<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 33-98828
PIONEER AMERICAS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1420850
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4300 BANK OF AMERICA CENTER, 700 LOUISIANA STREET, HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(713) 570-3200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
On August 9, 1999, there were outstanding 1,000 shares of the Registrant's
Common Stock, $.01 par value. All of such shares are owned by Pioneer
Companies, Inc.
The Registrant meets the conditions set forth in General Instruction
(H)(1)(a) and (b) of Form 10-Q, and is therefore filing this form with the
reduced disclosure format permitted by General Instruction (H)(2) of Form 10-Q.
<PAGE> 2
TABLE OF CONTENTS
PART I--FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets--June 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations--Three Months Ended June 30, 1999 and 1998 4
and Six Months Ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows--Six Months Ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
</TABLE>
Certain statements in this Form 10-Q regarding future expectations of the
Company's business and the Company's results of operations may be regarded as
"forward looking statements" within the meaning of the Securities Litigation
Reform Act. Such statements are subject to various risks, including the
Company's high financial leverage, the cyclical nature of the markets for many
of the Company's products and raw materials and other risks. Actual outcomes
may vary materially.
2
<PAGE> 3
PART I --FINANCIAL INFORMATION
PIONEER AMERICAS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,972 $ 50,593
Accounts receivable, less allowance for doubtful accounts of $1,758 at
June 30, 1999 and $2,017 at December 31, 1998 41,102 46,145
Inventories 27,751 26,360
Prepaid expenses 4,261 2,759
--------- ---------
Total current assets 84,086 125,857
Property, plant and equipment:
Land 10,622 10,727
Buildings and improvements 59,822 60,520
Machinery and equipment 310,050 306,989
Construction in progress 35,836 28,348
--------- ---------
416,330 406,584
Less accumulated depreciation (88,332) (72,525)
--------- ---------
327,998 334,059
Due from affiliates 14,723 16,512
Other assets, net of accumulated amortization of $9,069 at June 30, 1999
and $6,152 at December 31, 1998 60,589 48,327
Excess cost over fair value of net assets acquired, net of accumulated
amortization of $27,522 at June 30, 1999 and $22,950 at December 31, 1998 197,037 201,609
--------- ---------
Total assets $ 684,433 $ 726,364
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 30,626 $ 30,825
Accrued liabilities 26,060 31,384
Current portion of long-term debt 2,707 2,684
--------- ---------
Total current liabilities 59,393 64,893
Long-term debt, less current portion 563,332 564,689
Accrued pension and other employee benefits 14,463 25,836
Other long-term liabilities 21,769 22,063
Commitments and contingencies
Stockholder's equity:
Common stock, $.01 par value, 1,000 shares authorized,
issued and outstanding 1 1
Additional paid-in capital 65,483 65,483
Retained deficit (40,008) (16,601)
--------- ---------
Total stockholder's equity 25,476 48,883
--------- ---------
Total liabilities and stockholder's equity $ 684,433 $ 726,364
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
PIONEER AMERICAS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ---------------------------
1999 1998 1999 1998
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 65,997 $ 96,028 $ 134,036 $ 190,647
Cost of sales 68,588 70,835 122,338 135,783
-------- -------- --------- ---------
Gross profit (loss) (2,591) 25,193 11,698 54,864
Selling, general and administrative expenses 11,396 12,132 20,803 24,312
Unusual charges -- 231 -- 231
-------- -------- --------- ---------
Operating income (loss) (13,987) 12,830 (9,105) 30,321
Equity in net loss of unconsolidated subsidiaries -- (1,005) -- (2,141)
Interest expense, net (12,254) (11,794) (24,171) (24,242)
Other income (expense), net 29 (326) (978) 2,763
-------- -------- --------- ---------
Income (loss) before taxes (26,212) (295) (34,254) 6,701
Income tax provision (benefit) (8,516) (152) (10,847) 3,224
-------- -------- --------- ---------
Net income (loss) $(17,696) $ (143) $ (23,407) $ 3,477
======== ======== ========= =========
Earnings per common share:
Net income (loss) $(17,696) $ (143) $ (23,407) $ 3,477
======== ======== ========= =========
Weighted average number of common shares outstanding
1 1 1 1
======== ======== ========= =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
PIONEER AMERICAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Operating activities:
Net income (loss) $(23,407) $ 3,477
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization 25,870 23,152
Equity in net loss of unconsolidated subsidiaries -- 2,141
Net change in deferred taxes (11,208) (386)
Reduction in post-retirement medical expense (12,530) --
Loss on disposals of assets 1,061 --
Foreign exchange loss (769) 597
Net effect of changes in operating assets and liabilities (net of
acquisitions) (2,867) (11,299)
-------- --------
Net cash flows from operating activities (23,850) 17,682
-------- --------
Investing activities:
Investment in and advances to unconsolidated subsidiaries -- (4,629)
Capital expenditures (16,704) (12,912)
Proceeds received from disposals of assets 1,145 --
-------- --------
Net cash flows from investing activities (15,559) (17,541)
-------- --------
Financing activities:
Payments on long-term debt (1,334) (1,293)
Dividends to parent -- (454)
-------- --------
Net cash flows from financing activities (1,334) (1,747)
-------- --------
Effect of exchange rate changes on cash 1,122 (756)
-------- --------
Net decrease in cash (39,621) (2,362)
Cash at beginning of period 50,593 50,995
-------- --------
Cash at end of period $ 10,972 $ 48,633
======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
PIONEER AMERICAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
The consolidated balance sheet as of June 30, 1999 and the consolidated
statements of operations and cash flows for all periods presented are unaudited
and reflect all adjustments, consisting of normal recurring items, which
management considers necessary for a fair presentation. Operating results for
the first six months of 1999 are not necessarily indicative of results to be
expected for the year ending December 31, 1999. The consolidated financial
statements include the accounts of Pioneer Americas, Inc. ("Pioneer") 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 tabulations in the notes to the
financial statements are stated in thousands of dollars unless otherwise
indicated.
The consolidated balance sheet at December 31, 1998 is derived from the
December 31, 1998 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, 1998.
2. SUPPLEMENTAL CASH FLOW INFORMATION
Net effect of changes in operating assets and liabilities are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1999 1998
------- --------
<S> <C> <C>
Accounts receivable $ 5,799 $ 7,640
Due from affiliates 1,789 (3,238)
Inventories (1,456) (3,010)
Prepaid expenses (1,044) 805
Other assets (706) (3,841)
Accounts payable (838) (17,235)
Accrued liabilities (5,911) 4,456
Other long-term liabilities (500) 3,124
------- --------
Net change in operating accounts $(2,867) $(11,299)
======= ========
</TABLE>
Following are supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1999 1998
------- -------
<S> <C> <C>
Cash payments for:
Interest $25,331 $25,046
Income taxes 168 123
</TABLE>
Non-cash investing activity:
In March 1999, the Company's subsidiary, Kemwater North America Company
("KNA"), sold certain fixed assets. Proceeds received included cash plus a $2.5
million note receivable.
6
<PAGE> 7
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
Raw materials, supplies and parts $16,965 $17,014
Finished goods and work-in-process 8,165 9,045
Inventories under exchange agreements 2,621 301
------- -------
$27,751 $26,360
======= =======
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company and its operations are subject to extensive United States and
Canadian federal, state, provincial and local laws, regulations, rules and
ordinances relating to pollution, the protection of the environment and the
release or disposal of regulated materials. The operation of any chemical
manufacturing plant and the distribution of chemical products entail certain
obligations under current environmental laws. Present or future laws may affect
the Company's capital and operating costs relating to compliance, may impose
cleanup requirements with respect to site contamination resulting from past,
present or future spills and releases and may affect the markets for the
Company's products. The Company believes that its operations are currently in
general compliance with environmental laws and regulations, the violation of
which could result in a material adverse effect on the Company's business,
properties or results of operations on a consolidated basis. There can be no
assurance, however, that material costs will not be incurred as a result of
instances of noncompliance or new regulatory requirements.
The Company relies on indemnification from the previous owners in
connection with certain environmental liabilities at its chlor-alkali plants
and other facilities. There can be no assurance, however, that such
indemnification agreements will be adequate to protect the Company from
environmental liabilities at these sites or that such third parties will
perform their obligations under the respective indemnification arrangements, in
which case the Company would be required to incur significant expenses for
environmental liabilities, which would have a material adverse effect on the
Company.
The Company is subject to various legal proceedings and potential claims
arising in the ordinary course of its business. In the opinion of management,
the Company has adequate legal defenses and/or insurance coverage with respect
to these matters, and management does not believe that they will materially
affect the Company's operations or financial position.
5. PCI CHEMICALS CANADA INC.
Pioneer is a holding company with no operating assets or operations. A
subsidiary of Pioneer, PCI Chemicals Canada Inc. ("PCICC"), has outstanding
$175.0 million of 9 1/4% Senior Secured Notes, due October 15, 2007. These
notes are fully and unconditionally guaranteed on a joint and several basis by
Pioneer and Pioneer's other direct and indirect wholly-owned subsidiaries.
Together, PCICC and the subsidiary note guarantors comprise all of the direct
and indirect subsidiaries of Pioneer. Summarized financial information of PCICC
and the guarantors of these notes are as follows:
<TABLE>
<CAPTION>
NOTE CONSOLIDATED NOTE CONSOLIDATED
PCICC GUARANTORS COMPANY PCICC GUARANTORS COMPANY
------------- ------------- ------------- ------------- ------------- --------------
AS OF JUNE 30, 1999 AS OF DECEMBER 31, 1998
----------------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Current assets $ 22,481 $ 61,605 $ 84,086 $ 29,962 $ 95,895 $ 125,857
Non-current assets 187,958 412,389 600,347 191,004 409,503 600,507
Current liabilities 21,433 37,960 59,393 22,103 42,790 64,893
Non-current liabilities 181,433 418,131 599,564 185,031 427,557 612,588
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, 1999 FOR THE THREE MONTHS ENDED JUNE 30, 1998
----------------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 24,818 $ 41,179 $ 65,997 $ 33,540 $ 62,488 $ 96,028
Gross profit (loss) 499 (3,090) (2,591) 8,595 16,598 25,193
Net income (loss) (4,551) (13,145) (17,696) 384 (527) (143)
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999 FOR THE SIX MONTHS ENDED JUNE 30, 1998
----------------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 51,224 $ 82,812 $ 134,036 $ 68,447 $ 122,200 $ 190,647
Gross profit 4,711 6,987 11,698 20,360 34,504 54,864
Net income (loss) (6,260) (17,147) (23,407) 3,250 227 3,477
</TABLE>
7
<PAGE> 8
Separate financial statements of PCICC and the guarantors of the PCICC
notes are not included as management has determined that separate financial
statements of these entities are not material to investors.
6. ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and for hedging activities.
The Company is required to adopt the provisions of SFAS No. 133 in 2001.
Management is currently evaluating the impact of SFAS No. 133 on its financial
statements and related disclosures.
7. RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Revenues. Revenues decreased by $30.0 million or approximately 31% to
$66.0 million for the three months ended June 30, 1999, as compared to the
three months ended June 30, 1998. The decrease in revenues was primarily
attributable to lower electrochemical unit ("ECU") prices. ECU prices were
approximately 34% lower during the second quarter of 1999, versus the second
quarter of 1998.
Total revenues at the Company's downstream operations decreased $1.4
million, or approximately 11%, primarily as a result of the disposal of the
Company's household bleach bottling operations during the third quarter of 1998
and the disposal of the pool chemicals business in the fourth quarter of 1998.
These businesses were considered non-strategic, and the Company retained supply
agreements with the purchasers. Partially offsetting the decreases caused by the
two disposals was a revenue increase related to KNA. KNA became a wholly-owned
subsidiary of the Company on September 30, 1998, and its results are included in
the Company's consolidated financial statements since that date.
Cost of Sales. Cost of sales decreased $2.2 million or approximately 3%,
for the three months ended June 30, 1999, as compared to the same period in
1998, which was partially due to the decreased sales at the downstream
operations.
Gross Profit (Loss). During the second quarter of 1999 Pioneer incurred a
gross loss on revenues as a result of the lower ECU sales prices. The 1999
margin was a negative 4%, as compared to the gross profit margin of 26% in the
same period of 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $0.7 million, or approximately 6%, for the
three months ended June 30, 1999. Within this net decrease was a decrease of
$1.3 million related to the absence of incentive compensation accruals during
1999 (due to lower operating results), offset by an increase of $0.5
million of expenses related to the inclusion of KNA in the 1999 consolidated
results.
Unusual Charges. 1998 unusual charges of $0.2 million related to the
consolidation and downsizing of certain administrative functions of the
downstream subsidiaries.
Interest Expense, Net. Interest expense, net increased by $0.5 million in
1999 as a result of decreased interest income. Interest income was lower due to
a reduction in cash balances in 1999. Offsetting this fluctuation was a
small decrease in gross interest expense in 1999 compared to 1998 as a result
of scheduled debt repayments.
Net Loss. Due to the factors described above, net loss for the three
months ended June 30, 1999 was $17.7 million, compared to a net loss of $0.1
million for the same period in 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Revenues. Revenues decreased by $56.6 million or approximately 30% to
$134.0 million for the six months ended June 30, 1999, as compared to the six
months ended June 30, 1998. ECU prices were approximately 35% lower during the
first half of 1999, versus the same period in 1998. In 1998, production and
sales volumes were negatively impacted by three failed transformers at one
plant.
8
<PAGE> 9
Total revenues at the Company's downstream operations were fairly constant
between the two periods. The decreases caused by disposals of the Company's
household bleach operations and the pool chemicals business were offset by the
increase created by the consolidation of KNA.
Cost of Sales. Cost of sales decreased $13.4 million or approximately 10%,
for the six months ended June 30, 1999, as compared to the same period in 1998.
$10.9 million of this decrease was due to the modification of the Company's
retiree health care benefits. Benefits under the plan to current retirees were
not impacted, but current employees will no longer receive benefits under this
plan. The remaining decrease in cost of sales was principally due to lower cost
of sales at the downstream subsidiaries as a result of the disposed operations
discussed above, offset by the increase from the inclusion of KNA in 1999.
Gross Profit. Gross profit margin decreased to 9% in 1999 from 29% in
1998, primarily as a result of the ECU pricing decrease discussed above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $3.5 million, or approximately 14%, for
the six months ended June 30, 1999. $1.6 million of this decrease was due to
the modification of the Company's retiree health care benefits discussed above.
$3.1 million of the decrease is related to no "pay-for-performance" award
accruals being made in 1999. The inclusion of KNA in the 1999 consolidated
results increased selling, general and administrative expenses by $1.0 million,
partially offsetting these decreases.
Equity in Net Loss of Unconsolidated Subsidiaries. Equity in net loss of
unconsolidated subsidiaries represented the Company's 50% ownership in KNA
prior to September 30, 1998. Before September 30, 1998, Pioneer owned 50% of
KNA, which owned 100% of KWT, Inc. ("KWT"). The remaining 50% of KNA was owned
indirectly by Pioneer's parent, Pioneer Companies, Inc. ("PCI"). On September
30, 1998, KNA exchanged its ownership in KWT for the remaining 50% of KNA held
by PCI. No gain or loss was recognized on this exchange. Following this
transaction, KNA's results of operations are reflected in the consolidated
results of operations of the Company.
Interest Expense, Net. Interest expense, net decreased slightly in 1999 as
a result of slightly lower debt levels in 1999 (due to scheduled debt
repayments) plus lower interest rates in 1999. Offsetting the interest expense
decrease was a decrease in interest income due to lower cash balances in 1999.
Other Income (Expense), Net. Other income (expense), net decreased from an
income amount of $2.8 million for the six months ended June 30, 1998 to an
expense of $1.0 million for the six months ended June 30, 1999. The 1999
expense amount was primarily the loss from the sale of the iron chlorides
business. 1998's other income included a gain from the settlement of a lawsuit,
an insurance recovery and a state franchise tax refund.
Net Income (Loss). Due to the factors described above, there was a net
loss for the six months ended June 30, 1999 of $23.4 million, compared to net
income of $3.5 million for the same period in 1998.
9
<PAGE> 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended June 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PIONEER AMERICAS, INC.
August 12, 1999 By: /s/ Philip J. Ablove
-------------------------------
Philip J. Ablove
Vice President and
Chief Financial Officer
10
<PAGE> 11
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 10,972
<SECURITIES> 0
<RECEIVABLES> 42,860
<ALLOWANCES> 1,758
<INVENTORY> 27,751
<CURRENT-ASSETS> 84,086
<PP&E> 416,330
<DEPRECIATION> 88,332
<TOTAL-ASSETS> 684,433
<CURRENT-LIABILITIES> 59,393
<BONDS> 563,332
0
0
<COMMON> 1
<OTHER-SE> 25,475
<TOTAL-LIABILITY-AND-EQUITY> 684,433
<SALES> 134,036
<TOTAL-REVENUES> 134,036
<CGS> 122,338
<TOTAL-COSTS> 122,338
<OTHER-EXPENSES> 20,803
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,171
<INCOME-PRETAX> (34,254)
<INCOME-TAX> (10,847)
<INCOME-CONTINUING> (23,407)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,407)
<EPS-BASIC> (23,407.00)
<EPS-DILUTED> (23,407.00)
</TABLE>
