10-Q 1 march01qtr.txt VISKASE MARCH 2001 QUARTERLY SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 --------------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- --------------- Commission file number 0-5485 ------- VISKASE COMPANIES, INC. ---------------------- (Exact name of registrant as specified in its charter) Delaware 95-2677354 ------------------------------- ------------------- (State or other jurisdiction of I.R.S. Employer Incorporation or organization) Identification No.) 6855 W. 65th Street, Chicago, Illinois 60638 ----------------------------------------- -------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (708) 496-4200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of May 15, 2001, there were 15,308,530 shares outstanding of the registrant's Common Stock, $.01 par value. INDEX TO FINANCIAL STATEMENTS VISKASE COMPANIES, INC. AND SUBSIDIARIES UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Page ----- Consolidated balance sheets at March 31, 2001 (unaudited) and December 31, 2000 4 Unaudited consolidated statements of operations for the three months ended March 31, 2001 and March 31, 2000 5 Unaudited consolidated statements of cash flows for the three months ended March 31, 2001 and March 31, 2000 6 Notes to consolidated financial statements 7
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS -------------------- The financial information included in this quarterly report has been prepared in conformity with the accounting principles and practices reflected in the financial statements included in the annual report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2000 (2000 Form 10-K). These quarterly financial statements should be read in conjunction with the financial statements and the notes thereto included in the 2000 Form 10-K. The accompanying financial information, which is unaudited, reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The condensed consolidated balance sheet as of December 31, 2000 was derived from the audited consolidated financial statements in the Company's annual report on Form 10-K. Reported interim results of operations are based in part on estimates, which may be subject to year-end adjustments. In addition, these quarterly results of operations are not necessarily indicative of those expected for the year. VISKASE COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, December 31, 2001 2000 --------- ----------- (unaudited) (in thousands) ASSETS Current assets: Cash and equivalents $ 20,728 $ 55,350 Restricted cash 43,263 41,038 Receivables, net 27,103 27,334 Inventories 39,106 39,405 Other current assets 20,238 23,168 -------- -------- Total current assets 150,438 186,295 Property, plant and equipment, including those under capital leases 238,994 240,110 Less accumulated depreciation and amortization 115,295 110,845 -------- -------- Property, plant and equipment, net 123,699 129,265 Deferred financing costs, net 145 184 Other assets 6,908 6,620 -------- -------- Total assets $281,190 $322,364 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt including current portion of long-term debt and obligations under capital leases $180,880 $200,676 Accounts payable 14,684 15,887 Accrued liabilities 64,973 73,309 Current deferred income taxes 3,381 3,381 -------- -------- Total current liabilities 263,918 293,253 Long-term debt including obligations under capital leases 64,391 73,183 Accrued employee benefits 42,051 40,773 Deferred and noncurrent income taxes 20,236 22,552 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value; none outstanding Common stock, $.01 par value; 15,296,666 shares issued and outstanding at March 31, 2001 and 15,276,764 shares at December 31, 2000 153 153 Paid in capital 137,987 137,967 Accumulated (deficit) (248,088) (247,048) Cumulative foreign currency translation adjustments 818 1,840 Unearned restricted stock issued for future service (276) (309) -------- -------- Total stockholders' (deficit) (109,406) (107,397) -------- -------- Total liabilities and stockholders' equity $281,190 $322,364 ======== ======== The accompanying notes are an integral part of the consolidated financial statements.
VISKASE COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended Three Months Ended ------------------ ------------------ March 31, 2001 March 31, 2000 ----------------- ------------------ (in thousands, except for number of shares and per share amounts) NET SALES $48,040 $51,770 COSTS AND EXPENSES Cost of sales 9,282 38,705 Selling, general and administrative 10,921 11,186 Amortization of intangibles 500 500 ------- ------- OPERATING INCOME (LOSS) (2,663) 1,379 Interest income 904 53 Interest expense 6,500 12,159 Other expense, net 1,085 113 ------- ------- (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (9,344) (10,840) Income tax (benefit) (3,374) (713) ------- ------- NET (LOSS) FROM CONTINUING OPERATIONS (5,970) (10,127) DISCONTINUED OPERATIONS: Income from operations net of income taxes (Note 6) 1,231 ------- ------- NET (LOSS) BEFORE EXTRAODINARY ITEM (5,970) (8,896) Extraordinary gain on early extinguishment of debt, net of income tax provision of $3,152 4,930 ------- ------- NET (LOSS) (1,040) (8,896) Other comprehensive (loss), net of tax: Foreign currency translation adjustments (623) (1,305) ------- ------- COMPREHENSIVE (LOSS) $(1,663) $(10,201) ======= ======== WEIGHTED AVERAGE COMMON SHARES - BASIC AND DILUTED 15,298,498 15,085,642 ========== ========== PER SHARE AMOUNTS: EARNINGS (LOSS) PER SHARE - basic and diluted Continuing operations $(.39) $(.67) Discontinued operations: Income from operations .08 ------- ------- Net (loss) before extraordinary item (.39) (.59) Extraordinary gain .32 ------- ------- NET (LOSS) $(.07) $(.59) ======= ======= The accompanying notes are an integral part of the consolidated financial statements.
VISKASE COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Months Ended ------------------------- March 31, March 31, 2001 2000 --------- --------- (in thousands) Cash flows from operating activities: Net (loss) $ (1,040) $ (8,896) Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities: Depreciation and amortization under capital lease 5,453 10,140 Amortization of intangibles 500 1,250 Amortization of deferred financing fees and discount 29 1,564 (Decrease) in deferred and noncurrent income taxes (301) (1,011) Foreign currency transaction loss 485 307 Loss on disposition of assets 19 Bad debt provision 312 179 Extraordinary (gain) on debt extinguishment (8,082) Changes in operating assets and liabilities: Receivables (549) 2,456 Inventories (258) (3,692) Other current assets 2,803 482 Accounts payable and accrued liabilities (8,582) 2,091 Other (1,224) (338) -------- ------- Total adjustments (9,395) 13,428 -------- ------- Net cash (used in) provided by operating activities (10,435) 4,532 Cash flows from investing activities: Capital expenditures (1,069) (3,242) Proceeds from disposition of assets 100 ------- ------- Net cash (used in) investing activities (969) (3,242) Cash flows from financing activities: Issuance of common stock 53 69 Deferred financing costs (13) (317) Discount on early extinguishment of debt 8,082 Repayment of revolving loan, long-term borrowings and capital lease obligation (28,570) (1,064) ------- ------- Net cash (used in) provided by financing activities (20,448) 1,312 Effect of currency exchange rate changes on cash (545) 3 ------- ------- Net (decrease) in cash and equivalents 32,397) (19) Cash and equivalents at beginning of period 96,388 6,243 ------- ------- Cash and equivalents $20,728 $ 6,224 Restricted cash 43,263 ------- ------- Cash and equivalents at end of period $63,991 $ 6,224 ======= ======= Supplemental cash flow information: Interest paid $ 42 $ 4,940 Income taxes paid $ 2,560 $ 452 The accompanying notes are an integral part of the consolidated financial statements.
VISKASE COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. CASH AND CASH EQUIVALENTS (dollars in thousands) March December 31, 2001 31, 2000 -------- -------- Cash and cash equivalents $20,728 $55,350 Restricted cash 43,263 41,038 ------- ------- $63,991 $96,388 ======= ======= As of March 31, 2001, cash and cash equivalents of $19,370 and restricted cash of $32,576 are invested in short term investments. Pursuant to the Films Business sale Purchase Agreement, two escrow accounts were established. These escrow accounts are classified as restricted cash. The $1,031 escrow account is restricted pending the final approval of the purchase price adjustment pursuant to the Purchase Agreement and the $31,545 escrow account is restricted pending government approval of funds transfer from the Brazilian portion of the Films Business sale. The remaining $10,687 of restricted cash is collateral for outstanding letters of credit under the Senior Revolving Credit Facility. 2. INVENTORIES (dollars in thousands) Inventories consisted of: March December 31, 2001 31, 2000 -------- --------- Raw materials $ 3,411 $ 2,867 Work in process 17,924 17,827 Finished products 17,771 18,711 ------- ------- $39,106 $39,405 ======= ======= Approximately 57% of the inventories at March 31, 2001 were valued at Last-In, First-Out (LIFO). These LIFO values exceeded current manufacturing cost by approximately $4,170 at March 31, 2001. 3. DEBT OBLIGATIONS (dollars in thousands) Outstanding short-term and long-term debt consisted of: March December 31, 2001 31, 2000 -------- -------- Short-term debt, current maturity of long-term debt, and capital lease obligation: Current maturity of Viskase Capital Lease Obligation $ 17,499 $ 8,750 10.25% Senior Notes due 2001 163,187 191,703 Other 194 223 -------- -------- Total short-term debt $180,880 $200,676 ======== ======== Long-term debt: Viskase Capital Lease Obligation $ 64,106 $ 72,854 Other 285 329 -------- -------- Total long-term debt $ 64,391 $ 73,183 ======== ======== Senior Secured Credit Facility/Junior Term Loans ------------------------------------------------ In June 1999, Viskase Corporation and Viskase Sales Corporation entered into a two-year secured credit agreement consisting of a $50 million senior term facility (Senior Term Facility), a $50 million senior revolving credit facility,including a $26 million sublimit for issuance of letters of credit (Senior Revolving Credit Facility), collectively the "Senior Secured Credit Facility", and $35 million of junior secured term loans (Junior Term Loans). The Senior Term Facility and Junior Term Loans were paid in full in August 2000 using proceeds from the sale of Films Business. The Senior Secured Credit Facility has a maturity date of June 30, 2001. The Company's Senior Secured Credit Facility contained a number of financial covenants that, among other things, require the maintenance of a minimum level of tangible net worth, a minimum fixed charge coverage ratio and a minimum leverage ratio of total liabilities to EBITDA and a limitation on capital expenditures. On April 5, 2001, the Company received an amendment and waiver under the Company's Senior Secured Credit Facility which eliminated the financial covenants through the June 30, 2001 maturity date and eliminated the lender's obligation to extend additional borrowings. There are no borrowings outstanding under the Senior Revolving Credit Facility at March 31, 2001. Letters of credit in the amount of $25.3 million are outstanding under the Senior Revolving Credit Facility, and are cash collateralized. The Company finances its working capital needs through a combination of internally generated cash from operations and cash on hand. The Company anticipates it will enter into a new revolving credit facility to meet its working capital and letter of credit requirements. GECC ---- Under the terms of an April 13, 2000 Agreement and Amendment with GECC, the Company agreed to amend the amortization schedule of annual lease payments, maintain a letter of credit in the amount of $23.5 million at all times, limit additional borrowings and provide a subordinated security interest collateralized by the Collateral Pool. Holders of the Senior Secured Credit Facility and the Junior Term Loans consented to the payment extensions and the subordinated security interest granted to GECC. The revised amortization schedule is presented below: November 1, 2001 $11,750 February 28, 2002 11,749 February 28, 2003 23,499 February 28, 2004 23,499 February 28, 2005 23,499 As of March 31, 2001, the Company received an amendment and waiver under the GECC Lease Agreement that waived non-compliance with the Fixed Charge Coverage Ratio for the quarter ended March 31, 2001. The Company determined that, as of March 31, 2001, without the amendment and waiver it would not have been in compliance with the Fixed Charge Coverage Ratio. The Company will need to obtain additional debt covenant waivers in future quarters due to the effect of the Films Business sale. 10.25% Notes ------------ The Company's 10.25% Notes mature on December 1, 2001. The Company has from time to time purchased 10.25% Notes in open market or privately negotiated transactions, with the effect that as of March 31, 2001 there was $163.2 million principal amount of 10.25% Notes outstanding, net of repurchased notes. The Company recognized a $8.1 million gain on the repurchase of the 10.25% Notes during the quarter ended March 31, 2001. As of May 15, 2001, there remains $163.2 million principal amount of 10.25% Notes outstanding, net of repurchased notes. The Company does not presently anticipate, without a refinancing transaction, that its current cash position and operating cash flows will be sufficient to pay the principal and accrued interest on the 10.25% Notes when they mature. In addition, the Company's payment obligations on the GECC lease remain substantial and the Senior Secured Credit Facility expires in June 2001. Accordingly, the Company is evaluating the strategic alternatives available to it with respect to its capital structure in general and the treatment of the 10.25% Notes between the date hereof and the date of their maturity. These alternatives could include public offerings or private placements of debt and/or equity securities, an exchange offer for the 10.25% Notes or other restructuring of the Company's indebtedness, the Company's entering into a new senior credit facility or the sale of the Company or its assets. There can be no assurance that any such transaction will be concluded or that any such additional financing will be available to the Company or that any such transaction or financing can be done on terms favorable to the Company's stockholders or creditors. Failure by the Company to refinance or restructure its obligations with respect to the 10.25% Notes would have a material adverse effect on the Company's results of operations and financial condition. 4. CONTINGENCIES In late 1993, Viskase commenced a legal action against American National Can Company (ANC) in Federal District Court for the Northern District of Illinois, Eastern Division, 93C7651 (the "ANC Litigation"). Viskase claimed that ANC's use of two different very low density polyethylene plastic resins in the manufacture of ANC's multi-layer barrier shrink film products was infringing various Viskase patents relating to multi-layer barrier plastic films used for fresh red meat, processed meat and poultry product applications. In November 1996, after a three-week trial, a jury found that ANC had willfully infringed Viskase's patents and awarded Viskase $102.4 million in compensatory damages. The Court also entered an order permanently enjoining ANC from making or selling infringing products. In September 1997, the Court set aside the jury verdict in part and ordered a retrial on certain issues. The Court upheld the jury finding on the validity of all of Viskase's patents and the jury finding that ANC had willfully infringed Viskase's patents by ANC's use of Dow Chemical Company's "Attane" brand polyethylene plastic resin in ANC's products. However, the Court ordered a new trial on the issue of whether ANC's use of Dow Chemical Company's "Affinity" brand polyethylene plastic resin infringed Viskase's patents and whether such conduct was willful. Because the jury rendered one general damage verdict, the Court ordered a retrial of all damage issues. By operation of the Court's order, the injunction in respect of ANC's future use of the "Affinity" brand resin was removed. On August 19, 1998, the Court granted Viskase's motion for partial summary judgment finding that ANC's use of the "Affinity" brand resin infringed Viskase's patents. The Court also reinstated the permanent injunction. Viskase filed a motion to have the jury verdict as to compensatory damages reinstated. ANC filed a motion to dismiss the lawsuit claiming that Viskase's patents are invalid and Viskase failed to join an indispensable party to the lawsuit. On May 10, 1999, the Court granted Viskase's motion to have the jury verdict as to the compensatory damages reinstated. In May and June 1999, the parties briefed the issue of enhanced damages and on July 2, 1999, the Court awarded Viskase total damages of $164.9 million. ANC filed a motion for reconsideration which was denied. On May 3, 1999, ANC commenced legal action in the Federal District Court for the Northern District of Illinois seeking declaratory relief that one of the litigated patents is invalid. ANC also filed a motion to consolidate the declaratory action with the 1993 suit. ANC's motion to consolidate was granted and then the Court dismissed ANC's suit with prejudice at the same time the Court awarded Viskase total damages of $164.9 million. ANC has filed an appeal to the United States Court of Appeals for the Federal Circuit. Oral arguments before the United States Circuit of Appeals for the Federal Circuit were held on June 6, 2000 and Viskase expects a decision during the first half of 2001. On January 14, 2000, Pechiney Plastic Packaging, Inc. and Pechiney Emballage Flexible Europe, Inc. (successors in interest in ANC) filed suit against the Company and Viskase in the United States District Court for the Northern District of Illinois, Eastern Division (the "Newsome Litigation"). This suit alleges infringement of U.S. Reissue Patent No. 35,567, which patent is set to expire on April 26, 2002, and further alleges patent interference with one of the six Viskase patents litigated in the ANC Litigation. In May 2000, the District Court dismissed the patent interference count. Pechiney filed an Amended Complaint on June 30, 2000 seeking to reinstate the dismissed count (Count III). On July 25, 2000, Viskase filed a Motion to Dismiss Count III of the Amended Complaint and also filed a Motion for Sanctions related thereto. On August 9, 2000, Viskase filed a Supplemental Motion for Sanctions. On August 24, 2000, Pechiney responded to these motions and Viskase filed its reply on September 14, 2000. On September 29, 2000, the Company and Viskase entered into a Settlement and License Agreement (the "Agreement") with ANC, American National Can Group, Inc., Pechiney Plastic Packaging, Inc. and Pechiney Emballage Flexible Europe (collectively, "Pechiney") partially resolving the ANC Litigation and fully resolving the Newsome Litigation. Pursuant to the Agreement, Viskase received a payment of $54.75 million on October 2, 2000. In addition, an additional payment of $60.25 million will be made to Viskase if the United States Court of Appeals for the Federal Circuit affirms the monetary award in its entirety in the ANC Litigation. In October 2000, pursuant to the agreement, Viskase withdrew its Motions for Sanctions and the Amended Complaint in the Newsome Litigation was dismissed with prejudice. The Company recorded $54.75 million as patent infringement settlement income during the third quarter 2000 and expensed $7.85 million patent defense costs. No portion of the potential additional payment of $60.25 million was recorded in the Company's financial statements. In addition, in 1997 and 1998, ANC challenged two of the six Viskase patents in suit by filing requests for reexamination with the United States Patent and Trademark office (USPTO). In one of the reexaminations, the USPTO has issued, on February 14, 2001, a Notice of Intent to Issue a Reexamination Certificate. In early May 2000 the Reexamination Certificate was issued. In the other reexamination, the patent has been rejected by the USPTO, and Viskase appealed the rejection to the USPTO Board of Patent Appeals and Interferences. Viskase's appeal has been fully briefed and is awaiting an oral hearing. Pursuant to the Agreement, the parties have agreed that neither will, directly or indirectly, except as required by any court order or the USPTO, seek to obtain or assist any other person or entity in seeking or obtaining the further reexamination, or the invalidation or limitation of the patents licensed under the Agreement, including the two patents for which ANC had previously requested reexamination. In March 1997, Viskase received a subpoena from the Antitrust Division of the United States Department of Justice relating to a grand jury investigation of the sausage casings industry. In September 1999, Viskase received a subpoena from the Antitrust Division of the United States Department of Justice relating to the expansion of the grand jury investigation into the specialty films industry. Viskase is cooperating fully with the investigations. During 1999 and 2000, the Company and certain of its subsidiaries and one other sausage manufacturer were named in ten virtually identical civil complaints filed in the United States District Court for the District of New Jersey by the following plaintiffs: Smith Provision Co., Inc.; Parks LLC (d/b/a Parks Sausage Company); Real Kosher Sausage Company, Inc.; Sahlen Packing Co., Inc.; Marathon Enterprises, Inc.; Ventures East, Inc.; Keniston's, Inc.; Smithfield Foods, Inc.; Clougherty Packing Co.; and Klement Sausage Co. The District Circuit ordered all of these cases consolidated in Civil Action No. 99-5195-MLC (D.N.J.). Each complaint brought on behalf of a purported class of sausage casings customers alleges that the defendants unlawfully conspired to fix prices and allocate business in the sausage casings industry. The Company and its subsidiaries have filed answers to each of these complaints denying liability. In 2001, all of the consolidated cases were transferred to the United States District Court for the Northern District of Illinois, Eastern Division. The Company and its subsidiaries are involved in 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 position. 5. RESTRUCTURING CHARGE (dollars in millions) During 2000, the Company committed to a restructuring plan to re-focus its remaining business. The Company wrote down $55.8 million of building and equipment to net realizable value. The restructuring actions, which were implemented to reduce the Company's fixed cost structure, resulted in a before tax charge to continuing operations of $94.9 million consisting of: Employee costs $13.4 Write-down of building and equipment 13.4 Nucel(r) building and equipment 42.4 Nucel(r) other 24.2 Decommissioning 2.3 Reversal of excess reserve (.8) ----- Restructuring charge $94.9 ===== During the first quarter of March 31, 2001, cash payments against the year 2000 reserve were $4.7 million and cumulative cash payments were $9.9 million. A remaining restructuring reserve of $22.1 million is included in accrued liabilities on the balance sheet. Approximately 15% of the Company's worldwide workforce was laid off due to the restructuring plan. During the third quarter of 1998, due to the business conditions leading to the Viskase plan of restructuring, the Company evaluated the recoverability of long-lived assets including property, plant and equipment, patents and excess reorganization on a consolidated basis. Based upon the analysis, the Company recognized an impairment because the estimated consolidated undiscounted future cash flows derived from long-lived assets were determined to be less than their carrying value. The amount of the impairment was calculated using the present value of the Company's estimated future net cash flows to determine the assets' fair value. Based on this analysis, an impairment charge of $91.2 million for excess reorganization and $4.3 million for the write-down of the Chicago facility was taken. In addition, the Viskase plan of restructuring included charges for the decommissioning of the Chicago plant and the decommissioning of some of its foreign operations. During the first quarter of 2001, cash payments against the 1998 reserve were $.1 million and cumulative payments were $19.9 million, respectively. A remaining restructuring reserve of approximately $.1 million is included in accrued liabilities on the balance sheet. During 2000, an amount of $.8 million identified as an excess reserve was released and offset against the 2000 restructuring charges. 6. DISCONTINUED OPERATIONS (dollars in thousands) 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 purchase price of $245 million, subject to a working capital adjustment, which could result in additional amounts realized, was used to retire debt, including the Senior Secured Credit Facility and Junior Term Loans, pay GECC per the amended amortization schedule, and for general corporate purposes. The Company recognized a net gain in the amount of $68.2 million in 2000 results. The business sold includes 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. Operating results from discontinued operations are as follows: Three Months Ended March 31, 2000 --------------- Net sales $38,850 Costs and expenses Cost of sales 28,796 Selling, general and administrative 7,199 Amortization of intangibles 750 ------- Operating income 2,105 Interest expense 27 Other expense, net 394 ------- Income from discontinued operations before taxes 1,684 Income tax provision 453 ------- Net income from discontinued operations $ 1,231 ======= 7. COMPREHENSIVE INCOME (dollars in thousands) The following sets forth the components of other comprehensive (loss) and the related income tax (benefit): Three Months Three Months Ended March 31, Ended March 31, 2001 2000 --------------- --------------- Foreign currency translation adjustment (1) $(623) $(1,305) (1) Net of related tax (benefit) of $(399) and $(835) for the first quarter 2001 and 2000, respectively. 8. EARNINGS PER SHARE (EPS) Following are the reconciliations of the numerators and denominators of the basic and diluted EPS. Three Months Three Months Ended March 31, Ended March 31, 2001 2000 -------------- --------------- (in thousands, except for weighted average shares outstanding) NUMERATOR: Net (loss) available to common stockholders: From continuing operations $(5,970) $(10,127) Discontinued operations: Income from discontinued operations 1,231 ------- -------- Net (loss) before extraordinary item $(5,970) $ (8,896) Extraordinary gain $ 4,930 ------- -------- Net loss available to common stockholders for basic and diluted EPS $(1,040) $ (8,896) ======= ======== DENOMINATOR: Weighted average shares outstanding for basic EPS 15,298,498 15,085,642 Effect of dilutive securities ---------- ---------- Weighted average shares outstanding for diluted EPs 15,298,498 15,085,642 ========== ========== Common stock equivalents are excluded from the loss per share calculations as the result is antidilutive. 9. ACCOUNTING STANDARDS In September 2000, the FASB issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125" ("Statement 140"). Statement 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Management believes that adoption of Statement 140 will not have a material effect on the Company's financial statements. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- The accompanying management's discussion and analysis of financial condition and results of operations should be read in conjunction with the following table: Three Months Three Months March 31, March 31, 2001 2000 ----------- ----------- (in thousands) Net sales: Casings - continuing operations $ 48,040 $ 51,770 Films - discontinued operations 38,850 -------- -------- $ 48,040 $ 90,620 ======== ======== Operating income (loss): Casings - continuing operations $ (2,663) $ 1,379 Films - discontinued operations 2,105 -------- ------- $ (2,663) $ 3,484 ======== ======== March 31, December 31, 2001 2000 --------- ------------ (in thousands) Identifiable assets: Casings - continuing operations $281,190 $322,364 Films - discontinued operations 146,318 -------- -------- $281,190 $468,682 ======== ======== Results of Operations --------------------- The Company's net sales from continuing operations for the first quarter of 2001 were $48.0 million which represents a decrease of 7.2% from the comparable period of 2000. The decline in sales reflects the continuing effect of reduced selling prices in the casings industry. European sales were negatively affected by foreign currency translation due to the strengthening of the U.S. dollar. Also, European sales declined due to the outbreak of both mad cow disease and foot-and-mouth disease. Operating income from continuing operations for the first quarter of 2001 was $(2.7) million representing a decrease of $4.0 million from the comparable period of 2000. The decrease in operating income resulted primarily from declines in sales and gross margins caused by continued price competition in the worldwide casings industry and increased energy and raw material costs. Net interest expense from continuing operations for the first quarter of 2001 totaled $5.6 million, representing a decrease of $6.5 million from the comparable period of 2000. The decrease is primarily due to reduced interest expense related to the repurchase of the 10.25% Notes, repayment of the Senior Term and Revolving loans and the Junior Term loans. Other expense from continuing operations of approximately $1.1 million and $.1 million for the first quarter of 2001 and 2000, respectively, consists principally of foreign exchange losses. The tax benefit for the first quarter of 2001 resulted primarily from the benefit of U.S. losses partially offset by the provision related to income from foreign subsidiaries. Due to permanent differences in the U.S. resulting from foreign losses for which no tax benefit is provided, a benefit of $3.4 million was provided on a loss from continuing operations of $9.3 million. The U.S. tax benefit is recorded as a reduction of the deferred tax liability and does not result in a refund of income taxes. 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 purchase price of $245 million, subject to a working capital adjustment, which could result in additional amounts realized, was used to retire debt, including the Senior Secured Credit Facility and Junior Term Loans, pay GECC per the amended amortization schedule, and for general corporate purposes. The Company recognized a net gain in the amount of $68.2 million in 2000 results. The business sold includes 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. Other ----- In September 2000, the FASB issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125" ("Statement 140"). Statement 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Management believes that adoption of Statement 140 will not have a material effect on the Company's financial statements. Liquidity and Capital Resources ------------------------------- Cash and equivalents decreased by $32.4 million during the quarter ended March 31, 2001. Cash flows used in operating activities were $10.4 million, used in financing activities were $20.4 million and used in investing activities were $1.0 million. Cash flows used in investing activities were principally attributable to capital expenditures for property plant and equipment. Cash flows used in operating activities were principally attributable to an increase in working capital usage and the gain on the debt extinguishment offset by the effect of depreciation and amortization. Cash flows used in financing activities were principally due to the repurchase of the 10.25% Notes offset by the discount on the early extinguishment of debt. In June 1999, Viskase Corporation and Viskase Sales Corporation entered into a two-year secured credit agreement consisting of a $50 million senior term facility (Senior Term Facility), a $50 million senior revolving credit facility, including a $26 million sublimit for issuance of letters of credit (Senior Revolving Credit Facility), collectively the "Senior Secured Credit Facility", and $35 million of junior secured term loans (Junior Term Loans). The Senior Term Facility and Junior Term Loans were paid in full in August 2000 using proceeds from the sale of Films Business. The Senior Secured Credit Facility has a maturity date of June 30, 2001. The Company's Senior Secured Credit Facility contained a number of financial covenants that, among other things, require the maintenance of a minimum level of tangible net worth, a minimum fixed charge coverage ratio and a minimum leverage ratio of total liabilities to EBITDA and a limitation on capital expenditures. On April 5, 2001, the Company received an amendment and waiver under the Company's Senior Secured Credit Facility which eliminated the financial covenants through the June 30, 2001 maturity date and eliminated the lender's obligation to extend additional borrowings. There are no borrowings outstanding under the Senior Revolving Credit Facility at March 31, 2001. Letters of credit in the amount of $25.3 million are outstanding under the Senior Revolving Credit Facility, and are cash collateralized. The Company finances its working capital needs through a combination of internally generated cash from operations and cash on hand. The Company anticipates it will enter into a new revolving credit facility to meet its working capital and letter of credit requirements. Under the terms of the April 13, 2000 Agreement and Amendment with GECC, the Company agreed to amend the amortization schedule of annual lease payments, maintain a letter of credit in the amount of $23.5 million at all times, limit additional borrowings and provide a subordinated security interest collateralized by the Collateral Pool. Holders of the Senior Secured Credit Facility and the Junior Term Loans consented to the payment extensions and the subordinated security interest granted to GECC. The revised amortization schedule is presented below: November 1, 2001 $11,750 February 28, 2002 11,749 February 28, 2003 23,499 February 28, 2004 23,499 February 28, 2005 23,499 Capital expenditures from continuing operations for the quarter ended March 31, 2001 and 2000 were $1.1 million and $2.4 million, respectively. Capital expenditures during 2000 included $.9 million from discontinued operations. Significant 2001 and 2000 capital expenditures from continuing operations included costs associated with the Visflex(tm) plastic casing line and the Nucel(r) project. Capital expenditures from discontinued operations included additional production capacity for specialty films. Capital expenditures from continuing operations for 2001 are expected to be approximately $5 million. The Company has spent approximately $8 million annually on research and development programs, including product and process development, and on new technology development during each of the past three years. The 2001 research and development and product introduction expenses are expected to be in the $5 million range. Among the projects included in the current research and development efforts is the application of certain patents and technology licensed by Viskase to the manufacture of cellulosic casings. The Company's 10.25% Notes mature on December 1, 2001. The Company has from time to time purchased 10.25% Notes in open market or privately negotiated transactions, with the effect that as of March 31, 2001 there was $163.2 million principal amount of 10.25% Notes outstanding , net of repurchased notes. The Company recognized an $8.1 million gain on the repurchase of the 10.25% Notes at March 31, 2001. As of May 15, 2001, there remains a $163.2 million principal amount of 10.25% Notes outstanding, net of repurchased notes. The Company does not presently anticipate that its current cash position and operating cash flows will be sufficient to pay the principal and accrued interest on the 10.25% Notes when they mature. In addition, the Company's payment obligations on the GECC lease remain substantial and the Senior Secured Credit Facility expires in June 2001. Accordingly, the Company is evaluating the strategic alternatives available to it with respect to its capital structure in general and the treatment of the 10.25% Notes between the date hereof and the date of their maturity. These alternatives could include public offerings or private placements of debt and/or equity securities, an exchange offer for the 10.25% Notes or other restructuring of the Company's indebtedness, the Company's entering into a new senior credit facility or the sale of the Company or its assets. There can be no assurance that any such transaction will be concluded or that any such additional financing will be available to the Company or that any such transaction or financing can be done on terms favorable to the Company's stockholders or creditors. Failure by the Company to refinance or restructure its obligations with respect to the 10.25% Notes would have a material adverse effect on the Company's results of operations and financial condition. 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; and the ability to achieve synergistic and other cost reductions and efficiencies. 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 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 March 31, 2001, a 10% devaluation of the U.S. dollar would affect the Company's annual consolidated operating results, financial position and cash flows by approximately $.3 million. PART II. OTHER INFORMATION Item 1 - Legal Proceedings ----------------- For a description of pending litigation and other contingencies, see Part 1, Note 4, Contingencies in Notes to Consolidated Financial Statements for Viskase Companies, Inc. and Subsidiaries. Item 2 - Changes in Securities --------------------- No reportable events occurred during the quarter ended March 31, 2001. Item 3 - Defaults Upon Senior Securities ------------------------------- None. Item 4 - Submission of Matters to a Vote of Security Holders --------------------------------------------------- None. Item 5 - Other Information ----------------- None. Item 6 - Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits 10.36 Agreement and Waiver dated as of March 22, 2001 between Viskase Corporation (the Lessee) and State Street Bank and Trust Company (the Lessor)relating to Participation Agreement dated December 18, 1990 among Viskase Corporation, as Lessee; Viskase Companies, Inc., as Guarantor, General Electric Capital Corporation, as Owner Participant; and State Street Bank and Trust Company, as Owner Trustee. (b) Reports on Form 8-K SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VISKASE COMPANIES, INC. ----------------------- Registrant By: /s/ ------------------- Gordon S. Donovan Vice President, Chief Financial Officer and Treasurer (Duly authorized officer and principal financial officer of the registrant) Date: May 15, 2001