SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Willowbrook Centre Parkway, Willowbrook, IL 60527
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (630) 789-4900
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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
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Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b2 of the Act). Yes No X
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. Yes No X
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As of March 21, 2003 the aggregate market value of the voting stock held
by non-affiliates of the registrant was $53,682.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has
filed all documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the distribution
of securities under a plan confirmed by a court. Yes X No
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As of March 31, 2003, there were 15,314,562 shares outstanding of the
registrant's Common Stock, $.01 par value.
Page 1 of 139 Pages
An Index to Exhibits required by Item 15 is found at page 35.
VISKASE COMPANIES, INC.
Form 10-K Annual Report - 2002
Table of Contents
PART I Page
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of
Financial Condition, Results of Operations 15
Item 7a. Quantitative and Qualitative Disclosures
about Market Risk 23
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 24
PART III
Item 10. Directors and Executive Officers of the Registrant 25
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners
and Management 32
Item 13. Certain Relationships and Related Transactions 33
Item 14. Controls and Procedures 33
PART IV
Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 35
PART I
ITEM 1. BUSINESS
(a) General development of business: (in thousands, except number of
shares and per share and per bond amounts)
General
Viskase Companies, Inc. (formerly Envirodyne Industries, Inc.) is a Delaware
corporation organized in 1970. As used herein, the "Company" means Viskase
Companies, Inc. and its subsidiaries. The Company, through Viskase
Corporation (Viskase), operates in the casing product segment of the food
industry. Viskase is a major producer of cellulosic and plastic casings used
in preparing and packaging processed meat products. The market positions of
the Company's subsidiaries set forth in this Form 10-K represent management's
belief based upon internally generated information. No independent marketing
information has been used to confirm the stated market positions.
In recent years, the Company has sold certain of its operations in order to
reduce indebtedness and increase its operational focus. As a result of these
efforts, the Company sold its wholly owned subsidiary Sandusky Plastics, Inc.
(Sandusky) in June 1998, its wholly owned subsidiary Clear Shield National,
Inc. (Clear Shield) in July 1998 and its plastic barrier and non-barrier
shrink film business (Films Business) in August 2000. These divestitures have
left the cellulosic and plastics casings business as the Company's primary
operating activity. In addition, since 1998 the Company has implemented a
number of restructuring measures to reduce the fixed cost structure of its
remaining business and to address competitive price pressures and increases
in various production costs in the Company's business.
For more information about us, our products, services and solutions, visit
www.viskase.com. Also, our annual reports on Form 10-K, quarterly reports on
Form 10-Q and current reports on Form 8-K will be made available free of
charge through the Investor Relations section of our website as soon as
practicable after such material is electronically filed with, or furnished
to, the Securities and Exchange Commission.
Bankruptcy and Plan of Reorganization
On November 13, 2002, Viskase Companies, Inc. (VCI) filed a prepackaged
Chapter 11 bankruptcy in the United States Bankruptcy Court for the Northern
District of Illinois, Eastern Division (Bankruptcy Court). The Chapter 11
filing is for VCI only and does not include any of the Company's domestic or
foreign subsidiaries. On December 20, 2002 the Bankruptcy Court confirmed
VCI's Prepackaged Plan of Reorganization as Modified (The Plan, as modified).
VCI expects to consummate The Plan, as modified, and emerge from Chapter 11
bankruptcy in early April, 2003 (Effective Date).
Cash flows from operations for the 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 Subordinated Secured
Notes due 2008 (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 votes to accept the Plan from approximately
91.4% of the holders and 91.4% in the outstanding principal amount that
actually voted. Accordingly, on November 13, 2002, VCI 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 VCI only. The Chapter 11 filing does not
include any of the Company's domestic or foreign operating subsidiaries.
Therefore, the Company's operating subsidiaries continued to provide an
uninterrupted supply of products and services to customers worldwide. Trade
creditors and vendors have been totally unaffected and continue to be paid in
the ordinary course of business, and the operating subsidiaries' employees
have been paid all wages, salaries and benefits on a timely basis.
Under the terms of the Plan, the Company's wholly owned operating subsidiary,
Viskase, will be merged with and into VCI immediately prior to or upon
consummation of the Plan with VCI being the surviving corporation. The
outstanding Senior Notes will 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 63.4122 shares of New
Common Stock (i.e., 10,340,000 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 will be canceled. Holders of the old
common stock (Old Shares) will 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 $10.00 per share (Warrant). 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.
Under the proposed restructuring, 660,000 shares of New Common Stock (or upon
the request of Company management, options to purchase 660,000 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.
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 with an accreted value of approximately
$89,453, assuming interest in the first 5 years is paid in the form of New
Notes (paid-in-kind).
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 principal amount for a secured
working capital credit facility for the Company.
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 were
paid by the Company until the commencement of the Bankruptcy.
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.
Under Chapter 11, certain claims against VCI (the Debtor) in existence prior
to the Petition Date (November 13, 2002) were stayed while the Company
continued business operations as a debtor-in-possession. These claims are
reflected in the December 31, 2002 balance sheet as "Current liabilities
subject to compromise." As of the Petition Date, the Company stopped accruing
interest on the 10.25% Senior Notes. The interest not accrued from the
Petition Date through December 31, 2002 is $2,294.
The principal categories of claims reclassified in the Consolidated Balance
Sheets and included in Current liabilities subject to compromise are
identified below. These amounts may be subject to future adjustments
depending on Bankruptcy Court actions, further developments with respect to
disputed claims, the existence and value of any collateral securing such
claims and other events. At the Petition Date the amounts reflected below are
for the Senior Notes and accrued interest through the Petition Date.
Current liabilities subject to compromise as of the Petition Date are as
follows (refer to Note 1 to the consolidated financial statements):
(in thousands)
10.25% Senior Notes $163,060
Accrued interest 25,098
Other current liabilities 40
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$188,198
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The accompanying consolidated financial statements have been prepared in
accordance with the American Institute of Certified Public Accounts Statement
of Position 90-7: Financial Reporting by Entities in Reorganization under the
Bankruptcy Code and have been prepared in accordance with generally accepted
accounting principles applicable to a going concern, which contemplates
continuity of operations and assumes the realization of assets and
liquidation of liabilities in the ordinary course of business.
Following the approval of a plan of reorganization, SOP 90-7 requires that
the Company adopt "Fresh Start" accounting resulting in recording all assets
and liabilities at fair value. Upon emergence from bankruptcy, the amounts
and classifications reported in the consolidated historical financial
statements could materially change.
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, September 30, 2002 and December 31,
2002 and (ii) the Company becoming a debtor under Chapter 11 of the
Bankruptcy Code until April 21, 2003. There is no agreement with GECC to
extend the forbearance beyond April 21, 2003. However, the Company and GECC
have agreed to amend certain lease documents upon the emergence from
bankruptcy. The amendment will permanently waive prior non-compliance with
the Fixed Charge Coverage Ratio and establish a new Fixed Charge Coverage
Ratio for the remainder of the lease term. The amendment also changes the
February 28, 2004 lease payment with $11,750 due on February 28, 2004 and
$11,749 due on August 28, 2004.
(b) Financial information about industry segments:
Reference is made to Part IV, Item 15, Note 24 of Notes to Consolidated
Financial Statements.
(c) Description of business
General
Viskase invented the basic process for producing casings from regenerated
cellulose for commercial production in 1925. Management believes that Viskase
has been a leading worldwide producer of cellulosic casings since that time.
Cellulosic Casings
Cellulosic casings are used in the production of processed meat and poultry
products, such as hot dogs, salami and bologna. To manufacture these
products, meat is stuffed into a casing, which is then cooked and smoked. The
casings, which are non-edible, serve to hold the shape of the product during
these processes. For certain products, such as hot dogs, the casings are
removed and discarded prior to retail sale. Casings made of regenerated
cellulose were developed by Viskase to replace casings made of animal
intestines. Cellulosic casings generally afford greater uniformity, lower
cost and greater reliability of supply and also provide producers with the
ability to cook and smoke products in the casing. Cellulosic casings are
required for the high-speed production of many processed meats.
The production of regenerated cellulose casings generally involves four
principal steps: (i) production of a viscose slurry from wood pulp, (ii)
regeneration of cellulosic fibers, (iii) extrusion of a continuous tube
during the regeneration process, and (iv) "shirring" of the final product.
Shirring is a finishing process that involves pleating and compressing the
casing in tubular form for subsequent use in high-speed stuffing machines.
The production of regenerated cellulose casings involves a complex and
continuous series of chemical and manufacturing processes, and Viskase
believes that its facilities and expertise in the manufacture of extruded
cellulose are important factors in maintaining its product quality and
operating efficiencies.
Viskase's product line includes NOJAX(r) cellulosic casings for small-
diameter processed meat products, such as hot dogs, Precision(r) and
Zephyr(r) for large diameter processed meats and ham products, fibrous or
large-diameter casings, which are paper-reinforced cellulosic casings used in
the production of large-diameter sausages, salami, hams and other processed
meat products, and Visflex(tm) and Vismax(tm) plastic casing used for a wide
range of processed meat, poultry and cheese applications.
International Operations
Viskase has four manufacturing and/or finishing facilities located outside
the continental United States, in Beauvais, France; Thaon, France; Guarulhos,
Brazil and Caronno, Italy.
The aggregate of domestic exports and net sales of foreign operations
represents approximately 56.0% of Viskase's total net sales.
International sales and operations may be subject to various risks including,
but not limited to, possible unfavorable exchange rate fluctuations,
political instability, governmental regulations (including import and export
controls), restrictions on currency repatriation, embargoes, labor relations
laws and the possibility of governmental expropriation. Viskase's foreign
operations generally are subject to taxes on the repatriation of funds.
International operations in certain parts of the world may be subject to
international balance of payments difficulties that may raise the possibility
of delay or loss in the collection of accounts receivable from sales to
customers in those countries. Viskase believes its allowance for doubtful
accounts makes adequate provision for the collectibility of receivables.
Management believes that growth potential exists for many of Viskase's
products outside the United States and that Viskase is well positioned to
participate in these markets. While overall consumption of processed meat
products in North America and Western Europe is stable, there is a potential
for market growth in Eastern Europe, Latin America and Southeast Asia.
Sales and Distribution
Viskase has a broad base of customers, with no single customer accounting for
more than 6% of sales. Viskase sells its products in virtually every country
in the world. In the United States, Viskase has a staff of technical sales
teams responsible for sales to processed meat and poultry producers.
Approximately 77 distributors market Viskase products to customers in Europe,
Africa, the Middle East, Asia, and Latin America. Its products are marketed
through its own subsidiaries in France, Germany, Italy, Poland and Brazil. As
of December 31, 2002 and 2001, Viskase had backlog orders of approximately
$18.3 million and $20.0 million, respectively.
Viskase maintains ten service and distribution centers worldwide. The service
centers perform limited product finishing and provide sales, customer
service, warehousing and distribution. Distribution centers provide only
warehousing and distribution.
In North America, Viskase operates distribution centers in Atlanta, Georgia;
Buffalo, New York; Fresno, California; Remington, Indiana; Saskatoon,
Saskatchewan, Canada and Lindsay, Ontario, Canada. Viskase operates a service
center in Guarulhos, Brazil, and in Europe, Viskase operates a service center
in Caronno, Italy and distribution centers in Dormagen, Germany and Warsaw,
Poland.
Competition
Viskase is one of the world's leading producers of cellulosic casings.
Viskase seeks to maintain a competitive advantage by manufacturing products
having outstanding quality and superior performance characteristics over
competitive products, by responding quickly to customer product requirements,
by providing technical support services to its customers for production and
formulation opportunities and by producing niche products to fill individual
customer requirements. During the previous five years, Viskase has
experienced reduced profits due to over-capacity in the industry and intense
price competition.
Viskase's principal competitors in cellulosic casings are Teepak LLC, located
in the United States with plants in the United States and Belgium; Viscofan,
S.A., located in Spain, Germany, Brazil, Czech Republic and the United
States; Kalle Nalo GmbH, located in Germany; Case Tech, a wholly owned
subsidiary of Bayer AG, located in Germany; Oy Visko AB located in Finland;
KoSa, located in Mexico and the United States and two Japanese manufacturers,
Futamura Chemical marketed by Meatlonn, and Toho.
Viskase's primary competitors include several major corporations that are
larger and better capitalized than Viskase.
Research and Development; Customer Support
Viskase's continuing emphasis on research and development is central to its
ability to maintain industry leadership. In particular, Viskase focuses on
the development of new products that increase customers' operating
efficiencies, reduce their operating costs and expand their markets.
Viskase's projects include development of new processes and products to
improve its manufacturing efficiencies. Viskase's research scientists,
engineers and technicians are engaged in continuing product and equipment
development and also provide direct technical and educational support to its
customers.
Viskase believes it has achieved and maintained its position as a leading
producer of cellulosic casings for packaging meats through significant
expenditures on research and development. The Company expects to continue its
research and development efforts. The commercialization of certain of these
product and process applications and related capital expenditures to achieve
commercialization may require substantial financial commitments in future
periods. Research and development costs from continuing operations are
expensed as incurred and totaled $4,070 thousand, $4,837 thousand, and $5,474
thousand for 2002, 2001, and 2000, respectively.
Seasonality
Historically, domestic sales and profits of Viskase have been seasonal in
nature, increasing in the spring and summer months. Sales outside of the
United States follow a relatively stable pattern throughout the year.
Raw Materials
Raw materials used by Viskase include cellulose (from wood pulp), specialty
fibrous paper, and various other chemicals. Viskase generally purchases its
raw materials from a single source or small number of suppliers with whom it
maintains good relations. Certain primary and alternative sources of supply
are located outside the United States. Viskase believes, but there can be no
assurance, that adequate alternative sources of supply currently exist for
all of Viskase's raw materials or that raw material substitutes are
available, which Viskase could modify its processes to utilize.
Employees
The Company maintains productive and amicable relationships with its
approximately 1,380 employees worldwide. One of Viskase's domestic plants,
located in Loudon, Tennessee, is unionized, and all of its European and
Brazilian plants have National Agreements with annual renewals. Employees at
the Company's European plants have negotiations occurring at both local and
national levels. Based on past experience and current conditions, the Company
does not expect protracted work stoppages to occur stemming from union
activities; however, national events outside of the Company's control may
give rise to such risk. Unions represent approximately 575 of Viskase's 1,380
employees.
Trademarks and Patents
Viskase holds patents on many of its major technologies, including those used
in its manufacturing processes and the technology embodied in products sold
to its customers. The Company believes its ongoing market leadership benefits
from its technology. Viskase vigorously protects and defends its patents
against infringement by competitors on an international basis. As part of its
research and development program, Viskase has developed and expects to
continue to develop new proprietary technology and has licensed proprietary
technology from third parties. Management believes these activities will
enable Viskase to maintain its competitive position. Viskase also owns
numerous trademarks and registered trade names that are used actively in
marketing its products. Viskase periodically licenses its process and product
patents to competitors on a royalty basis.
Environmental Regulations
In manufacturing its products, the Company employs certain hazardous
chemicals and generates toxic and hazardous wastes. The use of these
chemicals and the disposal of such waste are subject to stringent regulation
by several governmental entities, including the United States Environmental
Protection Agency (USEPA) and similar state, local and foreign environmental
control entities. The Company is subject to various environmental, health and
safety laws, rules and regulations including those of the United States
Occupational Safety and Health Administration and USEPA. These laws, rules
and regulations are subject to amendment and to future changes in public
policy or interpretation, which may affect the operations of the Company. The
Company uses its best reasonable efforts to comply with promulgated laws,
rules and regulations and participates in the rulemaking process.
Certain of the Company's facilities are or may become potentially responsible
parties with respect to off-site waste disposal facilities.
As noted above, new environmental and health and safety laws can impose
significant compliance costs, including forthcoming rules. Under the Clean
Air Act Amendments of 1990, various industries, including casings
manufacturers, will be required to meet air emissions standards for certain
chemicals based on use of the "maximum achievable control technology" (MACT).
MACT Standards for new and existing cellulose casing manufacturing sources
were promulgated June 11, 2002. Viskase submitted extensive comments to the
EPA during the public comment period. Compliance with the new rules is
required within three years (by June 13, 2005). MACT rules will apply to all
casing manufacturers in the United States.
Under the Resource Conservation and Recovery Act (RCRA), regulations have
been proposed that, in the future, may impose design and/or operating
requirements on the use of surface impoundments of wastewater. Two of
Viskase's plants use surface impoundments. The Company does not foresee these
regulations being imposed for several years.
(d) Financial information about foreign and domestic operations and
export sales
Reference is made to Part IV, Item 15, Note 24 of Notes to Consolidated
Financial Statements.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of the Company's executive
officers, together with the positions with the Company held by such executive
officers, and a summary of their recent business experience. Under the
Company's Amended and Restated By-Laws, the Company's officers are elected
for such terms as may be determined from time to time by the Board of
Directors.
Name, Age and Office Business Experience
F. Edward Gustafson, 61, Mr. Gustafson has been Chairman of the Board,
Chairman of the Board, President and Chief Executive Officer of the
President and Chief Company since March 1996 and
Executive Officer a director of the Company since December 1993.
(Mr. Gustafson has been President and Chief
Executive Officer of Viskase since June 1998,
and previously from February 1990 to August
1994.) From May 1989 to March 1996 Mr. Gustafson
served as Executive Vice President and Chief
Operating Officer of the Company. Mr. Gustafson
has also served as Executive Vice President and
Chief Operating Officer of D.P. Kelly and
Associates, L.P. (DPK) since November 1988.
Gordon S. Donovan, 49, Mr. Donovan has been Chief Financial Officer of
Vice President, Chief the Company since January 1997 and Vice
Financial Officer, Treasurer President and Chief Financial Officer
Assistant Secretary of Viskase since June 1998. Mr. Donovan has
served as Treasurer and Assistant Secretary
of the Company since November 1989 and as Vice
President since May 1995.
Kimberly K. Duttlinger, 38, Ms. Duttlinger has been Vice President,
Vice President, Secretary Secretary and General Counsel of the Company
and General Counsel since April 2000. From August 1998 through April
2000, Ms. Duttlinger served as Associate General
Counsel of the Company. From May 1997 to August
1998, Ms. Duttlinger served as Corporate Counsel
of the Company.
ITEM 2. PROPERTIES
VISKASE FACILITIES
LOCATION SQUARE FEET PRIMARY USE
Manufacturing Facilities
Beauvais, France (a) 235,000 Casings production and finishing
Caronno, Italy 73,000 Casings finishing
Chicago, Illinois 991,000 Idle plant facilities held for sale
Guarulhos, Brazil (a) 25,000 Casings finishing
Kentland, Indiana 125,000 Casings finishing
Loudon, Tennessee 250,000 Casings production
Osceola, Arkansas 223,000 Casings production and casings finishing
Thaon, France 239,000 Casings finishing
Distribution Centers
Atlanta, Georgia (a)
Buffalo, New York (a)
Fresno, California (a)
Remington, Indiana (a)
Dormagen, Germany (a)
Saskatoon, Saskatchewan, Canada (a)
Lindsay, Ontario, Canada
Warsaw, Poland (a)
Service Centers
Guarulhos, Brazil (a)
Caronno, Italy
Headquarters
Worldwide: Willowbrook, Illinois (a)
Europe Pantin, France (a)
(a) Leased. All other properties are owned.
The Company believes that its properties generally are suitable and adequate
to satisfy the Company's present and anticipated needs. The Company's United
States real property collateralizes the Company's obligations under various
financing arrangements. For a discussion of these financing arrangements,
refer to Part IV, Item 15, Note 8 of Notes to Consolidated Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS
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 is claiming that Union
Carbide breached several representations and warranties and deliberately
failed to disclose to Viskase Canada the existence of contamination on 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 advised by the MOE that the MOE expects to issue certain Director's
Orders requiring remediation under applicable environmental legislation
against Viskase Canada and others in the next few months. 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 expects to amend the lawsuit
prior to June 1, 2003. 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). The Company has reserved
$.5 million (U.S.) for the property remediation. The lawsuit is still pending
and is expected to proceed to trial sometime during the second half of 2004.
In August 2001, the Department of Revenue of the Province of Quebec, Canada
issued an assessment against Viskase Canada in the amount of $2,669,501.48
(Canadian) plus interest and possible penalties. This assessment is based
upon Viskase Canada's failure to collect and remit sales tax during the
period July 1, 1997 to May 31, 2001. During this period Viskase Canada did
not collect and remit sales tax in Quebec on reliance of the written advice
of its outside accounting firm. Viskase Canada filed a Notice of Objection in
November 2001 with supplementary submission in October 2002. No decision has
been made on the Notice of Objection. The ultimate liability for the Quebec
sales tax lies with the customers of Viskase Canada during the relevant
period. The Company has, however, provided for a reserve of $.3 million
(U.S.) for interest and penalties, if any. Viskase Canada is negotiating with
the Quebec Department of Ministry to avoid having to collect the sales tax
from customers who will then be entitled to credit for such sales tax
collected.
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. 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.
In February 2003, the plaintiffs (other than Marathon Enterprises, Inc. which
has elected not to pursue its lawsuit against the Company) amended their
complaint to eliminate any claim against the Company that arose prior to
December 17, 1993. In March 2003, the Company filed a Motion to Dismiss the
amended complaint.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information. The Company's Common Stock is traded in the
over-the-counter market. The high and low closing bid prices of the Common
Stock during 2002 and 2001 are set forth in the following table. Such prices
reflect interdealer prices without markup, markdown or commissions and may
not represent actual transactions.
2002 First Quarter Second Quarter Third Quarter Fourth Quarter
High .045 .08 .06 .035
Low .020 .01 .02 .002
2001 First Quarter Second Quarter Third Quarter Fourth Quarter
High $2.00 $2.06 $1.50 $.30
Low .92 .90 .25 .01
(b) Holders. As of March 21, 2003, there were approximately 106 holders
of record and approximately 2,700 beneficial holders of the Company's Common
Stock.
(c) Dividends. The Company has never paid a cash dividend on shares of
its Common Stock. The payment of dividends is restricted by the terms of
various financing agreements to which the Company is a party. The Company has
no present intention of paying dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
Year Ended 53 Weeks Ending
---------------------------------------- ---------------------------
December December December December December
31, 2002 31, 2001 31, 2000(1) 31, 1999(1) 31, 1998(1)(2)
------- -------- ----------- ----------- --------------
(in thousands, except for per share amounts)
Net sales $183,577 $189,315 $200,142 $225,767 $246,932
(Loss) from continuing
operations (3) (19,330) (36,852) (95,967) (29,927) (147,871)
Income (loss) from discontinued
operations 3,435 (1,831) (33,389)
Gain on sales of discontinued operations 3,189 68,185 39,057
(Loss) before extraordinary item (3) (19,330) (33,663) (24,347) (31,758) (142,203)
Net (loss) (4) (19,330) (25,526) (17,836) (31,758) (148,996)
Per share (loss)
from continuing operations
- basic and diluted (3) (1.26) (2.41) (6.34) (2.00) (9.97)
Per share income (loss)
from discontinued operations
- basic and diluted .23 (.12) (2.25)
Gain on sale of discontinued operations .21 4.50 2.63
Per share (loss)
before extraordinary item
- basic and diluted
(Loss) per share (3) (1.26) (2.20) (1.61) (2.12) (9.59)
Per share net (loss)
- basic and diluted
(Loss) per share (4) (1.26) (1.67) (1.18) (2.12) (10.05)
Cash and equivalents 27,700 25,540 55,350 6,243 9,028
Restricted cash 28,347 26,558 41,038
Working capital (174,203) (178,952) (106,958) 34,480 41,725
Total assets 218,681 234,028 322,364 493,818 531,069
Debt obligations:
Short-term debt (5) (6) (7) 227,343 236,059 200,676 23,095 16,120
Long-term debt 85 194 73,183 404,151 388,880
Stockholders' (deficit) (175,146) (138,053) (107,397) (89,442) (55,907)
Cash dividends none none none none none
(1) Year 2000 and 1999 and fiscal year 1998 net sales and loss from
continuing operations exclude the results of the Films Business, which
was sold in 2000.
(2) Fiscal 1998 net sales and loss from continuing operations exclude the
results of Sandusky and Clear Shield, which were sold in 1998.
(3) Included in 2002 is net restructuring income of $6,132 and
reorganization expense of $3,401.
Included in 2001 is an asset write-down of $4,766 and an inventory lower
of cost or market charge of $3,612.
Included in 2000 and 1998 are restructuring charges of $94,910 and
$119,579, respectively.
(4) Includes a net extraordinary gain (loss) on debt extinguishment of
$8,137, $6,511 and $(6,793) or $.53, $.43 and $(.46) per share in 2001,
2000 and 1998, respectively. SFAS No. 145 requires that gains and losses
on debt extinguishment will no longer be classified as extraordinary for
fiscal years beginning after May 15, 2002. In 2003 these prior period
extraordinary items will be reclassified in the consolidated statements
of operations.
(5) Year 2002 includes $163,060 of debt classified as current liabilities
subject to compromise on the balance sheet.
(6) Years 2002 and 2001 include $64,106 of long-term debt reclassified to
current due to covenant restrictions.
(7) Years 2001 and 2000 include the current portion of long-term debt.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The Company's 2002 net sales from continuing operations was $183.6 million,
which represents a decrease of 3% from 2001. The decline in sales reflects
the continuing effect of reduced selling prices in the worldwide casings
industry and slightly lower volumes, offset by the strengthening Euro against
the U.S. Dollar that positively benefited net sales by approximately $3.2
million.
The Company's 2001 net sales from continuing operations was $189.3 million,
which represented a decrease of 5.4% from 2000. The decline in sales reflects
the continuing effect of reduced selling prices in the casings industry and
lower sales volumes in Europe due to outbreaks of both mad cow disease and
foot-and-mouth disease during the first half of 2001.
With the entrance of a foreign competitor in the mid-1990's, the Company
experienced significant pricing pressure and volume loss. The market for
cellulosic casings has continued to see price declines each year based on
competitor factors including excess production capacity. The Company does not
expect to experience significant future volume loss; however, the Company
believes pricing pressures will continue. The Company has previously
implemented facility realignment and other cost-cutting measures aimed at
offsetting the effect of lower prices.
The operating income from continuing operations for 2002 was $2.3 million.
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.
During the second quarter of 2002, the Company committed to a restructuring
plan to address the industry's competitive environment. Operating loss from
continuing operations, excluding the net restructuring income of $6.1
million, was $(3.8) million. This (loss) compares favorably to the operating
loss from the comparable prior year period of $(5.4) million, excluding the
2001 asset write-down and the 2001 lower of cost or market charge as
described below. The improvement in the operating loss results primarily from
operating efficiencies from previous cost saving measures and reduced raw
material costs. The Company does not, however, expect to see additional
improvement in its operating income until prices begin to increase in the
industry.
The operating loss from continuing operations for 2001 was $(13.7) million.
The 2001 operating loss included an asset write-down of $4.8 million for the
write-down of Viskase's Chicago facility to fair value and a $3.6 million
write-down of inventories to its lower of cost or market value included in
cost of sales. Operating loss from continuing operations, excluding the asset
write-down and lower of cost or market charge, was $(5.4) million. This
compares unfavorably to the 2000 operating income of $1.2 million, excluding
the 2000 restructuring charge of $94.9 million. The decrease in operating
income resulted primarily from declines in sales and gross margins caused by
continued price competition in the worldwide casings industry.
Net interest expense from continuing operations for 2002 totaled $21.1
million, which represented a decrease of $1.9 million from 2001. The decrease
is primarily due to reduced interest expense related to the GECC lease
payment.
Other income (expense) from continuing operations of approximately $1.5
million and $(3.4) million in 2002 and 2001, respectively, consists
principally of foreign exchange gains and (losses).
The reorganization expenses of $3.4 million consist principally of fees for
legal, financial advisory and professional services incurred due to the
Chapter 11 proceeding.
In 2000, the Company received a payment in resolution of the American
National Can Company (ANC) Litigation in the amount of $54.75 million, offset
by patent litigation expenses of $7.85 million.
The Company purchases gas futures contracts to lock in set rates on gas
purchases. The Company uses this strategy to minimize its exposure to
volatility in natural gas. These products are not linked to specific assets
and liabilities that appear on the balance sheet or to a forecasted
transaction and, therefore, do not qualify for hedge accounting. As such, the
loss on the change in fair value of the futures contracts was recorded in
other income and is immaterial.
In 2002, the tax benefit of $(1.3) million on the (loss) from continuing
operations before income taxes of $(20.6) million resulted from the benefit
of a U.S. income tax refund resulting from the Job Creation Act enacted in
March 2002, offset by the tax provision related to operations of foreign
subsidiaries.
In 2001, the income tax benefit from the loss from continuing operations
offset the income tax provision which would have been provided on the
extraordinary gain and the gain from the sale of discontinued operations. The
net benefit recognized of $(3.4) million results from a reduction of prior
accrued foreign taxes payable. A provision (benefit) of $(3.4) million and
$.7 million, respectively, was provided on loss from continuing operations
before taxes of $(40.2) million and $(95.2) million, respectively for 2001
and 2000. The company's effective tax rate from continuing operations reflect
the permanent differences in the U.S. resulting from the change in the
valuation allowance and the reversal of over-accrued foreign taxes. The tax
provision (benefit) for income from discontinued operations in 2000 was $.3
million. The tax provision with respect to the gain on disposal in 2001 and
2000 was $0 and $6.6 million, respectively. In addition, an extraordinary
gain in 2001 and 2000 recognized an income tax provision of $0 and $.6
million, respectively. The total income tax provision (benefit) was $(1.3)
million, $(3.4) million, and $8.3 million, respectively, in 2002, 2001 and
2000.
Net domestic cash income taxes (refunded) paid in 2002, 2001 and 2000, were
$(2.1) million, $2.2 million and $.5 million, respectively. Net foreign cash
income taxes paid during the same periods were $.9 million, $2.5 million and
$.3 million, respectively.
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, pay General Electric Capital Corporation
(GECC) and for general corporate purposes. The Company recognized a net gain
in the amount of $3.2 million in 2001 and $68.2 million in 2000. The business
sold included production facilities in the United States, United Kingdom, and
Brazil. In conjunction with the sale of the Films Business, the Company shut
down its oriented polypropylene (OPP) films business located in Newton
Aycliffe, England and the films operation in Canada; the costs of these are
included in the business discontinuance.
Liquidity and Capital Resources
Cash and equivalents increased by $2.2 million during the year ended December
31, 2002. Cash flows provided by operating activities were $18.3 million,
used for reorganization items were $1.3 million, used in investing activities
were $5.0 million, and used in financing activities were $8.9 million. Cash
flows provided by operating activities were principally attributable to the
effect of depreciation, amortization, and a decrease in working capital
usage. Cash flows used for reorganization items consist principally of fees
for legal, financial advisory and professional services incurred due to the
Chapter 11 proceeding. Cash flows used in investing activities were
principally attributable to capital expenditures for property, plant and
equipment, an increase in restrictions on cash offset by the proceeds on
disposition of assets. Cash flows used in financing activities principally
consisted of the payment of the scheduled GECC capital lease obligation.
In 2001 and 2000 the Company was able to purchase 10.25% Notes in open market
or privately negotiated transactions, with the effect that as of December 31,
2002 there was $163.1 million principal amount of 10.25% Notes outstanding,
net of repurchased notes. The Company was able to repurchase debt due to the
sale of the Films business in 2000. The Company recognized an $8.1 million
net gain on the repurchase of Notes during 2001 and a $6.5 million net gain
in 2000.
Cash flows from operations for the Company were insufficient to pay the
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 the 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 votes to accept the Plan from approximately
91.4% of the holders and 91.4% in the outstanding principal amount that
actually voted. Accordingly, on November 13, 2002, VCI 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 VCI only. The Chapter 11 filing does not
include any of the Company's domestic or foreign operating subsidiaries.
Therefore, the Company's operating subsidiaries continued to provide an
uninterrupted supply of products and services to customers worldwide. Trade
creditors and vendors have been totally unaffected and continue to be paid in
the ordinary course of business, and the operating subsidiaries' employees
have been paid all wages, salaries and benefits on a timely basis.
Letters of credit in the amount of $27.6 million were outstanding under
letter of credit facilities with commercial banks, and were cash
collateralized at December 31, 2002.
The Company finances its working capital needs through a combination of
internally generated cash from operations, cash on hand, and a revolving
credit facility that the Company anticipates that it will enter into upon
emergence from bankruptcy.
Certain identified production and finishing equipment at Viskase's domestic
facilities are subject to a capital lease with GECC. In connection with the
lease, GECC holds a security interest in (i) all domestic accounts receivable
(including intercompany receivables) and inventory; (ii) all patents,
trademarks and other intellectual property (subject to non-exclusive
licensing agreements); (iii) substantially all domestic fixed assets; and
(iv) certain real property and improvements thereon. The security interest
will be subordinated to the working capital facility.
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:
(in thousands)
February 28, 2003 $18,499
April 11, 2003 $ 5,000
February 28, 2004 $11,750
August 28, 2004 $11,749
February 28, 2005 $23,500
GECC 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, September 30, 2002 and December 31, 2002 and (ii) the Company becoming
a debtor under Chapter 11 of the Bankruptcy Code until April 21, 2003. There
is no agreement with GECC to extend the forbearance beyond April 21, 2003.
However, the Company and GECC have agreed to amend certain lease documents
upon the emergence from bankruptcy. The amendment will permanently waive
prior non-compliance with the Fixed Charge Coverage Ratio and establish a new
Fixed Charge Coverage Ratio for the remainder of the lease term. The
amendment also changes the February 28, 2004 lease payment with $11,750 due
on February 28, 2004 and $11,749 due on August 28, 2004.
Under Chapter 11, certain claims against VCI (the Debtor) in existence prior
to the Petition Date were stayed while the Company continued business
operations as a debtor-in-possession. These claims are reflected in the
December 31, 2002 balance sheet as "Current liabilities subject to
compromise." As of the Petition Date, the Company stopped accruing interest
on the 10.25% Senior Notes. The interest not accrued from the Petition Date
through December 31, 2002 is $2.3 million.
The principal categories of claims reclassified in the Consolidated Balance
Sheets and included in Current liabilities subject to compromise are
identified below. These amounts may be subject to future adjustments
depending on Bankruptcy Court actions, further developments with respect to
disputed claims, the existence and value of any collateral securing such
claims and other events. At the Petition Date the amounts reflected below are
for the Senior Notes and accrued interest through the Petition Date.
Current liabilities subject to compromise are as follows (refer to Note 1 to
the consolidated financial statements):
(in thousands)
10.25% Senior Notes $163,060
Accrued interest 25,098
Other current liabilities 40
--------
$188,198
========
Capital expenditures for continuing operations for the year ended December
31, 2002 and 2001 totaled $3.8 and $5.9 million, respectively. Significant
2002 expenditures included costs associated with the Viskase Food Science
Quality Institute (FSQI) and numerous smaller projects throughout the plants
worldwide. Significant 2001 capital expenditures for continuing operations
included costs associated with the Visflex(tm) and Vismax(tm) plastic casing
product line and the corporate office relocation. Significant 2000 capital
expenditures for continuing operations included costs associated with the
Nucel(r) project. Capital expenditures in 2000 for discontinued operations
included additional production capacity for specialty films. Capital
expenditures for 2003 are expected to increase approximately $7 million. The
increase is related to the installation of environmental equipment to conform
with MACT standards for casing manufacturers.
At December 31, 2002, the Company had capital expenditure commitments
outstanding of approximately $.3 million. The Company also has lease
agreements for machinery, equipment and facilities during 2002;
rent expenses on these were $2.0 million. Accordingly, the Company does not
consider its operating lease commitments to be a significant determinant of
the Company's liquidity.
In 2002 and 2001, the Company spent approximately $4.1 million and $5.0
million, respectively, 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
and mothballing the Nucel(r) project. The 2003 research and development and
product introduction expenses are expected to be approximately $4.0 million.
Among the projects included in the current research and development efforts
are the anti-listeria NOJAX(r) AL(tm) casing, SmokeMaster(tm) casing, and the
application of certain patents and technology being licensed by Viskase to
the manufacture of cellulosic casings.
The accompanying consolidated financial statements have been prepared in
accordance with the American Institute of Certified Public Accounts Statement
of Position 90-7: Financial Reporting by Entities in Reorganization under the
Bankruptcy Code and have been prepared in accordance with generally accepted
accounting principles applicable to a going concern, which contemplates
continuity of operations and assumes the realization of assets and
liquidation of liabilities in the ordinary course of business.
Following the approval of a plan of reorganization, SOP 90-7 requires that
the Company adopt "Fresh Start" accounting resulting in recording all assets
and liabilities at fair value. Upon emergence from bankruptcy, the amounts
and classifications reported in the consolidated historical financial
statements could materially change.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions in certain circumstances that affect amounts
reported in the accompanying financial statements. In preparing these
financial statements, management bases its estimates on historical experience
and other assumptions that they believe are reasonable. The Company does not
believe there is a great likelihood that materially different amounts would
be reported under different conditions or using different assumptions related
to the accounting policies described below. However, application of these
accounting policies involves the exercise of judgment and use of assumptions
as to uncertainties and, as a result, actual results could differ from these
estimates. If actual amounts are ultimately different from previous
estimates, the revisions are included in the Company's results for the period
in which the actual amounts become known. Historically, the aggregate
differences, if any, between the Company's estimates and actual amounts in
any year have not had a significant impact on the Company's consolidated
financial statements. The "Summary of Significant Accounting Policies" is
included as Note 2 of The Notes To Consolidated Financial Statements.
Revenue Recognition
Substantially all of the Company's revenues are recognized at the time
products are shipped to customers, under F.O.B. Shipping Point and F.O.B.
Port Terms. Revenues are net of any discounts and allowances. The Company
records all related shipping and handling costs as a component of cost of
goods sold. The SEC's Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements", provides guidance on the application of
generally accepted accounting principles to selected revenue recognition
issues. The Company's revenue recognition policy is in accordance with
generally accepted accounting principles and SAB No. 101.
Allowance for Doubtful Accounts Receivable
Accounts receivable have been reduced by an allowance for amounts that may
become uncollectible in the future. This estimated allowance is primarily
based upon management's evaluation of the financial condition of the
customer, the customer's ability to pay and historical write-offs.
Allowance for Obsolete and Slow Moving Inventories
Inventories are valued at the lower of cost or market. The inventories have
been reduced by an allowance for slow moving and obsolete inventories. The
estimated allowance is based upon management's estimate of specifically
identified items and historical write-offs of obsolete and excess
inventories.
Deferred Income Taxes
Deferred tax assets and liabilities are measured using enacted tax laws and
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities due to a change in tax rates is
recognized in income in the period that includes the enactment date. In
addition, the amounts of any future tax benefits are reduced by a valuation
allowance to the extent such benefits are not expected to be realized on a
more likely than not basis.
Pension Plans and Other Postretirement Benefit Plans
The measurements of liabilities related to pension plans and other
postretirement benefit plans are based upon management's assumptions related
to future events including interest rates, return on pension plan assets,
rate of compensation increases, and health care cost trend rates. The Company
reviews its actuarial assumptions on an annual basis and makes modifications
to the assumptions based on current rates and trends when it is deemed
appropriate to do so. As required by generally accepted accounting
principles, the effect of the modifications is generally recorded or
amortized over future periods.
Property, Plant and Equipment
The Company carries property, plant and equipment at cost less accumulated
depreciation. Property and equipment additions include acquisition of
property and equipment and costs incurred for computer software purchased for
internal use including related external direct costs of materials and
services and payroll costs for employees directly associated with the
project. Depreciation is computed on the straight-line method over the
estimated useful lives of the assets ranging from 2 to 32 years. Upon
retirement or other disposition, cost and related accumulated depreciation
are removed from the accounts, and any gain or loss is included in results of
operations.
Long-Lived Assets
The Company continues to evaluate the recoverability of long-lived assets
including property, plant and equipment and patents. Impairments are
recognized when the expected undiscounted future operating cash flows derived
from long-lived assets are less than their carrying value.
Other Matters
The Company does not have off-balance sheet arrangements, sometimes referred
to as "special purpose entities," financing or other relations with
unconsolidated entities or other persons. In the ordinary course of business,
the Company leases certain casing manufacturing and finishing equipment,
certain real property, consisting of manufacturing and distribution
facilities and office facilities. The casing manufacturing and finishing
equipment capital lease obligation is described under "Debt Obligations,"
Note 8 of Notes to Consolidated Financial Statements. Operating leases are
described under "Operating Leases," Note 9 of Notes to Consolidated Financial
Statements.
Transactions with related parties are in the ordinary course of business, are
conducted at an arm's length basis, and are not material to the Company's
financial position, results of operations or cash flows.
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 is claiming that Union Carbide breached several
representations and warranties and deliberately failed to disclose to Viskase
Canada the existence of contamination on 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 advised by the MOE that the MOE expects to issue certain Director's
Orders requiring remediation under applicable environmental legislation
against Viskase Canada and others in the next few months. 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 expects to amend the lawsuit
prior to June 1, 2003. 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). The Company has reserved
$.5 million (U.S.) for the property remediation. The lawsuit is still pending
and is expected to proceed to trial sometime during the second half of 2004.
In August 2001, the Department of Revenue of the Province of Quebec, Canada
issued an assessment against Viskase Canada in the amount of $2,669,501.48
(Canadian) plus interest and possible penalties. This assessment is based
upon Viskase Canada's failure to collect and remit sales tax during the
period July 1, 1997 to May 31, 2001. During this period Viskase Canada did
not collect and remit sales tax in Quebec on reliance of the written advice
of its outside accounting firm. Viskase Canada filed a Notice of Objection in
November 2001 with supplementary submission in October 2002. No decision has
been made on the Notice of Objection. The ultimate liability for the Quebec
sales tax lies with the customers of Viskase Canada during the relevant
period. The Company has, however, provided for a reserve of $.3 million
(U.S.) for interest and penalties, if any. Viskase Canada is negotiating with
the Quebec Department of Ministry to avoid having to collect the sales tax
from customers who will then be entitled to credit for such sales tax
collected.
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. 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.
In February 2003, the plaintiffs (other than Marathon Enterprises, Inc. which
has elected not to pursue its lawsuit against the Company) amended their
complaint to eliminate any claim against the Company that arose prior to
December 17, 1993. In March 2003, the Company filed a Motion to Dismiss the
amended complaint.
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.
Contractual Obligations Related to Debt, Leases and Related Risk Disclosure
(in thousands)
2002 Expected Maturity Date
---------------------------------------------------------------
Current
Liabilities
Subject to There-
Compromise 2003 2004 2005 2006 after Total
- -----------------------------------------------------------------------------------------------------------------------
Long-term debt,
including current portion:
Fixed interest rate ($000) $163,060 $85 $163,145
Interest rate 10.25% 0% 10.25%
Accrued interest on Senior Notes $25,098 $25,098
Capital lease obligations(1) $19,483 $21,300 $23,500 $64,283
Operating leases $1,425 $1,253 $1,097 $997 $3,503 $8,275
Third party license fees $865 $400 $250 $200 $450 $2,165
Employment agreement $2,109 $2,109
(1) Capital lease obligations relate primarily to GECC Capitalized Lease
Obligations classified as current in the financial statements. GECC
lease payment maturities conform to contractual payments under the
lease.
Other
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 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 SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The statement is applicable for fiscal years beginning after
May 15, 2002 and requires, among other things, that any gain or loss on
extinguishment of debt that does not meet criteria in Opinion 30, as amended,
no longer be classified as an extraordinary item. The gain of $8.1 million,
net of income taxes, relating to the repurchase of Senior Notes in 2001 and
the gain of $6.5 million, net of income taxes, relating to the repurchase of
Senior Notes in 2000, were reported as extraordinary items in the Company's
consolidated statements of operations for
the years then ended. In 2003, these prior period extraordinary items will be
reclassified in the consolidated statements of operations as a separate
caption along with interest expense in accordance with this statement.
In July 2002, the FASB issued SFAS 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 provisions of this Statement will prospectively apply to exit or
disposal activities initiated after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." This statement amends SFAS No.
123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to fair value based method of
accounting for stock-based employee compensation and amends the disclosure
requirements to require prominent disclosure in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
provisions of this statement are effective for financial statements for
fiscal years ending after December 15, 2002. Management has adopted the
footnote disclosure provisions (see Note 2 to the consolidated financial
statements) and is considering the recognition provisions of the standard and
its effects on the Company's financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also clarifies that a guarantor is required to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation undertaken
in issuing the guarantee. The provisions of this interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
Company will apply the provisions of this interpretation to guarantees issued
after December 31, 2002. The Company is in compliance with the disclosure
requirements of the interpretation.
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; 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; the ability to achieve other cost reductions and efficiencies;
and the effect of negotiations with the Company's creditors and the
restructuring of the Company's indebtedness.
ITEM 7A. 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 December 31, 2002, a 10% devaluation of the U.S.
dollar would affect the Company's consolidated financial position by
approximately $44 thousand.
The Company purchases gas futures contracts to lock in set rates on gas
purchases. The Company uses this strategy to minimize its exposure to
volatility in natural gas. These products are not linked to specific assets
and liabilities that appear on the balance sheet or to a forecasted
transaction and, therefore, do not qualify for hedge accounting. As such, the
loss on the change in fair value of the futures contracts was recorded in
other income and is immaterial.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary financial information meeting the
requirements of Regulation S-X are listed in the index to financial
statements and schedules, as included under Part IV, Item 15 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements on accounting and financial disclosure required
to be disclosed under this Item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth the name, age and positions, of the Company's
officers and directors. Also set forth below is information as to the
principal occupation and background for such persons.
Directors
Robert N. Dangremond, 60, has been a principal with Jay Alix & Associates, a
consulting and accounting firm specializing in corporate restructurings and
turnaround activities, since August 1989. Mr. Dangremond also serves as a
Director for the Furr's Restaurant Group. Mr. Dangremond has served as a
director of the Company since 1993. Mr. Dangremond will be resigning as a
director of the Company as of the Effective Date of the Plan.
F. Edward Gustafson, 61, has been Chairman of the Board, President and Chief
Executive Officer of the Company since March 1996 and a director of the
Company since December 1993. Mr. Gustafson has been President and Chief
Executive Officer of Viskase Corporation since June 1998, and previously from
February 1990 to August 1994. From May 1989 to March 1996, Mr. Gustafson
served as Executive Vice President and Chief Operating Officer of the
Company. Mr. Gustafson has also served as Executive Vice President and Chief
Operating Officer of D.P. Kelly and Associates, L.P. (DPK) since November
1988.
Gregory R. Page, 51, has been President and Chief Operating Officer of
Cargill, Inc. ("Cargill"), a multinational trader and processor of foodstuffs
and other commodities, since June 2000. From May 1998 to June 2000, Mr. Page
served as Corporate Vice President and Section President of Cargill. From
August 1995 to May 1998, Mr. Page served as President of the Red Meat Group
of Cargill. Mr. Page has served as a director of the Company since 1993. Mr.
Page will be resigning as a director of the Company as of the Effective Date
of the Plan.
Executive Officers
F. Edward Gustafson, 61, has been Chairman of the Board, President and Chief
Executive Officer of the Company since March 1996 and a director of the
Company since December 1993. Mr. Gustafson has been President and Chief
Executive Officer of Viskase Corporation since June 1998, and previously from
February 1990 to August 1994. From May 1989 to March 1996, Mr. Gustafson
served as Executive Vice President and Chief Operating Officer of the
Company. Mr. Gustafson has also served as Executive Vice President and Chief
Operating Officer of DPK since November 1988.
Gordon S. Donovan, 49, has been Chief Financial Officer of the Company since
January 1997, and Vice President and Chief Financial Officer of Viskase
Corporation since June 1998. Mr. Donovan has served as Treasurer and
Assistant Secretary of the Company since November 1989, and as Vice President
since May 1995.
Kimberly K. Duttlinger, 38, has been Vice President, Secretary and General
Counsel of the Company since April 2000. From August 1998 through April 2000,
Ms. Duttlinger served as Associate General Counsel of the Company. From May
1997 to August 1998, Ms. Duttlinger served as Corporate Counsel of the
Company.
Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of the
Exchange Act requires the Company's executive officers and directors and
persons who own more than 10% of a registered class of the Company's equity
securities to file reports of their ownership thereof and changes in that
ownership with the Securities and Exchange Commission (SEC) and the National
Association of Securities Dealers, Inc. Executive officers, directors and
greater than 10% stockholders are required by SEC regulations to furnish the
Company with copies of all such reports they file.
Based solely upon its review of copies of such forms received by it, or on
written representations from certain reporting persons that other filings
were required for such persons, the Company believes that, during the year
ended December 31, 2002, there were no individuals who failed to comply with
the applicable Section 16(a) filing requirements, except that Donald P.
Kelly, a greater than 10% stockholder inadvertently failed to timely file one
Form 4 reporting one transaction.
ITEM 11. EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation of Executive Officers. The
Summary Compensation Table below provides certain summary information
concerning the compensation by the Company for fiscal years 2002, 2001 and
2000 for services rendered by the Company's Chief Executive Officer and each
of the other executive officers of the Company whose total annual salary and
bonus exceeded $100,000 in 2002.
SUMMARY COMPENSATION TABLE
Restricted
Other Annua Stock
Name and Salary Bonus Compensation Award(s) Options (1) All Other
Principal Position Year ($) ($) ($) ($) (#) Compensation
- -----------------------------------------------------------------------------------------------------------------------
F. Edward Gustafson 2002 535,000 267,500 67,004 (2) - - 16,050 (3)
Chairman of the Board, 2001 513,000 - - - - 24,745
President and Chief 2000 497,250 273,488 74,423 212 (4) 200,000 (5) 17,239
Executive Officer
Gordon S. Donovan 2002 186,060 74,052 10,989 - - 6,496 (6)
Vice President, Chief 2001 178,728 14,012 10,663 - - 7,855
Financial Officer, Treasurer 2000 169,965 66,626 9,835 212 (4) 22,000 5,621
and Assistant Secretary
Kimberly K. Duttlinger 2002 125,340 43,518 4,720 - - 4,093 (7)
Vice President, Secretary, 2001 133,072 9,121 5,318 - - 4,325
and General Counsel 2000 143,127 49,093 2,147 212 (4) 15,000 4,294
- -------------------------------
(1) Under the terms of the Plan, stock options outstanding as of the
Effective Date under the Plan would be canceled upon emergence from
bankruptcy.
(2) Includes $30,000 for automobile allowance and $20,084 for reimbursement
of legal services.
(3) Includes $660 paid for group life insurance, $8,175 contributed to the
Viskase SAVE Plan and $7,215 contributed to the Viskase Companies, Inc.
Parallel Non-Qualified Savings Plan (Non-Qualified Plan).
(4) Grant of 75 restricted shares of Common Stock to each of Messrs.
Gustafson and Donovan and Ms. Duttlinger under the Company's "Diamond
Anniversary Grant." The shares would be converted to Warrants under the
Plan, and are subject to forfeiture until October 27, 2003.
(5) In 2000, Mr. Gustafson was granted a stock option to purchase up to
200,000 shares of Common Stock depending on the financial performance of
the Company based on earnings before interest, taxes, depreciation, and
amortization (EBITDA) for fiscal year 2000. Based on the Company's
EBITDA for fiscal year 2000, a portion (i.e., 50,000 shares of Common
Stock, which would be canceled under the Plan) of this stock option was
earned.
(6) Includes $494 paid for group life insurance, $5,582 contributed to the
Viskase SAVE Plan and $420 contributed to the Non-Qualified Plan.
(7) Includes $333 paid for group life insurance and $3,760 contributed to
the Viskase SAVE Plan.
Stock Option Exercises and Holdings. The following table provides information
concerning the exercise of stock options for Common Stock during the fiscal
year ended December 31, 2002 and the fiscal year-end value of stock options
for Common Stock with respect to each of the persons named in the Summary
Compensation Table. Pursuant to the Plan, all stock options outstanding as of
the Effective Date under the Plan would be canceled.
Aggregated Option/SAR Exercises in 2002 and December 31, 2002 Option Values
Number of
Securities $ Value of
Underlying Unexercised
Unexercised In-the-Money
Shares Options at Options at
Acquired Value 12/31/02 12/31/02
on Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- --------------------------------------------------------------------------------------------
F. Edward Gustafson........ -- -- 170,000 / 0 0 / 0
Gordon S. Donovan.......... -- -- 79,000 / 0 0 / 0
Kimberly K. Duttlinger..... -- -- 40,000 / 0 0 / 0
Restricted Stock Plan. Upon the emergence from bankruptcy under chapter 11 of
the Bankruptcy Code, Mr. Donovan and Ms. Duttlinger would be granted 37,500
and 10,000 restricted shares, respectively, of New Common Stock under the
Restricted Stock Plan. Based upon the number of shares of Common Stock held
in their 401(k) accounts, Mr. Donovan and Ms. Duttlinger would also be
granted an additional 8,105 and 153 restricted shares of New Common Stock,
respectively, under the Restricted Stock Plan.
Restricted stock grants issued under the Restricted Stock Plan would vest 12-
1/2% on the date of the grant, 17-1/2% on the first anniversary of the grant,
20% on the second anniversary of the grant, 20% on the third anniversary of
the grant, and 30% on the fourth anniversary of the grant, subject to
acceleration under certain defined events.
Equity Compensation Plan Information Table. The following table provides
information as of December 31, 2002 regarding the number of shares of the
Company's Common Stock that may be issued under the Company's equity
compensation plans.
(a) (b) (c)
Number of
securities
remaining
available for
future issuance
Number of under equity
securities to be Weighted compensation
issued upon average exercise plans excluding
exercise of price of securities
outstanding outstanding reflected in
Plan Category options options column (a)
- -----------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by security holders 835,430 $2.71 449,898
Equity compensation plans not approved by security holders -- -- --
------- ----- -------
Total 835,430 $2.71 449,898
======= ===== =======
These options will be canceled under terms of the Plan on the Emergence Date.
Pension Plan Table. The following table sets forth estimated annual benefits
payable upon retirement under the Retirement Program for Employees of Viskase
Corporation (the "Retirement Program") to employees of the Company and its
wholly owned subsidiary, Viskase Corporation, in specified remuneration and
years of service classifications.
Pension Plan Table
Assumed Final Average Annual Benefits for Years of Service Indicated (2)
Annual Salary (1)
15 20 25 30 35
- --------------------- ------- -------- -------- --------- --------
$100,000 $18,000 $24,000 $30,000 $36,000 $42,000
150,000 27,000 36,000 45,000 54,000 63,000
200,000 36,000 48,000 60,000 72,000 84,000
250,000 45,000 60,000 75,000 90,000 105,000
300,000 54,000 72,000 90,000 108,000 126,000
350,000 63,000 84,000 105,000 126,000 147,000
400,000 72,000 96,000 120,000 144,000 168,000
450,000 81,000 108,000 135,000 162,000 189,000
500,000 90,000 120,000 150,000 180,000 210,000
550,000 99,000 132,000 165,000 198,000 231,000
(1) Annual benefits payable under the Retirement Program are calculated
based on the participant's average base salary for the consecutive
thirty-six (36) month period immediately prior to retirement.
(2) The annual benefits payable are based on straight-life annuity basis at
normal retirement age. The benefits reported in this table are not
subject to any reduction for benefits paid by other sources, including
Social Security. As of December 31, 2002, Messrs. Gustafson and Donovan
and Ms. Duttlinger are credited with 13, 15 and 6 years of service,
respectively.
Compensation of Directors. Each director who is not an officer of the Company
received an annual retainer of $20,000 in 2002 and a fee of $4,000 for each
attended meeting of the Board of Directors. Chairmen of committees (other
than the Interested Person Transaction Committee) of the Board of Directors
received an annual retainer of $1,500 in 2002. Directors also received a fee
for each attended meeting of a committee of the Board of Directors (other
than the Interested Person Transaction Committee) of $1,000 ($500 in the case
of committee meetings occurring immediately before or after meetings of the
full Board of Directors). Members of the Interested Person Transaction
Committee did not receive a fee in 2002. Directors who are officers of the
Company do not receive compensation in their capacity as directors. Pursuant
to Viskase Companies, Inc. 1993 Stock Option Plan, as amended, on the date of
each annual meeting of stockholders, non-employee directors are granted a
stock option to purchase 1,000 shares of Common Stock at an option exercise
price equal to the fair market value of the Common Stock the date of grant.
The Company did not hold an annual meeting of stockholders during 2002.
Pursuant to the Non-Employee Directors' Compensation Plan, non-employee
directors may elect to receive their director fees in the form of shares of
Common Stock. The number of shares received is based on the average of the
closing bid and ask price of the Common Stock on the business day preceding
the date the Common Stock is issued. None of the directors currently receive
their fees in the form of Common Stock.
Compensation Committee Interlocks and Insider Participation. During 2002, the
Compensation and Nominating Committee of the Board of Directors consisted of
Messrs. Robert N. Dangremond and Gregory R. Page, each of whom is a non-
employee director of the Company and will be resigning as a director as of
the Effective Date of the Plan. Mr. Page is the President and Chief Operating
Officer of Cargill, Inc. During 2002, Viskase Corporation, a wholly owned
subsidiary of the Company, had sales of $592,000 made in the ordinary course
to Cargill, Inc. and its affiliates.
Employment Agreements and Change-in-Control Arrangements
Employment Agreements with F. Edward Gustafson. On March 27, 1996, the
Company entered into an Employment Agreement with Mr. F. Edward Gustafson.
The Employment Agreement was amended and restated during 1997, amended twice
during 2001 and once during 2002 (the "Employment Agreement"). Pursuant to
the Employment Agreement, Mr. Gustafson has agreed to serve as Chairman of
the Board, President and Chief Executive Officer of the Company, and the
Company has agreed to use its best efforts to cause Mr. Gustafson to be
elected as a director of the Company, during the term of the Agreement. The
initial term of the Employment Agreement is three (3) years, provided,
however, that on March 26, 1997 and each subsequent anniversary thereof, the
term of the Employment Agreement will be automatically extended for a period
of one (1) year unless the Company or Mr. Gustafson gives written notice to
the other at least thirty (30) days prior to the anniversary date that the
term shall not be so extended.
Under the Employment Agreement, Mr. Gustafson receives an annual base salary
of $535,000 and $30,000 per year in lieu of a Company-provided automobile.
Mr. Gustafson's base salary will be increased by the Board of Directors each
year in a manner consistent with increases in base salary for other senior
officers of the Company. In addition, the Employment Agreement provides that
Mr. Gustafson would be eligible to receive a bonus based on a percentage of
his base salary depending on the Company's performance based on EBITDA. Mr.
Gustafson will be eligible to receive an annual bonus for future fiscal years
of the Company based on such financial performance or other performance-
related criteria as established by the Board of Directors after consultation
with Mr. Gustafson. For information concerning actual bonuses earned by Mr.
Gustafson, see the "Summary Compensation Table." Mr. Gustafson is also
entitled to participate in any employee benefit plans in effect for, and to
receive other fringe benefits provided to, other executive officers.
Pursuant to and upon execution of the Employment Agreement, Mr. Gustafson was
granted two (2) stock options, each to purchase 35,000 shares of Common
Stock. One (1) stock option is exercisable in cumulative annual increments of
one-third commencing on the first anniversary of the date of grant. The other
stock option is exercisable in cumulative annual increments of one-third
commencing on the second anniversary of the date of grant. In addition, Mr.
Gustafson was granted a third stock option to purchase up to 75,000 shares of
Common Stock dependent on the Company's financial performance for fiscal year
1996. The Company did not meet the financial performance targets and,
therefore, no portion of this stock option became exercisable or will become
exercisable in the future. Lastly, Mr. Gustafson was granted 35,000
restricted shares of Common Stock that could not be transferred, and were
subject to forfeiture, until March 27, 1999.
If Mr. Gustafson's employment is terminated by the Company for Cause, as
defined in the Employment Agreement, or by Mr. Gustafson other than for Good
Reason or Disability, as defined in the Employment Agreement, Mr. Gustafson
will be paid all Accrued Compensation, as defined in the Employment
Agreement, through the date of termination of employment. If Mr. Gustafson's
employment with the Company is terminated by the Company for any reason other
than for Cause, death or Disability, or by Mr. Gustafson for Good Reason, (i)
Mr. Gustafson will be paid all Accrued Compensation plus 300% of his base
salary (or 200% in the event that DPK, or a company in which DPK has a
substantial interest, is the beneficial owner of the Company following a
Change of Control) and the prorated amount of annual bonus that would have
been payable to Mr. Gustafson with respect to the fiscal year in which Mr.
Gustafson's employment is terminated, provided that the performance targets
have been actually achieved as of the date of termination (unless such
termination of employment follows a Change in Control, as defined in the
Agreement, in which case Mr. Gustafson will receive a bonus equal to 50% of
his base salary regardless of the Company's performance) ("Termination
Compensation"), (ii) Mr. Gustafson will continue to receive life insurance,
medical, dental and hospitalization benefits for a period of twenty-four (24)
months following termination of employment, and (iii) all outstanding stock
options and restricted shares of Common Stock will become immediately
exercisable, vested and nonforfeitable. Under the Employment Agreement, with
respect to any Change in Control that occurred prior to November 1, 2001, Mr.
Gustafson has until thirty (30) days following the earlier to occur of (i)
the date on which the Company has provided written notice of acceptance to
the exchange offer agent with respect to
the Exchange Offer (as defined in Amendment Number Three to the Employment
Agreement); (ii) the effective date of the Plan (as defined in Amendment
Number Three to the Employment Agreement) of the Company and Viskase
Corporation under chapter 11 of the United States Bankruptcy Code or the date
on which the Company's and Viskase Corporation's bankruptcy is converted from
a chapter 11 proceeding to a chapter 7 proceeding; or (iii) the closing date
contained in any agreement related to the sale of substantially all of the
assets of the Company and/or Viskase Corporation or the sale or other
issuance of at least a majority of the stock of the Company or Viskase
Corporation, to provide notice that he intends to terminate his employment
for Good Reason because of such Change in Control. With respect to any Change
in Control occurring after November 1, 2001, Mr. Gustafson has one year after
such Change in Control to terminate his Employment Agreement for Good Reason
based upon such Change in Control. During 2002, the Company and Viskase
Corporation entered into a Letter of Credit Agreement with Mr. Gustafson that
requires the Company and Viskase Corporation to secure and maintain a standby
letter of credit in amount equal to the Accrued Compensation and Termination
Compensation.
Pursuant to the Employment Agreement, Mr. Gustafson is generally prohibited
during the term of the Agreement, and for a period of two (2) years
thereafter, from competing with the Company, soliciting any customer of the
Company or inducing or attempting to persuade any employee of the Company to
terminate his or her employment with the Company in order to enter into
competitive employment. For purposes of the Employment Agreement, the Company
includes Viskase Companies, Inc. and any of its subsidiaries over which Mr.
Gustafson exercised, directly or indirectly, any supervisory, management,
fiscal or operating control during the term of the Employment Agreement.
On August 30, 2001, Viskase Corporation entered into an employment agreement
with Mr. Gustafson ("Viskase Employment Agreement"). The Viskase Employment
Agreement was amended once during 2001 and once during 2002. The Viskase
Employment Agreement is substantially similar to the Employment Agreement.
Any benefits received by Mr. Gustafson under either employment agreement
would be credited against benefits payable under the other employment
agreement.
Employment Agreements with Gordon S. Donovan and Kimberly K. Duttlinger. On
November 29, 2001, the Company and Viskase entered into employment agreements
with Mr. Donovan and Ms. Duttlinger ("Executive Employment Agreements").
Pursuant to the Executive Employment Agreement, Mr. Donovan has agreed to
serve as Vice President, Chief Financial Officer and Treasurer of the Company
and Viskase Corporation and Ms. Duttlinger has agreed to serve as Vice
President, Secretary and General Counsel of the Company and Viskase
Corporation, during the term of the Executive Employment Agreements. The
initial term of the Executive Employment Agreements is approximately three
(3) years ending December 31, 2004, provided, however, that on January 1,
2003 and each subsequent anniversary thereof, the term of the Executive
Employment Agreements will be automatically extended for a period of one (1)
year unless the Company or Mr. Donovan or Ms. Duttlinger gives written notice
to the other at least thirty (30) days prior to the anniversary date that the
term shall not be so extended.
Under the Executive Employment Agreements, Mr. Donovan and Ms. Duttlinger
receive an annual base salary of at least $193,020 and $129,840,
respectively. Mr. Donovan's and Ms. Duttlinger's base salary will be
increased by the President of the Company each year in a manner consistent
with increases in base salary for other senior officers of the Company. In
addition, the Executive Employment Agreements provide that Mr. Donovan and
Ms. Duttlinger are eligible to participate in the (i) Management Incentive
Plan, a bonus program calculated as a percentage of his/her base salary
depending on the Company's performance based on EBITDA and his/her personal
performance; (ii) Non-Qualified Parallel Plan; (iii) Executive Auto Allowance
Program; and (iv) 1993 Stock Option Plan and any replacement thereof. Mr.
Donovan and Ms. Duttlinger are also entitled to participate in any employee
benefit plans in effect for, and to receive other fringe benefits provided
to, other executive officers.
If Mr. Donovan's or Ms. Duttlinger's employment is terminated by the Company
for Cause, as defined in the Executive Employment Agreements, or by Mr.
Donovan or Ms. Duttlinger other than for Good Reason or Disability, as
defined in the Executive Employment Agreements, Mr. Donovan or Ms. Duttlinger
will be paid all Accrued Compensation, as defined in the Employment
Agreement, through the date of termination of employment. If Mr. Donovan's or
Ms. Duttlinger's employment with the Company is terminated by the Company for
any reason other than for Cause, death or Disability, or by Mr. Donovan or
Ms. Duttlinger for Good Reason, (i) Mr. Donovan or Ms. Duttlinger will be
paid all Accrued Compensation plus 200% of his/her base salary and the
prorated amount of annual bonus that would have been payable to Mr. Donovan
or Ms. Duttlinger with respect to the fiscal year in which his/her employment
is terminated, provided that the performance targets have been actually
achieved as of the date of termination (unless such termination of employment
follows a Change in Control, as defined in the Agreement, in which case Mr.
Donovan will receive a bonus equal to 40% of his base salary regardless of
the Company's performance and Ms. Duttlinger will receive a bonus equal to
35% of her base salary regardless of the Company's performance), (ii) Mr.
Donovan and Ms. Duttlinger will continue to receive life insurance, medical,
dental and hospitalization benefits for a period of twenty-four (24) months
following termination of employment, and (iii) all outstanding stock options
and restricted shares will become immediately exercisable, vested and
nonforfeitable.
Pursuant to the Executive Employment Agreements, Mr. Donovan and Ms.
Duttlinger are generally prohibited during the term of their respective
Agreements, and for a period of two (2) years thereafter, from competing with
the Company, soliciting any customer of the Company or inducing or attempting
to persuade any employee of the Company to terminate his or her employment
with the Company in order to enter into competitive employment. For purposes
of the Executive Employment Agreements, the Company includes Viskase
Companies, Inc. and any of its subsidiaries over which Mr. Donovan or Ms.
Duttlinger exercised, directly or indirectly, any supervisory, management,
fiscal or operating control during the term of the Executive Employment
Agreements.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock as of
March 28, 2003 of (a) each person or group of persons known to the Company to
beneficially own more than 5% of the outstanding shares of Common Stock, (b)
each director and nominee for director of the Company, (c) each executive
officer of the Company listed in the Summary Compensation Table above, and
(d) all executive officers and directors of the Company as a group. All
information is taken from or based upon ownership filings made by such
persons with the Securities and Exchange Commission or upon information
provided by such persons to the Company.
Name and Address of Number of Shares Percent
Beneficial Owner Beneficially Owned (1) of Class (1)
- -------------------- ---------------------- ------------
Pacificor, Inc. 5,000,000 32.65%
1575 N. Ontare Road
Santa Barbara, CA 93105
Steven L. Gevirtz 3,495,652 (2) 22.83%
Katana Fund LLC
Katana Capital Advisors LLC
1859 San Leandro Lane
Santa Barbara, California 93108
F. Edward Gustafson 1,979,610 (3)(4)(5) 12.78%
625 Willowbrook Centre Parkway
Willowbrook, Illinois 60527
Donald P. Kelly 1,570,287 (3) 10.25%
701 Harger Road, Suite 190
Oak Brook, Illinois 60523
Volk Enterprises, Inc. 1,300,000 8.49%
618 S. Kilroy
Turlock, California 95380
Robert N. Dangremond 64,340 (6) *
Gordon S. Donovan 108,208 (5)(7) *
Kimberly K. Duttlinger 40,306 (8) *
Gregory R. Page 34,150 (6) *
All directors and executive officers of the
Company as a group (5 persons) 2,226,614 (9) 14.26%
- --------------------------------
* Less than 1%.
(1) Beneficial ownership is calculated in accordance with Section 13(d) of
the Securities Exchange Act of 1934 and the rules promulgated
thereunder. Accordingly, the "Number of Shares Beneficially Owned" and
the "Percent of Class" shown for each person listed in the table are
based on the assumption that stock options which are exercisable
currently or within 60 days of March 30, 2003, held by such person, have
been exercised. Unless otherwise indicated, the persons listed in the
table have sole voting and investment power over those securities listed
for such person.
(2) Katana Capital Advisors, LLC manages the Katana Fund LLC and therefore
is deemed to indirectly own the shares owned by the Katana Fund LLC.
(3) The ownership indicated includes 70,287 shares owned by DPK, of which
Mr. Kelly and Mr. Gustafson are principals and officers. The general
partner of DPK is C&G Management Company, Inc. ("C&G Management"), which
is owned by Mr. Kelly and Mr. Gustafson. The ownership indicated also
includes 1,300,000 shares owned by Volk Enterprises, Inc. ("Volk"). Volk
is controlled by Volk Holdings L.P., whose general partner is Wexford
Partners I L.P. ("Wexford Partners"). The general partner of Wexford
Partners is Wexford Corporation, which is owned by Mr. Kelly and Mr.
Gustafson. Mr. Kelly and Mr. Gustafson share voting and investment power
over the shares owned by DPK and Volk. However, Mr. Kelly and Mr.
Gustafson each disclaim beneficial ownership of shares owned by DPK and
Volk except to the extent of their respective pecuniary interest in such
entities.
(4) The ownership indicated includes 170,000 shares subject to stock options
owned by Mr. Gustafson. The ownership indicated also includes 70,619
shares owned by Mr. Gustafson's spouse. Mr. Gustafson does not have or
share voting or investment power over the shares owned by his spouse and
disclaims beneficial ownership of such shares.
(5) The ownership indicated also includes 218,000 and 2,998 shares acquired
by Messrs. Gustafson and Donovan, respectively, pursuant to the Non-
Qualified Plan.
(6) The ownership indicated includes 7,000 shares subject to stock options
owned by each of Messrs. Dangremond and Page.
(7) The ownership indicated includes 79,000 shares subject to stock options
owned by Mr. Donovan, 8,000 shares held by Mr. Donovan as trustee for
the benefit of his spouse, with whom Mr. Donovan shares voting and
investment power over such shares and 1,000 shares owned by Mr.
Donovan's spouse. Mr. Donovan does not have or share voting power over
the 1,000 shares owned by his spouse. Mr. Donovan disclaims beneficial
ownership of the shares held by him as trustee and the shares owned by
his spouse.
(8) The ownership indicated includes 40,000 shares subject to stock option
owned by Ms. Duttlinger.
(9) See Footnotes (3), (4), (5), (6), (7) and (8).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 2002, the Company purchased product