10-Q 1 h81537e10-q.txt PIONEER CORPORATION OF AMERICA - SEPTEMBER 30,2000 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 SEPTEMBER 30, 2000 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 CORPORATION OF AMERICA (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.) 700 LOUISIANA STREET, SUITE 4300, 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 November 1, 2000, 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. 2 PIONEER CORPORATION OF AMERICA TABLE OF CONTENTS PART I - FINANCIAL INFORMATION

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 3 PART I - FINANCIAL INFORMATION PIONEER CORPORATION OF AMERICA CONSOLIDATED BALANCE SHEETS (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)

See notes to consolidated financial statements. 3 4 PIONEER CORPORATION OF AMERICA CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)

See notes to consolidated financial statements. 4 5 PIONEER CORPORATION OF AMERICA CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)

See notes to consolidated financial statements. 5 6 PIONEER CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND BASIS OF PRESENTATION The consolidated balance sheet at September 30, 2000 and the consolidated statements of operations and cash flows for the periods presented are unaudited and reflect all adjustments, consisting of normal recurring items, which management considers necessary for a fair presentation. Operating results for the first nine months of 2000 are not necessarily indicative of results to be expected for the year ending December 31, 2000. The consolidated financial statements include the accounts of Pioneer Corporation of America ("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. Certain amounts have been reclassified in prior years to conform to the current year presentation. The consolidated balance sheet at December 31, 1999 is derived from the December 31, 1999 audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America, 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, 1999. 2. SUPPLEMENTAL CASH FLOW INFORMATION Net effects of changes in operating assets and liabilities are as follows:

Following are supplemental disclosures of cash flow information:

3. INVENTORIES Inventories consist of the following:

6 7 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. At several of the Company's facilities, investigations or remediation is underway, and at some of these locations regulatory agencies are considering whether additional actions are necessary to protect or remediate surface or groundwater resources. The Company could be required to incur additional costs to construct and operate remediation systems in the future. The Company relies on indemnification from certain of the previous owners of acquired businesses in connection with certain environmental liabilities at certain of 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. In connection with the 1995 transaction pursuant to which the Company acquired all of the outstanding common stock and other equity interests of an acquired company from the holders of those interests (the "Sellers"), the Sellers agreed to indemnify the Company and its affiliates for certain environmental remediation obligations arising prior to the closing date from or relating to certain plant sites or arising before or after the closing date with respect to certain environmental liabilities relating to certain properties and interests held by the Company for the benefit of the Sellers (the "Contingent Payment Properties"). Amounts payable in respect of such liabilities would generally be payable as follows: (i) out of certain reserves established on the Company's balance sheet at December 31, 1994; (ii) either by offset against the amounts payable under the $11.5 million in notes payable by the Company to the Sellers or from amounts held in an account (the "Contingent Payment Account") established for the deposit of proceeds from the Contingent Payment Properties; and (iii) in certain circumstances and subject to specified limitations, out of the personal assets of the Sellers. To the extent that liabilities exceed proceeds from the Contingent Payment Properties, the Company would be limited, for a ten-year period, principally to its rights of offset against the Seller's notes to cover such liabilities. During June 2000, the Company and the Sellers effected an agreement, pursuant to which the Company, in exchange for cash and other consideration, relieved the Sellers from their environmental indemnity obligations and agreed to transfer to the Sellers the record title to the Contingent Payment Properties and the $800,000 remaining cash balance in the Contingent Payment Account that was determined to be in excess of anticipated environmental liability. The cash balance in the Contingent Payment Account at the time of this transaction was $6.1 million. This cash balance was not previously reflected on the Company's balance sheet since a right of setoff existed. As part of this transaction, a third-party environmental analysis was performed on all of the Company's sites subject to the indemnity. The Company then adjusted the remediation reserve on its balance sheet to the discounted future cash flows for estimated environmental remediation. As a result of the above transaction and the new environmental analysis, the Company reported a pre-tax gain of $1.8 million during the second quarter of 2000 which is reflected as a reduction of cost of sales. 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. ("PCI Canada"), has outstanding $175.0 million of 9 1/4% Senior Secured Notes, due October 15, 2007. These notes are 7 8 fully and unconditionally guaranteed on a joint and several basis by Pioneer and Pioneer's other direct and indirect wholly-owned subsidiaries. Together, PCI Canada and the subsidiary note guarantors comprise all of the direct and indirect subsidiaries of Pioneer. Summarized financial information of PCI Canada and the guarantors of these notes are as follows:

Separate financial statements of PCI Canada and the guarantors of the PCI Canada notes are not included as management believes that separate financial statements of these entities are not material to investors. 6. DISPOSITION OF COAGULANT CHEMICALS BUSINESS On August 21, 2000, the Company sold its coagulant business and transferred to the buyer fixed assets, including a plant in Spokane, Washington, and certain technology-related assets and liabilities associated with the Spokane operations. The Company received cash of $0.9 million as payment for Spokane. On the same date, an affiliate of the Company also sold its coagulant business to the same buyer, transferring assets and liabilities associated with a plant in Savannah, Georgia, except for a related party payable of $17 million for advances from the Company which were written off by the Company, and is reflected as a decrease in due from affiliates on the balance sheet and an increase in other expense on the income statement. This transaction did not have a material impact on the Company's cash flows. 7. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999 Revenues. Revenues increased by $14.7 million or approximately 20% to $86.2 million for the three months ended September 30, 2000, as compared to the three months ended September 30, 1999. The increase in revenues was primarily attributable to higher electrochemical unit ("ECU") prices. ECU prices were approximately 45% higher during the third quarter of 2000 versus the third quarter of 1999. Cost of Sales. Cost of sales increased $11.2 million or approximately 16% for the three months ended September 30, 2000, as compared to the same period in 1999, principally due to an $8.9 million increase in power costs. Gross Profit (Loss). During the third quarter of 2000, gross profit increased by $3.4 million as a result of higher ECU sales prices, partially offset by the cost of sales increase discussed above. Gross profit margin for the third quarter of 2000 was 4%, as compared to a small negative margin in the same period of 1999. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $2.4 million for the three months ended September 30, 2000, primarily as a result of overhead expense reductions and lower amortization costs. 8 9 Interest Expense, Net. Interest expense, net increased in 2000 primarily as a result of interest incurred on revolving credit balances and higher variable interest rates in 2000 as compared to 1999. Other Income (Expense), Net. Other income (expense), net for the quarter ended September 30, 2000 was $19.7 million less than the year-ago period. This reduction was due to one-time refunds and credits received in the third quarter of 1999, along with the non-cash intercompany receivable write-down discussed in Note 6 of Notes to Consolidated Financial Statements. Net Loss. Due to the factors described above, net loss for the three months ended September 30, 2000 was $23.4 million, compared to a net loss of $13.9 million for the same period in 1999. NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999 Revenues. Revenues increased by $48.9 million, or approximately 24%, to $254.5 million for the nine months ended September 30, 2000, as compared to the nine months ended September 30, 1999. ECU prices were approximately 35% higher during the first nine months of 2000 versus the same period in 1999. Sales volumes during the first nine months of 2000 were also higher than the same period in 1999. Cost of Sales. Cost of sales increased $34.6 million, or approximately 18%, for the nine months ended September 30, 2000, as compared to the same period in 1999. $10.9 million of this increase was due to the absence of the gain resulting from the modification of the Company's retiree health care benefits that occurred during the first quarter of 1999. The remaining increase in cost of sales was principally due to a $15.9 million increase in power costs and greater sales volume. Gross Profit (Loss). Gross profit increased $14.3 million, resulting in a gross profit margin of 10% in 2000 compared to 6% in 1999, primarily as a result of the ECU pricing increase, partially offset by the cost of sales increase discussed above. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $0.8 million, or approximately 2%, for the nine months ended September 30, 2000. Decreases related to overhead expense reductions were partially offset by an increase of $1.6 million due to the absence of the modification of the Company's retiree health care benefits referred to above. Interest Expense, Net. Interest expense, net increased in 2000, primarily as a result of interest incurred on revolving credit balances and higher variable interest rates in 2000 as compared to 1999. Other Income (Expense), Net. Other income (expense), net decreased for the nine months ended September 30, 1999 by $14.8 million compared to the same period in 1999. The decrease was the result of a non-cash related party receivable write-down discussed in Note 6, partially offset by the $3.3 million gain from the sale of certain excess property in 2000. Net Loss. Due to the factors described above, the net loss for the nine months ended September 30, 2000 of $38.3 million, increased from a net loss of $37.3 million for the same period in 1999. 9 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 September 30, 2000. 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 CORPORATION OF AMERICA November 8, 2000 By: /s/ Philip J. Ablove ---------------------------------- Philip J. Ablove Executive Vice President and Chief Financial Officer 10 11 INDEX TO EXHIBITS

PIONEER CORP OF AMERICA 10-Q