 302 218
-------- -------- ------- --------
Total current assets.............. 41,511 41,511 29,931 11,156
Property, plant and equipment, net........ 88,110 88,110 63,530 83,305(f)
Investments in and advances to
unconsolidated subsidiary............... 674 $ 277(a) 951 686 33(f)
Other assets, net......................... 2,769 1,723(b) 4,492 3,239 10,720(g)
Excess cost over the fair value of net
assets acquired......................... 76,352(h)
-------- ------- -------- ------- --------
Total assets...................... $133,064 $ 2,000 $135,064 $97,386 $181,566
======== ======= ======== ======= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable........................ $ 26,575 $26,575 $19,161 $ (2,898)(i)
Accrued liabilities..................... 7,323 $ (562)(b) 6,761 4,874 (1,624)(i)
Returnable deposits.....................
Bank Indebtedness....................... 3,857 3,857 2,781(i) (2,781)(i)
Current portion of long-term debt....... 1,000(j)
-------- ------- -------- ------- --------
Total current liabilities......... 37,755 (562) 37,193 26,816 (6,303)
Long-term debt, less current maturities... 2,500 2,500 1,803 (1,803)(i)
Term Loans.............................. 82,000(j)
9 1/4% Senior Secured Notes............. 175,000(j)
Returnable deposits.......................
Accrued pension and other employee
benefits................................ 6,316 (4,218)(b) 2,098 1,513 (74)(i)
Other long-term liabilities............... 3,613 3,613 2,605 (2,605)(i)
Equity.................................... 82,880 6,780(c) 89,660 64,649 (64,649)(k)
-------- ------- -------- ------- --------
Total liabilities and
stockholder's equity............ $133,064 $ 2,000 $135,064 $97,386 $181,566
======== ======= ======== ======= ========
<CAPTION>
ADJUSTED
PCI CANADA
BUSINESS AND ACTUAL PRO FORMA
FINANCINGS COMPANY COMPANY
------------ -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current assets
Cash.................................... $ 8,374 $ 35,799 $ 44,173
Accounts receivable..................... 25,462 37,039 62,501
Due from parent......................... 5,003 5,003
Inventories............................. 7,033 15,341 22,374
Prepaid expenses........................ 218 2,467 2,685
-------- -------- --------
Total current assets.............. 41,087 95,649 136,736
Property, plant and equipment, net........ 146,835 171,899 318,734
Investments in and advances to
unconsolidated subsidiary............... 719 30,297 31,016
Other assets, net......................... 13,959 40,902 54,861
Excess cost over the fair value of net
assets acquired......................... 76,352 125,104 201,456
-------- -------- --------
Total assets...................... $278,952 $463,851 $742,803
======== ======== ========
LIAB
Current liabilities
Accounts payable........................ $ 16,263 $ 28,976 $ 45,239
Accrued liabilities..................... 3,250 27,298 30,548
Returnable deposits..................... 3,287 3,287
Bank Indebtedness.......................
Current portion of long-term debt....... 1,000 1,163 2,163
-------- -------- --------
Total current liabilities......... 20,513 60,724 81,237
Long-term debt, less current maturities... 6,620 6,620
Term Loans.............................. 82,000 98,750 180,750
9 1/4% Senior Secured Notes............. 175,000 200,000 375,000
Returnable deposits....................... 3,271 3,271
Accrued pension and other employee
benefits................................ 1,439 18,511 19,950
Other long-term liabilities............... 16,733 16,733
Equity.................................... 59,242 59,242
-------- -------- --------
Total liabilities and
stockholder's equity............ $278,952 $463,851 $742,803
======== ======== ========
</TABLE>
(see footnotes on following page)
39
<PAGE> 46
NOTES TO PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(1) Reflects the actual PCI Canada Business balance sheet as of September 30,
1997 expressed in Canadian dollars, using generally accepted accounting
principles followed in Canada ("Canadian GAAP").
(2) Reflects adjustments to convert to generally accepted accounting principles
followed in the United States ("US GAAP"):
(a) Recording of investment in joint venture under the equity method.
(b) Adjustment of pension assets and other liabilities.
(c) Reflects net equity adjustment due to US GAAP adjustments.
(3) Reflects the adjustments to the PCI Canada Business balance sheet, including
the following:
(d) Excess cash after payment of purchase price and related acquisition and
financing costs.
(e) Receivable related to difference between base working capital and
actual working capital at closing date.
(f) Adjustment to fair value of acquired property, plant and equipment and
investment in unconsolidated subsidiary in accordance with the purchase
method of accounting.
(g) Reflects the following:
<TABLE>
<S> <C> <C>
Capitalization of transaction and financing
(i) costs............................................. $ 9,794
(ii) Capitalization of patents and trademarks.......... 1,007
Capitalization of covenant not to compete or
(iii) solicit........................................... 3,158
(iv) Elimination of other assets not purchased......... (3,239)
-------
$10,720
=======
</TABLE>
(h) Addition of excess of cost over the fair value of net assets acquired.
(i) Reflects elimination of liabilities not assumed.
(j) Addition of debt incurred in connection with the PCI Canada
Acquisition.
(k) Elimination of the PCI Canada Business historical equity in accordance
with the purchase method of accounting.
40
<PAGE> 47
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------------------------
ACTUAL PRIOR PCI CANADA
COMPANY ACQUISITIONS(1) ACQUISITION(2) AS ADJUSTED
-------- --------------- --------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues.................................... $183,326 $83,912 $164,247 $431,485
Cost of sales............................... 126,739 54,941 115,233 296,913
-------- ------- -------- --------
Gross profit................................ 56,587 28,971 49,014 134,572
Selling, general and administrative
expenses.................................. 23,528 3,679 13,919 41,126
-------- ------- -------- --------
Operating income............................ 33,059 25,292 35,095 93,446
Equity in net loss of unconsolidated
subsidiary................................ (2,607) -- -- (2,607)
Interest expense, net....................... (17,290) (9,100) (23,492) (49,882)
Other income, net........................... 1,684 18 1,594 3,296
-------- ------- -------- --------
Income before income taxes and extraordinary
item...................................... 14,846 16,210 13,197 44,253
Provision for income taxes.................. 6,735 5,645 4,302 16,682
-------- ------- -------- --------
Income before extraordinary item............ $ 8,111 $10,565 $ 8,895 $ 27,571
======== ======= ======== ========
</TABLE>
(see footnotes on following page)
41
<PAGE> 48
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(1) Reflects the pro forma adjusted financial results of the Company's prior
acquisitions of T.C. Products and the Tacoma Facility, as shown below.
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL --------------------------------------------
TACOMA T.C. PRIOR
PLANT PRODUCTS(A) ADJUSTMENTS(B) ACQUISITIONS
------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
Revenues........................................ $73,715 $4,255 $ 5,942(i) $83,912
Cost of sales................................... 52,420 2,550 (29)(ii) 54,941
------- ------ ------- -------
Gross profit.................................... 21,295 1,705 5,971 28,971
Selling, general and administrative expenses.... 1,782 900 997(iii) 3,679
------- ------ ------- -------
Operating income................................ 19,513 805 4,974 25,292
Equity in net loss of unconsolidated
subsidiary.................................... --
Interest expense, net........................... (271) (8,829)(iv) (9,100)
Other income (expense), net..................... (2,209) 11 2,216(v) 18
------- ------ ------- -------
Income before income taxes and extraordinary
item.......................................... 17,304 545 (1,639) 16,210
Provision for income taxes...................... 6,059 241 (655)(vi) 5,645
------- ------ ------- -------
Income before extraordinary item................ $11,245 $ 304 $ (984) $10,565
======= ====== ======= =======
</TABLE>
(a) Reflects the pro forma financial results of T.C. Products for the period of
January 1, 1996 to June 30, 1996, the period prior to ownership by the
Company.
(b) Reflects the adjustments to the operating results from the assets acquired
in the Tacoma Acquisition (the "Tacoma Plant") to reflect operations as part
of the Company:
(i) Reflects the following:
<TABLE>
<C> <S> <C>
(1) Elimination of freight costs associated with the sale
of 100,000 tons per year of chlorine shipped to the
Gulf Coast for which OCC Tacoma will bear the cost..... $ 6,394
(2) Adjustment to sales to OCC Tacoma for the difference
between historical prices and Gulf Coast prices........ 60
(3) Additional 5% commission to be paid to OxyChem on
OxyChem's national accounts to be serviced by the
Company................................................ (512)
-------
$ 5,942
=======
</TABLE>
(ii) Reflects the following:
<TABLE>
<C> <S> <C>
(1) Elimination of the impact of LIFO accounting previously
used by the Tacoma Plant as the Company uses FIFO or
average cost methods of accounting for inventory
valuation.............................................. $ 652
(2) Additional depreciation expense with respect to the
properties, plant and equipment purchased in connection
with the Tacoma Acquisition using the straight-line
method over an average life of 20 years................ 351
(3) Elimination of operating lease expense for equipment
capitalized by the Company which was previously leased
by OCC Tacoma.......................................... (1,532)
(4) Incremental insurance costs............................ 500
-------
$ (29)
=======
</TABLE>
42
<PAGE> 49
(iii) Reflects the following:
<TABLE>
<S> <S> <C>
(1) Elimination of OxyChem corporate allocations........... $(1,782)
(2) Addition of the Company's incremental selling, general
and administrative expenses............................ 750
(3) Additional amortization expense with respect to
intangible assets purchased in connection with the
Tacoma Acquisition using the straight-line method over
periods of 5 to 25 Years............................... 2,029
-------
$ 997
=======
</TABLE>
(iv) Incremental interest expense related to the Existing Term Loans with
an assumed interest rate of 8.375% and to the Senior Secured Notes
with an interest rate of 9.25%. A 0.25% change in the interest rate
applicable to the Existing Term Loans would change pro forma interest
expense by $250.
(v) Reflects the following:
<TABLE>
<C> <S> <C>
(1) Elimination of environmental expense associated with
the Tacoma Plant's accrual of known environmental
matters................................................ $ 1,932
(2) Elimination of fees related to the Tacoma Plant's sales
of Receivables......................................... 377
(3) Elimination of amortization of deferred gain on
equipment capitalized by the Company, which was
previously leased by the Tacoma Plant.................. (93)
-------
$ 2,216
=======
</TABLE>
(vi) Represents the tax effect of all pro forma adjustments.
(2) Represents pro forma adjusted amounts for the PCI Canada Acquisition, as
shown below.
<TABLE>
<CAPTION>
PCI
CANADA
BUSINESS
CANADIAN US GAAP
GAAP, ADJUSTMENTS US GAAP, US GAAP, PRO FORMA AS
$CDN(A) $CDN(B) $CDN US$ ADJUSTMENTS(C) ADJUSTED
----------- ----------- -------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues.......................... $223,967 $ -- $223,967 $164,247 $ -- $164,247
Cost of sales..................... 149,043 -- 149,043 109,301 5,932(iii) 115,233
-------- ------- -------- -------- -------- --------
Gross profit...................... 74,924 -- 74,924 54,946 (5,932) 49,014
Selling, general and
administrative Expenses......... 14,546 (1,112)(i) 13,434 9,852 4,067(iv) 13,919
-------- ------- -------- -------- -------- --------
Operating income.................. 60,378 1,112 61,490 45,094 (9,999) 35,095
Equity in net loss of
unconsolidated Subsidiary....... -- -- -- -- -- --
Interest expense, net............. -- -- -- -- (23,492)(v) (23,492)
Other income, net................. 2,045 128(ii) 2,173 1,594 -- 1,594
-------- ------- -------- -------- -------- --------
Income before income taxes and
Extraordinary item.............. 62,423 1,240 63,663 46,688 (33,491) 13,197
Provision (benefit) for income
Taxes........................... (792) -- (792) (581) 4,883(vi) 4,302
-------- ------- -------- -------- -------- --------
Income before extraordinary
item............................ $ 63,215 $ 1,240 $64,455 $47,269 $(38,374) $ 8,895
======== ======= ======== ======== ======== ========
</TABLE>
(a) Reflects actual results for the PCI Canada Business expressed in Canadian
dollars using Canadian GAAP.
43
<PAGE> 50
(b) Reflects adjustments to reflect US GAAP:
<TABLE>
<S> <C> <C>
(i) Reflects selling, general and administrative expenses
Adjustment including:
Decrease in expenses due to computing pension expense under
US GAAP..................................................... $ (462)
Decrease in expenses due to reduction in restructuring
expenses under US GAAP...................................... (650)
-------
$(1,112)
=======
(ii) Increase in income of joint venture investment accounted for
under the equity method.
</TABLE>
(c) Reflects the adjustments to the PCI Canada Business' operating results to
reflect operations as a part of the Company:
<TABLE>
<S> <C> <C>
(iii) Additional depreciation expense with respect to the
property, plant and equipment purchased in connection with
the PCI Canada Acquisition using the straight-line method
over an average life of twelve years.
(iv) Reflects the following:
Elimination of ICI corporate allocations.................... $(1,197)
Addition of the Company's incremental selling, general and
administrative expenses..................................... 500
Additional amortization expense with respect to intangible
assets purchased in connection with the PCI Canada
Acquisition using the straight-line method over periods of 5
to 25 years................................................. 4,764
-------
$ 4,067
=======
(v) Incremental interest expense related to the Term Loans with
an assumed interest rate of 8.8% and to the Notes with an
interest rate of 9.25%. A 0.25% change in the interest rate
applicable to the Term Loans would change pro forma interest
expense by $250.
(vi) Represents the tax provision for the PCI Canada Business
plus the tax impact of all pro forma adjustments.
</TABLE>
44
<PAGE> 51
PRO FORMA STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
------------------------------------------------
PRIOR PCI CANADA
ACTUAL COMPANY ACQUISITION(1) ACQUISITION(2) AS ADJUSTED
-------------- -------------- ----------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues................................. $150,073 $37,021 $121,961 $309,055
Cost of sales............................ 112,553 26,170 84,220 222,943
-------- ------- -------- --------
Gross profit............................. 37,520 10,851 37,741 86,112
Selling, general and administrative
expenses............................... 19,580 1,274 10,456 31,310
-------- ------- -------- --------
Operating income......................... 17,940 9,577 27,285 54,802
Equity in net loss of unconsolidated
subsidiary............................. (2,552) -- -- (2,552)
Interest expense, net.................... (16,189) (4,042) (17,619) (37,850)
Other income (expense), net.............. 882 (39) 722 1,565
-------- ------- -------- --------
Income (loss) before income taxes and
extraordinary item..................... 81 5,496 10,388 15,965
Provision (benefit) for income taxes..... 1,779 2,395 3,412 7,586
-------- ------- -------- --------
Income (loss) before extraordinary
Item................................... $ (1,698) $ 3,101 $ 6,976 $ 8,379
======== ======= ======== ========
</TABLE>
(see footnotes on following page)
45
<PAGE> 52
NOTES TO PRO FORMA STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(1) Reflects the pro forma adjusted financial results of the Company's prior
acquisition of the Tacoma Plant, as shown below.
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL TACOMA --------------------------
PLANT ADJUSTMENTS AS ADJUSTED
------------- ----------- -----------
<S> <C> <C> <C>
Revenues...................................... $34,491 $ 2,530(a) $37,021
Cost of sales................................. 27,141 (971)(b) 26,170
------- ------- -------
Gross profit.................................. 7,350 3,501 10,851
Selling, general and administrative
expenses.................................... 539 735(c) 1,274
------- ------- -------
Operating income.............................. 6,811 2,766 9,577
Equity in net loss of unconsolidated
subsidiary.................................. -- -- --
Interest expense, net......................... -- (4,042)(d) (4,042)
Other income (expense), net................... 455 (494)(e) (39)
------- ------- -------
Income before income taxes and extraordinary
item........................................ 7,266 (1,770) 5,496
Provision for income taxes.................... 2,545 (150)(f) 2,395
------- ------- -------
Income before extraordinary item.............. $ 4,721 $(1,620) $ 3,101
======= ======= =======
</TABLE>
(a) Reflects the following:
<TABLE>
<S> <C> <C>
(1) Elimination of freight costs associated with the sale of
100,000 tons per year of chlorine shipped to the Gulf
Coast for which OxyChem will bear the cost................ $2,548
(2) Reclassification of freight rebate from other income to
offset freight costs included in revenues................. 586
(3) Adjustment to sales to OxyChem for the difference between
historical prices and Gulf Coast prices................... (344)
(4) Additional 5% commission to be paid to OxyChem on OxyChem's
national accounts to be serviced by the Company........... (260)
------
$2,530
======
</TABLE>
(b) Reflects the following:
<TABLE>
<S> <C> <C>
(1) Elimination of the impact of LIFO accounting previously used
by the Tacoma Plant as the Company uses FIFO or average
cost methods of accounting for inventory valuation........ $ (555)
(2) Additional depreciation expense with respect to the
properties, plant and equipment purchased in connection
with the Tacoma Acquisition using the straight-line method
over an average life of 20 years.......................... 121
(3) Elimination of operating lease expense for the equipment
capitalized by the Company which was previously leased by
OCC Tacoma................................................ (766)
(4) Incremental insurance costs................................. 229
------
$ (971)
======
</TABLE>
46
<PAGE> 53
(c) Reflects the following:
<TABLE>
<S> <C> <C>
(1) Elimination of OxyChem corporate allocations................ $(539)
(2) Addition of the Company's incremental selling, general and
administrative expenses................................... 344
(3) Additional amortization expense with respect to intangible
assets purchased in connection with the Tacoma Acquisition
using the straight-line method over periods of 5 to 25
Years..................................................... 930
-----
$ 735
=====
</TABLE>
(d) Incremental interest expense related to the Existing Term Loans with an
assumed interest rate of 8.375% and to the Senior Secured Notes with an
interest rate of 9.25%. A 0.25% change in the interest rate applicable to
the Existing Term Loans would change pro forma interest expense by $125.
(e) Reflects the following:
<TABLE>
<S> <C> <C>
(1) Elimination of fees related to the Tacoma Plant's sales of
receivables............................................... $ 138
(2) Elimination of amortization of deferred gain on equipment
capitalized by the Company, which was previously leased by
the Tacoma Plant.......................................... (46)
(3) Reclassification of freight rebate to revenues to offset
freight costs............................................. (586)
-----
$(494)
=====
</TABLE>
(f) Represents the tax effect of all pro forma adjustments.
(2) Represents pro forma adjusted amounts for the PCI Canada Acquisition, as
shown below.
<TABLE>
<CAPTION>
PCI CANADA
BUSINESS
CANADIAN US GAAP
GAAP, ADJUSTMENTS US GAAP, US GAAP, PRO FORMA AS
$CDN(A) $CDN(B) $CDN US$ ADJUSTMENTS(C) ADJUSTED
---------- ----------- -------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues....................... $167,879 $ -- $167,879 $121,961 $ -- $121,961
Cost of sales.................. 110,114 -- 110,114 79,996 4,224(iii) 84,220
-------- ------- -------- -------- -------- --------
Gross profit................... 57,765 -- 57,765 41,965 (4,224) 37,741
Selling, general and
administrative expenses...... 11,122 (1,101)(i) 10,021 7,280 3,176(iv) 10,456
-------- ------- -------- -------- -------- --------
Operating income............... 46,643 1,101 47,744 34,685 (7,400) 27,285
Equity in net loss of
unconsolidated subsidiary.... -- -- -- -- -- --
Interest expense, net.......... -- -- -- -- (17,619)(v) (17,619)
Other income, net.............. 931 63(ii) 994 722 -- 722
-------- ------- -------- -------- -------- --------
Income before income taxes and
extraordinary item........... 47,574 1,164 48,738 35,407 (25,019) 10,388
Provision (benefit) for income
taxes........................ (594) -- (594) (432) 3,844(vi) 3,412
-------- ------- -------- -------- -------- --------
Income before extraordinary
item......................... $ 48,168 $ 1,164 $49,332 $35,839 $(28,863) $ 6,976
======== ======= ======== ======== ======== ========
</TABLE>
(a) Reflects actual results for the PCI Canada Business expressed in Canadian
dollars using Canadian GAAP
47
<PAGE> 54
(b) Reflects adjustments to reflect US GAAP:
<TABLE>
<S> <C> <C>
(i) Reflects selling, general and administrative expenses
adjustment to reflect:
Decrease in expenses due to computing pension expense under
US GAAP................................................... $(1,189)
Increase in expenses due to restructuring expenses under US
GAAP...................................................... 88
-------
$(1,101)
=======
(ii) Increase in income of joint venture investment accounted for
under the equity method.
</TABLE>
(c) Reflects the adjustments to the PCI Canada Business' operating results to
reflect operations as a part of the Company:
<TABLE>
<S> <C> <C>
(iii) Additional depreciation expense with respect to the
property, plant And equipment purchased in connection with
the PCI Canada Acquisition Using the straight-line method
over an average life of twelve years.
(iv) Reflects the following:
Elimination of ICI corporate allocations.................... $ (772)
Addition of the Company's incremental selling, general and
administrative expenses................................... 375
Expenses Additional amortization expense with respect to
intangible Assets purchased in connection with the PCI
Canada Acquisition using the straight-line method over
periods of 5 to 25 years.................................. 3,573
-------
$ 3,176
=======
(v) Incremental interest expense related to the Term Loans with
an assumed interest rate of 8.8% and to the Notes with an
interest rate of 9.25%. A 0.25% change in the interest
rate applicable to the Term Loans would change pro forma
interest expense by $125.
(vi) Represents the tax provision for the PCI Canada Business
plus the tax impact of all pro forma adjustments.
</TABLE>
48
<PAGE> 55
PRO FORMA STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
-------------------------------------------
ACTUAL PRIOR PCI CANADA AS
COMPANY ACQUISITIONS(1) ACQUISITION(2) ADJUSTED
-------- --------------- -------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues..................................... $140,835 $64,546 $123,718 $329,099
Cost of sales................................ 98,600 42,854 85,631 227,085
-------- ------- -------- --------
Gross profit................................. 42,235 21,692 38,087 102,014
Selling, general and administrative
expenses................................... 19,142 4,627 10,569 34,338
-------- ------- -------- --------
Operating income............................. 23,093 17,065 27,518 67,676
Equity in net loss of unconsolidated
subsidiary................................. (912) -- -- (912)
Interest expense, net........................ (12,766) (7,000) (17,619) (37,385)
Other income (expense), net.................. 507 1,676 1,613 3,796
-------- ------- -------- --------
Income before income taxes and extraordinary
item....................................... 9,922 11,741 11,512 33,175
Provision for income taxes................... 4,868 4,064 3,826 12,758
-------- ------- -------- --------
Income before extraordinary item............. $ 5,054 $ 7,677 $ 7,686 $ 20,417
======== ======= ======== ========
</TABLE>
(see footnotes on following page)
49
<PAGE> 56
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(1) Reflects the pro forma adjusted financial results of the Company's prior
acquisitions of the Tacoma Plant and T.C. Products, as shown below.
<TABLE>
<CAPTION>
PRO FORMA
----------------------------------------------
ACTUAL TACOMA T.C. PRODUCTS ADJUSTMENTS PRIOR
PLANT (A) (B) ACQUISITIONS
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues............................... $56,038 $4,255 $ 4,253(i) $64,546
Cost of sales.......................... 39,925 2,550 379(ii) 42,854
------- ------ ------- -------
Gross profit........................... 16,113 1,705 3,874 21,692
Selling, general and administrative
expenses............................. 2,977 900 750(iii) 4,627
------- ------ ------- -------
Operating income....................... 13,136 805 3,124 17,065
Equity in net loss of unconsolidated
subsidiary........................... -- -- -- --
Interest expense, net.................. -- (271) (6,729)(iv) (7,000)
Other income (expense), net............ -- 11 1,665(v) 1,676
------- ------ ------- -------
Income before income taxes and
extraordinary item................... 13,136 545 (1,940) 11,741
Provision for income taxes............. 4,599 241 (776)(vi) 4,064
------- ------ ------- -------
Income before extraordinary item....... $ 8,537 $ 304 $(1,164) $ 7,677
======= ====== ======= =======
</TABLE>
(a) Reflects the pro forma financial results of T.C. Products for the period of
January 1, 1996 to June 30, 1996, the period prior to ownership by the
Company.
(b) Reflects the adjustments to the Tacoma Plant's operating results to reflect
operations as part of the Company:
(i) Reflects the following:
<TABLE>
<S> <C> <C>
(1) Elimination of freight costs associated with the sale
of 100,000 tons per year of chlorine shipped to the
Gulf Coast for which OCC Tacoma will bear the cost.... $ 4,850
(2) Adjustment to sales to OxyChem for the difference
between historical prices and Gulf Coast prices....... (207)
(3) Additional 5% commission to be paid to OxyChem on
OxyChem's national accounts to be serviced by the
Company............................................... (390)
-------
$ 4,253
=======
</TABLE>
50
<PAGE> 57
(ii) Reflects the following:
<TABLE>
<S> <C> <C>
(1) Elimination of the impact of LIFO accounting
previously used by the Tacoma Plant as the Company
uses FIFO or average costs methods of accounting for
inventory valuation................................... $ 756
(2) Additional depreciation expense with respect to the
properties, plant and equipment purchased in
connection with the Tacoma Acquisition using the
straight-line method over an average life of 20
years................................................. 397
(3) Elimination of operating lease expense for the
equipment capitalized by the Company which was
previously leased by OCC Tacoma....................... (1,149)
(4) Incremental insurance costs........................... 375
-------
$ 379
=======
</TABLE>
(iii) Reflects the following:
<TABLE>
<S> <C> <C>
(1) Elimination of OxyChem corporate allocations.......... $(1,334)
(2) Addition of the Company's incremental selling, general
and administrative expenses........................... 563
(3) Additional amortization expense with respect to
intangible assets purchased in connection with the
Tacoma Acquisition using the straight-line method over
periods of 5 to 25 years.............................. 1,521
-------
$ 750
=======
</TABLE>
(iv) Incremental interest expense related to the Existing Term Loans with
an assumed interest rate of 8.375% and to the Senior Secured Notes
with an interest rate of 9.25%. A 0.25% change in the interest rate
applicable to the Existing Term Loans would change pro forma interest
expense by $125.
(v) Reflects the following:
<TABLE>
<S> <C> <C>
(1) Elimination of environmental expense associated with
the Tacoma Plant's accrual of known environmental
matters............................................... $ 1,449
(2) Elimination of fees related to the Tacoma Plant's
sales of receivables.................................. 285
(3) Elimination of amortization of deferred gain on
equipment capitalized by the Company, which was
previously leased by the Tacoma Plant................. (69)
-------
$ 1,665
=======
</TABLE>
(vi) Represents the tax effect of all pro forma adjustments.
51
<PAGE> 58
(2) Represents to pro forma adjusted amounts for the PCI Canada Acquisition, as
shown below.
<TABLE>
<CAPTION>
PCI
CANADA
BUSINESS
CANADIAN US GAAP
GAAP, ADJUSTMENTS, US GAAP, US GAAP, PRO FORMA
$CDN(A) $CDN(B) $CDN US$ ADJUSTMENTS(C) AS ADJUSTED
----------- ------------ -------- -------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues.......................... $169,234 $ -- $169,234 $123,718 $ -- $123,718
Cost of sales..................... 111,011 -- 111,011 81,154 4,477 (iii 85,631
-------- ------ -------- -------- -------- --------
Gross profit...................... 58,223 -- 58,223 42,564 (4,477) 38,087
Selling, general and
administrative expenses......... 11,286 (950)(i) 10,336 7,556 3,013(iv) 10,569
-------- ------ -------- -------- -------- --------
Operating income.................. 46,937 950 47,887 35,008 (7,490) 27,518
Equity in net loss of
unconsolidated subsidiary....... -- -- -- -- -- --
Interest expense, net............. -- -- -- -- (17,619)(v) (17,619)
Other income (expense), net....... 2,086 120(ii) 2,206 1,613 -- 1,613
-------- ------ -------- -------- -------- --------
Income before income taxes and
extraordinary item.............. 49,023 1,070 50,093 36,621 (25,109) 11,512
Provision for income taxes........ (594) -- (594) (434) 4,260(vi) 3,826
-------- ------ -------- -------- -------- --------
Income before extraordinary
item............................ $ 49,617 $1,070 $50,687 $37,055 $(29,369) $ 7,686
======== ====== ======== ======== ======== ========
</TABLE>
(a) Reflects actual results for the PCI Canada Business expressed in Canadian
dollars using Canadian GAAP.
(b) Reflects adjustments to reflect US GAAP:
(i) Reflects selling, general and administrative expenses adjustment to
reflect:
<TABLE>
<S> <C>
Decrease in expenses due to computing pension expense under
US GAAP................................................... $(300)
Decrease in expenses due to reduction in restructuring
expenses under US GAAP.................................... (650)
-----
$(950)
=====
</TABLE>
(ii) Increase in income of joint venture investment accounted for under
the equity method.
(c) Reflects the adjustments to the PCI Canada Business' operating results to
reflect operations as a part of the Company:
(iii) Additional depreciation expense with respect to the property, plant
and equipment purchased in connection with the PCI Canada Acquisition
using the straight-line method over an average life of twelve years.
(iv) Reflects the following:
<TABLE>
<S> <C>
Elimination of ICI corporate allocations.................... $ (935)
Addition of the Company's incremental selling, general and
administrative expenses................................... 375
Additional amortization expense with respect to intangible
assets purchased in connection with the PCI Canada
Acquisition using the straight-line method over periods of
5 to 25 years............................................. 3,573
------
$3,013
======
</TABLE>
(v) Incremental interest expense related to the Term Loans with an assumed
interest rate of 8.8% and to the Notes with an interest rate of 9.25%.
A 0.25% change in the interest rate applicable to the Term Loans would
change pro forma interest expense by $125.
(vi) Represents the tax provision for the PCI Canada Business plus the tax
impact of all pro forma adjustments.
52
<PAGE> 59
SUPPLEMENTAL ANALYSIS OF
ADJUSTED EBITDA
The Company believes it is important to present a supplemental analysis of
its Adjusted EBITDA in order to reflect a recent change in the PCI Canada
Business. In April 1997, the PCI Canada Business completed a $21.2 million
expansion and upgrade of its Becancour facility by installing additional modern
membrane cell capacity, which increased Becancour's net chlor-alkali capacity by
36,000 tons, or 12%. The information presented reflects an analysis of operating
results had this increase in capacity been available for these historical
periods. Reference should be made to "Pro Forma Financial Information" presented
elsewhere herein.
The Company believes that this information is a useful adjunct to net
income, cash flows and other GAAP measurements. However, this supplemental
information should not be construed as an alternative to net income or any other
GAAP measure of performance as an indicator of the Company's current or future
performance or to GAAP-defined cash flows generated by operating, investing and
financing activities as an indicator of cash flows or a measure of liquidity.
The following adjustments to obtain Adjusted EBITDA relate to increased
margin as a result of using the increased capacity to meet customer demands.
During the periods presented, the PCI Canada Business purchased for resale
chlorine and caustic soda at market prices. Margin on the resulting resales was
minimal. Had the additional Becancour capacity been available during the
indicated periods, the Company believes portions of historical volumes purchased
for resale would have been produced internally and sold at higher margins.
Certain assumptions, including those of average sales prices, average
manufacturing costs and capacity utilization rates, were made based on actual
PCI Canada Business operating data for existing facilities during the periods
presented. There can be no assurance that such operating results would have been
achieved had such additional capacity been available.
<TABLE>
<CAPTION>
TWELVE
NINE MONTHS NINE MONTHS YEAR MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1996 1997 1996 1997
------------- ------------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Pro forma operating income................... $ 67,676 $54,802 $ 93,446 $ 80,572
Pro forma other income....................... 3,796 1,565 3,296 1,065
Pro forma depreciation and amortization...... 32,406 31,192 41,061 39,847
-------- ------- -------- --------
Pro forma EBITDA............................. 103,878 87,559 137,803 121,484
Supplemental margin increase due to increased
capacity................................... 5,925 2,100 7,887 4,062
-------- ------- -------- --------
Adjusted EBITDA.............................. $109,803 $89,659 $145,690 $125,546
======== ======= ======== ========
</TABLE>
53
<PAGE> 60
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical financial data of the
Predecessor Company for the years ended December 31, 1992, 1993, and 1994 and
the period from January 1, 1995 through April 20, 1995. Such data were derived
from the Predecessor Company's financial statements, which were audited by Ernst
& Young LLP, independent auditors, except for the financial statements of
certain of the Company's investments, which were audited by other independent
auditors. The table also sets forth the historical financial information of the
Company for the period from March 6, 1995 ("Inception") through December 31,
1995 and for the year ended December 31, 1996. Such data were derived from
financial statements audited by Deloitte & Touche LLP. For comparative purposes
the combined year ended December 31, 1995 has been included. The table also sets
forth the historical financial information of the Company for the nine months
ended September 30, 1996 and 1997. The consolidated balance sheets at September
30, 1996 and September 30, 1997 and the consolidated statements of operations
for the nine months ended September 30, 1996 and September 30, 1997 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 1997 are not necessarily indicative of results to
be expected for the year ending December 31, 1997. The data should be read in
conjunction with the Consolidated Financial Statements included elsewhere in
this Prospectus. The following table should also be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
54
<PAGE> 61
SELECTED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-------------------------------------------------- PERIOD FROM
PERIOD FROM INCEPTION COMBINED
YEAR ENDED DECEMBER 31, JANUARY 1, 1995 THROUGH YEAR ENDED
------------------------------ THROUGH APRIL 20, DECEMBER 31, DECEMBER 31,
1992 1993 1994(1) 1995 1995 1995(2)
-------- -------- -------- ----------------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.................................... $157,401 $151,191 $167,217 $ 57,848 $142,908 $200,756
Cost of sales............................... 126,149 131,711 134,556 37,400 98,175 135,575
-------- -------- -------- -------- -------- --------
Gross profit................................ 31,252 19,480 32,661 20,448 44,733 65,181
Selling, general and administrative
expenses.................................. 22,602 21,850 22,529 7,047 19,836 26,883
-------- -------- -------- -------- -------- --------
Operating income (loss)..................... 8,650 (2,370) 10,132 13,401 24,897 38,298
Equity in net income (loss) of
unconsolidated subsidiary................. 26 1,149 183 204 -- 204
Interest expense, net....................... 8,189 7,551 6,407 1,665 12,905 14,570
Settlement of litigation and insurance
claims, net............................... 2,755 8,360 3,326 -- -- --
Other income (expense), net................. 1,104 954 1,154 (319) 637 318
-------- -------- -------- -------- -------- --------
Income (loss) before taxes and extraordinary
items..................................... 4,346 542 8,388 11,621 12,629 24,250
Income tax provision (benefit).............. 1,765 486 3,242 4,809 6,208 11,017
-------- -------- -------- -------- -------- --------
Income (loss) before extraordinary item..... 2,581 56 5,146 6,812 6,421 13,233
Extraordinary item, net of applicable
tax(4).................................... -- -- -- 3,420 -- 3,420
-------- -------- -------- -------- -------- --------
Net income (loss)........................... $ 2,581 $ 56 $ 5,146 $ 3,392 $ 6,421 $ 9,813
======== ======== ======== ======== ======== ========
BALANCE SHEET DATA (AT PERIOD END):
Working capital............................. $ 7,697 $ (5,521) $ (4,351) $ 10,013 $ 10,450 $ 10,450
Total assets................................ 165,915 154,922 163,039 165,329 264,731 264,731
Total debt, redeemable preferred stock and
redeemable stock put warrants............. 76,848 67,709 57,865 57,677 135,000 135,000
Common stockholder's equity................. 20,165 19,721 23,102 26,370 55,427 55,427
OTHER FINANCIAL DATA:
Capital expenditures........................ 6,652 5,888 5,681 3,447 13,556 17,003
Depreciation and amortization............... 12,992 13,446 13,595 4,490 12,274 16,764
Ratio of earnings to fixed charges(5)....... 1.4x -- 1.8x 5.1x 1.8x 2.4x
ADDITIONAL INFORMATION:
EBITDA(6)................................... $ 25,501 $ 20,390 $ 28,207 $ 17,572 $ 37,808 $ 55,380
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED -----------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996(3) 1996 1997
------------ ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.................................... $183,326 $140,835 $150,073
Cost of sales............................... 126,739 98,600 112,553
-------- -------- --------
Gross profit................................ 56,587 42,235 37,520
Selling, general and administrative
expenses.................................. 23,528 19,142 19,580
-------- -------- --------
Operating income (loss)..................... 33,059 23,093 17,940
Equity in net income (loss) of
unconsolidated subsidiary................. (2,607) (912) (2,552)
Interest expense, net....................... 17,290 12,766 16,189
Settlement of litigation and insurance
claims, net............................... -- -- --
Other income (expense), net................. 1,684 507 882
-------- -------- --------
Income (loss) before taxes and extraordinary
items..................................... 14,846 9,922 81
Income tax provision (benefit).............. 6,735 4,868 1,779
-------- -------- --------
Income (loss) before extraordinary item..... 8,111 5,054 (1,698)
Extraordinary item, net of applicable
tax(4).................................... -- -- (18,658)
-------- -------- --------
Net income (loss)........................... $ 8,111 $ 5,054 $(20,356)
======== ======== ========
BALANCE SHEET DATA (AT PERIOD END):
Working capital............................. $ 3,334 $ 15,505 $ 34,925
Total assets................................ 291,010 283,281 463,851
Total debt, redeemable preferred stock and
redeemable stock put warrants............. 141,757 141,781 306,533
Common stockholder's equity................. 74,323 63,837 59,242
OTHER FINANCIAL DATA:
Capital expenditures........................ 17,121 15,796 10,977
Depreciation and amortization............... 15,695 13,558 14,792
Ratio of earnings to fixed charges(5)....... 1.7x 1.7x 1.1x
ADDITIONAL INFORMATION:
EBITDA(6)................................... $ 50,438 $ 37,158 $ 33,614
</TABLE>
(see footnotes on following page)
55
<PAGE> 62
NOTES TO SELECTED HISTORICAL FINANCIAL DATA
(1) GPS was acquired in May 1994 and therefore the results of operations for the
year ended December 31, 1994 include the results of operations from the date
of acquisition in May 1994 through December 31, 1994. GPS generated third
party sales during such partial period of $9.4 million.
(2) For comparative purposes the combined results of operations for the year
ended December 31, 1995 include the Company's operating results for the
period from Inception through December 31, 1995 and the Predecessor
Company's operating results from January 1, 1995 through April 20, 1995. The
Company believes that this provides a meaningful basis for comparison.
(3) Kemwater was formed in connection with the acquisition of KWT in February
1996 to continue the business activities previously conducted by Imperial
West and, accordingly, the results of operations for the year ended December
31, 1996 include the results of operations of Imperial West only for the
month of January 1996. Since the acquisition, 50% of Kemwater's results of
operations are included as equity in net income (loss) of unconsolidated
subsidiary. Prior to the formation of Kemwater, the financial statements of
Imperial West were consolidated with the Company's consolidated financial
statements.
(4) An extraordinary item of $3.4 million in 1995, net of an income tax benefit
of $2.1 million, was due to costs incurred and previously capitalized costs
written off, pertaining to debt refinanced by the Predecessor Company prior
to the PAI Acquisition. An extraordinary item of $18.7 million in 1997, net
of an income tax benefit of $12.4 million, was due to costs incurred and
previously capitalized costs written off, pertaining to debt refinanced by
the Company concurrent with the Tacoma Acquisition.
(5) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of income (loss) before provision for income taxes, excluding equity
in net income (loss) of subsidiaries owned 50% or less by the Company, plus
fixed charges net of capitalized interest. Fixed charges consist of interest
expense, including capitalized interest, the portion of rental expense
representative of an interest factor from operating leases and the
amortization of financing costs. The Company's earnings were insufficient to
cover total fixed charges for the year ended December 31, 1993. The coverage
deficiency was $0.6 million.
(6) EBITDA is defined as earnings before interest, income taxes, depreciation
and amortization, extraordinary items and equity in net income (loss) of
unconsolidated subsidiaries and is presented because the Company believes
that it provides useful information regarding its ability to service and/or
incur debt. EBITDA should not be considered in isolation or as a substitute
for net income, cash flows from operating activities and other combined
income or cash flow statement data prepared in accordance with generally
accepted accounting principles or as a measure of the Company's
profitability or liquidity. The Company's calculation of EBITDA may not be
consistent with similarly captioned amounts used by other companies.
56
<PAGE> 63
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth revenues of the Company for the periods
indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- --------------------
PREDECESSOR
COMPANY COMBINED(1)
----------- -----------
1994 1995 1996(2) 1996(2) 1997(3)
----------- ----------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues
PCAC............................ $ 88,907 $118,298 $129,570 $ 98,133 $108,487
All-Pure........................ 47,872 49,549 51,317 40,263 41,586
Kemwater/Imperial West(4)....... 30,438 32,909 2,439 2,439 --
-------- -------- -------- -------- --------
Total revenues.......... $167,217 $200,756 $183,326 $140,835 $150,073
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) For comparative purposes the combined results of operations for the year
ended December 31, 1995 include the Predecessor Company's operating results
from January 1, 1995 through April 20, 1995 and the Company's operating
results for the period from Inception through December 31, 1995. The Company
believes that this provides a meaningful basis for comparison.
(2) T.C. Products was acquired by All-Pure in July 1996 and, accordingly, the
results of operations for the year ended December 31, 1996 and the nine
months ended September 30, 1996 include the results of operations since the
acquisition date. T.C. Products generated third party sales during such
periods of $5.4 million and $3.0 million, respectively.
(3) The Tacoma Facility was acquired by PCAC on June 17, 1997 and, accordingly,
the results of operations for the nine months ended September 30, 1997
include the results of operations since the acquisition date.
(4) Kemwater was formed in connection with the acquisition of KWT in February
1996 to continue the business activities previously conducted by Imperial
West and, accordingly, the results of operations for the year ended December
31, 1996 include the results of operations of Imperial West only for the
month of January 1996. Since the acquisition, 50% of Kemwater's results of
operations are included as equity in net income (loss) of unconsolidated
subsidiary. Prior to the formation of Kemwater, the financial statements of
Imperial West were consolidated with the Company's consolidated financial
statements.
GENERAL
The Company manufactures and markets chlorine and caustic soda in the
United States and is a major manufacturer and marketer of several related
downstream water treatment products. The Company generates revenues principally
through PCAC and All-Pure. The Company also owns a 50% unconsolidated interest
in Kemwater, which was formed in February 1996 to continue the operations
previously conducted by the Company's Imperial West subsidiary and to operate
the business acquired through the acquisition of KWT.
Chlorine and caustic soda markets and profitability have been, and are
likely to continue to be, cyclical. Periods of high demand, high capacity
utilization and increasing operating margins tend to result in new plant
investments and increased production until supply exceeds demand, followed by
periods of declining prices and declining capacity utilization until the cycle
is repeated. In addition, markets for chlorine and caustic soda are affected by
general economic conditions, both in the United States and elsewhere in the
world, and a downturn in the economy could have a material adverse effect on the
Company's operations and its cash flows.
Large quantities of chlorine are not typically stored on- or off-site.
Chlor-alkali production rates are therefore typically based on short-term
chlorine demand (typically one month). However, chlor-alkali plants do not
achieve optimum cost efficiency if production rates are cycled. The maintaining
of steady production
57
<PAGE> 64
rates is made difficult by the cyclical nature of the chlor-alkali business,
which is at times exacerbated by the fact that the price and demand curves for
chlorine differ from those of caustic soda. Peak and trough demand for chlorine
and caustic soda rarely coincide and caustic soda demand, in the past, has
tended to trail chlorine demand into and out of economic growth cycles. In
addition, in recent years the end markets for chlorine and caustic soda have
increasingly diverged.
Chlorine demand over the last three years has experienced steady growth,
following trends in PVC, urethane and other intermediates and water treatment
markets. This increased demand has been partially offset by declining chlorine
use in the pulp and paper industry and as a feedstock in the production of CFCs
due to regulatory pressures. Due to increased demand, published chlorine prices
have risen from approximately $145 per ton during 1994 to approximately $160 per
ton at the end of 1996.
As chlorine demand continued to be strong in 1996, the industry's operating
rate remained high. However, this resulted in an overproduction of chlorine's
co-product, caustic soda, relative to demand. This oversupply led to decreasing
caustic soda prices, offsetting increased chlorine prices and resulting in ECU
netbacks (net selling prices) decreasing during 1996 from 1995 average levels.
To achieve operating efficiencies and to help mitigate the effects of
cyclicality on the Company's business, the Company has pursued a strategy of
converting chlorine and caustic soda into products that are used in markets with
steady demand, particularly water treatment chemicals. In pursuit of this
strategy, the Predecessor Company acquired Imperial West and All-Pure in 1990
and GPS in 1994, and the Company acquired T.C. Products in July 1996, each of
which is a major manufacturer and distributor of water treatment chemicals such
as iron chlorides, aluminum sulfate, repackaged chlorine and bleach, primarily
in the western United States.
Due in part to these acquisitions and the improved chlorine market, the
Predecessor Company and the Company increased ECU capacity utilization rates
over the last seven years from 93% in 1990 to approximately 100% in 1996.
On February 2, 1996, Imperial West participated in the acquisition of KWT
from a subsidiary of Kemira. KWT produces specialty and commodity inorganic
coagulants, including polyaluminum chlorides, aluminum sulfate, sodium aluminate
and ferric sulfate, at its plant in Savannah, Georgia for sale to the water
treatment market in the eastern United States and the Caribbean. The combined
operations of Imperial West and KWT are now conducted by Kemwater, 50% of the
common stock of which is held by a subsidiary of PAAC and 50% of the common
stock which is owned by a subsidiary of Pioneer. A subsidiary of PAAC also owns
all of the outstanding shares of Kemwater's preferred stock. The Company's
investment in Kemwater is accounted for by the equity method.
Effective July 1, 1996, All-Pure acquired T.C. Products through the
acquisition of its parent, T.C. Holdings, Inc. from its shareholders.
Consideration for the acquisition consisted of net cash payments of $5.5 million
and All-Pure subordinated notes with an aggregate principal amount of $4.5
million due July 30, 2001, subject to prepayment. The Company's existing cash
balances were used to fund the cash portion of the purchase price. T.C. Products
continues to manufacture and package bleach and related products at its plant in
Tacoma, Washington. The purchase of T.C. Products has been accounted for as a
purchase transaction and, accordingly, the consolidated financial statements
subsequent to July 1, 1996 reflect the purchase price, including transaction
costs, allocated to tangible and intangible assets acquired and liabilities
assumed, based on their fair values as of July 1, 1996, and include the results
of operations of T.C. Products subsequent to such date.
On June 17, 1997, Pioneer and the Company consummated the Tacoma
Acquisition. Pursuant to the Asset Purchase Agreement dated as of May 14, 1997,
PCAC acquired substantially all of the assets and properties used by OCC Tacoma
in the chlor-alkali business at Tacoma, Washington. The purchase price consisted
of (i) $97.0 million, paid in cash, (ii) 55,000 shares of Pioneer Preferred
Stock, having a liquidation preference of $100 per share, and (iii) the
assumption of certain obligations related to the acquired chlor-alkali business.
The Tacoma Acquisition has been accounted for as a purchase transaction and,
accordingly, the consolidated financial statements subsequent to June 17, 1997,
reflect the purchase price, including
58
<PAGE> 65
transaction costs, allocated to tangible and intangible assets acquired and
liabilities assumed, based on their fair values as of June 17, 1997, and include
the results of operations of the Tacoma Facility subsequent to such date.
Concurrent with the closing of the Tacoma Acquisition on June 17, 1997,
PAAC consummated a series of related transactions (the "Refinancings") comprised
of (i) the repurchase of all of PAAC's existing 13 3/8% First Mortgage Notes due
2005 (the "First Mortgage Notes") at 120% of their principal amount, (ii) the
issuance and sale of $200.0 million of 9 1/4% Series A Senior Secured Notes due
2007 (the "Senior Secured Notes") and (iii) borrowings of $100.0 million in term
loans under a term loan facility (the "Existing Term Facility"). The proceeds of
$300.0 million from these transactions were used to complete the tender offer,
effect the Tacoma Acquisition and pay related expenses. Funds not so used were
added to working capital.
On June 17, 1997, PAAC also entered into a $35.0 million revolving loan
(subject to borrowing base limitations that relate to the level of accounts
receivable and inventory) and letter of credit facility. The revolving facility
provides for revolving loans in an aggregate principal amount up to $35.0
million, of which up to $10.0 million will be available for the issuance of
letters of credit. PAAC did not incur revolving loans at closing in connection
with the Tacoma Acquisition and related refinancings but had $2.9 million in
letters of credit outstanding at such time under the revolving facility.
On October 31, 1997, Pioneer, PCI Canada and PCI Carolina, newly-formed
subsidiaries of the Company and ICI and its subsidiaries, ICI Canada and ICI
Americas, consummated the PCI Canada Acquisition. Pursuant to the Purchase
Agreement, the Company acquired substantially all of the assets and properties
used by ICI Canada and ICI Americas in its North American chlor-alkali business.
For the twelve months ended September 30, 1997, the PCI Canada Business
generated pro forma net sales and pro forma EBITDA of $162.5 million and $51.9
million, respectively. The purchase price consists of approximately $235.6
million, payable in cash, and the assumption of certain obligations related to
the acquired chlor-alkali business. The purchase price is subject to adjustment
based on the difference between base working capital and actual working capital
(each as defined in the Purchase Agreement) on the closing date. The acquisition
was accounted for using the purchase method of accounting and the results of
operations are included in financial statements since the date of acquisition.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Revenues
Revenues increased by $9.2 million or approximately 7% to $150.1 million
for the nine months ended September 30, 1997. Revenues for PCAC increased $10.4
million or approximately 11% in the first nine months of 1997 compared to the
same period a year ago. The increase in revenues was attributable to the
additional sales volumes from PCAC's Tacoma plant which was acquired on June 17,
1997. Partially offsetting this increase were lower ECU pricing and lower sales
volumes from PCAC's Henderson and St. Gabriel plants. ECU prices decreased by
approximately 5%, which reflects a $54 per ton decrease in caustic soda prices,
partially offset by a $41 per ton increase in chlorine prices. Caustic soda
sales volume decreased 5% mainly due to lost revenues caused by weather-related
delays in Mississippi River barge shipments during the first quarter of 1997 and
a reduction in exchange activity. Production at Henderson and St. Gabriel was
also curtailed somewhat by the shortage of railcars currently being experienced
in the United States. Revenues for All-Pure increased 3% or $1.3 million in the
first nine months of 1997 compared to the same period a year ago. This increase
was due to the revenues associated with the acquisition of T.C. Products, Inc.,
which the Company acquired in the third quarter of 1996, partially offset by
lower overall sales volumes and prices due to continuing competitive pressures
on All-Pure's products. Partially offsetting these increases was a reduction in
revenue attributable to the transfer of the business of a subsidiary of the
Company to Kemwater, a joint venture with Pioneer that is accounted for on the
equity method.
Cost of Sales
Cost of sales increased by $14.0 million or approximately 14% to $112.6
million for the nine months ended September 30, 1997. This increase was the
result of the acquisitions mentioned above, partially offset by
59
<PAGE> 66
lower cost of sales for chlorine and caustic soda due to lower sales volumes
from PCAC's Henderson and St. Gabriel plants.
Gross Profit
Gross profit margin decreased from 30% during the first nine months of 1996
to approximately 25% during the first nine months of 1997. This decrease was
primarily a result of lower ECU prices described above. In addition, an export
shipment of caustic soda during the third quarter of 1997, which had been
scheduled earlier in the year at the lower prices then prevailing, reduced gross
profit because it resulted in a loss.
Selling, General and Administrative Expense
Selling, general and administrative expense was comparable to the
corresponding 1996 period.
Equity in Net Loss of Unconsolidated Subsidiary
Equity in net loss of unconsolidated subsidiary represents the Company's
50% ownership interest in Kemwater. Kemwater's net loss for the first nine
months of 1997 increased as a result of higher raw material costs which it was
unable to pass through to its customers.
Interest Expense, Net
Interest expense increased by approximately $3.4 million to $16.2 million
in the first nine months of 1997 from $12.8 million in the first nine months of
1996. This increase was a result of the debt incurred for the Tacoma
Acquisition, partially offset by lower interest expense from refinancing of
$135.0 million 13 3/8% First Mortgage Notes with 9 1/4% Senior Secured Notes.
Income (Loss) Before Taxes and Extraordinary Item
As a result of the above, income before income taxes and extraordinary item
decreased $9.8 million to $0.1 million for the nine months ended September 30,
1997 from $9.9 million for the nine months ended September 30, 1996.
Extraordinary Item from Early Extinguishment of Debt
During the second quarter of 1997, the Company recognized an $18.7 million
extraordinary item as a result of the 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).
YEAR ENDED DECEMBER 31, 1996 COMPARED TO COMBINED YEAR ENDED DECEMBER 31, 1995
Revenues
Revenues decreased by $17.4 million or approximately 9% to $183.3 million
for 1996 compared to $200.8 million in 1995. The transfer of the Imperial West
business to Kemwater in February 1996 caused a decrease in Imperial West's
revenues of approximately $30.5 million. This decrease was partially offset by
an $8.3 million increase in revenues at PCAC related to sales to Kemwater which,
as a result of this change of ownership, are no longer eliminated in
consolidation. Also affecting PCAC's 1996 as compared to 1995 revenues was a 9%
increase in caustic soda sales volumes of 31,000 tons ($7.4 million), a 6%
increase in chlorine sales volumes of 20,000 tons ($3.0 million) and an
approximate 7% decrease in ECU sales prices ($10.6 million). Revenues for
All-Pure in 1996 increased by $1.7 million, which included the impact of $5.4
million of revenues from the T.C. Products acquisition in July 1996, which was
partially offset by a decrease in All-Pure sales volumes in 1996 as compared
with 1995.
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Cost of Sales
Cost of sales decreased by approximately $8.8 million, or 7%, to $126.7 in
1996 from $135.5 million in 1995. The decrease was the result of the transfer of
the Imperial West operations to Kemwater ($20.5 million). Offsetting this
decrease was an increase in manufacturing costs ($4.2 million), which was
primarily related to increased electricity costs, and increased caustic soda and
chlorine sales volume ($6.1 million). In addition, All-Pure's 1996 cost of sales
were higher primarily as the result of the inclusion of T.C. Products which
increased cost of sales by $3.1 million.
Gross Profit
Gross profit decreased by $8.6 million, or 13%, from $65.2 million in 1995
to $56.6 million in 1996. Gross margin decreased from 32% in 1995 to 31% in
1996. The decline was a result of a reduction of the factors outlined above.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased approximately $3.4
million to $23.5 million in 1996 due primarily to the transfer of Imperial West
operations to Kemwater during 1996.
Equity in Net Loss of Unconsolidated Subsidiaries
Equity in net loss of unconsolidated subsidiaries represents the Company's
50% ownership interest in Kemwater which was formed in February 1996 as the
result of the acquisition of KWT by Imperial West. Kemwater experienced a loss
in 1996 as a result of increased competitive pressure in their markets.
Interest Expense, Net
Interest expense increased by $2.7 million or 19% to $17.3 million for
1996. This increase was a result of including a full year of interest expense
for the debt incurred in connection with the PAI Acquisition in April 1995 as
well as the debt incurred in financing the T.C. Products acquisition.
Income Tax Provision
Provision for income taxes was $6.7 million in 1996 with an effective tax
rate of 45% as compared to $11.0 million in 1995, with an effective tax rate of
45%. The decrease in the income tax provision was primarily a result of the
decrease in the Company's income before income tax and extraordinary item to
$14.8 million for 1996 from $24.2 million in 1995.
Net Income
Due to the factors described above, net income for the year ended December
31, 1996 decreased to $8.1 million from $9.8 million for 1995, which includes an
extraordinary expense of $3.4 million for the write-off of financing costs.
COMBINED YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues
Revenues increased by $33.5 million or 20% to $200.7 million for the 1995
period. This increase was primarily due to a $29.4 million increase in
chlor-alkali sales at PCAC, resulting from an industry-wide strengthening of ECU
prices. The average ECU price during the 1995 period increased 27% over the same
period in 1994.
Gross Profit
Gross profit increased as a percentage of revenues to 32% in 1995 from 20%
in 1994 due to a combination of increased revenues and lower raw material costs
which more than offset higher transportation and other expenses and an inventory
step-up related to the PAI Acquisition.
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Selling, General and Administrative Expense
Selling, general and administrative expense increased by $4.4 million or
19% to $26.9 million for the year ended December 31, 1995. This increase was
primarily the result of an acquisition by the Predecessor Company in May 1994,
additional compensation pursuant to the Company's incentive compensation
program, and increased amortization as a result of the PAI Acquisition.
Interest Expense, Net
Interest expense increased by $8.2 million or 127% to $14.6 million for the
1995 period from $6.4 million for 1994. This increase was a result of debt
incurred with the PAI Acquisition.
Income Before Taxes and Extraordinary Item
As a result of the above, net income before taxes and extraordinary item
increased by $15.9 million or 189% to $24.2 million of income for the year ended
December 31, 1995 from $8.4 million for the year ended December 31, 1994.
Income Tax Provision
Provision for income taxes increased $7.8 million to $11.0 million for the
year ended December 31, 1995 from $3.2 million for the comparable 1994 period
due to higher income. Taxable income is higher than book income due to the
non-deductibility of amortization of the excess cost over the fair value of the
net assets acquired. A provision is recorded on the income statement; however,
federal income taxes payable are reduced due to the utilization of the net
operating loss carryforward.
Extraordinary Item
An extraordinary item of $3.4 million net of an income tax benefit 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 PAI Acquisition.
Net Income
As a result of the foregoing, net income increased 91% to $9.8 million.
LIQUIDITY AND CAPITAL RESOURCES
Following the Initial Offering, the other Financings and the PCI Canada
Acquisition, the Company is highly leveraged. In connection with the PCI Canada
Acquisition, the Company entered into the New Credit Facilities. The New Credit
Facilities consist of an $83.0 million senior Term Facility and an amended
Revolving Facility with availability up to $65.0 million, subject to borrowing
base limitations that relate to the level of accounts receivable and inventory.
The Company did not incur Revolving Loans at closing in connection with the PCI
Canada Acquisition but had $2.9 million in letters of credit outstanding at such
time under the Revolving Facility. As of September 30, 1997, after giving pro
forma effect to the Initial Offering, the other Financings and the PCI Canada
Acquisition, the Company had outstanding indebtedness of approximately $564.5
million.
The Company believes that cash flow from current and anticipated future
levels of operations and, to a lesser extent, the availability under the
Revolving Facility, will be adequate to make required payments of interest and
principal on the indebtedness that is outstanding, as well as to fund its
foreseeable capital expenditures and working capital requirements. The Company
estimates that annualized net cash interest of $50.4 million will be payable on
the Notes, the Term Facility, the Senior Secured Notes and the Existing Term
Facility. The Company anticipates that annualized capital expenditures for 1998,
after giving effect to the PCI Canada Acquisition, will be approximately $33.2
million, including approximately $4.8 million for environmental compliance
matters and $5.9 million for pipeline construction. The Company believes that
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forecasted capital expenditures will permit it to maintain its facilities on a
basis competitive within the industry through improved efficiency and throughput
and continuation of high operating rates.
The Company's belief that it will generate sufficient cash flow for its
requirements is based upon, among other things, the assumptions that: (i) the
Company's cash flow will be positive as a result of the continuing operating
profitability of its business; (ii) the Company will invest in working capital
in accordance with prior practices; (iii) the Company will not incur any
material capital expenditures in excess of its business plan; and (iv) the
Company has the benefit of a tax-sharing agreement with Pioneer which reduces
the amount of taxes payable by the Company.
Net Cash Provided by Operating Activities. During the year ended December
31, 1996, the Company generated $32.5 million in cash from operating activities
from profitability, depreciation, the utilization of the NOL and a decrease in
working capital (excluding the effects of the purchases of KWT and T. C.
Products). During the nine months ended September 30, 1997, the Company
generated $10.8 million in cash from operating activities primarily due to
depreciation and amortization.
Net Cash Used in Investing Activities. Cash used in investing activities
for the year ended December 31, 1996 was $29.2 million, primarily due to capital
expenditures related to property, plant and equipment and the purchases of KWT
and T.C. Products by the Company. Cash used in investing activities for the nine
months ended September 30, 1997 was $110.5 million, primarily due to the Tacoma
Acquisition.
Net Cash Provided (Used) in Financing Activities. Cash used in financing
activities for the year ended December 31, 1996 was $757,000, primarily due to a
payment of dividends to Pioneer. Cash provided in financing activities for the
nine months ended September 30, 1997 was $121.0 million, primarily due to
financing of the Tacoma Acquisition.
ACCOUNTING CHANGES
The Company adopted Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS No. 121"), on January 1, 1996. SFAS No. 121 sets forth
guidance on how to measure an impairment of long-lived assets and when to
recognize such an impairment. The adoption of this standard did not have a
material impact on the Company's financial position or results from operations.
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income," (SFAS No. 130) and Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information," (SFAS No.
131). SFAS No. 130 and SFAS No. 131 are effective for fiscal years beginning
after December 15, 1997. SFAS No. 130 establishes standards for reporting and
displaying of comprehensive income and its components. SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in interim and annual financial statements. These two
statements have no effect on the Company's 1997 financial statements, but
management is currently evaluating what, if any, additional disclosures may be
required when these two statements are adopted for periods beginning with the
first quarter of the year ending December 31, 1998.
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BUSINESS
GENERAL
The Company is a manufacturer and marketer of chlorine and caustic soda in
the United States and is a major manufacturer and marketer of several related
downstream water treatment products. The Company conducts its business primarily
through PCI Canada, PCAC and All-Pure. The Company also owns a 50%
unconsolidated joint venture interest in Kemwater (which effective in February
1996 succeeded to the operations of Imperial West). Pioneer owns the remaining
50% joint venture interest in Kemwater. The Company operates the PCI Canada
Business as a stand-alone entity following the PCI Canada Acquisition.
INDUSTRY OVERVIEW
The Company operates in chlor-alkali and chlor-alkali related industries.
Chlorine and caustic soda are co-products, concurrently produced in a ratio of 1
to 1.1. An ECU consists of 1 ton of chlorine and 1.1 tons of caustic soda.
Chlorine is used in the manufacture of over 15,000 products, comprising
approximately 60% of all commercial chemistry, 85% of all pharmaceutical
chemistry and 95% of all crop protection chemistry. Products manufactured with
chlorine as a raw material include plastics, detergents, pharmaceuticals, water
treatment chemicals and agricultural chemicals. Chlorine also is used directly
in water disinfection applications. In the United States and Canada, virtually
all public drinking water is made safe to drink by chlorination, and a
significant portion of industrial and municipal waste water is treated by
chlorine and chlorinated chemicals to kill water-borne pathogens and remove
solids.
The caustic soda market is even more diverse than that of chlorine. It is
used in thousands of industrial and commercial processes (either as an essential
raw material, as an intermediate or as a medium to control acidity) including
metal smelting, petroleum production and refining, pulp and paper production and
paint manufacturing. Caustic soda is combined with chlorine and water to produce
bleach and is also used as an active ingredient in a wide variety of end use
products, including detergents, rayon and cellophane.
The following table sets forth certain information regarding the principal
industry-wide applications for the Company's products.
<TABLE>
<CAPTION>
PRODUCTS PRINCIPAL APPLICATIONS
-------- ----------------------
<S> <C>
Chlorine....................... Agricultural chemical and pharmaceutical manufacturing,
PVC and other plastics, detergents, paints, water
purification, bleach, pulp and paper products, mining,
textiles
Caustic soda................... Cleaners, pulp and paper products, oil production and
refining, rayon, cellophane, vegetable oils, cosmetics,
aluminum, food processing, bleach, water treatment, mining
Hydrochloric acid.............. Cleaning, mining, dyes, ink, titanium, textiles, rocket
fuel, exotic metals, water treatment, oil production
Sodium chlorate................ Pulp and paper bleaching
Chlorinated paraffins
("Cereclor(R)").............. PVC compounding, cosmetics, lotions
PSR 2000(R).................... Pulping additive
IMPAQT(R)...................... Pulping additive
Hydrogen....................... Boiler and turbine fuel, chemical manufacturing, petroleum
Calcium chloride............... Concrete formulation, dust control, pulp and paper
products
Iron chlorides................. Waste and potable water treatment, electronics
Polyaluminum chlorides......... Waste and potable water treatment
Sodium aluminate............... Catalyst production, paints, waste and potable water
treatment
Ferric sulfate................. Waste and potable water treatment
Aluminum sulfate............... Waste and potable water treatment, pulp and paper products
Bleach......................... Waste and potable water treatment, household and
commercial cleaners, food processing, swimming pool
treatment
</TABLE>
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North America represents approximately 30% of world chlor-alkali production
capacity, with approximately 15.0 million tons of chlorine and 16.5 million tons
of caustic soda production capacity. OxyChem and The Dow Chemical Company are
the two largest chlor-alkali producers in North America, together representing
approximately one half of North American capacity. The remaining capacity is
held by approximately 20 companies. Approximately 65% of North American
chlor-alkali capacity is located on the Gulf Coast of Texas and Louisiana. The
Company believes that following the PCI Canada Acquisition it has approximately
6% of North American chlor-alkali capacity. The Company believes that the
chlorine and caustic soda currently produced at its Henderson and Tacoma
facilities provide a significant source of supply for the West Coast region,
where the Company is also the largest supplier of chlorine and bleach for water
treatment purposes and where Kemwater is the largest producer of iron chlorides.
The Company believes the St. Gabriel and Tacoma facilities are leading suppliers
of premium, low-salt grade caustic soda in their respective regions. The Company
believes the strong regional presence of the PCI Canada Business in eastern
Canada and the eastern United States enhances the competitiveness of the
Company's existing operations.
Since 1982, there has been a long-term downward trend in total North
American chlor-alkali production capacity as industry participants have closed
inefficient production facilities. Over the same time period, there has been a
long-term upward trend in capacity utilization, increasing from a low of
approximately 62% in 1982 to approximately 96% in 1996. This trend is a result
of the combination of decreasing industry production capacity and increasing
chlor-alkali demand.
The Company believes that the chlor-alkali capacity increases announced for
completion in late 1997 and 1998 will increase overall North American capacity
by approximately 3%, keeping pace with the overall projected chlorine demand
increase. The Company anticipates that the global chlorine supply/demand balance
will remain relatively stable over the next few years.
The following graph highlights the impact of these trends on United States
capacity utilization rates.
INDUSTRY CAPACITY AND UTILIZATION RATES
[CAPACITY AND UTILIZATION RATES GRAPH]
Source: The Chlorine Institute, Inc., industry and Company data.
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Environmental pressures over the last five years have led to a substantial
decline in chlorine demand in two major chlorine end-use markets -- pulp and
paper and CFCs. Usage of chlorine by the pulp and paper industry declined by
36%, from 1.2 million tons in 1991 to 771,610 tons in 1996. The use of chlorine
as a raw material for chemical intermediaries used in the production of CFCs has
been almost completely discontinued. The Company believes that the current level
of chlorine demand by the pulp and paper industry will continue to decline over
the next five years.
The declines in these markets have been offset by the growth in chlorine
demand for PVC, polycarbonate resins and isocyanates, water treatment
applications and engineering plastics. In addition, the Company believes that as
the global economy continues to improve, demand for chlorine derivatives should
increase. The Company believes that caustic soda demand will grow at a slower
pace than chlorine demand. Industry sources estimate that world chlor-alkali
demand will grow by approximately one to two percent annually.
The chlorine and caustic soda markets are cyclical markets that are
sensitive to relative changes in supply and demand, which are in turn affected
by general economic conditions, capacity additions and other factors. Over the
last five years, the market for PVC, the largest use of chlorine, has
experienced steady growth, resulting in strong demand for chlorine. However, the
use of chlorine as a bleaching agent in the pulp and paper industry and as
feedstock in the production of CFCs has been reduced significantly due to
regulatory pressures. As a result of these factors and a general decline in
economic growth in the early 1990s, the North American chlor-alkali industry
experienced declining prices, as ECU prices fell by over 52% from $389 per ECU
in the fourth quarter of 1989 to $185 per ECU in the second quarter of 1993.
After a significant improvement in domestic economic growth, in early 1994
chlor-alkali markets experienced increased levels of demand. Limited new
capacity was added during this time, resulting in greater capacity utilization
and higher domestic and export prices for chlor-alkali products. These
conditions continued in 1995 and the increase in demand enabled the Company and
the industry in general to increase selling prices significantly at a time when
operating costs generally did not increase, with prices eventually exceeding
$400 per ECU at the peak of the cycle in 1995. Toward the end of 1995 and
continuing through 1996, however, ECU prices began to decrease as strengthening
demand for chlorine was offset by an oversupply of caustic soda. As a result,
prices decreased to approximately $335 to $345 per ECU by the end of 1996, even
as chlorine prices remained strong due to steady demand growth from the PVC
industry. For the third quarter of 1997, prices have ranged from $310 to $345
per ECU. Demand for chlorine has been relatively stable, while increasing demand
for caustic soda has recently strengthened pricing, as evidenced by several
recent announced price increases. The industry has continued to operate at full
capacity and management does not anticipate a significant increase in capacity
over the next several years. The Company therefore believes that the previous
volatility in ECU prices should moderate over such period.
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The following graph presents United States industry-wide average annual ECU
prices since 1976.
INDUSTRY AVERAGE ANNUAL ECU PRICES
[INDUSTRY AVERAGE ANNUAL ECU PRICES GRAPH]
Source: United States Commerce Department, industry and Company data.
STRATEGY
The Company's management team is pursuing a business strategy designed to
capitalize on its marketing, production and distribution expertise and its
geographic focus. The Company seeks to manage effectively the intrinsic
cyclicality of the chlor-alkali industry while continuing to grow and improve
profitability by pursuing a strategy which includes the following principal
elements:
- Focusing on the Merchant Chlor-Alkali Market. The Company is dedicated to
serving the merchant chlor-alkali market, acting as a reliable source of
supply of chlorine and caustic soda. The Company is committed to being
flexible and responsive in periods of volatile chlor-alkali demand,
making it the preferred supplier for many of its customers. Unlike its
major competitors, the Company does not compete with its PVC customers
and, as a result, is viewed as a preferred, non-competing source of raw
materials.
- Optimizing Plant Efficiencies through High Capacity Utilization. The
Company seeks to maximize profitability by achieving a constant flow of
product through its plants. The Company strives to maintain a steady
demand for its output through (i) programs aimed primarily at growing
markets such as PVC and water treatment; (ii) renewable contracts with
major customers and a Chlorine Purchase Agreement with OCC Tacoma; (iii)
direct linkage with major customers via pipelines, including the Pipeline
Project, a seven-mile liquid chlorine pipeline from the St. Gabriel
facility expected to be completed in 1998; and (iv) captive demand for
chlorine and caustic soda through its downstream water treatment
operations.
- Improving Cost Efficiency. The Company continually seeks to improve its
cost competitiveness through a combination of productivity enhancements,
strict operating cost controls, capital improvements and maintenance of
high capacity utilization rates. Despite inflation, the Company's cash
production costs
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per ECU decreased by 5% from 1990 through 1996, while ECU production per
employee increased by 20%. In addition, the Company seeks to reduce distribution
costs and improve plant operating efficiency through the efficient use of its
strategic locations with deep water port facilities, direct pipeline
connections to customers and opportunistic product exchanges with
chlor-alkali producers in other regions.
- Focusing on Geographic Diversity and Market Penetration. The Company's
products are manufactured and sold in a number of markets, providing a
wide base for future growth and distribution to help mitigate the effects
of regional and economic fluctuations. Following the PCI Canada
Acquisition, the Company has major chlor-alkali facilities in three
states (Louisiana, Nevada and Washington) and two Canadian provinces
(Quebec and New Brunswick) and downstream plants producing a range of
products such as bleach, hydrochloric acid, iron chlorides, chlorinated
paraffins. The Company is well-positioned to direct its chlor-alkali
output to customers while more efficiently supplying the growth in its
own downstream operations. Through recent expansion, the Company is
creating substantial new regional strength in areas west of the Rocky
Mountains and in eastern Canada and the eastern United States, while
maintaining its traditionally strong presence in the Gulf Coast region.
- Expanding Product Offerings. The Company has developed downstream water
treatment chemical businesses whose steady requirements for chlorine and
caustic soda help maintain high operating rates at the Company's
chlor-alkali facilities which, in turn, decreases unit production costs.
In addition to serving as a source of demand, these growing businesses
service diverse product markets and regions and can offset industry
cyclicality in the chlorine and caustic soda markets by providing a more
stable downstream source of revenue. The PCI Canada Acquisition allows
the Company to expand into related product offerings for the pulp and
paper market, including sodium chlorate and proprietary additives such as
PSR 2000(R) and IMPAQT(R).
- Growing through Product Line Extensions and Strategic Acquisitions.
Management believes that there are significant opportunities to continue
the Company's growth both internally and through strategic acquisitions.
The Company focuses its product development efforts on areas identified
by its customers as being of major commercial importance. For example, in
the area of water treatment, the Company has developed or acquired rights
to a number of innovative coagulant products which help provide cost
effective, advanced waste water treatment solutions. In addition, the
Company is constantly reviewing acquisitions in related markets and since
1990 has consummated five downstream acquisitions, which provide
attractive product offerings and geographic coverage.
OPERATING UNITS
PCI Canada Business
The Company has expanded into the eastern Canadian and eastern United
States chlor-alkali markets with the acquisition of the PCI Canada Business.
Headquartered in Montreal, Quebec, the PCI Canada Business is a leading eastern
Canadian merchant chlor-alkali manufacturer, serving primarily the pulp and
paper industry. For the twelve months ended September 30, 1997, the PCI Canada
Business generated pro forma net sales and pro forma EBITDA of $162.5 million
and $51.9 million, respectively. On a pro forma basis, such net sales would
represent approximately 39% of the Company's total net sales.
The PCI Canada Business operates two chlor-alkali production facilities, at
Becancour, Quebec and Dalhousie, New Brunswick with aggregate production
capacity of approximately 376,000 ECUs, as well as additional downstream
production units at Cornwall, Ontario. The Becancour chlor-alkali facility has
an annual capacity of 340,000 tons of chlorine and 383,000 tons of caustic soda,
and also manufactures hydrochloric acid and bleach. The Becancour plant uses
both diaphragm cells and membrane cells. A recently completed $21.2 million
expansion and upgrade increased Becancour's net chlor-alkali capacity by 36,000
tons, or 12%, by installing additional modern membrane cell capacity. The
membrane cells account for approximately 18% of the plant's total caustic soda
capacity, with the diaphragm cells accounting for the remaining caustic soda
production capacity. The Dalhousie chlor-alkali facility has an annual capacity
of 36,000 tons of chlorine and 40,000 tons of caustic soda, and also
manufactures bleach and sodium chlorate.
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The Cornwall facility manufactures bleach, with an annual capacity of 222,000
tons, as well as hydrochloric acid, Cereclor(R), PSR 2000(R) and IMPAQT(R).
The PCI Canada Business also includes a research facility located outside
Toronto, Ontario, which conducts applications research, particularly with
respect to pulp and paper process technology.
The principal markets for the PCI Canada Business are the North American
pulping and bleaching market and the industrial chemicals market. The PCI Canada
Business has pursued a strategy of maintaining profitable chlor-alkali
operations while seeking further growth in value-added derivatives and
high-growth opportunities in the prime pulping and bleaching and industrial
chemicals markets. Sales have doubled in the last ten years to $162.5 million as
a result of increasing sales into selected high-growth industrial chemical
markets in the United States, diversification into new chemicals for pulping and
bleaching and upgrading of chlorine into higher value-added products. Products
for pulping and bleaching include chlorine and caustic soda, sodium chlorate,
PSR 2000(R), bleach, IMPAQT(R) and, through resale agreements, bleaching enzymes
and hydrogen peroxide. In the industrial chemicals market, the PCI Canada
Business is a major regional supplier of chlorine and caustic soda, hydrochloric
acid, chlorinated paraffins and commercial grade bleach. Approximately 35% of
the chlorine produced is upgraded to value-added products.
In 1996, the pulping and bleaching market represented approximately 55% of
net sales of the PCI Canada Business and the industrial chemicals market
represented approximately 45% of net sales. The geographic market served by the
PCI Canada Business consists primarily of eastern Canada and eastern United
States as well as the mid-Atlantic and southeastern United States. In 1996,
approximately 55% of sales were to customers in Canada and 45% of sales were to
customers in the United States.
Product is generally transported by rail and roadway, with the Becancour
facility also shipping by water throughout the year. The PCI Canada Business
maintains a tank car fleet consisting of approximately 850 tank cars that are
leased under long-term arrangements. Storage is provided on-site, as well as in
leased off-site space. The PCI Canada Business is ISO 9002 registered at all
locations for all products.
Chlorine and Caustic Soda. Following the Becancour expansion, the PCI
Canada Business has the capacity to produce approximately 376,000 tons of
chlorine and 423,000 tons of caustic soda annually at its Becancour and
Dalhousie plants. For the year ended December 31, 1996, the PCI Canada Business
produced approximately 329,100 tons of chlorine and 371,300 tons of caustic
soda.
Bleach. Following the Becancour expansion, the PCI Canada Business has the
capacity to produce approximately 238,000 tons of bleach annually at its
Cornwall and Becancour plants. For the year ended December 31, 1996, the PCI
Canada Business produced approximately 124,500 tons of bleach.
Hydrochloric Acid. Following the Becancour expansion, the PCI Canada
Business has the capacity to produce approximately 162,000 tons of hydrochloric
acid annually at its Becancour and Cornwall plants. For the year ended December
31, 1996, the PCI Canada Business produced approximately 48,700 tons of
hydrochloric acid.
Sodium Chlorate. The PCI Canada Business has the capacity to produce
approximately 22,000 tons of sodium chlorate annually at its Dalhousie plant.
For the year ended December 31, 1996, the PCI Canada Business produced
approximately 21,200 tons of sodium chlorate.
Cereclor(R). The PCI Canada Business has the capacity to produce
approximately 7,500 tons of Cereclor(R) chlorinated paraffins annually at its
Cornwall plant. For the year ended December 31, 1996, the PCI Canada Business
produced approximately 6,700 tons of Cereclor(R) chlorinated paraffins.
PSR 2000(R) Pulping Additive. PSR 2000(R) is a proprietary pulping additive
and is considered a replacement specialty product for saltcake, spent acid and
sodium hydrosulphide. The PCI Canada Business has the capacity to produce
approximately 31,000 tons of PSR 2000(R) annually at its Cornwall plant. For the
year ended December 31, 1996, the PCI Canada Business produced approximately
4,700 tons of PSR 2000(R).
IMPAQT(R) Pulping Additive. IMPAQT(R) is a proprietary aqueous dispersion
used as a specialty pulping additive. The PCI Canada Business has the capacity
to produce approximately 8,400 tons of IMPAQT(R)
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annually at its Cornwall and Charlotte plants. For the year ended December 31,
1996, the PCI Canada Business produced approximately 3,100 tons of IMPAQT(R).
Sales and Marketing. The pulp and paper market is characterized by large,
long term customers seeking strategic relationships with suppliers based on
applications support, breadth of product offerings, service and reliability of
supply. The chemicals and water treatment markets provide a steady source of
demand for chlorine and caustic soda used in the production of value-added
products.
The PCI Canada Business provides hydrogen peroxide and bleaching enzymes to
customers pursuant to a hydrogen peroxide resale agreement for eastern Canada
and a bleaching enzyme resale agreement for North America.
PCAC
PCAC manufactures chlorine and caustic soda for sale to third parties and
to All-Pure and Kemwater as raw materials in the manufacture of chlor-alkali
related products, including bleach and iron chlorides. In addition to chlorine
and caustic soda, PCAC produces commercial quantities of hydrochloric acid and
hydrogen. PCAC's chlor-alkali operations generated pro forma net sales
representing approximately 30% of the Company's total pro forma net sales in
1996. Pro forma merchant sales of chlorine (including resales of purchased
chlorine) accounted for approximately 35% of PCAC's pro forma net sales in such
period. Pro forma merchant sales of caustic soda accounted for approximately 60%
of PCAC's pro forma net sales in such period. Pro forma merchant sales of
hydrochloric acid and hydrogen accounted for approximately 5% of PCAC's pro
forma net sales in such period. On a pro forma basis, approximately 10% of
PCAC's chlorine production was used by PCAC for the production of hydrochloric
acid and other chemical products, while approximately 14% of chlorine production
and 6% of caustic soda production was supplied to All-Pure and Kemwater for
bleach and iron chloride production, repackaging and distribution.
PCAC owns and operates three chlor-alkali production facilities, located in
St. Gabriel, Louisiana; Henderson, Nevada; and Tacoma, Washington, with
aggregate production capacity of 574,000 tons of chlorine, 631,400 tons of
caustic soda, 174,000 tons of hydrochloric acid and 8,800 tons of calcium
chloride. The Tacoma Facility utilizes both membrane cell and diaphragm cell
technology to produce chlorine, caustic soda and hydrogen. The membrane cells
account for approximately 45% of the total plant capacity and the diaphragm
cells account for approximately 55% of the total plant capacity. The Henderson
facility utilizes diaphragm cell technology and the St. Gabriel facility
utilizes mercury cell technology. The elemental chlorine gas is dried, liquefied
through compression and refrigeration and stored in pressurized tanks. The
caustic soda solution is stored in tanks at the plants and off-site terminals.
Hydrogen, produced as a by-product, is transported by pipeline to the point of
its final consumption, used internally in the production of hydrochloric acid or
vented.
Production rates for chlorine and caustic soda are generally set based upon
demand for chlorine, because storage capacity for chlorine is both limited and
expensive. When demand is less than plant operational capacity and available
storage is filled, production operations must be curtailed. PCAC currently
leases a fleet of 672 rail cars for chlorine distribution, 503 rail cars for
caustic soda distribution, 103 rail cars for hydrochloric acid distribution and
three rail cars for calcium chloride distribution. These cars can, under certain
circumstances, be used to provide additional storage capacity.
Chlorine. PCAC has the capacity to produce approximately 349,000 tons of
chlorine annually at its Henderson and St. Gabriel plants and approximately
225,000 tons of chlorine at the Tacoma Facility. Expansion projects between 1990
and 1996 have increased the production capacity at the Henderson plant by
approximately 37,300 tons of chlorine per year. For the year ended December 31,
1996, the Company produced approximately 345,700 tons of chlorine. Directly and
through exchanges, PCAC supplied the equivalent of approximately 76,100 tons of
chlorine to All-Pure and Kemwater for bleach and iron chloride production and
for repackaging and distribution. An additional 44,800 tons of chlorine,
approximately 13% of PCAC's chlorine production, was used to produce
hydrochloric acid at the Henderson plant. Chlorine was also sold to
approximately 30 customers or shipped on behalf of exchange partners.
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Caustic Soda. PCAC has the capacity to produce approximately 383,900 tons
of caustic soda annually at its Henderson and St. Gabriel plants and
approximately 247,500 tons of caustic soda at the Tacoma Facility. The St.
Gabriel plant's mercury cell production process yields a higher grade of caustic
soda, commonly known as low salt. This higher grade caustic soda is a niche
product which is required for certain end uses and therefore receives premium
pricing in the marketplace. For the year ended December 31, 1996, PCAC produced
approximately 379,700 tons of caustic soda, approximately 57% of which was low
salt grade. PCAC supplied all caustic soda required by All-Pure and Kemwater for
bleach production and distribution. Caustic soda was also sold to approximately
75 customers or shipped on behalf of exchange partners.
Hydrochloric Acid. PCAC has the capacity to produce approximately 130,000
tons of hydrochloric acid annually at its Henderson plant and approximately
44,000 tons of hydrochloric acid at the Tacoma Facility by combining hydrogen
and chlorine. For the year ended December 31, 1996, PCAC produced approximately
134,300 tons of hydrochloric acid. PCAC supplied the equivalent of approximately
18% of its hydrochloric acid production to All-Pure and Kemwater for
distribution and production of iron chlorides. The remainder was sold to
approximately 45 customers or shipped on behalf of exchange partners. PCAC can
and does vary the production of hydrochloric acid depending upon the relative
prices of chlorine and hydrochloric acid.
Hydrogen. Hydrogen produced at the Henderson facility is used to
manufacture hydrochloric acid and is sold to a third party for use as turbine
fuel. Hydrogen produced at the St. Gabriel plant is used as a boiler fuel and is
sold as a feedstock to another chemical company. Hydrogen produced at the Tacoma
Facility is used as boiler fuel. For the year ended December 31, 1996, PCAC
produced approximately four million cubic feet of hydrogen, a portion of which
was sold to Saguaro Power as fuel and a portion to Borden Chemicals and
Plastics, LP ("BCP") as feedstock. Approximately 24% of the hydrogen was used
internally in the production of hydrochloric acid and as boiler fuel. At each of
the plants, hydrogen not used or sold is vented.
Sales and Marketing. Pursuant to a Chlorine Purchase Agreement, OCC Tacoma
will purchase 100,000 tons of chlorine during the year following the Tacoma
Acquisition, which would have represented approximately 4% of the Company's pro
forma net sales for the twelve months ended September 30, 1997. In addition, the
Company has the right to require OCC Tacoma to purchase, and OCC Tacoma has the
right to require the Company to sell, up to 100,000 tons of chlorine during the
second year following the Tacoma Acquisition and up to 75,000 tons of chlorine
during the third year following the Tacoma Acquisition. All deliveries will be
from the Tacoma Facility to OxyChem's plant at Ingleside, Texas. Market prices
will apply to all such transactions, with transportation costs to be borne and
paid by OCC Tacoma. The Company will also have the right to require OCC Tacoma
to purchase up to 50,000 tons of chlorine during the fourth year following the
Tacoma Acquisition and up to 25,000 tons of chlorine during the fifth year
following the Tacoma Acquisition at market prices, with each of the parties to
bear 50% of the transportation costs from Tacoma to Ingleside for any purchases
during such fourth and fifth years.
Pursuant to a Chlorine and Caustic Soda Sales Agreement, the Company will
sell to OxyChem those quantities of chlorine and caustic soda necessary for
OxyChem to satisfy its obligations under contracts with certain of OxyChem's
national account customers. The Company estimates that during the year following
the Tacoma Acquisition the Company will sell approximately 22,400 tons of
chlorine and 46,000 tons of caustic soda under the agreement, at prices set each
quarter at levels equal to 95% of the average price received by OxyChem under
its arm's-length customer contracts during the preceding quarter. The final
deliveries of chlorine and caustic soda under the arrangement will occur in
December 2000.
One PCAC customer, Novartis, accounted for approximately 13% of the
Company's net sales for the year ended December 31, 1996 and would have
accounted for approximately 6% of the Company's pro forma net sales for such
period. PCAC has a five-year contract with Novartis that expires in 1998 and
requires Novartis to purchase from PCAC 100% of Novartis's annual requirement of
chlorine. Product is transported directly to Novartis through pipelines from the
St. Gabriel plant.
Logistics play a significant role in marketing chlor-alkali and
chlor-alkali related products for two primary reasons. First, many customers
take shipments to fulfill requirement on an as-needed basis. PCAC must therefore
manage potential short-term dislocations between sales and production due to
seasonal or other factors in order to maintain the high, steady production rates
at which the plants operate most efficiently.
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Second, the relatively high cost of distribution tends to regionalize producers
and markets. To minimize these exposures, PCAC has developed product exchange
relationships with other producers for its primary products. The purpose of
these exchanges is to lower freight and other distribution costs, control
inventory, maintain steady operating rates and diversify sales through exchanges
of different products and product grades. In addition, PCAC utilizes product
exchanges in instances where it can capture more of a premium for its low-salt
grade caustic soda than it might otherwise receive.
The Company continually seeks improved methods of meeting the needs of its
customers. As a part of that effort, the Company is currently acquiring the
necessary permits and easements for the Pipeline Project, a seven-mile liquid
chlorine pipeline, which will extend from the St. Gabriel facility to Geismar,
Louisiana. The state-of-the-art pipeline, which will be equipped with leak and
excavation detection systems, will be capable of delivering 600 tons of chlorine
per day to customers in the Geismar area. It is estimated that the Pipeline
Project will be completed in 1998.
In order to maintain high capacity utilization rates at its chlor-alkali
plants, PCAC seeks to sell more chlorine than it can produce and therefore
frequently purchases chlorine for resale. In this manner, it is often able to
adjust chlorine purchase levels, rather than plant production levels, in
response to changes in the demand for chlorine. This strategy resulted in
chlorine production of 345,700 tons for the year ended December 31, 1996,
implying a capacity utilization rate of approximately 100%.
PCAC's chlor-alkali operations employ 25 personnel in sales, marketing and
distribution. The corporate executive offices in Houston, Texas include sales
administration and distribution functions and oversight of the field sales
offices. Field sales offices are located in Huntington Beach, California and St.
Louis, Missouri. Unlike most of its competitors, PCAC has maintained its
customer service centers at its plants. This facilitates the close
synchronization of sales, production, shipping and accounting which has given
PCAC the capability of filling "just-in-time" orders. The customer service
centers at the Henderson and St. Gabriel plants are responsible for all
order-entry and shipping and rail fleet management. Sales of chlor-alkali
products are primarily on a direct basis to customers under annual or
longer-term contractual arrangements. The arrangements identify delivery,
product quality and other standard terms and allow PCAC to make advance
determination of output requirements, although generally price provisions are
flexible so that both PCAC and the customer receive the benefit of prices which
bear a relationship to the current market price. In addition to direct sales,
PCAC has resale agreements with approximately 20 independent distributors for
caustic soda and hydrochloric acid.
All-Pure
All-Pure manufactures bleach and repackages chlorine and hydrochloric acid
and distributes these products along with caustic soda and other related
products in the western U.S. All-Pure also purchases and distributes various
complementary dry and specialty products such as calcium hypochloride and sulfur
dioxide, and purchases, tabletizes and repackages dry and specialty water
treatment products for distribution to municipalities, swimming pool supply
distributors and selected commercial and retail markets in southern California.
All-Pure's products are generally sold on a delivered basis and are delivered
primarily through a fleet of trucks, including equipment owned by Kemwater. In
July 1996, All-Pure acquired T.C. Products, which is engaged in the manufacture
and marketing of household bleach and related products from its plant in Tacoma,
Washington. All-Pure generated pro forma net sales representing approximately
12% of the Company's total pro forma net sales in 1996. Pro forma sales of
bleach accounted for approximately 56% of All-Pure's pro forma sales for such
period. Pro forma sales of repackaged chlorine accounted for approximately 25%
of All-Pure's pro forma sales for such period. Pro forma sales of specialty
swimming pool and spa chemicals accounted for approximately 7% of All-Pure's pro
forma sales for such period. The remaining 12% of All-Pure's pro forma sales was
derived from sales of other chlor-alkali related products.
While the technology for bleach-making and chlorine-repackaging is neither
difficult nor capital-intensive, the local operating permits required to engage
in these activities are not easily acquired. Management believes that these
operating permits constitute a significant barrier to entry into the business,
particularly in California. Because bleach contains a high percentage of water,
freight costs and logistics are an
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important consideration in product distribution. All-Pure's production plants
and distribution facilities are strategically located in or near most of the
largest population centers of the West Coast. For safety reasons, some
municipalities have switched from chlorine gas to bleach for water disinfection
purposes, and should other municipalities decide to switch from chlorine gas to
bleach for this purpose, All-Pure has significant spare bleach-making capacity
that can be used to supply product in bulk.
Bleach. All-Pure has the capacity to produce approximately 200 million
gallons of bleach annually. For the year ended December 31, 1996, All-Pure
produced approximately 34.0 million gallons of bleach, which was sold in
containers ranging from gallon containers to tank trucks.
Chlorine Repackaging. All-Pure repackages and distributes chlorine to end
users in the western U.S. As a regional distributor of chlorine, All-Pure
purchases chlorine in rail cars and repackages the chlorine for sale to
customers. For the year ended December 31, 1996, All-Pure repackaged and sold
approximately 29,200 tons of chlorine.
Product Distribution. In addition to chlorine and hydrochloric acid,
All-Pure distributes caustic soda and other related products in the western U.S.
For the year ended December 31, 1996, All-Pure sold approximately 4,800 tons of
caustic soda to customers located primarily in northern California.
Dry and Specialty Pool and Spa Chemicals. All-Pure purchases dry and
specialty pool and spa products for distribution to the pool water treatment
supply industry. In addition, All-Pure repackages dry pool chemicals for
distribution.
Sales and Marketing. All-Pure primarily repackages chlor-alkali chemicals,
manufactures bleach and distributes these products as well as other products
purchased for resale to approximately 2,200 customers in a variety of markets.
The dynamics of each market vary significantly, requiring All-Pure to be
extremely versatile in its methods of marketing. All-Pure also manufactures and
distributes bleach for swimming pool water treatment in southern California.
All-Pure repackages and distributes complementary products such as hydrochloric
acid and specialty pool and spa products.
Delivered costs of All-Pure's products are freight sensitive because the
products contain water, or are packaged in steel containers that constitute
approximately 40% of the gross weight of the delivered unit, and because such
products provide relatively low per-volume sales revenue. All-Pure has an
advantage over its competitors through its multiple plant locations, which limit
freight costs through their close proximity to customers, allowing All-Pure to
provide reliable supply and service.
The majority of products are sold as water treatment chemicals for swimming
pools, potable water and waste water. Seasonality is a variable that impacts
sales of water treatment chemicals for swimming pools. In order to lessen the
impact of seasonality on their business, All-Pure focuses on increasing
household bleach sales during the winter months.
All-Pure is divided into three regional profit centers -- southern
California, northern California and the Pacific Northwest each under the
direction of a general manager, who, in turn, reports to senior management of
Pioneer. There are 12 sales representatives overall. The administrative support
staff is at All-Pure headquarters, located in Walnut Creek, California in rented
offices shared with Kemwater. The ability to share certain administrative
support functions provides cost savings for both All-Pure and Kemwater.
Kemwater
The combined operations of Imperial West and KWT are now conducted by
Kemwater, 50% of the common stock of which is held by a subsidiary of PAAC and
50% of the common stock of which is owned by a subsidiary of Pioneer. A
subsidiary of PAAC also owns all of the outstanding shares of Kemwater's
preferred stock.
Since the Company does not own a controlling interest in Kemwater, the
Company accounts for Kemwater using the equity method. In the consolidated
financial statements, the Company's investment in Kemwater is presented as
"Investment in and advances to unconsolidated subsidiary" and its equity in the
loss of Kemwater is shown as "Equity in net loss of unconsolidated subsidiary."
In the 1995 consolidated financial
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statements, Imperial West is consolidated and includes total assets of $25.7
million, total revenues of $23.7 million and a net loss of $0.6 million.
Kemwater manufactures six chemical products: iron chlorides (ferric and
ferrous chlorides), polyaluminum chlorides, aluminum sulfate, sodium aluminate,
ferric sulfate solution and bleach. Kemwater markets these products and other
inorganic chemicals purchased by it to municipalities and industrial customers
for use primarily in the treatment of potable water and waste water. Kemwater's
products are generally sold on a delivered basis and are delivered primarily
through a fleet of tank trucks, including Kemwater's own equipment. All of
Kemwater's chlorine requirements for its production of iron chlorides and bleach
are provided by PCAC.
Kemwater is the major supplier of iron chlorides to the waste and potable
water markets west of the Rocky Mountains. Iron chlorides are used primarily to
remove organic solids from waste water and potable water streams and to control
hydrogen sulfide emissions. Kemwater also manufactures polyaluminum chlorides in
Savannah, Georgia. The majority of polyaluminum chloride sales are currently in
the southeastern United States. Kemwater also uses terminals at its facilities
in Mojave, California and Spokane, Washington for distribution of polyaluminum
chlorides in the western U.S. and Canada. Additionally, Kemwater sells
polyaluminum chlorides through exclusive distributors in Mexico, the Caribbean
and western Canada. Kemwater will be adding polyaluminum chloride production
capacity in one of its northwestern plants. Kemwater has exclusive licenses to
use Kemira's existing and future advanced water treatment technology in the
development and sale of products and services for the potable water, waste water
and industrial water treatment markets in the United States (other than the
northeastern United States) and the Caribbean, and nonexclusive access to the
use of the technology for the Canadian and Mexican markets, with an option to
acquire an exclusive license for those markets in the future. Kemwater also
manufactures and markets aluminum sulfate to the water treatment and pulp and
paper industries and is a manufacturer of bleach for municipal water
disinfection.
Kemwater markets liquid inorganic chemicals in bulk to municipalities and
industry for use mainly in the treatment of municipal and industrial waste water
and potable water. Kemwater differentiates itself from its competitors through
emphasis on superior product quality, customer service and a private tank truck
transportation fleet. Kemwater employs 16 personnel in sales, marketing and
customer service. Kemwater sells its products directly to customers primarily on
municipal bid contracts. The contracts typically have terms of one or more years
with prices fixed on an annual basis. Sales through distributors accounted for
less than 10% of product sales volume for the year ended December 31, 1996.
Kemwater's headquarters is located in Walnut Creek, California, in rented
offices shared with All-Pure. The ability to share certain administrative
support functions provides cost savings for both Kemwater and All-Pure.
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FACILITIES
The following table sets forth certain information regarding the Company's
principal production, distribution and storage facilities following the PCI
Canada Acquisition. All property is leased unless otherwise indicated.
<TABLE>
<CAPTION>
MANUFACTURED PRODUCTS; TYPE OF
LOCATION FACILITY
-------- ---------------------------------------
<S> <C>
PCI CANADA BUSINESS FACILITIES
Becancour, Quebec, Canada*................... Chlorine and caustic soda
Hydrochloric acid
Bleach
Hydrogen
Dalhousie, New Brunswick, Canada*............ Chlorine and caustic soda
Sodium chlorate
Hydrogen
Cornwall, Ontario, Canada.................... Hydrochloric acid
Bleach
Cereclor(R) (chlorinated paraffins)
PSR 2000(R)
IMPAQT(R)
Mississauga, Ontario, Canada*................ Research facility
Point Tupper, Nova Scotia, Canada............ Storage tanks
Charlotte, North Carolina.................... IMPAQT(R) plant
Bayonne, New Jersey.......................... Caustic soda storage tanks
PCAC FACILITIES
St. Gabriel, Louisiana*...................... Chlorine and caustic soda
Hydrogen
Henderson, Nevada*........................... Chlorine and caustic soda
Hydrochloric acid
Bleach
Hydrogen
Tacoma, Washington*.......................... Chlorine and caustic soda
Calcium chloride
Hydrochloric acid
Hydrogen
Tampa, Florida............................... Caustic soda storage tanks
Richmond, California......................... Caustic soda storage tanks
Wilmington, California....................... Caustic soda storage tanks
ALL-PURE FACILITIES
Tracy, California............................ Bleach
Chlorine repackaging
Santa Fe Springs, California................. Bleach
Chlorine repackaging
Kalama, Washington........................... Bleach
Chlorine repackaging
Tacoma, Washington*.......................... Bleach
Fresno, California........................... Distribution center
City of Industry, California................. Bleach
Chlorine repackaging
Hydrochloric acid repackaging
Dry chemical repackaging
</TABLE>
- ---------------
* Owned property
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PCI Canada Business Facilities
Becancour, Quebec. The Becancour facility is located on a 100-acre site and
consists of two major cellrooms for chlorine and caustic soda, built in 1976 and
1979, as well as four hydrochloric acid plants. The Becancour plant uses both
diaphragm cells and membrane cells. A recently completed $21.2 million expansion
and upgrade increased Becancour's net chlor-alkali capacity by 36,000 tons, or
12%, by installing additional modern membrane cell capacity. The membrane cells
account for approximately 18% of the plant's total caustic soda capacity, with
the diaphragm cells accounting for the remaining caustic soda production
capacity.
Annual capacity at Becancour is 340,000 tons of chlorine, 383,000 tons of
caustic soda, 150,000 tons of hydrochloric acid and 16,000 tons of bleach. The
production of chlor-alkali products principally requires salt, electricity and
water as raw materials. Electricity is purchased from Hydro-Quebec and salt is
delivered by rail and water. The site is on the deep-water St. Lawrence Seaway.
Hydrogen is supplied to an adjacent hydrogen peroxide plant as well as to a
merchant supplier of liquid hydrogen. In addition, all of the PCI Canada
Business facilities are ISO 9002 certified.
Dalhousie, New Brunswick. The Dalhousie facility is located on a 36-acre
site and consists of a chlor-alkali plant built in 1963 and expanded in 1971 and
a sodium chlorate plant built in 1992.
Annual capacity at Dalhousie is 36,000 tons of chlorine, 40,000 tons of
caustic soda and 22,000 tons of sodium chlorate. The chlor-alkali plant uses
Solvay Mark V mercury-cell technology. The sodium chlorate plant uses Chemetics
technology and was designed to allow debottlenecking to 24,000 tons. Electricity
is supplied by New Brunswick Power and salt is provided by rail and truck.
Cornwall, Ontario. The Cornwall units are located on leased portions of a
36-acre site and consist of a commercial (high stability) bleach plant, a
Cereclor(R) chlorinated paraffin plant with new twin reactors installed in 1996
and 1997, a PSR 2000H pulping additive plant and an IMPAQTH pulping additive
plant. Additionally, the PCI Canada Business operates a chemical packaging and
compressed gas filling plant for a third party.
Annual capacity at Cornwall is 222,000 tons of bleach, 11,000 tons of
hydrochloric acid, 7,500 tons of Cereclor(R) chlorinated paraffins, 31,000 tons
of PSR 2000H and 4,400 tons of IMPAQTH. The bleach plant uses Powell technology
to produce 20% consumer grade product and is equipped with an on-line dilution
system and a special filter to allow high purity production. The Cereclor(R)
plant includes a glass lined reactor installed in 1996 and a new reactor
installed in 1997.
Mississauga Research and Technology Laboratory, Mississauga, Ontario. The
Mississauga site consists of a research and technology facility including pilot
plants on 1.2 acres of land in the Sheridan Park Research Center outside
Toronto.
Point Tupper, Nova Scotia. The Point Tupper assets consist of an 8,000 ton
storage tank located on deep water at the site of a customer.
Charlotte, North Carolina. The Charlotte assets consist of a small IMPAQTH
plant owned by the PCI Canada Business but operated by ICI Americas and located
on a larger ICI Americas site.
Bayonne, New Jersey. The Bayonne site consists of 5,000 ton caustic soda
storage tanks.
PCAC Facilities
St. Gabriel, Louisiana Plant. PCAC's St. Gabriel plant is located on a
100-acre site near Baton Rouge, Louisiana and serves the southern U.S. and
Mississippi River markets and the export market. Approximately 228 acres
adjoining this site are available to the Company for future industrial
development. The plant was completed in 1970 and is situated on the Mississippi
River with river frontage and deep water docking, loading and unloading
facilities. The dock is capable of berthing ocean-going vessels of up to 36,000
DWT. Annual capacity at St. Gabriel is 197,000 tons of chlorine and 216,700 tons
of caustic soda. In 1996, the plant received ISO 9002 registration.
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St. Gabriel is the newest mercury-cell plant in the U.S. The mercury-cell
production process yields a higher quality of caustic soda, called low-salt
grade, which usually receives premium pricing in the marketplace. Caustic soda
produced by mercury cells does not require evaporation to meet market
concentration requirements. Accordingly, even though mercury cell technology
uses more electricity than membrane cell or diaphragm cell technology, total
costs of production are generally competitive.
Salt is delivered under long-term supply contracts to the St. Gabriel plant
by barge. Electricity is supplied to the plant under long-term contracts through
regional power networks. Water is provided at the St. Gabriel plant from on-site
water wells.
St. Gabriel's chlorine production system includes a three-tower drying
system, multi-stage centrifugal chlorine compressors and a three-stage
liquefaction system. St. Gabriel has a utility section consisting of two boiler
systems for steam generation used principally for heating. Each boiler, capable
of producing 325,000 pounds per hour of steam, has fuel feedstock flexibility,
allowing conversion from outside-sourced natural gas to internally generated
hydrogen.
Chlorine tank storage capacity at the St. Gabriel plant is 3,000 tons,
which provides storage for approximately six days of production. The St. Gabriel
plant supplies its largest customer, Novartis, which is located adjacent to the
St. Gabriel facility, with chlorine directly through a dedicated pipeline. No
other chlor-alkali producer has a dedicated line to such customer. Caustic soda
storage capacity is 10,500 tons, which provides for approximately 18 days of
production. Additional production storage capacity is available using rail cars.
Hydrogen produced at the St. Gabriel plant is piped directly to BCP under a
long-term contract.
Henderson, Nevada Plant. PCAC's Henderson plant is located on a 374-acre
site near Las Vegas, Nevada and serves customers in the western U.S. It is the
closest chlor-alkali plant to the important southern California area by over 500
miles. Approximately 70 acres are developed and used for production facilities.
The original plant began operation in 1942. Annual capacity at the plant is
152,000 tons of chlorine, 167,200 tons of caustic soda, 130,000 tons of
hydrochloric acid and 5,100 tons of bleach. The Henderson plant is part of an
industrial complex shared with three other manufacturing companies. Common
facilities and property are owned and managed by subsidiaries of Basic
Investments, which provide common services to the four site companies. Basic
Investments' facilities include extensive water and high voltage power
distribution systems and access roads.
Salt is delivered under long-term supply contracts to the Henderson plant
by rail car. Electricity is supplied to the plant under long-term contracts
through regional power networks. The electric power is distributed within the
Henderson industrial site through facilities owned and operated by a subsidiary
of Basic Investments. The Henderson plant obtains water from Lake Mead pursuant
to PCAC's Category IV federal water rights. The water is transported by means of
a 25-mile pipeline system operated by a subsidiary of Basic Investments.
The plant was upgraded and rebuilt in 1976-1977 to use diaphragm cell
technology, and in 1978 quadruple-effect caustic soda evaporation units were
installed. Incremental expansions during the period from 1990 to 1995 resulted
in plant capacity increases of 105 ECUs per day. The evaporation plant requires
2.2 tons of steam per ton of caustic soda produced. Steam for the facility is
currently provided under a favorable long-term contract with Saguaro Power, a
cogeneration electricity producer in which PCAC has an indirect 15% interest.
PCAC also has its own boilers at the Henderson facility that are capable of
producing steam. PCAC leases two units used in the production of hydrochloric
acid.
Following evaporation to desired levels of concentration, caustic soda is
stored in tanks and off-site terminals. Caustic soda storage capacity is 7,000
tons, which provides storage for approximately 16 days of production. Chlorine
tank storage capacity at the Henderson plant is 600 tons, which provides storage
for approximately two days of production. Additional production storage capacity
for chlorine and caustic soda is available using rail cars, and the Company's
terminals in Richmond, California and Wilmington, California provide additional
caustic soda storage capacity. Hydrochloric acid storage capacity at the
Henderson plant is 1,500 tons, which provides for approximately three days of
production. Additional storage capacity is available using rail cars.
Tacoma, Washington Plant. The Tacoma Facility is located on a 31-acre site
which is part of an industrial complex on the Hylebos waterway in Tacoma,
Washington. It serves customers in the Pacific
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Northwest and California and, to a lesser extent, foreign caustic soda
customers. The site has docks capable of handling ocean-going vessels up to
30,000 DWT size. Annual capacity is approximately 225,000 tons of chlorine,
247,500 tons of caustic soda, 44,000 tons of hydrochloric acid and 8,800 tons of
calcium chloride.
The plant uses both diaphragm cells installed in the late 1970s and
membrane cells installed in 1988. The state-of-the-art membrane cell production
process yields a higher quality of caustic soda and thus for some end uses
receives premium pricing. The membrane cells account for approximately 45% of
the total plant caustic soda capacity, with the diaphragm cells accounting for
the remaining caustic soda production capacity. The operations of the two
systems are designed to optimize the capabilities of the plant in a
cost-efficient manner, resulting in a cost-competitive facility.
Steam for the facility is produced on-site in two natural gas fired steam
boilers. The boilers are capable of using a portion of the hydrogen generated in
the cell operations as fuel. Process water for the plant is purchased from the
City of Tacoma and sea water is used for cooling purposes throughout the
facility.
Electric power is purchased from the Tacoma Department of Public Utilities
under a contract extending to September 30, 2001. Prices are fixed except for
the top 27 MW portion of the load, or approximately 33% of the total electricity
usage, which is purchased on a market-price basis. Steam for the facility is
produced on-site in two natural gas fired steam boilers. The gas for these units
is supplied under a contract effective through September 30, 1997, subject to
annual renewal. The boilers are capable of utilizing a portion of the hydrogen
generated in the cell operations. Process water for the plant is purchased from
the City of Tacoma and sea water is used for cooling purposes throughout the
facility.
Chlorine tank storage capacity is 1,500 tons, which provides storage for
approximately 2 1/2 days of production. Caustic soda storage capacity is 11,100
tons, providing storage for approximately 16 days of production. Additional
production storage capacity is available using rail cars, and the Company's
leased terminals in Richmond, California and Wilmington, California provide
additional storage capacity for caustic soda. The Company also acquired a leased
railroad tankcar fleet as part of the Tacoma Acquisition. The Tacoma Facility is
a WISHA Star site. ISO 9002 registration was completed in December 1996.
Tampa, Florida. To facilitate distribution to the southeastern region of
the U.S., PCAC leases two caustic soda storage tanks at Tampa, Florida with a
capacity of 5,100 tons, approximately nine days of production from the St.
Gabriel facility.
Richmond, California. As a part of the Tacoma Acquisition, PCAC acquired
the leases to three caustic soda storage tanks at Richmond, California, which
are used to facilitate distribution to customers in northern California. The
tanks have a capacity of 9,100 tons, approximately 13 days of production from
the Tacoma Facility.
Wilmington, California. PCAC acquired the leases to four caustic soda
storage tanks at Wilmington, California as a part of the Tacoma Acquisition.
Those tanks and PCAC's existing leased tank at the same facility provide storage
capacity of 17,400 tons, representing approximately 38 days of production from
the Henderson facility or approximately 25 days of production from the Tacoma
Facility. The tanks are used to facilitate distribution to the southern
California region.
All-Pure Facilities
Tracy, California. The Tracy facility is located 60 miles east of Oakland
and serves the central California and San Francisco Bay area markets. The plant
includes a 262,000 ton per year bleach production facility and a chlorine
repackaging facility on a 15-acre tract. The land at the facility is leased
under a lease expiring in the year 2000.
Santa Fe Springs, California. The Santa Fe facility is located in the Los
Angeles area and serves the southern California markets. The plant includes a
262,000 ton per year bleach production facility and a chlorine repackaging
facility on a 4.5-acre tract. The land at the facility is leased under a lease
expiring in 1998 with a five-year renewal option.
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Kalama, Washington. Located 30 miles north of Portland, Oregon, the Kalama
facility serves the northern Oregon and Washington markets. The plant includes a
52,500 ton per year bleach production facility and a chlorine repackaging
facility on a three-acre tract. The land at the facility is leased under a
month-to-month lease; All-Pure and the lessor are engaged in discussions
regarding a long-term lease extension or the lease of a new site within the same
port facility.
Tacoma, Washington. The T.C. Products facility in Tacoma serves the Pacific
Northwest market. The plant consists of a 105,000 ton per year bleach production
facility on a five-acre tract.
Fresno, California. The Fresno facility consists of an approximately 10,000
square foot warehouse, excluding office space, and serves the central California
market. All product shipped from the warehouse is transferred from the Tracy,
California production facility for distribution to customers. The land at the
facility is leased under a lease expiring in June 2001.
City of Industry, California. The City of Industry facility is located in
the Los Angeles area and serves the southern California, southern Nevada and
western Arizona markets. The plant includes a 262,000 ton per year bleach
production facility and chlorine, hydrochloric acid and dry chemical repackaging
facilities on a five-acre tract. The facility includes a 96,000 square foot
warehouse. The land at the facility is leased under a lease expiring in 1998
with options to extend until 2008.
OTHER INVESTMENTS
Saguaro Power
PCAC has an indirect 15% equity interest in Saguaro Power, which owns and
operates a 90-megawatt cogeneration facility located on approximately six acres
of the Henderson property. The Saguaro Power facility is operated by an indirect
subsidiary of S.C.E. Capital Company. The facility uses natural gas, which is
supplied under a defined price long-term contract, as feedstock to produce
electricity and steam. Electricity is sold to one customer under a long-term
contract, and steam is sold primarily to PCAC, which has a right to resell steam
to other companies in the Henderson industrial complex. PCAC leases the property
to Saguaro Power under a lease that expires in 2022. The cost to the Company of
purchasing steam from Saguaro Power is substantially less than the cost to the
Company of producing the steam internally.
Basic Investments
PCAC's facility in Henderson, Nevada is located within an industrial
complex operated by Basic Investments, Inc. ("Basic Investments"). Other
industrial operators in the complex are Kerr-McGee Chemical Corporation ("Kerr
McGee"), Titanium Metals Corporation ("Timet") and Chemical Lime Company
("Chemical Lime") which, together with PCAC, own all of the capital stock of
Basic Investments. PCAC owns approximately 32% of the common stock of Basic
Investments, including voting shares which entitle it to elect two members of
the seven person board of directors.
The Company's interests in Basic Investments and in Victory Valley Land
Company, L.P. ("Victory Valley" and, together with Basic Investments, the "Basic
Ownership"), together with certain real property (the "Excess Land"), constitute
assets that, pursuant to the PAI Acquisition Agreement, will be held for the
economic benefit of the sellers for a period of 20 years. Any proceeds from such
interests are deposited into an escrow account and are available to satisfy
certain obligations of the sellers under environmental and other obligations in
favor of Pioneer, PAAC and their affiliates. After payment or provision for
payment of such obligations, amounts received by the Company on account of the
Basic Ownership will be remitted to the PAI sellers for such 20-year period. The
sellers also have certain rights during such period with respect to
determinations affecting the Basic Ownership, including the right (subject to
certain conditions) to direct the sale or disposition of interests constituting
the Basic Ownership and the sale or disposition of Excess Land and the right
(with certain exceptions) to vote the interests constituting the Basic
Ownership. Since the PAI Acquisition, approximately 64 acres of Excess Land have
been sold, and the escrow account had a balance of approximately $4.6 million on
September 30, 1997. The Company accounts for its interests in the Basic
Ownership by using a right of offset. As a result, the Company's interest in the
Basic Ownership is offset
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against the corresponding liability, resulting in no net asset being recorded on
the Company's consolidated balance sheet.
Canso
Each of the PCI Canada Business, Kimberly Clark Nova Scotia Inc. ("Kimberly
Clark") and Stora Forest Industries Inc. ("Stora") owns a one-third equity
interest in Canso Chemicals Limited, a Nova Scotia company ("Canso"). Canso
operates the Point Tupper transfer facility, which consists of a caustic soda
storage tank and related piping leased from the PCI Canada Business and located
on land leased from Stora. Canso purchases caustic soda from the PCI Canada
Business, stores it at the Point Tupper transfer facility and sells it to Stora
for use in Stora's adjacent pulp and paper mills. Canso also owns a facility at
Abercrombie, Nova Scotia, where chlorine and caustic soda purchased from the PCI
Canada Business are stored and transshipped for sale to the adjacent Kimberly
Clark pulp and paper mill.
COMPETITION
The chlor-alkali industry is highly competitive. Many of the Company's
competitors are larger and have greater financial resources than the Company.
Many of the Company's competitors are some of the world's largest chemical
companies that have their own raw material resources and numerous regional
companies that specialize in a smaller number of chemical products. While a
significant portion of the Company's business is based upon widely available
technology, the difficulty in obtaining permits for the production of
chlor-alkali and chlor-alkali related products is a barrier to entry. The
Company's ability to compete effectively depends on its ability to deliver
quality products at competitive prices and to provide reliable and responsive
service to its customers.
The North American chlor-alkali industry is currently dominated by two
producers, OxyChem and The Dow Chemical Company, together representing
approximately one half of the total North American capacity. The remaining
capacity is held by approximately 20 companies. Approximately 65% of North
American chlor-alkali capacity is located on the Gulf Coast in Texas and
Louisiana. Following the PCI Canada Acquisition, the Company will have
approximately 6% of North American chlor-alkali capacity. The Company believes
it has a strong regional presence with respect to many of its products in the
markets it serves.
Competitors in the chlor-alkali related industries in which the Company
operates are numerous and the industry is highly fragmented. The Company
believes that All-Pure is the largest supplier of chlorine and bleach for water
treatment purposes in the region of the United States west of the Rocky
Mountains and that Kemwater is the largest producer of iron chlorides in such
region.
EMPLOYEES
As of October 31, 1997, the Company had 1,362 employees. Approximately 95
of the Company's employees at its Henderson, Nevada plant are covered by
collective bargaining agreements with the United Steelworkers of America and the
International Association of Machinists and Aerospace Workers that are in effect
until March 2001. Approximately 117 employees at the Tacoma Facility are
represented by the International Chemical Workers Union and International Union
of Operating Engineers under collective bargaining agreements that expire in
June 2000 and June 1998, respectively. Approximately 57 of the Company's
employees at an All-Pure facility are covered by collective bargaining
agreements with the Steel, Paper, House, Chemical Drivers and Helpers Union and
the International Chemical Workers Union that are in effect until September 2002
and January 1998, respectively. An additional 29 employees are covered by a
collective bargaining agreement with the Teamsters Union in Tacoma, Washington
which is in effect until December 1997. The Company's employees at its other
production facilities are not covered by union contracts or collective
bargaining agreements. The Company considers its relationship with its employees
to be good and has not experienced any strikes or work stoppages.
As of October 31, 1997, 460 of the Company's 1,362 employees were employed
by the PCI Canada Business in Canada and the United States. Approximately 168
employees at the Becancour facility are represented by the Communications,
Energy and Paperworkers Union under a contract that expires in April 2000.
Approximately 61 employees at the Cornwall facility are represented by the
United Steelworkers Union
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under a contract that expires in October 1999. Other PCI Canada Business
employees are not covered by union contracts or collective bargaining
agreements.
ENVIRONMENTAL AND SAFETY REGULATION
General Environmental Matters
General. The manufacturing operations of the Company are subject to United
States and Canadian federal, state, provincial and local laws and regulations
relating to protection of the environment, including those applicable to waste
management, discharge of pollutants into the air and water, cleanup liability
from historical waste disposal practices and employee health and safety. Each of
the United States federal environmental programs typically has a state
counterpart. The state environmental programs generally must be at least as
stringent as the federal requirements, and some state regulations are more
onerous than the federal requirements. Both federal and state environmental
programs allow the imposition of substantial civil and criminal penalties for
noncompliance. By comparison, while there are certain federal laws that apply to
all provinces in Canada, most Canadian environmental laws are implemented on the
provincial level. Although the Company believes that its operations are in
general compliance with applicable environmental laws and regulations, risks of
substantial costs and liabilities are inherent in chemical manufacturing
operations, and there can be no assurance that significant costs and liabilities
will not be incurred. Moreover, it is possible that other developments, such as
new environmental laws and regulations or stricter enforcement and cleanup
policies, could result in substantial costs and liabilities to the Company. The
Company has accrued $11.9 million related to expected future environmental
restoration and remediation costs, computed on an undiscounted basis. In the
opinion of management, there is currently no material estimable range of loss in
excess of the amount recorded. However, it is possible that new information
about the sites for which the reserve has been established, new technology or
future developments could require the Company to reassess its potential exposure
related to environmental matters.
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.
Air Quality. The Company's United States operations are subject to the
Federal Clean Air Act and the amendments to that act which were enacted in 1990.
The Company will be subject to some of the additional environmental regulations
adopted by the federal EPA and state environmental agencies to implement the
Clean Air Act Amendments of 1990. The Tacoma plant has applied for a Title V
operating permit under these regulations. Among the requirements that are
potentially applicable to the Company are those that require the EPA to
establish hazardous air pollutant emissions requirements for chlorine production
facilities. Although the Company cannot estimate the cost of complying with
these requirements until the implementing regulations are proposed, at this time
the Company does not believe that such requirements will have a material adverse
effect on it.
Most of the Company's plants manufacture or use chlorine, which is in
gaseous form if released into the air. Chlorine gas in relatively low
concentrations can irritate the eyes, nose and skin and in large quantities or
high concentrations can cause permanent injury or death. In 1991, there was an
accidental release of approximately 42 tons of chlorine from the Henderson
facility. In response, local emergency authorities evacuated areas in and around
the City of Henderson. The Company has resolved substantially all of the
personal injury, property damage and regulatory claims relating to this release,
and substantially all the costs incurred as a result of the accident have been
recovered under applicable insurance policies. There was a release of about 10
tons of chlorine from the St. Gabriel facility in 1992 and another release in
1994 of less than one ton of chlorine, and from 1995 to date, there have been
six releases from the Company's plants, each of which was less than 35 pounds.
These releases were controlled by plant personnel, in some cases with the
assistance of local emergency response personnel, and there were no material
claims against the Company as a
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result of these incidents. The Company maintains systems to detect emissions of
chlorine at its plants, and the St. Gabriel, Tacoma and Henderson plants are
members of their local industrial emergency response networks. The Company
believes that its insurance coverage is adequate with respect to costs that
might be incurred in connection with any future release, although there can be
no assurance that the Company will not incur substantial expenditures that are
not covered by insurance if a release does occur in the future.
Water Quality. The Company maintains waste water discharge permits for many
of its facilities pursuant to the U.S. Federal Water Pollution Control Act of
1972, as amended, and comparable state laws. Where required, the Company has
also applied for permits to discharge stormwater under such laws. In order to
meet the discharge requirements applicable to stormwater, it will be necessary
to modify surface drainage or make other changes at certain plants. The Company
plans to spend an additional $1.2 million by the end of 1997 for modifications
to the stormwater system at the Henderson plant. The Company believes that the
costs associated with stormwater discharge at Henderson and its other plants
will not have a material adverse effect on the Company's financial condition,
liquidity or operating results. The various states in which the Company operates
also have water pollution control statutes and regulatory programs which include
groundwater, as well as surface water, protection provisions. The requirements
of these laws vary and are generally implemented through a state regulatory
agency. These water protection programs typically require site discharge
permits, and spill notification, prevention and corrective action plans. At
several of the Company's facilities, investigations or remediations are underway
and at some of these locations regulatory agencies are considering whether
additional actions are necessary to protect or remediate surface or groundwater
resources and the Company could be required to incur additional costs to
construct and operate remediation systems in the future. In addition, at several
of its facilities, the Company is in the process of replacing or closing ponds
for the collection of wastewater. The Company plans to spend approximately $1.3
million during the next 15 years for closure of eight chlor-alkali waste water
disposal ponds at its Henderson plant.
Chlorine Regulation. Chlorine uses in two markets, pulp and paper bleaching
and as a raw material for chemical intermediaries used in the production of
CFCs, have declined since the late 1980s. This decline was based on concerns
that the products or by-products from those applications might cause damage to
human health or the environment. Certain environmental groups and international
commissions have urged the restriction or ban of chlorine-related processes and
products and the EPA is considering new or additional regulation of
chlorine-containing substances such as the herbicide atrazine and byproducts
from the treatment of drinking water. Such pressures and regulatory initiatives
could have the effect of reducing the use of chlorine by customers in the
Company's markets or could have the effect of increasing competition from other
chlorine producers with respect to the Company's markets. The Company is working
with other industry representatives to advocate a risk-based scientific approach
for evaluating the alleged health and environmental risks of chlorine and
chlorinated compounds which are used for a broad range of consumer products,
such as plastics, water and pharmaceuticals. The Company believes that a
risk-based approach will show that the risk associated with not using such
compounds, or the risks of other chemicals that might be proposed to replace
them, support a conclusion that there is no need for a ban or substantial new
restrictions, but the necessary studies have not been completed with respect to
all of such areas.
OSHA and Community Right-to-Know. The Company is subject to laws and
regulations concerning occupational health and safety, emergency planning and
community right-to-know disclosures. These laws include the Federal Occupational
Safety and Health Act ("OSHA") and the Emergency Planning and Community
Right-to-Know Act of 1986 ("EPCRA"). OSHA and comparable state statutes
establish workplace standards that apply generally to businesses in the
manufacturing sector, including the Company's businesses. EPCRA establishes
notification requirements for businesses, like the Company's, that use regulated
hazardous substances. The Company is not aware of any failures to comply with
OSHA or EPCRA requirements that could reasonably be expected to result in a
material adverse effect on the Company's business, properties or results of
operations on a consolidated basis.
The Company's St. Gabriel plant uses mercury in its chlorine manufacturing
process. The Company currently complies with both OSHA and industry standards
for employees who could be exposed to mercury. The Federal Occupational Safety
and Health Administration has previously proposed to lower the maximum
permissible exposure level for mercury, and the Company believes that it will be
able to comply with the new
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standard if it is reproposed at the same level. It is possible, however, that
even lower mercury emissions or exposure limits could be imposed in the future
by the Federal Occupational Safety and Health Administration or the EPA and the
cost of compliance with such new limits cannot be estimated at the present time.
Hazardous and Solid Wastes. The Company's manufacturing facilities generate
hazardous and non-hazardous solid wastes which are subject to the requirements
of RCRA and comparable state statutes. Under the 1984 amendments to RCRA, the
EPA promulgated regulations banning the land disposal of certain hazardous
wastes unless the wastes meet defined treatment or disposal standards, including
certain mercury-containing wastes generated by the Company's St. Gabriel plant.
In response to these regulations, the St. Gabriel plant has substantially
reduced the quantity of wastes that are subject to the land ban. The Company has
installed an in-plant treatment system that reduces the level of mercury in its
wastes below the hazardous classification. The Company's disposal costs could
increase substantially if its present disposal sites become unavailable due to
capacity or regulatory restrictions. The Company presently believes, however,
that its current disposal arrangements, together with the new treatment system,
will allow the Company to continue to dispose of land-banned wastes with no
material adverse effect on it.
Superfund. The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability,
without regard to fault or the legality of the original conduct, on certain
classes of persons for the clean-up of releases of a "hazardous substance" into
the environment. These persons include the owner or operator of the disposal
site or sites where the release occurred and companies that disposed or arranged
for the disposal of hazardous substances found at the site. Persons who are or
were responsible for releases of hazardous substances under CERCLA may be
subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment and for
damages to natural resources. In the ordinary course of the Company's
operations, substances are generated that fall within the definition of
"hazardous substances," and the Company is the owner or operator of several
sites at which hazardous substances have been released into soil or groundwater.
Under CERCLA, regulatory agencies or third parties may incur costs to
investigate or remediate such conditions and seek reimbursement from the Company
for such costs. However, no investigations or remedial activities are currently
being conducted under CERCLA by third parties at any of the Company's
facilities. Such activities are being carried out at certain facilities under
the other statutory authorities discussed above.
Canadian Environmental Laws. The PCI Canada Business facilities (other than
the Charlotte, North Carolina facility) are governed by federal environmental
laws adopted by the Canadian parliament and administered by Environment Canada
and by provincial environmental laws adopted by the respective provincial
legislatures and enforced by administrative agencies. Many of these laws are
comparable to the U.S. laws described above. In particular, the Canadian
environmental laws generally provide for control and/or prohibition of
pollution, for the issuance of certificates of authority or certificates of
authorization which permit the operation of regulated facilities and prescribe
limits on the discharge of pollutants, and for penalties for the failure to
comply with applicable laws. These laws include the substantive areas of air
pollution, water pollution, solid and hazardous waste generation and disposal,
toxic substances, petroleum storage tanks, protection of surface and subsurface
waters, and protection of other natural resources. However, there is no Canadian
law similar to CERCLA that would make a company liable for legal off-site
disposal. The Canadian statutes and regulations which are expected to have the
most significant impact on the operations of the Company are summarized below.
The Canadian Environmental Protection Act ("CEPA") is the primary federal
statute which governs environmental matters throughout the provinces. The
Chlor-Alkali Mercury Release Regulations and the Chlor-Alkali Mercury Liquid
Effluent Regulations, adopted under the CEPA, regulate the operation of the
Dalhousie facility and the remediation of the Cornwall chlor-alkali facility. In
particular, these regulations provide for the quantity of mercury a chlor-alkali
plant may release into the ambient air and the quantity of mercury that may be
released with liquid effluent. The federal Fisheries Act is the principal
federal water pollution control statute. It prohibits the deposit of deleterious
substances into waters frequented by fish. This law would apply in the event of
a spill of caustic soda or other deleterious substance that adversely impacts
marine life in a waterway. The Cornwall, Becancour, Dalhousie, Abercrombie and
Point Tupper sites are all located adjacent to major waterways and are therefore
subject to the requirements of this statute.
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The primary provincial environmental laws include the Environmental
Protection Act in the province of Ontario, the Quebec Environment Quality Act
("EQA") in Quebec, the Clean Environment Act in New Brunswick, and the Nova
Scotia Environment Act in Nova Scotia. In general, each of these acts regulates
the discharge of a contaminant into the natural environment if such discharge
causes or is likely to cause an adverse effect. If a contaminant is discharged
into the natural environmental in contravention of the general prohibition or
the regulations adopted thereunder, the regulatory authority may issue an order
directing the responsible party to investigate or correct a condition, or to
limit or repair the source of the discharge. In Quebec, a person who is
responsible, in whole or in part, for contamination which is likely to affect
the life, health, safety, welfare or comfort of human beings, or to cause damage
or to otherwise impair the quality of the soil, vegetation, wildlife or
property, may be required to prepare an environmental study of contamination and
a plan for remediation and to remove, collect or neutralize the contaminants, or
to take any other measures to restore the environment. In addition, the Quebec
Minister of Environment may also take any measures considered necessary to clean
up contaminants and to recover the direct and indirect costs related to such
measures from any person who had custody of or control over the contaminants. In
the other jurisdictions, such orders may generally be issued to the owner or
previous owner of the source of the contaminant, any person who is or was in
occupation of the source of contaminant, or a person who has or had the charge,
management or control of the source of the contaminant. The order may require a
number of actions, including limiting the rate of discharge of the contaminant
or requiring the repair or prevention of injury or damage from the contaminant.
In certain circumstances, there is also a duty upon an owner of a pollutant and
upon a person having control of a pollutant that is discharged to do everything
practicable to prevent the adverse effect and to restore the natural
environment. Certificates of Authority may also be issued under the various
provincial environmental laws to permit construction and operation of regulated
facilities.
The PCI Canada Business facilities that were acquired by the Company at
Becancour and Dalhousie, as well as the Canso facility, include landfills and
impoundments in which brine muds and sludges have been or will be disposed.
Inactive disposal areas have been closed, and the active facilities are
permitted under their respective statutory requirements. Many of the active and
inactive disposal sites have a system of groundwater monitoring wells which are
sampled and the results reported to governmental authorities on a regular basis.
Some groundwater contamination, including mercury and chlorides, has been
identified as a result of this monitoring, but there are presently no
requirements to remediate such conditions or to modify the disposal areas. These
disposal sites will be a long-term management obligation for the Company. The
Company anticipates that it will incur annual monitoring costs for such
facilities for the foreseeable future. Although the Company understands that no
remediation is currently required for such facilities, it is possible that such
requirements could be imposed in the future. Such costs would be included in the
general environmental indemnity provided by ICI if they are incurred within the
next ten years. Thereafter, all monitoring, closure and post-closure for these
disposal areas will be the responsibility of the Company. There can be no
assurance that such costs will not be material at the time they are incurred,
but the Company presently cannot predict whether, or when, any material closure
or remediation requirements might be imposed.
The Cornwall facility was historically used for the production of
chlor-alkali products from mercury cells and for the production of carbon
tetrachloride and carbon disulfide. The Company purchased equipment and leased
buildings required to conduct future operations, and did not acquire the real
property at Cornwall. ICI agreed to retain responsibility for pre-closing
conditions, including ongoing remediation, at the Cornwall facility. Liabilities
from pre-closing operations at the Cornwall site are specifically enumerated as
an excluded liability that the Company did not acquire in connection with its
purchase of the PCI Canada Business. The Company does not believe that it will
have any material liability related to the Cornwall site. However, the Company
will conduct future operations at the site and the Company could have some
liability for operational improvements or, to the extent that such operations
contribute additional contaminants to the soil or water, for remediation. In
addition, there can be no assurance that ICI will promptly perform the
obligations under its indemnity or that it will have the financial resources to
complete the required remediation.
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Indemnities
ZENECA Indemnity. The Company's Henderson plant is located within what is
known as the "Basic Complex." Soil and groundwater contamination have been
identified within and adjoining the Basic Complex, including land owned by the
Company. A groundwater treatment system has been installed at the facility and,
pursuant to a consent agreement with the Nevada Division of Environmental
Protection, a study is being conducted to further evaluate soil and groundwater
contamination at the facility and other properties within the Basic Complex and
to determine whether additional remediation will be necessary with respect to
the Company's property.
In connection with the 1988 acquisition of the Henderson and St. Gabriel
properties by PAI, the sellers agreed to indemnify the Company with respect to,
among other things, certain environmental liabilities associated with historical
operations at the Henderson site. Zeneca Delaware Holdings, Inc. and Zeneca,
Inc. (collectively, the "ZENECA Companies") have assumed the indemnity
obligations. In general, PAI is indemnified against environmental costs which
arise from or relate to pre-closing actions which involved disposal, discharge
or release of materials resulting from the former agricultural chemical and
other non-chlor-alkali manufacturing operations at the Henderson plant. The
ZENECA Companies are also responsible for costs arising out of the pre-closing
actions of Basic Investments and pre-closing actions at the Basic Complex and
for other pre-closing environmental liabilities arising at other off-site
locations. Under the ZENECA Indemnity, the Company may only recover indemnified
amounts for environmental work to the extent that such work is required to
comply with environmental laws or is reasonably required to prevent an
interruption in the production of chlor-alkali products. The ZENECA Indemnity
also covers certain claims by non-governmental third parties. The Company is
responsible for environmental costs relating to the chlor-alkali manufacturing
operations at the Henderson plant, both pre- and post-acquisition, for certain
actions taken without ZENECA's consent and for certain operation and maintenance
costs of a groundwater treatment system at the facility.
Payments for environmental liabilities under the ZENECA Indemnity, together
with other non-environmental liabilities for which the ZENECA Companies agreed
to indemnify the Company, cannot exceed approximately $65 million. Through
September 30, 1997, the Company has been reimbursed for approximately $12
million of costs covered by the ZENECA Indemnity, but the ZENECA Companies may
have directly incurred additional costs that would further reduce the total
amount remaining under the ZENECA Indemnity. In 1994, the Company recorded an
additional $3.2 million environmental reserve related to pre-closing actions at
sites that are the responsibility of ZENECA. At the same time a receivable was
recorded from ZENECA for the same amount. It is the Company's policy to record
such amounts when a liability can be reasonably estimated. No additional amounts
were recorded in 1995, 1996 or 1997.
As a result of the PAI Acquisition, the ZENECA Indemnity will terminate on
April 20, 1999. 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 either the
ZENECA Companies have assumed control of such claims or the Company is
contesting the legal requirements that gave rise to such claims, or has
commenced removal, remedial or maintenance work with respect to such claims, or
has commenced an investigation which results in the commencement of such work
within ninety days. 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, however, that disputes could arise
between the parties concerning the effect of contractual language and that the
Company would have to subject its claims for clean-up expenses, which could be
substantial, to the contractually-established arbitration process.
PAI Sellers' Indemnity. In the PAI Acquisition Agreement, the sellers
agreed to indemnify Pioneer, PAAC and their affiliates for certain environmental
liabilities that result from certain discharges of hazardous materials, or
violations of environmental laws, arising prior to the closing date from or
relating to the PAI plant sites or arising before or after the closing date with
respect to certain environmental liabilities relating to the Contingent Payment
Properties. Amounts payable pursuant to the PAI Sellers' Indemnity will
generally be payable as follows: (i) out of certain reserves established on PAI
balance sheet at December 31, 1994;
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(ii) either by offset against the amounts payable under the Pioneer Seller Notes
or from amounts held in the Contingent Payment Account; and (iii) in certain
circumstances and subject to specified limitations, out of the personal assets
of the sellers. See "Business -- Basic Investments." The Company is required to
reimburse the sellers 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. The Company has also
agreed to indemnify the sellers for certain environmental liabilities that may
arise after the closing date. See "Risk Factors -- Environmental
Regulation -- Henderson Remediation Matters; ZENECA Indemnity; PAI Sellers'
Indemnity."
OCC Tacoma Indemnity. The Tacoma Facility is located adjacent to the
Hylebos Waterway, which is connected to Commencement Bay. The Hylebos Waterway
is one of the study areas included in the Commencement Bay Nearshore/Tideflats
site which has been placed on the National Priorities List for remediation under
CERCLA. OxyChem is a member of the Hylebos Cleanup Committee ("HCC"), which has
entered into a consent agreement with the EPA under which the HCC will prepare a
pre-remedial design for cleanup of the Hylebos Waterway. OxyChem is
participating in a voluntary, non-binding mediation under which an arbitrator
will allocate liability for the waterway among approximately 30 participating
PRPs. The aggregate costs of the cleanup of the Hylebos Waterway will depend
upon cleanup levels established by the EPA. Cleanup levels have been selected by
the EPA and a remediation plan is being prepared but has not yet been finalized
or approved by the EPA. The Company believes that a remediation plan based upon
the final EPA cleanup levels may be completed within five years, and that the
voluntary mediation will be completed prior to that date. However, the Company
cannot presently determine the amount of cleanup costs that will ultimately be
allocated to OxyChem, or the timing of such final allocation.
The Tacoma Facility has a RCRA treatment, storage, and disposal facility
permit which requires the plant to investigate groundwater contamination at the
site and to treat the groundwater to standards established in the permit.
Pursuant to this requirement, the plant has installed a groundwater extraction,
treatment and injection system (not included in the Tacoma Acquisition), which
withdraws the groundwater, removes volatile organic compounds (including
trichloroethylene and perchloroethylene) and returns the treated water to the
subsurface through wells that are designed to control off-site migration of
contamination. The plant has estimated that this groundwater system will operate
for at least 30 years. Certain other areas at and near the Tacoma Facility are
currently being voluntarily investigated under the oversight of the Washington
Department of Ecology ("DOE") or the EPA. OCC Tacoma has voluntarily proposed to
investigate certain substances that may exceed site-specific cleanup levels in
the embankment area of the Tacoma Facility next to the Hylebos Waterway and in a
subtidal and intertidal area adjacent to the northern portion of the Tacoma
Facility, and to submit investigation and remediation plans for consideration by
the EPA. If remediation plans are agreed upon, these areas would be remediated
either in conjunction with or prior to the general remediation of Hylebos
Waterway sediments.
OxyChem has been named as a Potentially Liable Party ("PLP") under state
law for remediation of, or it is voluntarily investigating, certain off-site,
upland disposal sites used by the Tacoma Facility. OCC Tacoma has agreed to
retain responsibility for these sites. Two other properties, located immediately
adjacent to the Tacoma Facility, have allegedly been affected by operations at
the Tacoma Facility. A groundwater contamination plume under the Tacoma Facility
extends to the northwest and west. This area is being addressed by the Tacoma
Facility's groundwater treatment system. In August 1997, OCC Tacoma acquired the
neighboring property to the south of the Tacoma Facility. Waste from the Tacoma
Facility was allegedly disposed in the past on the embankment area of this
neighboring property and allegedly impacted the groundwater quality. The
embankment area of this property is currently under investigation with the
oversight of the DOE and the EPA. Remediation of this embankment area will be
conducted, if necessary, in conjunction with the remediation of the adjacent
embankment area of the Tacoma Facility. At this time, the Company is not able to
determine the cost or scope of any such remediation of this neighboring
property.
In connection with the Tacoma Acquisition, OCC Tacoma agreed to indemnify
the Company with respect to certain environmental matters, which indemnity is
guaranteed by OxyChem. In general, the Company will be indemnified against
damages incurred for remediation of certain environmental conditions, for
certain environmental violations caused by pre-closing operations at the site
and for certain common law
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claims. The conditions subject to the indemnity are sites at which hazardous
materials have been released prior to closing as a result of pre-closing
operations at the site, including Commencement Bay (outside the Hylebos area),
off-site disposal sites in areas upland of the waterways and natural resource
damages (together, the "Excluded Environmental Conditions"). In addition, OCC
Tacoma will indemnify the Company for certain costs relating to releases of
hazardous materials from pre-closing operations at the site into Hylebos
Waterway, site groundwater containing certain volatile organic compounds that
must be remediated under the RCRA permit, and historical disposal areas on the
embankment adjacent to the site for maximum periods of 24 or 30 years, depending
upon the particular condition, after which the Company will have full
responsibility for any remaining liabilities with respect to such conditions.
OCC Tacoma may obtain an early expiration date for conditions other than the
Excluded Environmental Conditions by obtaining a discharge of liability or an
approval letter from a governmental authority. Although there can be no
assurance that the presently anticipated remediation work will be completed
prior to the expiration of the indemnity, or that additional remedial
requirements will not be imposed thereafter, the Company believes that the
residual liabilities, if any, can be managed in a manner that will not have a
material adverse effect on the Company.
OCC Tacoma will also indemnify the Company against certain other
environmental conditions and environmental violations caused by pre-closing
operations that are identified after the closing. Environmental conditions that
are subject to formal agency action within five years after closing or to an
administrative or court order within ten years after closing, and environmental
violations that are subject to formal agency action within two years after
closing or to an administrative or court order within five years after closing,
will be covered by the indemnity up to certain dollar amounts and time limits.
The Company will indemnify OCC Tacoma for environmental conditions and
environmental violations identified after the closing if (i) an order or agency
action is not imposed within the relevant time frames or (ii) applicable
expiration dates or dollar limits are reached.
The Company is responsible for remediation of environmental conditions and
correction of environmental violations caused by post-closing actions at the
site (other than post-closing actions by OCC Tacoma and its representatives) and
the Company will indemnify OCC Tacoma for such conditions and violations.
Moreover, if the Company takes certain actions which increase the cost of
remediation or result in the identification of new environmental conditions
after the closing, the Company will be liable for such costs. In particular, the
Company may not, without OCC Tacoma's consent, construct new facilities within
designated areas of the site that are being or will be remediated. In addition,
the Company must consult with OCC Tacoma prior to construction or expansion in
other areas of the site that requires the disturbance, excavation or remediation
of soil, sediment or groundwater. This could limit the Company's ability to
expand production capacity or to add material new capacity at the site.
The indemnity obtained from OCC Tacoma for the Excluded Environmental
Conditions, for expansion of or repairs to improvements at the site and for
certain other matters is personal to the Company and its affiliates and may not,
without OCC Tacoma's consent, be assigned to other persons.
The Company has reviewed the time frames currently estimated for
remediation of the known environmental conditions associated with Commencement
Bay, the Hylebos Waterway, the plant and adjacent properties and the Company
presently believes that it will have no material liability upon the termination
of OCC Tacoma's indemnity. However, the OCC Tacoma indemnity is subject to
limitations as to dollar amount and duration, as well as certain other
conditions, and there can be no assurance that such indemnity will be adequate
to protect the Company, that remediation will proceed on the present schedule,
that it will involve the presently anticipated remedial methods, or that
unanticipated conditions will not be identified. If these or other changes
occur, the Company could incur a material liability for which it is not insured
or indemnified.
PCI Canada Acquisition Indemnity. In the Purchase Agreement, ICI and its
affiliates (the "ICI Indemnitors") have agreed to indemnify the Company for
certain liabilities associated with environmental matters arising from
pre-closing operations of the PCI Canada Business. In particular, the ICI
Indemnitors will retain unlimited responsibility for environmental liabilities
associated with the Cornwall site, liabilities arising out of the discharge of
contaminants into rivers and marine sediments and liabilities arising out of
off-site disposal sites (the "Retained Environmental Liabilities"). The ICI
Indemnitors will also provide a general
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environmental indemnity for other pre-closing environmental matters. This
indemnity will terminate on October 31, 2007, and is subject to a limit of $25
million. The Company may not recover under the environmental indemnity until it
has incurred cumulative costs of $1 million, at which point the Company may
recover costs in excess of $1 million.
With respect to the Becancour and Dalhousie facilities, the ICI Indemnitors
will be responsible under the general environmental indemnity for 100% of the
costs incurred in the first five years after October 31, 1997 and for a
decreasing percentage of such costs incurred in the following five years.
Thereafter, the Company will be responsible for environmental liabilities (other
than the Retained Environmental Liabilities) at such facilities.
The Company will indemnify ICI for environmental liabilities arising out of
post-closing operations and for liabilities arising out of pre-closing
operations that are not indemnified by the ICI Indemnitors.
The Company believes that the indemnity provided by ICI will be adequate to
address the known environmental liabilities at the acquired facilities, and that
any residual liabilities incurred by the Company will not be material. However,
no assurance can be given that the indemnity will be adequate in the event that
new facts or conditions are identified, new or different statutory or regulatory
requirements are imposed, substantial changes in remedial or disposal techniques
or costs occur, or the anticipated timing of remedial requirements is changed.
Further, no assurance can be given that ICI or its affiliates will promptly pay
for liabilities covered by the indemnity as they arise, or that ICI and its
affiliates will have the financial resources to provide such indemnity. If these
or other changes occur, the Company could incur a material liability for which
it is not insured or indemnified.
Remediation Matters
General. Most of the plant sites on which the Company's manufacturing
operations are located have been used for many years. Although the Company
believes that prior operators utilized operating and disposal practices that met
industry standards at the time, state and federal laws relating to remediation
of historical disposal sites have become more stringent. As a result, to the
extent wastes have been released or disposed of at its manufacturing sites, the
Company has in the past been, and will in the future be, required to remediate
contaminated property or remove previously disposed wastes and address related
liabilities. In the past the Company has been subject to claims by neighboring
landowners and other third parties asserting claims for personal injury and
property damage allegedly caused by hazardous substances released into the
environment. However, the Company has resolved, or expects to resolve, such
claims without material liability.
Basic Complex. Environmental contamination, including soil and groundwater
contamination, has been identified within and adjoining the Basic Complex,
including land owned and occupied by the Company. The Company is cooperating
with the NDEP with respect to the issues affecting such property. In 1983,
Stauffer Chemical, Montrose and the NDEP entered into a Consent Order requiring
Stauffer Chemical and Montrose to install a groundwater intercept system to
analyze for designated organic chemicals identified in the groundwater outside
Stauffer Chemical's plant site and to remove certain chemicals to levels
specified in the Consent Order. At that time, the NDEP made a finding that the
organic contamination that had migrated off site did not represent an imminent
or substantial endangerment to human health or the environment. In consideration
for the companies' implementation of the groundwater intercept system, the State
of Nevada and the NDEP granted the companies a release and covenant not to sue
under certain environmental statutes for any civil liabilities or claims arising
out of the presence of the organics covered by the Consent Order, subject to the
compliance by the companies with the Consent Order. The companies have
implemented the groundwater intercept system, and it meets the treatment levels
specified in the Consent Order. Although the Company is not a party to the
Consent Order, the Company contractually agreed, in connection with its
acquisition of the Henderson facility, to operate the system and to pay for 50%
of certain operating and maintenance costs for the system. Montrose agreed to
pay the other 50% of such costs, and ZENECA must pay for remaining obligations
arising as a result of the Consent Order. While it is possible that these costs
could increase substantially if the existing groundwater treatment system must
be modified or expanded, or additional groundwater remediation is required, the
Company believes that some of these costs would be borne
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by Montrose and ZENECA, and the remaining costs would not have a material
adverse effect on the Company. At the present time, however, the Company cannot
reasonably estimate the scope of any other operating and maintenance
requirements or their probable cost.
PCAC, along with Stauffer Management Company ("Stauffer Management") (a
ZENECA subsidiary), Montrose, Kerr McGee, Timet and Chemical Lime entered into a
Consent Agreement in 1991 with the NDEP under which the parties agreed to
provide reports summarizing documented information regarding historical waste
disposal at each of their sites at the Basic Complex. These reports were Phase I
of the "Environmental Conditions Assessment" (or "ECA") process for the Basic
Complex. PCAC and Stauffer Management submitted the required report for the PCAC
plant site in April 1993. The Phase I Report identified both present and former
waste management areas, including disposal sites for agricultural chemicals
formerly manufactured at the site and ponds used for disposal of chlor-alkali
waste water.
PCAC and Stauffer Management have entered into a Phase II agreement with
the NDEP, which would cover additional investigation of the plant site,
including additional soil and groundwater sampling. The parties have received a
Letter of Understanding which identifies the areas that will be addressed in
Phase II. Montrose also filed a report covering its leased portions of the
Henderson property and has negotiated a Phase II agreement with the NDEP. In
certain instances, PCAC, Stauffer Management and Montrose will cooperate in the
preparation of information required for Phase II.
PCAC and Stauffer Management also participated as members of the Henderson
Industrial Site Steering Committee in the submission in April 1993 of a report
regarding the Basic Complex common disposal areas. Historical waste management
areas identified in the report included a landfill, waste water transmission
ditches and waste water disposal ponds. These areas were used in the past for
disposal of wastes manufactured in the Basic Complex. Additional investigations
of the Basic Complex common area pursuant to a Phase II agreement are nearing
completion. Limited remediation of asbestos contamination is ongoing, and it is
likely that further remediation of soil or groundwater may follow completion of
the Phase II investigations. Because the costs of future remedial obligations
cannot be determined until the investigation is complete, it is not possible to
determine whether, if at all, such costs will exceed amounts currently reserved
with respect to such liabilities.
The EPA is not a party to the various agreements with the NDEP and
therefore is not bound by the terms of such agreements, nor is it bound by the
release and covenant not to sue set forth in the Consent Order. The EPA is not
presently pursuing any enforcement action relating to remediation of historical
waste disposal at PCAC or the Basic Complex common area. There can be no
assurance, however, that the EPA will not attempt to exercise its jurisdiction
under federal environmental statutes, including CERCLA, with respect to the
Basic Complex common areas or the individual plant sites in the future. If the
EPA elects to exercise its jurisdiction over the Basic Complex or the Henderson
plant and pursue an independent enforcement action, it is possible that the
costs of remediation would substantially exceed those that the Company currently
anticipates under the terms of the NDEP Consent Agreement.
The Company believes that the remediation costs related to the Company's
chlor-alkali facilities will not be material and that it will be reimbursed
under the ZENECA Indemnity or the PAI Sellers' Indemnity or by other responsible
parties for substantially all of the non-chlor-alkali related remediation costs
that may be incurred in connection with historical waste disposal at the
Henderson plant and the Basic Complex common areas. The inactive waste
management areas at the Henderson facility include a drum disposal area, ponds
and other waste disposal areas at which significant quantities of wastes from
historical non-chlor-alkali manufacturing operations were disposed of or
accumulated. Generally, these historical disposal areas have been closed by
leaving the wastes in place and capping them with a clay cover to minimize the
migration of any contaminants. Groundwater monitoring wells were installed
downgradient to detect any significant contaminant migration. To date, the
results from these wells and communications with the NDEP indicate that on-site
containment will continue to be an acceptable long-term waste management
solution for these historical wastes. However, if off-site disposal is required,
because of more stringent disposal standards in the future or unanticipated
significant groundwater impacts from these areas, the cost of such disposal
could be substantial and could, together with other remediation obligations,
approach or exceed the amount available under the
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ZENECA Indemnity, the PAI Sellers' Indemnity or by other responsible parties. No
assurance can be given that the Company will not be required to incur
significant expenses for remedial and other liabilities under environmental laws
in connection with the Henderson facility or operations, whether at or near the
Henderson facility or at off-site locations, or that such expenses will be
reimbursed under the ZENECA Indemnity or the PAI Sellers' Indemnity or by other
responsible parties. See "Risk Factors -- Environmental Regulation."
Antioch Plant. Kemwater's Antioch plant received a Clean-up and Abatement
Order from the California Regional Water Quality Control Board (the "RWQCB")
relating to contaminated groundwater. The RWQCB has requested Kemwater to
prepare a work plan for additional investigation and remediation of the
groundwater. Kemwater is preparing a plan for additional investigation and is
reviewing the costs associated with remediation technologies that would meet the
state standards. In the event that treatment of the ground water is necessary,
there can be no assurance that it would not have a material adverse effect on
Kemwater.
INSURANCE
The Company maintains general liability insurance and property and business
interruption insurance, as well as worker's compensation insurance. In
accordance with customary industry practice, the Company is not fully insured
against all risks incident to its business. Because of the nature of industry
hazards, it is possible that liabilities for pollution and other damages arising
from a major occurrence could exceed insurance coverage or policy limits or that
such insurance may not be available at reasonable rates in the future. Any such
liabilities could have a material adverse effect on the Company.
LEGAL PROCEEDINGS
The Company has been named as a defendant in various legal proceedings
arising in the ordinary course of its business. In the opinion of management,
none of such litigation is material to the Company's financial statements.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF PAAC
The directors and executive officers of PAAC as of November 1, 1997 are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William R. Berkley................... 51 Chairman of the Board
Michael J. Ferris.................... 53 President and Chief Executive Officer and
Director
Philip J. Ablove..................... 57 Vice President and Chief Financial Officer and
Director
Jerry B. Bradley..................... 51 Vice President, Human Resources
Verrill M. Norwood................... 66 Vice President, Environmental and Regulatory
Affairs
Kent R. Stephenson................... 48 Vice President, General Counsel and Secretary
Ronald E. Ciora...................... 56 President of All-Pure
James E. Glattly..................... 50 President of PCAC
Norman E. Thogersen.................. 50 President of PCI Canada and PCI Carolina
Andrew M. Bursky..................... 41 Director
Donald J. Donahue.................... 73 Director
Richard C. Kellogg, Jr............... 46 Director
Paul J. Kienholz..................... 66 Director
Jack H. Nusbaum...................... 57 Director
Thomas H. Schnitzius................. 55 Director
</TABLE>
The Board of Directors has an Executive Committee and an Audit Committee.
The current members of the Executive Committee are Messrs. Berkley, Bursky,
Ferris and Donahue. The current members of the Audit Committee are Messrs.
Donahue and Nusbaum. The current members of the Compensation and Stock Option
Committee are Messrs. Berkley, Bursky and Donahue.
William R. Berkley has been a director of PAAC since its formation in March
1995 and Chairman of the Board and a director of Pioneer since its formation in
1987. He also serves as Chairman of the Board of several companies which he
controls or founded. These include W.R. Berkley Corporation, a property and
casualty insurance holding company, and Interlaken Capital, Inc., a private
investment and consulting firm. Mr. Berkley is also a director of Strategic
Distribution, Inc., a publicly traded distributor of maintenance and safety
products to industry.
Michael J. Ferris has served as President and Chief Executive Officer of
PAAC and Pioneer since January 5, 1997. Prior to joining PAAC and Pioneer, he
was employed by Vulcan Materials Company, a company engaged in the production of
industrial materials and commodities, from March 1974 to January 1997, where he
served as Executive Vice President, Chemicals from 1996 to 1997. Mr. Ferris is
also a director of ChemFirst, Inc., a specialty chemical company.
Philip J. Ablove has served as Vice President and Chief Financial Officer
of PAAC and Pioneer since March 1996, after serving as Acting Chief Financial
Officer since October 1995, and has been a director of PAAC since its formation
in March 1995 and a director of Pioneer and its corporate predecessor since
January 1991. He was President and Chief Executive Officer of Pioneer's
corporate predecessor from January 1991 to July 1992, and he served as a
consultant to such entity from October 1990 to January 1991. Mr. Ablove served
as a consultant to Pioneer from October 1995 to March 1996. He has served as a
consultant to various companies since 1983.
Jerry B. Bradley has served as Vice President of Human Resources of PAAC
and of Pioneer since October 1995. From May 1993 to October 1995, Mr. Bradley
was President of Tandem Partners, Inc., a human resources consulting firm. From
1978 to 1993 he was employed by Occidental Chemical Corporation, where he served
as Vice President, Human Resources from 1978 to 1993.
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Verrill M. Norwood has served as Vice President of Environmental and
Regulatory Affairs of PAAC since the consummation of the PAI Acquisition on
April 20, 1995, and as Vice President of Environmental and Regulatory Affairs of
PAI since 1990. Prior to joining PAI, Mr. Norwood was employed by Olin
Corporation from 1973 to 1990, where he served as Vice President, Environmental
Affairs from 1978 to 1990.
Kent R. Stephenson has served as Vice President, General Counsel and
Secretary of PAAC since the consummation of the PAI Acquisition on April 20,
1995, as Vice President, General Counsel and Secretary of PAI since June 1995,
and as Vice President, General Counsel and Secretary of PAI since 1993. Prior to
joining PAI, he was employed by Zapata Corporation, a publicly traded gas
services company, from 1978 to 1993. Mr. Stephenson served as Senior Vice
President, General Counsel and Secretary of Zapata from 1987 to 1993.
Ronald E. Ciora has served as President of All-Pure since November 1995.
From March 1989 to November 1995, he was President and Chief Operating Officer
of DPC Industries, Inc., DX Distribution, Inc. and DXI Industries, Inc., which
are companies engaged in chemical distribution, chlorine repackaging and bleach
manufacturing.
James E. Glattly has served as President of PCAC since December 1996, and
served as Vice President of Sales and Marketing of PAAC from April 1995 to
December 1996 and as Vice President of Sales and Marketing of PAI from 1988 to
December 1996. Prior to joining PAI, he was employed by Occidental Chemical
Corporation from 1985 to 1988 and from 1974 to 1983, where he served in various
capacities, including Western Regional Manager and various other sales
positions. From 1983 to 1985 Mr. Glattly served as General Manager of HCI
Chemical.
Norman E. Thogersen has served as President of PCI Canada and PCI Carolina
since the consummation of the PCI Canada Acquisition on October 31, 1997. Prior
to the PCI Canada Acquisition, Mr. Thogersen served as the Chairman, President
and Chief Executive Officer of ICI Canada since 1995, and as Vice President and
General Manager of the PCI Canada Business since 1988 . He was employed by ICI
Canada for 27 years.
Andrew M. Bursky has been a director of PAAC since its formation in March
1995 and a director of Pioneer since January 1994. Mr. Bursky has been Managing
Director of Interlaken Capital, Inc. since May 1980. He has been Chairman of the
Board of Strategic Distribution, Inc. since July 1988. Mr. Bursky was an
executive officer of Idle Wild Farm, Inc., a privately owned manufacturer of
frozen food, and Blue Lustre Products, Inc., a privately owned company engaged
in the sale and leasing of carpet cleaning equipment and other carpet cleaning
products, which in October 1993 and October 1995, respectively, while he was an
executive officer, filed chapter 11 petitions for reorganization under federal
bankruptcy law.
Donald J. Donahue has been a director of PAAC since its formation in March
1995 and a director of Pioneer since February 1988. Mr. Donahue served as
Chairman of the Board of Magma Copper Company from 1987 to 1996 and as Chairman
of Nacolah Holding Co., a life and health insurance company, from 1990 to 1993.
From 1984 to 1985, Mr. Donahue served as Chairman and was a director of KMI
Continental Group, Inc., a natural resource conglomerate. From 1975 to 1984, he
was Vice Chairman and a director of Continental Group, Inc. Mr. Donahue is a
director of Chase Brass Industries, Inc. and a director of Counsellors Tandem
Securities Fund, Inc. and 15 other registered investment companies managed by
EMW Warburg Pincus Counsellors, Inc.
Richard C. Kellogg, Jr. has been a director of PAAC and Pioneer since April
1995. He is currently Chairman of the Board of Basic Investments, a utility and
land development holding company, and is a director of Grupo Transmerquin SA, a
chemical distribution holding company. He served as Chairman of the Board and
Chief Executive Officer of PAAC and as President of Pioneer from April 1995 to
January 1997. He was a founder of PAI, serving as its Chairman of the Board,
Chief Executive Officer and a director from its inception in 1988 to January
1997. From 1983 to 1993, Mr. Kellogg also served as Vice President of Trans
Marketing Houston, Inc. ("TMHI"), an international trading company. TMHI filed
for bankruptcy in April 1993 and a liquidation plan was approved by the federal
bankruptcy court in December 1993.
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Paul J. Kienholz has been a director of PAAC and Pioneer since June 1996.
He served as President and Chief Operating Officer of PAAC from the consummation
of the PAI Acquisition on April 20, 1995 until his retirement in November 1996,
and as President of PAI from 1988 until his retirement. Prior to joining PAI,
Mr. Kienholz was employed by PPG Industries, Inc. from 1959 to 1988, where he
served in various capacities, including Director, Chlor-Alkali Products.
Jack H. Nusbaum has been a director of PAAC since its formation in March
1995 and a director of Pioneer since 1988. Mr. Nusbaum is a Senior Partner and
Chairman of the New York law firm of Willkie Farr & Gallagher, where he has been
a partner for more than the past twenty-five years. He is a director of W.R.
Berkley Corporation, Fine Host Corporation, Strategic Distribution, Inc., The
Topps Company, Inc. and Prime Hospitality Corp.
Thomas H. Schnitzius has served as a director of each of Pioneer and PAAC
since the consummation of the PAI Acquisition on April 20, 1995, and as a
director of PAI since October 1993. He has been a principal in the Houston
investment banking firm of Schnitzius & Vaughan since its formation in October
1987. Prior to 1987, he was a principal in the investment banking firm of
Schnitzius & Co., Ltd.
EXECUTIVE COMPENSATION
Executive officers of PAAC are compensated in their capacity as executive
officers of Pioneer or certain of its other subsidiaries. The following table
sets forth certain information concerning compensation for service to Pioneer
and its subsidiaries paid (i) during the last three fiscal years to William R.
Berkley, Chairman of the Board of Pioneer, who received no compensation for
acting in a capacity similar to that of a chief executive officer, (ii) during
the period from April 21, 1995 to December 31, 1995 and during 1996, to Richard
C. Kellogg, Jr., who acted in a capacity similar to that of a chief executive
officer during such period, (iii) during the period from April 21, 1995 to
December 31, 1995 and during 1996, to Pioneer's other four most highly
compensated executive officers serving during 1996 and (iv) during the period
from April 21, 1995 to December 31, 1995 and during 1996, to Paul J. Kienholz,
who retired as President and Chief Operating Officer of PAAC on November 30,
1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS ALL OTHER
NAME AND PRINCIPAL ------------------------------- OTHER ANNUAL ------------ COMPEN-
POSITION YEAR(1) SALARY($) BONUS($) COMPENSATION(2)($) OPTIONS(3) SATION($)
------------------ ------- --------- -------- ------------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
William R. Berkley 1996 8,000(4) 0 22,000 0 0
Chairman of the Board 1995 8,000(4) 0 22,000 0 0
1994 0 0 6,000 0 0
Richard C. Kellogg, Jr. 1996 300,000 75,000 0 0 3,750(6)
President(5) 1995 206,731 135,900 0 131,691 4,590(6)
James C. Glattly 1996 193,336 50,000 0 0 3,750(6)
President, PCAC(7) 1995 114,327 69,675 0 53,500 2,453(6)
Philip J. Ablove 1996 183,318 40,000 0 0 1,406(6)
Vice President and
Chief Financial Officer
Verrill M. Norwood 1996 172,497 25,000 0 0 10,890(8)
Vice President, Environmental, 1995 104,423 58,793 0 26,750 320,893(9)
Health & Safety, PCAC
Ronald E. Ciora 1996 165,000 50,000 0 0 2,062(6)
President, All-Pure 1995 18,827 -- 0 16,050 45,000(10)
Paul J. Kienholz 1996 250,000 50,000 0 0 16,623(12)
President, PCAC(11) 1995 172,243 124,125 0 56,175 539,092(13)
</TABLE>
- ---------------
(1) Each of Messrs. Kellogg, Kienholz, Glattly and Norwood were officers of PAI
on April 20, 1995, when PAI was acquired by Pioneer. After the PAI
Acquisition, each served as an executive officer of Pioneer (including
service as an executive officer of one or more subsidiaries of Pioneer),
and information with respect to 1995 compensation is provided for each only
with respect to services provided to Pioneer and its subsidiaries during
the portion of the year beginning on April 21, 1995. Information with
respect to Mr. Ablove, who became Vice President and Chief Financial
Officer of Pioneer on March 8, 1996, and
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Mr. Ciora, who became President of All-Pure on December 1, 1995, is
provided for the portions of the relevant years during which each served.
(2) Mr. Berkley is not an officer of Pioneer. As a director of Pioneer he
receives an annual retainer, all or a portion of which has been paid
through the delivery of shares under Pioneer's 1993 Non-Employee Director
Stock Plan. The retainer for service as a director during each of 1995 and
1996 was $22,000 per year, with payment for 1996 in the form of 2,700
shares of Class A Common Stock and $7,994 in cash, and with payment for
1995 in the form of 3,320 shares of Class A Common Stock. The $6,000 in
payment of the retainer and director's meeting fees for 1994 was paid in
the form of 4,000 shares of Class A Common Stock.
(3) Expressed in terms of the numbers of shares of Pioneer's Class A Common
Stock underlying options granted during the year. All such options were
granted under Pioneer's 1995 Stock Incentive Plan.
(4) Represents director's meeting fees.
(5) Mr. Kellogg resigned as President of Pioneer and PAAC on January 4, 1997
and no longer serves as an executive officer.
(6) Represents amounts contributed to match a portion of the employee's
contributions under a 401(k) plan.
(7) Mr. Glattly served as Vice President, Sales and Marketing of PAAC and PCAC
until December 1, 1996, when he was named President of PCAC.
(8) Includes (a) $7,140, representing payment under a supplemental pension
plan, and (b) $3,750, which was contributed to match a portion of
contributions under a 401(k) plan.
(9) Includes (a) $318,575, representing payment upon the termination of a
salary continuation agreement in effect since 1993, together with payment
for the resulting tax liability, and (b) $2,318, which was contributed to
match a portion of contributions under a 401(k) plan.
(10) Represents an amount paid as compensation for the loss of benefits from a
previous employer.
(11) Mr. Kienholz served as President of PCAC until December 1, 1996. He retired
on January 1, 1997, and no longer serves as an executive officer
(12) Includes (a) $12,873, representing payment under a supplemental pension
plan, and (b) $3,750, which was contributed to match a portion of
contributions under a 401(k) plan.
(13) Includes (a) $533,206, representing payment upon the termination of a
salary continuation agreement in effect since 1988, together with payment
for the resulting tax liability, and (b) $5,886, which was contributed to
match a portion of contributions under a 401(k) plan.
Pioneer has adopted the 1995 Stock Incentive Plan (the "1995 Stock
Incentive Plan"), under which 802,500 shares of Class A Common Stock of Pioneer
were reserved for issuance pursuant to the grant of stock based awards to
employees of Pioneer and its subsidiaries, including PAAC. Such awards may
include incentive stock options, nonqualified stock options, stock appreciation
rights ("SARs"), restricted stock awards, phantom stock unit awards, performance
share unit awards and other forms of equity-based incentive compensation, or
combinations of the foregoing. No more than 133,750 shares of Class A Common
Stock may be issued to any one person pursuant to awards of options or SARs
during any one year. Share numbers referred to above and in the following
discussions have each been adjusted as a result of the 7% stock dividend paid on
January 7, 1997. Applicable stock option exercise prices have also been adjusted
as a result of the stock dividend. Similar adjustments will occur as a result of
a 7% stock dividend to be paid on December 18, 1997.
On April 20, 1995, options exercisable for approximately 535,000 shares of
Class A Common Stock of Pioneer were granted to the employees of PAAC and its
subsidiaries pursuant to the 1995 Stock Incentive Plan. Such options are
exercisable at a price of $6.07 per share, the fair market value of the Class A
Common Stock as of the date of grant. None of the options is exercisable prior
to April 20, 1998.
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<PAGE> 101
In 1996 Pioneer adopted the Key Executive Stock Grant Plan, under which
535,000 shares of Class A Common Stock of Pioneer were reserved for issuance
pursuant to the grant of stock based awards to senior executives of Pioneer and
its subsidiaries, including PAAC. Such awards are to be made in the form of
phantom stock awards under Pioneer's incentive compensation bonus plan, payable
upon vesting in shares of Class A Common Stock. No awards have been made under
the Key Executive Stock Grant Plan.
OPTION GRANTS IN LAST FISCAL YEAR
In 1996, Philip J. Ablove was the only named executive officer who received
a grant of options to purchase Class A Common Stock of Pioneer. The following
table provides information with respect to such grant:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF TOTAL ANNUAL RATES OF STOCK
SHARES OPTIONS EXERCISE PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME(1) GRANTED(#) 1996 (PER SHARE) DATE 5%($) 10%($)
------- ----------- ---------------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Philip J. Ablove...... 53,500 100.0 $5.61 6/04/06 $188,753 $478,378
</TABLE>
- ---------------
(1) The options were granted under Pioneer's 1995 Stock Incentive Plan at fair
market value on the date of grant. The options granted are exercisable in
17,833-share increments on June 4 in the years 1999 through 2001.
(2) These amounts represent assumed rates of appreciation in market value from
the date of grant until the end of the option term, at the rates set by the
Securities and Exchange Commission, and therefore are not intended to
forecast possible future appreciation, if any, in Pioneer's stock price.
Pioneer did not use an alternative formula for a grant date valuation, as it
is not aware of any formula which will determine with reasonable accuracy a
present value based on future unknown or volatile factors.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table shows with respect to the named executive officers the
number of shares covered by both exercisable and non-exercisable stock options
as of December 31, 1996, with respect to options to purchase Class A Common
Stock of Pioneer. Also reported are the values for in-the-money options which
represent the positive spread between the exercise price of any such existing
stock options and the year-end price of the Class A Common Stock of Pioneer. No
shares of Class A Common Stock of Pioneer were issued during 1996 to any
individual as the result of the exercise of stock options.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISABLE
OPTIONS AT DECEMBER 31, IN-THE-MONEY OPTIONS AT
1996(#) DECEMBER 31, 1996($)(1)
---------------------------- ----------------------------
NAME(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard C. Kellogg, Jr........... -0- 131,691 -0- -0-
James E. Glattly................. -0- 53,500 -0- -0-
Philip J. Ablove................. -0- 53,500 -0- -0-
Verrill M. Norwood, Jr........... -0- 26,750 -0- -0-
Ronald E. Ciora.................. -0- 16,050 -0- -0-
Paul J. Kienholz(2).............. -0- 56,175 -0- -0-
</TABLE>
- ---------------
(1) The closing price of the Class A Common Stock of Pioneer on December 31,
1996, the last trading day of Pioneer's fiscal year, was $5.00 per share.
(2) As a result of Mr. Kienholz' retirement on December 31, 1996, the options
held by him expired on March 31, 1997.
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<PAGE> 102
PENSION PLAN
PCAC's pension plan provides defined benefit retirement coverage to the
executive officers of Pioneer and substantially all of PCAC's employees. At the
normal retirement age of 65, participants receive benefits based on their
credited service and their covered compensation for the average of their highest
five complete consecutive plan years out of their last ten complete consecutive
plan years. Covered compensation under the plan includes base pay, overtime and
shift differential pay and certain annual performance and sales incentive
programs and commissions, but excludes all other items of compensation. However,
the Internal Revenue Code limits remuneration which may be taken into account
(subject to certain grandfather rules) under the pension plan for 1995 to
$150,000. The benefits in the table set forth below are computed as a straight
life annuity at age 65. Benefits are not subject to any deduction for social
security since the basic benefit formula incorporates the average social
security breakpoint in calculating the benefit. Pioneer's other operating
subsidiaries do not have similar plans.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE(1)
---------------------------------------------------
REMUNERATION 15 20 25 30 35
------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$125,000......................... $27,153 $36,204 $45,255 $54,306 $63,357
150,000......................... 32,778 43,704 54,630 65,556 76,482
175,000......................... 32,778 43,704 54,630 65,556 76,482
200,000......................... 32,778 43,704 54,630 65,556 76,482
225,000......................... 32,778 43,704 54,630 65,556 76,482
250,000......................... 32,778 43,704 54,630 65,556 76,482
300,000......................... 32,778 43,704 54,630 65,556 76,482
400,000......................... 32,778 43,704 54,630 65,556 76,482
450,000......................... 32,778 43,704 54,630 65,556 76,482
500,000......................... 32,778 43,704 54,630 65,556 76,482
</TABLE>
- ---------------
(1) The estimated years of credited service for each of the named executive
officers of PAAC as of December 31, 1996, were: Mr. Kellogg -- 5 years; Mr.
Kienholz -- 7 years; Mr. Glattly -- 7 years; and Mr. Norwood -- 4 years.
Messrs. Kienholz and Norwood also participate in a supplemental retirement
plan which was established by Pioneer in 1995 in order to fund amounts due to
such individuals under agreements reached when they were hired in 1988 and 1993,
respectively. Under such plan, Mr. Kienholz began receiving supplemental
retirement payments in the amount of $1,073 per month after he reached age 65 in
December 1995, and Mr. Norwood began receiving supplemental retirement payments
in the amount of $1,428 per month after he reached age 65 in July 1996.
EMPLOYMENT AGREEMENTS AND SEVERANCE AND CHANGE-IN-CONTROL ARRANGEMENTS
On April 20, 1995, Pioneer entered into a five-year employment agreement
with Richard C. Kellogg, Jr. pursuant to which Mr. Kellogg served as President
of Pioneer through January 1997 and continues to serve as an employee of
Pioneer. Pursuant to the terms of the agreement, Pioneer will continue to pay
Mr. Kellogg's annual salary of $300,000 per year through April 20, 2000.
On April 20, 1995, PCAC extended its existing employment agreement with Mr.
Kienholz, pursuant to which Mr. Kienholz served as President of PCAC. The
agreement provided for an annual salary of at least $200,000, and for continuing
employment until October 31, 1996. Mr. Kienholz retired on December 31, 1996 and
thereafter he has provided consulting services to the Company under an agreement
which provides for consideration of $2,500 per month. The agreement terminates
on December 31, 1997. On April 20, 1995, Pioneer entered into three-year
employment agreements with Messrs. Glattly and Norwood. The employment
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<PAGE> 103
agreement with Mr. Glattly provides for an annual salary of at least $165,000.
The employment agreement with Mr. Norwood provides for an annual salary of at
least $143,100.
On March 8, 1996, Philip J. Ablove, who is a director of Pioneer and PAAC,
was elected Vice President and Chief Financial Officer of Pioneer, after serving
as acting Chief Financial Officer and a management consultant to Pioneer since
October 1995. Pioneer has agreed to pay Mr. Ablove an annual salary of $225,000.
Following any change of control during his employment by Pioneer, he would be
entitled to a severance payment equal to at least 12 months' salary.
On January 4, 1997, Pioneer entered into a three-year employment agreement
with Michael J. Ferris, pursuant to which Mr. Ferris serves as President and
Chief Executive Officer of Pioneer and PAAC. The agreement provides for an
annual salary of not less than $350,000, and that during 1997 Mr. Ferris will
also receive a cash bonus of not less than $200,000, payable quarterly in
arrears.
Under each of the employment agreements currently in effect, the employee
will be entitled to receive other benefits made available to executive officers
and to receive bonus compensation in accordance with any management incentive
plan established by the Board of Directors. Each of the employment agreements
provides that if the executive's employment thereunder is terminated by the
employer without "just cause" or by the employee for "good reason" (as such
terms are defined in the employment agreement), the executive shall continue to
receive his annual salary until the last date of the employment term or, if
later, the first anniversary of the termination date, subject to certain
provisions for offset, and will continue to receive certain other benefits
provided for in the agreement. Termination following a change in control does
not constitute "just cause" or "good reason", but "good reason" does include the
failure of any successor to the employer by operation of law to assume the
employment agreement.
Pioneer and Mr. Ferris entered into a Stock Purchase Agreement dated
January 4, 1997, in connection with Mr. Ferris' employment as President and
Chief Executive Officer of Pioneer. In accordance with the terms of the
agreement, on February 13, 1997, Pioneer sold 150,000 shares of Pioneer's Class
A Common Stock to Mr. Ferris for $5.346 per share, or $801,900 in the aggregate.
The price paid was the average of the closing sale prices of the Common Stock as
reported on the NASDAQ National Market System on the days during which the
Common Stock was traded during the 30 consecutive trading days immediately
preceding the date of the agreement. The shares were sold to Mr. Ferris in
reliance on the exemption provided by Section 4(2) of the Securities Act.
On January 4, 1997, Mr. Ferris was granted an incentive stock option to
purchase 133,750 shares of Class A Common Stock under Pioneer's 1995 Stock
Incentive Plan, at an exercise price of $5.00 per share, the fair market value
of a share of Class A Common Stock on the date of grant. The option is
exercisable in 20,000-share increments on January 4 in the years 1998 through
2003, with an additional 13,750 exercisable on January 4, 2004. Mr. Ferris was
also granted a non-qualified stock option to purchase 191,250 shares of Class A
Common Stock at an exercise price of $5.00 per share. The option is exercisable
in 38,250-share increments on January 4 in the years 1998 through 2002. As a
part of his compensation package, it was also agreed that Mr. Ferris will
receive a future grant of a non-qualified stock option to purchase 25,000 shares
of Class A Common Stock on January 4 in each of the years 1998, 1999 and 2000.
Shares subject to the options will have exercise prices of $6.00, $7.00 and
$8.00, respectively.
COMPENSATION OF DIRECTORS
Directors of PAAC do not receive a fee for service as directors. Directors
of PAAC are reimbursed for travel expenses incurred in attending board and
committee meetings.
All of the directors of PAAC also serve as directors of Pioneer. In 1992,
the Board of Directors of Pioneer established a policy under which each director
who is not also an employee of Pioneer receives an annual retainer and a fee for
each meeting attended. Pursuant to Pioneer's 1993 Non-Employee Director Stock
Plan, Pioneer granted each non-employee director who served throughout the year
2,700 shares of Class A Common Stock of Pioneer and $7,994 in cash in payment of
the 1996 annual retainer of $22,000, and each director was paid $2,000 for each
Board of Directors meeting attended in 1996. Mr. Ablove received 501 shares and
$1,489
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<PAGE> 104
in cash in payment of the retainer as a result of his service as a non-employee
director during a portion of the year. Mr. Bursky has been granted a
non-qualified stock option to purchase 85,000 shares of Class A Common Stock at
an exercise price of $5.56 per share. The option is exercisable in increments of
40,000 shares, 20,000 shares, 20,000 shares and 5,000 shares on May 15 in the
years 1998 to 2001, respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
William R. Berkley, a member of the Compensation and Stock Option Committee
of PAAC and Pioneer, is a director of PAAC and the Chairman of the Board of
Directors of Pioneer. Mr. Berkley (who may be deemed to beneficially own all
shares of Pioneer common stock held by the Interlaken Partnership) may be deemed
to beneficially own approximately 59.9% of the voting power of Pioneer. See
"Stock Ownership."
CERTAIN TRANSACTIONS
PCAC, a wholly-owned subsidiary of PAAC, is party to an agreement with
Basic Investments, an entity in which PCAC owns a minority interest (and which
constitutes part of the Basic Ownership held for the benefit of the sellers in
the PAI Acquisition), for the delivery of water to the Henderson production
facility. The agreement provides for the delivery of a minimum of eight million
gallons of water per day. The agreement expires on December 31, 2014, unless
terminated earlier in accordance with the provisions thereof. Basic Investments
also charges PCAC and other companies in the Basic Complex for power
distribution services. For the year ended December 31, 1996, Basic Investments
charged PCAC approximately $500,000 for the provision of such services. At
December 31, 1996, net receivables from Basic Investments were $300,000. See
"Business -- Basic Investments."
PCAC sells certain services to and purchases steam from Saguaro Power. For
the year ended December 31, 1996, sales to Saguaro Power totaled $1.0 million
and purchases from Saguaro Power totaled $1.8 million; as of December 31, 1996,
Saguaro Power owed PCAC $0.1 million and PCAC owed Saguaro Power $0.2 million.
See "Business -- Saguaro Power."
PCAC is also party to a development management agreement with Victory
Valley, an entity controlled by Basic Investments and in which PCAC owns a
minority interest (and which constitutes part of the Basic Ownership held for
the benefit of the sellers in the PAI Acquisition). Pursuant to the agreement,
Victory Valley manages the development of certain real property in Henderson,
Nevada which is a portion of the Excess Land owned by PCAC.
PCAC sells certain products to Kemwater at market prices. Sales to Kemwater
totaled $8.8 million during the year ended December 31, 1996. Kemwater provides
transportation services to PCAC at market prices which totaled $1.8 million for
1996.
PAI sold caustic soda to TMHI for export from 1988 to 1993 and participated
in certain joint insurance programs. Mr. Kellogg, who was an executive officer
and director of PAI, co-founded TMHI and served as a director and executive
officer of TMHI. PAI wrote off $1.3 million of receivables in 1992 and charged
an additional $1.1 million against income in 1993 related to sales to TMHI that
were deemed uncollectible. In April 1993, TMHI filed for bankruptcy.
In connection with the consummation of the PAI Acquisition, Pioneer issued
and sold (i) to the Interlaken Partnership, 3,039,772 shares of Class A Common
Stock of Pioneer for an aggregate purchase price of $15 million, and (ii) to Mr.
Kellogg, 515,000 shares of Class A Common Stock of Pioneer for an aggregate
purchase price of approximately $2.5 million. An entity controlled by Mr.
Berkley is the sole general partner of the Interlaken Partnership, and Mr.
Berkley also owns approximately 32.3% of the limited partnership interests in
the Interlaken Partnership. The Interlaken Partnership beneficially owns
approximately 34.9% of the voting power of Pioneer, and William R. Berkley,
Chairman of Pioneer and PAAC (who may be deemed to beneficially own all shares
of Pioneer common stock held by the Interlaken Partnership), may be deemed to
beneficially own approximately 59.9% of the voting power of Pioneer. Mr. Berkley
has the right to vote and otherwise act in respect of the shares of Pioneer
beneficially owned by the Interlaken Partnership in his
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<PAGE> 105
capacity, through controlled entities, as the sole general partner of the
Interlaken Partnership. See "Stock Ownership."
Upon consummation of the PAI Acquisition, Interlaken Capital, Inc., an
entity controlled by Mr. Berkley, received a fee of approximately $1.6 million
from PAAC in connection with financial advisory services with respect to the PAI
Acquisition and related financings. The firm was also paid a fee of $300,000,
plus reimbursement of reasonable out-of-pocket expenses, for services rendered
in connection with the KWT transaction. The firm was paid a fee of approximately
$1.3 million, plus reimbursement of reasonable out-of-pocket expenses, for
services rendered in connection with the Tacoma Acquisition. The firm was paid a
fee of approximately $2.36 million, plus reimbursement of reasonable
out-of-pocket expenses, for services rendered in connection with the PCI Canada
Acquisition.
Upon consummation of the PAI Acquisition, Pioneer and PAI entered into
employment agreements with the executive officers of PAI, and Pioneer granted to
such executive officers options to purchase shares of Pioneer's Class A Common
Stock pursuant to its 1995 Stock Incentive Plan. See "Management -- Executive
Compensation."
PAAC and its subsidiaries (the "PAAC Group") have entered into a tax
sharing agreement (the "Tax Sharing Agreement") with Pioneer and the other
members of the consolidated group (the "Pioneer Group") of which Pioneer is the
common parent. Under the Tax Sharing Agreement, (i) Pioneer is obligated to pay
the federal income tax liability of the Pioneer Group and (ii) the PAAC Group is
required to make tax sharing payments to Pioneer in an amount equal to its share
of the Pioneer Group's consolidated cash tax liability, if any. In determining
the PAAC Group's share of the Pioneer Group's consolidated cash tax liability
(x) available net operating loss carryforwards each year will be determined as
if any prior use of those carryforwards by members of the Pioneer Group other
than the PAAC Group (the "Non-PAAC Group"), except carryforwards generated by
the Non-PAAC Group after the PAI Acquisition, had not occurred ("Previously Used
NOLs") and (y) net operating loss carryforwards, except carryforwards generated
by the Non-PAAC Group after the PAI Acquisition, will first reduce the "separate
tax liability" of the PAI Group each year to the fullest extent permitted by the
Code before any net operating loss use by the Non-PAAC Group except that
Previously Used NOLs may only be utilized by the PAAC Group.
Jack H. Nusbaum, a director of Pioneer and PAAC, is a Senior Partner and
Chairman of the law firm of Willkie Farr & Gallagher, which regularly acts as
counsel to Pioneer and PAAC and is acting as counsel to Pioneer and the Company
in connection with the Exchange Offer.
Thomas H. Schnitzius, a director of Pioneer and PAAC, is a principal of
Schnitzius & Vaughan, an investment banking firm. PAI retained Schnitzius &
Vaughan to provide merger and acquisition and financial advisory services to
PAI. PAI paid Schnitzius & Vaughan a $250,000 fee for financial advisory
services rendered in connection with PAI's March 1995 debt refinancing. In
addition, as compensation for financial services rendered to it by Schnitzius &
Vaughan in connection with the PAI Acquisition, PAI paid that firm a fee of
approximately $1.0 million upon the consummation of the PAI Acquisition, plus
reimbursement of reasonable out-of-pocket expenses relating to such services.
The firm was also paid a fee of $300,000, plus reimbursement of reasonable
out-of-pocket expenses, for services rendered in connection with the KWT
transaction, and a fee of $150,000, plus reimbursement of reasonable
out-of-pocket expenses, for services rendered in connection with the T.C.
Products acquisition. Schnitzius & Vaughan provides financial advisory services
on an on-going basis to the Company, for which it received fees of $476,000 for
1996. The firm is currently paid a retainer for such services of $6,000 per
month. The firm was paid a fee of approximately $450,000, plus reimbursement of
reasonable out-of-pocket fees and expenses, for services rendered in connection
with the Tacoma Acquisition and the firm was paid a fee of approximately $1.0
million, plus reimbursement of reasonable out-of-pocket expenses, for services
rendered in connection with the PCI Canada Acquisition.
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<PAGE> 106
STOCK OWNERSHIP
PCI Canada is an indirect wholly-owned subsidiary of PAAC, which is a
direct wholly-owned subsidiary of Pioneer. The following table sets forth, as of
November 1, 1997, certain information regarding ownership of PAAC common stock
by (i) each person known by PAAC to be the beneficial owner of more than five
percent of the PAAC common stock, (ii) each of the directors of PAAC and the
executive officers of PAAC named in the Summary Compensation Table and (iii) all
directors and executive officers of PAAC as a group. Except as otherwise
indicated, each party has sole voting and investment power over the shares
beneficially owned.
<TABLE>
<CAPTION>
AMOUNT AND
TITLE OF NAME OF NATURE PERCENT
CLASS BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
-------- ---------------- ----------------------- --------
<S> <C> <C> <C>
Common Stock Pioneer Companies, Inc.......................... 1,000 100%
4300 NationsBank Center
700 Louisiana Street
Houston, TX 77002
William R. Berkley.............................. 1,000(1) 100%
c/o Pioneer Companies, Inc.
165 Mason Street
Greenwich, CT 06830
All Directors and Executive Officers as a group
(15 persons).................................... 1,000(1) 100%
</TABLE>
- ---------------
(1) Mr. Berkley, Chairman of the Board and principal shareholder of Pioneer, may
be deemed to beneficially own the shares of PAAC and PCI Canada common stock
owned by Pioneer. Mr. Berkley disclaims beneficial ownership of all such
shares.
The Interlaken Partnership beneficially owns approximately 34.9% of the
voting power of Pioneer and William R. Berkley, Chairman of Pioneer and PAAC
(who may be deemed to beneficially own all shares of Pioneer common stock held
by the Interlaken Partnership), may be deemed to beneficially own approximately
59.9% of the voting power of Pioneer. As a result of Mr. Berkley's ownership of
Pioneer voting stock, Mr. Berkley is able to control the election of PAAC's
Board of Directors and thereby direct the management and policies of PAAC, PAI
and its subsidiaries.
Pioneer's authorized and outstanding common stock consists of Class A
Common Stock, entitled to one vote per share, and Class B Common Stock, entitled
to one-tenth of one vote per share and convertible into Class A Common Stock on
a share-for-share basis. The Class B Common Stock of Pioneer was issued to
Pioneer's former lending banks under the plan of reorganization of Pioneer and
its subsidiaries in 1992. Information obtained from a Schedule 13G, dated July
21, 1992, filed with the Securities and Exchange Commission by Chemical Bank
("Chemical"), Barnett Bank of South Florida, N.A. ("Barnett") and The Chase
Manhattan Bank ("Chase") indicates that (i) Chemical had acquired 616,768 shares
of Class B Common Stock of Pioneer of which it was the beneficial owner with
sole voting and dispositive power, (ii) Barnett had acquired 122,146 shares of
Class B Common Stock of which it was the beneficial owner with sole voting and
dispositive power and (iii) Chase had acquired 84,295 shares of Class B Common
Stock of which it was the beneficial owner with sole voting and dispositive
power. In September 1995, Barnett converted its Class B Common Stock into Class
A Common Stock. The holdings of Chemical and Chase represent approximately 0.7%
and 0.1%, respectively, of the voting power of Pioneer and, in the aggregate,
approximately 7.7% of the number of shares of Pioneer common stock outstanding.
Upon consummation of the Tacoma Acquisition, Pioneer issued 55,000 shares
of Pioneer Preferred Stock, constituting all of the issued and outstanding
shares of Pioneer Preferred Stock, to OCC Tacoma. Each share of Pioneer
Preferred Stock is convertible at any time into eight shares of Class A Common
Stock of Pioneer (subject to adjustment). Each share of Pioneer Preferred Stock
is entitled to eight votes per share (subject to adjustment) and votes with the
Pioneer common stock on all matters. The Pioneer Preferred Stock issued to OCC
Tacoma upon consummation of the Tacoma Acquisition represents approximately 4.8%
of the voting power of Pioneer.
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DESCRIPTION OF OTHER INDEBTEDNESS
NEW CREDIT FACILITIES
Term Facility
Concurrent with the closing of the Initial Offering and the other
Financings, the Company entered into a nine and one-quarter year Term Facility
provided to PAI by a syndicate of financial institutions, pursuant to which PAI
borrowed $83.0 million.
Quarterly amortization of the Term Loans is in an aggregate annual
principal amount equal to 1% of the initial principal amount beginning December
31, 1997, with the remaining 91% of the initial principal amount maturing on
December 5, 2006. Indebtedness under the Term Facility is subject to mandatory
prepayment provisions including, without limitation: (i) upon the occurrence of
a change of control (to be defined in a manner similar to "change of control" in
the Indenture) and (ii) with 100% of the net proceeds from asset sales permitted
under the Term Facility (provided that up to $35.0 million of such proceeds
since the closing of the Term Facility may be re-invested within 365 days of
their receipt in the Company or its subsidiaries in their current lines of
business) to the extent such proceeds are not used to pay principal outstanding
under the Existing Term Facility and the Senior Secured Notes.
Borrowings under the Term Facility bear interest at a floating rate, based
at PAI's option on LIBOR or the administrative agent's alternate base rate.
Indebtedness under the Term Facility is guaranteed by PAAC, the Issuer and
the Guarantors (other than PAI). The Term Facility is secured on a pari passu
basis with the Collateral securing the Notes.
The Term Facility contains covenants similar to the covenants contained in
the Indenture, the indenture governing the Senior Secured Notes and the Existing
Term Facility. Events of default with respect to the Term Facility include,
among others, failure to make payment when due, defaults under certain other
agreements or instruments of indebtedness and certain other events of default
similar to those contained in the Indenture.
Revolving Facility
Concurrent with the closing of the Initial Offering and the other
Financings, the Company entered into an amended Revolving Facility under which
the agent bank (the "Bank") and the other lenders will provide a revolving loan
and letter of credit facility to the Company, subject to the conditions set
forth therein.
The Bank will extend credit to the Company on a revolving basis at any time
and from time to time for a period of five years following the Initial Offering
in an aggregate principal amount of Revolving Loans outstanding up to $65.0
million, of which a portion will be available for the issuance of letters of
credit ("Letters of Credit"), and to include an initial US$30.0 million Canadian
sub-facility available to PCI Canada; provided that the aggregate amount of the
Revolving Loans and the aggregate undrawn face amount of Letters of Credit may
not at any time exceed the borrowing base (the "Borrowing Base"), which will be
the sum of, subject to certain exceptions, (i) up to 85% of eligible accounts
receivable and (ii) up to 50% of eligible inventory, not to exceed certain
decreasing amounts. The obligations under the Revolving Facility are secured by
a first priority lien on all accounts receivables and inventory, and certain
assets related thereto, of certain operating subsidiaries, including PCI Canada,
as well as Kemwater. Borrowings under the Revolving Facility bear interest at a
rate determined by reference to the Bank's reference rate in effect from time to
time (the "Reference Rate") or, at the Company's option, the Bank's LIBOR
interest rate (the "LIBOR Rate"). The interest rate will be adjusted quarterly
based upon the ratio of total debt to earnings before interest, taxes and
depreciation and amortization for the preceding four quarters. If any borrowings
are not repaid when due, the outstanding principal amount of such borrowings
will bear interest at the then applicable rate plus 2.0%. The Company will pay
the Bank, monthly in arrears, a commitment fee based on the average difference
between $65.0 million and the aggregate of the Revolving Loans and the aggregate
undrawn face amount of the Letters of Credit outstanding. PAAC will also pay
other customary fees including a fee on Letters of
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Credit based on the average aggregate undrawn face amount of Letters of Credit
outstanding. The Revolving Facility is guaranteed by the subsidiaries of PAAC.
The Revolving Facility contains customary covenants with respect to, among
other things, (i) maintenance of a ratio of EBITDA to interest expense and (ii)
restrictions on the incurrence of additional liens or indebtedness. The Company
intends to use any borrowings under the Revolving Facility for its ongoing
working capital needs and general corporate purposes. Letters of Credit will be
used to support obligations of the Company incurred in the ordinary course of
business.
EXISTING TERM FACILITY
Concurrent with the closing of the Tacoma Acquisition, the Company entered
into a nine and one-half year $100.0 million term facility (the "Existing Term
Facility") provided by a syndicate of financial institutions.
Quarterly amortization of the loans under the Existing Term Facility (the
"Existing Term Loans") is in an aggregate annual principal amount equal to 1% of
the initial principal amount beginning September 30, 1997, with the remaining
90.75% of the initial principal amount maturing on December 5, 2006.
Indebtedness under the Existing Term Facility is subject to mandatory prepayment
provisions including, without limitation: (i) upon the occurrence of a change of
control (defined in a manner similar to "change of control" in the indenture for
the Senior Secured Notes) and (ii) with 100% of the net proceeds from asset
sales permitted under the Existing Term Facility (provided that up to $35.0
million of such proceeds since the closing of the Existing Term Facility may be
re-invested within 365 days of their receipt in the Company or its subsidiaries
in their current lines of business).
Borrowings under the Existing Term Facility bear interest at a floating
rate, based at the Company's option on LIBOR or the administrative agent's
alternate base rate.
Indebtedness under the Existing Term Facility is guaranteed by all
subsidiaries of the Company. The Existing Term Facility is secured on a pari
passu basis with the Senior Secured Notes, by (a) a first mortgage lien and
security interest in the real property, buildings, fixtures and equipment
relating to the Tacoma Facility, (b) a first-priority, perfected security
interest in certain agreements related to the Tacoma Acquisition, (c) first
mortgage liens on the Henderson, Nevada and St. Gabriel, Louisiana chlor-alkali
production facilities of PCAC, including real property, buildings, fixtures and
equipment, and (d) a first-priority, perfected pledge of all the capital stock
of PCAC, All-Pure, PCI Canada and PCI Carolina.
The Existing Term Facility contains covenants similar to the covenants
contained in the indenture for the Senior Secured Notes. Events of default with
respect to the Existing Term Facility include, among others, failure to make
payment when due, defaults under certain other agreements or instruments of
indebtedness and certain other events of default similar to those contained in
the indenture for the Senior Secured Notes.
All of the capital stock of PCI Canada is pledged for the benefit of the
Existing Term Loan lenders and holders of the Senior Secured Notes.
SENIOR SECURED NOTES
Concurrent with the closing of the Tacoma Acquisition, the Company issued
and sold $200.0 million aggregate principal amount of 9 1/4% Senior Secured
Notes due 2007 (the "Senior Secured Notes"). Interest on the Senior Secured
Notes is payable semi-annually on June 15 and December 15 of each year. The
Senior Secured Notes will mature on June 15, 2007, unless previously redeemed.
The Senior Secured Notes are senior obligations of the Company and are
fully and unconditionally guaranteed on a senior basis by all subsidiaries of
the Company. In addition, the guarantee of PCAC with respect to the Senior
Secured Notes is secured by (i) a first mortgage lien on the chlor-alkali
production facility acquired in the Tacoma Acquisition, (ii) a first priority
security interest in certain agreements related to the Tacoma Acquisition and
(iii) first mortgage liens on PCAC's chlor-alkali production facilities located
in Henderson, Nevada and St. Gabriel, Louisiana, and the guarantee of PAI with
respect to the Senior
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Secured Notes is secured by a pledge of the capital stock of PCAC, All-Pure, PCI
Canada and PCI Carolina held by PAI. The Senior Secured Notes rank pari passu
with all other existing and future senior indebtedness and senior to all
subordinated indebtedness of the Company, except that the Senior Secured Notes
are effectively subordinated to secured senior indebtedness of the Company with
respect to the assets securing such indebtedness.
The Senior Secured Notes are redeemable in cash at the option of the
Company, in whole or in part, on or after June 15, 2002, at declining redemption
prices, together with accrued and unpaid interest thereon and liquidated
damages, if any, to the date of redemption. In addition, the Company may also
redeem at its option at any time prior to June 15, 2000 up to 35% of the
aggregate principal amount of the Senior Secured Notes originally issued at
109.25% of the principal amount thereof, plus accrued and unpaid interest
thereon and liquidated damages, if any, to the date of redemption, with the net
proceeds of an equity offering by the Company or an equity offering by Pioneer
followed by a capital contribution from Pioneer to the Company; provided that at
least 65% of the aggregate principal amount of the Senior Secured Notes
originally issued must remain outstanding immediately after such redemption.
Upon a Change of Control (as defined in the indenture relating to the Senior
Secured Notes), the Company will be required to offer to repurchase the Senior
Secured Notes at a purchase price equal to 101% of the principal amount thereof,
plus accrued interest thereon and liquidated damages, if any, to the date of
repurchase.
The indenture governing the Senior Secured Notes contains certain covenants
with respect to the Company and its subsidiaries which will restrict, among
other things, (a) the incurrence of additional indebtedness, (b) the payment of
dividends and other restricted payments, (c) the creation of certain liens, (d)
the use of proceeds from sales of assets and subsidiary stock, (e) sale and
leaseback transactions and (f) transactions with affiliates. The indenture also
restricts the Company's ability to consolidate or merge with or into, or to
transfer all or substantially all of its assets to, another person. These
restrictions and requirements are subject to a number of important
qualifications and exceptions.
All of the capital stock of PCI Canada is pledged for the benefit of the
Existing Term Loan lenders and holders of the Senior Secured Notes.
OTHER
Other long-term debt of PAAC consists of $4.5 million of outstanding
variable rate subordinated notes, with principal payments due July 31, 2001, and
$2.3 million of an outstanding variable rate tax-exempt bond, financed through
the Economic Development Corporation of Pierce County, Washington, with
principal payments due in variable annual installments through 2014.
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DESCRIPTION OF THE NOTES
GENERAL
The Exchange Notes will be issued, and the Original Notes were issued,
under an Indenture (the "Indenture") among PCI Canada, as Issuer, PAAC and the
other Guarantors and United States Trust Company of New York, as trustee (the
"Trustee"). The terms and conditions of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the U.S. Trust
Indenture Act of 1939 (the "Trust Indenture Act") as in effect on the date of
the Indenture. The Notes are subject to all such terms and conditions, and
reference is made to the Indenture and the Trust Indenture Act for a statement
thereof. The following statements are summaries of the provisions of the Notes
and the Indenture and do not purport to be complete. Such summaries make use of
certain terms defined in the Indenture and are qualified in their entirety by
express reference to the Indenture. Certain of such defined terms are set forth
below under "-- Certain Definitions." For purposes of this "Description of the
Notes," the "Issuer" means PCI Chemicals Canada Inc. and "PAAC" means Pioneer
Americas Acquisition Corp. A copy of the Indenture will be available upon
request to the Issuer.
The Notes will be limited to $175.0 million aggregate principal amount and
will be issued in fully registered form without coupons in denominations of
$1,000 and any integral multiple of $1,000. Principal of, premium and Liquidated
Damages, if any, and interest on the Notes will be payable, and the Notes will
be transferable, at the corporate trust office or agency of the Trustee
maintained for such purposes in New York, New York. Initially, the Trustee will
act as paying agent and registrar under the Indenture. The Issuer and PAAC and
its Subsidiaries may act as paying agent and registrar under the Indenture, and
the Issuer may change any paying agent and registrar without notice to the
Persons who are registered holders ("Holders") of the Notes. The Issuer may pay
principal, premium and interest by check and may mail an interest check to a
Holder's registered address. Holders must surrender the Notes to the paying
agent to collect principal and premium payments. No service charge will be made
for any registration of transfer or exchange of the Notes, except for any tax or
other governmental charge that may be imposed in connection therewith.
All of the capital stock of PCI Canada is pledged for the benefit of the
Existing Term Loan lenders and holders of the Senior Secured Notes.
PAYMENT TERMS
Interest on the Notes will initially accrue from the respective issue date,
and thereafter from the most recent date to which interest has been paid.
Interest will be payable semi-annually on April 15 and October 15, of each year
commencing April 15, 1998, at the rate of 9 1/4% per annum to Holders of the
Notes as of the close of business on April 1 and October 1 next preceding the
applicable interest payment date. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months. The Notes mature on October 15,
2007.
Payment of the Notes is guaranteed by the Guarantors, jointly and
severally, on a senior basis. See "-- Guarantees."
RANKING
The Notes are senior obligations of the Issuer and rank pari passu with all
existing and future Senior Indebtedness of the Issuer and senior to all
Subordinated Indebtedness of the Issuer. However, the Notes and the obligations
of the Guarantors under their guarantees of the Notes are effectively
subordinated to secured Senior Indebtedness of the Issuer and the Guarantors,
respectively, with respect to the assets securing such Indebtedness. See
"Description of Other Indebtedness."
As of September 30, 1997, after giving pro forma effect to the Initial
Offering and the other Financings, the Issuer and the Guarantors would have had
outstanding approximately $557.8 million aggregate principal amount of secured
Senior Indebtedness. As of September 30, 1997, on a pro forma basis, the Issuer
and the Guarantors would have had, subject to certain restrictions (including
borrowing base limitations), the ability
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to draw up to $62.1 million of additional secured Senior Indebtedness under the
Revolving Facility. See "Risk Factors -- Ranking of the Notes and Guarantees"
and "Description of Other Indebtedness."
In addition, PAAC and its Subsidiaries may incur up to $50.0 million of
Senior Indebtedness which will be secured on a pari passu basis with the Senior
Secured Notes and the Existing Term Facility.
Holders of secured Indebtedness of the Issuer or the Guarantors have claims
with respect to the assets constituting collateral for such Indebtedness that
are prior to the claims of holders of the Notes and the Guarantees,
respectively. In the event of a default on the Notes, or a bankruptcy,
liquidation or reorganization of the Issuer or the Guarantors, such assets will
be available to satisfy obligations with respect to the Indebtedness secured
thereby before any payment therefrom could be made on the Notes or the
Guarantees, as the case may be. To the extent that the value of such collateral
is not sufficient to satisfy the Indebtedness secured thereby, amounts remaining
outstanding on such Indebtedness would be entitled to share, together with the
Indebtedness under the Notes and the Guarantees, as the case may be, with
respect to any other assets of the Issuer and the Guarantors.
GUARANTEES
The Guarantors will, jointly and severally, unconditionally guarantee the
due and punctual payment of principal of, premium, if any, and interest on, the
Notes. Such guarantees will be senior obligations of each Guarantor, and will
rank pari passu with all existing and future Senior Indebtedness of such
Guarantor and senior to all Subordinated Indebtedness of such Guarantor.
The Guarantors as of the Closing Date are set forth below:
Pioneer Americas Acquisition Corp.
Pioneer Americas, Inc.
Pioneer Chlor Alkali Company, Inc.
Imperial West Chemical Co.
All-Pure Chemical Co.
Black Mountain Power Company
All-Pure Chemical Northwest, Inc.
Pioneer Chlor Alkali International, Inc.
G.O.W. Corporation
Pioneer (East), Inc.
T.C. Holdings, Inc.
T.C. Products, Inc.
PCI Carolina, Inc.
Pioneer Licensing, Inc.
Guarantors will include such other Subsidiaries of PAAC that become
Guarantors as described under "-- Certain Covenants -- Certain Guarantees." The
Indenture will provide that the obligations of the Guarantors under their
respective Guarantees will be reduced to the extent necessary to prevent the
Guarantees from violating or becoming voidable under applicable law relating to
fraudulent conveyance or fraudulent transfer or similar laws affecting the
rights of creditors generally.
Upon any sale, exchange, transfer or other disposition to any Person of all
of the Issuer's, PAAC's or a Restricted Subsidiary's Equity Interests in, or all
or substantially all of the assets of, any Guarantor which is in compliance with
the Indenture, such Guarantor will be released from all its obligations under
its Guarantee.
Separate financial statements of the Guarantors are not included herein
because (i) the Issuer is a wholly-owned indirect subsidiary of PAAC, which is a
holding company with no independent operations, (ii) the Guarantees are full and
unconditional (except to the extent necessary to comply with fraudulent
conveyance laws), (iii) such Guarantors are jointly and severally liable with
respect to the Guarantees, (iv) other than the Issuer, all of the consolidated
Subsidiaries of PAAC currently in existence are Guarantors
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and the aggregate consolidated net assets, earnings and equity of the Issuer and
the Guarantors are substantially equivalent to the net assets, earnings and
equity of PAAC on a consolidated basis.
SECURITY
The Issuer has granted to a collateral agent (the "Collateral Agent"), for
the benefit of itself and (x) the Holders and the Trustee, for itself and the
Holders, and (y) the Term Loan lenders and the agent under the Term Facility
(the "Term Loan Agent"), first priority liens on, and security interests in,
substantially all tangible and intangible property and assets used in the PCI
Canada Business (other than accounts receivable and inventory). All of such
property is collectively referred to herein as the "Collateral."
There can be no assurance that the proceeds of any sale of the Collateral
in whole or in part pursuant to the Indenture and the related security documents
following an Event of Default would be sufficient to satisfy payments due on any
of the Notes or the other secured Indebtedness. See "Risk Factors -- Limitations
on Security Interest." In addition, the ability of the Collateral Agent, the
Trustee, any of the Holders, the Term Loan Agent or the Term Loan lenders (the
"Secured Parties") to realize upon the Collateral may be subject to certain
bankruptcy law limitations in the event of a bankruptcy. See "-- Certain
Bankruptcy Considerations."
The collateral release provisions of the Indenture will permit the release
of Collateral without substitution of collateral of equal value under certain
circumstances. See "-- Release of Collateral." As described under "-- Certain
Covenants -- Limitations on Asset Sales," the Net Proceeds of certain Asset
Sales may under specified circumstances be required to be utilized to make a pro
rata offer to purchase Notes.
For so long as any of the Original Notes or the Exchange Notes, as the case
may be, are outstanding, if an Event of Default occurs under the Indenture and a
declaration of acceleration of the Original Notes or the Exchange Notes, as the
case may be, occurs as a result thereof, the Trustee, on behalf of the Holders,
and as directed by Holders of a majority of the total principal amount of the
Notes, in addition to any rights or remedies available to it under the
Indenture, may, subject to the provisions of the Intercreditor Agreement (as
defined under "-- Intercreditor Agreement"), cause the Collateral Agent to take
such action as it may deem advisable to protect and enforce the rights of the
Trustee and the Holders in the Collateral, including the institution of
foreclosure proceedings. The proceeds received by the Collateral Agent from any
foreclosure with respect to the Collateral will be applied by the Collateral
Agent first to pay the expenses of such foreclosure and fees and other amounts
then payable to the Collateral Agent under the Intercreditor Agreement, and
thereafter to pay, pro rata: (i) the obligations under the Indenture, including
amounts then payable to the Trustee under the Indenture and the principal of,
premium, if any, and interest on the Notes and any Exchange Notes, and (ii) the
obligations under the Term Facility, including amounts then payable to the Term
Loan Agent and the principal of, premium, if any, and interest on the Term
Loans.
Dispositions of Collateral may be subject to delay pursuant to the
Intercreditor Agreement. See "-- Intercreditor Agreement."
INTERCREDITOR AGREEMENT
The Issuer, the Trustee, the Term Loan Agent and the Collateral Agent have
entered into an Intercreditor and Collateral Agency Agreement (the
"Intercreditor Agreement"). The Intercreditor Agreement provides generally that
(i) with respect to administering the Collateral and amending, supplementing or
waiving the provisions of the instruments relating to the security interests
granted therein, the holders of a majority of the aggregate outstanding
principal amount of the obligations secured by the Collateral (the "Majority
Holders") may direct the Collateral Agent, provided that the Majority Holders
include the holders of a majority of the aggregate outstanding principal amount
of the Term Loans; (ii) with respect to releasing a substantial portion of the
Collateral in circumstances not otherwise permitted by the Indenture or the Term
Facility, the Majority Holders may direct the Collateral Agent, provided that
the Majority Holders include the holders of 100% of the aggregate outstanding
principal amount of the Term Loans; and (iii) with respect to foreclosing on or
otherwise pursuing remedies with respect to the Collateral, the holders of a
majority of the aggregate outstanding principal amount of either (x) the Notes
or (y) the Term Loans may direct the
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Collateral Agent, provided that the holders taking such action hold an aggregate
principal amount of such debt representing at least 15% of the aggregate
outstanding principal amount of the obligations secured by the Collateral.
All cash or cash equivalents received by the Collateral Agent (x) upon the
release of Collateral, (y) as proceeds of insurance or condemnation or other
taking awards, or (z) as proceeds of any sale (including an Asset Sale
authorized under the terms of the Indenture) or other disposition of Collateral
(collectively, "Trust Moneys") shall be subject to a lien and security interest
in favor of (i) the Collateral Agent for the benefit of the Secured Parties, in
accordance with the terms of the Intercreditor Agreement.
If an Event of Default shall have occurred and be continuing, and the
obligations secured by the Collateral shall have been accelerated, then upon the
instructions of the holders of the obligations secured by the Collateral, in
accordance with the terms of the Intercreditor Agreement, the Collateral Agent
shall, as soon as practicable, apply the Trust Moneys relating to the Collateral
first to pay amounts then payable to the Collateral Agent under the
Intercreditor Agreement, and thereafter to pay, pro rata; (i) the obligations
under the Indenture, including amounts then payable to the Trustee under the
Indenture and the principal of, premium, if any, and interest on the Original
Notes and any Exchange Notes and (ii) the obligations under the Term Facility,
including amounts then payable to the Term Loan Agent and the principal of
premium, if any, and interest on the Term Loans.
CERTAIN BANKRUPTCY CONSIDERATIONS
The Collateral Agent's ability to realize on the security for the Notes is
limited by the following legal and regulatory restrictions. See "Risk
Factors -- Limitations on Security Interest" and "Risk Factors -- Fraudulent
Conveyance Issues."
Bankruptcy and Insolvency Act (Canada). In an insolvency or bankruptcy
context, the ability of the Collateral Agent to realize on the security under
the Security Documents will be subject to the provisions of the Bankruptcy and
Insolvency Act (Canada). Under that Act the Collateral Agent will be a secured
creditor.
Insolvency does not in itself prevent secured creditors from realizing upon
their security. A secured creditor that intends to realize upon its security on
all or substantially all of the property used by an insolvent company in the
carrying on of its business, must however, give to the insolvent company a
written ten day notice of its intention to do so.
An insolvent company may, in certain circumstances, delay realization by a
secured creditor of its security by making a proposal in bankruptcy to all or
some of its creditors including the secured creditors, or by filing with the
official receiver a notice of intention to make such a proposal. In such
circumstances, proceedings against the insolvent company are stayed, thereby
delaying the rights of secured creditors to realize upon secured assets, unless
they obtain from the court an exemption from the stay. If the proposal made to
the secured creditors is rejected, the secured creditors may realize upon
secured assets. Furthermore, if the proposal is rejected by the unsecured
creditors, bankruptcy will automatically occur.
Bankruptcy does not, in principle, prevent secured creditors from realizing
upon their security. The trustee appointed to the bankruptcy can ask the court
to postpone the right of a secured creditor to enforce its security to give the
trustee the opportunity to consider whether anything can be realized on the
property for the benefit of the estate. The Court may not, save for some
exceptions, postpone the right of a secured creditor to enforce its security for
more than six months from (i) the date the debtor becomes bankrupt, or in some
instances, (ii) the date the debt became due.
The trustee appointed to the bankruptcy might also delay a secured creditor
from realizing on its security upon giving such creditor a notice of his
intention to inspect the property of the bankrupt which is subject to the
security, generally for the purpose of valuing the security. The trustee may
also request that the secured creditor assess the value of its security, and the
secured creditor be paid the secured value assessed at which time the trustee
will have the right to redeem the security or require that the property subject
to the security be sold.
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Secured creditors may also make an application for the appointment of a
receiver, receiver and manager or interim receiver (a "Receiver") and, where a
court appoints a Receiver, there may be a general stay of proceedings against
third parties, including secured creditors. The Collateral Agent's ability to
realize on the security for the Notes would be governed by a court order.
Companies' Creditors Arrangement Act (Canada). An insolvent company, in
certain circumstances, may also obtain a stay of proceedings by placing itself
under the protection of the Companies' Creditors Arrangement Act ("CCAA"). Like
the proposal in bankruptcy, the CCAA allows a company to propose an arrangement
to all of its creditors, including its secured creditors, and gives the court
the power to stay all actions and proceedings against the assets of the company
including realization on security for 30 days on the initial application and
thereafter until otherwise ordered by the court. There may, in certain
circumstances, also be further postponement of creditors' rights subsequent
thereto. However, should a class of secured creditors reject the arrangement,
such class is free to act upon its security.
Civil Code of Quebec. The Civil Code of Quebec provides a limited list of
hypothecary rights available to creditors. These are the taking of possession
for the purposes of administration, taking in payment, sale by judicial
authority or sale by the creditor. These rights may not be exercised
simultaneously and in order to exercise them successively, a creditor would have
to follow the applicable preliminary measures prior to the exercise of each
right. A hypothecary creditor wishing to realize on its security must publish a
notice indicating which remedy it wishes to invoke. In the case of security on
personal (moveable) property, the notice must be given 20 days prior to exercise
of the creditors' rights. In the case of security on real (immovable) property,
the delay is 60 days. However, where a creditor only intends to take possession
for purposes of temporary administration, the delay is 10 days. Rights which may
be conferred on the Collateral Agent pursuant to the Security Documents may not
be enforceable to the extent that they are inconsistent with the provisions of
the Civil Code of Quebec.
Personal Property Security Act (Ontario). The Personal Property Security
Act (Ontario) ("Ontario PPSA") provides a secured creditor with remedies in
addition to those that may be provided under the creditors' security documents.
The remedies provided under the Ontario PPSA include taking possession for the
purposes of administration, disposition or satisfaction of the indebtedness. The
Ontario PPSA does impose certain limitations on the exercise of remedies under
either the creditors' security documents or the Ontario PPSA including the
requirement to give notice, to act in a commercially reasonable manner and to
account for any surplus.
Personal Property Security Act (New Brunswick). The Personal Property
Security Act (New Brunswick) ("New Brunswick PPSA") provides a secured creditor
with remedies in addition to those that may be provided under the creditors'
security documents. The remedies provided under the New Brunswick PPSA include
taking possession for the purposes of administration, disposition or
satisfaction of the indebtedness. The New Brunswick PPSA does impose certain
limitations on the exercise of remedies under either the creditors' security
documents or the New Brunswick PPSA including the requirement to give notice, to
act in a commercially reasonable manner and to account for any surplus.
Nova Scotia and the Personal Property Security Act (Nova Scotia). On
November 3, 1997 the Personal Property Security Act (Nova Scotia)("Nova Scotia
PPSA") became effective. The Nova Scotia PPSA provides a secured creditor with
remedies in addition to those that may be provided under the creditors' security
documents. The remedies provided under the Nova Scotia PPSA include the taking
of possession for the purposes of administration, disposition or satisfaction of
the indebtedness. The Nova Scotia PPSA imposes certain limitations on the
exercise of remedies under either the creditors' security documents or the Nova
Scotia PPSA including the requirement to give notice, to act in a commercially
reasonable manner and to account for any surplus.
U.S. Bankruptcy Code. The right of the Collateral Agent to repossess and
dispose of the Collateral upon the occurrence of an Event of Default is likely
to be significantly impaired by applicable United States bankruptcy law if a
bankruptcy case were to be commenced by or against the Issuer prior to the
Collateral Agent's having repossessed and disposed of the Collateral. Under the
United States Bankruptcy Code, a
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secured creditor such as the Collateral Agent is prohibited from repossessing
its security from a debtor in a bankruptcy case, or from disposing of security
repossessed from such debtor, without bankruptcy court approval. Moreover, the
United States Bankruptcy Code permits the debtor to continue to retain and to
use collateral even though the debtor is in default under the applicable debt
instruments, provided that the secured creditor is given "adequate protection."
The meaning of the term "adequate protection" may vary according to
circumstances, but it is intended in general to protect the value of the secured
creditor's interest in the collateral and may include cash payments or the
granting of additional security, if and as such times as the court, in its
discretion or any use of the collateral by the debtor during the pendency of the
bankruptcy case. In view of the lack of a precise definition of the term
"adequate protection" and the broad discretionary powers of a bankruptcy court,
it is impossible to predict how long payments under the Original Notes, the
Exchange Notes, if any, or the other secured indebtedness could be delayed
following commencement of a bankruptcy case, whether or when the Collateral
Agent could repossess or dispose of the Collateral or whether or to what extent
holders of such indebtedness would be compensated for any delay in payment or
loss of value of the Collateral through the requirement of "adequate
protection." Furthermore, in the event that the bankruptcy court determines the
value of the collateral is not sufficient to repay all amounts due on such
indebtedness, the holders of such indebtedness would hold "undersecured claims."
Applicable U.S. federal bankruptcy laws do not permit the payment and/or accrual
of interest, costs and attorney's fees for "undersecured claims" during the
pendency of a debtor's bankruptcy case.
ADDITIONAL AMOUNTS
All payments made by the Issuer under or with respect to the Notes will be
made free and clear of and without withholding or deduction for or on account of
any present or future tax, duty, levy, impost, assessment or other governmental
charge (including penalties, interest and other liabilities related thereto)
imposed or levied by or on behalf of the Government of Canada or of any province
or territory thereof or by any authority or agency therein or thereof having
power to tax (hereinafter, "Taxes"), unless the Issuer is required to withhold
or deduct Taxes by law or by the interpretation or administration thereof. If
the Issuer is required to withhold or deduct any amount for or on account of
Taxes from any payment made under or with respect to the Notes, the Issuer will
pay such additional amounts ("Additional Amounts") as may be necessary so that
the net amount received by each Holder (including Additional Amounts) after such
withholding or deduction will not be less than the amount the Holder would have
received if such Taxes had not been withheld or deducted; provided that no
Additional Amounts will be payable with respect to a payment made to a Holder to
the extent solely attributable to (i) such Holder not being treated as dealing
at arm's length with the Company (within the meaning of the Income Tax Act
(Canada)) at the time of making such payment, or (ii) such Holder's being
connected with Canada or any province or territory thereof otherwise than solely
by reason of the Holder's activity in connection with purchasing the Notes, by
the mere holding of Notes or by reason of the receipt of payments thereunder.
The Issuer will also (i) make such withholding or deduction and (ii) remit the
full amount deducted or withheld to the relevant authority in accordance with
applicable law. The Company will furnish to the Holders, within 30 calendar days
after the date the payment of any Taxes is due pursuant to applicable law,
certified copies of tax receipts evidencing such payment by the Issuer. The
Issuer will, upon written request of each Holder, reimburse each such Holder for
the amount of (i) any Taxes so levied or imposed and paid by such Holder as a
result of payments made under or with respect to the Notes, and (ii) any Taxes
so levied or imposed with respect to any reimbursement under the foregoing
clause (i) so that the net amount received by such Holder (net of payments made
under or with respect to the Notes) after such reimbursement will not be less
than the net amount the Holder would have received if Taxes on such
reimbursement had not been imposed; provided, however, no reimbursement shall be
made in respect of Taxes for which no Additional Amounts would be payable by
reason of clause (i) or (ii) of the second preceding sentence.
At least 30 calendar days prior to each date on which any payment under or
with respect to the Notes is due and payable, if the Issuer will be obligated to
pay Additional Amounts with respect to such payment, the Issuer will deliver to
the Trustee an officers' certificate stating the fact that such Additional
Amounts will be payable and the amounts so payable and will set forth such other
information necessary to enable the Trustee to pay such Additional Amounts to
Holders on the payment date. Whenever in the Indenture or in this
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"Description of the Notes" there is mentioned, in any context, the payment of
principal, interest, if any, or any other amount payable under or with respect
to any Note, such mention shall be deemed to include mention of the payment of
Additional Amounts to the extent that, in such context, Additional Amounts are,
were or would be payable in respect thereof. The Holders and the Issuer agree
that the payment of any Additional Amounts by the Issuer shall be treated as
payments of interest.
OPTIONAL REDEMPTION
The Notes will not be redeemable at the option of the Issuer prior to
October 15, 2002. On or after that date, the Notes will be redeemable at the
option of the Issuer, in whole or in part from time to time, on not less than 30
nor more than 60 days' prior notice, mailed by first-class mail to the Holders'
registered addresses, in cash, at the following redemption prices (expressed as
percentages of the principal amount), if redeemed in the 12-month period
commencing October 15 in the year indicated below, in each case plus accrued and
unpaid interest and Liquidated Damages, if any, to the date fixed for
redemption:
<TABLE>
<CAPTION>
YEAR REDEMPTION
---- ----------
<S> <C>
2002........................................................ 104.625%
2003........................................................ 103.084%
2004........................................................ 101.542%
2005 and thereafter......................................... 100.000%
</TABLE>
The Notes will not be subject to, or entitled to the benefits of, any
sinking fund.
Notwithstanding the foregoing, at any time prior to October 15, 2000, the
Issuer may redeem, in part, up to 35% of the aggregate principal amount of the
Notes originally issued at a purchase price of 109.25% of the principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the
date fixed for redemption, with the net proceeds of (i) any Equity Offering by
the Issuer or (ii) any Equity Offering by Pioneer or PAAC, but only to the
extent that Pioneer or PAAC contributes such net proceeds to the Issuer as a
capital contribution; provided that at least 65% of the aggregate principal
amount of the Notes originally issued remains outstanding immediately after
giving effect to such redemption. In order to effect the foregoing redemption,
the Issuer will be required to send the redemption notice not later than 60 days
after the receipt of the proceeds of such public offering.
Notes may be redeemed or repurchased as set forth below under "-- Change of
Control" and "-- Certain Covenants -- Limitations on Asset Sales" in part in
multiples of $1,000. If less than all the Notes issued under the Indenture are
to be redeemed, the Trustee will select the Notes to be redeemed pro rata, by
lot or by any other method which the Trustee deems fair and appropriate. The
Indenture will provide that if any Note is to be redeemed or repurchased in part
only, the notice which relates to the redemption or repurchase of such Note will
state the portion of the principal amount of such Note to be redeemed or
repurchased and will state that on or after the date fixed for redemption or
repurchase a new Note equal to the unredeemed portion thereof will be issued.
On and after the date fixed for redemption or repurchase, interest will
cease to accrue on the Notes or portions thereof called for redemption or
tendered for repurchase.
REDEMPTION FOR CHANGES IN CANADIAN WITHHOLDING TAXES
The Notes will be redeemable at the option of the Issuer, as a whole, but
not in part, at any time on not less than 30 nor more than 60 days' prior
notice, mailed by first-class mail to the Holders' registered addresses, in
cash, at 100% of the aggregate principal amount thereof, together with accrued
and unpaid interest and Liquidated Damages, if any, to the date fixed for
redemption in the event the Issuer has become or would be obligated to pay, on
any date on which any amount would be payable with respect to the Notes, any
Additional Amounts as a result of a change in, or amendment to the laws
(including any regulations promulgated thereunder) of Canada (or any political
subdivision or taxing authority thereof or therein), or any change in,
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or amendment to any official position regarding the application or
interpretation of such laws or regulations, which change is announced or becomes
effective on or after the Closing Date.
CHANGE OF CONTROL
The Indenture provides that in the event of a Change of Control (the date
of such occurrence being the "Change of Control Date"), the Issuer will notify
the Holders in writing of such occurrence and will make an irrevocable offer
(the "Change of Control Offer") to purchase on a business day (the "Change of
Control Payment Date") not later than 60 days following the Change of Control
Date, all Notes then outstanding at a purchase price (the "Purchase Price")
equal to 101% of the principal amount thereof plus accrued and unpaid interest
and Liquidated Damages, if any, to the Change of Control Payment Date.
Notice of a Change of Control Offer will be mailed by the Issuer to the
Holders at their registered addresses not less than 30 days nor more than 45
days before the Change of Control Payment Date. The Change of Control Offer is
required to remain open for at least 20 business days and until 5:00 p.m., New
York City time, on the Change of Control Payment Date. The notice will contain
all instructions and materials necessary to enable Holders to tender (in whole
or in part in a principal amount equal to $1,000 or a whole multiple thereof)
their Notes pursuant to the Change of Control Offer. Substantially
simultaneously with mailing of the notice, the Issuer will cause a copy of such
notice to be published in a newspaper of general circulation in the Borough of
Manhattan, The City of New York.
The notice, which governs the terms of the Change of Control Offer, will
state, among other things: (i) that the Change of Control Offer is being made
pursuant to this covenant; (ii) the Purchase Price and the Change of Control
Payment Date; (iii) that any Notes not surrendered or accepted for payment will
continue to accrue interest; (iv) that any Notes accepted for payment pursuant
to the Change of Control Offer will cease to accrue interest after the Change of
Control Payment Date; (v) that any Holder electing to have a Note purchased (in
whole or in part) pursuant to a Change of Control Offer will be required to
surrender the Note, with the form entitled "Option of Holder to Elect Purchase"
on the reverse of the Note completed, to the Paying Agent at the address
specified in the notice (or otherwise make effective delivery of the Note
pursuant to book-entry procedures and the related rules of the applicable
depositories) at least five business days before the Change of Control Payment
Date; and (vi) that any Holder will be entitled to withdraw his election if the
Paying Agent receives, not later than three business days prior to the Change of
Control Payment Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the Holder, the principal amount of the Note the
Holder delivered for purchase, the certificate number of the Note and a
statement that such Holder is withdrawing his election to have such Note
purchased.
On the Change of Control Payment Date, the Issuer will: (i) accept for
payment the Notes, or portions thereof, surrendered and properly tendered and
not withdrawn, pursuant to the Change of Control Offer; (ii) deposit with the
Paying Agent money sufficient to pay the Purchase Price of all the Notes, or
portions thereof, so accepted; and (iii) deliver to the Trustee the Notes so
accepted together with an officer's certificate stating that such Notes have
been accepted for payment by the Issuer. The Paying Agent will promptly mail or
deliver to Holders of Notes so accepted payment in an amount equal to the
Purchase Price. Holders whose Notes are purchased only in part will be issued
new Notes equal in principal amount to the unpurchased portion of the Notes
surrendered.
A "Change of Control" means the occurrence of any of the following: (i) a
"person" or "group" (as such terms are used in Sections 14(d)(2) and 13(d)(3),
respectively, of the Exchange Act), other than any of (x) William R. Berkley and
his Affiliates and/or (y) Interlaken Capital, Inc. and its Affiliates (each
individually a "Substantial Shareholder" and collectively the "Substantial
Shareholders"), is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act) of at least 50% of the outstanding voting power of the
fully diluted Voting Stock of Pioneer or PAAC, (ii) the adoption of a plan
relating to the liquidation or dissolution of Pioneer or PAAC, (iii) the merger,
amalgamation or consolidation of Pioneer or PAAC with or into another
corporation with the effect that the stockholders of Pioneer or PAAC immediately
prior to such merger, amalgamation or consolidation cease to be the "beneficial
owners" (as defined in Rule 13d-3 under the Exchange Act) of 50% or more of the
combined voting power of the securities of the
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surviving corporation of such merger, amalgamation or the corporation resulting
from such merger, amalgamation or consolidation ordinarily (and apart from
rights arising under special circumstances) having the right to vote in the
election of directors outstanding immediately after such merger, amalgamation or
consolidation, (iv) during any period of two consecutive calendar years
individuals who at the beginning of such period constituted the Board of
Directors of Pioneer or PAAC (together with any new directors whose election by
the Board of Directors of Pioneer or PAAC, or whose nomination for election by
the shareholders of Pioneer or PAAC, was approved by a vote of a majority of the
directors then still in office who either were directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the directors of
Pioneer or PAAC then in office or (v) the Issuer ceases to be a wholly-owned
direct or indirect subsidiary of Pioneer or PAAC. Notwithstanding the foregoing,
a Change of Control will not be deemed to have occurred under clause (v) above
solely as a result of a merger, amalgamation, consolidation or similar
arrangement of the Issuer with or into Pioneer or PAAC provided that such
merger, amalgamation, consolidation or similar arrangement is permitted by the
covenant described below under "-- Certain Covenants -- Limitations on Mergers;
Sales of Assets."
The Issuer will comply, to the extent applicable, with the requirements of
Rule 14e-1 under the Exchange Act, any other tender offer rules under the
Exchange Act and other securities laws or regulations in connection with the
offer to repurchase and the repurchase of the Notes as described above.
The indenture governing the Senior Secured Notes also requires PAAC to make
an offer to purchase the Senior Secured Notes upon the occurrence of a change of
control pursuant to such indenture. The Issuer's ability to repurchase the Notes
pursuant to a Change of Control Offer will be limited by, among other things,
PAAC's and its Subsidiaries' financial resources at the time of repurchase.
There can be no assurance that sufficient funds will be available at the time of
any Change of Control to make any required repurchases. Furthermore, there can
be no assurance that the Issuer will be able to fund the repurchase of Notes
upon a Change of Control within the limitations imposed by the terms of other
then-existing Senior Indebtedness. The Existing Term Facility and the Term
Facility require a mandatory prepayment of the loans thereunder at 100% of the
principal amount thereof, plus accrued and unpaid interest, with respect to a
change of control under such facility. The Revolving Facility may prohibit the
Issuer from repurchasing Notes if at the time of such repurchase an event of
default under the Revolving Facility exists or would be caused thereby. The
occurrence of a Change of Control may cause an event of default under the New
Credit Facilities, the Existing Term Facility, the Senior Secured Notes or other
Indebtedness of the Issuer or the Guarantors, upon which event of default all
amounts outstanding under such Indebtedness may become due and payable. In the
event a Change of Control occurs at a time when the Issuer is prohibited from
purchasing Notes, the Issuer will be required under the Indenture, within 30
days following a Change of Control to (i) seek the consent of its lenders to the
purchase of the Notes or (ii) refinance the Indebtedness that prohibits such
purchase. If the Issuer does not obtain such a consent or refinance such
borrowings, the Issuer will remain prohibited from repurchasing Notes. The
Issuer's failure to purchase tendered Notes or make a Change of Control Offer
following a Change of Control would constitute an Event of Default under the
Indenture. An amendment of or waiver under the Indenture may not waive the
Issuer's obligation to make a Change of Control Offer without the consent of the
Holders of at least two-thirds in outstanding principal amount of the Notes.
The existence of the requirement of the Issuer to make a Change of Control
Offer to purchase Notes upon the occurrence of a Change of Control may deter a
third party from acquiring Pioneer, the Issuer or PAAC in a transaction which
would constitute a Change of Control. Subject to certain limitations described
below in "-- Certain Covenants", including the limitation on incurrence of
additional Indebtedness, Pioneer, the Issuer or PAAC could, in the future, enter
into certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of Senior Indebtedness (or any
other Indebtedness) outstanding at such time or otherwise affect Pioneer's, the
Issuer's or PAAC's capital structure or credit ratings. The Change of Control
provisions will not prevent a leveraged buyout led by Pioneer, the Issuer, PAAC
or the management, a recapitalization of Pioneer, the Issuer or PAAC or a change
in a majority of the members of the Board of
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Directors of Pioneer, the Issuer or PAAC which is approved by its then Board of
Directors, as the case may be.
The Indenture provides that the Issuer and PAAC will not, and will not
permit any of the Restricted Subsidiaries to, create or permit to exist or
become effective any restriction (other than restrictions not more restrictive
taken as a whole (as determined in good faith by the chief financial officer of
the Issuer) than those in effect under Existing Indebtedness and the New Credit
Facilities) that would materially impair the ability of the Issuer to make a
Change of Control Offer to purchase the Notes or, if such Change of Control
Offer is made, to pay for the Notes tendered for purchase.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitations on Indebtedness. The Indenture provides that the Issuer and
PAAC will not, and will not permit any of the Restricted Subsidiaries to,
directly or indirectly, create, incur, issue, assume, guarantee or otherwise
become liable with respect to or become responsible for the payment of,
contingently or otherwise ("incur"), any Indebtedness; provided, however, that
the Issuer, PAAC, or a Restricted Subsidiary may incur Indebtedness if at the
time of such incurrence and after giving pro forma effect thereto, the
Consolidated Cash Flow Coverage Ratio for the most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such Indebtedness is incurred,
calculated on a pro forma basis as if such Indebtedness was incurred on the
first day of such four full fiscal quarter period, would be at least 2.0 to 1.0.
The Indenture further provides that notwithstanding the foregoing
limitations, the incurrence of the following will not be prohibited:
(a) Indebtedness of the Issuer evidenced by the Original Notes, the
Exchange Notes and Indebtedness of the Guarantors evidenced by the
Guarantees and the guarantees with respect to the Exchange Notes;
(b) Indebtedness of PAI evidenced by the Term Loans and Indebtedness
of the Issuer, PAAC or any Restricted Subsidiary evidenced by the
guarantees with respect to the Term Loans;
(c) Indebtedness of the Issuer, PAAC or any Restricted Subsidiary
constituting Existing Indebtedness, and any extension, deferral, renewal,
refinancing or refunding thereof;
(d) Indebtedness of the Issuer, PAAC or any Restricted Subsidiary
incurred under one or more Credit Facilities in an aggregate principal
amount at any one time outstanding not to exceed the Borrowing Base at the
time such Indebtedness was incurred, less the aggregate amount of all
permanent repayments of revolving loans under such Credit Facilities made
in accordance with the second paragraph of the covenant described under
"-- Limitations on Asset Sales";
(e) Capitalized Lease Obligations of the Issuer, PAAC or any
Restricted Subsidiary and Indebtedness of the Issuer, PAAC, or any
Restricted Subsidiary secured by Liens that secure the payment of all or
part of the purchase price of assets or property acquired or constructed in
the ordinary course of business after the date of the Indenture; provided,
however, that the aggregate principal amount of such Capitalized Lease
Obligations plus such Indebtedness of the Issuer, PAAC and all of the
Restricted Subsidiaries does not exceed $10.0 million outstanding at any
time;
(f) Indebtedness of the Issuer to PAAC, or of the Issuer or PAAC to
any Restricted Subsidiary, or of PAAC to the Issuer or any Restricted
Subsidiary or of any Restricted Subsidiary to the Issuer, PAAC or another
Restricted Subsidiary (but only so long as such Indebtedness is held by the
Issuer, PAAC or a Restricted Subsidiary);
(g) Indebtedness under Hedging Obligations, provided, however, that,
in the case of foreign currency exchange or similar agreements which relate
to other Indebtedness, such agreements do not increase the Indebtedness of
the Issuer, PAAC or any Restricted Subsidiary outstanding other than as a
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result of fluctuations in foreign currency exchange rates, and in the case
of interest rate protection agreements, only if the notional principal
amount of such interest rate protection agreement does not exceed the
principal amount of the Indebtedness to which such interest rate protection
agreement relates;
(h) Indebtedness in respect of performance, completion, guarantee,
surety and similar bonds, banker's acceptances or letters of credit
provided by the Issuer, PAAC or any Restricted Subsidiary in the ordinary
course of business;
(i) In addition to any Indebtedness otherwise permitted to be Incurred
under the Indenture, up to $10.0 million aggregate principal amount of
Indebtedness at any one time outstanding; and
(j) Any refinancing, refunding, deferral, renewal or extension (each,
a "Refinancing") of any Indebtedness of the Issuer, PAAC or any Restricted
Subsidiary permitted by the initial paragraph of this covenant and clauses
(a) and (b) of the second paragraph of this covenant (the "Refinancing
Indebtedness"); provided, however, that (i) such Refinancing Indebtedness
does not exceed the aggregate principal amount of the Indebtedness so
refinanced, plus the amount of any premium required to be paid in
connection with such Refinancing in accordance with the terms of such
Indebtedness or the amount of any premium reasonably determined by the
Board of Directors as necessary to accomplish such Refinancing, plus the
amount of reasonable and customary out-of-pocket fees and expenses payable
in connection therewith, (ii) the Refinancing Indebtedness does not provide
for any mandatory redemption, amortization or sinking fund requirement in
an amount greater than or at a time prior to the amounts and times
specified in the Indebtedness being refinanced, refunded, deferred, renewed
or extended and (iii) if the Indebtedness being refinanced, refunded,
deferred, renewed or extended is subordinated to the Notes, the Refinancing
Indebtedness incurred to refinance, refund, defer, renew or extend such
Indebtedness is subordinated in right of payment to the Notes on terms at
least as favorable to the Holders as those contained in the documentation
governing the Indebtedness being so refinanced, refunded, deferred, renewed
or extended.
Notwithstanding anything to the contrary contained in the Indenture, the
Issuer, PAAC and the Restricted Subsidiaries each may guarantee Indebtedness of
the Issuer, PAAC or any Restricted Subsidiary that is permitted to be incurred
under the Indenture; provided that if such Indebtedness is subordinated in right
of payment to any other Indebtedness of the obligor, then such guarantee shall
be subordinated to Indebtedness of such guarantor to the same extent.
Limitations on Restricted Payments. The Indenture provides that each of the
Issuer and PAAC will not, nor will it cause, permit or suffer any Restricted
Subsidiary to, (i) declare or pay any dividends or make any other distributions
(including through mergers, liquidations or other transactions commonly known as
leveraged buyouts) on any class of Equity Interests of the Issuer, PAAC or such
Restricted Subsidiary (other than dividends or distributions payable by the
Issuer or a Wholly-Owned Restricted Subsidiary of PAAC on account of its Equity
Interests held by the Issuer, PAAC or another Restricted Subsidiary or payable
in shares of Capital Stock of the Issuer or PAAC other than Redeemable Stock),
(ii) make any payment on account of, or set apart money for a sinking or other
analogous fund for, the purchase, redemption or other retirement of such Equity
Interests, (iii) purchase, defease, redeem or otherwise retire any Subordinated
Indebtedness, or (iv) make any Restricted Investment, either directly or
indirectly, whether in cash or property or in obligations of the Issuer, PAAC or
any Restricted Subsidiary (all of the foregoing being called "Restricted
Payments"), unless, (x) in the case of a dividend, such dividend is payable not
more than 60 days after the date of declaration and (y) after giving effect to
such proposed Restricted Payment, all the conditions set forth in clauses (1)
through (3) below are satisfied (A) at the date of declaration (in the case of
any dividend), (B) at the date of such setting apart (in the case of any such
fund) or (C) on the date of such other payment or distribution (in the case of
any other Restricted Payment) (each such date being referred to as a
"Computation Date"):
(1) no Default or Event of Default has occurred and is continuing or
would result from the making of such Restricted Payment;
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(2) at the Computation Date for such Restricted Payment and after
giving effect to such Restricted Payment on a pro forma basis, the Issuer,
PAAC or such Restricted Subsidiary could incur $1.00 of additional
Indebtedness pursuant to the covenant described in the initial paragraph
under "-- Limitations on Indebtedness;" and
(3) the aggregate amount of Restricted Payments declared, paid or
distributed subsequent to the Closing Date (including the proposed
Restricted Payment) does not exceed the sum of (i) 50% of the cumulative
Consolidated Net Income of PAAC for the period subsequent to October 1,
1997 to and including the last day of PAAC's last fiscal quarter ending
prior to the Computation Date (each such period to constitute a
"Computation Period") (or, if such aggregate cumulative Consolidated Net
Income is a loss, minus 100% of such loss of PAAC during the Computation
Period), (ii) the aggregate Net Cash Proceeds of the issuance or sale or
the exercise (other than to PAAC or a Subsidiary of PAAC or an employee
stock ownership plan or other trust established by the Issuer, PAAC or any
of PAAC's Subsidiaries for the benefit of their respective employees) of
the Issuer's or PAAC's Equity Interests (other than Redeemable Stock)
subsequent to the Closing Date, (iii) the aggregate Net Cash Proceeds of
the issuance or sale (other than to PAAC or a Subsidiary of PAAC) of any
debt securities of the Issuer or PAAC, respectively, that have been
converted into or exchanged for Equity Interests (other than Redeemable
Stock) of the Issuer or PAAC, respectively, to the extent such debt
securities were originally issued or sold for cash, plus the aggregate Net
Cash Proceeds received by the Issuer or PAAC, respectively, at the time of
such conversion or exchange, in each case subsequent to the Closing Date,
(iv) cash contributions to the Issuer's or PAAC's capital subsequent to the
Closing Date and (v) $5.0 million.
If no Default or Event of Default has occurred and is continuing or would
occur as a result thereof, the prohibitions set forth above are subject to the
following exceptions: (a) Restricted Investments in obligations representing a
portion of the proceeds of any Asset Sale consummated in accordance with the
covenant described under "-- Limitations on Asset Sales", provided, however,
that such Restricted Investments will be excluded in the calculation of the
amount of Restricted Payments previously made for purposes of clause (3) of the
preceding paragraph; (b) any purchase or redemption of Equity Interests or
Subordinated Indebtedness made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Equity Interests of the Issuer or PAAC (other
than Redeemable Stock and other than Equity Interests issued or sold to PAAC or
a Subsidiary of PAAC or an employee stock ownership plan), provided, however,
that (x) such purchase or redemption will be excluded in the calculation of the
amount of Restricted Payments previously made for purposes of clause (3) of the
preceding paragraph and (y) the Net Cash Proceeds from such sale will be
excluded for purposes of clause (3)(ii) of the preceding paragraph to the extent
utilized for purposes of such purchase or redemption; (c) any purchase or
redemption of Subordinated Indebtedness of the Issuer or PAAC made by exchange
for, or out of the proceeds of the substantially concurrent sale of,
Subordinated Indebtedness of the Issuer, PAAC or any Restricted Subsidiary which
is permitted to be issued pursuant to the provisions of the covenant described
under "-- Limitation on Indebtedness," provided, however, that such purchase or
redemption will be excluded in the calculation of the amount of Restricted
Payments previously made for purposes of clause (3) of the preceding paragraph;
(d) the repurchase, redemption or other acquisition or retirement for value of
Capital Stock of Pioneer, the Issuer or PAAC held by management or other
employees of Pioneer, the Issuer or PAAC or any Subsidiary of PAAC pursuant to
any shareholders agreement, management or employee stock option agreement or
management or employee equity subscription agreement, in accordance with the
provisions of any such arrangement, in an amount not greater than $500,000 in
any calendar year plus the portion of any such amounts which remains unused at
the end of the two prior calendar years, but in no event to exceed $1.5 million
in any calendar year; provided, however, that any such purchase, redemption,
acquisition or retirement for value will be excluded in the calculation of the
amount of Restricted Payments previously made for purposes of clause (3) of the
preceding paragraph; (e) payments to Pioneer pursuant to any tax sharing
arrangement so long as payments thereunder do not exceed the amount of PAAC and
its consolidated subsidiaries' share of U.S. Federal and state and Canadian
federal and provincial income taxes actually paid or to be paid by Pioneer,
provided, however, that such payments will be excluded in the calculation of the
amount of Restricted Payments previously made for
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purposes of clause (3) of the preceding paragraph; (f) payments to Pioneer to
perform accounting, legal, corporate reporting and administrative functions in
the ordinary course of business in an amount not greater than $500,000 in any
calendar year, or to pay required fees in connection with the PCI Canada
Acquisition, provided, however, that such payments will be excluded in the
calculation of the amount of Restricted Payments previously made for purposes of
clause (3) of the preceding paragraph; and (g) Investments described in clause
(vi) of the definition of Permitted Investments, provided, however, that such
Investments will be included in the calculation of the amount of Restricted
Payments previously made for purposes of clause (3) of the preceding paragraph.
For purposes of this covenant, (a) the amount of any Restricted Payment
declared, paid or distributed in property of the Issuer, PAAC or any Restricted
Subsidiary will be deemed to be the net book value of any such property that is
intangible property and the Fair Market Value (as determined by and set forth in
a resolution of the Issuer's Board of Directors) of any such property that is
tangible property at the Computation Date, in each case, after deducting related
reserves for depreciation, depletion and amortization; (b) the amount of any
Restricted Payment declared, paid or distributed in obligations of the Issuer,
PAAC or any Restricted Subsidiary will be deemed to be the principal amount of
such obligations as of the date of the adoption of a resolution by the Board of
Directors of the Issuer, PAAC or such Restricted Subsidiary authorizing such
Restricted Payment; and (c) a distribution to holders of the Issuer's or PAAC's
Equity Interests of (i) shares of Capital Stock or other Equity Interests of any
Restricted Subsidiary or (ii) other assets of the Issuer or PAAC, without, in
either case, the receipt of equivalent consideration therefor will be regarded
as the equivalent of a cash dividend equal to the excess of the Fair Market
Value of the Equity Interests or other assets being so distributed at the time
of such distribution over the consideration, if any, received therefor. The
Issuer shall deliver to the Trustee an officers' certificate stating that such
Restricted Payment is permitted, attaching a copy of the applicable resolution
of the Board of Directors pursuant to which the value of the Restricted Payment
to be made was determined and setting forth the basis upon which the
calculations required by this covenant were computed.
Limitations on Liens. The Indenture provides that the Issuer and PAAC will
not, and will not permit any Restricted Subsidiary to, create, incur, assume or
suffer to exist any Lien upon any of their respective assets or properties now
owned or acquired after the Closing Date, or any income or profits therefrom,
excluding, however, from the operation of the foregoing any of the following:
(a) Liens existing as of the Closing Date or pursuant to an agreement
or document in existence on the Closing Date, including the New Credit
Facilities and security documents related thereto;
(b) Permitted Liens;
(c) Liens on assets or property of the Issuer, or on assets or
property of PAAC or the Restricted Subsidiaries, to secure the payment of
all or a part of the purchase price of assets or property acquired or
constructed in the ordinary course of business after the date of the
Indenture; provided, however, that (i) the aggregate principal amount of
Indebtedness secured by such Liens does not exceed the original cost or
purchase price of the assets or property so acquired (including the
reasonable and customary costs of installation of such acquired assets) or
constructed, (ii) the Indebtedness secured by such Liens is otherwise
permitted to be incurred under the Indenture, (iii) such Liens do not
encumber any other assets or property of the Issuer, PAAC or any of the
Restricted Subsidiaries and (iv) the Indebtedness secured by such Liens may
not be created more than 100 days after the later of the acquisition,
completion of construction, repair, improvement, addition or commencement
of full operation of the property subject to such Liens;
(d) Liens on assets or property acquired by the Issuer, PAAC or any
Restricted Subsidiary after the date of the Indenture; provided, however,
that (i) such Liens existed on the date such assets or property were
acquired and were not incurred as a result of or in anticipation of such
acquisition and (ii) such Liens do not extend to or cover any assets or
property of the Issuer, PAAC or any of the Restricted Subsidiaries other
than the assets or property so acquired;
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(e) Liens securing Indebtedness which is incurred to refinance
Indebtedness which has been secured by a Lien permitted under the Indenture
and which is permitted to be refinanced under the Indenture; provided,
however, that such Liens do not extend to or cover any assets or property
of the Issuer, PAAC or any of the Restricted Subsidiaries not securing the
Indebtedness so refinanced;
(f) Liens on assets or property of the Issuer, PAAC or any Restricted
Subsidiary that is subject to a Sale and Leaseback Transaction, provided,
however, that the aggregate principal amount of Attributable Indebtedness
in respect of all Sale and Leaseback Transactions then outstanding does not
at the time such a Lien is incurred exceed $10.0 million;
(g) Liens on property or shares of Capital Stock of a Person at the
time such Person becomes a Restricted Subsidiary; provided, however, that
such Liens are not created, incurred or assumed in contemplation of the
acquisition thereof by the Issuer, PAAC or a Restricted Subsidiary;
provided further, that such Liens may not extend to any other property
owned by the Issuer, PAAC or a Restricted Subsidiary;
(h) Liens securing Indebtedness of a Restricted Subsidiary owing to
the Issuer, PAAC or a Wholly-Owned Restricted Subsidiary;
(i) Liens on inventory, accounts receivable or related general
intangibles of any Restricted Subsidiary securing the obligations under
clause (d) of the covenant described under "-- Limitations on
Indebtedness";
(j) pari passu Liens on the collateral which secures the Senior
Secured Notes securing up to $50.0 million aggregate principal amount of
Indebtedness permitted to be incurred under the initial paragraph of the
covenant described under "-- Limitations on Indebtedness," provided that
(i) the proceeds of such Indebtedness are used to acquire or construct
additional property, plant and equipment that will be utilized in one or
more Related Businesses, and (ii) the aggregate principal amount of
Indebtedness secured by such Liens does not exceed the original cost or
purchase price of the assets or property so acquired (including the
reasonable and customary costs of installation of such acquired assets) or
constructed; and
(k) Liens on assets or property of the Issuer, or on assets or
property of PAAC or the Restricted Subsidiaries, acquired or constructed
after the date of the Indenture other than in the ordinary course of
business and other than assets or properties constituting Collateral;
provided, however, that (i) the aggregate principal amount of Indebtedness
secured by such Liens does not exceed the original cost or purchase price
of the assets or property so acquired (including the reasonable and
customary costs of installation of such acquired assets) or constructed,
(ii) the Indebtedness secured by such Liens is otherwise permitted to be
incurred under the Indenture, and (iii) such Liens do not encumber the
Collateral.
Limitations on Payment Restrictions Affecting Restricted Subsidiaries. The
Indenture provides that the Issuer and PAAC will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any consensual encumbrance or restriction of
any kind on the ability of PAAC or any Restricted Subsidiary to (i) pay
dividends or make any other distribution to the Issuer, PAAC or the Restricted
Subsidiaries on its Equity Interests, (ii) pay any Indebtedness owed to the
Issuer, PAAC or any Restricted Subsidiary, (iii) make loans or advances to the
Issuer, PAAC or any other Restricted Subsidiary or (iv) transfer any of its
property or assets to the Issuer, PAAC or any Restricted Subsidiary, except (A)
consensual encumbrances or restrictions contained in or created pursuant to the
New Credit Facilities, other Existing Indebtedness listed on a schedule to the
Indenture and security and intercreditor documents related thereto in existence
on the Closing Date, (B) consensual encumbrances or restrictions in the Notes,
the Exchange Notes and the Indenture, (C) any restriction, with respect to a
Restricted Subsidiary of the Issuer or PAAC that is not a Subsidiary of the
Issuer or PAAC on the Closing Date, in existence at the time such entity becomes
a Restricted Subsidiary of the Issuer or PAAC; provided that such encumbrance or
restriction is not created in anticipation of or in connection with such entity
becoming a Subsidiary of the Issuer or PAAC and is not applicable to any Person
or the properties or assets of
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any Person other than a Person that becomes a Subsidiary, (D) any encumbrances
or restrictions pursuant to an agreement effecting a refinancing of Indebtedness
referred to in clauses (A) or (C) of this covenant or contained in any amendment
to any agreement creating such Indebtedness, provided that the encumbrances and
restrictions contained in any such refinancing or amendment are not materially
more restrictive taken as a whole (as determined in good faith by the chief
financial officer of the Issuer) than those provided for in such Indebtedness
being refinanced or amended, (E) encumbrances or restrictions contained in any
other Indebtedness permitted to be incurred subsequent to the Closing Date
pursuant to the provisions of the covenant described under "-- Limitations on
Indebtedness", provided that any such encumbrances or restrictions are not
materially more restrictive taken as a whole (as determined in good faith by the
chief financial officer of the Issuer) than the most restrictive of those
provided for in the Indebtedness referred to in clause (A), (B) or (C) of this
covenant, (F) any such encumbrance or restriction consisting of customary
nonassignment provisions in leases governing leasehold interests to the extent
such provisions restrict the transfer of the lease, (G) any restriction with
respect to a Restricted Subsidiary imposed pursuant to an agreement entered into
for the sale or disposition of all or substantially all of the Capital Stock or
assets of such Restricted Subsidiary in compliance with the Indenture pending
the closing of such sale or disposition; or (H) any encumbrance or restriction
due to applicable law.
Limitations on Asset Sales. The Indenture provides that the Issuer and PAAC
will not, and will not permit any Restricted Subsidiary to, make any Asset Sale
(other than to the Issuer, PAAC or any Restricted Subsidiary) unless (i) the
Issuer, PAAC or such Restricted Subsidiary receives consideration at the time of
such Asset Sale at least equal to the Fair Market Value of the assets sold or
otherwise disposed of, and at least 80% of the consideration received by the
Issuer, PAAC or such Restricted Subsidiary from such Asset Sale is in the form
of cash; provided however, that the amount of any cash equivalent or note or
other obligation received by the Issuer, PAAC or such Restricted Subsidiary from
the transferee in any such transaction that is converted within 90 days by the
Issuer, PAAC or such Restricted Subsidiary into cash will be deemed upon such
conversion to be cash for purposes of this provision; and (ii) the Net Proceeds
received by the Issuer, PAAC or such Restricted Subsidiary from such Asset Sale
are applied in accordance with the following paragraphs.
If all or a portion of the Net Proceeds of any Asset Sale are not required
to be applied to repay permanently any Senior Indebtedness of the Issuer, PAAC
or PAI then outstanding as required by the terms thereof, or the Issuer
determines not to apply such Net Proceeds to the permanent prepayment of any
Senior Indebtedness outstanding (in the case of any optional prepayment of Term
Loans, only if such prepayment is effected on a pro rata basis in accordance
with the Intercreditor Agreement and in the case of a revolving credit facility
or similar arrangement that makes credit available, only if the commitment
thereunder is also permanently reduced by such amount) or if no such Senior
Indebtedness is then outstanding, then the Issuer may, within 365 days of the
Asset Sale, invest the Net Proceeds in the Issuer, PAAC or in one or more
Restricted Subsidiaries in a Related Business. The Existing Term Facility
requires, and the Term Facility will require, that any cumulative Net Proceeds
(including proceeds of Collateral in the case of the Term Facility) received in
excess of $35.0 million will be used to make a mandatory prepayment of the loans
thereunder. The amount of Net Proceeds neither used to permanently repay or
prepay Senior Indebtedness nor used or invested as set forth in this paragraph
constitutes "Excess Proceeds."
When the aggregate amount of Excess Proceeds from one or more Asset Sales
equals $10.0 million or more, the Issuer will apply 100% of such Excess Proceeds
within 365 days subsequent to the consummation of the Asset Sale which resulted
in the Excess Proceeds equalling $10.0 million or more to the purchase of Notes
tendered to the Issuer for purchase at a price equal to 100% of the principal
amount thereof, plus accrued interest and Liquidated Damages, if any, to the
date of purchase pursuant to an offer to purchase made by the Issuer (an "Asset
Sale Offer") with respect to the Notes. Any Asset Sale Offer may include a pro
rata offer under similar circumstances to purchase other Senior Indebtedness
requiring a similar offer. Any Asset Sale Offer will be made substantially in
accordance with the procedures for a Change of Control Offer described under
"-- Change of Control." Until such time as the Net Proceeds from any Asset Sale
are applied in accordance with this covenant, such Net Proceeds will be
segregated from the other assets of the Issuer, PAAC and the Subsidiaries of
PAAC and invested in cash or Eligible Investments, except that the Issuer,
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PAAC or any Restricted Subsidiary may use any Net Proceeds pending the
utilization thereof in the manner (and within the time period) described above,
to repay revolving loans (under the Revolving Facility or otherwise) without a
permanent reduction of the commitment thereunder.
The Issuer will cause a notice of any Asset Sale Offer to be mailed to the
Holders at their registered addresses not less than 30 days nor more than 45
days before the purchase date. Such notice will contain all instructions and
materials necessary to enable Holders to tender their Notes to the Issuer. Upon
receiving notice of an Asset Sale Offer, Holders may elect to tender their Notes
in whole or in part in integral multiples of $1,000 in exchange for cash. To the
extent that Holders properly tender Notes in an amount exceeding the Asset Sale
Offer, Notes of tendering Holders will be repurchased on a pro rata basis (based
on amounts tendered).
The Issuer's ability to repurchase the Notes pursuant to an Asset Sale
Offer may be prohibited by the Existing Term Facility or the New Credit
Facilities if at the time of such repurchase an event of default under the
Existing Term Facility or the New Credit Facilities, as the case may be, exists
or would be caused thereby. Any future credit agreements to which the Issuer
becomes a party may restrict the Issuer's ability to repurchase the Notes
pursuant to an Asset Sale Offer. In the event the Issuer is required to make an
Asset Sale Offer at a time when the Issuer is prohibited from making such Offer,
the Issuer will be required under the Indenture, on or prior to the date that
the Issuer is required to make an Asset Sale Offer, to (i) seek the consent of
its lenders to repurchase Notes pursuant to such Asset Sale Offer or (ii)
refinance the Indebtedness that prohibits such Asset Sale Offer. If the Issuer
does not obtain such a consent or refinance such borrowings, the Issuer will
remain prohibited from making such Offer. The Issuer's failure to purchase Notes
pursuant to an Asset Sale Offer or make such Asset Sale Offer would constitute
an Event of Default under the Indenture. See "-- Change of Control."
The Issuer will comply, to the extent applicable, with the requirements of
Rule 14e-1 under the Exchange Act, any other tender offer rules under the
Exchange Act and other securities laws or regulations in connection with any
offer to repurchase and the repurchase of the Notes as described above.
The Issuer and PAAC will not, and will not permit any of the Restricted
Subsidiaries to, create or permit to exist or become effective any consensual
restriction (other than restrictions not more restrictive taken as a whole (as
determined in good faith by the chief financial officer of the Issuer) than
those in effect under Existing Indebtedness and the New Credit Facilities) that
would materially impair the ability of the Issuer to comply with the provisions
of this "Limitations on Asset Sales" covenant.
Limitations on Sale and Leaseback Transactions. The Indenture provides that
the Issuer and PAAC will not, and will not permit any Restricted Subsidiary to,
enter into any Sale and Leaseback Transaction unless (i) at the time of the
occurrence of such transaction and after giving effect to such transaction and
(x) in the case of a Sale and Leaseback Transaction which is a Capitalized Lease
Obligation, giving effect to the Indebtedness in respect thereof, and (y) in the
case of any other Sale and Leaseback Transaction, giving effect to the
Attributable Indebtedness in respect thereof, the Issuer, PAAC or such
Restricted Subsidiary could incur $1.00 of additional Indebtedness pursuant to
the covenant described in the initial paragraph under "-- Limitations on
Indebtedness," (ii) at the time of the occurrence of such transaction, the
Issuer, PAAC or such Restricted Subsidiary could incur Indebtedness secured by a
Lien on property in a principal amount equal to or exceeding the Attributable
Indebtedness in respect of such Sale and Leaseback Transaction pursuant to the
covenant described under "-- Limitations on Liens", and (iii) the transfer of
assets in such Sale and Leaseback Transaction is permitted by, and the Issuer
applies the proceeds of such transaction in compliance with, the covenant
described under "-- Limitations on Asset Sales."
Limitations on Mergers; Sales of Assets. The Indenture provides that the
Issuer will not amalgamate with, consolidate with or merge into, or sell,
assign, convey, lease or transfer all or substantially all of its assets and
those of its Subsidiaries taken as a whole to, any Person, unless (i) the
resulting, surviving or transferee Person expressly assumes all the obligations
of the Issuer under the Notes and the Indenture; (ii) such Person is organized
and existing under the laws of Canada, any province thereof, the United States
of America, any state thereof or the District of Columbia; (iii) at the time of
the occurrence of such transaction and after giving effect to such transaction
on a pro forma basis, such Person could incur $1.00 of additional
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Indebtedness pursuant to the covenant described in the initial paragraph under
"-- Limitations on Indebtedness" (assuming a market rate of interest with
respect to such additional Indebtedness); (iv) at the time of the occurrence of
such transaction and after giving effect to such transaction on a pro forma
basis, the Consolidated Net Worth of such Person is equal to or greater than the
Consolidated Net Worth of the Issuer immediately prior to such transaction; (v)
each Guarantor, to the extent applicable, will by supplemental indenture confirm
that its Guarantee will apply to such Person's obligations under the Notes; (vi)
immediately before and immediately after giving effect to such transaction and
treating any Indebtedness which becomes an obligation of the Issuer or any of
its Subsidiaries or of such Person as a result of such transaction as having
been incurred by the Issuer or such Subsidiary or such Person, as the case may
be, at the time of such transaction, no Default or Event of Default has occurred
and is continuing; and (vii) the Issuer shall have received an opinion of
outside counsel in Canada to the effect that (A) any payment of interest or
principal on the Notes by the Issuer to a Holder will, after the amalgamation,
consolidation, merger, sale, assignment, conveyance, transfer, lease or other
disposition of assets, be exempt from Canadian withholding tax if the Holder is
or is deemed to be a non-resident of Canada, deals at arm's length with the
resulting, surviving or transferee Person for purposes of the Income Tax Act
(Canada) at the time of making the payment and (B) no other taxes on income
(including taxable capital gains) will be payable under the Income Tax Act
(Canada) by a Holder of the Notes who is or who is deemed to be a non-resident
of Canada in respect of the acquisition, ownership or disposition of the Notes,
including the receipt of interest, principal or premium thereon, provided that
such Holder does not use or hold, and is not deemed to use or hold the Notes in
carrying on a business in Canada for purposes of the Income Tax Act (Canada)
and, in the case of a Holder of Notes who carries on an insurance business in
Canada and elsewhere, the Notes are not effectively connected with its Canadian
insurance business.
No Guarantor will, and the Issuer and PAAC will not permit a Guarantor to,
in a single transaction or series of related transactions amalgamate, merge or
consolidate with or into any other corporation (other than the Issuer or any
other Guarantor) or other entity, or sell, assign, convey, transfer, lease or
otherwise dispose of all or substantially all of its properties and assets to
any entity (other than the Issuer or any other Guarantor) unless at the time and
giving effect thereto: (i) either (1) such Guarantor is the continuing
corporation or (2) the entity (if other than such Guarantor) formed by such
amalgamation, consolidation or into which such Guarantor is merged or the entity
which acquires by sale, assignment, conveyance, transfer, lease or disposition
the properties and assets of such Guarantor is a corporation duly organized and
validly existing under the laws of the United States of America, any state
thereof or the District of Columbia or of Canada or any province thereof and
expressly assumes by a supplemental indenture, executed and delivered to the
Trustee, in a form reasonably satisfactory to the Trustee, all the obligations
of such Guarantor under the Notes and the Indenture; and (ii) immediately before
and immediately after giving effect to such transaction, no Default or Event of
Default has occurred and is continuing. The provisions of this paragraph will
not apply to any transaction (including any Asset Sale made in accordance with
"-- Limitations on Asset Sales" above) with respect to any Guarantor if the
Guarantee of such Guarantor is released in connection with such transaction in
accordance with the applicable provisions of the Indenture. Upon any sale,
exchange, transfer or other disposition to any Person of all of the Issuer's,
PAAC's or a Restricted Subsidiary's Equity Interests in, or all or substantially
all of the assets of, any Guarantor which is in compliance with the Indenture,
such Guarantor will be released from all its obligations under its Guarantee.
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraphs in
which the Issuer or any Guarantor is not the continuing corporation, the
successor Person formed or remaining will succeed to, and be substituted for,
and may exercise every right and power of, the Issuer or such Guarantor, as the
case may be, and the Issuer or such Guarantor, as the case may be, would be
discharged from its obligations under the Indenture, the Notes or its Guarantee,
as the case may be.
The governing law of the Indenture and the Notes is New York law. New York
law offers no clear guidance as to the definition of the term "all or
substantially all" in the context of the "Limitations on Mergers; Sales of
Assets" covenant in an indenture such as the Indenture. To the extent that the
law of other jurisdictions does offer guidance as to the definition of the term,
such jurisdictions have applied a qualitative
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test as well as quantitative tests to determine the meaning of "all or
substantially all" on a case-by-case basis. The lack of an established meaning
for the term "all or substantially all" could lead to uncertainty as to the
ability of the Holders of Notes to determine whether or not a transaction
governed by this "Limitations on Mergers; Sales of Assets" covenant has
occurred.
Certain Guarantees. The Indenture provides that if (i) any Subsidiary of
PAAC becomes a Restricted Subsidiary after the Closing Date, (ii) the Issuer,
PAAC or any Subsidiary of PAAC that is a Guarantor transfers or causes to be
transferred, in one transaction or a series of related transactions, property or
assets (including, without limitation, businesses, divisions, real property,
assets or equipment) which in the aggregate have a value equal to or greater
than 15% of PAAC's and its Subsidiaries' total assets determined on a
consolidated basis as of the time of transfer to any Subsidiary or Subsidiaries
of PAAC that is not the Issuer or a Guarantor or are not Guarantors, (iii) any
Subsidiary of PAAC which has a value equal to or greater than 5% of PAAC's and
its Subsidiaries' total assets determined on a consolidated basis as of the time
of determination directly or indirectly guarantees or otherwise becomes
obligated with respect to any Senior Indebtedness of the Issuer or PAAC, or (iv)
any Subsidiary of PAAC becomes a guarantor of the Term Loans or the loans under
the Existing Term Facility after the Closing Date, the Issuer and PAAC will
cause such Subsidiary or Subsidiaries of PAAC to execute and deliver to the
Trustee a supplemental indenture pursuant to which such Subsidiary or
Subsidiaries of PAAC will unconditionally guarantee all of the Issuer's
obligations under the Indenture and the Notes on the same terms as the other
Guarantors, which Guarantee will rank pari passu with any Senior Indebtedness of
such Subsidiary; provided, that clause (i) of this covenant will not apply to
any newly acquired or created Subsidiary organized outside of the United States
of America and conducting the majority of its business outside of the United
States of America for so long as the issuance of a guarantee by such Subsidiary
would result in a material increase in the aggregate amount of income tax
payable by PAAC on a consolidated basis and the Issuer shall deliver to the
Trustee an officers' certificate so stating.
Transactions with Affiliates. The Indenture provides that the Issuer, PAAC
and the Restricted Subsidiaries will not, directly or indirectly, enter into any
transaction or series of related transactions with or for the benefit of any of
their respective Affiliates other than with the Issuer, PAAC or any Restricted
Subsidiary, except on an arm's-length basis and if (x)(i) in the case of any
such transaction in which the aggregate rental value, remuneration or other
consideration (including the value of a loan), together with the aggregate
rental value, remuneration or other consideration (including the value of a
loan) of all such other transactions consummated in the year during which such
transaction is proposed to be consummated, exceeds $750,000, the Issuer delivers
board resolutions to the Trustee evidencing that the Board of Directors and the
Independent Directors that are disinterested each have (by a majority vote)
determined in good faith that the aggregate rental value, remuneration or other
consideration (including the value of any loan) inuring to the benefit of such
Affiliate from any such transaction is not greater than that which would be
charged to or extended by the Issuer, PAAC or its Subsidiaries, as the case may
be, on an arm's-length basis for similar properties, assets, rights, goods or
services by or to a Person not affiliated with the Issuer, PAAC or its
Subsidiaries, as the case may be, and (ii) in the case of any such transaction
in which the aggregate rental value, remuneration or other consideration
(including the value of any loan), together with the aggregate rental value,
remuneration or other consideration (including the value of any loan) of all
such other transactions consummated in the year during which such transactions
are proposed to be consummated, exceeds $7.5 million, the Issuer delivers to the
Trustee board resolutions as described in clause (x)(i) of this paragraph and an
opinion of an investment banking firm of national standing in the United States
of America, unaffiliated with the Issuer and the Affiliate which is party to
such transaction, to the effect that the aggregate rental price, remuneration or
other consideration (including the value of a loan) inuring to the benefit of
such Affiliate from any such transaction is not greater than that which would be
charged to or extended by the Issuer, PAAC or its Subsidiaries, as the case may
be, on an arm's-length basis for similar properties, assets, rights, goods or
services by or to a Person not affiliated with the Issuer, PAAC or its
Subsidiaries, as the case may be, and (y) all such transactions referred to in
clauses (x)(i) and (ii) are entered into in good faith. Any transaction required
to be approved by Independent Directors pursuant to the preceding paragraph must
be approved by at least one such Independent Director.
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The provisions of the preceding paragraph do not prohibit (i) any
Restricted Payment permitted to be paid pursuant to the provisions of the
covenant described under "-- Limitations on Restricted Payments" other than with
respect to Investments described in the following clause (ii), (ii) any
Investment made in Kemwater during a period of three years following the Closing
Date, provided that such Investment matures or is required to be redeemed within
one year of its being made, (iii) any issuance of securities, or other payments,
awards or grants in cash, securities or otherwise pursuant to, or the funding
of, employment arrangements, stock options and stock ownership plans approved by
the Board of Directors, (iv) loans or advances to employees in the ordinary
course of business consistent with past practices, not to exceed $500,000
aggregate principal amount outstanding at any time, (v) the payment of fees and
compensation paid to, and indemnity provided on behalf of, officers, directors,
employees or consultants of the Issuer, PAAC or any of their Subsidiaries, as
determined by the board of directors of the Issuer, PAAC or any of their
Subsidiaries in good faith and (vi) Existing Affiliate Agreements, including
amendments thereto entered into after the Closing Date provided that the terms
of any such amendment either (A) are not, in the aggregate, less favorable to
the Issuer than the terms of such agreement prior to such amendment, or (B) if
such terms are, in the aggregate, less favorable to the Issuer, such amendment
satisfies the requirements of the preceding paragraph.
Limitation on Ownership of Wholly-Owned Restricted Subsidiary Stock. The
Indenture provides that the Issuer and PAAC (a) will not, and will not permit
any Wholly-Owned Restricted Subsidiary of PAAC to, transfer, convey, sell or
otherwise dispose of any Capital Stock of any Wholly-Owned Restricted Subsidiary
of PAAC (other than All-Pure and its subsidiaries) to any Person (other than the
Issuer, PAAC or a Wholly-Owned Restricted Subsidiary of PAAC), unless (i) such
transfer, conveyance, sale or other disposition is of all the Capital Stock of
such Wholly-Owned Restricted Subsidiary of PAAC and (ii) the Net Proceeds from
such transfer, conveyance, sale, lease or other disposition are applied in
accordance with the covenant described under the caption "-- Limitations on
Asset Sales," and (b) will not permit any Wholly-Owned Restricted Subsidiary of
PAAC (other than All-Pure and its subsidiaries) to issue any of its Equity
Interests (other than, if necessary, Capital Stock constituting directors'
qualifying shares or interests held by directors or shares or interests required
to be held by foreign nationals, to the extent mandated by applicable law) to
any Person other than to the Issuer, PAAC or a Wholly-Owned Restricted
Subsidiary of PAAC of PAAC.
Impairment of Security Interest. The Indenture provides that the Issuer and
PAAC will not, and will not cause or permit any Restricted Subsidiaries to, take
or omit to take any action which action or omission might or would have the
result of affecting or impairing the Liens and security interest in favor of the
Collateral Agent for the benefit of the Secured Parties with respect to the
Collateral and the Issuer will not grant to any Person, or suffer any Person to
have any interest whatsoever in the Collateral, in each case other than as
otherwise permitted by the Indenture, the Term Facility or the Security
Documents. The Issuer and PAAC will not, and will not cause or permit any
Restricted Subsidiaries to, enter into any agreement or instrument that by its
terms requires that the proceeds received from any sale of Collateral be applied
to repay, redeem, defease or otherwise acquire or retire any Indebtedness of any
Person, other than pursuant to the Indenture or the Term Facility. A release of
any of the Collateral strictly in accordance with the terms and conditions of
the Indenture and the Security Documents will not be deemed for any purpose to
be an impairment of security under the Indenture.
Amendment to Security Documents. The Indenture provides that the Issuer and
PAAC will not amend, modify or supplement, or permit or consent to any
amendment, modification or supplement of, the Security Documents in any manner
or to any extent that would constitute an Event of Default under the Indenture
or the Security Documents; provided that the Indenture and the Security
Documents may be amended, modified or supplemented as set forth under the
caption "Amendment, Supplement or Waiver."
Stock Pledge Agreements. The Indenture provides that the Issuer and PAAC
will, and will cause the applicable Subsidiary or Subsidiaries of PAAC to,
execute and deliver to the Collateral Agent one or more stock pledge agreements
substantially in the form of the Stock Pledge Agreement securing the Senior
Secured Notes providing for the pledge to the Collateral Agent for the benefit
of itself and the Trustee, for itself and the Holders and the Term Loan Agent,
for itself and the other Term Loan Lenders, of all the Capital Stock of (i) the
Issuer and each of the Restricted Subsidiaries and (ii) each other Restricted
Subsidiary that (A) is
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engaged in any business activity other than the holding of the Capital Stock of
one or more Subsidiaries of PAAC (or in the case of Imperial West, engaging in
any business activity other than the holding of its Investment in Kemwater) and
(B) has assets equal to or greater than 5% of PAAC's total assets determined on
a consolidated basis as of the time of determination, together with delivery to
the Collateral Agent of stock certificates evidencing such Capital Stock
(together with undated stock powers executed in blank), at such time as such
Capital Stock is not pledged for the benefit of the lenders under the Existing
Term Facility and the holders of the Senior Secured Notes. The Indenture
provides in certain limited circumstances for the release of the Issuer and PAAC
from compliance with, and the reinstatement of, this covenant.
Provision of Financial Statements. The Indenture provides that, whether or
not PAAC is subject to Section 13(a) or 15(d) of the Exchange Act, PAAC will, to
the extent permitted under the Exchange Act, file with the Commission the annual
reports, quarterly reports and other documents which PAAC would have been
required to file with the Commission pursuant to such Section 13(a) or 15(d) if
PAAC were so subject, such documents to be filed with the Commission on or prior
to the respective dates (the "Required Filing Dates") by which PAAC would have
been required so to file such documents if PAAC were so subject. PAAC will also
in any event (x) within 15 days of each Required Filing Date (i) transmit by
mail to all holders of Notes, as their names and addresses appear in the
security register, without cost to such holders and (ii) file with the Trustee
copies of the annual reports, quarterly reports and other documents which PAAC
would have been required to file with the Commission pursuant to Section 13(a)
or 15(d) of the Exchange Act if PAAC were subject to such Sections and (y) if
filing such documents by PAAC with the Commission is not permitted under the
Exchange Act, promptly upon written request and payment of the reasonable cost
of duplication and delivery, supply copies of such documents to any prospective
holder of Notes at PAAC's cost. Any financial statements contained in each of
such reports or other documents will be prepared in accordance with GAAP
consistently applied.
Limitation on Applicability of Certain Covenants. The Indenture provides
that notwithstanding anything to the contrary therein, the covenants described
above entitled "Limitations on Indebtedness," "Limitations on Restricted
Payments," "Limitations on Liens," "Limitations on Payment Restrictions
Affecting Restricted Subsidiaries," "Limitations on Asset Sales" and
"Transactions with Affiliates" will not apply to transactions effected pursuant
to and in accordance with the Contingent Payment Agreement and amounts related
to such transactions will not be required to be included in any calculation
required by any such covenant. Such transactions include (i) any payment made by
the Issuer, PAAC or a Restricted Subsidiary, (ii) any assets or property
transferred by the Issuer, PAAC or a Restricted Subsidiary, (iii) the
application of any proceeds received by the Issuer, PAAC or any Restricted
Subsidiary in connection with any transfer of assets or property made by such
Person, (iv) any escrow or segregation of moneys to be paid by the Issuer, PAAC
or a Restricted Subsidiary, (v) any Investment of such escrowed or segregated
moneys by the Issuer, PAAC or a Restricted Subsidiary or any other Investment
under the Contingent Payment Agreement, (vi) any obligation of the Issuer, PAAC
or a Restricted Subsidiary to make any such payments or to effect any such
escrow or segregation of moneys, (vii) any Indebtedness incurred by the Issuer,
PAAC or a Restricted Subsidiary that is non-recourse to the assets of the
Issuer, PAAC, such Restricted Subsidiary or any other Restricted Subsidiary,
other than the borrower's interest in Basic Investments, Victory Valley, the
Excess Land and/or any other assets or funds held under the Contingent Payment
Agreement, and as to which none of the Issuer, PAAC or any Restricted Subsidiary
(other than the borrower) provides credit support or is directly or indirectly
liable, or (viii) any Lien incurred by the Issuer, PAAC or any Restricted
Subsidiary in connection with Indebtedness described in clause (vii) above that
does not extend to assets of the Issuer, PAAC or any Restricted Subsidiary other
than such Person's interest in Basic Investments, Victory Valley, the Excess
Land and/or any other assets or funds held under the Contingent Payment
Agreement.
Additional Covenants. The Indenture also contains covenants with respect to
the following matters: (i) payment of principal, premium and interest; (ii)
maintenance of an office or agency in the City of New York; (iii) arrangements
regarding the handling of money held in trust; (iv) maintenance of corporate
existence; (v) payment of taxes and other claims; (vi) maintenance of
properties; and (vii) maintenance of insurance.
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RELEASE OF COLLATERAL
The Issuer will be permitted to sell Collateral in an Asset Sale and obtain
a release of the liens of the Security Documents in such Collateral only upon
compliance with the covenant described in "-- Certain Covenants -- Limitations
on Asset Sales" and only upon delivery to the Trustee and the Collateral Agent
of (a) a notice that, among other things, describes the interests to be
released, states the fair market value of the released interests as of a date no
later than 60 days before the date of such notice, and certifies that the
purchase price received is not less than the fair market value of such released
interest as of the date of such release, (b) the Net Proceeds of the Asset Sale,
(c) an officer's certificate certifying, among other things, the terms of the
Indenture governing Asset Sales and all other applicable terms have been
complied with, (d) an opinion of counsel as to the Asset Sale, and (e)
satisfactory title opinions confirming that the Liens of the Collateral Agent on
the remaining Collateral continue unimpaired as perfected first priority liens.
To the extent Trust Moneys consist of insurance proceeds or condemnation or
other taking awards, any such moneys which may be used to effect a restoration
of the affected Collateral will be permitted to be withdrawn by the Issuer and
paid by the Collateral Agent, at the direction of the Trustee, upon a request by
the Issuer to reimburse the Issuer for expenditures made or costs incurred to
repair, rebuild or replace the destroyed, damaged, or taken Collateral, and upon
delivery of (a) an officer's certificate certifying, among other things, as to
expenditures made or costs incurred, the necessity or desirability in the
conduct of the Issuer's business of the repaired, rebuilt, replaced property,
and the fair market value of such property as of the date of the expenditures,
(b) an opinion of counsel as to the validity and perfection of the Collateral
Agent's lien on the repaired or replaced Collateral and (c) an architect's
certificate as to the costs of such restoration and compliance with law.
To the extent Trust Moneys consist of proceeds of an Asset Sale involving
Collateral, and the Issuer intends to reinvest such proceeds in the Issuer or in
one or more Restricted Subsidiaries in a Related Business, such Trust Moneys
will be permitted to be withdrawn by the Issuer upon request to the Trustee and
upon receipt by the Trustee and the Collateral Agent of (a) notice of such
withdrawal, (b) an officer's certificate certifying compliance with the
Indenture, (c) instruments granting the Collateral Agent first priority liens,
for the benefit of the Secured Parties, on the real or personal property
interests in which the Issuer or Restricted Subsidiary have invested, and (d) an
opinion of counsel as to the instruments governing such liens and security
interests.
Trust Moneys will be permitted to be applied from time to time (x) to the
payment of principal and interest on the Notes, or (y) to the extent otherwise
permitted by the Indenture, to redeem or repurchase Notes, including without
limitation pursuant to a Change of Control Offer or (to the extent such Trust
Moneys constitute proceeds from Asset Sales) an Asset Sale Offer, or (z) at the
direction of the Issuer to pay any other Senior Indebtedness secured by liens in
the Collateral (but only to the extent such Trust Moneys constitute proceeds
from Asset Sales), in each case upon receipt by the Trustee and the Collateral
Agent of (a) resolutions of the boards of directors of the Issuer directing such
application, (b) cash equaling the accrued interest, if any, required to be paid
in connection with such payment or purchase, (c) an officer's certificate, and
(d) an opinion of counsel. Trust Moneys received by the Collateral Agent or the
Trustee pursuant to an Asset Sale Offer remaining after the completion of such
Asset Sale Offer will be permitted to be withdrawn by the Issuer upon request of
the Issuer and delivery of an officer's certificate and an opinion of counsel.
The Indenture provides that any release of Collateral, including Trust
Moneys, will be subject to the provisions of Section 314(d) of the Trust
Indenture Act relating to, among other things, the delivery of a certificate or
an opinion of an engineer, appraiser or other expert as to the fair value of
Collateral being released from the Liens of the Security Documents.
CERTAIN DEFINITIONS
"Affiliate" means, with respect to any party, any Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such party including any estate or trust under will of such party.
For purposes of this definition, "control" (including, with correlative
meanings, the terms "controlling,"
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"controlled by" and "under common control with"), as used with respect to any
Person, means the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise; provided,
however, that beneficial ownership of 5% or more of the voting securities of a
Person will be deemed to be control.
"Asset Sale" means, with respect to the Issuer, PAAC or any Restricted
Subsidiary, the sale, lease, conveyance or other disposition (including, without
limitation, by way of merger or consolidation, and whether by operation of law
or otherwise) to any Person other than the Issuer, PAAC or a Wholly-Owned
Restricted Subsidiary of any of the Issuer's, PAAC's or such Restricted
Subsidiary's assets (including, without limitation, (x) any sale or other
disposition of Equity Interests of any Restricted Subsidiary and (y) any sale or
other disposition of any noncash consideration received by the Issuer, PAAC or
such Restricted Subsidiary from any prior transaction or series of related
transactions that constituted an Asset Sale under the Indenture), whether owned
on the date of the Indenture or subsequently acquired, in one transaction or a
series of related transactions: provided, however, that the following will not
constitute Asset Sales: (i) transactions (other than transactions described in
clause (y) above) in any calendar year with aggregate cash and/or Fair Market
Value of any other consideration received (including, without limitation, the
unconditional assumption of Indebtedness) of less than $1.0 million; (ii) a
transaction or series of related transactions that results in a Change in
Control; (iii) any sale of assets of the Issuer, PAAC and its Restricted
Subsidiaries or merger permitted under the covenant described under "Certain
Covenants -- Limitations on Mergers; Sales of Assets"; (iv) any sale or other
disposition of inventory, property (whether real, personal or mixed) or
equipment that has become worn out, obsolete or damaged or otherwise unsuitable
or no longer needed for use in connection with the business of the Issuer, PAAC
or any Restricted Subsidiary, as the case may be, in the good faith
determination of the Board of Directors; and (v) any sale of inventory to
customers in the ordinary and customary course of business.
"Attributable Indebtedness" means, with respect to any Sale and Leaseback
Transaction, as at the time of determination, the greater of (i) the Fair Market
Value of the property subject to such transaction and (ii) the present value
(discounted at a rate equivalent to the Issuer's then current weighted average
cost of funds for borrowed money, compounded on a semi-annual basis) of the
total net obligations of the lessee for rental payments during the remaining
term of the lease included in such arrangement (including any period for which
such lease has been extended). As used in the preceding sentence, the "total net
obligations of the lessee for rental payments" under any lease for any such
period means the sum of rental and other payments required to be paid with
respect to such period by the lessee thereunder excluding any amounts required
to be paid by such lessee on account of maintenance and repairs, insurance,
taxes, assessments, water rates or similar charges. In the case of any lease
which is terminable by the lessee upon payment of a penalty, such net amount of
rent also includes the amount of such penalty, but no rent will be considered as
required to be paid under such lease subsequent to the first date upon which it
may be so terminated.
"Bankruptcy Law" means the Bankruptcy and Insolvency Act (Canada), the
Companies' Creditors Arrangement Act (Canada), the Winding-up Act (Canada),
Chapter 11 of Title 11 of the United States Code, as amended, or any other
Canadian federal, Canadian provincial, United States federal or United States
state law or the law of any other jurisdiction relating to bankruptcy,
insolvency, receivership, winding-up, liquidation, reorganization or relief of
debtors or any amendment to, succession to or change in any such law.
"Basic Investments" means Basic Investments, Inc., a Nevada corporation.
"Board of Directors" means the Board of Directors of the Issuer and/or PAAC
or any committee thereof duly authorized to act on behalf of such Board.
"Borrowing Base" means, as of any date, an amount equal to the sum of (a)
85% of the net book value of all accounts receivable of the Issuer, PAAC and the
Restricted Subsidiaries as of such date, (b) 50% of the net book value of all
inventory owned by the Issuer, PAAC and the Restricted Subsidiaries as of such
date, and (c) the lesser of (x) $10.0 million and (y) 85% of the net book value
of all accounts receivable of Kemwater as of such date plus 50% of the net book
value of all inventory as of such date owned by Kemwater, all calculated on a
consolidated basis and in accordance with GAAP. To the extent that information
is not available as to the amount of accounts receivable or inventory as of a
specific date, the Issuer may utilize the
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most recent available quarterly or annual financial report of the Issuer, PAAC
or the Restricted Subsidiaries for purposes of calculating the Borrowing Base.
"Capital Stock" means, with respect to any Person, any common stock,
preferred stock and any other capital stock of such Person and shares,
interests, participations or other ownership interest (however designated), of
any Person and any rights (other than debt securities convertible into, or
exchangeable for, capital stock), warrants or options to purchase any of the
foregoing, including (without limitation) each class of common stock and
preferred stock of such Person if such Person is a corporation and each general
and limited partnership interest of such Person if such Person is a partnership.
"Capitalized Lease Obligation" means Indebtedness represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP and the amount of such Indebtedness
will be the capitalized amount of such obligations determined in accordance with
GAAP.
"Cash Flow" for any period means the Consolidated Net Income of PAAC, the
Issuer and the Restricted Subsidiaries for such period, plus the following to
the extent included in calculating such Consolidated Net Income: (i)
Consolidated Interest Expense, (ii) income tax expense and (iii) depreciation,
depletion and amortization expense.
"Closing Date" means November 5, 1997.
"Consolidated Cash Flow Coverage Ratio" as of any date of determination
means the ratio of (i) the aggregate amount of Cash Flow for the period of the
most recent four consecutive fiscal quarters for which internal financial
statements are available prior to the date of such determination to (ii)
Consolidated Interest Expense for such four fiscal quarters of the Issuer, PAAC
and the Restricted Subsidiaries; provided, however, that (A) if the Issuer, PAAC
or any Restricted Subsidiary has incurred any Indebtedness since the beginning
of such period that remains outstanding or if the transaction giving rise to the
need to calculate the Consolidated Cash Flow Coverage Ratio is an incurrence of
Indebtedness, or both, Cash Flow and Consolidated Interest Expense for such
period will be calculated after giving effect on a pro forma basis to such
Indebtedness as if such Indebtedness had been issued on the first day of such
period and the discharge of any other Indebtedness repaid, repurchased, defeased
or otherwise discharged with the proceeds of such new Indebtedness as if such
discharge had occurred on the first day of such period, (B) if since the
beginning of such period the Issuer, PAAC or any Restricted Subsidiary has made
any Asset Sale, the Cash Flow for such period will be reduced by an amount equal
to the Cash Flow (if positive), directly attributable to the assets which are
the subject of such Asset Sale for such period, or increased by an amount equal
to the Cash Flow (if negative), directly attributable thereto for such period
and Consolidated Interest Expense for such period will be reduced by an amount
equal to the Consolidated Interest Expense directly attributable to any
Indebtedness of the Issuer, PAAC or any Restricted Subsidiary repaid,
repurchased, defeased or otherwise discharged with respect to the Issuer, PAAC
and its continuing Restricted Subsidiaries in connection with any such sale or
other disposition for such period (or, if the Capital Stock of any Subsidiary is
sold, the Consolidated Interest Expense for such period directly attributable to
the Indebtedness of such Subsidiary to the extent the Issuer, PAAC and its
continuing Restricted Subsidiaries are no longer liable for such Indebtedness
after such sale), (C) if since the beginning of such period the Issuer, PAAC or
any Restricted Subsidiary (by merger or otherwise) has made an Investment in any
Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary) or
an acquisition of assets, including any acquisition of assets occurring in
connection with a transaction causing a calculation to be made under the
Indenture, which constitutes all or substantially all of an operating unit of a
business, Cash Flow and Consolidated Interest Expense for such period will be
calculated after giving pro forma effect thereto (including the incurrence of
any Indebtedness) as if such Investment or acquisition occurred on the first day
of such period and (D) in making such computation, Consolidated Interest Expense
attributable to any Indebtedness incurred under any revolving credit facility
will be computed based on the average daily balance of such Indebtedness during
such period. For purposes of this definition, whenever pro forma effect is to be
given to an acquisition of assets, the amount of income or earnings relating
thereto, and the amount of Consolidated Interest Expense associated with any
Indebtedness incurred in connection therewith, the pro forma calculations will
be determined in good faith by a responsible financial or accounting officer of
the Issuer. If any Indebtedness bears a floating rate of interest and is being
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given pro forma effect, the interest on such Indebtedness will be calculated as
if the rate in effect on the date of determination had been the applicable rate
for the entire period.
"Consolidated Indebtedness" means the Indebtedness of the Issuer, PAAC and
its consolidated Restricted Subsidiaries determined on a consolidated basis in
conformity with GAAP.
"Consolidated Interest Expense" means, for any period, interest expense of
the Issuer, PAAC and its consolidated Restricted Subsidiaries, excluding
amortization of any deferred financing fees, plus, to the extent not included in
such interest expense, (i) interest expense attributable to Capitalized Lease
Obligations, (ii) amortization of debt discount and debt issuance cost, (iii)
capitalized interest, (iv) non-cash interest expense, (v) commissions, discounts
and other fees and charges owed with respect to letters of credit and bankers'
acceptance financing, (vi) interest actually paid by the Issuer, PAAC or any
such Restricted Subsidiary under any guarantee of Indebtedness or other
obligation of any other Person, (vii) net costs associated with Hedging
Obligations (including amortization of fees), (viii) Preferred Stock dividends
in respect of all Redeemable Stock of the Issuer or PAAC held by Persons other
than the Issuer, PAAC or a Wholly-Owned Restricted Subsidiary of PAAC and (ix)
the cash contributions to any employee stock ownership plan or similar trust to
the extent such contributions are used by such plan or trust to pay interest or
fees to any Person (other than the Issuer or PAAC) in connection with loans
incurred by such plan or trust to purchase newly issued or treasury shares of
the Capital Stock of the Issuer or PAAC.
"Consolidated Net Income" means, for any period, and as to any Person, the
aggregate Net Income of such Person and its Subsidiaries (other than, in the
case of the Issuer or PAAC, the Unrestricted Subsidiaries) for such period
determined in accordance with GAAP; provided that (i) the Net Income of any
Person which is not a Subsidiary of such Person but which is consolidated with
such Person or is accounted for by such Person by the equity method of
accounting will be included only to the extent of the amount of cash dividends
or cash distributions paid to such Person or a Wholly-Owned Restricted
Subsidiary of such Person (other than, in the case of the Issuer or PAAC, the
Unrestricted Subsidiaries), (ii) the Net Income of any Person acquired by such
Person or a Subsidiary of such Person in a pooling of interests transaction for
any period prior to the date of such acquisition will be excluded, (iii) the Net
Income of any Subsidiary of such Person that is subject to restrictions, direct
or indirect, on the payment of dividends or the making of distributions to such
Person will be excluded to the extent of such restrictions, (iv) the Net Income
of (A) any Unrestricted Subsidiary and (B) any Subsidiary less than 80% of whose
securities having the right (apart from the right under special circumstances)
to vote in the election of directors are owned by the Issuer, PAAC or the
Wholly-Owned Restricted Subsidiaries of PAAC will be included only to the extent
of the amount of cash dividends or cash distributions actually paid by such
Subsidiary to the Issuer, PAAC or a Wholly-Owned Restricted Subsidiary of PAAC,
(v) in the case of the Issuer or PAAC, the Net Income attributable to any
business, properties or assets acquired (by way of merger, consolidation,
purchase or otherwise) by the Issuer, PAAC or any Restricted Subsidiary for any
period prior to the date of such acquisition will be excluded, (vi) all
extraordinary gains and losses, and any gain or loss realized upon the
termination of any employee pension benefit plan, in respect of dispositions of
assets other than in the ordinary course of business and any one-time increase
or decrease to Net Income which is required to be recorded because of the
adoption of new accounting policies, practices or standards required by GAAP
(together, in each case, with any provision for taxes) will be excluded, and
(vii) all amounts of "other income, net" classified as such on one or more lines
of such Person's statement of operations, in accordance with GAAP, net of
applicable income taxes, will be excluded from such Person's aggregate Net
Income; provided that in the case of the Issuer or PAAC the foregoing exclusion
will not apply to cash dividends or cash distributions paid to PAAC in respect
of its indirect equity interest in Saguaro Power Company, a Limited Partnership,
to the extent included in clause (i) of this definition.
"Consolidated Net Worth" means, for any Person, the total of the amounts
shown on the balance sheet of such Person and its consolidated Subsidiaries,
determined on a consolidated basis without duplication in accordance with GAAP,
as of the end of the most recent fiscal quarter of such Person ending at least
45 days prior to the taking of any action for the purpose of which the
determination is being made, as (i) the amount of Capital Stock (other than
Redeemable Stock) plus (ii) the amount of surplus and retained earnings (or, in
the case of a surplus or retained earnings deficit, minus the amount of such
deficit).
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"Contingent Payment Agreement" means the Contingent Payment Agreement dated
as of April 20, 1995 among Pioneer, PAAC and the Sellers named therein.
"Credit Facility" means any revolving credit facility or similar
arrangement that makes credit available entered into by and among the Issuer,
PAAC and/or any Guarantor and the lending institutions party thereto, including
any credit agreement, related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and in each case as
amended, modified, renewed, refunded, replaced or refinanced from time to time.
"Eligible Investments" means, (i) securities issued or directly and fully
guaranteed or insured by Canada or the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of Canada or
the United States of America is pledged in support thereof) having maturities of
not more than 90 days from the date of acquisition, (ii) time deposits and
certificates of deposit with maturities of not more than 90 days from the date
of acquisition, of any commercial banking institution to which the Bank Act
(Canada) applies or that is a member of the Federal Reserve System having
capital and surplus in excess of $500.0 million, whose debt has a rating at the
time of any such investment of at least "A-2" or the equivalent thereof by
Standard & Poor's Ratings Group or at least "P-2" or the equivalent thereof by
Moody's Investors Service, Inc., or any bank or financial institution party to
the Term Facility, the Existing Term Facility or the Revolving Facility, (iii)
fully secured repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (i) entered into with any
bank or financial institution meeting the qualifications specified in clause
(ii) above, (iv) commercial paper issued by any commercial banking institution
to which the Bank Act (Canada) applies or that is a member of the Federal
Reserve System having capital and surplus in excess of $500.0 million and
commercial paper or master notes of issuers, rated at the time of any such
investment at least "A-2" or the equivalent thereof by Standard & Poor's Ratings
Group or at least "P-2" or the equivalent thereof by Moody's Investors Service,
Inc., or any bank or financial institution party to the Term Facility, the
Existing Term Facility or the Revolving Facility, and in each case maturing
within 270 days after the date of acquisition, and (v) any shares in an open-end
mutual fund organized by a bank or financial institution having combined capital
and surplus of at least $500.0 million investing solely in investments permitted
by the foregoing clauses (i), (ii) and (iv).
"Equity Interests" means shares, interests, participations or other
equivalents (however designated) of Capital Stock and all warrants, options or
other rights to acquire Capital Stock (but excluding any debt security which is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means an offering of Equity Interests (other than
Redeemable Stock) of any Person made on a primary basis by such Person
(including a rights offering to existing stockholders of such Person), which
yields gross proceeds to such Person of $15.0 million or more.
"Excess Land" means certain real property adjoining the sites of PCAC's
Henderson, Nevada and St. Gabriel, Louisiana plants and the Mojave, California
property owned by Imperial West that is not used in the business conducted at
such sites, which real property is referred to and defined in the Contingent
Payment Agreement as the "Subject Parcels."
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Notes" means notes issued pursuant to any Exchange Offer
Registration Statement.
"Exchange Offer Registration Statement" means the registration statement to
be filed by the Issuer and the Guarantors with the Securities and Exchange
Commission (the "Commission") with respect to an offer to exchange the Notes for
another series of notes of the Issuer with substantially identical terms to the
Notes.
"Existing Affiliate Agreements" means (i) agreements between Pioneer
Americas, Inc. or any of its subsidiaries and Saguaro Power Company, a Limited
Partnership, relating to the delivery of steam and other services, existing on
the date of the Indenture and listed on a schedule thereto, (ii) the Tax Sharing
Agreement of Pioneer and its subsidiaries, (iii) agreements between Pioneer
Americas, Inc. or any of its subsidiaries and Basic Investments relating to the
delivery of water and power, power transmission services, and other services,
existing on the date of the Indenture and listed on a schedule thereto and (iv)
any other
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agreements with affiliates of PAAC or the Issuer, existing on the date of the
Indenture and listed on a schedule thereto.
"Existing Indebtedness" means all Indebtedness (other than the Term Loans
and the Revolving Loans outstanding) of the Issuer, PAAC or any Restricted
Subsidiary existing on the date of the Indenture and listed on a schedule
thereto.
"Fair Market Value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length transaction, for cash, between a
willing seller and a willing buyer, neither of whom is under undue pressure or
compulsion to complete the transaction. Fair Market Value will be determined by
a majority of the members of the Board of Directors of the Issuer, and a
majority of the disinterested members of such Board of Directors, if any, acting
in good faith and will be evidenced by a duly and properly adopted resolution of
the Board of Directors.
"GAAP" means generally accepted accounting principles in the United States
of America set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as approved by a significant segment
of the accounting profession, which are in effect from time to time.
"Hedging Obligations" means the obligations of any Person or entity
pursuant to any swap or cap agreement, exchange agreement, collar agreement,
option, futures or forward hedging contract, derivative instrument or other
similar agreement or arrangement designed to protect such Person or entity
against fluctuations in interest rates or foreign exchange rates or the price of
raw materials and other chemical products used or produced in the Issuer and
PAAC's business, as the case may be.
"incur" has the meaning ascribed thereto in the covenant described under
"-- Certain Covenants -- Limitations on Indebtedness"; provided that (a) with
respect to any Indebtedness of the Issuer, PAAC or any Restricted Subsidiary
that is owing to the Issuer, PAAC or another Restricted Subsidiary, any
disposition, pledge or transfer of such Indebtedness to any Person (other than
the Issuer, PAAC or a Wholly-Owned Restricted Subsidiary) will be deemed to be
an incurrence of such Indebtedness and (b) with respect to any Indebtedness of
the Issuer, PAAC or a Restricted Subsidiary that is owing to another Restricted
Subsidiary, any transaction pursuant to which a Wholly-Owned Restricted
Subsidiary to which such Indebtedness is owing ceases to be a Wholly-Owned
Restricted Subsidiary will be deemed to be an incurrence of such Indebtedness,
and provided, further that any Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary will be deemed to be incurred by
such Restricted Subsidiary at the time it becomes a Restricted Subsidiary. The
term "incurrence" has a corresponding meaning.
"Indebtedness" of any Person means, without duplication, all liabilities
with respect to (i) indebtedness for money borrowed or which is evidenced by a
bond, debenture, note or other similar instrument or agreement, but excluding
trade credit evidenced by any such instrument or agreement; (ii) reimbursement
obligations, letters of credit and bankers' acceptances; (iii) indebtedness with
respect to Hedging Obligations; (iv) Capitalized Lease Obligations; (v)
indebtedness, secured or unsecured, created or arising in connection with the
acquisition or improvement of any property or asset or the acquisition of any
business; (vi) all indebtedness secured by any Lien upon property owned by such
Person and all indebtedness secured in the manner specified in this clause even
if such Person has not assumed or become liable for the payment thereof; (vii)
all indebtedness of such Person created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such Person
or otherwise representing the deferred and unpaid balance of the purchase price
of any such property, including all indebtedness created or arising in the
manner specified in this clause even though the rights and remedies of the
seller or lender under such agreement in the event of default are limited to
repossession or sale of such property; (viii) guarantees, direct or indirect, of
any indebtedness of other Persons referred to in clauses (i) through (vii)
above, or of dividends or leases, taxes or other obligations of other Persons,
excluding any guarantee arising out of the endorsement of negotiable instruments
for collection in the ordinary course of business; (ix) contingent obligations
in respect of, or to purchase or otherwise acquire or be responsible or liable
for, through the purchase of products or services, irrespective of whether such
products are delivered or such services are rendered, or otherwise, any such
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indebtedness referred to in clauses (i) through (vii) above; (x) any obligation,
contingent or otherwise, arising under any surety, performance or maintenance
bond; and (xi) Redeemable Stock of the Issuer or PAAC valued at the greater of
its voluntary or involuntary maximum fixed repurchase price plus accrued and
unpaid dividends; which indebtedness, Capitalized Lease Obligation, guarantee or
contingent or other obligation such Person has directly or indirectly created,
incurred, assumed, guaranteed or otherwise become liable or responsible for,
whether then outstanding or thereafter created in the case of clauses (i)
through (x) above, to the extent any of the foregoing indebtedness (other than
letters of credit and Hedging Obligations) would appear as a liability on the
balance sheet of such Person in accordance with GAAP. For purposes of the
foregoing definition, the "maximum fixed repurchase price" of any Redeemable
Stock which does not have a fixed repurchase price will be calculated in
accordance with the terms of such Redeemable Stock as if such Redeemable Stock
were purchased on any date on which Indebtedness is required to be determined
pursuant to the Indenture. As used herein, Indebtedness with respect to any
Hedging Obligation means, with respect to any specified Person on any date, the
net amount (if any) that would be payable by such specified Person upon the
liquidation, close-out or early termination on such date of such Hedging
Obligation. For purposes of the foregoing, any settlement amount payable upon
the liquidation, close-out or early termination of a Hedging Obligation will be
calculated by the Issuer in good faith and in a commercially reasonable manner
on the basis that such liquidation, close-out or early termination results from
an event of default or other similar event with respect to such specified
Person. Any reference in this definition to indebtedness will be deemed to
include any renewals, extensions and refundings of any such indebtedness or any
indebtedness issued in exchange for such indebtedness.
"Independent Director" means a director of the Issuer and/or PAAC other
than a director (i) who (apart from being a director of the Issuer, PAAC or any
of its Subsidiaries) is an employee, insider, associate or Affiliate of the
Issuer, PAAC or any of their Subsidiaries or has held any such position during
the previous year or (ii) who is a director, an employee, insider, associate or
Affiliate of another party to the transaction in question.
"Investment" means any direct or indirect advance, loan, other extension of
credit or capital contribution (by means of any transfer of cash or other
property to others or any payment for property or services for the account or
use of others) to, purchase or acquisition of Equity Interests, bonds, notes,
debentures or other securities of, or purchase or other acquisition of all or a
substantial part of the business, Equity Interests or other evidence of
beneficial ownership of, or any other investment in or guarantee of any
Indebtedness of, any Person or any other item that would be classified as an
investment on a balance sheet prepared in accordance with GAAP. Investments do
not include advances to customers and suppliers in the ordinary course of
business and on commercially reasonable terms. If the Issuer, PAAC or any
Subsidiary of either sells or otherwise disposes of any Equity Interests of any
direct or indirect Subsidiary of either such that, after giving effect to any
such sale or disposition, such Person is no longer a Subsidiary of either, the
Issuer, PAAC or such Subsidiary shall be deemed to have made an Investment on
the date of any such sale or disposition equal to the Fair Market Value of the
Equity Interests of such Subsidiary not sold or disposed of determined as
provided in the final paragraph of the covenant described under "-- Certain
Covenants -- Limitations on Restricted Payments."
"Lien" means any mortgage, pledge, lien, security interest, charge or
encumbrance of any kind (including any conditional sale or other title retention
agreement and any lease in the nature thereof).
"Net Cash Proceeds" means, with respect to any issuance or sale of Equity
Interests or debt securities that have been converted into or exchanged for
Equity Interests, as referred to under "-- Certain Covenants -- Limitations on
Restricted Payments," the proceeds of such issuance or sale in the form of cash
or cash equivalents, net of attorneys' fees, accountants' fees and brokerage,
consultation, underwriting and other fees and expenses actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Net Income" of any Person, for any period, means the net income (loss) of
such Person and its subsidiaries (other than, in the case of the Issuer or PAAC,
the Unrestricted Subsidiaries) determined in accordance with GAAP.
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"Net Proceeds" means the aggregate cash proceeds received by the Issuer,
PAAC or any of the Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, the proceeds of insurance paid on account of the
loss of or damage to any property, or compensation or other proceeds for any
property taken by condemnation, eminent domain or similar proceedings, and any
non-cash consideration received by the Issuer, PAAC or any Restricted Subsidiary
from any Asset Sale that is converted into or sold or otherwise disposed of for
cash within 90 days after the relevant Asset Sale), net of (i) the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees and sales commissions), (ii) any taxes paid or
payable as a result thereof, (iii) all amounts required to be applied to the
repayment of, or representing the amount of permanent reductions in the
commitments relating to, Indebtedness secured by a Lien on the asset or assets
the subject of such Asset Sale which Lien is permitted pursuant to the terms of
the Indenture, (iv) any reserve for adjustment in respect of the sale price of
such asset or assets required by GAAP, (v) all distributions and other payments
required to be made (including any amounts held pending distribution) to
minority interest holders in Subsidiaries or joint ventures as a result of such
Asset Sale, and (vi) all payments due under Existing Affiliate Agreements
arising out of an Asset Sale. The amount of any taxes required to be accrued as
a liability under GAAP as a consequence of an Asset Sale will be the amount
thereof as determined in good faith by the Board of Directors of the Issuer.
"Permitted Investment" means (i) any Eligible Investment, (ii) any
Investment in the Issuer, (iii) Investments in existence on the Closing Date,
and any such Investment in Basic Investments, Basic Land Company, Basic
Management, Inc., Basic Water Company or Victory Valley which has been
reclassified or converted into an alternate form of Investment in the same or a
successor entity, (iv) intercompany notes permitted under clause (f) of the
covenant described under "-- Certain Covenants -- Limitations on Indebtedness,"
(v) Investments in any Wholly-Owned Restricted Subsidiary or any Person which,
as a result of such Investment, becomes a Wholly-Owned Restricted Subsidiary;
provided that such Wholly-Owned Restricted Subsidiary is engaged in a Related
Business, and (vi) other Investments after the Closing Date in joint ventures,
corporations, limited liability companies, partnerships or Unrestricted
Subsidiaries engaged in a Related Business that do not at any one time
outstanding exceed $5.0 million; provided that the amount of Investments
pursuant to clause (vi) will be included in the calculation of Restricted
Payments pursuant to the covenant described under "-- Certain
Covenants -- Limitations on Restricted Payments."
"Permitted Liens" means as of any particular time, any one or more of the
following:
(a) Liens for taxes, rates and assessments not yet past due or, if
past due, the validity of which is being contested in good faith by the
Issuer, PAAC or any Restricted Subsidiary by appropriate proceedings
promptly instituted and diligently conducted and against which the Issuer
or PAAC has established appropriate reserves in accordance with GAAP;
(b) the Lien of any judgment rendered which is being contested in good
faith by the Issuer, PAAC or any of the Restricted Subsidiaries by
appropriate proceedings promptly instituted and diligently conducted and
against which the Issuer or PAAC has established appropriate reserves in
accordance with GAAP and which does not have a material adverse effect on
the ability of the Issuer, PAAC and the Restricted Subsidiaries to operate
their business or operations;
(c) other than in connection with Indebtedness, any Lien arising in
the ordinary course of business (i) to secure payments of workers'
compensation, unemployment insurance, pension or other social security or
retirement benefits, or to secure the performance of bids, tenders, leases,
progress payments, contracts (other than for the payment of money) or to
secure public or statutory obligations of the Issuer, PAAC, or any
Restricted Subsidiary, or to secure surety or appeal bonds to which the
Issuer, PAAC or any Restricted Subsidiary is a party, (ii) imposed by law
dealing with materialmen's, mechanics', workmen's, repairmen's,
warehousemen's, landlords', vendors' or carriers' Liens created by law, or
deposits or pledges which are not yet due or, if due, the validity of which
is being contested in good faith by the Issuer, PAAC or any Restricted
Subsidiaries by appropriate proceedings promptly instituted and diligently
conducted and against which the Issuer or PAAC has established appropriate
reserves in accordance with GAAP, (iii) rights of financial institutions to
set off and chargeback arising by operation of law and (iv) similar Liens;
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(d) servitudes, licenses, easements, encumbrances, restrictions,
rights-of-way and rights in the nature of easements or similar charges
which will not in the aggregate materially adversely impair the use of the
subject property by the Issuer, PAAC or a Restricted Subsidiary;
(e) zoning and building by-laws and ordinances, municipal bylaws and
regulations, and restrictive covenants, which do not materially interfere
with the use of the subject property by the Issuer, PAAC or a Restricted
Subsidiary as such property is used as of the date of the Indenture; and
(f) any extension, renewal, substitution or replacement (or successive
extensions, renewals, substitutions or replacements), as a whole or in
part, of any of the Liens referred to in clauses (a) through (e) of this
definition or the Indebtedness secured thereby; provided that (i) such
extension, renewal, substitution or replacement Lien is limited to that
portion of the property or assets, now owned or hereafter acquired, that
secured the Lien prior to such extension, renewal, substitution or
replacement Lien and (ii) the Indebtedness secured by such Lien (assuming
all available amounts were borrowed) at such time is not increased.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock," as applied to the Equity Interests of any corporation,
means stock of any class or classes (however designated) which is preferred over
shares of stock of any other class of such corporation as to the distribution of
assets on any voluntary or involuntary liquidation or dissolution of such
corporation or as to dividends.
"Redeemable Stock" means any Equity Interest that by its terms or otherwise
(i) is required to be redeemed prior to the maturity of the Notes, (ii) matures
or is redeemable, in whole or in part, at the option of the Issuer, PAAC, any
Subsidiary or the holder thereof or pursuant to a mandatory sinking fund at any
time prior to the maturity of the Notes, or (iii) is convertible into or
exchangeable for debt securities which provide for any scheduled payment of
principal prior to the maturity of the Notes at the option of the issuer at any
time prior to the maturity of the Notes, until the right to so convert or
exchange is irrevocably relinquished.
"Related Business" means any corporation or other entity engaged in, and
any asset utilized in, the manufacture or distribution of chlorine, caustic
soda, bleach, hydrochloric acid, iron and other chlorides and aluminum sulfate,
and in lines of business reasonably related thereto.
"Restricted Investment" means any Investment other than a Permitted
Investment.
"Restricted Subsidiary" means (i) any Guarantor which is a Subsidiary of
PAAC (other than the Issuer), (ii) any Subsidiary of PAAC in existence on the
date hereof to which any line of business or division (and the assets associated
therewith) of any Guarantor are transferred after the date of the Indenture,
(iii) any Subsidiary of the Issuer or of PAAC organized or acquired after the
date of the Indenture, unless such Subsidiary has been designated as an
Unrestricted Subsidiary by a resolution of the Board of Directors as provided in
the definition of "Unrestricted Subsidiary" and (iv) any Unrestricted Subsidiary
which is designated as a Restricted Subsidiary by the Board of Directors;
provided, that immediately after giving effect to any such designation (A) no
Default or Event of Default has occurred and is continuing and (B) in the case
of any designation referred to in clause (iii) or (iv) hereof, the Issuer could
incur at least $1.00 of Indebtedness pursuant to the covenant described in the
initial paragraph under "-- Certain Covenants -- Limitations on Indebtedness,"
on a pro forma basis taking into account such designation. The Issuer will
evidence any such designation to the Trustee by promptly filing with the Trustee
an officers' certificate certifying that such designation has been made and
complies with the requirements of the immediately preceding sentence.
Notwithstanding any provision of the Indenture to the contrary, each Guarantor
will be a Restricted Subsidiary.
"Sale and Leaseback Transaction" with respect to any Person, means any
arrangement with another Person for the leasing of any real or tangible personal
property, which property has been or is to be sold or transferred by such Person
to such other Person in contemplation of such leasing.
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"Security Documents" means the Intercreditor Agreement and all security
agreements, deeds of trust, pledges, hypothecs, debentures, debenture pledges,
bonds, bond pledges, pledge agreements, collateral assignments or any other
instrument evidencing or creating any security interest or lien in favor of the
Collateral Agent in all or any portion of the Collateral, in each case as
amended, supplemented or otherwise modified from time to time.
"Senior Indebtedness" means the principal of, premium, if any, and interest
on any Indebtedness of the Issuer, PAAC or the Restricted Subsidiaries, whether
outstanding on the date of the Indenture or thereafter incurred as permitted by
the Indenture, unless, in the case of any particular Indebtedness, the agreement
or instrument creating or evidencing the same or pursuant to which the same is
outstanding expressly provides that such Indebtedness is junior or subordinated
in right of payment to any item of Indebtedness of the Issuer, PAAC or the
Restricted Subsidiaries. Without limiting the generality of the foregoing,
"Senior Indebtedness" includes the principal of, premium, if any, and interest
and all other obligations of every nature of the Issuer, PAAC or any Restricted
Subsidiary from time to time owed under the New Credit Facilities, the Existing
Term Facility and the Senior Secured Notes, as the case may be. Notwithstanding
the foregoing, "Senior Indebtedness" does not include (i) in the case of the
obligation of the Issuer in respect of each Note, the obligation of PAAC in
respect of the other Notes, (ii) any liability for foreign, federal, state,
provincial, local or other taxes owed or owing by the Issuer, PAAC or any
Restricted Subsidiary to the extent that such liability constitutes
Indebtedness, (iii) Indebtedness of the Issuer to PAAC, or of the Issuer or PAAC
to any Restricted Subsidiary or of PAAC to the Issuer or any Restricted
Subsidiary or of any Restricted Subsidiary to the Issuer, PAAC or another
Restricted Subsidiary, (iv) that portion of any Indebtedness which at the time
of issuance is issued in violation of the Indenture and (v) Indebtedness and
amounts incurred in connection with obtaining goods, materials or services in
the ordinary course of business (other than such Indebtedness which is owed to
banks and other financial institutions or secured by the goods or materials
which were purchased with such Indebtedness).
"Subordinated Indebtedness" means Indebtedness of the Issuer, PAAC or any
Guarantor subordinated in right of payment to the Notes or any Guarantee, as the
case may be.
"Subsidiary" means, with respect to any Person, (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors, under ordinary circumstances,
is at the time owned, directly or indirectly, by such Person, by such Person and
one or more of its Subsidiaries or by one or more of such Person's Subsidiaries
or (ii) any other Person or entity of which at least a majority of voting
interest, under ordinary circumstances, is at the time owned, directly or
indirectly, by such Person, by such Person and one or more of its Subsidiaries
or by one or more of such Person's Subsidiaries.
"Trust Moneys" means all cash or Eligible Investments received by the
Collateral Agent: (a) in exchange for the release of property from the Lien of
any of the Security Documents; or (b) as compensation for or proceeds of the
sale of all or any part of the Collateral taken by eminent domain or purchased
by, or sold pursuant to any order of, a governmental authority or otherwise
disposed of or (c) as proceeds of insurance upon any, all or part of the
Collateral (other than any liability insurance proceeds payable to the
Collateral Agent for any loss, liability or expense incurred by it), or (d) as
proceeds of any other sale or other disposition of all or any part of the
Collateral by or on behalf of the Collateral Agent or any collection, recovery,
receipt, appropriation or other realization of or from all or any part of the
Collateral pursuant to the Security Documents or otherwise or (e) for
application under the Indenture as provided in the Indenture or any Security
Document, or whose disposition is not otherwise specifically provided for in the
Indenture or in any Security Document.
"Unrestricted Subsidiary" means, until such time as it may be designated as
a Restricted Subsidiary by the Board of Directors as provided in and in
compliance with the definition of "Restricted Subsidiary," (i) any Subsidiary of
the Issuer or PAAC organized or acquired after the date of the Indenture
designated as an Unrestricted Subsidiary by the Board of Directors in which all
investments by the Issuer, PAAC or any Restricted Subsidiary are made only from
funds available for the making of Restricted Payments as described under
"-- Certain Covenants -- Limitations on Restricted Payments" and (ii) any
Subsidiary of an
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Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Issuer or PAAC (including any newly acquired or newly formed Subsidiary) to
be an Unrestricted Subsidiary unless such Subsidiary owns any Equity Interests
of, or owns, or holds any Lien upon, any property of, any Subsidiary of the
Issuer or PAAC which is not a Subsidiary of such Subsidiary to be so designated;
provided that (w) each Subsidiary to be so designated and each of its
Subsidiaries has not, at the time of designation, and does not thereafter,
directly or indirectly, incur any Indebtedness pursuant to which the lender has
recourse to any of the assets of the Issuer, PAAC or any of the Restricted
Subsidiaries, (x) immediately after giving effect to such designation no Default
or Event of Default has occurred and is continuing, (y) all outstanding
Investments by the Issuer, PAAC and Restricted Subsidiaries (except to the
extent repaid in cash) in the Subsidiary so designated will be deemed to be
Restricted Payments at the time of such designation equal in amount to the Fair
Market Value of such Investments at the time of such designation and would be
Restricted Payments permitted to be paid pursuant to the provisions of the
covenant described under "-- Certain Covenants -- Limitations on Restricted
Payments" and (z) the amount of such Restricted Payments will be included in the
calculation of the amount of Restricted Payments previously made pursuant to
such covenant. The Issuer will evidence any such designation by promptly filing
with the Trustee an officers' certificate certifying that such designation has
been made and complies with the requirements of the immediately preceding
sentence.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case under
clause (i) or (ii) above, are not callable or redeemable at the option of the
issuer thereof.
"Victory Valley" means Victory Valley Land Company, L.P., a Delaware
limited partnership.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or Persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
"Wholly-Owned Restricted Subsidiary" means, with respect to any Person, a
Restricted Subsidiary of such Person all of the outstanding Capital Stock or
other ownership interests of which (other than capital stock constituting
directors' qualifying shares or interests held by directors or shares or
interests required to be held by foreign nationals, to the extent mandated by
applicable law) are owned by such Person or by one or more Wholly-Owned
Restricted Subsidiaries of such Person and one or more Wholly-Owned Restricted
Subsidiaries of such Person.
DEFAULTS AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in payment of interest or Additional Amounts on
the Notes; (ii) default in payment of principal of, or premium with respect to,
the Notes; (iii) failure by the Issuer or a Guarantor, if applicable, to comply
with the covenants entitled "Limitations on Restricted Payments," "Limitations
on Indebtedness," "Certain Guarantees," "Limitations on Liens," "Limitations on
Asset Sales," "Limitations on Sale and Leaseback Transactions," "Limitations on
Ownership of Restricted Subsidiary Stock," "Change of Control," and "Limitation
on Mergers; Sales of Assets;" (iv) failure by the Issuer or a Guarantor, if
applicable, to comply with any of its other agreements in the Indenture, the
Security Documents, the Notes or the Guarantees for a period that continues for
60 days after receipt of written notice from the Trustee or from the Holders of
at least 25% of the aggregate principal amount of the Notes then outstanding,
specifying such default; (v) the Issuer denies or disaffirms in writing its
obligations under the Indenture or the Notes; (vi) a Guarantor denies or
disaffirms in writing its obligations under its Guarantee, or any Guarantee for
any reason ceases to be, or is asserted in writing by any Guarantor or the
Company not to be, in full force and effect and enforceable in accordance with
its terms, except to the extent contemplated by the Indenture and any such
Guarantee; (vii) a default under any Indebtedness of the Issuer, PAAC or any of
the Restricted Subsidiaries, which default (A) is caused by a failure to pay the
final scheduled principal installment on such Indebtedness on the stated
maturity date
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thereof (which failure continues beyond any applicable grace period) or (B)
results in the acceleration of such Indebtedness prior to its express maturity
and, in each case, the principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness with respect to which the
principal amount remains unpaid at its final maturity or the maturity of which
has been so accelerated, aggregates $5.0 million or more; (viii) final judgments
rendered against the Issuer, PAAC or any of the Restricted Subsidiaries (other
than any judgment as to which and only to the extent, a reputable insurance
company has acknowledged coverage of such claim in writing) of $5.0 million or
more which remain undischarged or unstayed for a period of 60 days; (ix) any of
the Security Documents ceases to be in full force and effect (other than in
accordance with their respective terms), or any of the Security Documents ceases
to give the Collateral Agent the Liens, rights, power and privileges purported
to be created thereby, or any Security Document or any Collateral becomes
subject to any Lien other than the Liens created permitted by the Indenture or
the Security Documents; and (x) certain events of bankruptcy or insolvency of
the Issuer, PAAC, any Guarantor or any other Restricted Subsidiary pursuant to
or under or within the meaning of any Bankruptcy Law.
If an Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the Notes may declare the Notes due and
payable immediately. However, if an Event of Default resulting from bankruptcy
or insolvency occurs, such amount will be due and payable without any
declaration or any act on the part of the Trustee or the Holders. Such
declaration or acceleration may be rescinded and past defaults may be waived by
the Holders of a majority in principal amount of the Notes upon conditions
provided in the Indenture.
Holders may not enforce the Indenture, the Security Documents, the Notes or
the Guarantees, except as provided therein. The Trustee may require an indemnity
satisfactory to it before enforcing the Indenture, the Security Documents, the
Notes or the Guarantees. Subject to certain limitations, Holders of a majority
in principal amount of the Notes will have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Indenture,
that is unduly prejudicial to the rights of any Holder or that would subject the
Trustee to personal liability. The Trustee may withhold from the Holders of the
Notes notice of any continuing default (except a default in payment of
principal, premium, if any, or interest) if it determines in good faith that
withholding notice is in their interest. The Issuer is required to file periodic
reports with the Trustee as to the absence of Default. If a Default exists, the
Issuer is required to describe the Default and efforts undertaken to remedy the
Default.
Directors, officers, employees or stockholders, as such, of the Issuer, the
Guarantors and any Subsidiaries of the Issuer or any of the Guarantors will not
have any liability for any obligations of the Issuer or any Guarantors under the
Notes, any Guarantee or the Indenture or for any claim based on, in respect of,
or by reason of, such obligations. Each Holder of a Note by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for the issue of the Notes. Such waiver may not be effective to
waive liabilities under U.S. federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar may require a Holder, among other things, to furnish appropriate
endorsements and transfer documents and to pay any taxes and fees required by
law. The Registrar need not transfer or exchange any Note previously selected
for redemption. A registered Holder of a Note will be treated as the owner
thereof for all purposes. No Note will be valid until the Trustee or an
authenticating agent manually signs the certificate of authentication on the
Note. Each Note will become effective on the date upon which it is so signed.
AMENDMENT, SUPPLEMENT AND WAIVER
Subject to certain exceptions, the Indenture or the Notes may be amended or
supplemented, and any past default or compliance with any provision may be
waived, with the consent of the Holders of a majority in principal amount of the
Notes then outstanding. Without the consent of any Holder, the Issuer and the
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Guarantors will be permitted to amend or supplement the Indenture, the Security
Documents, the Notes or the Guarantees to comply with the provisions of the
Indenture in the case of a consolidation, amalgamation, merger or sale of all or
substantially all of the assets of the Issuer and its Subsidiaries taken as a
whole, to provide for uncertificated Notes in addition to or in place of
certificated Notes, to cure any ambiguity, defect or inconsistency, to comply
with any requirement of the Commission in connection with the qualification of
the Indenture under the Trust Indenture Act, to comply with any requirement of
the Commission or applicable law to effectuate the Exchange Offer, to add
additional guarantees with respect to the Notes, to secure the Notes or the
Guarantees, to add to the covenants of the Issuer, PAAC or any Subsidiary for
the benefit of the holders of the Notes, to surrender any right or power
conferred upon the Company, Issuer, PAAC or any Subsidiary or to make any other
change that does not adversely affect the rights of any Holder.
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder) (i) reduce the
principal amount of Notes whose holders must consent to an amendment or waiver
of the Indenture, the Security Documents, the Notes or the Guarantees; (ii)
reduce the rate of, or change the time for payment of, interest, including
default interest, on any Note; (iii) reduce the principal of or change the fixed
maturity of any Note, or alter the optional redemption provision or the
provisions relating to redemption for changes in Canadian withholding or other
taxes that would result in the payment of Additional Amounts, or alter the price
at which the Issuer will offer to purchase such Note pursuant to an Asset Sale
Offer or a Change of Control Offer; (iv) make any Note payable in money other
than that stated in such Note; (v) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of Holders of the
Notes to receive payments of principal of or interest on the Notes; (vi) waive a
Default or Event of Default in the payment of principal of, premium if any, or
interest on the Notes, including any such obligation arising pursuant to an
Asset Sale Offer, a Change of Control Offer or a Guarantee (except a rescission
of acceleration of the Notes by the Holders of at least a majority (or, in the
case of the failure to make a Change of Control Offer, two-thirds) in principal
amount of the Notes then outstanding and a waiver of the payment default that
resulted from such acceleration); (vii) waive the obligation to make an Asset
Sale Offer or any payment required to be made pursuant to an Asset Sale Offer, a
Change of Control Offer or a Guarantee; (viii) affect the ranking of the Notes;
(ix) release all or substantially all of the Collateral other than pursuant to
the terms of the Indenture or the Security Documents; (x) make any change in the
provisions of the Indenture described under "-- Additional Amounts" that
adversely affects the rights of any Holder, or amend the terms of the Notes or
the Indenture in a way that would result in the loss of an exemption from any of
the Taxes; or (xi) make any change in the foregoing amendment and waiver
provisions. An amendment or waiver may not waive the Company's obligation to
make a Change of Control Offer without the consent of the Holders of at least
two-thirds in outstanding principal amount of the Notes.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuer may, at its option and at any time, elect to have all of the
obligations of the Issuer and each Guarantor discharged with respect to the
outstanding Notes ("Legal Defeasance") except for (i) the rights of Holders of
outstanding Notes to receive payments in respect of the principal of, premium,
if any, and interest on such Notes when such payments are due but only from
assets deposited by the Issuer pursuant to clause (i) of the following
paragraph, (ii) the Issuer's obligations with respect to the Notes concerning
issuing temporary Notes, registration or transfer of Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights, powers,
trusts, duties and immunities of the Trustee, and the Issuer's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Issuer may, at its option and at any time, elect to have the
obligations of the Issuer and any Guarantor released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations will not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
Notes.
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In order to effect either a Legal Defeasance or a Covenant Defeasance, (i)
the Issuer must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable U.S. Government
Obligations, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on the outstanding Notes
on the stated maturity or on the applicable redemption date, as the case may be,
of such principal or installment of principal of, premium, if any, or interest
on the outstanding Notes; (ii) in the case of Legal Defeasance, the Issuer will
deliver to the Trustee an opinion of counsel reasonably acceptable to the
Trustee confirming that (A) the Issuer has received from the Internal Revenue
Service a ruling and from Revenue Canada a ruling, or (B) since the date of the
Indenture, there has been a change in the applicable U.S. federal income tax
law, including by means of a Revenue Ruling published by the Internal Revenue
Service, and a ruling from Revenue Canada has been published, in either case to
the effect that, and based thereon such opinion of counsel will confirm that,
the holders of the outstanding Notes will not recognize income, gain or loss for
U.S. federal income tax, Canadian federal or provincial income tax or certain
other tax purposes as a result of such Legal Defeasance and will be subject to
U.S. federal income tax and Canadian federal and provincial income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Issuer will deliver to the Trustee an opinion of counsel
reasonably acceptable to the Trustee confirming that the holders of the
outstanding Notes will not recognize income, gain or loss for U.S. federal
income tax, Canadian federal or provincial income tax or certain other tax
purposes as a result of such Covenant Defeasance and will be subject to U.S.
federal income tax and Canadian federal and provincial income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred; (iv) no Default or Event of Default
has occurred and is continuing on the date of such deposit or insofar as Events
of Default from bankruptcy or insolvency events are concerned, at any time in
the period ending on the 91st day after the date of deposit; (v) such Legal
Defeasance or Covenant Defeasance will not result in a breach or violation of,
or constitute a default under any material agreement or instrument (other than
the Indenture) to which the Issuer or any Guarantor is a party or by which the
Issuer or any Guarantor is bound; (vi) the Issuer will deliver to the Trustee an
opinion of counsel to the effect that after the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights generally
and that the Trustee has a perfected security interest in such trust funds for
the ratable benefit of the Holders of the outstanding Notes; (vii) the Issuer
will deliver to the Trustee an officers' certificate stating that the deposit
was not made by the Issuer with the intent of preferring the Holders of the
Notes or any Guarantee over the other creditors of the Issuer or any Guarantor
or with the intent of defeating, hindering, delaying or defrauding creditors of
the Issuer or any Guarantor or others; and (viii) the Issuer will deliver to the
Trustee an officers' certificate and an opinion of counsel, each stating that
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
ENFORCEABILITY OF JUDGMENTS WITH RESPECT TO THE NOTES
Since all of the assets of the Issuer are outside the United States, any
judgment obtained in the United States against the Issuer, including judgments
with respect to the payment of amounts owing with respect to the Notes, may not
be collectible within the United States.
The Issuer has been informed by its Canadian counsel, Stikeman, Elliott, a
general partnership, and Stewart McKelvey Stirling Scales, that the laws of each
of the provinces of Ontario, Quebec, New Brunswick and Nova Scotia of Canada
(each, a "Province") permit an action (or, in the province of Quebec, a motion)
to be brought in a court of competent jurisdiction in any Province on any final
and enforceable judgment in personam of any federal or state court located in
the Borough of Manhattan in The City of New York, State of New York ("New York
Court") that is not impeachable as void or voidable under the internal laws of
the State of New York for a sum certain if (i) the New York Court rendering such
judgment had jurisdiction over the judgment debtor, as recognized by the courts
of such Province (and submission by the Issuer in the Indenture and the Security
Documents to the jurisdiction of the New York Court will be sufficient for the
purpose); (ii) such judgment was not obtained by fraud or in a manner contrary
to natural justice or in
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contravention of the fundamental principles of procedure and, in each Province
other than Quebec, the enforcement thereof would not be inconsistent with public
policy as such term is applied by a court of competent jurisdiction in such
Province or, in Quebec, the outcome of the judgment is not manifestly
inconsistent with public order as understood in international relations; (iii)
the enforcement of such judgment in any Province other than Quebec does not
constitute, directly or indirectly, the enforcement of foreign revenue,
expropriatory or penal laws and, in Quebec, does not constitute the enforcement
of obligations arising from the taxation laws of New York unless the laws or
tribunals of New York recognize and enforce the taxation laws of Quebec; (iv)
the action to enforce such judgment must be commenced, in each Province other
than Quebec, within six years and, in Quebec within three years, of the date of
such judgment; (v) in Quebec, there has been no dispute between the same
parties, based on the same facts and having the same object, which has given
rise to a decision by a court of competent jurisdiction in Quebec, whether it
has acquired the authority of a final judgment (res judicata) or not, or is
pending before a competent authority in first instance, or has been decided in a
third country and the decision meets the necessary conditions for recognition by
such a court in Quebec; (vi) the enforcement of such judgment would not be
contrary to any order made by the Attorney General of Canada under the Foreign
Extra Territorial Measures Act (Canada) or the Competition Tribunal under the
Competition Act (Canada) in respect of certain judgments, laws and directives
having effects on competition in Canada; and (vii) in New Brunswick, the
requirements of the Foreign Judgements Act (New Brunswick) have been satisfied.
To the knowledge of such counsel, there are no reasons under present laws
of any province of Canada for avoiding the recognition of such judgment of a New
York Court under the Indenture or the Notes based on public policy or public
order.
CONSENT TO JURISDICTION AND SERVICE
The Indenture provides that the Issuer will appoint CT Corporation,
currently located at 1633 Broadway, New York, New York 10019, as its agent for
service of process in any suit, action or proceeding with respect to the
Indenture, the Security Documents or the Notes and for actions brought under
federal or state securities laws brought in any Federal or state court located
in The City of New York and submit to such jurisdiction.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in their exercise as a prudent Person would
exercise under the circumstances in the conduct of such Person's own affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Issuer or any Guarantor, to obtain payment of claims in
certain cases or to realize on certain property received by it in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest, it must
eliminate such conflict or resign.
The Issuer or any Guarantor may have customary banking relationships with
the Trustee in the ordinary course of business. The Trustee acts as trustee
under the indenture with respect to the Senior Secured Notes.
GOVERNING LAW
The Indenture, the Notes, the Guarantees and the Intercreditor Agreement
will be governed by, and construed in accordance with, the laws of the State of
New York. The Security Documents will be governed by, and construed in
accordance with, the laws of the province of Canada in which the particular
Collateral secured thereby is situated and the federal laws of Canada applicable
therein.
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BOOK-ENTRY; DELIVERY; FORM AND TRANSFER
The Notes sold to Qualified Institutional Buyers initially were in the form
of one or more registered global notes without interest coupons (collectively,
the "U.S. Global Notes"). Upon issuance, the U.S. Global Notes were deposited
with the Trustee, as custodian for The Depository Trust Company ("DTC"), in New
York, New York, and registered in the name of DTC or its nominee, in each case
for credit to the accounts of DTC's Direct and Indirect Participants (as defined
below).
Transfer of beneficial interests in any Global Notes will be subject to the
applicable rules and procedures of DTC and its Direct or Indirect Participants,
which may change from time to time.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Notes may be exchanged
for Notes in certificated form in certain limited circumstances. See
"-- Transfers of Interests in Global Notes for Certificated Notes."
Initially, the Trustee will act as Paying Agent and Registrar. The Notes
may be presented for registration of transfer and exchange at the offices of the
Registrar.
Depositary Procedures
DTC has advised the Issuer that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through electronic
book-entry changes in accounts of Participants. The Direct Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Access to DTC's system is also available to
other entities that clear through or maintain a direct or indirect, custodial
relationship with a Direct Participant (collectively, the "Indirect
Participants"). DTC may hold securities beneficially owned by other persons only
through the Direct Participants or Indirect Participants and such other persons'
ownership interest and transfer of ownership interest will be recorded only on
the records of the Direct Participant and/or Indirect Participant, and not on
the records maintained by DTC.
DTC has also advised the Issuer that, pursuant to DTC's procedures, (i)
upon deposit of the Global Notes, DTC will credit the accounts of the Direct
Participants designated by the Initial Purchasers with portions of the principal
amount of the Global Notes allocated by the Initial Purchasers to such Direct
Participants, and (ii) DTC will maintain records of the ownership interests of
such Direct Participants in the Global Notes and the transfer of ownership
interests by and between Direct Participants. DTC will not maintain records of
the ownership interests of, or the transfer of ownership interests by and
between, Indirect Participants or other owners of beneficial interests in the
Global Notes. Direct Participants and Indirect Participants must maintain their
own records of the ownership interests of, and the transfer of ownership
interests by and between, Indirect Participants and other owners of beneficial
interests in the Global Notes.
Investors in the U.S. Global Notes may hold their interests therein
directly through DTC if they are Direct Participants in DTC or indirectly
through organizations that are Direct Participants in DTC.
The laws of some states require that certain persons take physical delivery
in definitive, certificated form, of securities that they own. This may limit or
curtail the ability to transfer beneficial interests in a Global Note to such
persons. Because DTC can act only on behalf of Direct Participants, which in
turn act on behalf of Indirect Participants and others, the ability of a person
having a beneficial interest in a Global Note to pledge such interest to persons
or entities that are not Direct Participants in DTC, or to otherwise take
actions in respect of such interests, may be affected by the lack of physical
certificates evidencing such interests. For certain other restrictions on the
transferability of the Notes, see "-- Transfers of Interests in Global Notes for
Certificated Notes."
EXCEPT AS DESCRIBED IN "-- TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR
CERTIFICATED NOTES," OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL
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DELIVERY OF NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED
OWNERS OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Under the terms of the Indenture, the Issuer, PAAC, the Guarantors and the
Trustee will treat the persons in whose names the Notes are registered
(including Notes represented by Global Notes) as the owners thereof for the
purpose of receiving payments and for any and all other purposes whatsoever.
Payments in respect of the principal, premium, Liquidated Damages, if any, and
interest on Global Notes registered in the name of DTC or its nominee will be
payable by the Trustee to DTC or its nominee as the registered holder under the
Indenture. Consequently, neither the Issuer, the Trustee nor any agent of the
Issuer or the Trustee has or will have any responsibility or liability for (i)
any aspect of DTC's records or any Direct Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interests in the Global Notes or for maintaining, supervising or
reviewing any of DTC's records or any Direct Participant's or Indirect
Participant's records relating to the beneficial ownership interests in any
Global Note or (ii) any other matter relating to the actions and practices of
DTC or any of its Direct Participants or Indirect Participants.
DTC has advised the Issuer that its current payment practice (for payments
of principal, interest and the like) with respect to securities such as the
Notes is to credit the accounts of the relevant Direct Participants with such
payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Notes as shown on
DTC's records. Payments by Direct Participants and Indirect Participants to the
beneficial owners of the Notes will be governed by standing instructions and
customary practices between them and will not be the responsibility of DTC, the
Trustee, the Issuer, PAAC or the Guarantors. Neither the Issuer, PAAC, the
Guarantors nor the Trustee will be liable for any delay by DTC or its Direct
Participants or Indirect Participants in identifying the beneficial owners of
the Notes, and the Issuer and the Trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee as the registered
owner of the Notes for all purposes.
The Global Notes will trade in DTC's Same-Day Funds Settlement System and,
therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants who hold an interest through a
Direct Participant will be effected in accordance with the procedures of such
Direct Participant but generally will settle in immediately available funds.
DTC has advised the Issuer that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Notes are credited and
only in respect of such portion of the aggregate principal amount of the Notes
as to which such Direct Participant or Direct Participants has or have given
direction. However, if there is an Event of Default under the Notes, DTC
reserves the right to exchange Global Notes (without the direction of one or
more of its Direct Participants) for legended Notes in certificated form, and to
distribute such certificated forms of Notes to its Direct Participants. See
"-- Transfers of Interests in Global Notes for Certificated Notes."
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the U.S. Global Notes among Direct Participants, it is under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Issuer, PAAC, the
Guarantors, the Initial Purchasers or the Trustee will have any responsibility
for the performance by DTC or its respective Direct and Indirect Participants of
their respective obligations under the rules and procedures governing any of
their operations.
The information in this section concerning DTC and its book-entry system
has been obtained from sources that the Issuer believes to be reliable, but the
Issuer takes no responsibility for the accuracy thereof.
Transfers of Interests in Global Notes for Certificated Notes
An entire Global Note may be exchanged for definitive Notes in registered,
certificated form without interest coupons ("Certified Notes") if (i) DTC (x)
notifies the Issuer that it is unwilling or unable to continue as depositary for
the Global Notes and the Issuer thereupon fails to appoint a successor
depositary within 90 days or (y) has ceased to be a clearing agency registered
under the Exchange Act, (ii) the Issuer, at
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its option, notifies the Trustee in writing that it elects to cause the issuance
of Certificated Notes or (iii) there shall have occurred and be continuing a
Default or an Event of Default with respect to the Notes. In any such case, the
Issuer will notify the Trustee in writing that, upon surrender by the Direct and
Indirect Participants of their interest in such Global Note, Certificated Notes
will be issued to each person that such Direct and Indirect Participants and the
DTC identify as being the beneficial owner of the related Notes.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, by such
Direct Participant (for itself or on behalf of an Indirect Participant), to the
Trustee in accordance with customary DTC procedures. Certificated Notes
delivered in exchange for any beneficial interest in any Global Note will be
registered in the names, and issued in any approved denominations, requested by
DTC on behalf of such Direct or Indirect Participants (in accordance with DTC's
customary procedures).
Neither the Issuer, the Guarantors nor the Trustee will be liable for any
delay by the holder of the Global Notes or the DTC in identifying the beneficial
owners of Notes, and the Issuer and the Trustee may conclusively rely on, and
will be protected in relying on, instructions from the holder of the Global Note
or the DTC for all purposes.
Transfers of Certificated Notes for Interests in Global Notes
Certificated Notes may only be transferred if the transferor first delivers
to the Trustee a written certificate (and in certain circumstances, an opinion
of counsel) confirming that, in connection with such transfer, it has complied
with the restrictions on transfer described under "Notice to Investors."
Same Day Settlement and Payment
The Indenture requires that payments in respect of the Notes represented by
the Global Notes (including principal, premium, if any, interest and Liquidated
Damages, if any) be made by wire transfer of immediately available same day
funds to the accounts specified by the holder of interests in such Global Note.
With respect to Certificated Notes, the Issuer will make all payments of
principal, premium, if any, interest and Liquidated Damages, if any, by wire
transfer of immediately available same day funds to the accounts specified by
the holders thereof or, if no such account is specified, by mailing a check to
each such holder's registered address. The Issuer expects that secondary trading
in the Certificated Notes will also be settled in immediately available funds.
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ORIGINAL NOTES REGISTRATION RIGHTS
The Issuer, the Guarantors and the Initial Purchasers entered into the
Registration Rights Agreement on the Closing Date pursuant to which the Issuer
and the Guarantors agreed, for the benefit of holders of the Original Notes, to,
at their expense (i) on or prior to the 30th day following the Closing Date
(provided that if the 30th day is not a business day, the first business day
thereafter), file the Exchange Offer Registration Statement with the Commission
with respect to the Exchange Offer pursuant to which the Original Notes will be
exchanged for the Exchange Notes, which will have terms identical to the
Original Notes and will be guaranteed by the Guarantors on the same terms as the
Guarantees (except that the Exchange Notes will not contain terms with respect
to transfer restrictions or any provision relating to this paragraph) and (ii)
use their best efforts to cause the Exchange Offer Registration Statement to be
declared effective under the Securities Act by the 150th day after the Closing
Date (provided that if the 150th day is not a business day, the first business
day thereafter). Upon effectiveness of the Exchange Offer Registration
Statement, the Issuer and the Guarantors agreed to offer to all holders of the
Notes an opportunity to exchange their securities for a like principal amount of
the Exchange Notes. The Issuer and the Guarantors agreed to keep the Exchange
Offer open for acceptance for not less than 20 business days after the date the
Exchange Offer Registration Statement is declared effective, and to comply with
Regulation 14E and Rule 13e-4 under the Exchange Act (other than the filing
requirements of Rule 13e-4). For each Original Note surrendered to the Issuer
and the Guarantors for exchange pursuant to the Exchange Offer, the holder of
such Original Note will receive an Exchange Note having a principal amount at
maturity equal to that of the surrendered Original Note. Interest on each
Exchange Note will accrue from the last interest payment date on which interest
was paid on the Original Note surrendered in exchange therefor or, if no
interest has been paid on such Original Note, from the date of original
issuance.
Under existing interpretations of the staff of the Commission's Division of
Corporation Finance (the "Staff"), the Exchange Notes will generally be freely
transferable after the Exchange Offer without further registration under the
Securities Act; provided that broker-dealers ("Participating Broker-Dealers")
receiving Exchange Notes in the Exchange Offer will be subject to a prospectus
delivery requirement with respect to resales of such Exchange Notes. To date,
the Staff has taken the position that Participating Broker-Dealers may fulfill
their prospectus delivery requirements with respect to transactions involving an
exchange of securities such as the exchange pursuant to the Exchange Offer
(other than a resale of an unsold allotment from the sale of the Notes to the
Initial Purchasers) with the prospectus contained in the Exchange Offer
Registration Statement. Pursuant to the Registration Rights Agreement, the
Issuer and the Guarantors will agree to permit Participating Broker-Dealers and
other persons, if any, subject to similar prospectus delivery requirements to
use the prospectus contained in the Exchange Offer Registration Statement in
connection with the resale of such Exchange Notes for a period of 180 days.
Each holder of the Original Notes who wishes to exchange its Original Notes
for Exchange Notes in the Exchange Offer will be required to make certain
representations to the Issuer and the Guarantors, including that (i) any
Exchange Notes to be received by it will be acquired in the ordinary course of
its business, (ii) it has no arrangement with any person to participate in a
public distribution (within the meaning of the Securities Act) of the Exchange
Notes and (iii) it is not an "affiliate," as defined in Rule 405 of the
Securities Act, of the Issuer or the Guarantors, or if it is such an affiliate,
that it will comply with the registration and prospectus delivery requirements
of the Securities Act to the extent applicable to it.
In addition, each holder who is not a broker-dealer will be required to
represent that it is not engaged in, and does not intend to engage in, a public
distribution of the Exchange Notes. Each holder who is a broker-dealer and who
receives Exchange Notes for its own account in exchange for Original Notes that
were acquired by it as a result of market-making activities or other trading
activities, will be required to acknowledge that it will deliver a prospectus in
connection with any resale by it of such Exchange Notes.
If (i) the Exchange Offer is not permitted by applicable law or (ii) any
holder of Transfer Restricted Securities notifies the Issuer and the Guarantors
prior to the 20th business day following consummation of the Exchange Offer that
(A) it is prohibited by law or Commission policy from participating in the
Exchange Offer or (B) that it may not resell the Exchange Notes acquired by it
in the Exchange Offer to the public
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without delivering a prospectus and the prospectus contained in the Exchange
Offer Registration Statement is not appropriate or available for such resales or
(C) that it is a broker-dealer and owns Notes acquired directly from the Issuer
or an affiliate of the Issuer, the Issuer and the Guarantors will, at their
expense, (a) promptly file a shelf registration statement (a "Shelf Registration
Statement" and together with the Exchange Offer Registration Statement, the
"Registration Statements") permitting resales from time to time of the Notes,
(b) use their best efforts to cause such registration statement to become
effective and (d) use their best efforts to keep such registration statement
current and effective until two years from the date it becomes effective or such
shorter period that will terminate when all the Notes covered by such
registration statement have been sold pursuant thereto. For purposes of the
foregoing, "Transfer Restricted Securities" means each Original Note until (i)
the date on which such Original Note has been exchanged by a person other than a
broker-dealer for an Exchange Note in the Exchange Offer, (ii) following the
exchange by a broker-dealer in the Exchange Offer of an Original Note for an
Exchange Note, the date on which such Exchange Note is sold to a purchaser who
receives from such broker-dealer on or prior to the date of such sale a copy of
the prospectus contained in the Exchange Offer Registration Statement, (iii) the
date on which such Note has been effectively registered under the Securities Act
and disposed of in accordance with the Shelf Registration Statement or (iv) the
date on which such Note is distributed to the public pursuant to Rule 144 under
the Securities Act. The Issuer and the Guarantors, at their expense, will
provide to each holder of the Original Notes copies of the prospectus, which is
a part of the Shelf Registration Statement, notify each such holder when the
Shelf Registration Statement has become effective and take certain other actions
as are required to permit unrestricted resales of the Original Notes from time
to time. A holder of Original Notes who sells such Original Notes pursuant to
the Shelf Registration Statement generally will be required to be named as a
selling securityholder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such
holder (including certain indemnification obligations).
In the event that (i) the Exchange Offer Registration Statement is not
filed with the Commission on or prior to the 30th day after the Closing Date or
declared effective on or prior to the 150th day after the Closing Date, (ii) the
Exchange Offer is not consummated on or prior to the 30th business day following
the date the Exchange Offer Registration Statement is declared effective, (iii)
the Shelf Registration Statement is not filed or declared effective within the
required time periods or (iv) any of the Registration Statements required by the
Registration Rights Agreement is declared effective but thereafter ceases to be
effective (except as specifically permitted therein) for a period of 15
consecutive days without being succeeded immediately by any additional
Registration Statement filed and declared effective (each such event, a
"Registration Default"), then the Issuer and the Guarantors will pay liquidated
damages ("Liquidated Damages") to each holder of Original Notes, with respect to
the first 90-day period immediately following the occurrence of such
Registration Default in an amount equal to $.05 per week per $1,000 principal
amount of Original Notes held by such holder. The amount of the Liquidated
Damages will increase by an additional $.05 per week per $1,000 principal amount
of Original Notes at the beginning of each subsequent 90-day period, up to a
maximum amount of $.50 per week per $1,000 principal amount of Original Notes;
provided, that the Issuer and the Guarantors shall in no event be required to
pay Liquidated Damages for more than one Registration Default at any given time.
Following the cure of all Registration Defaults, the accrual of Liquidated
Damages will cease.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is filed as an exhibit to the Registration Statement
of which this Prospectus is a part.
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CERTAIN TAX CONSEQUENCES
CANADA
The Issuer has received the opinion of Stikeman, Elliott, a general
partnership, with respect to Canadian federal law regarding certain tax
consequences of an investment in the Notes.
This summary is general in nature and is not exhaustive of all possible
Canadian tax consequences. Accordingly, prospective investors should consult
with their own tax advisors for advice with respect to their particular
circumstances, including any consequences of an investment in the Notes arising
under tax laws of any province or territory of Canada or tax laws of any
jurisdiction other than Canada.
INCOME TAX
The following is a summary of the principal Canadian federal income tax
considerations under the Income Tax Act (Canada) (the "Income Tax Act")
generally applicable to purchasers of Notes who, for the purpose of the Income
Tax Act, are not resident or deemed to be resident in Canada, hold their Notes
as capital property, deal at arm's length with the Issuer, do not use or hold
and are not deemed to use or hold the Notes in carrying on business in Canada
and are not insurers that carry on an insurance business in Canada and
elsewhere.
The summary is based on the current provisions of the Income Tax Act, the
regulations thereunder, specific proposals to amend the Income Tax Act or the
regulations publicly announced by the Minister of Finance before the date of
this Prospectus, counsel's understanding of the current administrative practice
of Revenue Canada, and the current provisions of the international tax
convention entered into by Canada with the United States, but does not otherwise
take into account or anticipate changes in the law, whether by judicial,
governmental or legislative decisions or action, nor is it exhaustive of all
possible Canadian federal tax consequences. It furthermore does not take into
account or consideration tax legislation of any province or territory of Canada
or any jurisdiction other than Canada. This summary is of a general nature only
and is not intended to be, and should not be interpreted as, legal or tax advice
to any particular holder of an Original Note or Exchange Note.
The Issuer is not required to withhold tax from interest paid by it on the
Notes to any non-resident of Canada with whom it is dealing at arm's length
within the meaning of the Income Tax Act.
Under the Income Tax Act, related persons (as defined therein) are deemed
not to deal at arm's length and it is a question of fact whether persons not
related to each other deal at arm's length. No other tax on income (including
taxable capital gains) is payable in respect of the purchase, holding,
redemption or disposition of the Notes or the receipt of interest or any premium
thereon by holders with whom the Issuer deals at arm's length, except that in
certain circumstances holders who are non-resident insurers carrying on an
insurance business in Canada and elsewhere may be subject to such taxes.
ESTATE AND GIFT TAX
Neither Canada nor the province of New Brunswick currently imposes any
estate or gift tax in connection with an interest in the Notes.
UNITED STATES
The following summary describes certain United States federal income tax
consequences of the ownership and disposition of the Notes as of the date hereof
and represents the opinion of Willkie Farr & Gallagher, United States counsel to
the Company, insofar as it relates to matters of law or legal conclusions.
Except where noted, it deals only with Notes held as capital assets by United
States Holders (as defined) and does not deal with special situations, such as
those of dealers in securities or currencies, financial institutions, life
insurance companies, persons holding Notes as a part of a hedging or conversion
transaction or a straddle or United States Holders whose "functional currency"
is not the U.S. dollar. Furthermore, the discussion below is based upon the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and
144
<PAGE> 151
regulations, rulings and judicial decisions thereunder as of the date hereof,
and such authorities may be repealed, revoked or modified so as to result in
federal income tax consequences different from those discussed below. Persons
considering the purchase, ownership or disposition of Notes should consult their
own tax advisors concerning the federal income tax consequences in light of
their particular situations as well as any consequences existing under the laws
of any other existing jurisdiction.
As used herein, a "United States Holder" of a Note means a holder that is a
citizen or resident of the United States, a corporation, partnership or other
entity created or organized in or under the laws of the United States or any
political subdivision thereof, an estate the income of which is subject to
United States federal income taxation regardless of its source, or a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust.
PAYMENT OF INTEREST
Interest (including Additional Amounts) on a Note will generally be taxable
to a United States Holder as ordinary income at the time it is paid or accrued
in accordance with the United State Holder's method of accounting for tax
purposes. Interest will be from sources outside the United States.
MARKET DISCOUNT; ACQUISITION PREMIUM
If a United States Holder purchases Notes for an amount that is less than
the stated redemption price at maturity of such Notes, the amount of the
difference will be treated as "market discount" for federal income tax purposes,
unless such difference is less than a specified de minimis amount. Under the
market discount rules, a United States Holder will be required to treat any
principal payment on, or any gain on the sale, exchange, retirement or other
disposition of Notes as ordinary income to the extent of the market discount
which has not previously been included in income and is treated as having
accrued on such Notes at the time of such payment or disposition. In addition,
the United States Holder may be required to defer, until the maturity of the
Notes or the earlier disposition of the Notes in a taxable transaction, the
deduction for a portion of the interest expense on any indebtedness incurred or
continued to purchase or carry such Notes.
Any market discount will be considered to accrue on a straight-line basis
during the period from the date of acquisition to the maturity date of the
Notes, unless the United States Holder elects to accrue on a constant yield
method. A United States Holder of Notes may elect to include market discount in
income currently as it accrues (on either a straight-line basis or constant
yield method), in which case the rule described above regarding deferral of
interest deductions will not apply. This election to include market discount in
income currently, once made, applies to all market discount obligations acquired
on or after the first taxable year to which the election applies and may not be
revoked without the consent of the Internal Revenue Service ("IRS").
A United States Holder that purchases Notes for an amount that is greater
than the sum of all amounts payable on the Notes after the purchase date other
than stated interest will be considered to have purchased such Notes at a
"premium." A United States Holder generally may elect to amortize the premium
over the remaining term of the Notes on a constant yield method. The amount
amortized in any year will be treated as a reduction of the United States
Holder's interest income from the Note. Premiums on Notes held by a United
States Holder that does not make such an election will decrease the gain or
increase the loss otherwise recognized on disposition of the Notes. The election
to amortize premium on a constant yield method once made applies to all debt
obligations held or subsequently acquired by the electing United States Holder
on or after the first day of the first taxable year to which the election
applies and may not be revoked without the consent of the IRS. Because the Notes
may be redeemed at the option of the Issuer at a price in excess of their
principal amount, a United States Holder may be required to amortize any bond
premium based on the earlier call date and the call price payable at that time.
145
<PAGE> 152
SALE, EXCHANGE AND RETIREMENT OF NOTES
A United States Holder's tax basis in a Note will, in general, be the
United States Holder's cost therefor increased by any market discount included
in income by such United States Holder and reduced by any amortized premium.
Upon the sale, exchange or retirement of a Note, a United States Holder will
recognize gain or loss equal to the difference between the amount realized upon
the sale, exchange or retirement (less any accrued stated interest, which will
be taxable as such) and the adjusted tax basis of a Note. Except with respect to
market discount, such gain or loss will be a capital gain or loss. Under current
law, net capital gain of individuals are, under certain circumstances, taxed at
lower rates than items of ordinary income. The deductibility of capital losses
is subject to limitations.
EXCHANGE OFFER
The exchange of Original Notes for Exchange Notes by holders will not be a
taxable event for United States federal income tax purposes, and holders should
not recognize any taxable gain or loss or any interest income as a result of
such exchange.
146
<PAGE> 153
PLAN OF DISTRIBUTION
Based on interpretations by the Staff set forth in no-action letters issued
to third parties, the Registrants believe that Exchange Notes issued pursuant to
the Exchange Offer in exchange for the Original Notes may be offered for resale,
resold and otherwise transferred by holders thereof (other than any holder which
is (i) an "affiliate" of the Registrants within the meaning of Rule 405 under
the Securities Act, (ii) a broker-dealer who acquired Original Notes directly
from the Registrants or (iii) broker-dealers who acquired Original Notes as a
result of market-making or other trading activities) without compliance with the
registration and prospectus delivery provisions of the Securities Act provided
that such Exchange Notes are acquired in the ordinary course of such holders'
business, and such holders are not engaged in, and do not intend to engage in,
and have no arrangement or understanding with any person to participate in, a
distribution of such Exchange Notes; provided that broker-dealers
("Participating Broker-Dealers") receiving Exchange Notes in the Exchange Offer
will be subject to a prospectus delivery requirement with respect to resales of
such Exchange Notes. To date, the Staff has taken the position that
Participating Broker-Dealers may fulfill their prospectus delivery requirements
with respect to transactions involving an exchange of securities such as the
exchange pursuant to the Exchange Offer (other than a resale of an unsold
allotment from the sale of the Original Notes to the Initial Purchasers) with
the prospectus contained in the Exchange Offer Registration Statement. Pursuant
to the Registration Rights Agreement, the Registrants have agreed to permit
Participating Broker-Dealers and other persons, if any, subject to similar
prospectus delivery requirements to use this Prospectus in connection with the
resale of such Exchange Notes. The Registrants have agreed that, for a period
not to exceed 180 days after the Exchange Date, they will make this Prospectus,
and any amendment or supplement to this Prospectus, available to any
broker-dealer that requests such documents in the Letter of Transmittal.
Each holder of the Original Notes who wishes to exchange its Original Notes
for Exchange Notes in the Exchange Offer will be required to make certain
representations to the Company as set forth in "The Exchange Offer -- Terms and
Conditions of the Letter of Transmittal." In addition, each holder who is a
broker-dealer and who receives Exchange Notes for its own account in exchange
for Original Notes that were acquired by it as a result of market-making
activities or other trading activities, will be required to acknowledge that it
will deliver a prospectus in connection with any resale by it of such Exchange
Notes.
The Registrants will not receive any proceeds from any sale of Exchange
Notes by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or at negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
The Issuer has agreed to pay all expenses incidental to the Exchange Offer
other than commissions and concessions of any brokers or dealers and will
indemnify holders of the Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act, as set forth in the
Registration Rights Agreement.
147
<PAGE> 154
LEGAL MATTERS
Certain legal matters with respect to the Exchange Notes will be passed
upon for PCI Canada by Stikeman, Elliott, Montreal, Quebec, a general
partnership, and Stewart McKelvey Stirling Scales, Saint John, New Brunswick,
with respect to matters of Canadian law, and by Willkie Farr & Gallagher, New
York, New York with respect to matters of United States law. Jack H. Nusbaum, a
Senior Partner and Chairman of Willkie Farr & Gallagher, is a director of
Pioneer and PAAC and beneficially owns 13,652 shares of Pioneer's Class A Common
Stock.
EXPERTS
The consolidated financial statements of Pioneer Americas Acquisition Corp.
as of December 31, 1996 and 1995 and for the year ended December 31, 1996 and
for the period from March 6, 1995 through December 31, 1995, included in this
prospectus, and the related financial statement schedule included elsewhere in
the registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein and elsewhere
in the registration statement, and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The consolidated financial statements and schedule of Pioneer Americas,
Inc. (the Predecessor Company) for the period from January 1, 1995 through April
20, 1995 and for the year ended December 31, 1994, included in this Prospectus,
have been audited by Ernst & Young LLP, independent auditors, as stated in their
reports, which are included herein, which are based in part on the reports of
Piercy, Bowler, Taylor & Kern, independent auditors of Basic Investments, Inc.
The consolidated financial statements and schedule of Pioneer Americas, Inc.
(the Predecessor Company) are included in reliance upon such reports given upon
the authority of such firms and experts in accounting and auditing.
The financial statements of the PCI Canada Business as of December 31, 1996
and December 31, 1995 and for each of the three years in the period ended
December 31, 1996, included in this Prospectus, have been audited by KPMG,
independent auditors, as stated in their reports, which are included herein.
The financial statements of the Tacoma Plant as of December 31, 1996 and
December 31, 1995 and for each of the three years in the period ended December
31, 1996, included in this Prospectus, have been audited by Arthur Andersen LLP,
independent auditors, as stated in their reports, which are included herein.
CHANGE IN INDEPENDENT PUBLIC AUDITORS
Effective October 16, 1995, each of the Guarantors that are subsidiaries of
PAAC, by action of its board of directors, engaged Deloitte & Touche LLP as its
independent auditors. Deloitte & Touche LLP has acted as independent auditors of
PAAC since the inception of PAAC and it was determined that, following the
acquisition of the Subsidiary Guarantors by PAAC, Deloitte & Touche LLP should
act as independent auditors of the Subsidiary Guarantors as well.
Ernst & Young LLP had been the independent auditors for PAI prior to their
dismissal, effective October 16, 1995. The reports of Ernst & Young LLP on the
financial statements of PAI for the fiscal years 1993 and 1994 did not contain
an adverse opinion or a disclaimer of opinion and were not qualified or modified
as to uncertainty, audit scope or accounting principles. In connection with the
audits of the financial statements of PAI for each of the two fiscal years ended
December 31, 1994, and in the subsequent interim period, there were no
disagreements with Ernst & Young LLP on any matters of accounting principles or
practices, financial statement disclosure or auditing scope and procedures
which, if not resolved to the satisfaction of Ernst & Young LLP, would have
caused Ernst & Young LLP to make reference to the matter in their report.
148
<PAGE> 155
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
(1) Pioneer Americas Acquisition Corp. and subsidiary
companies:
Report of Deloitte & Touche LLP, independent
auditors.......................................... F-2
Report of Ernst & Young LLP, independent
auditors.......................................... F-3
Report of Piercy, Bowler, Taylor & Kern,
independent public accountants.................... F-4
Consolidated balance sheets of the Company as of
December 31, 1996 and 1995........................ F-5
Consolidated statements of operations of the
Company for the year ended December 31, 1996 and
the period from March 6, 1995 ("Inception")
through December 31, 1995 and of the Predecessor
Company for the period from January 1, 1995
through April 20, 1995 and for the year ended
December 31, 1994................................. F-6
Consolidated statements of stockholders' equity of
the Company for the period from Inception through
December 31, 1995 and for the year ended December
31, 1996 and of the Predecessor Company for the
year ended December 31, 1994 and for the period
from January 1, 1995 through April 20, 1995....... F-7
Consolidated statements of cash flows of the
Company for the year ended December 31, 1996 and
the period from Inception through December 31,
1995 and of the Predecessor Company for the period
from January 1, 1995 through April 20, 1995 and
for the year ended December 31, 1994.............. F-8
Notes to consolidated financial statements........ F-9
Consolidated balance sheets of the Company as of
September 30, 1997 (unaudited) and December 31,
1996.............................................. F-25
Unaudited consolidated statements of operations of
the Company for the three months and nine months
ended September 30, 1997 and September 30, 1996... F-26
Unaudited consolidated statements of cash flows of
the Company for the nine months ended September
30, 1997 and September 30, 1996................... F-27
Notes to unaudited consolidated financial
statements........................................ F-28
(2) PCI Canada Business:
Report of KPMG, Chartered Accountants............. F-32
Combined Balance Sheets of the PCI Canada Business
as of December 31, 1996, 1995 and 1994 and
September 30, 1997 and 1996 (unaudited)........... F-33
Combined Statements of Operations of the PCI
Canada Business for the years ended December 31,
1996, 1995 and 1994 and for the nine months ended
September 30, 1997 and 1996 (unaudited)........... F-34
Combined Statements of Head Office Account of the
PCI Canada Business for the years ended December
31, 1996, 1995 and 1994 and for the nine months
ended September 30, 1997 and 1996 (unaudited)..... F-35
Combined Statements of Change in Financial
Position of the PCI Canada Business for the years
ended December 31, 1996, 1995 and 1994 and for the
nine months ended September 30, 1997 and 1996
(unaudited)....................................... F-36
Notes to combined financial statements............ F-37
(3) Tacoma Plant:
Report of Arthur Andersen LLP, independent public
accountants....................................... F-46
Balance sheets for the Tacoma Plant at December
31, 1996 and 1995................................. F-47
Statements of operations and changes in owner's
investment for the Tacoma Plant for the years
ended December 31, 1996, 1995 and 1994............ F-48
Statements of cash flows of the Tacoma Plant for
the years ended December 31, 1996, 1995 and
1994.............................................. F-49
Notes to financial statements..................... F-50
Balance sheets for the Tacoma Plant at June 16,
1997 (unaudited) and December 31, 1996............ F-60
Unaudited statements of operations and changes in
owner's investment for the Tacoma Plant for the
year-to-date periods ended June 16, 1997 and June
30, 1996.......................................... F-61
Unaudited statements of cash flows of the Tacoma
Plant for the year-to-date periods ended June 16,
1997 and June 30, 1996............................ F-62
Notes to unaudited financial statements........... F-63
</TABLE>
F-1
<PAGE> 156
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Pioneer Americas Acquisition Corp.
We have audited the accompanying consolidated balance sheets of Pioneer
Americas Acquisition Corp. and its subsidiaries (the "Company"), as of December
31, 1996 and 1995, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the year ended December 31,
1996 and for the period from March 6, 1995 (Inception) through December 31,
1995. Our audit also includes the consolidated financial statement schedule II.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company at December 31, 1996 and 1995, and the results of their operations
and their cash flows for the year ended December 31, 1996 and the period from
Inception through December 31, 1995 in conformity with generally accepted
accounting principles. Also, in our opinion the related consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects,
the information set forth therein.
DELOITTE & TOUCHE LLP
Houston, Texas
March 7, 1997
F-2
<PAGE> 157
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pioneer Americas, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Pioneer Americas, Inc. (the "Predecessor
Company") for the period from January 1, 1995 through April 20, 1995 and for the
year ended December 31, 1994. Our audits also included the related financial
statement schedule II. These financial statements and schedule are the
responsibility of the Predecessor Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits. The financial statements of certain of the Predecessor Company's
investments (as described in Note 5) have been audited by other auditors whose
report has been furnished to us; insofar as our opinion on the consolidated
financial statements relates to data included for these investments, it is based
solely on their report.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated results of operations and cash flows of the
Predecessor Company for the period from January 1, 1995 through April 20, 1995
and for the year ended December 31, 1994, in conformity with generally accepted
accounting principles. Also, in our opinion the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects, the information set forth
therein.
ERNST & YOUNG LLP
Houston, Texas
June 26, 1995
F-3
<PAGE> 158
INDEPENDENT AUDITORS' REPORT
Board of Directors
Basic Investments, Inc.
Henderson, Nevada
We have audited the combined statements of income, equity and cash flows of
Basic Investments, Inc. and affiliates (the Company) for the year ended December
31, 1994. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the results of combined operations and cash
flows of Basic Investments, Inc. and affiliates for the year ended December 31,
1994 in conformity with generally accepted accounting principles.
Piercy, Bowler, Taylor & Kern
Certified Public Accountants and
Business Advisors
A Professional Corporation
Las Vegas, Nevada
January 30, 1995
F-4
<PAGE> 159
PIONEER AMERICAS ACQUISITION CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 14,417 $ 11,218
Accounts receivable, less allowance for doubtful accounts:
1996, $1,311; 1995, $1,424............................. 18,830 27,825
Due from parent........................................... 2,547 574
Inventories............................................... 6,247 11,347
Prepaid expenses.......................................... 1,156 3,766
-------- --------
Total current assets.............................. 43,197 54,730
Property, plant, and equipment, at cost:
Land................................................... 3,735 1,711
Buildings and improvements............................. 17,062 13,997
Machinery and equipment................................ 71,704 67,587
Cylinders and tanks.................................... 4,540 4,503
Construction in progress............................... 11,871 9,394
-------- --------
108,912 97,192
Less accumulated depreciation.......................... (16,429) (7,795)
-------- --------
92,483 89,397
Investment in and advances to unconsolidated subsidiary..... 28,586 --
Other assets, net of accumulated amortization: 1996, $2,458;
1995, $1,068.............................................. 19,621 11,664
Excess cost over the fair value of net assets acquired, net
of accumulated amortization: 1996, $7,556; 1995, $3,311... 107,123 108,940
-------- --------
Total assets...................................... $291,010 $264,731
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 17,221 $ 20,183
Accrued liabilities....................................... 19,276 20,660
Returnable deposits....................................... 3,238 3,437
Current portion of long-term debt......................... 128 --
-------- --------
Total current liabilities......................... 39,863 44,280
Long-term debt, less current maturities..................... 141,629 135,000
Returnable deposits......................................... 3,272 3,281
Accrued pension and other employee benefits................. 14,100 13,573
Other long-term liabilities................................. 17,823 13,170
Commitments and contingencies (Note 10)
Stockholder's equity:
Common stock, $.01 par value, authorized 1,000 shares,
issued and outstanding 1,000 shares.................... 1 1
Additional paid-in capital................................ 61,124 49,652
Retained earnings......................................... 13,198 5,774
-------- --------
Total stockholder's equity........................ 74,323 55,427
-------- --------
Total liabilities and stockholder's equity........ $291,010 $264,731
======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 160
PIONEER AMERICAS ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-------------------------------
PERIOD FROM PERIOD FROM
INCEPTION JANUARY 1, 1995
YEAR ENDED THROUGH THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31, APRIL 20, DECEMBER 31,
1996 1995 1995 1994
------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
Revenues................................ $183,326 $142,908 $57,848 $167,217
Cost of sales........................... 126,739 98,175 37,400 134,556
-------- -------- ------- --------
Gross profit............................ 56,587 44,733 20,448 32,661
Selling, general and administrative
expenses.............................. 23,528 19,836 7,047 22,529
-------- -------- ------- --------
Operating income........................ 33,059 24,897 13,401 10,132
Equity in net loss of unconsolidated
subsidiary............................ (2,607) -- -- --
Interest expense, net................... (17,290) (12,905) (1,665) (6,407)
Settlement of litigation and insurance
claims, net........................... -- -- -- 3,326
Other income (expense), net............. 1,684 637 (115) 1,337
-------- -------- ------- --------
Income before taxes and extraordinary
item.................................. 14,846 12,629 11,621 8,388
Income tax provision.................... 6,735 6,208 4,809 3,242
-------- -------- ------- --------
Income before extraordinary item........ 8,111 6,421 6,812 5,146
Extraordinary item, early extinguishment
of debt (net of income tax benefit of
$2,140)............................... -- -- 3,420 --
-------- -------- ------- --------
Net income.............................. 8,111 6,421 3,392 5,146
Accretion of dividends on preferred
stock and adjustment to redeemable
stock put warrants.................... -- -- -- (1,824)
-------- -------- ------- --------
Net income applicable to common stock... $ 8,111 $ 6,421 $ 3,392 $ 3,322
======== ======== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 161
PIONEER AMERICAS ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER OF
COMMON ADDITIONAL
SHARES COMMON PAID-IN RETAINED
OUTSTANDING STOCK CAPITAL EARNINGS TOTAL
----------- ------ ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Post Acquisition
Balance at Acquisition.................. 1 $ 1 $46,062 $ -- $46,063
Recognition of the NOL benefit........ -- -- 3,590 -- 3,590
Dividend paid to parent............... -- -- -- (647) (647)
Net income............................ -- -- -- 6,421 6,421
----- --- ------- ------- -------
Balance at December 31, 1995............ 1 1 49,652 5,774 55,427
Recognition of the NOL benefit........ -- -- 11,472 -- 11,472
Dividend paid to parent............... -- -- -- (687) (687)
Net income............................ -- -- -- 8,111 8,111
----- --- ------- ------- -------
Balance at December 31, 1996............ 1 $ 1 $61,124 $13,198 $74,323
===== === ======= ======= =======
Predecessor Company
Balance at December 31, 1993............ 1,453 $14 $ 4,028 $15,679 $19,721
Common Stock issuance................. 56 1 158 -- 159
Adjust carrying value of stock
warrants........................... -- -- -- (1,424) (1,424)
Accretion of excess redemption value
of redeemable preferred stock over
carrying value and amount of
dividends not declared or paid..... -- -- -- (500) (500)
Net income............................ -- -- -- 5,146 5,146
----- --- ------- ------- -------
Balance at December 31, 1994............ 1,509 15 4,186 18,901 23,102
Accretion of excess redemption value
of redeemable preferred stock over
carrying value and amount of
dividends not declared or paid..... -- -- -- (124) (124)
Net income............................ -- -- -- 3,392 3,392
----- --- ------- ------- -------
Balance at April 20, 1995............... 1,509 $15 $ 4,186 $22,169 $26,370
===== === ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 162
PIONEER AMERICAS ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
PERIOD FROM -------------------------------
INCEPTION PERIOD FROM
YEAR ENDED THROUGH JANUARY 1, 1995 YEAR ENDED
DECEMBER 31, DECEMBER 31, THROUGH DECEMBER 31,
1996 1995 APRIL 20, 1995 1994
------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................. $ 8,111 $ 6,421 $ 3,392 $ 5,146
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization........ 15,695 12,274 4,490 13,595
Provision for bad debts.............. -- 138 47 1,235
Write-off of previous finance
costs............................. -- -- 1,282 --
Gain on disposal of property, plant
and equipment..................... -- -- 13 (4)
Provision for SAR's.................. -- -- -- 968
Equity in net loss (earnings) of
unconsolidated subsidiaries....... 2,607 -- (204) (183)
Net change in deferred taxes......... 4,339 3,590 (2,086) (1,256)
Net effect of changes in operating
assets and liabilities (net of
acquisitions)..................... 1,701 5,865 (4,323) 2,918
-------- --------- --------- --------
Net cash flows from operating
activities........................... 32,453 28,288 2,611 22,419
-------- --------- --------- --------
INVESTING ACTIVITIES:
Acquisitions of businesses........... (5,459) (152,318) -- --
Investment in and advances to
unconsolidated subsidiaries....... (6,645) -- -- --
Capital expenditures................. (17,121) (13,556) (3,447) (5,681)
Proceeds from sale of property, plant
and equipment..................... -- -- 58 694
-------- --------- --------- --------
Net cash flows from investing
activities........................... (29,225) (165,874) (3,389) (4,987)
-------- --------- --------- --------
FINANCING ACTIVITIES:
Borrowings:
Proceeds.......................... -- 153,500 106,000 83,900
Repayments........................ (70) (27,500) (103,971) (99,961)
Dividends paid to parent............. (687) (416) -- --
Dividends paid on preferred stock and
purchase of stock put warrant..... -- -- (2,341) --
Proceeds from issuance of common
stock............................. -- 21,000 -- 170
-------- --------- --------- --------
Net cash flows from financing
activities........................... (757) 146,584 (312) (15,891)
-------- --------- --------- --------
Net increase (decrease) in cash........ 2,471 8,998 (1,090) 1,541
Cash at beginning of period............ 11,218 -- 3,310 1,769
Cash acquired in acquisition........... 728 2,220 -- --
-------- --------- --------- --------
Cash at end of period.................. $ 14,417 $ 11,218 $ 2,220 $ 3,310
======== ========= ========= ========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 163
PIONEER AMERICAS ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Pioneer Americas Acquisition Corp. (Pioneer) is a Delaware corporation
formed on March 6, 1995 (Inception). Pioneer is 100% owned by Pioneer Companies,
Inc. (PCI).
On April 20, 1995, Pioneer acquired Pioneer Americas, Inc. (Pioneer
Americas or the Predecessor Company) for approximately $177 million (the
Acquisition). Pioneer Americas manufactured chlorine, caustic soda and related
products used in a variety of applications including water treatment, plastics,
detergents, and agricultural chemicals. Consideration for the Acquisition
included cash, assumption of certain liabilities and repayment of debt of the
Predecessor Company, redemption of preferred stock of the Predecessor Company
and fees and expenses related to the Acquisition. In connection with the
Acquisition, PCI sold common stock, issued long-term debt and entered into a new
bank revolving credit facility. The Acquisition was accounted for as a purchase;
accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based upon their fair market value and the operations of the
Predecessor Company were included in the consolidated financial statements from
the date acquired. The Acquisition resulted in $112 million of excess cost over
the fair value of the net assets acquired, which is being amortized on a
straight line basis over 25 years.
In February 1996, Pioneer acquired an interest in Kemwater North America
Company (Kemwater) for $0.3 million of cash and a contribution of the assets and
liabilities of its subsidiary Imperial West Chemical Co. (Imperial West).
Kemwater was formed to conduct the operations of Imperial West and KWT, Inc.
(acquired by PCI in February 1996). Kemwater, which manufactures and supplies
iron chlorides that are used to remove solids from water streams and to control
hydrogen sulfide emissions by the potable and waste water markets, is owned 50%
by Pioneer and 50% by PCI. Since it does not own a controlling interest in
Kemwater, Pioneer accounts for Kemwater using the equity method. In the 1996
consolidated financial statements, Pioneer's investment in Kemwater is presented
as Investment in and advances to unconsolidated subsidiary and its equity in the
loss of Kemwater is shown as Equity in net loss of unconsolidated subsidiary. In
the 1995 consolidated financial statements of Pioneer, Imperial West is
consolidated and includes the following: total assets of $25.7 million, total
revenues of $23.7 million and net loss of $0.6 million. Had the acquisition been
made as of January 1, 1996 and 1995, it would not have had a significant impact
on the consolidated financial statements for 1996 and 1995. The acquisition did
not have a material impact on Pioneer s financial statements, and therefore pro
forma information is not presented.
Pioneer acquired T.C. Products in July 1996 for $10.0 million. T.C.
Products manufactures bleach and related products. The acquisitions was
accounted for as a purchase; accordingly, the purchase price was allocated to
the assets acquired and liabilities assumed based upon their fair market value
and the operations for the acquired company was included in the consolidated
financial statements from the date acquired. The acquisition resulted in $7.0
million of excess cost over the fair value of the net assets acquired, which is
being amortized on a straight line basis over 25 years. Had the acquisition been
made as of January 1, 1996 and 1995, it would not have had a significant impact
upon the consolidated financial statements for 1996 and 1995. The acquisition
did not have a material impact on Pioneer's financial statements, and therefore
pro forma information is not presented.
The consolidated financial statements include the accounts of Pioneer and
its consolidated subsidiaries (the Company). All significant intercompany
balances and transactions have been eliminated in consolidation. All dollar
amounts in tabulations in the notes to the consolidated financial statements are
stated in thousands of dollars unless otherwise indicated.
Amounts presented in the notes to the consolidated financial statements for
the Predecessor Company are based upon its historical accounting basis for the
periods presented. Such amounts do not include effects of the purchase of the
Predecessor Company by Pioneer. Amounts presented in the notes to the
consolidated financial statements for the Predecessor Company for the period
from January 1, 1995 through April 20, 1995
F-9
<PAGE> 164
PIONEER AMERICAS ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and for the year ended December 31, 1994 are included under the captions
Predecessor Company, 1995 and Predecessor Company, 1994, respectively.
The Company operates in one industry segment and one geographic area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents. Interest income is netted
against interest expense for the periods presented. The Company had interest
income for the year ended December 31, 1996 and the period from Inception
through December 31, 1995 of $0.7 million and $0.3 million, respectively. The
Predecessor Company had interest income of $0.1 million for each of the period
from January 1, 1995 through April 20, 1995 and the year ended December 31,
1994.
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 Company enters into agreements with other companies to
exchange chemical inventories in order to minimize working capital requirements
and to facilitate distribution logistics. Balances related to quantities due to
or payable by the Company are included in inventory. The results of operations
for the period from Inception through December 31, 1995 include the effects of
an increase of $1.7 million to cost of sales due to the step-up in value of
inventory in connection with the Acquisition.
Property, Plant, and Equipment
Depreciation for financial reporting purposes is computed primarily under
the straight-line method over the estimated remaining useful lives of the
assets. Asset lives range from 5 years to 15 years with a predominant life of 10
years.
Other Assets
Other assets include amounts for deferred financing costs which are being
amortized on a straightline basis over the term of the related debt.
Amortization of such costs using the interest method would not result in
material differences in the amounts amortized during the periods presented.
Amortization expense for other assets for the year ended December 31, 1996 was
$1.3 million and for the period from Inception through December 31, 1995 was
approximately $1.1 million.
Other assets of the Predecessor Company included amounts for organization
costs, deferred financing costs, non-compete agreements, permits, licenses, and
customer lists obtained in conjunction with the acquisitions of All-Pure
Chemical Co. ("All-Pure"), GPS Pool Supply, Inc. ("GPS") and Imperial West,
which were being amortized on a straight-line basis over their estimated useful
lives. The Predecessor Company's deferred financing costs were being amortized
on a straight-line basis over the term of the related debt. Amortization of such
costs using the interest method would not result in material differences in the
amounts amortized during the periods presented. Amortization expense for other
assets was approximately $0.8 million for the period from January 1, 1995
through April 20, 1995 and $1.7 million for the year ending December 31, 1994.
F-10
<PAGE> 165
PIONEER AMERICAS ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Excess Cost Over the Fair Value of Net Assets Acquired
Excess cost over the fair value of net assets acquired of approximately
$115 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 annually and if this review indicates that such excess cost
will not be recoverable, as determined based on the estimated future
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 discounted cash
flows or the fair value of the related entity. No such reductions were made in
1996 or 1995. Amortization expense for excess cost over the fair value of net
assets acquired was approximately $4.7 million for the year ended December 31,
1996 and $3.3 million for the period from Inception through December 31, 1995.
The Predecessor Company's excess cost over the fair value of net assets
acquired of approximately $12.8 million and is amortized on a straight-line
basis over 20 years. Amortization expense was approximately $0.2 million for the
period from January 1, 1995 through April 20, 1995 and $0.6 million for 1994.
Environmental Expenditures
Remediation costs are accrued based on estimates of known environmental
remediation exposure. Such accruals are based upon management's best estimate of
the ultimate cost and are recorded even if significant uncertainties exist over
the ultimate cost of the remediation. Ongoing environmental compliance cost,
including maintenance and monitoring costs, are charged to operations as
incurred.
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 files a consolidated tax return with PCI. Pioneer has entered
into a tax sharing agreement with PCI whereby the Company will make tax sharing
payments to PCI with respect to federal cash income taxes reflecting the
consolidated cash tax liability of PCI. The tax sharing agreement has the effect
of presenting the income tax provision on a separate return basis. For financial
reporting purposes, deferred income taxes are determined utilizing an asset and
liability approach. This method gives consideration to the future tax
consequences associated with differences between the financial accounting basis
and tax basis of the assets and liabilities, and the ultimate realization of any
deferred tax asset resulting from such differences. State income taxes are
included in income taxes payable.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Impairment of Long-Lived Assets
During 1996, the Company adopted a new accounting standard for the
impairment of long-lived assets. This standard requires that certain assets be
reviewed for impairment whenever events or circumstances indicate that the
carrying amount of the assets may not be recovered. If it is determined that the
asset's carrying amount is not recoverable, the new accounting standard requires
that the carrying value be reduced to
F-11
<PAGE> 166
PIONEER AMERICAS ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the fair value of the assets. Implementation of this standard did not have a
significant impact on the Company's 1996 consolidated financial statements.
Reclassification
Certain amounts have been reclassified in prior years to conform to the
current year presentation. All reclassifications have been applied consistently
for the periods presented.
3. SUPPLEMENTAL CASH FLOW INFORMATION
Net effect of changes in operating assets and liabilities (net of
acquisitions) are as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-------------------
1996 1995 1995 1994
------- ------- -------- --------
<S> <C> <C> <C> <C>
Accounts receivable............................ $ 5,228 $ 802 $(3,617) $(4,889)
Due from parent................................ (1,973) 111 -- 535
Receivable from insurance carriers and
agents....................................... -- -- -- (102)
Income taxes receivable........................ -- -- -- 2,738
Inventories.................................... 3,151 1,541 (638) (876)
Prepaid expenses............................... 76 (1,404) 722 (371)
Other assets................................... (1,254) (3,104) (1,342) (305)
Accounts payable............................... (4,168) (1,030) 4,899 862
Accrued liabilities............................ (4,457) 8,777 (3,784) 3,783
Returnable deposits............................ (199) (234) (259) (323)
Other long-term liabilities.................... 4,770 (71) (726) 1,079
Accrued pension and other employee benefits.... 527 477 422 787
------- ------- ------- -------
Net change in operating accounts............... $ 1,701 $ 5,865 $(4,323) $ 2,918
======= ======= ======= =======
</TABLE>
Following is supplemental cash information:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
---------------
1996 1995 1995 1994
------- -------- ------ ------
<S> <C> <C> <C> <C>
Cash paid during the period for:
Interest...................................... $18,297 $ 8,288 $3,067 $4,482
------- -------- ------ ------
Income taxes.................................. $ 3,556 $ 1,707 $1,852 $3,730
======= ======== ====== ======
Investing activities of acquisitions during the
period:
Cash paid for acquisition..................... $ 5,459 $152,318 $ -- $ 238
Long-term debt issued......................... 4,500 11,463 -- 3,254
Liabilities assumed........................... 3,994 90,596 -- --
NOL benefit recognized........................ -- 13,600 -- --
------- -------- ------ ------
Fair value of assets acquired................. $13,953 $267,977 $ -- $3,492
======= ======== ====== ======
</TABLE>
Included in the above table are the acquisitions of T.C. Products in 1996;
Pioneer Americas, Inc. in 1995; and GPS in 1994 by the Predecessor Company.
Other non-cash items included in the consolidated financial statements
include: increase in stockholders' equity of $11.5 million and $3.6 million in
1996 and 1995, respectively, due to recognizing the benefit of the net operating
loss carryforward; and exchange of $135 million of 13 3/8% First Mortgage Notes
for $135 million of 13 3/8% First Mortgage Notes in 1996.
F-12
<PAGE> 167
PIONEER AMERICAS ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVENTORIES
Inventories consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Raw materials, supplies and parts........................... $ 7,512 $ 9,849
Finished goods and work-in-process.......................... 2,668 3,155
Inventories under exchange agreements....................... (3,933) (1,657)
------- -------
$ 6,247 $11,347
======= =======
</TABLE>
5. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES
Kemwater
Pioneer and PCI each own a 50% interest in Kemwater which was formed in
February 1996 to continue the business activities previously conducted by
Pioneer's subsidiary, Imperial West and to operate the business acquired by PCI
through the acquisition of KWT, Inc. At December 31, 1996, Pioneer's investment
in and advances to Kemwater aggregated $28.6 million. Advances to Kemwater are
primarily for purchase of product and to fund Kemwater's current operations and
capital requirements. Pioneer and PCI have funded, and intend to continue
funding in the foreseeable future, Kemwater's operations and capital
requirements; accordingly, Pioneer has reduced its investment at December 31,
1996 to a deficit of $0.3 million. Following is a summary of selected items from
Kemwater's balance sheet at December 31, 1996 and operations for the year ended
December 31, 1996 (in thousands):
<TABLE>
<S> <C>
Current assets............................................. $13,004
Non-current assets......................................... 32,224
Current liabilities........................................ 7,294
Non-current liabilities.................................... 40,498
Revenues................................................... 36,142
Gross profit............................................... 1,865
Net loss................................................... (5,214)
</TABLE>
BII and VVLC
The Company, through its subsidiary Pioneer Chlor Alkali Company, Inc.
("PCAC"), owns approximately 32% of the common stock of Basic Investments, Inc.
( BII ), which owns and maintains the water and power distribution network
within the Henderson, Nevada industrial complex and which is a large landowner
in Clark County, Nevada. The remainder of the common stock of BII is owned by
other companies located in the industrial complex. Prior to the Acquisition, the
investment in BII was accounted for by the Predecessor Company under the equity
method after adjustment to reflect PCAC's basis.
PCAC has an approximate 21% limited partnership interest in Victory Valley
Land Company ("VVLC"). The purpose of the business is to receive, hold and
develop the lands, water rights, and other assets contributed by the partners
for investment. A wholly owned subsidiary of BII, acting as general partner with
a 50% interest in VVLC, contributed all rights, title, and interest in and to
certain land to VVLC. PCAC assigned certain water rights to VVLC. Prior to the
Acquisition, the investment in VVLC was accounted for by the Predecessor Company
under the equity method.
The Company's interests in BII and in VVLC (referred to as the Basic
Ownership) constitute assets that, pursuant to the Acquisition Agreement and a
related Contingent Payment Agreement, will be held for the economic benefit of
the Sellers for a period of 20 years. Dividends and distributions received by
the Company on account of the Basic Ownership (including amounts payable as a
result of sales of land or other assets
F-13
<PAGE> 168
PIONEER AMERICAS ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
owned by BII or VVLC) are deposited into a Contingent Payment Account and used
to satisfy certain obligations of the Sellers under environmental and other
indemnities in favor of the Company. After payment or provision for payment of
such obligations in accordance with the provisions of the Contingent Payment
Agreement, amounts received by the Company subsequent to April 20, 1995 on
account of the Basic Ownership will be remitted to the Sellers under the
Contingent Payment Agreement for such 20-year period. The Sellers also have
certain rights during such period with respect to determinations affecting the
Basic Ownership, including the right (subject to certain limited conditions) to
direct the sales or disposition of interests constituting the Basic Ownership
and the right (with certain limited exceptions) to vote the interests
constituting the Basic Ownership, notwithstanding the ownership of such
interests by the Company. Since the Sellers maintain the economic benefit of the
Basic Ownership, and the Company has not received, nor expects to receive in the
future, any economic benefit from BII or VVLC, the Company has not maintained
these balances in its consolidated financial statements since the Acquisition.
The BII financial information includes the accounts of VVLC. The following
is a summary of financial information pertaining to BII and VVLC for the
Predecessor Company for the year ended December 31, 1994:
<TABLE>
<S> <C>
Revenues.................................................... $5,659
Costs and expenses.......................................... 4,834
------
Income before taxes......................................... 825
Income tax expenses......................................... (274)
------
Net income........................................ $ 551
======
Equity in earnings (included in other income)..... $ 183
======
</TABLE>
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Payroll, benefits, and pension.............................. $ 2,371 $ 5,371
Interest and bank fees...................................... 4,595 4,941
Future tax effects.......................................... 2,237 2,293
Miscellaneous accrued liabilities........................... 10,073 8,055
------- -------
Accrued liabilities....................................... $19,276 $20,660
======= =======
</TABLE>
7. PENSION AND OTHER EMPLOYEE BENEFITS
Annual pension costs and liabilities for the Company under its two
defined-benefit plans covering all of its employees are determined by actuaries
using various methods and assumptions. The Company has agreed to voluntarily
contribute such amounts as are necessary to provide assets sufficient to meet
the benefits to be paid to its employees. The Company's present intent is to
make annual contributions, which are actuarially computed, in amounts not more
than the maximum nor less than the minimum allowable under the Internal Revenue
Code. For purposes of determining annual expenses and funding contributions, the
following assumptions were used for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Rate of return of plan assets............................... 8.0% 8.0% 8.0%
Discount rate............................................... 7.5% 7.5% 7.5%
Annual compensation increase................................ 4.0% 4.0% 5.0%
</TABLE>
F-14
<PAGE> 169
PIONEER AMERICAS ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pension expense for the periods presented was comprised of:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
---------------
1996 1995 1995 1994
------- ----- ----- ------
<S> <C> <C> <C> <C>
Service cost.................................... $ 597 $ 410 $ 178 $ 571
Interest cost................................... 892 566 260 770
Return on plan assets........................... (1,132) (394) (149) (537)
Amortization of prior service and other......... 462 56 (7) 225
------- ----- ----- ------
Total pension expense................. $ 819 $ 638 $ 282 $1,029
======= ===== ===== ======
</TABLE>
The funded status of the pension plans for which assets exceed accumulated
benefits and the plan for which accumulated benefits exceed assets as of the
actuarial valuation dates of December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------- ---------------
ACCUMULATED ASSETS EXCEED ACCUMULATED
BENEFITS EARNED ACCUMULATED BENEFITS EARNED
ASSETS BENEFITS ASSETS
--------------- ------------- ---------------
<S> <C> <C> <C>
Actuarial present value of benefits based
on service to date and present pay
levels:
Vested benefit obligation............... $ 3,823 $ 6,122 $ 8,488
Non-vested benefit obligation........... 212 389 1,513
------- ------- -------
Accumulated benefit obligation.......... 4,035 6,511 10,001
Plan assets at fair value............... 3,318 6,963 7,293
------- ------- -------
Plan assets in excess (less than)
accumulated benefit obligation....... 717 (452) (2,708)
Additional amounts related to projected
salary increases..................... 2,171 911 2,199
------- ------- -------
Plan assets less than total projected
benefit obligation................... (1,454) (1,363) (4,907)
Unrecognized gain....................... 236 1,254 185
Unrecognized prior service cost......... (372) 220 (202)
------- ------- -------
Pension obligation...................... $ 1,318 $ 2,837 $ 4,890
======= ======= =======
</TABLE>
Plan assets at December 31, 1996 and 1995 consist primarily of fixed income
investments and equity investments.
The Company offers defined-contribution plans for its employees with the
employees generally contributing from 1% to 15% of their compensation. Aggregate
contributions by the Company to such plans were $0.4 million and $0.2 million in
1996 and 1995, respectively. Aggregate contributions by the Predecessor Company
for such plans were $0.1 million for the period from January 1, 1995 through
April 20, 1995 and none for 1994.
F-15
<PAGE> 170
PIONEER AMERICAS ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition to providing pension benefits, PCAC provides certain health
care and life insurance benefits for retired employees. Substantially all of
PCAC's employees may become eligible for those benefits if they reach normal
retirement age while working for the Company. The following table presents the
plan's funded status reconciled with amounts recognized in the Company's balance
sheet at December 31:
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees.................................................. $ 3,737 $3,669
Fully eligible active plan participants................... 1,483 1,380
Other active plan participants............................ 4,986 4,169
------- ------
10,206 9,218
Unrecognized net loss....................................... (125) --
------- ------
Accrued post retirement benefit cost...................... $10,081 $9,218
======= ======
</TABLE>
Net periodic post-retirement benefit cost for the periods presented
includes the following components:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-----------
1996 1995 1995 1994
------ ---- ---- ----
<S> <C> <C> <C> <C>
Service cost........................................... $ 369 $243 $109 $324
Interest cost.......................................... 693 449 176 519
Amortization of transition obligation over 20 years.... -- 15 8 32
Other components....................................... -- 48 -- --
------ ---- ---- ----
Net periodic post-retirement benefit cost.... $1,062 $755 $293 $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 10.0% for 1996 (the
same as the rate previously assumed for 1995 and 1994) 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, 1996, 1995 and 1994 by $0.8 million, $0.7
million, and $0.6 million, respectively, and the aggregate of the service and
interest cost components of the net periodic post-retirement benefit cost for
each of 1996, 1995 and 1994 by $0.1 million.
The weighted-average discount rate used in determining the accumulated
post-retirement benefit obligation was 7.5% at December 31, 1996, 1995, and
1994.
As a result of the Acquisition, the unrecognized net loss and unrecognized
transition obligation amounts as of that date were recognized.
8. BANK CREDIT FACILITY
In April 1995, the Company entered into a credit agreement which provides
for the three-year Bank Credit Facility with Bank of America, Illinois ("BAI").
The Company may borrow up to $30.0 million, subject to certain borrowing base
limitations. At December 31, 1996, no amounts were outstanding under the Bank
Credit Facility. The revolving loans bear interest at a rate equal to, at the
Company's option, (i) the reference rate set by BAI or (ii) the LIBOR Base Rate.
The Bank Credit Facility requires the Company 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 the inventory, accounts receivable and certain other assets of PCAC and
All-Pure. Up to $10.0 million of the Borrowing Base, as
F-16
<PAGE> 171
PIONEER AMERICAS ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
defined by the Bank Credit Facility, can be utilized for letters of credit. The
Borrowing Base at December 31, 1996 was approximately $18.6 million. After
consideration of applicable outstanding letters of credit of approximately $2.9
million, the unused availability of the Borrowing Base was approximately $15.7
million at December 31, 1996.
The Bank Credit Facility contains restrictive covenants that, among other
things and under certain conditions, limit the ability of the Company to incur
additional indebtedness, to acquire or dispose of assets or operations and to
pay dividends or redeem shares of stock.
9. LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
13 3/8% First Mortgage Notes, due
2005.................................. $135,000 $135,000
Subordinated notes payable to sellers of
T.C. Products, principal payments due
July 31, 2001, with a variable
interest rate based on a bank's prime
rate plus 1%, interest is paid
monthly............................... 4,500 --
Tax-exempt bond financed through the
Economic Development Corporation of
Pierce County, Washington, principal
payments due in variable annual
installments through 2014, with a
variable interest rate based on
current market values of comparable
securities, interest is paid
monthly............................... 2,257 --
-------- --------
Total................................... 141,757 135,000
Current maturities of long-term debt.... (128) --
-------- --------
Long-term debt.......................... $141,629 $135,000
======== ========
</TABLE>
Long-term debt matures as follows: $0.1 million in 1997; $0.1 million in
1998; $0.1 million in 1999; $0.1 million in 2000; $4.6 million in 2001; and
$136.6 million thereafter.
As part of the Acquisition in April 1995, the Company issued and sold $135
million of 13 3/8% Senior Notes due in 2005. In January 1996, the Company
exchanged, as part of a public offering, the $135 million of Notes for $135
Million of 13 3/8% First Mortgage Notes due in 2005. Like the Senior Notes, the
Mortgage Notes are senior secured obligations of the Company, ranking senior in
right of payment to all subordinated indebtedness. The Mortgage Notes are fully
and unconditionally guaranteed on a joint and several basis by all of the
Company's direct and indirect wholly-owned subsidiaries and are secured by the
first mortgage liens on certain manufacturing facilities. The Company is a
holding company with no operating assets or operations. Financial statements of
the Company's direct and indirect wholly-owned subsidiaries are not separately
included as the Company's management does not believe this information would be
material to investors.
The Mortgage Notes are redeemable at the Company's option starting in 2000.
Before 1998, the Company may redeem a maximum of $35 million of the Mortgage
Notes at 113% of the principal amount due with funds from a public offering of
common stock of the Company or PCI (to the extent such funds are contributed to
the Company). Upon a change of control, as defined in the agreement, the Company
is required to offer to purchase the Mortgage Notes for 101% of the principal
due.
The Mortgage Notes and other long-term debt contain various restrictions on
the Company, which, among other things, limit the ability of the Company to
incur additional indebtedness, to acquire or dispose of assets or operations and
to pay dividends or redeem shares of stock.
F-17
<PAGE> 172
PIONEER AMERICAS ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. FINANCIAL INSTRUMENTS
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. The Company's sales are primarily to customers in the western and
southeastern regions of the United States. Credit losses relating to these
customers have been within management's expectations.
The Company maintains cash deposits with major banks, which from time to
time may exceed federally insured limits. The Company periodically assesses the
financial condition of the institutions and believes that any possible loss is
minimal.
Net sales of the Company included sales to a major customer of
approximately $23.5 million for the year ended December 31, 1996. Net sales of
the Predecessor Company included sales to a major customer of approximately $7.5
million for the period from January 1, 1995 through April 20, 1995 and $18.7
million in 1994.
Investments
It is the policy of the Company to invest its excess cash in investment
instruments or securities whose value is not subject to market fluctuations such
as master notes of issuers rated at the time of such investment of at least A-2
or the equivalent thereof by S&P or at least P-2 or the equivalent thereof by
Moody's or any bank or financial institution party to the Company's Bank Credit
Facility with Bank of America.
Fair Value of Financial Instruments
In preparing disclosures about the fair value of financial instruments, the
Company has assumed that the carrying amount approximates fair value for cash
and cash equivalents, receivables, short-term borrowings, accounts payable and
certain accrued expenses because of the short maturities of those instruments.
The fair values of long-term debt instruments are estimated based upon quoted
market values (if applicable), or on the current interest rates available to the
Company for debt with similar terms and remaining maturities. Considerable
judgment is required in developing these estimates and, accordingly, no
assurance can be given that the estimated values presented herein are indicative
of the amounts that would be realized in a free market exchange. The Company
held no derivative financial instruments as of December 31, 1996 and 1995.
At December 31, 1996, the fair market value of all of the Company's
financial instruments approximated the book value, except its 13 3/8% First
Mortgage Notes Due 2005, which had a book value of $135 million and a fair value
based upon its current quoted market price of $153 million.
11. COMMITMENTS AND CONTINGENCIES
Letters of Credit
At December 31, 1996 the Company had letters of credit and performance
bonds outstanding of approximately $5.2 million and $2.5 million, respectively.
These letters of credit and performance bonds were issued for the benefit of:
customers under sales agreements securing delivery of products sold, a power
company as a deposit for the supply of electricity, and a state environmental
agency as required for manufacturers in the state. The letters of credit expire
at various dates in 1997 and 1998. No amounts were drawn on the letters of
credit at December 31, 1996.
F-18
<PAGE> 173
PIONEER AMERICAS ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Purchase Commitments
The Company 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 563,111 tons of salt are to be purchased in 1997, 280,000
tons in 1998 and 225,000 tons in each of the years 1999 through 2003. The future
minimum salt commitments are as follows (in thousands):
<TABLE>
<S> <C>
1997....................................................... $ 4,402
1998....................................................... 2,480
1999....................................................... 1,903
2000....................................................... 1,960
2001....................................................... 2,019
Thereafter................................................. 4,221
-------
Total purchase commitments....................... $16,985
=======
</TABLE>
Operating Leases
The Company leases certain 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 December 31, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
1997.................................... $ 8,318
1998.................................... 7,960
1999.................................... 7,916
2000.................................... 6,267
2001.................................... 5,786
Thereafter.............................. 4,685
-------
Total minimum obligations..... $40,932
=======
</TABLE>
Lease expense charged to operations for the year ended December 31, 1996
and for the period from Inception through December 31, 1995 was approximately
$7.8 million and $6.3 million, respectively. Lease expense charged to the
Predecessor Company's operations for the period from January 1, 1995 through
April 20, 1995 and the year ended December 31, 1994 was approximately $3.3
million and $8.4 million, respectively.
Litigation
During 1993, Imperial West was awarded $1.4 million as the result of a
breach of contract claim it had asserted against the lessor of one of the
Imperial West plants. Appeals of the judgment were upheld and the award together
with interest was paid in January 1996. The consolidated financial statements at
December 31, 1995 included a receivable for the award. The lessor also 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. Certain insurers paid a portion of Imperial West's defense costs
in connection with the lawsuit by the lessor.
In 1994, the trustee in the bankruptcy of a company which was a customer of
the Predecessor Company filed suit against the Predecessor Company, seeking the
recovery of up to $2.2 million in payments made to the Predecessor Company on a
basis which the trustee alleges was preferential to other creditors' claims.
F-19
<PAGE> 174
PIONEER AMERICAS ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 the Company is vigorously contesting the action. The Company does
not believe this action will have a significant effect on its financial position
or results of operations.
The Company is party to other 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.
12. 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 deferred tax liabilities and assets are as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
Deferred tax liabilities:
Tax over book basis -- property, plant
and equipment...................... $20,006 $ 22,063
Other -- net.......................... 399 1,435
------- --------
Total deferred tax
liabilities................. 20,405 23,498
------- --------
Deferred tax assets:
Post employment benefits.............. 5,552 5,791
Alternative minimum tax credit
carryforward....................... 671 --
Allowance for doubtful accounts....... 511 569
Other accrued liabilities............. 6,165 6,530
Net operating loss carry forward of
PCI................................ 14,391 22,091
------- --------
Total deferred tax assets..... 27,290 34,981
Valuation allowance for deferred tax
assets................................ -- (11,433)
------- --------
Net deferred tax assets................. 27,290 23,498
------- --------
Net deferred taxes...................... $ 6,885 $ --
======= ========
</TABLE>
Significant components of the provision for income taxes for the periods
presented are as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------
1996 1995 1995 1994
------ ------ -------- --------
<S> <C> <C> <C> <C>
Current:
Federal............................... $ 614 $ 799 $ 5,938 $ 3,930
State................................. 1,528 1,830 957 568
------ ------ ------- -------
Total current................. 2,142 2,629 6,895 4,498
------ ------ ------- -------
Deferred:
Federal............................... 5,032 4,180 (1,816) (1,010)
State................................. (439) (601) (270) (246)
------ ------ ------- -------
Total current................. 4,593 3,579 (2,086) (1,256)
------ ------ ------- -------
Total income tax provision.... $6,735 $6,208 $ 4,809 $ 3,242
====== ====== ======= =======
</TABLE>
F-20
<PAGE> 175
PIONEER AMERICAS ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-----------------------------------
1996 1995 1995 1994
---------------- ---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rates............. $4,390 35% $4,420 35% $4,068 35% $2,936 35%
State income taxes, net of federal tax
benefits.............................. 708 6 799 6 407 3 321 4
Amortization of excess cost over the
fair value of net assets acquired..... 1,591 14 1,159 9 69 1 221 2
Adjustment of previously provided
taxes................................. -- -- -- -- -- -- (285) (3)
Other, net.............................. 46 -- (170) (1) 265 2 49 1
------ -- ------ -- ------ -- ------ --
$6,735 55% $6,208 49% $4,809 41% $3,242 39%
====== == ====== == ====== == ====== ==
</TABLE>
At December 31, 1996, PCI had available to it on a consolidated tax return
basis approximately $35.6 million of net operating loss carryforward ("NOL") for
income tax purposes (expiring 2003 to 2010). The NOL is available for offset
against future taxable income if generated during the carryforward period. A tax
sharing agreement provides that the Company will be liable to PCI for its
separate tax liability only to the extent the consolidated group has a tax
liability. However as long as PCI's NOL is available to the consolidated group
to reduce taxable income, the Company's tax liability to PCI will be
substantially reduced. As a result of the tax sharing agreement, the NOL is
reflected by the Company for financial reporting purposes.
For the year ended December 31, 1996 and the period from Inception through
December 31, 1995, the benefit of the utilization of the NOL of $11.5 million
and $3.6 million, respectively was recognized as an increase to additional
paid-in capital. Approximately $13.6 million was recognized as an increase to
additional paid-in capital as part of the purchase price allocation of the
Acquisition.
13. 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. At several of the Company's facilities, investigations or remediations
are underway and at some of these locations regulatory agencies are considering
whether additional actions are necessary to protect or remediate surface or
groundwater resources, and the Company could be required to incur additional
costs to construct and operate remediation systems in the future. In addition,
at several of its facilities, the Company is in the process of replacing or
closing ponds for the collection of wastewater. The Company plans to spend
approximately $1.3 million during the next fifteen years for closure of eight
chlor-alkali waste water disposal ponds at the Henderson plant. The Company
believes that it is in substantial compliance with existing governmental
regulations.
PCAC's Henderson plant is located within what is known as the "Basic
Complex." Soil and groundwater contamination have been identified within and
adjoining the Basic Complex, including land owned by PCAC. A groundwater
treatment system was installed at the facility in 1983 and, pursuant to a
Consent Agreement with the Nevada Division of Environmental Protection, a study
is being conducted to further evaluate soil and groundwater contamination at the
facility and other properties within the Basic Complex and to determine whether
additional remediation will be necessary with respect to PCAC's property.
In connection with the October 1988 acquisition of the chlor-alkali
business by the Predecessor Company, ICI Delaware Holdings, Inc. and ICI
Americas, Inc. (such companies or their successors, the
F-21
<PAGE> 176
PIONEER AMERICAS ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"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 change in ownership resulting from the Acquisition, the ZENECA
Indemnity will terminate on April 20, 1999. 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,
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
opinion of management, any environmental liability in excess of the amount
indemnified and accrued on the consolidated balance sheet, if any, would not
have a material adverse effect on the consolidated financial statements.
In the Acquisition Agreement, the Sellers agreed to indemnify the Company
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 certain properties held for the benefit of the Sellers
("Sellers' Indemnity"). Amounts payable pursuant to the Sellers' Indemnity will
generally be payable as follows: (i) out of certain reserves established on the
Predecessor Company 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 of the Closing Date.
PCI 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. PCI and the Sellers have agreed that they will cooperate in matters
relating to the ZENECA Indemnity.
Remediation costs are accrued based on estimates of known environmental
remediation exposure. Such accruals are based upon management's best estimate of
the ultimate cost and are recorded even if significant uncertainties exist over
the ultimate cost of the remediation. Ongoing environmental compliance cost,
including maintenance and monitoring costs, are charge to operations as
incurred. 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, totaled approximately $1.7 million and $1.2 million for the year
ended December 31, 1996 and for the period from Inception through December 31,
1995, respectively, and $0.4 million and $1.8 million for the Predecessor
Company for the period from January 1, 1995 through April 20, 1995 and the year
ended December 31, 1994, respectively. Capital expenditures for
environmental-related matters at existing facilities were approximately $4.3
million and $2.2 million for the year ended December 31, 1996 and for the period
from Inception through December 31, 1995, respectively, and $0.2 million and
$0.5 million for the Predecessor Company for the period from January 1, 1995
through April 20, 1995 and the year ended December 31, 1994, respectively.
Future environmental-related capital expenditures will depend upon regulatory
requirements, as well as timing related to obtaining necessary permits and
approvals.
F-22
<PAGE> 177
PIONEER AMERICAS ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 the Company for chlor-alkali-related remediation
of the Henderson and St. Gabriel facilities. The recorded accrual included
certain amounts related to anticipated closure and post-closure actions that may
be required in the event that operation of the present chlor-alkali plants
ceases. Such accrual is recorded in the Company's consolidated balance sheets at
December 31, 1996 and 1995. However, complete analysis and study has 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. Such accrual is reflected in the
Company's consolidated balance sheets at December 31, 1996 and 1995. Other
assets include an account receivable of the same amount from the ZENECA
Companies. 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.
14. 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's interest in Saguaro is accounted for using the cost method of
accounting. The Company sells certain products and services to and purchases
steam from Saguaro at market prices. Transactions with Saguaro are as follows:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
--------------
1996 1995 1995 1994
------ ------ ---- ------
<S> <C> <C> <C> <C>
Sales to Saguaro................................. $1,005 $ 754 $353 $1,286
Purchases from Saguaro........................... 1,840 1,388 616 2,096
Partnership distribution from Saguaro (included
in
other income).................................. 735 637 -- 1,290
</TABLE>
Accounts receivable from and accounts payable to Saguaro are at the
Company's normal terms and are generally not significant to the Company's
consolidated balance sheet.
The Company is a party to an agreement negotiated on an arms-length basis
with BII for the delivery of the Company's water to the Henderson production
facility. The agreement provides for the delivery of a minimum of eight million
gallons of water per day. The agreement expires on December 31, 2014, unless
terminated earlier in accordance with the provisions of the agreement. For the
year ended December 31, 1996 and the period from Inception through December 31,
1995, BII charged expenses to the Company of approximately $0.2 million and $0.2
million, respectively. For the period from January 1, 1995 through
F-23
<PAGE> 178
PIONEER AMERICAS ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
April 20, 1995 and the year ended December 31, 1994, BII charged expenses to the
Predecessor Company of approximately $0.2 million and $0.5 million,
respectively.
The Company sells certain products to Kemwater at market prices. Sales to
Kemwater totaled $8.8 million during the year ended December 31, 1996. Kemwater
provides transportation services to the Company at market prices which totaled
$1.8 million for 1996.
F-24
<PAGE> 179
PIONEER AMERICAS ACQUISITION CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 35,799 $ 14,417
Accounts receivable, less allowance for doubtful accounts
of $1,357 at September 30, 1997 and $1,311 at December
31, 1996............................................... 37,039 18,830
Due from parent........................................... 5,003 2,547
Inventories............................................... 15,341 6,247
Prepaid expenses.......................................... 2,467 1,156
-------- --------
Total current assets.............................. 95,649 43,197
Property, plant and equipment:
Land...................................................... 4,885 3,735
Buildings and improvements................................ 26,523 17,062
Machinery and equipment................................... 137,154 71,704
Cylinders and tanks....................................... 4,541 4,540
Construction in progress.................................. 25,135 11,871
-------- --------
198,238 108,912
Less accumulated depreciation............................. (26,339) (16,429)
-------- --------
171,899 92,483
Investment in and advances to unconsolidated subsidiary..... 30,297 28,586
Other assets, net of accumulated amortization of $2,288 at
September 30, 1997 and $2,458 at December 31, 1996........ 40,902 19,621
Excess cost over fair value of net assets acquired, net of
accumulated amortization of $11,408 at September 30, 1997
and $7,556 at December 31, 1996........................... 125,104 107,123
-------- --------
Total assets...................................... $463,851 $291,010
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 28,976 $ 17,221
Accrued liabilities....................................... 27,298 19,276
Returnable deposits....................................... 3,287 3,238
Current portion of long-term debt......................... 1,163 128
-------- --------
Total current liabilities......................... 60,724 39,863
Long-term debt.............................................. 305,370 141,629
Returnable deposits......................................... 3,271 3,272
Accrued pension and other employee benefits................. 18,511 14,100
Other long-term liabilities................................. 16,733 17,823
Commitments and contingencies
Stockholder's equity:
Common stock, $.01 par value, authorized 1,000 shares,
issued and outstanding 1,000 shares.................... 1 1
Additional paid-in capital................................ 66,624 61,124
Retained earnings (deficit)............................... (7,383) 13,198
-------- --------
Total stockholder's equity........................ 59,242 74,323
-------- --------
Total liabilities and stockholder's equity........ $463,851 $291,010
======== ========
</TABLE>
See notes to consolidated financial statements.
F-25
<PAGE> 180
PIONEER AMERICAS ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues................................................ $65,242 $48,872 $150,073 $140,835
Cost of sales........................................... 46,894 34,257 112,553 98,600
------- ------- -------- --------
Gross profit............................................ 18,348 14,615 37,520 42,235
Selling, general and administrative expenses............ 7,300 6,767 19,580 19,142
------- ------- -------- --------
Operating income........................................ 11,048 7,848 17,940 23,093
Equity in net loss of unconsolidated subsidiary......... (779) (689) (2,552) (912)
Interest expense, net................................... 6,750 4,417 16,189 12,766
Other income, net....................................... 446 403 882 507
------- ------- -------- --------
Income before taxes and extraordinary item.............. 3,965 3,145 81 9,922
Income tax provision.................................... 2,090 981 1,779 4,868
------- ------- -------- --------
Income (loss) before extraordinary item................. 1,875 2,164 (1,698) 5,054
Extraordinary item from early extinguishment of
debt (net of income tax benefit of $12,439)........... -- -- (18,658) --
------- ------- -------- --------
Net income (loss)....................................... $ 1,875 $ 2,164 $(20,356) $ 5,054
======= ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-26
<PAGE> 181
PIONEER AMERICAS ACQUISITION CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1997 1996
--------- --------
<S> <C> <C>
Operating activities:
Net income (loss)......................................... $ (20,356) $ 5,054
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary item (net of tax)........................ 18,658 --
Depreciation and amortization.......................... 14,792 13,558
Equity in net loss of unconsolidated subsidiaries...... 2,552 912
Net change in deferred taxes........................... 1,486 2,882
Net effect of changes in operating assets and
liabilities (net of acquisitions) (Note 2)............ (6,329) 4,987
--------- --------
Net cash flows from operating activities.................. 10,803 27,393
Investing activities:
Acquisition of businesses.............................. (97,000) (5,459)
Investment in and advances to unconsolidated
subsidiary............................................ (2,490) (2,436)
Capital expenditures................................... (10,977) (15,796)
--------- --------
Net cash flows used in investing activities............... (110,467) (23,691)
Financing activities:
Payments on long-term debt............................. (162,342) (33)
Proceeds from long-term debt........................... 300,000
Debt issuance and related costs........................ (16,362)
Dividends paid to parent............................... (250) (456)
--------- --------
Net cash flows from (used in) financing activities........ 121,046 (489)
Net increase in cash...................................... 21,382 3,213
Cash acquired in purchase................................. -- 728
Cash at beginning of period............................... 14,417 11,218
--------- --------
Cash at end of period..................................... $ 35,799 $ 15,159
========= ========
</TABLE>
See notes to consolidated financial statements.
F-27
<PAGE> 182
PIONEER AMERICAS ACQUISITION CORP., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
The consolidated balance sheet as of September 30, 1997 and the statements
of operations and cash flows for all periods presented are unaudited and reflect
all adjustments, consisting of normal recurring items, which in the opinion of
management are necessary for a fair presentation. Operating results for the
first nine months of 1997 are not necessarily indicative of results to be
expected for the year ended December 31, 1997. The consolidated financial
statements include the accounts of Pioneer Americas Acquisition Corp. and its
consolidated subsidiaries (collectively referred to as the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation. All dollar amounts in the notes to the financial statements are
stated in thousands of dollars unless otherwise indicated.
The consolidated balance sheet at December 31, 1996 is derived from the
December 31, 1996 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, 1996.
Accounting Changes
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income," (SFAS No. 130) and Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information," (SFAS No.
131). SFAS No. 130 and SFAS No. 131 are effective for fiscal years beginning
after December 15, 1997. SFAS No. 130 establishes standards for reporting and
displaying of comprehensive income and its components. SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in interim and annual financial statements. These two
statements have no effect on the Company's 1997 financial statements, but
management is currently evaluating what, if any, additional disclosures may be
required when these two statements are adopted for periods beginning with the
first quarter of the year ending December 31, 1998.
Acquisition
On June 17, 1997, Pioneer Companies, Inc. ("PCI") and the Company
consummated the acquisition of a chlor-alkali production facility and related
business located in Tacoma, Washington (the "Tacoma Acquisition") from OCC
Tacoma, Inc. ("OCC Tacoma"), a subsidiary of Occidental Chemical Corporation.
Pursuant to the Asset Purchase Agreement dated as of May 14, 1997, the Company
acquired substantially all of the assets and properties used by OCC Tacoma in
the chlor-alkali business at Tacoma, Washington. The purchase price consisted of
(i) $97,000, payable in cash; (ii) 55,000 shares of Convertible Redeemable
Preferred Stock, par value $.01 per share, of PCI, having a liquidation
preference of $100 per share, and (iii) the assumption of certain obligations
related to the acquired chlor-alkali business. The Tacoma acquisition was
accounted for in accordance under the purchase method of accounting. The
acquired goodwill of approximately $15,000 is being amortized straight-line over
25 years. Results of operations of the acquired business have been reflected in
the Company's financial statements since June 17, 1997.
F-28
<PAGE> 183
PIONEER AMERICAS ACQUISITION CORP., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Pro Forma Financial Data
The following pro forma financial data presents the consolidated financial
results of operations as if the Tacoma Acquisition had occurred at the beginning
of the period presented and does not purport to be indicative of either further
results of operations or results that would have occurred had the Tacoma
Acquisition actually been made as of such date.
PRO FORMA COMBINED SUMMARY FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Revenues.................................................... $187,094 $210,364
Income before extraordinary item............................ 193 5,675
Extraordinary item, early extinguishment of debt
(net of income tax benefit of $12,439).................... 18,658 --
-------- --------
Net income (loss)........................................... $(18,465) $ 5,675
======== ========
</TABLE>
Earnings per share has not been presented as the Company is a wholly-owned
subsidiary of PCI and per share data would not provide any additional useful
information.
2. SUPPLEMENTAL CASH FLOW INFORMATION
Net effect of changes in operating assets and liabilities (net of
acquisitions) are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1996
-------- -------
<S> <C> <C>
Accounts receivable......................................... $(17,818) $ 4,447
Due from parent............................................. (2,456) (1,628)
Inventories................................................. (1,873) 1,865
Prepaid expenses............................................ (3,249) (208)
Other assets................................................ (187) 1,005
Accounts payable............................................ 11,755 (1,784)
Accrued liabilities......................................... 8,022 3,342
Returnable deposits......................................... 48 45
Other long-term liabilities................................. (571) (2,097)
-------- -------
Net change in operating accounts.................. $ (6,329) $ 4,987
======== =======
</TABLE>
F-29
<PAGE> 184
PIONEER AMERICAS ACQUISITION CORP., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Following is supplemental cash flow information:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1996
-------- -------
<S> <C> <C>
Cash payments for:
Interest.................................................. $ 15,791 $ 9,269
Income taxes.............................................. 543 3,664
Acquisition of OCC Tacoma facility:
Cash paid for acquisition................................. $ 97,000
Equity contribution by parent............................. 5,500
Liabilities assumed....................................... 2,955
--------
Fair value of assets acquired............................. $105,455
========
Acquisition of T.C. Products, Inc.:
Cash paid for acquisition................................. $ 5,459
Long-term debt issued..................................... 4,500
Liabilities assumed....................................... 3,994
-------
Fair value of assets acquired............................. $13,953
=======
</TABLE>
Other non-cash items included in the consolidated financial statements
include an increase in stockholder's equity of $3,805 for the nine months ended
September 30, 1996 due to the recognition of the net operating loss
carryforward.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Raw materials, supplies and parts........................ $ 7,562 $7,512
Finished goods and work-in process....................... 12,047 2,668
Inventories under exchange agreements.................... (4,268) (3,933)
------- ------
$15,341 $6,247
======= ======
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The manufacturing operations of the Company are subject to United States
federal, state and local laws and regulations relating to protection of the
environment, including those applicable to waste management, discharge of
pollutants into the air and water, cleanup liability from historical waste
disposal practices and employee health and safety. Each of the United States
federal environmental programs typically has a state counterpart. The state
environmental programs generally must be at least as stringent as the federal
requirements, and some state regulations are more onerous than the federal
requirements. Both federal and state environmental programs allow the imposition
of substantial civil and criminal penalties for noncompliance. Although the
company believes that its operations are in general compliance with applicable
environmental laws and regulations, risks of substantial costs and liabilities
are inherent in chemical manufacturing operations, and there can be no assurance
that significant costs and liabilities will not be incurred. Moreover, it is
possible that other developments, such as new environmental laws and regulations
or stricter enforcement and cleanup policies, could result in substantial costs
and liabilities to the Company. The
F-30
<PAGE> 185
PIONEER AMERICAS ACQUISITION CORP., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Company has accrued $11.9 million related to expected future environmental
restoration and remediation costs, computed on an undiscounted basis. In the
opinion of management, there is currently no material estimable range of loss in
excess of the amount recorded. However, it is possible that new information
about the sites for which the reserve has been established, new technology or
future developments could require the Company to reassess its potential exposure
related to environmental matters.
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.
F-31
<PAGE> 186
PIONEER AMERICAS ACQUISITION CORP., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
AUDITORS' REPORT TO THE BOARD OF DIRECTORS
We have audited the combined balance sheets of ICI Forest Products -- North
America (the "Division") as at December 31, 1996, 1995 and 1994 and the combined
statements of operations, head office account and changes in financial position
for each of the years in the three-year period ended December 31, 1996. These
combined financial statements are the responsibility of the Division's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these combined financial statements present fairly, in all
material respects, the financial position of the Division as at December 31,
1996, 1995 and 1994 and the results of its operations and the changes in its
financial position for each of the years in the three-year period ended December
31, 1996 in accordance with Canadian generally accepted accounting principles.
KPMG
Chartered Accountants
Montreal, Canada
September 5, 1997
F-32
<PAGE> 187
ICI FOREST PRODUCTS - NORTH AMERICA
COMBINED BALANCE SHEETS
(IN THOUSANDS OF CANADIAN DOLLARS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------- ------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash.................................... $ -- $ 19,026 $ 16,210 $ -- $ 771
Accounts receivable (note 3).......... 31,455 31,271 29,573 31,382 35,272
Inventories (note 4).................. 9,754 10,738 8,856 16,397 12,855
Prepaid expenses...................... 302 761 604 555 709
-------- -------- -------- -------- --------
41,511 61,796 55,243 48,334 49,607
Property, plant and equipment (note
5).................................... 88,110 69,822 78,407 67,053 72,610
Other assets (note 6)................... 3,443 5,079 7,505 5,856 6,879
-------- -------- -------- -------- --------
$133,064 $136,697 $141,155 $121,243 $129,096
======== ======== ======== ======== ========
LIABILITIES AND HEAD OFFICE ACCOUNT
Current liabilities:
Bank indebtedness..................... $ 3,857 $ -- $ -- $ -- $ --
Accounts payable...................... 26,575 22,129 23,321 20,228 25,478
Other current liabilities............. 7,323 6,136 7,097 10,727 14,902
-------- -------- -------- -------- --------
37,755 28,265 30,418 30,955 40,380
Long-term debt (note 7)................. 2,500 2,500 2,500 2,500 2,500
Other non-current liabilities (note
8).................................... 9,929 13,249 12,641 16,323 15,461
-------- -------- -------- -------- --------
50,184 44,014 45,559 49,778 58,341
Head office account..................... 82,745 92,670 95,531 71,439 70,576
Cumulative translation adjustment (note
9).................................... 135 13 65 26 179
-------- -------- -------- -------- --------
Commitments and contingent liabilities
(note 13)
$133,064 $136,697 $141,155 $121,243 $129,096
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-33
<PAGE> 188
ICI FOREST PRODUCTS -- NORTH AMERICA
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30 YEARS ENDED DECEMBER 31
------------------- ------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales................................... $203,428 $203,210 $268,877 $271,338 $225,714
Less freight............................ 35,549 33,976 44,910 44,878 46,564
-------- -------- -------- -------- --------
Net sales............................... 167,879 169,234 223,967 226,460 179,150
Cost of sales........................... 110,114 111,011 149,043 149,409 137,614
-------- -------- -------- -------- --------
Gross profit............................ 57,765 58,223 74,924 77,051 41,536
Other expenses (income):
Selling, general and administrative
expenses........................... 9,690 9,558 12,213 15,092 13,241
Amortization of deferred investment
tax credits........................ (594) (594) (792) (792) (792)
Research expenditures (note 11)....... 1,070 1,278 1,683 1,753 1,503
Restructuring (note 12)............... 362 450 650 910 16,310
-------- -------- -------- -------- --------
10,528 10,692 13,754 16,963 30,262
-------- -------- -------- -------- --------
Income before the undernoted item....... 47,237 47,531 61,170 60,088 11,274
Other income, net....................... 931 2,086 2,045 1,546 875
-------- -------- -------- -------- --------
Income before interest and income
taxes................................. $ 48,168 $ 49,617 $ 63,215 $ 61,634 $ 12,149
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-34
<PAGE> 189
PIONEER AMERICAS ACQUISITION CORP., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
ICI FOREST PRODUCTS -- NORTH AMERICA
COMBINED STATEMENTS OF HEAD OFFICE ACCOUNT
(IN THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------- --------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Head office account, beginning of
period............................ $ 95,531 $ 71,439 $ 71,439 $ 70,576 $ 99,744
Income before interest and income
taxes............................. 48,168 49,617 63,215 61,634 12,149
Transfer to head office............. (60,954) (28,386) (39,123) (60,771) (41,317)
-------- -------- -------- -------- --------
Head office account, end of
period............................ $ 82,745 $ 92,670 $ 95,531 $ 71,439 $ 70,576
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-35
<PAGE> 190
PIONEER AMERICAS ACQUISITION CORP., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
ICI FOREST PRODUCTS -- NORTH AMERICA
COMBINED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(IN THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------- ------------------------------
1997 1996 1996 1995 1994
--------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
)(UNAUDITED
Cash provided by (used in):
Operations:
Income before interest and income
taxes.......................... $ 48,168 $49,617 $63,215 $61,634 $ 12,149
Add (deduct) items not affecting
cash:
Loss (gain) on disposal of
property, plant and
equipment.................... 45 126 259 2,682 30
Depreciation and
amortization................. 6,141 5,756 7,701 7,712 8,514
Amortization of deferred
investment tax credits....... (594) (594) (792) (792) (792)
Net change in non-cash working
capital balances............... 2,946 1,171 4,225 (6,246) 8,511
Cumulative translation
adjustment..................... 70 (13) 39 (153) 179
--------- ------- ------- ------- --------
56,776 56,063 74,647 64,837 28,591
Financing:
Transfer to head office........... (60,954) (28,386) (39,123) (60,771) (41,317)
Investments:
Investments in property, plant and
equipment...................... (15,889) (8,672) (19,335) (4,837) (5,567)
Proceeds on disposal of property,
plant and equipment............ -- 21 21 -- --
--------- ------- ------- ------- --------
(15,889) (8,651) (19,314) (4,837) (5,567)
--------- ------- ------- ------- --------
Increase (decrease) in cash......... (20,067) 19,026 16,210 (771) (18,293)
Cash, beginning of period........... 16,210 -- -- 771 19,064
--------- ------- ------- ------- --------
Cash (bank indebtedness), end of
period............................ $ (3,857) $19,026 $16,210 $ -- $ 771
========= ======= ======= ======= ========
</TABLE>
See accompanying notes to combined financial statements.
F-36
<PAGE> 191
PIONEER AMERICAS ACQUISITION CORP., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
ICI FOREST PRODUCTS -- NORTH AMERICA
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
1. BASIS OF PRESENTATION:
The financial statements of ICI Forest Products -- North America (the
"Division") represent the combined financial position and results of operations
of the Forest Products divisions of ICI Canada Inc. and ICI Americas Inc. Both
of these companies are indirectly wholly-owned subsidiaries of Imperial Chemical
Industries PLC (a UK corporation) ("ICI").
The combined statements of operations disclose income before interest and
income taxes. Management has not attempted to record interest income or expense
arising from intercompany balances, nor has a provision for income taxes been
recorded for the Division. Further, remediation costs for the Cornwall plant
cellroom, which has been shut down, and the related below ground environmental
restoration costs have been recorded by ICI Canada Inc. and not the Division.
In all other respects, these combined financial statements are in
accordance with Canadian generally accepted accounting principles expressed in
Canadian dollars.
Unaudited combined financial statements of the Division for the nine months
ended September 30, 1997 and 1996 have been presented for information purposes
only.
2. SIGNIFICANT ACCOUNTING POLICIES:
(a) Principles of combination:
The balance sheet and results of operations of the two divisions have been
combined to present the financial position and results of operations of the ICI
North American Forest Products business. All significant intercompany balances
and transactions have been eliminated on combination. Because the Division does
not represent a separate legal entity with issued share capital, the equivalent
of shareholders' equity is represented by a "Head office account".
(b) Foreign exchange:
Monetary assets and liabilities denominated in foreign currencies are
translated at the rates of exchange at the balance sheet dates. Other balance
sheet items are translated at the rates prevailing at the respective transaction
dates. Income and expenses are translated at average rates prevailing during the
period. Gains or losses on foreign exchange are recorded in the statements of
operations.
The Forest Products division of ICI Americas Inc. is considered to be a
self-sustaining foreign operation and its assets and liabilities have been
translated into Canadian dollars at the rate of exchange in effect at the
balance sheet dates. Revenue and expense items (including depreciation) have
been translated at the average rate of exchange prevailing during the period.
Exchange gains and losses arising from the translation of the financial
statements are accumulated in the cumulative translation adjustment account. The
balance in this account will be recognized in earnings in proportion to any
reduction in the net investment in the US division.
(c) Inventories:
Inventories are valued at the lower of average actual cost and net
realizable value. Manufactured goods include the cost of raw materials, variable
labor and manufacturing overheads, including depreciation.
(d) Property, plant and equipment:
Property, plant and equipment are recorded at cost. Depreciation on plant
and equipment and buildings is provided on a straight-line basis over the
estimated useful lives of the assets. Annual reviews are made of the
F-37
<PAGE> 192
ICI FOREST PRODUCTS -- NORTH AMERICA
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
residual lives of all productive assets, taking into account commercial and
technological obsolescence as well as physical condition. Depreciation is not
provided for on construction in progress.
(e) Research expenditures:
All expenditures for research, except property, plant and equipment used
for this purpose, are charged to earnings as incurred, net of investment tax
credits earned.
(f) Provision for environmental liabilities:
Provision is made for environmental expenditures that are required to
comply with governmental regulations, to meet contractual obligations, or to
improve the health and welfare of employees on a best estimate basis.
(g) Pensions:
The estimated present value of accrued pension benefits is based on
actuarial valuations and the net assets available to provide for these benefits
are at market related values. The pension expense is determined by ICI Canada
Inc. and ICI Americas Inc. for the respective divisions and allocated to the
Division based on its proportionate number of active employees and retirees.
This allocation might differ from the calculation that would be obtained if
performed on the population of the Division alone.
(h) Post-retirement benefits other than pensions:
The Division accrues the estimated present value of retirement benefits
which include medical, dental, and life insurance provided to qualifying
employees upon retirement over the employees' periods of service to their dates
of full entitlement. The expense is determined by ICI Canada Inc. and ICI
Americas Inc. for the respective divisions and allocated to the Division based
on its proportionate number of active employees and retirees. This allocation
might differ from the calculation that would be obtained if performed on the
population of the Division alone.
(i) Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the dates of the financial statements
and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
(j) Investment in joint venture:
The Division's investment in a joint venture has been accounted for using
the cost method under which the investment is recorded at cost and the net
earnings of the joint venture are recognized as income only to the extent of
dividends received from the joint venture.
(k) Financial instruments:
The Division uses derivative financial instruments, principally forward
foreign exchange contracts, to manage risks from fluctuations in exchange rates
related to sales and purchases in foreign currencies. Derivative financial
instruments are not used for trading purposes. Gains and losses on forward
foreign exchange contracts, which have been designated as hedges of anticipated
future transactions, are deferred and recognized upon completion of the
underlying hedged transaction.
F-38
<PAGE> 193
ICI FOREST PRODUCTS -- NORTH AMERICA
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
3. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
----------------- ---------------------------
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Accounts receivable.......................... $32,188 $32,011 $30,386 $32,008 $34,989
Amounts receivable from related entities..... 119 107 36 221 1,140
Less allowance for doubtful accounts......... (852) (847) (849) (847) (857)
------- ------- ------- ------- -------
$31,455 $31,271 $29,573 $31,382 $35,272
======= ======= ======= ======= =======
</TABLE>
4. INVENTORIES:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
---------------- --------------------------
1997 1996 1996 1995 1994
------ ------- ------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Raw materials.................................. $3,245 $ 3,734 $2,656 $ 7,744 $ 1,496
Finished goods................................. 3,458 3,957 3,452 5,403 5,734
Stores and supplies............................ 3,051 3,047 2,748 3,250 5,625
------ ------- ------ ------- -------
$9,754 $10,738 $8,856 $16,397 $12,855
====== ======= ====== ======= =======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1997 1996
-------- --------
ACCUMULATED NET BOOK NET BOOK
COST DEPRECIATION VALUE VALUE
-------- ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Plant and equipment................................ $269,527 $186,971 $82,556 $60,973
Construction in progress........................... 4,562 -- 4,562 7,782
Buildings.......................................... 874 634 240 270
Land............................................... 752 -- 752 797
-------- -------- ------- -------
$275,715 $187,605 $88,110 $69,822
======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995 1994
ACCUMULATED NET BOOK NET BOOK NET BOOK
COST DEPRECIATION VALUE VALUE VALUE
-------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Plant and equipment....................... $240,932 $181,059 $59,873 $61,840 $67,830
Construction in progress.................. 17,476 -- 17,476 4,161 3,665
Buildings................................. 873 612 261 292 389
Land...................................... 797 -- 797 760 726
-------- -------- ------- ------- -------
$260,078 $181,671 $78,407 $67,053 $72,610
======== ======== ======= ======= =======
</TABLE>
F-39
<PAGE> 194
ICI FOREST PRODUCTS -- NORTH AMERICA
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
6. OTHER ASSETS:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------- ------------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Investment in joint venture (note 10)............. $ 674 $ 674 $ 674 $ 674 $ 674
Deferred pension asset............................ 2,769 4,405 4,456 5,182 6,205
Deposit........................................... -- -- 2,375 -- --
------ ------ ------ ------ ------
$3,443 $5,079 $7,505 $5,856 $6,879
====== ====== ====== ====== ======
</TABLE>
As at December 31, 1996, the Division made $2.375 million in advance
payments towards the acquisition of plant and equipment.
7. LONG-TERM DEBT:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------- ------------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Province of New Brunswick, non-interest bearing
loan, due December 31, 2000..................... $2,500 $2,500 $2,500 $2,500 $2,500
====== ====== ====== ====== ======
</TABLE>
8. OTHER NON-CURRENT LIABILITIES:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
---------------- ---------------------------
1997 1996 1996 1995 1994
------ ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Post-retirement benefits...................... $6,120 $ 5,769 $ 5,906 $ 5,644 $ 5,499
Unfunded pension liability.................... 196 150 168 189 220
Restructuring provisions...................... 49 2,974 2,409 5,540 4,000
Deferred investment tax credits............... 3,564 4,356 4,158 4,950 5,742
------ ------- ------- ------- -------
$9,929 $13,249 $12,641 $16,323 $15,461
====== ======= ======= ======= =======
</TABLE>
9. CUMULATIVE TRANSLATION ADJUSTMENT:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- -------------------
1997 1996 1996 1995 1994
----- ----- ---- ----- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period............................. $ 65 $ 26 $26 $ 179 $ 0
Effect of changes in exchange rates during the period on
the net assets of the US division...................... 70 (13) 39 (153) 179
---- ---- --- ----- ----
$135 $ 13 $65 $ 26 $179
==== ==== === ===== ====
</TABLE>
F-40
<PAGE> 195
ICI FOREST PRODUCTS -- NORTH AMERICA
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
10. INVESTMENT IN JOINT VENTURE:
The Division owns 33 1/3% of the issued common shares of Canso Chemicals
Limited. The following information is submitted with respect to the Division's
investment in Canso Chemicals Limited:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- -------------------
1997 1996 1996 1995 1994
----- ----- ---- ---- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Division's equity in earnings (losses) of the
joint venture for the period................... $ 63 $120 $128 $ 90 $(147)
Division's equity in the net assets of the joint
venture........................................ 951 880 888 760 670
==== ==== ==== ==== =====
</TABLE>
11. RESEARCH EXPENDITURES:
Research expenditures are net of the following tax credits:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
- ------------- ------------------
1997 1996 1996 1995 1994
- ----- ----- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
$260 $180 $199 $207 $251
==== ==== ==== ==== ====
</TABLE>
12. RESTRUCTURING:
During 1994, a decision was made to restructure the operations of the
Division. The restructuring charge of $16,310,000 related primarily to
severance, demolition and decommissioning costs, and a write-down of fixed
assets.
During 1995, the Division recorded a provision of $910,000 representing
future minimum lease payments and related expenses attributed to excess office
space which arose from restructuring of the operations.
During 1996, an additional $650,000 was recorded for restructuring
activities primarily affecting the research center.
During 1997, a reserve of $362,000 was recorded for restructuring
activities at the Becancour plant.
13. COMMITMENTS AND CONTINGENT LIABILITIES:
(a) Environmental liabilities:
It is the Division's policy to provide, on a best estimate basis, for
environmental site clean-up costs when actions are required to comply with
government environmental regulations, to meet contractual obligations, or to
improve the health and welfare of employees.
Given the uncertainties inherent in estimating total costs involved because
of the expenses and effectiveness of alternate remedial technologies, the extent
of pollution, the interpretation of complex regulations and the degree to which
the Division itself is involved, it is reasonably possible that actual costs
will differ from amounts accrued and the differences could be material to the
Division.
Remediation costs associated with the Cornwall plant cellroom as well as
below ground environmental restoration costs for the site have not been accrued
for by the Division. These costs have been provided for by ICI Canada Inc.
F-41
<PAGE> 196
ICI FOREST PRODUCTS -- NORTH AMERICA
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
13. COMMITMENTS AND CONTINGENT LIABILITIES: (CONTINUED)
(b) Lease commitments:
The future minimum lease payments under operating leases, primarily for
premises and transportation equipment, are as follows:
<TABLE>
<S> <C>
1997............................................... $ 6,768
1998............................................... 4,755
1999............................................... 4,143
2000............................................... 3,207
2001............................................... 2,398
Thereafter......................................... 1,860
-------
$23,131
=======
</TABLE>
14. PENSIONS:
ICI Canada Inc. and ICI Americas Inc. have various non-contributory defined
benefit pension plans which cover virtually all employees including those of the
Division. The plans provide pensions based on length of service and final
average earnings.
The estimated present value of accrued pension benefits based on actuarial
valuations and the net assets available to provide for these benefits at market
related values for the entire plans, without allocation for that portion
relating solely to the Division's employees, are shown below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
ICI Canada Inc.:
Accrued pension benefits......................... $264,000 $257,000 $224,000
Pension fund assets.............................. 265,000 246,000 233,000
ICI Americas Inc.:
Accrued pension benefits......................... 287,000 287,000 235,000
Pension fund assets.............................. 294,000 251,000 207,000
======== ======== ========
</TABLE>
15. RELATED PARTY TRANSACTIONS:
Related party transactions occurred in the normal course of business with
the Division's affiliated companies. These transactions were entered into at
normal market-related terms and prices.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------- ------------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Transactions:
Sales................................... $ 658 $ 491 $ 659 $1,102 $ 694
Purchases............................... 8,428 3,666 6,215 8,368 5,105
Charges from head office................ 1,062 1,279 1,632 1,823 2,881
Purchases of plant and equipment........ 4,400 2,099 4,500 -- --
Research fee income..................... 162 169 217 250 82
Insurance expense....................... 448 480 620 742 716
Balances:
Accounts receivable..................... 119 107 36 221 1,140
Accounts payable........................ 1,430 1,634 3,110 951 537
====== ====== ====== ====== ======
</TABLE>
F-42
<PAGE> 197
ICI FOREST PRODUCTS -- NORTH AMERICA
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
15. RELATED PARTY TRANSACTIONS: (CONTINUED)
The Division is charged for corporate administrative costs incurred by the
head office. These expenses are allocated to the Division based on a combination
of negotiated rates and allocation formulas using sales and the number of
employees as a base.
16. FINANCIAL INSTRUMENTS:
(a) Foreign currency risk management:
A portion of the Division's sales and purchases are transacted in foreign
currencies. The Division uses various forward foreign exchange contracts to
manage its foreign exchange risk. The following table summarizes the Division's
commitments to buy and sell foreign currency at December 31:
<TABLE>
<CAPTION>
NOTIONAL FAIR
NOTIONAL EXCHANGE CANADIAN MARKET
AMOUNT RATE MATURITY EQUIVALENT VALUE
------------- -------------- -------------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Sell contracts:
December 1996........ US$18,000 average 1.3584 up to June 1997 $24,552 $24,509
December 1995........ US$27,000 average 1.3804 up to September 1996 37,270 36,857
December 1994........ US$36,000 average 1.3503 up to December 1995 48,610 50,644
Purchase contracts:
December 1996........ (pound)1,000 average 2.0204 up to March 1997 2,091 2,427
</TABLE>
The forward foreign exchange contracts represent an obligation to exchange
principal amounts between the Division and counterparties. Credit risk exists in
the event of failure by counterparties to meet their obligations. The Division
reduces this risk by dealing with only highly-rated counterparties, normally
major Canadian financial institutions.
(b) Fair value disclosure:
Fair value estimates are made as of a specific point in time, using
available information about the financial instrument. These estimates are
subjective in nature and often cannot be determined with precision.
The Division has determined that the carrying value of its short-term
financial assets and liabilities approximates fair values at the balance sheet
dates because of the short-term maturity of those instruments. The fair value of
pension assets is considered to approximate the carrying value.
The fair value of the Division's long-term debt with the government could
not be determined because an independently verifiable market value for a similar
debt instrument is not available.
(c) Credit and concentration of credit risk:
The Division sells to the Canadian and US market in approximately the same
proportions. Six of its customers represent 30% (1995 - 20%; 1994 - 27%) of the
combined total sales for fiscal 1996 and 28% (1995 - 27%; 1994 - 20%) of the
accounts receivable as at the December 31 balance sheet dates.
The Division regularly monitors the credit risk exposures and takes steps
to mitigate the likelihood of these exposures resulting in actual loss. The
Division's extension of credit is based on an evaluation of each customer's
financial condition. Credit losses are provided for in the financial statements
and actual losses in each of the three years ended December 31, 1996 have been
nominal.
F-43
<PAGE> 198
ICI FOREST PRODUCTS -- NORTH AMERICA
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
17. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES:
The combined financial statements of ICI Forest Products -- North America,
presented before accounting for interest and income taxes, are expressed in
Canadian dollars and are prepared in accordance with Canadian generally accepted
accounting principles ("GAAP"), which conform, in all material respects, with
those generally accepted in the United States except as described below:
(a) Reconciliation of income before interest and income taxes:
(i) Pension costs and post retirement benefits other than pensions:
Canadian GAAP requires that the discount rate used should represent
management's best estimate of the long-term rate of return on the
pension fund assets. Under US GAAP, the discount rate to be used should
reflect the rate at which the pension benefits can be effectively
settled at the date of the financial statements.
For US GAAP purposes, the expenses relating to pensions and post
retirement benefits other than pensions have been determined using the
actual demographics of the employees of the Division itself.
(ii) Joint venture:
The investment in joint venture is recognized using the cost method.
Under US GAAP, the investment in joint venture is accounted for using
the equity method.
(iii) Restructuring costs:
Included in restructuring costs are estimates of severance payments to
be paid to employees. Under US GAAP, the liability and expense related
to these costs are only recognized when the benefit arrangement has been
communicated to employees.
(iv) Investment and other tax credits:
Under Canadian GAAP, investment and other tax credits are recorded as a
reduction of the cost of the expenses incurred or as a reduction of the
assets acquired either as a direct reduction or recorded as a deferred
credit and amortized on the same basis as the related assets. Under US
GAAP, tax credits are recorded as a reduction of the provision for
income taxes. As these combined financial statements present income
before interest and income taxes, no adjustment has been made for this
difference.
(v) Foreign exchange contracts:
Under Canadian GAAP, where foreign exchange contracts are identified as
a hedge against an anticipated revenue stream denominated in a foreign
currency, any exchange gain or loss is deferred. Under US GAAP,
anticipated revenue streams do not qualify for hedge accounting and any
exchange gain or loss is recorded in income for the period.
F-44
<PAGE> 199
ICI FOREST PRODUCTS -- NORTH AMERICA
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
17. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES:
(a) Reconciliation of income before interest and income taxes: (Continued)
(vi) The application of US GAAP would have the following effect on the
income before interest and income taxes as reported:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------- ---------------------------
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income before interest and income
taxes -- Canadian GAAP............. $48,168 $49,617 $63,215 $61,634 $12,149
Adjustments in respect of:
Pension and post retirement
costs........................... 1,189 300 462 1,687 586
Equity in joint venture............ 63 120 128 90 (147)
Restructuring costs................ (88) 650 650 (3,800) 3,800
Foreign exchange................... -- -- -- 2,034 (2,034)
------- ------- ------- ------- -------
1,164 1,070 1,240 11 2,205
------- ------- ------- ------- -------
Income before interest and income
taxes -- US GAAP................... $49,332 $50,687 $64,455 $61,645 $14,354
======= ======= ======= ======= =======
</TABLE>
(b) Reconciliation of significant balance sheet items:
(i) The application of US GAAP would have a significant effect on the
following balance sheet item as reported:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
----------------- ----------------------------
1997 1996 1996 1995 1994
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Head office account -- Canadian
GAAP.............................. $82,745 $92,670 $ 95,531 $71,439 $70,576
Adjustments:
Pension and post retirement
costs.......................... 5,941 4,590 4,752 4,290 2,603*
Equity in joint venture........... 277 206 214 86 (4)**
Restructuring costs............... 562 650 650 -- 3,800
Foreign exchange.................. -- -- -- -- (2,034)
------- ------- -------- ------- -------
6,780 5,446 5,616 4,376 4,365
------- ------- -------- ------- -------
Head office account -- US GAAP...... $89,525 $98,116 $101,147 $75,815 $74,941
======= ======= ======== ======= =======
</TABLE>
- ---------------
* includes cumulative adjustment for pension and post retirement costs of
$2,017,000
** includes cumulative adjustment of equity in opening retained earnings in
joint venture of $143,000
(c) The combined statements of changes in financial position reconcile the
changes in cash and bank indebtedness. Under US GAAP, bank indebtedness of
$3,857,000 would have been disclosed as financing activities.
F-45
<PAGE> 200
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors,
OCCIDENTAL CHEMICAL CORPORATION:
We have audited the accompanying balance sheets of the Tacoma Plant (as
defined in Note 1) of Occidental Chemical Corporation, an indirect wholly-owned
subsidiary of Occidental Petroleum Corporation, as of December 31, 1996 and
1995, and the related statements of operations and changes in owner's investment
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of Occidental Chemical
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Tacoma Plant of
Occidental Chemical Corporation as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 28, 1997
F-46
<PAGE> 201
OCCIDENTAL CHEMICAL CORPORATION
TACOMA PLANT
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
CURRENT ASSETS
Cash........................................................ $ 6 $ 6
Inventories................................................. 4,818 4,790
Deferred income taxes....................................... 1,287 2,389
Other current assets........................................ 1,009 95
------- -------
Total current assets.............................. 7,120 7,280
PROPERTY, PLANT AND EQUIPMENT, at cost, net of accumulated
depreciation of $80,650 in 1996 and $74,768 in 1995....... 61,512 62,857
OTHER ASSETS, net........................................... 795 973
------- -------
TOTAL ASSETS...................................... $69,427 $71,110
======= =======
CURRENT LIABILITIES
Accounts payable............................................ $ 2,720 $ 2,919
Accrued liabilities......................................... 4,510 8,248
------- -------
Total current liabilities......................... 7,230 11,167
DEFERRED INCOME TAXES....................................... 1,961 2,727
ACCRUED ENVIRONMENTAL LIABILITIES........................... 20,481 21,242
OTHER LIABILITIES........................................... 7,791 8,244
------- -------
Total liabilities................................. 37,463 43,380
COMMITMENTS AND CONTINGENT LIABILITIES (Note 6)
OWNER'S INVESTMENT.......................................... 31,964 27,730
------- -------
TOTAL LIABILITIES AND OWNER'S INVESTMENT.......... $69,427 $71,110
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-47
<PAGE> 202
OCCIDENTAL CHEMICAL CORPORATION
TACOMA PLANT
STATEMENTS OF OPERATIONS AND CHANGES IN OWNER'S INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
EXTERNAL SALES, net......................................... $61,848 $60,871 $40,588
SALES TO OWNER AT MARKET VALUE.............................. 11,867 9,270 10,069
------- ------- -------
TOTAL SALES, net............................................ 73,715 70,141 50,657
OPERATING COSTS AND EXPENSES:
Cost of Sales............................................. 52,420 53,252 53,420
Selling, general and administrative expenses.............. 1,782 1,995 1,782
Other operating expense................................... 2,209 2,607 2,254
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES........................... 17,304 12,287 (6,799)
Income tax expense (benefit).............................. 6,059 4,301 (2,377)
------- ------- -------
NET INCOME (LOSS)........................................... 11,245 7,986 (4,422)
PENSION LIABILITY ADJUSTMENT................................ 439 643 (105)
INCREASE (DECREASE) IN OWNER'S INVESTMENT................... (7,450) (4,567) 8,646
OWNER'S INVESTMENT, beginning of year....................... 27,730 23,668 19,549
------- ------- -------
OWNER'S INVESTMENT, end of year............................. $31,964 $27,730 $23,668
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-48
<PAGE> 203
OCCIDENTAL CHEMICAL CORPORATION
TACOMA PLANT
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $11,245 $ 7,986 $(4,422)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization of assets................ 6,247 5,928 5,587
Deferred income taxes.................................. 99 1,088 1,073
Other noncash charges to income........................ 1,941 2,039 1,630
Changes in operating assets and liabilities:
Increase in inventories................................ (28) (851) (193)
Decrease (increase) in other current assets............ (914) (93) 3
Decrease in accounts payable and accrued liabilities... (3,937) (204) (3,588)
Other, net................................................ (2,589) (4,794) (3,723)
------- ------- -------
Net cash provided (used) by operating activities............ 12,064 11,099 (3,633)
------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (4,614) (6,532) (5,011)
------- ------- -------
Net cash used by investing activities....................... (4,614) (6,532) (5,011)
------- ------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Increase (decrease) in owner's investment................. (7,450) (4,567) 8,646
------- ------- -------
Net cash provided (used) by financing activities............ (7,450) (4,567) 8,646
------- ------- -------
Change in cash.............................................. -- -- 2
Cash -- beginning of year................................... 6 6 4
------- ------- -------
Cash -- end of year......................................... $ 6 $ 6 $ 6
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-49
<PAGE> 204
OCCIDENTAL CHEMICAL CORPORATION
TACOMA PLANT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
Organization, business and basis of presentation --
The accompanying financial statements present the financial position,
results of operations and cash flows of the Tacoma plant (the Tacoma Plant) of
Occidental Chemical Corporation (OCC), a New York corporation. The financial
statements are prepared for a proposed acquisition by Pioneer Companies, Inc.
(Pioneer) of the Tacoma Plant (see Note 11).
All of the outstanding common shares of OCC are owned indirectly by
Occidental Petroleum Corporation (Occidental). Certain amounts in the
accompanying financial statements have been allocated in a reasonable and
consistent manner in order to depict the financial position, results of
operations and cash flows of the Tacoma Plant on a stand-alone basis.
The Tacoma Plant, located in Tacoma, Washington, consists of a chlor-alkali
process which manufactures chlorine, sodium hydroxide and related products, and
a discontinued ammonia process that has not operated since 1992. The Tacoma
Plant's products are sold to national and international markets as well as to
other plants and affiliates of OCC. The accompanying financial statements
exclude the previously discontinued manufacturing processes associated with
unrelated product lines, including chlorinated organic compounds. Additionally,
the Tacoma Plant does business as OCC and enters into operating and sales
contracts administered by OCC. These include national sales agreements as well
as purchase and energy agreements.
Occidental utilizes a centralized cash management system for its
operations, including the Tacoma Plant. Cash distributed to or advanced from
Occidental has been reflected in Owner's investment in the accompanying balance
sheets. In addition, settlements of transactions with OCC and other Occidental
affiliates are recorded through Owner's investment.
Supplemental cash flow information --
For the years ended December 31, 1996, 1995 and 1994, all cash payments for
income taxes were made by Occidental. For the same periods, there were no cash
payments for interest.
As of December 31, 1996 and 1995, net trade receivables of $7,604,000 and
$8,952,000, respectively, were transferred to an affiliate (see Note 2).
Property, plant and equipment --
Property, plant and equipment additions, major renewals and improvements
are capitalized at cost. Maintenance and repair costs are charged to expense as
incurred. The cost and related accumulated depreciation, depletion and
amortization of property, plant and equipment sold or retired are removed from
the property, plant and equipment accounts and any resulting gain or loss is
recorded.
Depreciation of plant and equipment is primarily provided using the
units-of-production method.
Costs incurred during the construction period of major projects are
capitalized and accumulated in Construction in progress (see Note 5). Upon
completion, the costs are transferred to the appropriate Property, plant and
equipment accounts. Interest costs incurred during the construction period of
major projects which extend longer than one year are capitalized and amortized
over the lives of the related assets. There were no such major projects during
1996, 1995 or 1994.
F-50
<PAGE> 205
OCCIDENTAL CHEMICAL CORPORATION
TACOMA PLANT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Income taxes --
The Tacoma Plant is included in the consolidated U.S. federal income tax
return of Occidental. The Tacoma Plant uses the asset and liability method
required by Statement of Financial Accounting Standards (SFAS) No.
109 -- "Accounting for Income Taxes." Deferred income taxes are recorded at
enacted rates to recognize the future effects of temporary differences which
arise between financial statement assets and liabilities and their basis for
income tax reporting purposes. A portion of the income tax provision for this
return is allocated to the Tacoma Plant on the basis of a tax sharing
arrangement between OCC and Occidental Chemical Holding Corporation (OCHC), an
indirect parent of OCC. Current and deferred income tax provisions allocated by
OCC are based on taxable income determined as though the Tacoma Plant filed as
an independent company, making the same tax return elections used in
Occidental's consolidated return. However, this arrangement also permits the
Tacoma Plant to recognize income tax benefits for current year operating losses
and deductible temporary differences without limiting such benefits. Amounts due
to Occidental for current income tax provisions are netted in Owner's investment
in the accompanying balance sheets.
Risks and uncertainties --
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
regarding certain types of assets, liabilities, revenues and expenses. Such
estimates primarily relate to unsettled transactions and events as of the date
of the financial statements. Accordingly, upon settlement, actual results may
differ from estimated amounts, generally not by material amounts. Management
believes that these estimates and assumptions provide a reasonable basis for the
fair presentation of the Tacoma Plant's financial position and results of
operations.
Included in the accompanying balance sheets are deferred income tax assets
of $11,061,000 and $12,555,000 as of December 31, 1996 and 1995, respectively,
consisting of the current portion of $1,287,000 and $2,389,000, shown as current
deferred income tax assets and the noncurrent portion which is netted against
deferred income tax liabilities (see Note 7). Realization of that asset is
dependent upon the generation of sufficient future taxable income. It is
expected that the recorded deferred income tax asset will be realized through
future operating income and reversal of taxable temporary differences.
Since the Tacoma Plant's two principal products are commodities,
significant changes in the prices of chlorine and sodium hydroxide could have a
significant impact on the Tacoma Plant's results of operations for any
particular year.
Fair value of financial instruments --
The Tacoma Plant values financial instruments as required by SFAS No. 107
-- "Disclosures About Fair Value of Financial Instruments." The carrying value
of on-balance sheet financial instruments approximates fair value.
(2) RECEIVABLES --
As of December 31, 1996 and 1995, OCC transferred, with limited recourse,
to an Occidental affiliate net trade receivables of the Tacoma Plant under a
revolving sale program, in connection with the ultimate sale for cash of such
receivables. The net trade receivables transferred amounted to $7,604,000 and
$8,952,000 as of December 31, 1996 and 1995, respectively. OCC transferred the
receivables to the affiliate in a noncash transaction that was reflected as a
reduction in the Tacoma Plant's Owner's investment. OCC has retained the
F-51
<PAGE> 206
OCCIDENTAL CHEMICAL CORPORATION
TACOMA PLANT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(2) RECEIVABLES -- (CONTINUED)
collection responsibility with respect to the receivables sold. An interest in
newly created receivables is transferred monthly, net of collections made from
customers. Fees related to the sales of receivables under this program, which
are allocated from OCC, were $377,000, $425,000 and $333,000 for the years ended
December 31, 1996, 1995 and 1994, respectively, and are included in Other
operating expense.
(3) INVENTORIES --
Inventories are valued at the lower of cost or market. The last-in,
first-out (LIFO) cost method was used in determining the costs of raw materials
and finished goods. Materials and supplies inventories were determined using the
weighted-average cost method. Inventories consisted of the following as of
December 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Raw materials............................................... $ 1,291 $ 1,653
Materials and supplies...................................... 3,338 3,152
Finished goods.............................................. 2,071 2,519
------- -------
6,700 7,324
LIFO reserve................................................ (1,882) (2,534)
------- -------
Inventory at lower of cost or market........................ $ 4,818 $ 4,790
======= =======
</TABLE>
During the years ended December 31, 1996 and 1994, certain inventory
quantities carried at LIFO were reduced. These reductions resulted in a
liquidation of LIFO inventory quantities, the effect of which did not have a
material impact on Cost of sales.
(4) CHANGE IN ACCOUNTING PRINCIPLE --
In December 1992, the Financial Accounting Standards Board issued SFAS No.
112 -- "Employers' Accounting for Postemployment Benefits," which substantially
changed the existing method of accounting for employer benefits provided to
inactive or former employees after active employment but before retirement. This
statement requires that the cost of postemployment benefits (principally medical
benefits for inactive employees) be recognized in the financial statements
during employees' active working careers. OCC adopted SFAS No. 112 effective
January 1, 1994, but the adoption did not have a material impact on the Tacoma
Plant's financial position or results of operations.
(5) PROPERTY, PLANT AND EQUIPMENT --
Property, plant and equipment at December 31, 1996 and 1995 consisted of
the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Land and land improvements.................................. $ 2,951 $ 2,875
Buildings................................................... 9,173 8,915
Machinery and equipment..................................... 118,212 114,530
Construction in progress.................................... 11,826 11,305
-------- --------
142,162 137,625
Accumulated depreciation.................................... (80,650) (74,768)
-------- --------
$ 61,512 $ 62,857
======== ========
</TABLE>
F-52
<PAGE> 207
OCCIDENTAL CHEMICAL CORPORATION
TACOMA PLANT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(6) COMMITMENTS AND CONTINGENT LIABILITIES --
Commitments --
The Tacoma Plant leases railcars as well as certain machinery and equipment
under noncancelable operating leases. The operating lease for machinery and
equipment expires in 2001, at which time the property can be purchased for the
then fair market value or the lease can be renewed at the then fair rental value
for two years.
At December 31, 1996, future minimum lease payments under noncancelable
operating leases were as follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ $ 3,784
1998........................................................ 3,561
1999........................................................ 3,412
2000........................................................ 3,560
2001........................................................ 3,178
Thereafter.................................................. 16,582
-------
Total minimum lease payments.............................. $34,077
=======
</TABLE>
Rental expense totaled approximately $4,156,000, $4,164,000 and $4,262,000
for the years ended December 31, 1996, 1995 and 1994, respectively.
OCC purchases the entire requirement of salt for the Tacoma Plant from
Mitsubishi International Corporation (MIC) under the terms of a contract ending
on December 31, 1996. The contract requires OCC to purchase a predetermined
annual quantity of salt at an established price. Payments are made to MIC each
month in the amount of one-twelfth of the annual quantity at the established
price for that year. Total purchases under this contract were $8,202,000,
$7,712,000 and $6,339,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. In May 1996, OCC entered into a new contract with MIC to purchase
salt for the Tacoma Plant under similar terms for 1997 through 1999.
OCC purchases electric power for the Tacoma Plant from the City of Tacoma,
Department of Public Utilities, Light Division (the City) under the terms of a
contract expiring in September 2001. The contract has three monthly levels of
commitment. The first two take-or-pay levels are for fixed quantities of power
at predetermined prices. The third level is for power consumed above the
take-or-pay quantities at market prices. Under the terms of the contract, any
power committed to but not consumed by the Tacoma Plant can be resold by the
City, the proceeds of which will be applied against the Tacoma Plant's
commitment. Total purchases under this contract were $13,621,000, $13,894,000
and $13,643,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Lawsuits --
An individual brought a lawsuit in 1995 against OCC alleging personal
injury from exposure to chlorine gas released from the Tacoma Plant in 1994.
Although a release did occur, the alleged causation and damages are denied. It
is impossible at this time to determine the ultimate legal liabilities that may
arise from this lawsuit. However, in management's opinion, the lawsuit should
not have a material adverse effect upon the financial position or results of
operations of the Tacoma Plant.
F-53
<PAGE> 208
OCCIDENTAL CHEMICAL CORPORATION
TACOMA PLANT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(7) INCOME TAXES --
Income tax expense (benefit) for the years ended December 31, 1996, 1995
and 1994 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -------
<S> <C> <C> <C>
Current U.S. federal.................................... $5,960 $3,213 $(3,450)
Deferred U.S. federal................................... 99 1,088 1,073
------ ------ -------
$6,059 $4,301 $(2,377)
====== ====== =======
</TABLE>
The following table reconciles the maximum statutory U.S. federal income
tax rate multiplied by the Tacoma Plant's income (loss) before income taxes to
the recorded income tax expense (benefit) (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -------
<S> <C> <C> <C>
U.S. federal income tax at 35%.......................... $6,056 $4,300 $(2,380)
Nondeductible expenses and other........................ 3 1 3
------ ------ -------
$6,059 $4,301 $(2,377)
====== ====== =======
</TABLE>
Pension liability adjustments charged directly to Owner's investment in
1996, 1995 and 1994 were net of tax charges (benefits) of $237,000, $347,000 and
($23,000), respectively.
Deferred income taxes reflect the future tax consequences of temporary
differences between the tax basis of assets and liabilities and their financial
reporting amounts. Temporary differences are associated with the financial
statement assets and liabilities shown in the table below. Deferred income tax
assets and liabilities have been recorded in the following amounts as of
December 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES ASSETS LIABILITIES
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Inventories................................ $ 371 $ -- $ 340 $ --
Property, plant and equipment, net......... -- 11,565 -- 12,592
Other assets............................... -- 170 -- 301
Accrued liabilities........................ 916 -- 2,049 --
Other liabilities.......................... 9,774 -- 10,166 --
------- ------- ------- -------
$11,061 $11,735 $12,555 $12,893
======= ======= ======= =======
</TABLE>
(8) RETIREMENT PLANS AND POSTRETIREMENT BENEFITS --
The Tacoma Plant participates in various defined contribution retirement
plans sponsored by Occidental for its salaried, union and nonunion hourly
employees that provide for periodic contributions by OCC based on plan-specific
criteria, such as base pay, age level, and employee contributions. OCC
contributed and the Tacoma Plant expensed $250,000, $255,000 and $240,000 under
the provisions of these plans during the years ended December 31, 1996, 1995 and
1994, respectively.
Also, the Tacoma Plant's retirement and postretirement defined benefit
plans for union hourly employees are accrued based on various assumptions and
discount rates, as described below. The actuarial assumptions
F-54
<PAGE> 209
OCCIDENTAL CHEMICAL CORPORATION
TACOMA PLANT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(8) RETIREMENT PLANS AND POSTRETIREMENT BENEFITS -- (CONTINUED)
used could change in the near term as a result of changes in expected future
trends and other factors which, depending on the nature of the changes, could
cause increases or decreases in the liabilities accrued.
Pension costs for the Tacoma Plant defined benefit pension plan, for union
hourly employees determined by independent actuarial valuations, are funded by
payments to trust funds that are administered by independent trustees. The
components of the net pension cost for the years ended December 31, 1996, 1995
and 1994 were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -----
<S> <C> <C> <C>
Service cost -- benefits earned during the period........ $ 374 $ 389 $ 347
Interest cost on projected benefit obligation............ 660 676 674
Estimated return on plan assets.......................... (1,492) (1,699) (252)
Net amortization and deferral............................ 891 1,348 (133)
------- ------- -----
Net pension cost............................... $ 433 $ 714 $ 636
======= ======= =====
</TABLE>
The Tacoma Plant recorded adjustments to Owner's investment of an increase
of $439,000 in 1996 and $643,000 in 1995 and a decrease of $105,000 in 1994 to
reflect the net-of-tax difference between the additional liability required
under pension accounting provisions and the corresponding intangible asset.
The following table sets forth the defined benefit plan's funded status and
amounts recognized in the Tacoma Plant balance sheets at December 31, 1996 and
1995 (in thousands):
<TABLE>
<CAPTION>
ACCUMULATED BENEFITS
EXCEED ASSETS
---------------------
1996 1995
-------- ---------
<S> <C> <C>
Present value of the estimated pension benefits to be paid
in the future:
Vested benefits........................................... $9,043 $ 8,473
Nonvested benefits........................................ 437 410
------ -------
Accumulated benefit obligation.............................. 9,480 8,883
Excess of projected benefit obligation over accumulated
benefit obligation..................................... 426 399
------ -------
Total projected benefit obligations......................... 9,906 9,282
Plan assets at fair value................................... 9,701 8,085
------ -------
Projected benefit obligation in excess of plan assets....... $ 205 $ 1,197
====== =======
Projected benefit obligation in excess of plan assets....... $ 205 $ 1,197
Unrecognized net asset...................................... 160 192
Unrecognized prior service cost............................. (195) (215)
Unrecognized net loss....................................... (363) (1,266)
Additional minimum liability(a)............................. -- 891
------ -------
Pension liability (prepaid pension)......................... $ (193) $ 799
====== =======
</TABLE>
(a) A related amount up to the limit allowable under SFAS No. 87 -- "Employers'
Accounting for Pensions" has been included in Other assets. Amounts
exceeding such limits have been charged to Owner's investment.
F-55
<PAGE> 210
OCCIDENTAL CHEMICAL CORPORATION
TACOMA PLANT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(8) RETIREMENT PLANS AND POSTRETIREMENT BENEFITS -- (CONTINUED)
In 1996 and 1995, the discount rate used in determining the actuarial
present value of the projected benefit obligations was 7.5 percent. The rate of
increase in future compensation levels used in determining the actuarial present
value of the projected benefit obligations was 4.5 percent in 1996 and 1995. The
expected long-term rate of return on assets was 8 percent in 1996 and 1995.
OCC provides medical, dental and life insurance for certain active,
retired, and disabled employees of the Tacoma Plant and their eligible
dependents. Beginning in 1993, certain salaried participants pay for all medical
cost increases in excess of increases in the Consumer Price Index (CPI). The
benefits generally are funded by OCC as the benefits are paid during the year.
The cost of providing these benefits is based on claims filed and insurance
premiums paid for the period.
To reflect the Tacoma Plant's participation in the OCC plan, the net
periodic postretirement benefit costs and the postretirement benefit obligations
are based on an allocation of the OCC actuarial study using participant counts
at the Tacoma Plant for each of the years presented in the tables below. This
allocation excludes amounts attributable to salaried retirees and surviving
spouses because nonunion retiree information is not maintained for such
participants by plant location.
The OCC postretirement benefit obligation as of December 31, 1996 and 1995
was determined by application of the terms of medical, dental, and life
insurance plans, including the effect of established maximums on covered costs,
together with relevant actuarial assumptions and health care cost trend rates
projected at a CPI increase of 3 percent and 4 percent in 1996 and 1995,
respectively (except for union employees). For union employees, the health care
cost trend rates were projected at annual rates ranging ratably from 9 percent
in 1996 to 6 percent through the year 2002 and level thereafter. The effect of a
one percent annual increase in these assumed cost trend rates would increase the
allocated accumulated postretirement benefit obligation by approximately
$660,000 and the allocated annual service and interest costs by approximately
$95,000 in 1996. The weighted average discount rate used in determining the
accumulated postretirement benefit obligation as of December 31, 1996 and 1995
was 7.5 percent. The plans are unfunded.
The following table sets forth the allocation of OCC postretirement plans'
combined status, reconciled with the amounts included in the accompanying
balance sheets at December 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................. $3,924 $3,820
Fully eligible active plan participants................... 642 630
Other active plan participants............................ 3,573 3,310
------ ------
Total accumulated postretirement benefit obligation......... 8,139 7,760
Unrecognized prior service cost............................. (109) (156)
Unrecognized net loss....................................... (586) (691)
------ ------
Allocated accrued postretirement benefit cost............... $7,444 $6,913
====== ======
</TABLE>
F-56
<PAGE> 211
OCCIDENTAL CHEMICAL CORPORATION
TACOMA PLANT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(8) RETIREMENT PLANS AND POSTRETIREMENT BENEFITS -- (CONTINUED)
The allocated net periodic postretirement benefit cost included the
following components for the years ended December 31, 1996, 1995 and 1994 (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost -- benefits attributed to service during the
period.................................................... $202 $194 $190
Interest cost on accumulated postretirement benefit
obligation................................................ 582 572 570
Net amortization and deferral............................... 47 47 47
---- ---- ----
Allocated net periodic postretirement benefit cost.......... $831 $813 $807
==== ==== ====
</TABLE>
(9) RELATED PARTY TRANSACTIONS --
The Tacoma Plant has been charged for certain financial and operational
support services provided by OCC, such as marketing, sales and customer service,
transportation and distribution, and technical services. Charges for such
support services included in the accompanying statements of operations totaled
$8,759,000, $8,806,000 and $10,151,000 for the years ended December 31, 1996,
1995 and 1994, respectively. These charges were allocated based on ratios
including such factors as revenues, operating income, fixed assets, and working
capital in a reasonable and consistent manner.
Included in the above allocations are research and development costs, which
are charged to operations by OCC as incurred, and were $70,000, $96,000 and
$143,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
These charges are included in Selling, general and administrative expenses in
the accompanying statements of operations.
See Note 1 regarding the centralized cash management system of Occidental.
See Note 2 regarding the transfer of receivables to an affiliate.
(10) ENVIRONMENTAL COSTS --
General --
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to existing conditions
caused by past operations, and that do not contribute to current or future
revenue generation, are expensed. Reserves for estimated costs are recorded when
environmental remedial efforts are probable and the costs can be reasonably
estimated. In determining the reserves, the Tacoma Plant uses the most current
information available, including similar past experiences, available technology,
regulations in effect, the timing of remediation and cost-sharing arrangements.
The environmental reserves are based on management's estimate of the most likely
costs to be incurred and are reviewed periodically and adjusted as additional or
new information becomes available.
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 96-1 "Environmental Remediation Liabilities,"
which provides authoritative guidance on specific accounting issues that are
present in the recognition, measurement, display, and disclosure of
environmental remediation liabilities. The provisions of this SOP are effective
for fiscal years beginning after December 15, 1996. OCC plans to adopt the
provisions of this SOP in 1997. The impact of adopting this SOP, if any, on the
financial statements of the Tacoma Plant has not been determined.
F-57
<PAGE> 212
OCCIDENTAL CHEMICAL CORPORATION
TACOMA PLANT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(10) ENVIRONMENTAL COSTS -- (CONTINUED)
Tacoma Plant site --
Historic operations of various discontinued processes and equipment at the
Tacoma Plant site, including past activities of other owners or operators of all
or a portion of the Tacoma Plant site, have resulted in releases of certain
hazardous and nonhazardous substances and materials into the soil, surface
water, groundwater and intertidal and subtidal sediments at and in the vicinity
of the Tacoma Plant site.
The Tacoma Plant is permitted under the Resource Conservation and Recovery
Act (RCRA). Although permitted waste management units at the Tacoma Plant site
have been closed in accordance with RCRA, the current RCRA permit requires the
owner and operator of the Tacoma Plant to take corrective action to address the
presence of certain substances in groundwater associated with past practices at
the Tacoma Plant site. The Tacoma Plant is controlling migration of and
remediating substances in groundwater through extraction, treatment and
reinjection (see Reserves and expenditures for the Tacoma Plant site section of
Note 10 below).
In addition, governmental authorities have identified OCC as a "potentially
responsible party" for the Commencement Bay Nearshore/Tideflats Superfund Site
(the CB/NT site), which includes the Hylebos Waterway, pursuant to the
Comprehensive Environmental Response, Compensation, and Liability Act. The CB/NT
site covers in excess of ten square miles and includes the Tacoma Plant site and
other properties along the Hylebos Waterway and in the vicinity of Commencement
Bay. More than 100 potentially responsible parties have been identified with
respect to the Hylebos Waterway area of the CB/NT site. OCC is participating
with a group of entities in performing a pre-remedial design investigation to
evaluate potential alternatives for remediation of sediments in the Hylebos
Waterway.
It is reasonably possible that the activities of the Tacoma plant
chlor-alkali process and discontinued processes have contributed to the presence
of hazardous and nonhazardous substances and materials at and in the vicinity of
the Tacoma Plant site. It is impossible at this time to determine the quantity
of such substances and materials, if any, attributable to these processes, and
OCC does not have sufficient information available to determine a range of
potential liability.
Reserves and expenditures for the Tacoma Plant site --
At December 31, 1996 and 1995, the current portion of the reserve for
groundwater remediation at the Tacoma Plant site included in Accrued liabilities
was $2,550,000 and $5,200,000, respectively. The reserve for remediation was
originally established in 1990. Additions to the remediation reserve of
$1,932,000, $2,030,000 and $1,530,000 for the years ended December 31, 1996,
1995 and 1994, respectively, are included in Other operating expense.
The Tacoma Plant's estimated operating expenses relating to compliance with
environmental laws and regulations governing ongoing operations on the Tacoma
Plant site were approximately $901,000, $983,000 and $958,000 for the years
ended December 31, 1996, 1995 and 1994, respectively. In addition, estimated
capital expenditures for environmental compliance on the Tacoma Plant site for
the years ended December 31, 1996, 1995 and 1994 were approximately $1,175,000,
$693,000 and $82,000, respectively.
F-58
<PAGE> 213
OCCIDENTAL CHEMICAL CORPORATION
TACOMA PLANT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(11) SALE OF TACOMA PLANT --
Pioneer is currently negotiating to purchase selected assets, liabilities
and operations of the Tacoma Plant primarily including, but not limited to,
property, plant and equipment and inventories. As of February 1, 1997, OCC
transferred substantially all of the Tacoma Plant's assets and liabilities into
OCC Tacoma, Inc., a newly created, wholly-owned subsidiary of OCC.
The assets, liabilities and operations included in these financial
statements are those required to present the Tacoma Plant as a stand-alone
entity and include certain assets, liabilities and operations that are not
included in the proposed sale to Pioneer, such as certain railcar and equipment
leases. Excluded operations include, among other things, support services such
as marketing, sales and customer service, transportation and distribution, and
technical services. In addition, OCC will retain various chlorine and caustic
soda account contracts which will be supplied in part by a proposed arrangement
between Pioneer and OCC.
Negotiations are ongoing concerning a mutually acceptable method of
acquisition by Pioneer. As currently contemplated, in addition to the primary
asset conveyance instrument, related agreements would allocate responsibility,
as between OCC and Pioneer, for environmental costs and obligations associated
with the Tacoma Plant site arising from pre-closing events or occurrences,
including any investigation, monitoring, treatment or remediation of substances
and materials in water, soils and sediments at and in the vicinity of the Tacoma
Plant site, the Hylebos Waterway and the CB/NT site. This allocation of
responsibility is expected to include cost and time limitations, above or after
which OCC's responsibility for environmental costs and obligations associated
with the Tacoma Plant site between the parties would terminate.
F-59
<PAGE> 214
OCCIDENTAL CHEMICAL CORPORATION
TACOMA PLANT
BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 16, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash...................................................... $ 6 $ 6
Inventories............................................... 5,018 4,818
Deferred income taxes..................................... 1,256 1,287
Other current assets...................................... 1,408 1,009
------- -------
Total current assets.............................. 7,688 7,120
PROPERTY, PLANT AND EQUIPMENT, at cost, net of accumulated
depreciation of $83,551 in 1997 and $80,650 in 1996....... 80,406 61,512
OTHER ASSETS, net........................................... 784 795
------- -------
TOTAL ASSETS...................................... $88,878 $69,427
======= =======
CURRENT LIABILITIES:
Accounts payable.......................................... $ 2,384 $ 2,720
Accrued liabilities....................................... 3,121 4,510
------- -------
Total current liabilities......................... 5,505 7,230
DEFERRED INCOME TAXES....................................... 2,485 1,961
ACCRUED ENVIRONMENTAL LIABILITIES........................... 20,078 20,481
OTHER LIABILITIES........................................... 7,961 7,791
------- -------
Total liabilities................................. 36,029 37,463
COMMITMENTS AND CONTINGENT LIABILITIES (Note 5)
OWNER'S INVESTMENT.......................................... 52,849 31,964
------- -------
TOTAL LIABILITIES AND OWNER'S INVESTMENT.......... $88,878 $69,427
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-60
<PAGE> 215
OCCIDENTAL CHEMICAL CORPORATION
TACOMA PLANT
STATEMENTS OF OPERATIONS AND CHANGES IN OWNER'S INVESTMENT
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
APRIL 1, 1997 THREE MONTHS JANUARY 1, 1997 SIX MONTHS
TO ENDED TO ENDED
JUNE 16, 1997 JUNE 30, 1996 JUNE 16, 1997 JUNE 30, 1996
------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
EXTERNAL SALES, net...................... $10,757 $16,632 $24,527 $31,691
SALES TO OWNER AT MARKET VALUE........... 4,996 2,400 9,964 4,845
------- ------- ------- -------
TOTAL SALES, net............... 15,753 19,032 34,491 36,536
OPERATING COSTS AND EXPENSES:
Cost of sales.......................... 13,551 14,702 27,141 27,767
Selling, general and administrative
expenses............................ 270 429 539 875
Other operating (income) expense....... 87 579 (455) 1,178
------- ------- ------- -------
INCOME BEFORE INCOME TAXES............... 1,845 3,322 7,266 6,716
Income tax expense..................... 647 1,163 2,545 2,352
------- ------- ------- -------
NET INCOME............................... 1,198 2,159 4,721 4,364
PENSION LIABILITY ADJUSTMENT............. -- -- -- 8
INCREASE (DECREASE) IN OWNER'S
INVESTMENT............................. 18,434 (2,475) 16,164 (1,954)
OWNER'S INVESTMENT, beginning of
period................................. 33,217 30,464 31,964 27,730
------- ------- ------- -------
OWNER'S INVESTMENT, end of period........ $52,849 $30,148 $52,849 $30,148
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-61
<PAGE> 216
OCCIDENTAL CHEMICAL CORPORATION
TACOMA PLANT
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS
JANUARY 1, 1997 ENDED
TO JUNE 16, JUNE 30,
1997 1996
--------------- ----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income................................................ $ 4,721 $ 4,364
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of assets................ 3,091 3,032
Deferred income taxes.................................. 555 610
Other noncash charges to income........................ 43 1,010
Changes in operating assets and liabilities:
Decrease (increase) in inventories..................... (200) 56
Increase in other current assets....................... (399) (548)
Decrease in accounts payable and accrued liabilities... (1,725) (3,506)
Other, net................................................ (139) (1,000)
-------- -------
Net cash provided by operating activities................... 5,947 4,018
-------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (1,577) (2,064)
Buyout of operating lease................................. (20,534) --
-------- -------
Net cash provided by investing activities................... (22,111) (2,064)
-------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Increase (decrease) in owner's investment................. 16,164 (1,954)
-------- -------
Net cash provided by financing activities................... 16,164 (1,954)
-------- -------
Change in cash.............................................. -- --
Cash -- beginning of period................................. 6 6
-------- -------
Cash -- end of period....................................... $ 6 $ 6
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-62
<PAGE> 217
OCCIDENTAL CHEMICAL CORPORATION
TACOMA PLANT
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
JUNE 16, 1997 AND JUNE 30, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
Organization and sale of Tacoma plant --
The accompanying unaudited interim financial statements present the
financial position, results of operations and changes in owner's investment and
cash flows of the Tacoma plant (the Tacoma Plant) of Occidental Chemical
Corporation (OCC-NY), a New York corporation, and of OCC Tacoma Inc., a Delaware
corporation (OCC-NY alone or together with its subsidiary, OCC Tacoma, Inc.
herein referred to as OCC). As of February 1, 1997, OCC-NY transferred
substantially all of the Tacoma Plant's assets and liabilities into OCC Tacoma
Inc., a newly created, wholly-owned subsidiary of OCC-NY.
On June 17, 1997 Pioneer Companies, Inc. (Pioneer) purchased selected
assets, liabilities and operations of the Tacoma Plant primarily including, but
not limited to, property, plant and equipment and inventories for $97 million
plus 55,000 shares of convertible Series A Preferred Stock of Pioneer with a
liquidation value of $5.5 million.
The assets, liabilities and operations included in these financial
statements are those required to present the Tacoma Plant as a stand-alone
entity and include certain assets, liabilities and operations that were not
included in the sale to Pioneer, such as certain railcar leases. Excluded
operations include, among other things, support services such as marketing,
sales and customer service, transportation and distribution, and technical
services. In addition, OCC-NY retained various chlorine and sodium hydroxide
account contracts which will be supplied in part by an arrangement between
Pioneer and OCC-NY.
In addition to the primary asset conveyance instrument, related agreements
allocate responsibility, between OCC Tacoma, Inc. and Pioneer, for environmental
costs and obligations associated with the Tacoma Plant site, including any
investigation, monitoring, treatment or remediation of substances and materials
in water, soils and sediments at and in the vicinity of the Tacoma Plant site,
the Hylebos Waterway and the Commencement Bay Nearshore/Tideflats Superfund site
(the CB/NT site). This allocation of responsibility includes cost and time
limitations, above or after which OCC's responsibility for environmental costs
and obligations associated with the Tacoma Plant site would terminate between
OCC and Pioneer.
In connection with the sale to Pioneer, on June 12, 1997, OCC terminated a
machinery and equipment lease by purchasing the equity of the owner trust which
owned the leased machinery and equipment and prepaying the related debt for an
aggregate expenditure of approximately $20.5 million.
Business and basis of presentation
Certain information and disclosures normally included in the notes to
financial statements have been condensed or omitted pursuant to such rules and
regulations, but resultant disclosures are in accordance with generally accepted
accounting principles as they apply to interim reporting. These interim
financial statements should be read in conjunction with the Tacoma Plant's
audited financial statements for the year ended December 31, 1996 (1996
Financial Statements).
The Tacoma Plant, located in Tacoma, Washington, consists of a chlor-alkali
process which manufactures chlorine, sodium hydroxide and related products, and
a discontinued ammonia process that has not operated since 1992. The Tacoma
Plant's products are sold to national and international markets as well as to
other plants and affiliates of OCC. The accompanying financial statements
exclude the previously discontinued manufacturing processes associated with
unrelated product lines, including chlorinated organic compounds. Additionally,
prior to the sale to Pioneer, the Tacoma Plant did business as OCC and entered
into
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<PAGE> 218
OCCIDENTAL CHEMICAL CORPORATION
TACOMA PLANT
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
JUNE 16, 1997 AND JUNE 30, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
operating and sales contracts administered by OCC. These included national sales
agreements as well as purchase and energy agreements.
In the opinion of OCC's management, the accompanying interim financial
statements contain all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the Tacoma Plant's financial position as of June 16,
1997 and June 30, 1996 and the results of operations and changes in owner's
investment and cash flows for the periods then ended. The results of operations
and cash flows for the period ended June 16, 1997 are not necessarily indicative
of the results of operations or cash flows to be expected for the full year.
Reference is made to Note 1 to the 1996 Financial Statements for a summary
of significant accounting policies.
Supplemental cash flow information --
For the periods ended June 16, 1997 and June 30 1996, all cash payments for
income taxes were made by Occidental Petroleum Corporation (Occidental). For the
same periods, there were no cash payments for interest.
As of June 16, 1997 and June 30 1996, net trade receivables of $4,621,000
and $10,217,000, respectively, were transferred to an affiliate (see Note 2).
Risks and uncertainties --
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
regarding certain types of assets, liabilities, revenues and expenses. Such
estimates primarily relate to unsettled transactions and events as of the date
of the financial statements. Accordingly, upon settlement, actual results may
differ from estimated amounts, generally not by material amounts. Management
believes that these estimates and assumptions provide a reasonable basis for the
fair presentation of the Tacoma Plant's financial position and results of
operations.
Included in the accompanying balance sheets are deferred income tax assets
of $10,791,000 and $11,689,000 as of June 16, 1997 and June 30, 1996,
respectively, consisting of a current portion of $1,256,000 and $1,470,000,
shown as current deferred income tax assets and the noncurrent portion which is
netted against deferred income tax liabilities. Realization of that asset is
dependent upon the generation of sufficient future taxable income. It is
expected that the recorded deferred income tax asset will be realized through
future operating income and reversal of taxable temporary differences.
Since the Tacoma Plant's two principal products are commodities,
significant changes in the prices of chlorine and sodium hydroxide could have a
significant impact on the Tacoma Plant's results of operations for any
particular period.
(2) RECEIVABLES --
As of June 16, 1997 and June 30, 1996, OCC transferred, with limited
recourse, to an Occidental affiliate net trade receivables of the Tacoma Plant
under a revolving sale program, in connection with the ultimate sale for cash of
such receivables. The net trade receivables transferred amounted to $4,621,000
and $10,217,000 as of June 16, 1997 and June 30, 1996, respectively. OCC
transferred the receivables to the affiliate in a noncash transaction that was
reflected as a reduction in the Tacoma Plant's Owner's investment. OCC has
retained the
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<PAGE> 219
OCCIDENTAL CHEMICAL CORPORATION
TACOMA PLANT
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
JUNE 16, 1997 AND JUNE 30, 1996
(2) RECEIVABLES -- (CONTINUED)
collection responsibility with respect to the receivables sold. An interest in
newly created receivables is transferred monthly, net of collections made from
customers. Fees related to the sales of receivables under this program, which
are allocated from OCC, were $138,000 and $191,000 for the year-to-date periods
ended June 16, 1997 and June 30, 1996, respectively, and are included in Other
operating expense.
(3) INVENTORIES --
Inventories are valued at the lower of cost or market. The last-in,
first-out (LIFO) cost method was used in determining the costs of raw materials
and finished goods. Materials and supplies inventories were determined using the
weighted-average cost method. Inventories consisted of the following as of June
16, 1997 and June 30, 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Raw materials............................................... $ 1,443 $ 1,155
Materials and supplies...................................... 3,336 3,090
Finished goods.............................................. 2,676 3,352
------- -------
7,455 7,597
LIFO reserve................................................ (2,437) (2,863)
------- -------
Inventory at lower of cost or market........................ $ 5,018 $ 4,734
======= =======
</TABLE>
During the year-to-date periods ended June 16, 1997 and June 30, 1996,
certain inventory quantities carried at LIFO were reduced. These reductions
resulted in a liquidation of LIFO inventory quantities, the effect of which did
not have a material impact on Cost of sales.
(4) PROPERTY, PLANT AND EQUIPMENT --
Property, plant and equipment at June 16, 1997 and June 30, 1996 consisted
of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land and land improvements.................................. $ 3,017 $ 2,875
Buildings................................................... 9,733 8,915
Machinery and equipment..................................... 139,164 114,518
Construction in progress.................................... 12,043 13,376
-------- --------
163,957 139,684
Accumulated depreciation.................................... (83,551) (77,582)
-------- --------
$ 80,406 $ 62,102
======== ========
</TABLE>
(5) COMMITMENTS AND CONTINGENT LIABILITIES --
Commitments --
The Tacoma Plant leases railcars under noncancelable operating leases.
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<PAGE> 220
OCCIDENTAL CHEMICAL CORPORATION
TACOMA PLANT
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
JUNE 16, 1997 AND JUNE 30, 1996
(5) COMMITMENTS AND CONTINGENT LIABILITIES -- (CONTINUED)
At June 16, 1997, future minimum lease payments under noncancelable
operating leases were as follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ $ 1,042
1998........................................................ 1,905
1999........................................................ 1,756
2000........................................................ 1,872
2001........................................................ 1,491
Thereafter.................................................. 14,190
Total minimum lease payments................................ $22,256
</TABLE>
Rental expense totaled approximately $1,947,000 and $2,086,000 for the
year-to-date periods ended June 16, 1997 and June 30, 1996, respectively.
Reference is made to Note 6 to the 1996 Financial Statements for a
description of salt and electric power purchase commitments.
Total purchases under the salt contract were $3,447,000 and $4,101,000 for
the year-to-date periods ended June 16, 1997 and June 30, 1996, respectively.
Total purchases under the electric power contract were $5,688,000 and
$6,475,000 for the year-to-date periods ended June 16, 1997 and June 30, 1996,
respectively.
Lawsuits --
Reference is made to Note 6 to the 1996 Financial Statements for a
description of lawsuits.
(6) INCOME TAXES --
Income tax expense for the year-to-date periods ended June 16, 1997 and
June 30, 1996 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Current U.S. federal........................................ $1,990 $1,742
Deferred U.S. federal....................................... 555 610
------ ------
$2,545 $2,352
====== ======
</TABLE>
Reference is made to Note 7 to the 1996 Financial Statements for a
description of income taxes.
(7) RETIREMENT PLANS AND POSTRETIREMENT BENEFITS --
Reference is made to Note 8 to the 1996 Financial Statements for a
description of retirement plans and postretirement benefits.
(8) RELATED PARTY TRANSACTIONS --
The Tacoma Plant has been charged for certain financial and operational
support services provided by OCC-NY, such as marketing, sales and customer
service, transportation and distribution, and technical services. Charges for
such support services included in the accompanying statements of operations
totaled
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<PAGE> 221
OCCIDENTAL CHEMICAL CORPORATION
TACOMA PLANT
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
JUNE 16, 1997 AND JUNE 30, 1996
(8) RELATED PARTY TRANSACTIONS -- (CONTINUED)
$5,035,000 and $4,749,000 for the year-to-date periods ended June 16, 1997 and
June 30, 1996, respectively. These charges were allocated based on ratios
including such factors as revenues, operating income, fixed assets, and working
capital in a reasonable and consistent manner.
Included in the above allocations are research and development costs, which
are charged to operations by OCC-NY as incurred, and were $6,000 and $12,000 for
the year-to-date periods ended June 16, 1997 and June 30, 1996, respectively.
These charges are included in Selling, general and administrative expenses in
the accompanying statements of operations.
Reference is made to Note 1 to the 1996 Financial Statements regarding the
centralized cash management system of Occidental.
See Note 2 regarding the transfer of receivables to an affiliate.
(9) ENVIRONMENTAL COSTS --
General --
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to existing conditions
caused by past operations, and that do not contribute to current or future
revenue generation, are expensed. Reserves for estimated costs are recorded when
environmental remedial efforts are probable and the costs can be reasonably
estimated. In determining the reserves, the Tacoma Plant uses the most current
information available, including similar past experiences, available technology,
regulations in effect, the timing of remediation and cost-sharing arrangements.
The environmental reserves are based on management's estimate of the most likely
costs to be incurred and are reviewed periodically and adjusted as additional or
new information becomes available.
Tacoma Plant site
Historic operations of various discontinued processes and equipment at the
Tacoma Plant site, including past activities of other owners or operators of all
or a portion of the Tacoma Plant site, have resulted in releases of certain
hazardous and nonhazardous substances and materials into the soil, surface
water, groundwater and intertidal and subtidal sediments at and in the vicinity
of the Tacoma Plant site.
The Tacoma Plant is permitted under the Resource Conservation and Recovery
Act (RCRA). Although permitted waste management units at the Tacoma Plant site
have been closed in accordance with RCRA, the current RCRA permit requires the
owner and operator of the Tacoma Plant to take corrective action to address the
presence of certain substances in groundwater associated with past practices at
the Tacoma Plant site. The Tacoma Plant is controlling migration of and
remediating substances in groundwater through extraction, treatment and
reinjection (see Reserves and expenditures for the Tacoma Plant site section of
Note 9 below).
In addition, governmental authorities have identified OCC as a "potentially
responsible party" for the CB/NT site, which includes the Hylebos Waterway,
pursuant to the Comprehensive Environmental Response, Compensation, and
Liability Act. The CB/NT site covers in excess of ten square miles and includes
the Tacoma Plant site and other properties along the Hylebos Waterway and in the
vicinity of Commencement Bay. More than 100 potentially responsible parties have
been identified with respect to the Hylebos Waterway area of the CB/NT site. OCC
is participating with a group of entities in performing a pre-
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<PAGE> 222
OCCIDENTAL CHEMICAL CORPORATION
TACOMA PLANT
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
JUNE 16, 1997 AND JUNE 30, 1996
(9) ENVIRONMENTAL COSTS -- (CONTINUED)
remedial design investigation to evaluate potential alternatives for remediation
of sediments in the Hylebos Waterway.
It is reasonably possible that the activities of the Tacoma plant
chlor-alkali process and discontinued processes have contributed to the presence
of hazardous and nonhazardous substances and materials at and in the vicinity of
the Tacoma Plant site. It is impossible at this time to determine the quantity
of such substances and materials, if any, attributable to these processes, and
OCC does not have sufficient information available to determine a range of
potential liability.
Reserves and expenditures for the Tacoma Plant site --
At June 16, 1997 and June 30, 1996, the current portion of the reserve for
groundwater remediation at the Tacoma Plant site included in Accrued liabilities
was $2,055,000 and $2,570,000, respectively. The reserve for remediation was
originally established in 1990. An addition to the remediation reserve of
$966,000 for the year-to-date period ended June 30, 1996 is included in Other
operating expense.
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position No. 96-1 "Environmental Remediation Liabilities"
(SOP 96-1), which provides authoritative guidance on specific accounting issues
that are present in the recognition, measurement, display and disclosure of
environmental remediation liabilities. OCC implemented SOP 96-1 effective
January 1, 1997. The implementation of SOP 96-1 resulted in a $672,000 increase
in Income before taxes for the Tacoma Plant for the year-to-date period ended
June 16, 1997.
F-68
<PAGE> 223
[Flow chart depicting the Company's principal products, uses and processes]
[LOGO]
PCI CHEMICALS CANADA INC.
All tendered Original Notes, executed Letters of Transmittal, and other
related documents should be directed to the Exchange Agent. Requests for
assistance and for additional copies of the Prospectus, the Letter of
Transmittal and other related documents should be directed to the Exchange
Agent.
The Exchange Agent
for the Exchange Offer is
UNITED STATES TRUST COMPANY OF NEW YORK
By Facsimile:
(212) 780-0592
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Confirm by telephone:
(800) 548-6565
By Registered or Certified Mail:
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By Hand:
UNITED STATES TRUST COMPANY OF NEW YORK
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ATTENTION: CORPORATE TRUST OPERATIONS
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