SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-5485
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VISKASE COMPANIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-2677354
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Willowbrook Centre Parkway, Willowbrook, Illinois 60527
- ----------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (630) 789-4900
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
----- -----
As of November 14, 2002, there were 15,315,237 shares outstanding of the
registrant's Common Stock, $.01 par value.
INDEX TO FINANCIAL STATEMENTS
VISKASE COMPANIES, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated balance sheets at September 30, 2002 and December 31, 2001 4
Consolidated statements of operations and comprehensive income (loss) for the
three months ended September 30, 2002 and September 30, 2001 and for the
nine months ended September 30, 2002 and September 30, 2001 5
Consolidated statements of cash flows for the nine months ended
September 30, 2002 and September 30, 2001 7
Notes to consolidated financial statements 8
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
The financial information included in this quarterly report has been prepared
in conformity with the accounting principles and practices reflected in the
financial statements included in the annual report on Form 10-K filed with
the Securities and Exchange Commission for the year ended December 31, 2001
(2001 Form 10-K). These quarterly financial statements should be read in
conjunction with the financial statements and the notes thereto included in
the 2001 Form 10-K. The accompanying financial information, which is
unaudited, reflects all adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods
presented.
The consolidated balance sheet as of December 31, 2001 was derived from the
audited consolidated financial statements in the Company's annual report on
the 2001 Form 10-K.
Reported interim results of operations are based in part on estimates, which
may be subject to year-end adjustments. In addition, these quarterly results
of operations are not necessarily indicative of those expected for the year.
VISKASE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
------------- ------------
(unaudited)
(in thousands except for the number of shares and per share amounts)
ASSETS
Current assets:
Cash and equivalents $22,566 $25,540
Restricted cash 29,149 26,558
Receivables, net 28,494 25,838
Inventories 29,473 29,064
Other current assets 8,106 9,691
------- -------
Total current assets 117,788 116,691
Property, plant and equipment,
including those under capital leases 238,762 233,637
Less accumulated depreciation
and amortization 145,886 127,338
------- -------
Property, plant and equipment, net 92,876 106,299
Deferred financing costs, net 43 2,024
Other assets 7,655 9,014
-------- --------
Total assets $218,362 $234,028
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term debt including current portion
of long-term debt and obligations
under capital leases $227,324 $236,059
Accounts payable 11,259 9,784
Accrued liabilities 49,593 48,203
Current deferred income taxes 1,597 1,597
-------- --------
Total current liabilities 289,773 295,643
Long-term debt including obligations
under capital leases 115 194
Accrued employee benefits 54,624 51,116
Noncurrent deferred income taxes 25,104 25,128
Commitments and contingencies (see Note 5)
Stockholders' deficit:
Preferred stock, $.01 par value;
none outstanding
Common stock, $.01 par value;
15,315,237 issued and outstanding
at September 30, 2002 and
15,317,112 shares at December 31, 2001 153 153
Paid in capital 138,008 138,014
Accumulated (deficit) (288,009) (272,574)
Accumulated other comprehensive (loss) (1,301) (3,461)
Unearned restricted stock issued
for future service (105) (185)
--------- ---------
Total stockholders' (deficit) (151,254) (138,053)
--------- ---------
Total Liabilities and Stockholders' deficit $218,362 $234,028
======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
VISKASE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
Three Months Ended Nine Months Ended
------------------------ -------------------------
September September September September
30, 2002 30, 2001 30, 2002 30, 2001
--------- --------- --------- ---------
(in thousands, except for number of shares and per share amounts)
NET SALES $48,673 $48,483 $138,351 $143,026
COSTS AND EXPENSES
Cost of sales 38,701 37,640 109,700 114,887
Selling, general and administrative 12,392 9,774 32,585 31,269
Amortization of intangibles 500 500 1,500 1,500
Restructuring (income) (6,132)
------- ------- -------- --------
OPERATING (LOSS) INCOME (2,920) 569 698 (4,630)
Interest income 283 558 830 2,015
Interest expense 6,147 6,198 18,415 19,085
Other expense (income), net 1,032 (692) 389 3,770
------- ------- -------- --------
(LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (9,816) (4,379) (17,276) (25,470)
Income tax (benefit) provision (1,133) 317 (1,841) (587)
-------- ------- --------- ---------
(LOSS) FROM CONTINUING OPERATIONS (8,683) (4,696) (15,435) (24,883)
DISCONTINUED OPERATIONS:
Gain on disposal, net of income taxes of $0 3,189
------- ------- -------- --------
NET (LOSS) BEFORE
EXTRAORDINARY ITEM (8,683) (4,696) (15,435) (21,694)
Extraordinary gain on early extinguishment
of debt, net of income taxes of $0 8,137
------- ------- -------- --------
NET (LOSS) (8,683) (4,696) (15,435) (13,557)
Other comprehensive income;
Foreign currency translation adjustments 868 1,746 2,160 477
------- ------- -------- --------
COMPREHENSIVE (LOSS) $(7,815) $(2,950) $(13,275) $(13,080)
======== ======== ========= =========
WEIGHTED AVERAGE COMMON SHARES
- BASIC AND DILUTED 15,316,053 15,317,346 15,316,504 15,306,836
========== ========== ========== ==========
PER SHARE AMOUNTS:
NET INCOME (LOSS) PER SHARE:
- basic and diluted
CONTINUING OPERATIONS $(.57) $(.31) $(1.01) $(1.63)
DISCONTINUED OPERATIONS
Gain on disposal, net of tax .21
---------- ---------- ---------- ----------
(LOSS) BEFORE EXTRAORDINARY ITEM $(.57) $(.31) $(1.01) $(1.42)
Extraordinary gain, net of tax .53
---------- ---------- ---------- ----------
Net (loss) $(.57) $(.31) $(1.01) $(.89)
========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
VISKASE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
--------------------------
September September
30, 2002 30, 2001
--------------------------
(in thousands)
Cash flows from operating activities:
Net (loss) $(15,435) $(13,557)
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization under capital lease 15,754 16,314
Amortization of intangibles 1,500 1,500
Amortization of deferred financing fees 320 91
Fees associated with restructuring plan 1,492
(Decrease) in deferred income taxes (671) (882)
Extraordinary (gain) on debt extinguishment (8,137)
Foreign currency transaction (gain) loss (522) 452
(Gain) loss on disposition of assets (12) 1,950
Bad debt provision 170 240
Net property, plant and equipment write-off 1,029
Changes in operating assets and liabilities:
Receivables (1,329) (2,913)
Inventories 628 4,643
Other current assets 1,766 14,299
Accounts payable and accrued liabilities 1,850 (29,822)
Other 3,835 4,801
--------- ---------
Total adjustments 25,810 2,536
--------- ---------
Net cash provided by (used in) operating activities 10,375 (11,021)
Cash flows from investing activities:
Capital expenditures (1,371) (3,836)
Proceeds from disposition of assets 560 834
Restricted cash (2,591) 14,376
--------- ---------
Net cash (used in) provided by investing activities (3,402) 11,374
Cash flows from financing activities:
Deferred financing costs (1,015)
Repayment of long-term borrowings
and capital lease obligation (8,845) (20,660)
--------- ---------
Net cash (used in) financing activities (8,845) (21,675)
Effect of currency exchange rate changes on cash (1,102) (1,133)
--------- ---------
Net (decrease) in cash and equivalents (2,974) (22,455)
Cash and equivalents at beginning of period 25,540 55,350
--------- ---------
Cash and equivalents at end of period $22,566 $32,895
========= =========
Supplemental cash flow information:
Interest paid $3,179 $11,477
Income taxes paid $423 $5,140
The accompanying notes are an integral part of the consolidated financial
statements.
VISKASE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PROCEEDINGS UNDER CHAPTER 11 AND GOING CONCERN PRESENTATION (in
thousands, except number of shares and per bond amounts)
Cash flows from operations for Viskase Companies, Inc. (Company) were
insufficient to pay the 10.25% Senior Notes (Senior Notes) when they matured
on December 1, 2001, and accordingly the Company did not pay the $163,060
principal and $8,357 interest that became due at that time. In September
2001, certain of the holders of the Senior Notes formed an ad hoc committee
(Ad Hoc Committee) to participate in the development of a plan to restructure
the Company's capital structure and address its future cash flow needs. On
July 15, 2002, the Company executed a restructuring agreement with the Ad Hoc
Committee for the restructuring of the Senior Notes. Under terms of the
restructuring agreement, on or about August 21, 2002 the Company initiated an
exchange offer to exchange the Senior Notes for new 8% Senior Secured Notes
(New Notes) and shares of Series A Preferred Stock (Preferred Stock). The
proposed exchange offer was subject to acceptance by holders of 100% of the
outstanding Senior Notes, unless waived by the Company and approved by the Ad
Hoc Committee. The exchange offer was conducted simultaneously with a
solicitation for a prepackaged plan of reorganization (Plan) for the Company
which required the consent of a majority in number of the holders and at
least 66-2/3% in principal amount of Senior Notes actually voting in the
solicitation. Under the restructuring agreement, if less than 100% of the
outstanding Senior Notes accepted the exchange offer, but a sufficient number
of holders and aggregate amount of Senior Notes voted in favor of acceptance
of the Plan, the Company agreed to commence a voluntary Chapter 11 petition
to seek confirmation of the Plan. The Plan contains substantially the same
economic terms as the exchange offer.
Although 100% of the outstanding Senior Notes did not accept the exchange
offer, the Company did receive the required consent of a majority in number
of the holders and at least 66-2/3% in principal amount of Senior Notes
actually voting in the solicitation. Accordingly, on November 13, 2002, the
Company filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy
Code in the United States Bankruptcy Court for Northern District of Illinois,
Eastern Division (Bankruptcy Court) to seek confirmation of the Plan. Under
Chapter 11, the Company may operate its business in the ordinary course,
subject to prior Bankruptcy Court approval of transactions outside the
ordinary course and certain other matters.
The Chapter 11 filing was for Viskase Companies, Inc. only. The Chapter 11
filing does not include any of the Company's domestic or foreign operating
subsidiaries. Therefore, the Company's operating subsidiaries will continue
to provide an uninterrupted supply of products and services to customers
worldwide. Trade creditors and vendors will be totally unaffected and will
continue to be paid in the ordinary course of business, and the operating
subsidiaries' employees will be paid all wages, salaries and benefits on a
timely basis.
The Company has asked the Bankruptcy Court for an expedited confirmation
hearing in order to allow the Company to emerge from bankruptcy as soon as
practicable. Although the Company expects to consummate the Plan already
approved by the required number of holders and principal amount outstanding
of the Senior Notes, it can provide no assurances that any restructuring will
be completed on the terms indicated in the Plan, or at all.
Under the terms of the Plan, the Company's wholly owned operating subsidiary,
Viskase Corporation (Viskase), would be merged with and into the Company
immediately prior to or upon consummation of the Plan with the Company being
the surviving corporation. The outstanding Senior Notes would receive New
Notes and shares of new common stock (New Common Stock) to be issued by the
Company on a basis of $367.96271 principal amount of New Notes (i.e.,
$60,000) and 3,170.612 shares of New Common Stock (i.e., 517,000,000 shares
or 94% of the New Common Stock) for each one thousand dollar principal amount
of Senior Notes. The existing shares of common stock of the Company would be
canceled. Holders of the old common stock would receive warrants with a term
of seven years to purchase shares of New Common Stock equal to 2.7% of the
Company's New Common Stock at an exercise price of $0.20 per share. Assuming
all warrants are exercised, holders of the Senior Notes would receive
approximately 91.5% of the New Common Stock and approximately 5.8% would be
issued or reserved for issuance to the Company's management and employees.
The New Notes would bear interest at a rate of 8% per year, and will accrue
interest from December 1, 2001, payable semi-annually (except annually with
respect to year four and quarterly with respect to year five), with interest
payable in the form of New Notes (pay-in-kind) for the first three years.
Interest for years four and five will be payable in cash to the extent of
available cash flow, as defined, and the balance in the form of New Notes
(pay-in-kind). Thereafter, interest will be payable in cash. The New Notes
would mature on December 1, 2008.
The New Notes would be secured by a first lien on the assets of the Company,
other than the assets subject to the General Electric Capital Corporation
(GECC) lease and certain real estate, post-merger. The New Notes would be
subject to subordination of up to $25,000 for a secured working capital
credit facility for the Company.
Under the proposed restructuring, 33,000,000 shares of New Common Stock (or
upon the request of Company management, options to purchase 33,000,000 shares
of New Common Stock), initially representing 6% of the New Common Stock, will
be reserved for Company management and employees. Such shares or options will
be subject to a vesting schedule with acceleration upon the occurrence of
certain events.
Upon completion of the proposed restructuring the Board of Directors of the
Company would be reconstituted to consist of five members, including the
Company's Chief Executive Officer and four other persons designated by the Ad
Hoc Committee.
The Ad Hoc Committee has retained legal counsel, the fees and expenses of
which are being paid by the Company.
The Ad Hoc Committee members, holding in the aggregate approximately 54% of
the Senior Notes, have agreed to and have voted in favor of the Plan. The
members of the Ad Hoc Committee have also agreed to take such other
reasonable actions as necessary to consummate the proposed restructuring. In
addition, the members of the Ad Hoc Committee have agreed not to transfer
(other than to another member of the Ad Hoc Committee or an affiliate of a
member) their shares of New Common Stock for a period of two years after the
restructuring is completed. For a period of one year thereafter, the Company
would have a right of first refusal to either purchase or designate a
purchaser for shares of New Common Stock to be transferred by a member of the
Ad Hoc Committee to a person other than another member of the Ad Hoc
Committee or their affiliates.
The Company's consolidated financial statements are presented on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Except for the
classification of certain debt as discussed in Note 4, the consolidated
financial statements do not include any adjustment relating to recoverability
and classification of recorded asset amounts or the amount and classification
of liabilities or any other adjustments that might be necessary should the
Company be unable to continue as a going concern. However, as a result of the
Chapter 11 filing and non-payment of debt when due, such realization of
assets and liquidation of liabilities of the Company are subject to
significant uncertainty. The Company's consolidated financial statements also
do not reflect adjustments to assets and liabilities which may occur as a
result of the filing of a plan of reorganization and application of AICPA
Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" (SOP 90-7). The principal financial
statement requirements of SOP 90-7 for entities in Chapter 11 bankruptcy
proceedings with the expectation of reorganizing are as follows:
- Balance sheet: Distinguish between pre-petition liabilities that are
and are not subject to compromise and post-petition liabilities.
- Statement of operations: Expenses and gains and losses resulting from
the reorganization are separately reported as "reorganization items",
except for discontinued operations and extraordinary items.
Following the approval of a plan of reorganization, SOP 90-7 may require that
the Company adopt "fresh start" accounting resulting in recording all assets
and liabilities at fair value. Upon emergence from bankruptcy, the Plan could
materially change the amounts and classifications reported in the
consolidated historical financial statements.
GECC, Viskase's equipment lessor, has agreed, subject to certain conditions,
not to accelerate payment of amounts due because of any default or event of
default under any of the lease documents arising from (i) the Company's
failure to meet the Fixed Charge Coverage Ratio for the fiscal quarters
ending on March 31, 2002, June 30, 2002 and September 30, 2002 and (ii) the
Company becoming a debtor under Chapter 11 of the Bankruptcy Code until
December 15, 2002. There is no agreement with GECC to extend the forbearance
beyond December 15, 2002, and the Company can make no assurance that any
extension would be received.
2. CASH AND CASH EQUIVALENTS (dollars in thousands)
September December
30, 2002 31, 2001
--------- --------
Cash and cash equivalents $22,566 $25,540
Restricted cash 29,149 26,558
------- -------
$51,715 $52,098
======= =======
As of September 30, 2002, cash and cash equivalents of $17,514 and restricted
cash of $29,149 are invested in short term investments.
The 2002 restricted cash is principally cash held as collateral for
outstanding letters of credit with commercial banks. Included within
restricted cash is a letter of credit of $2,109 which F. Edward Gustafson,
Chairman of the Board, President and Chief Executive Officer, is the
beneficiary. The letter of credit supports amounts payable under his
Employment Agreements.
3. INVENTORIES (dollars in thousands)
Inventories consisted of:
September December
30, 2002 31, 2001
--------- --------
Raw materials $ 4,186 $ 3,173
Work in process 12,586 13,131
Finished products 12,701 12,760
------- -------
$29,473 $29,064
======= =======
The Company's domestic inventories at September 30, 2002 were valued at Last-
In, First-Out (LIFO), which represents approximately 52% of the inventory
value. These LIFO values exceeded current manufacturing cost by
approximately $1,410 at September 30, 2002.
4. DEBT OBLIGATIONS (dollars and shares in thousands, except for number of
shares and per share amounts)
Outstanding short-term and long-term debt consisted of:
September December
30, 2002 31, 2001
--------- --------
Short-term debt, current maturity of long-term
debt, and capital lease obligation:
Viskase Capital Lease Obligation $ 64,106 $ 72,855
10.25% Senior Notes due 2001 163,060 163,060
Other 158 144
-------- --------
Total short-term debt $227,324 $236,059
======== ========
Long-term debt:
Other $115 $194
---- ----
Total long-term debt $115 $194
---- ----
10.25% Senior Notes
- -------------------
Cash flows from operations for the Company were insufficient to pay the
10.25% Senior Notes when they matured on December 1, 2001, and accordingly
the Company did not pay the $163,060 principal and $8,357 interest that
became due at that time. In September 2001, certain of the holders of the
Senior Notes formed an Ad Hoc Committee to participate in the development of
a plan to restructure the Company's capital structure and address its future
cash flow needs. On July 15, 2002, the Company executed a restructuring
agreement with the Ad Hoc Committee for the restructuring of the Senior
Notes. Under terms of the restructuring agreement, on or about August 21,
2002 the Company initiated an exchange offer to exchange the Senior Notes for
New Notes and shares of Preferred Stock. The proposed exchange offer was
subject to acceptance by holders of 100% of the outstanding Senior Notes,
unless waived by the Company and approved by the Ad Hoc Committee. The
exchange offer was conducted simultaneously with a solicitation for a Plan
for the Company which required the consent of a majority in number of the
holders and at least 66-2/3% in principal amount of Senior Notes actually
voting in the solicitation. Under the restructuring agreement, if less than
100% of the outstanding Senior Notes accepted the exchange offer, but a
sufficient number of holders and aggregate amount of Senior Notes voted in
favor of acceptance of the Plan, the Company agreed to commence a voluntary
Chapter 11 petition to seek confirmation of the Plan. The Plan contains
substantially the same economic terms as the exchange offer.
Although 100% of the outstanding Senior Notes did not accept the exchange
offer, the Company did receive the required consent of a majority in number
of the holders and at least 66-2/3% in principal amount of Senior Notes
actually voting in the solicitation. Accordingly, on November 13, 2002, the
Company filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy
Code in the Bankruptcy Court to seek confirmation of the Plan. Under Chapter
11, the Company may operate its business in the ordinary course, subject to
prior Bankruptcy Court approval of transactions outside the ordinary course
and certain other matters.
The Chapter 11 filing was for Viskase Companies, Inc. only. The Chapter 11
filing does not include any of the Company's domestic or foreign operating
subsidiaries. Therefore, the Company's operating subsidiaries will continue
to provide an uninterrupted supply of products and services to customers
worldwide. Trade creditors and vendors will be totally unaffected and will
continue to be paid in the ordinary course of business, and the operating
subsidiaries' employees will be paid all wages, salaries and benefits on a
timely basis.
The Company has asked the Bankruptcy Court for an expedited confirmation
hearing in order to allow the Company to emerge from bankruptcy as soon as
practicable. Although the Company expects to consummate the Plan already
approved by the required number of holders and principal amount outstanding
of the Senior Notes, it can provide no assurances that any restructuring will
be completed on the terms indicated in the Plan, or at all.
Under the terms of the Plan, the Company's wholly owned operating subsidiary,
Viskase, would be merged with and into the Company immediately prior to or
upon consummation of the Plan with the Company being the surviving
corporation. The outstanding Senior Notes would receive New Notes and shares
of New Common Stock to be issued by the Company on a basis of $367.96271
principal amount of New Notes (i.e., $60,000) and 3,170.612 shares of New
Common Stock (i.e., 517,000,000 shares or 94% of the New Common Stock) for
each one thousand dollar principal amount of Senior Notes. The existing
shares of common stock of the Company would be canceled. Holders of the old
common stock would receive warrants with a term of seven years to purchase
shares of New Common Stock equal to 2.7% of the Company's New Common Stock at
an exercise price of $0.20 per share. Assuming all warrants are exercised,
holders of the Senior Notes would receive approximately 91.5% of the New
Common Stock and approximately 5.8% would be issued or reserved for issuance
to the Company's management and employees.
The New Notes would bear interest at a rate of 8% per year, and will accrue
interest from December 1, 2001, payable semi-annually (except annually with
respect to year four and quarterly with respect to year five), with interest
payable in the form of New Notes (pay-in-kind) for the first three years.
Interest for years four and five will be payable in cash to the extent of
available cash flow, as defined, and the balance in the form of New Notes
(pay-in-kind). Thereafter, interest will be payable in cash. The New Notes
would mature on December 1, 2008.
The New Notes would be secured by a first lien on the assets of the Company,
other than the assets subject to the GECC lease and certain real estate,
post-merger. The New Notes would be subject to subordination of up to $25,000
for a secured working capital credit facility for the Company.
Under the proposed restructuring, 33,000,000 shares of New Common Stock (or
upon the request of Company management, options to purchase 33,000,000 shares
of New Common Stock), initially representing 6% of the New Common Stock, will
be reserved for Company management and employees. Such shares or options will
be subject to a vesting schedule with acceleration upon the occurrence of
certain events.
Upon completion of the proposed restructuring the Board of Directors of the
Company would be reconstituted to consist of five members, including the
Company's Chief Executive Officer and four other persons designated by the Ad
Hoc Committee.
The Ad Hoc Committee has retained legal counsel, the fees and expenses of
which are being paid by the Company.
The Ad Hoc Committee members, holding in the aggregate approximately 54% of
the Senior Notes, have agreed to and have voted in favor of the Plan. The
members of the Ad Hoc Committee have also agreed to take such other
reasonable actions as necessary to consummate the proposed restructuring. In
addition, the members of the Ad Hoc Committee have agreed not to transfer
(other than to another member of the Ad Hoc Committee or an affiliate of a
member) their shares of New Common Stock for a period of two years after the
restructuring is completed. For a period of one year thereafter, the Company
would have a right of first refusal to either purchase or designate a
purchaser for shares of New Common Stock to be transferred by a member of the
Ad Hoc Committee to a person other than another member of the Ad Hoc
Committee or their affiliates.
The Company's consolidated financial statements are presented on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Except for the
classification of certain debt as discussed in Note 4, the consolidated
financial statements do not include any adjustment relating to recoverability
and classification of recorded asset amounts or the amount and classification
of liabilities or any other adjustments that might be necessary should the
Company be unable to continue as a going concern. However, as a result of the
Chapter 11 filing and non-payment of debt when due, such realization of
assets and liquidation of liabilities of the Company are subject to
significant uncertainty. The Company's consolidated financial statements also
do not reflect adjustments to assets and liabilities which may occur as a
result of the filing of a plan of reorganization and application of AICPA
Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" (SOP 90-7). The principal financial
statement requirements of SOP 90-7 for entities in Chapter 11 bankruptcy
proceedings with the expectation of reorganizing are as follows:
- Balance sheet: Distinguish between pre-petition liabilities that are
and are not subject to compromise and post-petition liabilities.
- Statement of operations: Expenses and gains and losses resulting from
the reorganization are separately reported as "reorganization items",
except for discontinued operations and extraordinary items.
Following the approval of a plan of reorganization, SOP 90-7 may require that
the Company adopt "fresh start" accounting resulting in recording all assets
and liabilities at fair value. Upon emergence from bankruptcy, the Plan could
materially change the amounts and classifications reported in the
consolidated historical financial statements.
GECC
- ----
The GECC capital lease obligations were classified as current in the
financial statements due to covenant restrictions. The following lease
payment maturities conform to contractual payments under the lease:
February 28, 2003 $23,499
February 28, 2004 $23,499
February 28, 2005 $23,500
GECC, Viskase's equipment lessor, has agreed, subject to certain conditions,
not to accelerate payment of amounts due because of any default or event of
default under any of the lease documents arising from (i) the Company's
failure to meet the Fixed Charge Coverage Ratio for the fiscal quarters
ending on March 31, 2002, June 30, 2002 and September 30, 2002 and (ii) the
Company becoming a debtor under Chapter 11 of the Bankruptcy Code until
December 15, 2002. There is no agreement with GECC to extend the forbearance
beyond December 15, 2002, and the Company can make no assurance that any
extension would be received.
Letter of Credit Facility
- -------------------------
Letters of credit in the amount of $28,354 were outstanding under letter of
credit facilities with commercial banks, and were cash collateralized at
September 30, 2002.
The Company finances its working capital needs through a combination of
internally generated cash from operations and cash on hand.
The Company anticipates that it will enter into a new revolving credit
facility to meet its working capital and letter of credit requirements at or
prior to the Company's emergence from the Chapter 11 bankruptcy case.
5. CONTINGENCIES (dollars in thousands)
In 1988, Viskase Canada Inc. (Viskase Canada), a subsidiary of the Company,
commenced a lawsuit against Union Carbide Canada Limited and Union Carbide
Corporation in the Ontario Superior Court of Justice, Court File No.:
292270188 seeking damages resulting from Union Carbide's breach of
environmental representations and warranties under the Amended and Restated
Purchase and Sale Agreement, dated January 31, 1986 (Agreement). Pursuant to
the Agreement, Viskase Corporation and various affiliates (including Viskase
Canada) purchased from Union Carbide and Union Carbide Films Packaging, Inc.,
its cellulosic casings business and plastic barrier films business
(Business), which purchase included a facility in Lindsay, Ontario, Canada
(Site). Viskase Canada claimed that Union Carbide breached several
representations and warranties and deliberately failed to disclose to Viskase
Canada the existence of contamination on the Site. In 1992, Union Carbide and
Viskase Canada jointly put in place a continuous pumping program at the Site.
In October 2001, the Canadian Ministry of the Environment (MOE) notified
Viskase Canada that it had evidence to suggest that the Site was a source of
polychlorinated biphenyl (PCB) contamination. Viskase Canada is working with
the MOE in investigating the alleged PCB contamination and developing and
implementing, if appropriate, a remedial plan for the Site. Viskase Canada
has been granted leave to amend its lawsuit against Union Carbide to allege
that any PCB contamination at or around the Site was generated from Union
Carbide's plastics extrusion business, which was operated at the Site by
Union Carbide prior to the purchase of the Business. Union Carbide's plastics
extrusion business was not part of the Business purchased by Viskase
Corporation and its affiliates. Viskase Canada will be asking the court to
require Union Carbide to repurchase the Site from Viskase Canada and award
Viskase Canada damages in excess of $2,000 (Canadian dollars). The lawsuit is
still pending and is expected to proceed to trial sometime during the second
half of 2003.
In March 1997, Viskase received a subpoena from the Antitrust Division of the
United States Department of Justice (DOJ) relating to a grand jury
investigation of the sausage casings industry. In September 1999, Viskase
received a subpoena from the DOJ relating to the expansion of the grand jury
investigation into the specialty plastic films industry. During October 2002,
Viskase was advised by the DOJ that it has closed the investigation of the
sausage casings and specialty plastic films industries and that no action
will be taken.
During 1999 and 2000, the Company and certain of its subsidiaries and one
other sausage casings manufacturer were named in ten virtually identical
civil complaints filed in the United States District Court for the District
of New Jersey by the following plaintiffs: Smith Provision Co., Inc.; Parks
LLC (d/b/a Parks Sausage Company); Real Kosher Sausage Company, Inc.; Sahlen
Packing Co., Inc.; Marathon Enterprises, Inc.; Ventures East, Inc.;
Keniston's, Inc.; Smithfield Foods, Inc.; Clougherty Packing Co.; and Klement
Sausage Co. The District Circuit ordered all of these cases consolidated in
Civil Action No. 99-5195-MLC (D.N.J.). Each complaint brought on behalf of a
purported class of sausage casings customers alleges that the defendants
unlawfully conspired to fix prices and allocate business in the sausage
casings industry. The Company and its subsidiaries have filed answers to each
of these complaints denying liability. In 2001, all of the consolidated cases
were transferred to the United States District Court for the Northern
District of Illinois, Eastern Division. The Company strongly denies the
allegations set forth in these complaints and intends to vigorously defend
these claims.
The Company and its subsidiaries are involved in these and various other
legal proceedings arising out of their business and other environmental
matters, none of which is expected to have a material adverse effect upon
results of operations, cash flows or financial condition.
6. RESTRUCTURING (INCOME) CHARGE (dollars in millions)
During the second quarter of 2002, the Company committed to a restructuring
plan to address the industry's competitive environment. The plan resulted in
a before tax charge of $3.2 million. Approximately 2% of the Company's
worldwide workforce was laid off due to the 2002 restructuring plan. In
connection with the restructuring, the Company wrote off the remaining net
book value of the Nucel(r) equipment and the costs associated with the
decommissioning of this equipment.
The Company also reversed an excess reserve of $9.3 million for Nucel(r)
technology third party license fees that had been renegotiated during the
second quarter of 2002. The Nucel(r) technology license fees were originally
reflected in the 2000 Restructuring Reserve.
Restructuring
2002 Reserve as of
Charge Payments Writedown September 30, 2002
------ -------- --------- ------------------
Employee costs $1.4 $(.6) $.8
Nucel(r) equipment 1.0 $(1.0)
Decommissioning .8 (.5) .3
------ ------ ------ ----
Total restructuring charge $3.2 ($1.1) $(1.0) $1.1
====== ====== ====
Reversal of 2000 excess reserve (9.3)
------
Restructuring (income) $(6.1)
======
The following table provides details of the 2000 restructuring reserve for
the period ended September 30, 2002:
Restructuring Restructuring
Reserve as of Other Reserve as of
December 31, 2001 Payments Adjustments September 30, 2002
----------------- -------- ----------- ------------------
Employee costs $ 1.0 $(.7) $.1 $.4
Nucel(r) license fees 13.8 (1.7) (9.3) 2.8
Decommissioning .3 (.2) (.1)
----- ------ ------ ----
Total restructuring reserve $15.1 $(2.6) $(9.3) $3.2
===== ====== ====== ====
In the third quarter of 2002 and the year-to-date period, the Company paid
third party license fees of approximately $.6 million and $1.7 million,
respectively. The renegotiated Nucel(r) technology third party license fee
payments remaining are estimated at $.5 million, $.9 million, $.4 million,
$.3 million, $.2 million and $.5 million for the year periods 2002 to 2007
and are included in the 2000 restructuring reserve.
7. DISCONTINUED OPERATIONS (dollars in millions)
On January 17, 2000, the Company's Board of Directors announced its intent to
sell the Company's plastic barrier and non-barrier shrink Films Business. The
sale of the Films Business was completed on August 31, 2000. The aggregate
proceeds of $255 million, including a Working Capital Adjustment of $10.3
million, were used to retire senior secured debt, pay GECC per the amended
amortization schedule, and for general corporate purposes. The Company
recognized a net gain in the amount of $3.2 million in the September year-to-
date period of 2001 due to the finalization of a working capital adjustment.
8. EARNINGS PER SHARE (EPS)
Following are the reconciliations of the numerators and denominators of the
basic and diluted EPS.
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September September September September
30, 2002 30, 2001 30, 2002 30, 2001
------------ ------------ ----------- -----------
(in thousands, except for weighted average shares outstanding)
NUMERATOR:
Net (loss) available to common stockholders:
CONTINUING OPERATIONS: $(8,683) $(4,696) $(15,435) $(24,883)
DISCONTINUED OPERATIONS:
Gain on disposal, net of tax 3,189
-------- -------- --------- ---------
(LOSS) BEFORE EXTRAORDINARY ITEM $(8,683) $(4,696) $(15,435) $(21,694)
Extraordinary gain, net of tax 8,137
-------- -------- --------- ---------
Net (loss) available to common
stockholders for basic and
diluted EPS $(8,683) $(4,696) $(15,435) $(13,557)
======== ======== ========= =========
DENOMINATOR:
Weighted average shares
outstanding for basic EPS 15,316,053 15,317,346 15,316,504 15,306,836
Effect of dilutive securities
Weighted average shares
outstanding for diluted EPS 15,316,053 15,317,346 15,316,504 15,306,836
========== ========== ========== ==========
Common stock equivalents are excluded from the calculations because the
result would be antidilutive. Options to purchase common stock at strike
prices from $1.78 to $7.25 per share were not included in the computation of
diluted EPS for the periods presented because the options' exercise prices
were greater than the average market price of the common shares during the
first nine months of 2002. Options to purchase 844,430 shares of common
stock, which expire in 2005 through 2010, were outstanding at September 30,
2002. These options will be canceled under the proposed reorganization plan.
9. ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations." The statement applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. The provisions
of this statement are required to be applied for fiscal years beginning after
June 15, 2002. The Company is considering the Standard and its effect on the
Company's financial statements.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." The statement updates,
clarifies and simplifies existing accounting pronouncements. The provisions
of this statement related to rescission of Statement 4 shall be applied in
fiscal years beginning after May 15, 2002. The provisions in paragraphs 8 and
9(c) of the statement related to Statement 13 shall be effective for
transactions occurring after May 15, 2002. The Company is considering the
Standard and its effect on the Company's financial statements.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." The
statement requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. This statement replaces previous
accounting guidance provided by Emerging Issues Task Force (EITF) Issue No.
94-3. Statement 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The Company is considering the
Standard and its effect on the Company's financial statements.
10. SUBSEQUENT EVENTS (dollars in thousands)
On November 13, 2002, the Company filed a voluntary petition under Chapter 11
of the U.S. Bankruptcy Code in the Bankruptcy Court to seek confirmation of
the Plan. The terms of the Plan are consistent with the provisions of the
restructuring agreement entered into between the Company and the Ad Hoc
Committee. Under Chapter 11, the Company may operate its business in the
ordinary course, subject to prior Bankruptcy Court approval of transactions
outside the ordinary course and certain other matters.
Liabilities subject to comprise include Senior Notes outstanding in the
amount of $163,060 and Accrued Liabilities for related interest in the amount
of $22,999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
----------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Results of Operations
- ---------------------
The Company's net sales from operations for the first nine months and third
quarter of 2002 were $138.4 million and $48.7 million, respectively, which
represents a decrease of 3.3% and a slight increase from comparable periods
of 2001. The decline in nine month net sales reflects the continuing effect
of reduced selling prices in the casings industry on relatively constant
volume, offset by the strengthening Euro against the U.S. Dollar that
positively benefited net sales. Third quarter sales were comparable to the
prior year quarter due to an increase in fibrous volume and the effects of
the strengthening Euro against the U.S. Dollar offset by continuing price
pressure in the industry.
Operating income (loss) for the first nine months and third quarter of 2002
were $.7 million and $(2.9) million, respectively. The nine-month operating
income includes net restructuring income of $6.1 million recognized in the
second quarter of 2002. The restructuring income is the result of a reversal
of $9.3 million of excess reserves that were originally recorded in 2000 due
to the negotiation of reduced Nucel(r) technology third party license fees,
offset by a year 2002 restructuring charge of $3.2 million (see Note 6).
Additionally, the nine month operating income includes expense of $2.4
million for the fees associated with the Plan. The fees associated with the
Plan are included within selling, general and administrative on the
Consolidated Statements of Operations and Comprehensive Loss. Operating
income, excluding the net restructuring income of $6.1 million and the
$2.4 million of fees associated with the Plan for the first nine months,
was a loss of $(3.0) million. This (loss) compares favorably to the
operating loss from the comparable prior year period of $(4.6) million.
The improvement in the operating loss results primarily from operating
efficiencies from previous cost saving measures, reduced raw material and
energy costs. The third quarter operating loss is the result of $2.4 million
of expense for the fees associated with the Plan and higher costs
associated with employee benefit plans.
Net interest expense for the nine month period 2002 totaled $17.6 million
representing an increase of $.5 million from the comparable period of 2001.
The increase is primarily due to reduced interest income resulting from lower
investment balances and lower interest rates.
Other expense is approximately $.4 million and $3.8 million for the first
nine months of 2002 and 2001, respectively. The 2002 other expense consists
principally of Brazilian foreign exchange losses, offset by gains due to the
strengthening of the Euro against the Dollar, and during 2001, includes
foreign exchange losses and a write down of $1.6 million for land and
buildings to net realizable value.
The tax benefit for the first nine months of 2002 resulted primarily from the
benefit of an anticipated U.S. income tax refund resulting from the Job
Creation Act enacted in March 2002. An income tax benefit of $1.8 million was
provided on a pre-tax loss of $(17.3) million for the nine month period of
2002.
DISCONTINUED OPERATIONS
- -----------------------
On January 17, 2000, the Company's Board of Directors announced its intent to
sell the Company's plastic barrier and non-barrier shrink Films Business. The
sale of the Films Business was completed on August 31, 2000. The aggregate
proceeds of $255 million, including a Working Capital Adjustment of $10.3
million, were used to retire debt, including the Senior Secured Credit
Facility and Junior Term Loans, pay GECC per the amended amortization
schedule, and for general corporate purposes. The Company recognized a net
gain in the amount of $3.2 million in the second quarter of 2001 due to the
finalization of the working capital adjustment.
Liquidity and Capital Resources
- -------------------------------
Cash and equivalents decreased by $3.0 million during the nine month period
ended September 30, 2002. Cash flows used in investing activities of $3.4
million and cash flows used in financing activities of $8.8 million exceeded
cash flows provided by operating activities of $10.4 million. Cash flows
provided by operating activities were principally attributable to the effect
of depreciation, amortization, fees associated with the Plan and a decrease
in operating assets and liabilities offset by the Company's loss from
operations. Cash flows used in investing activities were principally
attributable to an increase in restricted cash and capital expenditures
for property, plant and equipment. Cash flows used in financing activities
principally consisted of the payment of the scheduled GECC Capital Lease
obligation.
Cash flows from operations for the Company were insufficient to pay the
10.25% Senior Notes when they matured on December 1, 2001, and accordingly
the Company did not pay the $163.1 million principal and $8.4 million
interest that became due at that time. In September 2001, certain of the
holders of the Senior Notes formed an Ad Hoc Committee to participate in the
development of a plan to restructure the Company's capital structure and
address its future cash flow needs. On July 15, 2002, the Company executed a
restructuring agreement with the Ad Hoc Committee for the restructuring of
the Senior Notes. Under terms of the restructuring agreement, on or about
August 21, 2002 the Company initiated an exchange offer to exchange the
Senior Notes for New Notes and shares of Preferred Stock. The proposed
exchange offer was subject to acceptance by holders of 100% of the
outstanding Senior Notes, unless waived by the Company and approved by the Ad
Hoc Committee. The exchange offer was conducted simultaneously with a
solicitation for a Plan for the Company which required the consent of a
majority in number of the holders and at least 66-2/3% in principal amount of
Senior Notes actually voting in the solicitation. Under the restructuring
agreement, if less than 100% of the outstanding Senior Notes accepted the
exchange offer, but a sufficient number of holders and aggregate amount of
Senior Notes voted in favor of acceptance of the Plan, the Company agreed to
commence a voluntary Chapter 11 petition to seek confirmation of the Plan.
The Plan contains substantially the same economic terms as the exchange
offer.
Although 100% of the outstanding Senior Notes did not accept the exchange
offer, the Company did receive the required consent of a majority in number
of the holders and at least 66-2/3% in principal amount of Senior Notes
actually voting in the solicitation. Accordingly, on November 13, 2002, the
Company filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy
Code in the Bankruptcy Court to seek confirmation of the Plan. Under Chapter
11, the Company may operate its business in the ordinary course, subject to
prior Bankruptcy Court approval of transactions outside the ordinary course
and certain other matters.
The Chapter 11 filing was for Viskase Companies, Inc. only. The Chapter 11
filing does not include any of the Company's domestic or foreign operating
subsidiaries. Therefore, the Company's operating subsidiaries will continue
to provide an uninterrupted supply of products and services to customers
worldwide. Trade creditors and vendors will be totally unaffected and will
continue to be paid in the ordinary course of business, and the operating
subsidiaries' employees will be paid all wages, salaries and benefits on a
timely basis.
The Company has asked the Bankruptcy Court for an expedited confirmation
hearing in order to allow the Company to emerge from bankruptcy as soon as
practicable. Although the Company expects to consummate the Plan already
approved by the required number of holders and principal amount outstanding
of the Senior Notes, it can provide no assurances that any restructuring will
be completed on the terms indicated in the Plan, or at all.
Under the terms of the Plan, the Company's wholly owned operating subsidiary,
Viskase, would be merged with and into the Company immediately prior to or
upon consummation of the Plan with the Company being the surviving
corporation. The outstanding Senior Notes would receive New Notes and shares
of New Common Stock to be issued by the Company on a basis of $367.96271
principal amount of New Notes (i.e., $60 million) and 3,170.612 shares of New
Common Stock (i.e., 517 million shares or 94% of the New Common Stock) for
each one thousand dollar principal amount of Senior Notes. The existing
shares of common stock of the Company would be canceled. Holders of the old
common stock would receive warrants with a term of seven years to purchase
shares of New Common Stock equal to 2.7% of the Company's New Common Stock at
an exercise price of $0.20 per share. Assuming all warrants are exercised,
holders of the Senior Notes would receive approximately 91.5% of the New
Common Stock and approximately 5.8% would be issued or reserved for issuance
to the Company's management and employees.
The New Notes would bear interest at a rate of 8% per year, and will accrue
interest from December 1, 2001, payable semi-annually (except annually with
respect to year four and quarterly with respect to year five), with interest
payable in the form of New Notes (pay-in-kind) for the first three years.
Interest for years four and five will be payable in cash to the extent of
available cash flow, as defined, and the balance in the form of New Notes
(pay-in-kind). Thereafter, interest will be payable in cash. The New Notes
would mature on December 1, 2008.
The New Notes would be secured by a first lien on the assets of the Company,
other than the assets subject to the GECC lease and certain real estate,
post-merger. The New Notes would be subject to subordination of up to $25
million for a secured working capital credit facility for the Company.
Under the proposed restructuring, 33 million shares of New Common Stock (or
upon the request of Company management, options to purchase 33 million shares
of New Common Stock), initially representing 6% of the New Common Stock, will
be reserved for Company management and employees. Such shares or options will
be subject to a vesting schedule with acceleration upon the occurrence of
certain events.
Upon completion of the proposed restructuring the Board of Directors of the
Company would be reconstituted to consist of five members, including the
Company's Chief Executive Officer and four other persons designated by the Ad
Hoc Committee.
The Ad Hoc Committee has retained legal counsel, the fees and expenses of
which are being paid by the Company.
The Ad Hoc Committee members, holding in the aggregate approximately 54% of
the Senior Notes, have agreed to and have voted in favor of the Plan. The
members of the Ad Hoc Committee have also agreed to take such other
reasonable actions as necessary to consummate the proposed restructuring. In
addition, the members of the Ad Hoc Committee have agreed not to transfer
(other than to another member of the Ad Hoc Committee or an affiliate of a
member) their shares of New Common Stock for a period of two years after the
restructuring is completed. For a period of one year thereafter, the Company
would have a right of first refusal to either purchase or designate a
purchaser for shares of New Common Stock to be transferred by a member of the
Ad Hoc Committee to a person other than another member of the Ad Hoc
Committee or their affiliates.
The Company's consolidated financial statements are presented on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Except for the
classification of certain debt as discussed in Note 4, the consolidated
financial statements do not include any adjustment relating to recoverability
and classification of recorded asset amounts or the amount and classification
of liabilities or any other adjustments that might be necessary should the
Company be unable to continue as a going concern. However, as a result of the
Chapter 11 filing and non-payment of debt when due, such realization of
assets and liquidation of liabilities of the Company are subject to
significant uncertainty. The Company's consolidated financial statements also
do not reflect adjustments to assets and liabilities which may occur as a
result of the filing of a plan of reorganization and application of AICPA
Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" (SOP 90-7). The principal financial
statement requirements of SOP 90-7 for entities in Chapter 11 bankruptcy
proceedings with the expectation of reorganizing are as follows:
- Balance sheet: Distinguish between pre-petition liabilities that are
and are not subject to compromise and post-petition liabilities.
- Statement of operations: Expenses and gains and losses resulting from
the reorganization are separately reported as "reorganization items",
except for discontinued operations and extraordinary items.
Following the approval of a plan of reorganization, SOP 90-7 may require that
the Company adopt "fresh start" accounting resulting in recording all assets
and liabilities at fair value. Upon emergence from bankruptcy, the Plan could
materially change the amounts and classifications reported in the
consolidated historical financial statements.
Letters of credit in the amount of $28.4 million were outstanding under
letter of credit facilities with commercial banks, and were cash
collateralized at September 30, 2002.
The Company finances its working capital needs through a combination of
internally generated cash from operations and cash on hand.
The Company anticipates that it will enter into a new revolving credit
facility to meet its working capital and letter of credit requirements at or
prior to the Company's emergence from the Chapter 11 bankruptcy case.
The GECC capital lease obligations were classified as current in the
financial statements due to covenant restrictions. The following lease
payment maturities conform to contractual payments under the lease.
February 28, 2003 $23.5 million
February 28, 2004 $23.5 million
February 28, 2005 $23.5 million
GECC, Viskase's equipment lessor, has agreed, subject to certain conditions,
not to accelerate payment of amounts due because of any default or event of
default under any of the lease documents arising from (i) the Company's
failure to meet the Fixed Charge Coverage Ratio for the fiscal quarters
ending on March 31, 2002, June 30, 2002 and September 30, 2002 and (ii) the
Company becoming a debtor under Chapter 11 of the Bankruptcy Code until
December 15, 2002. There is no agreement with GECC to extend the forbearance
beyond December 15, 2002, and the Company can make no assurance that any
extension would be received.
Capital expenditures for the first nine months of 2002 and 2001 totaled $1.4
million and $3.8 million, respectively. Significant capital expenditures
during 2002 and 2001 included costs associated with the Viskase Food Science
Quality Institute (FSQI) and the Visflex(tm) plastic casing line,
respectively. Capital expenditures for 2002 are expected to be approximately
$4 million.
In 2001, the Company spent approximately $5 million on research and
development programs, including product and process development, and on new
technology development. Prior to 2001, the Company was spending approximately
$8 million on research and development programs. The decrease is due to the
sale of the Films Business. The 2002 research and development and product
introduction expenses are expected to be in the $4 million range. The current
research and development efforts are directed toward the application of
certain patents and process technology to improve the manufacture of
cellulosic casings.
Contingencies
- -------------
In 1988, Viskase Canada Inc. (Viskase Canada), a subsidiary of the Company,
commenced a lawsuit against Union Carbide Canada Limited and Union Carbide
Corporation in the Ontario Superior Court of Justice, Court File No.:
292270188 seeking damages resulting from Union Carbide's breach of
environmental representations and warranties under the Amended and Restated
Purchase and Sale Agreement, dated January 31, 1986 (Agreement). Pursuant to
the Agreement, Viskase Corporation and various affiliates (including Viskase
Canada) purchased from Union Carbide and Union Carbide Films Packaging, Inc.,
its cellulosic casings business and plastic barrier films business
(Business), which purchase included a facility in Lindsay, Ontario, Canada
(Site). Viskase Canada claimed that Union Carbide breached several
representations and warranties and deliberately failed to disclose to Viskase
Canada the existence of contamination on the Site. In 1992, Union Carbide and
Viskase Canada jointly put in place a continuous pumping program at the Site.
In October 2001, the Canadian Ministry of the Environment (MOE) notified
Viskase Canada that it had evidence to suggest that the Site was a source of
polychlorinated biphenyl (PCB) contamination. Viskase Canada is working with
the MOE in investigating the alleged PCB contamination and developing and
implementing, if appropriate, a remedial plan for the Site. Viskase Canada
has been granted leave to amend its lawsuit against Union Carbide to allege
that any PCB contamination at or around the Site was generated from Union
Carbide's plastics extrusion business, which was operated at the Site by
Union Carbide prior to the purchase of the Business. Union Carbide's plastics
extrusion business was not part of the Business purchased by Viskase
Corporation and its affiliates. Viskase Canada will be asking the court to
require Union Carbide to repurchase the Site from Viskase Canada and award
Viskase Canada damages in excess of $2.0 million (Canadian dollars). The
lawsuit is still pending and is expected to proceed to trial sometime during
the second half of 2003.
In March 1997, Viskase received a subpoena from the Antitrust Division of the
United States Department of Justice (DOJ) relating to a grand jury
investigation of the sausage casings industry. In September 1999, Viskase
received a subpoena from the DOJ relating to the expansion of the grand jury
investigation into the specialty plastic films industry. During October 2002,
Viskase was advised by the DOJ that it has closed the investigation of the
sausage casings and specialty plastic films industries and that no action
will be taken.
During 1999 and 2000, the Company and certain of its subsidiaries and one
other sausage casings manufacturer were named in ten virtually identical
civil complaints filed in the United States District Court for the District
of New Jersey by the following plaintiffs: Smith Provision Co., Inc.; Parks
LLC (d/b/a Parks Sausage Company); Real Kosher Sausage Company, Inc.; Sahlen
Packing Co., Inc.; Marathon Enterprises, Inc.; Ventures East, Inc.;
Keniston's, Inc.; Smithfield Foods, Inc.; Clougherty Packing Co.; and Klement
Sausage Co. The District Circuit ordered all of these cases consolidated in
Civil Action No. 99-5195-MLC (D.N.J.). Each complaint brought on behalf of a
purported class of sausage casings customers alleges that the defendants
unlawfully conspired to fix prices and allocate business in the sausage
casings industry. The Company and its subsidiaries have filed answers to each
of these complaints denying liability. In 2001, all of the consolidated cases
were transferred to the United States District Court for the Northern
District of Illinois, Eastern Division. The Company strongly denies the
allegations set forth in these complaints and intends to vigorously defend
these claims.
The Company and its subsidiaries are involved in these and various other
legal proceedings arising out of their business and other environmental
matters, none of which is expected to have a material adverse effect upon
results of operations, cash flows or financial condition.
Other
- -----
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations." The statement applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees.
The provisions of this statement are required to be applied for fiscal years
beginning after June 15, 2002. The Company is considering the Standard and
its effect on the Company's financial statements.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." The statement updates,
clarifies and simplifies existing accounting pronouncements. The provisions
of this statement related to rescission of Statement 4 shall be applied in
fiscal years beginning after May 15, 2002. The provisions in paragraphs 8 and
9(c) of the statement related to Statement 13 shall be effective for
transactions occurring after May 15, 2002. The Company is considering the
Standard and its effect on the Company's financial statements.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." The
statement requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. This statement replaces previous
accounting guidance provided by EITF Issue No. 94-3. Statement 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. The Company is considering the Standard and its effects on the
Company's financial statements.
Forward-looking Statements
- --------------------------
Forward-looking statements in this report are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements are not guarantees of future performance and
are subject to risks and uncertainties that could cause actual results and
Company plans and objectives to differ materially from those projected. Such
risks and uncertainties include, but are not limited to, general business and
economic conditions; the Company's ability to effectuate a restructuring of
the Senior Notes in accordance with the Plan; other effects of the
restructuring on the Company; competitive pricing pressures for the Company's
products; changes in other costs; opportunities that may be presented to and
pursued by the Company; determinations by regulatory and governmental
authorities; fluctuations in currency exchange rates; and the ability to
achieve synergistic and other cost reductions and efficiencies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company is exposed to certain market risks related to foreign currency
exchange rates. In order to manage the risk associated with this exposure to
such fluctuations, the Company occasionally uses derivative financial
instruments. The Company does not enter into derivatives for trading
purposes.
The Company also prepared sensitivity analyses to determine the impact of a
hypothetical 10% devaluation of the U.S. dollar relative to the European
receivables and payables denominated in U.S. dollars. Based on its
sensitivity analyses at September 30, 2002, a 10% devaluation of the U.S.
dollar would affect the Company's annual consolidated operating results,
financial position and cash flows by a minimal amount.
ITEM 4. CONTROLS AND PROCEDURES
-----------------------
CEO and CFO Certifications
- --------------------------
This quarterly report contains two separate forms of certifications of the
Chief Executive Officer (CEO) and Chief Financial Officer (CFO). The first
form of certification, appearing immediately following the Signatures section
of this quarterly report is required by SEC rules promulgated pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (302 Certifications). In the
302 Certifications, there are several certifications made by the CEO and CFO
relating to the Company's disclosure controls and procedures and internal
controls. This section of this quarterly report should be read in conjunction
with the 302 Certifications relating to the Company's disclosure controls and
procedures and the Company's internal controls.
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
Within 90 days prior to the filing of this quarterly report (Evaluation
Date), the Company's management, under the supervision and with the
participation of the CEO and the CFO, evaluated the effectiveness of the
design and operation of the Company's disclosure controls and procedures.
Disclosure controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in the Company's reports
filed under the Exchange Act, such as this quarterly report, is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. Disclosure controls are also designed with the
objective of ensuring that such information is accumulated and communicated
to the Company's management, including the CEO and CFO, as appropriate to
allow timely decisions regarding required disclosure.
Based upon the evaluation by the CEO and CFO, the Company's disclosure
controls and procedures are effective in ensuring that all material
information required to be filed in this quarterly report has been made known
to them in a timely fashion.
Evaluation of Internal Controls
- -------------------------------
The Company's management also evaluated the effectiveness of the Company's
internal controls. Internal controls are procedures which are designed with
the objective of providing reasonable assurance that (1) the Company's
transactions are properly authorized; (2) the Company's assets are
safeguarded against unauthorized or improper use; and (3) the Company's
transactions are properly recorded and reported, all to permit the
preparation of our financial statements in conformity with generally accepted
accounting principles.
In accord with SEC requirements, the CEO and CFO note that, since the
Evaluation Date, there have been no significant changes in the Company's
internal controls or in other factors that could significantly affect
internal controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Limitations on the Effectiveness of Controls
- --------------------------------------------
A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. The design of a control system will be subject to various
limitations, such as resource constraints, expertise of personnel and cost-
benefit constraints. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls
also is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Because of
the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
-----------------
For a description of pending litigation and other contingencies, see Part 1,
Note 5, Contingencies in Notes to Consolidated Financial Statements for
Viskase Companies, Inc. and Subsidiaries.
Item 2 - Changes in Securities
---------------------
No reportable events occurred during the quarter ended September 30, 2002.
Item 3 - Defaults Upon Senior Securities
-------------------------------
The Company did not pay the $163.1 million principal and $8.4 million
interest on the 10.25% Senior Notes that became due on December 1, 2001. On
the date of this quarterly report, the total arrearage under the 10.25%
Senior Notes was approximately $186.1 million.
Item 4 - Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5 - Other Information
-----------------
None.
Item 6 - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
10.37 Restructuring Agreement, dated as of July 15, 2002 by and among High
River Limited Partnership, Debt Strategies Fund, Inc., and Northeast
Investors Trust and Viskase Companies, Inc. (incorporated herein by reference
to Exhibit 99.1 to Form 8-K filed August 21, 2002.)
99.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C.
Section 1350
99.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C.
Section 1350
(b) Reports on Form 8-K
Form 8-K dated July 16, 2002 to report the execution of a restructuring
agreement with an Ad Hoc Committee of the Company's 10.25% Senior Notes of
December 1, 2001 for the restructuring of the 10.25% Senior Notes.
Form 8-K dated August 21, 2002 to report the commencement of an exchange
offer with respect to the issued and outstanding 10.25% Senior Notes due 2001
of the Company and a solicitation of acceptances of a prepackaged plan of
reorganization.
Form 8-K dated September 23, 2002 to report that Viskase Companies, Inc.
extended the expiration of its exchange offer relating to its 10.25% Senior
Notes until 5:00 p.m. on October 18, 2002.
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 thereunto duly authorized.
VISKASE COMPANIES, INC.
By: /s/ Gordon S. Donovan
----------------------
Gordon S. Donovan
Vice President, Chief Financial Officer and Treasurer
Date: November 14, 2002
CERTIFICATIONS
I, F. Edward Gustafson, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Viskase Companies,
Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002
/s/ F. Edward Gustafson
------------------------
F. Edward Gustafson
Chairman, Chief Executive Officer and President
I, Gordon S. Donovan, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Viskase Companies,
Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002
/s/ Gordon S. Donovan
----------------------
Gordon S. Donovan
Vice President, Chief Financial Officer and Treasurer