10-Q 1 jun01qtr.txt VISKASE JUNE QUARTER 2001 FORM 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 June 30, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- --------------- Commission file number 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 August 13, 2001, there were 15,318,612 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 June 30, 2001 (unaudited) and December 31, 2000 4 Unaudited consolidated statements of operations and comprehensive loss for the three months ended June 30, 2001 and June 30, 2000 and for the six months ended June 30, 2001 and June 30, 2000 5 Unaudited consolidated statements of cash flows for the six months ended June 30, 2001 and June 30, 2000 7 Notes to consolidated financial statements 8 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS -------------------- The financial information included in this quarterly report has been prepared in conformity with the accounting principles and practices reflected in the financial statements included in the annual report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2000, as amended (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 consolidated balance sheet as of December 31, 2000 was derived from the audited consolidated financial statements in the Company's annual report on the 2000 Form 10-K. Reported interim results of operations and comprehensive loss are based in part on estimates which may be subject to year-end adjustments. In addition, these quarterly results of operations and comprehensive loss are not necessarily indicative of those expected for the year. VISKASE COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2001 2000 -------- ------------ (unaudited) (in thousands except for the number of shares) (S> ASSETS Current assets: Cash and equivalents $18,578 $ 55,350 Restricted cash 26,623 41,038 Receivables, net 27,548 27,334 Inventories 37,520 39,405 Other current assets 22,441 23,168 -------- -------- Total current assets 132,710 186,295 Property, plant and equipment, including those under capital leases 233,449 240,110 Less accumulated depreciation and amortization 117,583 110,845 -------- -------- Property, plant and equipment, net 115,866 129,265 Deferred financing costs, net 1,061 184 Other assets 6,312 6,620 -------- -------- Total assets $255,949 $322,364 ======== ======== LIABILITIES AND STOCKHOLDERS' (DEFICIT) Current liabilities: Short-term debt including current portion of long-term debt and obligations under capital leases $244,829 $200,676 Accounts payable 13,245 15,887 Accrued liabilities 51,805 73,309 Current deferred income taxes 3,381 3,381 -------- -------- Total current liabilities 313,260 293,253 Long-term debt including obligations under capital leases 240 73,183 Accrued employee benefits 43,004 40,773 Deferred and noncurrent income taxes 16,871 22,552 Commitments and contingencies Stockholders' deficit: Preferred stock, $.01 par value; none outstanding Common stock, $.01 par value; 15,305,755 shares issued and outstanding at June 30, 2001 and 15,276,764 shares at December 31, 2000 153 153 Paid in capital 138,000 137,967 Accumulated (deficit) (255,909) (247,048) Accumulated other comprehensive loss 571 1,840 Unearned restricted stock issued for future service (241) (309) -------- -------- Total stockholders' (deficit) (117,426) (107,397) -------- -------- Total Liabilities and Stockholders' Deficit $255,949 $322,364 ======== ======== The accompanying notes are an integral part of the consolidated financial statements.
VISKASE COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (unaudited) Three Months Ended Six Months Ended ------------------ ---------------- June June June June 30, 2001 30, 2000 30, 2001 30, 2000 -------- -------- -------- ------- (in thousands, except for number of shares and per share amounts) NET SALES $46,503 $51,134 $94,543 $102,904 COSTS AND EXPENSES Cost of sales 37,965 40,685 77,247 79,390 Selling, general and administrative 10,574 10,937 21,495 22,123 Amortization of intangibles and excess reorganization value 500 500 1,000 1,000 Restructuring charges 2,700 2,700 -------- ------- ------- ------- OPERATING (LOSS) (2,536) (3,688) (5,199) (2,309) Interest income 553 95 1,457 148 Interest expense 6,387 12,594 12,887 24,753 Other expense, net 3,377 511 4,462 624 -------- ------- ------- ------- (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (11,747) (16,698) (21,091) (27,538) Income tax provision (benefit) 2,470 (803) (904) (1,516) -------- ------- ------- -------- NET (LOSS) FROM CONTINUING OPERATIONS (14,217) (15,895) (20,187) (26,022) DISCONTINUED OPERATIONS: Income from operations net of income taxes (Note 6) 704 1,935 Gain on disposal net of income taxes of $0 3,189 3,189 -------- ------- ------- -------- NET (LOSS) BEFORE EXTRAORDINARY ITEM (11,028) (15,191) (16,998) (24,087) Extraordinary gain on early extinguishment of debt, net of six month and three month income taxes of $0 and $3,152, respectively 3,207 8,137 -------- ------- ------- ------- NET (LOSS) (7,821) (15,191) (8,861) (24,087) Other comprehensive (loss), net of tax (see Note 7) Foreign currency translation adjustments (247) (785) (1,269) (2,090) -------- ------- ------- ------- COMPREHENSIVE (LOSS) $(8,068) $(15,976) $(10,130) $(26,177) ======== ======== ======== ======== WEIGHTED AVERAGE COMMON SHARES - BASIC AND DILUTED 15,304,458 15,095,505 15,301,494 15,090,574 ========== ========== ========== ==========
PER SHARE AMOUNTS:
EARNINGS (LOSS) PER SHARE: - basic and diluted Continuing operations $(.93) (1.06) $(1.32) $(1.73) Discontinued operations: Income from operations .05 .13 Gain on disposal .21 .21 -------- ------- ------- ------- Net (loss) before extraordinary item (.72) (1.01) (1.11) (1.60) Extraordinary gain .21 .53 ------- ------- ------- ------- Net (loss) $(.51) $(1.01) $(.58) $(1.60) ======= ======= ======= ======= The accompanying notes are an integral part of the consolidated financial statements.
VISKASE COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Six Months Ended ---------------- June 30, June 30, 2001 2000 -------- -------- (in thousands) Cash flows from operating activities: Net (loss) $(8,861) $(24,087) Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities: Depreciation and amortization under capital lease 10,874 20,087 Amortization of intangibles 1,000 2,500 Amortization of deferred financing fees and discount 60 3,306 (Decrease) in deferred and noncurrent income taxes (1,089) (2,717) Extraordinary (gain) on debt extinguishment (8,137) Foreign currency transaction loss 812 791 Loss (Gain) on disposition of assets 1,895 (5) Bad debt provision 272 537 Changes in operating assets and liabilities: Receivables (1,583) 972 Inventories 735 (3,322) Other current assets 442 374 Accounts payable and accrued liabilities (22,313) 10,642 Other (678) (433) -------- ------- Total adjustments (17,710) 32,732 -------- ------- Net cash (used in) provided by operating activities (26,571) 8,645 Cash flows from investing activities: Capital expenditures (2,672) (7,543) Proceeds from disposition of assets 799 5 -------- ------- Net cash (used in) investing activities (1,873) (7,538) Cash flows from financing activities: Issuance of common stock 101 84 Deferred financing costs (958) (1,777) Repayment of revolving loan, long-term borrowings and capital lease obligation (20,609) (144) -------- ------- Net cash (used in) financing activities (21,466) (1,837) Effect of currency exchange rate changes on cash (1,277) (147) -------- ------- Net (decrease) in cash and equivalents (51,187) (877) Cash and equivalents at beginning of period 96,388 6,243 -------- ------- Cash and equivalents 18,578 5,366 Restricted cash 26,623 -------- ------- Cash and equivalents at end of period $45,201 $5,366 ======== ======= Supplemental cash flow information: Interest paid $11,466 $16,961 Income taxes paid $5,094 $1,720 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)
June December 30, 2001 31, 2000 -------- --------- Cash and cash equivalents $18,578 $55,350 Restricted cash 26,623 41,038 -------- -------- $45,201 $96,388 ======== ======= As of June 30, 2001, cash and cash equivalents of $15,940 and restricted cash of $26,623 are invested in short term investments. The restricted cash is principally cash held as collateral for outstanding letters of credit.
2. INVENTORIES (dollars in thousands)
Inventories consisted of: June December 30, 2001 31, 2000 -------- --------- Raw materials $ 3,979 $ 2,867 Work in process 17,553 17,827 Finished products 15,988 18,711 ------- ------- $37,520 $39,405 ======= ======= Approximately 60% of the inventories at June 30, 2001 were valued at Last-In, First-Out (LIFO). These LIFO values exceeded current manufacturing cost by approximately $5,003 at June 30, 2001.
3. DEBT OBLIGATIONS (dollars in thousands) Outstanding short-term and long-term debt consisted of: June December 30, 2001 31, 2000 -------- --------- Short-term debt, current maturity of long-term debt, and capital lease obligation: Viskase Capital Lease Obligation $ 81,604 $ 8,750 10.25% Senior Notes due 2001 163,060 191,703 Other 165 223 -------- -------- Total short-term debt $244,829 $200,676 ======== ======== Long-term debt: Viskase Capital Lease Obligation $72,854 Other $ 240 329 -------- -------- Total long-term debt $ 240 $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 expired on June 30, 2001. Letters of credit in the amount of $25.8 million were outstanding under a letter of credit facility with a commercial bank, and were cash collateralized at June 30, 2001. 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 in connection with the restructuring. 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 June 30, 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 June 30, 2001. The Company determined that, as of June 30, 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. The capital lease obligation has been classified as a current liability because the Company does not have waivers for future quarters. 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 June 30, 2001 there was $163.1 million principal amount of 10.25% Notes outstanding, net of repurchased notes. The Company recognized an $8.1 million net gain on the repurchase of the 10.25% Notes during the six months ended June 30, 2001. 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 expired on June 30, 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. 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. The Company recorded $54.75 million as patent infringement settlement income during the third quarter 2000 and expensed $7.85 million patent defense costs. On July 31, 2001, the Court of Appeals affirmed the lower court's decision in part, reversed the decision in part and remanded the case back to the District Court for the Northern District of Illinois. Under an agreement reached last year among the parties, Viskase Corporation was paid $54.75 million in partial settlement and agreed not to pursue the patent litigation further if the monetary damages award was not affirmed in its entirety. Because the monetary damages were not affirmed in its entirety, Viskase Corporation will not receive any additional payments under the agreement and no further legal proceedings will take place. The patents, which were the subject of the ANC Litigation, are part of the Company's Films Business which was sold in August 2000. 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. The following table provides details of the 2000 restructuring reserve for the six months ended June 30, 2001:
Restructuring Restructuring Reserve as of Other Reserve as of December 31, 2000 Payments Adjustments June 30, 2001 ----------------- -------- ----------- ------------- Employee severance costs $11.2 $(7.5) $(.5) $ 3.2 Nucel(r) and other 15.3 (.6) .1 14.8 Decommissioning .6 (.3) .0 .3 ----- ----- ---- ----- Total restructuring reserve $27.1 $(8.4) $(.4) $18.3 ===== ===== ==== ===== Approximately 15% of the Company's worldwide workforce was laid off due to the restructuring plan.
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 proceeds of $255 million, including a Working Capital Adjustment of $10.3 million, were used to retire debt; including the Senior Secured Credit Facility and Junior Term Loans, pay GECC per the amended amortization schedule, and for general corporate purposes. The Company recognized a net gain in the amount of $3.2 million in 2001 and $68.2 million in 2000. 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 Six Months Ended ------------------ ---------------- June June 30, 2000 30, 2000 --------- -------- Net sales $40,877 $79,727 Costs and expenses Cost of sales 30,763 59,559 Selling, general and administrative 7,298 14,497 Amortization of intangibles 750 1,500 -------- ------- Operating income 2,066 4,171 Interest expense 21 48 Other expense net 1,274 1,668 -------- ------- Income from discontinued operations before taxes 771 2,455 Income tax provision 67 520 -------- ------- Net income from discontinued operations $ 704 $1,935 ======== =======
7. COMPREHENSIVE LOSS (dollars in thousands) The following sets forth the components of other comprehensive (loss) and the related income taxes:
Three Months Three Months Six Months Six Months Ended June Ended June Ended June Ended June 30, 2001 30, 2000 30, 2001 30, 2000 ------------ ------------ ----------- ----------- Foreign currency translation adjustment (1) $(247) $(785) $(1,269) $(2,090) (1) Net of related tax (benefit) of $0 and $(502) for the second quarter ended 2001 and 2000, respectively, and $0 and $(1,336) for the first six months ended 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 Six Months Six Months Ended June Ended June Ended June Ended June 30, 2001 30, 2000 30, 2001 30, 2000 ------------ ------------ ---------- ---------- (in thousands, except for weighted average shares outstanding) NUMERATOR: Net (loss) available to common stockholders: From continuing operations: $(14,217) $(15,895) $(20,187) $(26,022) Discontinued operations: Income from operations 704 1,935 Gain on disposal 3,189 3,189 -------- -------- -------- -------- Net (loss) before extraordinary item (11,028) (15,191) (16,998) (24,087) Extraordinary gain 3,207 8,137 -------- -------- -------- -------- Net (loss) available to common stockholders for basic and diluted EPS $(7,821) $(15,191) $(8,861) $(24,087) ======== ======== ======== ======== DENOMINATOR: Weighted average shares outstanding for basic EPS 15,304,458 15,095,505 15,301,494 15,090,574 Effect of dilutive securities 0 0 0 0 ---------- ---------- ---------- ---------- Weighted average shares outstanding for diluted EPS 15,304,458 15,095,505 15,301,494 15,090,574 ========== ========== ========== ==========
Common stock equivalents are excluded from the loss-per-share calculations as the result is antidilutive. 9. ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". This Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets". The provisions of this Statement are required to be applied starting with fiscal years beginning after December 15, 2001. Management believes that adoption of Statement 142 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 Ended Six Months Ended ------------------ ---------------- June June June June 30, 2001 30, 2000 30, 2001 30, 2000 --------- --------- -------- --------- (in thousands)
Net sales: Casings - continuing operations $46,503 $51,134 $94,543 $102,904 Films - discontinued operations 40,877 79,727 ------- ------- ------- -------- $46,503 $92,011 $94,543 $182,631 ======= ======= ======= ======== Operating (loss) income: Casings - continuing operations $(2,536) $(3,688) $(5,199) $(2,309) Films - discontinued operations 2,066 4,171 ------- ------- ------- ------- $(2,536) $(1,622) $(5,199) $1,862 ------- ------- ------- -------
June December 30, 2001 31, 2000 -------- -------- (in thousands)
Identifiable assets: Casings - continuing operations $255,949 $322,364 Films - discontinued operations 146,318 -------- -------- $255,949 $468,682 ======== ========
Results of Operations --------------------- The Company's net sales from continuing operations for the first six months and second quarter of 2001 were $94.5 million and $46.5 million, respectively, which represents a decrease of 8.1% and 9.1% from comparable periods of 2000, respectively. The decline in sales reflects the continuing effect of reduced selling prices in the worldwide casings industry and lower sales volumes due to outbreaks of both mad cow disease and foot-and-mouth disease in Europe. European sales were also negatively affected by foreign currency translation due to the strengthening of the U.S. dollar. Operating (loss) from continuing operations for the first six months and second quarter of 2001 was $(5.2) million and $(2.5) million, respectively. The 2000 operating (loss) includes a restructuring charge of $2.7 million for the first six months and second quarter. The 2000 operating income (loss) from continuing operations, excluding the restructuring charge for 2000, was $.4 million and $(1.0) million for the first six months and second quarter, respectively. 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 six-month period in 2001 totaled $11.4 million, representing a decrease of $13.2 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 $4.5 million and $.6 million for the first six months of 2001 and 2000, respectively, consists principally of foreign exchange losses and during the second quarter of 2001, included a write down of $1.6 million for land and buildings to net realizable value. The tax benefit for the first six months of 2001 resulted from the benefit related to losses from foreign subsidiaries. A benefit of $(.9) million was provided on a loss from continuing operations of $(21.1) million. The foreign tax benefit is recorded as a reduction of the deferred tax liability and may 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 proceeds of $255 million, including a Working Capital Adjustment of $10.3 million, were used to retire debt; including the Senior Secured Credit Facility and Junior Term Loans, pay GECC per the amended amortization schedule, and for general corporate purposes. The Company recognized a net gain in the amount of $1.9 million in 2001 and $68.2 million in 2000. 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 June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". This Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets". The provisions of this Statement are required to be applied starting with fiscal years beginning after December 15, 2001. Management believes that adoption of Statement 142 will not have a material effect on the Company's financial statements. Liquidity and Capital Resources ------------------------------- Cash and equivalents decreased by $51.2 million during the six months ended June 30, 2001. Cash flows used in operating activities were $26.6 million, used in financing activities were $21.5 million and used in investing activities were $1.9 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 the Company's loss from operations, 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. 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 expired on June 30, 2001. Letters of credit in the amount of $25.8 million were outstanding under a letter of credit facility with a commercial bank, and were 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 in connection with the refinancing. 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 for continuing operations for the first six months of 2001 and 2000 were $2.7 million and $6.3 million, respectively. Capital expenditures during 2000 included $1.2 million from discontinued operations. Significant 2001 and 2000 capital expenditures from continuing operations included costs associated with the Visflex( 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 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 June 30, 2001 there was $163.1 million principal amount of 10.25% Notes outstanding, net of repurchased notes. The Company recognized an $8.1 million net gain on the repurchase of the 10.25% Notes during the six months ended June 30, 2001. 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. The Senior Secured Credit Facility expired on June 30, 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. During July 2001, the Company received an additional $10.3 million of cash proceeds related to the Purchase Price Adjustment on the sale of the Films Business. 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 from time-to-time. Currently, there are no derivative financial instruments outstanding. 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 June 30, 2001, a 10% devaluation of the U.S. dollar would affect the Company's annual consolidated operating results, financial position and cash flows by an amount less than $.1 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 June 30, 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 10.37 Master Letter of Credit Agreement dated June 29, 2001 between Viskase Corporation and LaSalle Bank National Association. (b) Reports on Form 8-K 1. On May 31, 2001 Viskase Companies, Inc. ("VCIC") announced that it is planning an exchange offer for its 10-1/4% Senior Notes due 2001 (the "Exchange Offer"). Although the specific terms of the Exchange Offer have not been finalized, the purpose of the Offer is to reduce Viskase's overall level of indebtedness and to address the refinancing of the 10-1/4% Senior Notes, which mature on December 1, 2001. Viskase has retained an advisor to assist with the Exchange Offer. Viskase does not presently intend to make the semi-annual interest payment due June 1, 2001 on the 10-1/4% Senior Notes, but expects to make the payment as part of the proposed Exchange Offer. 2. On June 29, 2001 Viskase Companies, Inc. ("VCIC") announced that it will make the semi-annual interest payment due June 1, 2001 on the 10-1/4% Senior Notes to the Trustee, on Friday, June 29, 2001. Viskase has established the close of business on July 16, 2001 as the special record date for the payment of the interest and overdue interest. The payment amount shall equal $51.92123 for each $1,000 principal amount of 10-1/4 % Notes and will be made on July 17, 2001. Viskase continues to explore various recapitalization and restructuring alternatives for reducing its overall level of indebtedness including among others exchanging the 10-1/4% Senior Notes for new securities and/or repurchasing 10-1/4% Senior Notes at a discount in the open market. 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: August 15, 2001