10-Q 1 form10k2005.txt SEPTEMBER 2005 QUARTERLY REPORT 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 September 30, 2005 ------------------ 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.) 625 Willowbrook Centre Parkway, Willowbrook, Illinois 60527 ----------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (630) 789-4900 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- ---- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- 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 --- --- As of October 27, 2005, there were 9,715,954 shares outstanding of the registrant's Common Stock, $.01 par value. 1 VISKASE COMPANIES, INC. INDEX Page PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Consolidated Financial Statements Consolidated balance sheets at September 30, 2005 (unaudited) and December 31, 2004 3 Unaudited consolidated statements of operations and comprehensive loss for the three months ended September 30, 2005 and September 30, 2004 and for the nine months ended September 30, 2005 and September 30, 2004 4 Unaudited consolidated statements of cash flows for the nine months ended September 30, 2005 and September 30, 2004 5 Notes to consolidated financial statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 25 Item 3. Quantitative and Qualitative Disclosures About Market Risk 39 Item 4. Controls and Procedures 39 PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings 40 Item 6. Exhibits 40 2 VISKASE COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands, Except for Number of Shares and Per Share Amounts)
September 30, 2005 December 31, 2004 ------------------ ----------------- ASSETS Current assets: Cash and cash equivalents $22,767 $30,255 Restricted cash 3,244 3,461 Receivables, net 31,563 30,509 Inventories 35,129 32,268 Other current assets 15,745 10,469 ------- ------- Total current assets 108,448 106,962 Property, plant and equipment 112,869 112,158 Less accumulated depreciation 22,729 19,312 ------- ------- Property, plant and equipment, net 90,140 92,846 Deferred financing costs, net 3,840 4,060 Other assets 3,793 9,564 ------- ------- Total Assets $206,221 $213,432 ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Short-term debt including current portion of long-term debt $227 $384 Accounts payable 15,319 17,878 Accrued liabilities 36,372 25,820 Current deferred income taxes 1,481 1,481 ------- ------- Total current liabilities 53,399 45,563 Long-term debt 102,696 100,962 Accrued employee benefits 56,534 66,715 Deferred and noncurrent income taxes 7,680 12,205 Deferred revenue 832 Commitments and contingencies Stockholders' deficit: Preferred stock, $.01 par value; none outstanding Common stock, $.01 par value; 10,670,053 shares issued and 9,715,954 shares outstanding at September 30, 2005; and 10,670,053 shares issued and 9,632,022 shares outstanding at December 31, 2004 107 107 Paid in capital 1,894 1,894 Accumulated (deficit) (21,095) (21,310) Less 805,270 treasury shares, at cost (298) (298) Accumulated other comprehensive income 4,481 7,608 Unearned restricted stock issued for future service (9) (14) ------- ------- Total stockholders' (deficit) (14,920) (12,013) ------- ------- Total Liabilities and Stockholders' Deficit $206,221 $213,432 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 3 VISKASE COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (In Thousands, Except for Number of Shares and Per Share Amounts)
3 Months 3 Months 9 Months 9 Months Ended Ended Ended Ended September September September September 30, 2005 30, 2004 30, 2005 30, 2004 --------- --------- --------- --------- NET SALES $52,232 $52,954 $153,856 $154,366 COSTS AND EXPENSES Cost of sales 41,842 42,048 122,816 121,690 Selling, general and administrative 7,287 7,373 21,978 22,779 Amortization of intangibles 117 269 504 808 Restructuring expense 2,174 668 ------- ------- -------- -------- OPERATING INCOME 2,986 3,264 6,384 8,421 Interest income 205 131 517 349 Interest expense 3,199 3,409 9,458 9,747 Other (income) expense, net (763) (1,860) (257) 1,436 Post-retirement benefits curtailment gain (668) (668) Loss on early extinguishment of debt, net of income tax provision of $0 in 2004 13,083 ------- ------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES 1,423 1,846 (1,632) (15,496) Income tax provision (benefit) (2,186) (154) (1,850) (393) ------- ------- -------- -------- NET INCOME (LOSS) 3,609 2,000 218 (15,103) Other comprehensive (loss) income: Foreign currency translation adjustments (364) (659) (3,127) (332) ------- ------- -------- -------- COMPREHENSIVE INCOME (LOSS) $3,245 $1,341 ($2,909) ($15,435) ======= ======= ========= ========= WEIGHTED AVERAGE COMMON SHARES - BASIC 9,715,954 9,632,022 9,692,212 10,142,026 ========= ========= ========= ========== PER SHARE AMOUNTS: (LOSS) PER SHARE - BASIC $.37 $.21 $.02 ($1.49) ======= ======== ======== ========= WEIGHTED AVERAGE COMMON SHARES - DILUTED 10,517,668 10,431,096 10,547,767 10,142,026 ========== ========== ========== ========== PER SHARE AMOUNTS: (LOSS) PER SHARE - DILUTED $.34 $.19 $.02 ($1.49) ======= ======== ======== =========
The accompanying notes are an integral part of the consolidated financial statements. 4 VISKASE COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
9 Months Ended 9 Months Ended September 30, 2005 September 30, 2004 ------------------ ------------------ Cash flows from operating activities: Net income (loss) $218 ($15,103) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization under capital lease 8,289 8,011 Amortization of intangibles 503 808 Amortization of deferred financing fees 529 223 Net (decrease) in deferred income taxes (3,711) (707) Postretirement plan curtailment gain (668) Foreign currency translation loss (gain) 578 (17) Net (gain) loss on disposition of assets (278) 144 Bad debt provision 93 122 Loss on debt extinguishment 13,083 Non-cash interest on 8% Notes 1,748 5,263 Payment of interest on 8% Notes (2,196) Changes in operating assets and liabilities: Receivables (2,554) (2,255) Inventories (4,504) 770 Other current assets (6,076) (1,151) Accounts payable and accrued liabilities 11,979 (4,606) Other (3,472) 11,888 ------- ------- Total adjustments 2,456 29,380 ------- ------- Net cash provided by operating activities 2,674 14,277 Cash flows (used in) provided by investing activities: Capital expenditures (9,756) (3,898) Reacquisition of leased assets (645) (9,500) Treasury stock purchase (298) Proceeds from disposition of assets 1,114 1,349 Restricted cash 217 23,535 ------- ------- Net cash (used in) provided by investing activities (9,070) 11,188 Cash flows (used in) provided by financing activities: Deferred financing costs (309) (4,015) Proceeds from issuance of long-term debt 89,348 Proceeds from issuance of warrants 1,001 Repayment of long-term borrowings (123) (104,273) ------- --------- Net cash (used in) financing activities (432) (17,939) Effect of currency exchange rate changes on cash (660) (147) ------- ------- Net (decrease) increase in cash and equivalents (7,488) 7,379 Cash and equivalents at beginning of period 30,255 23,160 ------- ------- Cash and equivalents at end of period $22,767 $30,539 ======== ======== Supplemental cash flow information: Interest paid less capitalized interest $4,595 $3,218 Income taxes paid $16 $34
The accompanying notes are an integral part of the consolidated financial statements. 5 VISKASE COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands) 1. Summary of Significant Accounting Policies General Viskase Companies, Inc. is a Delaware corporation organized in 1970. As used herein, the "Company" means Viskase Companies, Inc. and its subsidiaries. Nature of Operations The Company is a producer of non-edible cellulosic and plastic casings used to prepare and package processed meat products, and a provider of value-added support services relating to these products, for some of the largest global consumer products companies. The Company operates eight manufacturing facilities and eight distribution centers in North America, Europe and Latin America and, as a result, is able to sell its products in most countries throughout the world. Principles of Consolidation The consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated in consolidation. Reclassification Reclassifications have been made to the prior years' financial statements to conform to the 2005 presentation. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements includes the use of estimates and assumptions that affect a number of amounts included in the Company's financial statements, including, among other things, pensions and other post-retirement benefits and related disclosures, inventories valued under the last-in, first-out method, reserves for excess and obsolete inventory, allowance for doubtful accounts, restructuring charges and income taxes. Management bases its estimates on historical experience and other assumptions that it believes are reasonable. 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 effect on the Company's consolidated financial statements. Cash Equivalents For purposes of the statement of cash flows, the Company considers cash equivalents to consist of all highly liquid debt investments purchased with an initial maturity of approximately three months or less. Due to the short-term nature of these instruments, the carrying values approximate the fair market value. Cash equivalents and restricted cash include $21,792 and $28,272 of short-term investments at September 30, 2005 and December 31, 2004, respectively. Restricted cash is principally cash held as collateral for outstanding letters of credit with a commercial bank. 6 VISKASE COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands) Inventories Domestic inventories are valued primarily at the lower of last-in, first-out ("LIFO") cost or market. Remaining inventories, primarily foreign, are valued at the lower of first-in, first-out ("FIFO") cost or market. 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 (i) building and improvements - 10 to 32 years, (ii) machinery and equipment - 4 to 12 years, (iii) furniture and fixtures - 3 to 12 years and (iv) auto and trucks - 2 to 5 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. Deferred Financing Costs Deferred financing costs are amortized on a straight-line basis over the expected term of the related debt agreement. Amortization of deferred financing costs is classified as interest expense. Patents Patents are amortized on the straight-line method over an estimated average useful life of 10 years. Goodwill and Intangible Assets Intangible assets that have an indefinite useful life are not amortized and are tested at least annually for impairment. As part of fresh-start accounting, the Company recognized intangible assets that are being amortized. Non-compete agreements in the amount of $1,236 were amortized over the two year period ended March 31, 2005. Long-Lived Assets The Company continues to evaluate the recoverability of long-lived assets including property, plant and equipment, patents and other intangible assets. Impairments are recognized when the expected undiscounted future operating cash flows derived from long-lived assets are less than their carrying value. If impairment is identified, valuation techniques deemed appropriate under the particular circumstances will be used to determine the asset's fair value. The loss will be measured based on the excess of carrying value over the determined fair value. The review for impairment is performed at least once a year or when circumstances warrant. Accounts Payable The Company's cash management system provides for the daily replenishment of its bank accounts for check-clearing requirements. The outstanding check balances of $1,153 and $1,092 at September 30, 2005 and December 31, 2004, respectively, are not deducted from cash but are reflected in Accounts Payable on the consolidated balance sheets. 7 VISKASE COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands) Deferred Revenue License fees paid in advance are deferred and recognized on a straight line basis over the life of the applicable patent. As of September 30, 2005, the remaining balance of unearned revenue was $947. Pensions and Other Post-Retirement Benefits The North American operations of the Company have defined benefit retirement plans covering substantially all salaried and full time hourly non-union employees hired on or prior to March 31, 2003 and employees covered by a collective bargaining agreement hired on or prior to September 30, 2004. The Company's operation in Germany also has a defined benefit plan covering substantially all of its employees. Pension cost is computed using the projected unit credit method. The discount rate used approximates the average yield for high-quality corporate bonds as of the valuation date. The Company's funding policy is consistent with funding requirements of the applicable Federal and foreign laws and regulations. Salaried and full time hourly non-union United States employees hired after March 31, 2003 and United States employees covered by a collective bargaining agreement hired after September 30, 2004 are eligible for a defined contribution benefit equal to three percent of their base earnings, as defined by the plan. The United States and Canadian operations of the Company have historically provided post-retirement health care and life insurance benefits. The Company accrues for the accumulated post-retirement benefit obligation that represents the actuarial present value of the anticipated benefits. Measurement is based on assumptions regarding such items as the expected cost of providing future benefits and any cost sharing provisions. The Company terminated post-retirement medical benefits as of December 31, 2004 for all active employees and retirees in the United States who were not covered by a collective bargaining agreement. On September 30, 2005 employees in the U.S. covered by a collective bargaining agreement ratified a new agreement to terminate post- retirement medical benefits as of December 31, 2006 for all active employees and retirees covered by the collective bargaining agreement. 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. Net Income (Loss) Per Share Net income (loss) per share of common stock is based upon the weighted- average number of shares of common stock outstanding during the year. No effect has been given to common stock equivalents, where their effect is anti-dilutive on loss per share. 8 VISKASE COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands) Other Comprehensive Income Comprehensive income includes all other non-shareholder changes in equity. Changes in other comprehensive income in 2005 and 2004 resulted from changes in foreign currency translation adjustments. Revenue Recognition The Company's revenues are recognized at the time products are shipped to the customer, under F.O.B. Shipping Point terms or under F.O.B. Port terms. Revenues are net of any discounts, rebates and allowances. The Company records all labor, raw materials, in-bound freight, plant receiving and purchasing, warehousing, handling and distribution costs as a component of cost of goods sold. Accounting for Stock-Based Compensation The Company uses the intrinsic value method as provided for under APB 25 to account for options granted to employees for the purchase of common stock. No compensation expense is recognized on the grant date, since at that date, the option price equals the market price of the underlying common stock. The pro forma effect of accounting for stock options under a fair value method is as follows:
(Dollars in Thousands, Except Per Share Amounts) 9 Months 9 Months Ended September Ended September 30, 2005 30, 2004 --------------- --------------- Net income, as reported $218 ($15,103) Deduct: Total stock-based compensation expense under a fair value based method, net of related tax effects (201) ----- --------- Net income, pro forma $17 ($15,103) ===== ========= Basic earnings per share, as reported $0.02 ($1.49) Diluted earnings per share, as reported $0.02 ($1.49) Basic earnings per share, pro forma $0.00 ($1.49) Diluted earnings per share, pro forma $0.00 ($1.49)
Accounting Standards In November 2004, the FASB issued SFAS No. 151 ("SFAS 151"), "Inventory Costs - an Amendment of ARB No. 43 Chapter 4." SFAS 151 requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling be recognized as current-period charges rather than being included in inventory regardless of whether the costs meet the criterion of abnormal as defined in ARB 43. SFAS 151 is applicable for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company plans to adopt this standard beginning the first quarter of fiscal year 2006 and does not believe the adoption will have a material impact on its financial statements as such costs have historically been expensed as incurred. 9 VISKASE COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands) In December 2004, the FASB issued SFAS No. 153 ("SFAS 153"), "Exchanges of Nonmonetary Assets - an Amendment of APB Opinion No. 29" which addresses the measurement of exchanges of nonmonetary assets and eliminates the exception from fair value accounting for nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of an entity are expected to change significantly as a result of the exchange. This statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005 and is not expected to have a significant impact on the Company's financial statements. In December 2004, the FASB issued SFAS No. 123 (revised 2004) ("SFAS 123R"), "Share-Based Payment." SFAS 123R sets accounting requirements for "share-based" compensation to employees, requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees and disallows the use of a fair value method of accounting for stock compensation. SFAS 123R is applicable for annual, rather than interim, periods beginning after June 15, 2005, as such, the Company must adopt in January 2006. The Company is currently evaluating the impact this statement will have on the financial statements. In March 2005, the FASB issued Interpretation No. 47 ("FIN 47"), "Accounting for Conditional Asset Retirement Obligations." FIN 47 clarifies that the term "conditional asset retirement obligation" as used in SFAS No. 143, "Accounting for Asset Retirement Obligations," refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005 and is not expected to have a significant impact on the Company's financial statements. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections." SFAS No. 154 replaced Accounting Principles Board Opinion, or APB, No. 20, "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements" and establishes retrospective application as the required method for reporting a change in accounting principle. SFAS No. 154 provided guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. SFAS No. 154 also addresses the reporting of a correction of an error by restating previously issued financial statements. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. 2. Cash and Cash Equivalents
September 30, 2005 December 31, 2004 ------------------ ----------------- Cash and cash equivalents $22,767 $30,255 Restricted cash 3,244 3,461 ------- ------- $26,011 $33,716
As of September 30, 2005, cash equivalents and restricted cash of $21,792 are invested in short-term investments. 10 VISKASE COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands) 3. Inventories Inventories consisted of:
September 30, 2005 December 31, 2004 ------------------ ----------------- Raw materials $5,759 $4,816 Work in process 14,675 13,558 Finished products 14,695 13,894 ------- ------- $35,129 $32,268
Approximately 48% of the Company's inventories at September 30, 2005 were valued at LIFO. Remaining inventories, primarily foreign, are valued at the lower of FIFO cost or market. At September 30, 2005, the LIFO values exceeded current manufacturing cost by approximately $251. 4. Debt Obligations (Dollars in Thousands, Except For Number of Shares and Warrants, and Per Share, Per Warrant and Per Bond Amounts) On June 29, 2004, the Company issued $90,000 of new 11.5% Senior Secured Notes due 2011 ("11.5% Senior Secured Notes") and 90,000 warrants ("New Warrants") to purchase an aggregate of 805,230 shares of common stock of the Company. The proceeds of the 11.5% Senior Secured Notes and the 90,000 New Warrants totaled $90,000. The 11.5% Senior Secured Notes have a maturity date of, and the New Warrants expire on, June 15, 2011. The $90,000 proceeds were used for the (i) repurchase of $55,527 principal amount of the Company's 8% Senior Subordinated Notes due December 1, 2008 (the "8% Notes") at a price of 90% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon; (ii) early termination of the General Electric Capital Corporation ("GECC") capital lease and repurchase of the operating assets subject thereto for a purchase price of $33,000; and (iii) payment of fees and expenses associated with the refinancing and repurchase of existing debt. In addition, the Company entered into a new $20,000 revolving credit facility with a financial institution. The revolving credit facility is a five-year facility with a June 29, 2009 maturity date. Each of the 90,000 New Warrants entitles the holder to purchase 8.947 shares of the Company's common stock at an exercise price of $.01 per share. The New Warrants were valued for accounting purposes using a fair value method. Using a fair value method, each of the 90,000 New Warrants was valued at $11.117 for an aggregate fair value of the warrant issuance of $1,001. The remaining $88,899 of aggregate proceeds were allocated to the carrying value of the 11.5% Senior Secured Notes as of June 29, 2004. 11 VISKASE COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands) Outstanding short-term and long-term debt consisted of:
September 30, 2005 December 31, 2004 ------------------ ----------------- Short-term debt, current maturity of long-term debt: Other $227 $384 ---- ---- Total short-term debt $227 $384 ---- ---- Long-term debt: 11.5% Senior Secured Notes $89,178 $89,071 8% Notes 13,397 11,757 Other 121 134 ------- ------- Total long-term debt $102,696 $100,962 ======== ========
Revolving Credit Facility ------------------------- On June 29, 2004, the Company entered into a new $20,000 secured revolving credit facility ("Revolving Credit Facility"). The Revolving Credit Facility includes a letter of credit subfacility of up to $10,000 of the total $20,000 maximum facility amount. The Revolving Credit Facility expires on June 29, 2009. Borrowings under the loan and security agreement governing this Revolving Credit Facility are subject to a borrowing base formula based on percentages of eligible domestic receivables and eligible domestic inventory. Under the Revolving Credit Facility, we will be able to choose between two per annum interest rate options: (i) the lender's prime rate and (ii) LIBOR plus a margin currently of 2.25% (which margin will be subject to performance based increases up to 2.50% and decreases down to 2.00%); provided that the minimum interest rate shall be at least equal to 3.00%. Letter of credit fees will be charged a per annum rate equal to the then applicable LIBOR rate margin less 50 basis points. The Revolving Credit Facility also provides for an unused line fee of 0.375% per annum. Indebtedness under the Revolving Credit Facility is secured by liens on substantially all of the Company's and the Company's domestic subsidiaries' assets, with liens (i) on inventory, account receivables, lockboxes, deposit accounts into which payments are deposited and proceeds thereof, which will be contractually senior to the liens securing the 11.5% Senior Secured Notes and the related guarantees pursuant to an intercreditor agreement, (ii) on real property, fixtures and improvements thereon, equipment and proceeds thereof, which will be contractually subordinate to the liens securing the 11.5% Senior Secured Notes and such guarantees pursuant to such intercreditor agreement, (iii) on all other assets, which will be contractually pari passu with the liens securing the 11.5% Senior Secured Notes and such guarantees pursuant to such intercreditor agreement. The Revolving Credit Facility contains various covenants which will restrict the Company's ability to, among other things, incur indebtedness, enter into mergers or consolidation transactions, dispose of assets (other than in the ordinary course of business), acquire assets, make certain restricted payments, prepay any of the 8% Notes at a purchase price in excess of 90% of the aggregate principal amount thereof (together with accrued and unpaid interest to the date of such prepayment), create liens on our assets, make investments, create guarantee obligations and enter into sale and leaseback transactions and transactions with affiliates, in each case subject to permitted exceptions. The Revolving Credit Facility also requires that we comply with various financial covenants, including meeting a minimum EBITDA requirement and limitations on capital expenditures in the event our usage of the Revolving Credit Facility exceeds 30% of the facility amount. The Revolving Credit Facility also requires payment of a prepayment premium in the event that it is terminated prior to maturity. The prepayment premium, as a percentage of the $20,000 facility amount, is 2% through June 29, 2006, and 1% through June 29, 2007. 12 VISKASE COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands) There were no short-term borrowings under revolving credit facilities during 2004 and 2005. 11.5% Senior Secured Notes -------------------------- On June 29, 2004, the Company issued $90,000 of 11.5% Senior Secured Notes that bear interest at a rate of 11.5% per annum, payable semi- annually in cash on June 15 and December 15. The 11.5% Senior Secured Notes mature on June 15, 2011. The 11.5% Senior Secured Notes will be guaranteed on a senior secured basis by all of our future domestic restricted subsidiaries that are not immaterial subsidiaries (as defined). The 11.5% Senior Secured Notes and the related guarantees (if any) are secured by substantially all of the tangible and intangible assets of the Company and guarantor subsidiaries (if any); and includes the pledge of the capital stock directly owned by the Company or the guarantors; provided that no such pledge will include more than 65% of any foreign subsidiary directly owned by the Company or the guarantor. The Indenture and the security documents related thereto provide that, to the extent that any rule is adopted, amended or interpreted that would require the filing with the SEC (or any other governmental agency) of separate financial statements for any of our subsidiaries due to the fact that such subsidiary's capital stock secures the 11.5% Senior Secured Notes, then such capital stock will automatically be deemed not to be part of the collateral securing the 11.5% Senior Secured Notes to the extent necessary to not be subject to such requirement. In such event, the security documents may be amended, without the consent of any holder of 11.5% Senior Secured Notes, to the extent necessary to release the liens on such capital stock. With limited exceptions, the 11.5% Senior Secured Notes require that the Company maintain a minimum annual level of EBITDA calculated at the end of each fiscal quarter as follows:
Fiscal quarter ending Amount ---------------------------------------------- ------ September 30, 2004 through September 30, 2006 $16,000 December 31, 2006 through September 30, 2008 $18,000 December 31, 2008 and thereafter $20,000
unless the sum of (i) unrestricted cash of the Company and its restricted subsidiaries as of such day and (ii) the aggregate amount of advances that the Company is actually able to borrow under the Revolving Credit Facility on such day (after giving effect to any borrowings thereunder on such day) is at least $15,000. The minimum annual level of EBITDA covenant is not currently in effect as the Company's unrestricted cash and the amount of available credit under the Revolving Credit Facility exceed $15,000. The Company's EBITDA as of September 30, 2005 would have exceeded the required covenant level if the covenant had been in effect at that time. The 11.5% Senior Secured Notes limit the ability of the Company to (i) incur additional indebtedness; (ii) pay dividends, redeem subordinated debt, or make other restricted payments, (iii) make certain investments or acquisitions; (iv) issue stock of subsidiaries; (v) grant or permit to exist certain liens; (vi) enter into certain transactions with affiliates; (vii) merge, consolidate, or transfer substantially all of our assets; (viii) incur dividend or other payment restrictions affecting certain subsidiaries; (ix) transfer, sell or acquire assets, including capital stock of subsidiaries; and (x) change the nature of our business. At any time prior to June 15, 2008, the Company may redeem, at its option, some or all of the 11.5% Senior Secured Notes at a make-whole redemption price equal to the greater of (i) 100% of the aggregate principal amount of the 11.5% Senior Secured Notes being redeemed and (ii) the sum of the present values of 105 3/4% of the aggregate principal amount of such 11.5% Senior Secured 13 VISKASE COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands) Notes and scheduled payments of interest on such 11.5% Senior Secured Notes to and including June 15, 2008, discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 50 basis points, together with, in each case, accrued and unpaid interest and additional interest, if any, to the date of redemption. The make-whole redemption price as of September 30, 2005 is approximately 122%. On or after June 15, 2008, the Company may redeem, at its option, some or all of the 11.5% Senior Secured Notes at the following redemption prices, plus accrued and unpaid interest to the date of redemption: For the periods below Percentage On or after June 15, 2008 105 3/4% On or after June 15, 2009 102 7/8% On or after June 15, 2010 100% Prior to June 15, 2007, the Company may redeem, at its option, up to 35% of the aggregate principal amount of the 11.5% Senior Secured Notes with the net proceeds of any equity offering at 111 1/2% of their principal amount, plus accrued and unpaid interest to the date of redemption, provided that at least 65% of the aggregate principal amount of the 11.5% Senior Secured Notes remains outstanding immediately following the redemption. Within 90 days after the end of each fiscal year ending in 2006 and thereafter, for which the Company's Excess Cash Flow (as defined) was greater than or equal to $2,000, the Company must offer to purchase a portion of the 11.5% Senior Secured Notes at 101% of principal amount, together with accrued and unpaid interest to the date of purchase, with 50% of our Excess Cash Flow from such fiscal year ("Excess Cash Flow Offer Amount"); except that no such offer shall be required if the Revolving Credit Facility prohibits such offer from being made because, among other things, a default or an event of default is then outstanding thereunder. The Excess Cash Flow Offer Amount shall be reduced by the aggregate principal amount of 11.5% Senior Secured Notes purchased in eligible open market purchases as provided in the indenture. If the Company undergoes a change of control (as defined), the holders of the 11.5% Senior Secured Notes will have the right to require the Company to repurchase their 11.5% Senior Secured Notes at 101% of their principal amount, plus accrued and unpaid interest to the date of purchase. If the Company engages in asset sales, it must either invest the net cash proceeds from such sales in its business within a certain period of time (subject to certain exceptions), prepay indebtedness under the Revolving Credit Facility (unless the assets that are the subject of such sales are comprised of real property, fixtures or improvements thereon or equipment) or make an offer to purchase a principal amount of the 11.5% Senior Secured Notes equal to the excess net cash proceeds. The purchase price of each 11.5% Senior Secured Note so purchased will be 100% of its principal amount, plus accrued and unpaid interest to the date of purchase. 8% Notes -------- The 8% Notes bear interest at a rate of 8% per year, and 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 8% Notes (paid-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 8% Notes (paid-in-kind). Thereafter, interest will be payable in cash. The 8% Notes mature on December 1, 2008. 14 VISKASE COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands) On June 29, 2004, the Company repurchased $55,527 aggregate principal amount of its 8% Notes, and the holders (i) released the liens on the collateral that secured the 8% Notes, (ii) contractually subordinated the Company's obligations under the 8% Notes to obligations under certain indebtedness, including the new 11.5% Senior Secured Notes and the Revolving Credit Facility; and (iii) eliminated substantially all of the restrictive covenants contained in the indenture governing the 8% Notes. The carrying value of the remaining 8% Notes outstanding at September 30, 2005 is $13,397. The 8% Notes were valued at market in fresh-start accounting. The discount to face value is being amortized using the effective-interest rate methodology through maturity with an effective interest rate of 10.46%. The following table summarizes the carrying value of the 8% Notes at December 31 assuming interest through 2006 is paid in the form of 8% Notes (paid-in-kind):
2005 2006 2007 ---- ---- ---- 8% Notes Principal $17,261 $18,684 $18,684 Discount 3,305 2,283 1,148 ------- ------- ------- Carrying value $13,956 $16,401 $17,536 ======= ======= =======
Letter of Credit Facility ------------------------- Letters of credit in the amount of $2,419 were outstanding under letter of credit facilities with commercial banks, and were cash collateralized at September 30, 2005. The Company finances its working capital needs through a combination of internally generated cash from operations and cash on hand. The Revolving Credit Facility provides additional financial flexibility. Aggregate maturities of debt for each of the next five years are:
11.5% Senior Secured Notes $90,000 8% Notes $18,684 Other $227 121 ---- ---- ---- ------- ---- ------- $227 $18,684 $90,121 ==== ==== ==== ======== ==== =======
15 VISKASE COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands) 5. Post-Retirement Plans Pension contributions --------------------- The Company paid $2,834 during the first nine months of 2005, and expects to contribute an additional $1,373 during the remainder of the year.
9 Months 9 Months Ended Ended September September 30, 2005 30, 2004 --------- --------- Component of net period benefit cost Service cost $1,852 $1,613 Interest cost 5,481 5,533 Expected return on plan assets (5,099) (5,264) Amortization of prior service cost (272) 18 ------ ------- Total net periodic benefit cost $1,962 $1,900 ====== ======
The Company has expensed $1,962 in the first nine months of 2005 and expects its pension expense to be $2,576 for the year. Post-retirement benefits ------------------------ The Company paid $979 during the first nine months of 2005, and expects to contribute an additional $204 during the remainder of the year.
Other Benefits ---------------------- 9 Months 9 Months Ended Ended September September 30, 2005 30, 2004 --------- --------- Component of net period benefit cost Service cost $180 $682 Interest cost 817 2,596 Amortization of prior service cost (78) 264 ----- ----- Net periodic benefit cost $919 $3,542 Effect of curtailment (668) ----- ------ Total net periodic benefit cost $251 $3,542 ==== ======
The Company has expensed $251 in the first nine months of 2005 and expects its post-retirement benefits income to be $1,341 for the year including the effects of the curtailment of post-retirement benefits discussed below. 16 VISKASE COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands) The Company terminated post-retirement medical benefits as of December 31, 2004 for all active employees and retirees in the United States who were not covered by a collective bargaining agreement. On September 30, 2005 employees in the U.S. covered by a collective bargaining agreement ratified a new agreement to terminate post- retirement medical benefits for all active employees and retirees as of December 31, 2006. As a result of the agreement, the Company recognized a one time curtailment gain of $668 during the third quarter of 2005. The Company will amortize a $12,768 gain due to unrecognized prior service cost net of $4,240 of unrecognized actuarial losses over the final 15 months of the plan. 6. Restructuring Charges During the second quarter of 2005, our board of directors has approved a plan under which we will restructure our finishing operations by relocating finishing operations from our facility in Kentland, Indiana to a facility in Mexico. We expect to complete the restructuring by the end of 2006. The relocation of the finishing operations is intended to lower costs and optimize operations. The total cost of the restructuring, exclusive of capital expenditures, is expected to be approximately $10,000, substantially all of which will result in cash expenditures. We also expect to make capital expenditures of approximately $9,000 to $10,000 in connection with the restructuring. We began incurring a substantial portion of these costs and capital expenditures in the second quarter of 2005 and expect to continue to incur them through the end of 2006. A $1,787 charge for one-time employee costs related to the Kentland relocation was recorded during the second quarter of 2005. During the first quarter of 2005, the Company committed to a restructuring plan to continue to address the Company's competitive environment. The plan resulted in a before tax charge of $387. During the first quarter of 2004, the Company committed to a restructuring plan to continue to address the Company's competitive environment. The plan resulted in a before tax charge of $784. Approximately 13% of the home office personnel were laid off due to the restructuring plan. The 2004 restructuring charge is offset by a reversal of an excess reserve of $116 relating to the 2003 restructuring reserve. During the third and fourth quarters of 2003, the Company committed to a restructuring plan to address the industry's competitive environment. The plan resulted in a before-tax charge of $2,562. Approximately 2% of the Company's worldwide workforce was laid off due to the 2003 restructuring plan. The renegotiated Nucel(r) technology third-party license fee payments remaining as of September 30, 2005 are $150 and are included in the 2000 restructuring reserve. 17 VISKASE COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands) Restructuring Reserves ---------------------- The following table provides details of the 2005, 2003 and 2000 restructuring reserves for the period ended September 30, 2005 (dollars in millions):
Restructuring Restructuring reserve as of reserve as of December 31, 2005 Other September 30, 2004 Charge Payments adjustments 2005 ------------- ------ -------- ----------- ------------- 2005 employee costs $2.2 ($0.4) $1.8 2003 employee costs $0.1 (0.1) 2000 Nucel(r) license fees 0.2 0.2 ---- ---- ------ ---- ---- Total restructuring charge payments $0.3 $2.2 ($0.5) $2.0 ==== ==== ====== ==== ====
7. Capital Stock and Paid in Capital Authorized shares of preferred stock $(0.01 par value per share) and common stock $(0.01 par value per share) for the Company are 50,000,000 shares and 50,000,000 shares, respectively. A total of 10,670,053 shares of common stock were issued and 9,715,954 were outstanding as of September 30, 2005. A total of 10,670,053 shares of common stock were issued and 9,632,022 were outstanding as of December 31, 2004. In connection with the Company's emergence from bankruptcy in 2003, 660,000 shares of common stock were reserved for grant to management and employees under the Viskase Companies, Inc. Restricted Stock Plan. On April 3, 2003, the Company granted 330,070 shares of restricted common stock ("Restricted Stock") under the Restricted Stock Plan. Shares granted under the Restricted Stock Plan vest 12.5% on grant date; 17.5% on the first anniversary of grant date; 20% on the second anniversary of grant date; 20% on the third anniversary; and, 30% on the fourth anniversary of the grant date, subject to acceleration upon the occurrence of certain events. The Restricted Stock expense for the nine- month periods ended September 30, 2005 and 2004 is $5 and $5, respectively. The value of the Restricted Stock was calculated based on the fair market value of approximately $0.10 per share for the new common stock upon emergence from bankruptcy using a multiple of cash flow calculation to determine enterprise value and the related equity value. 8. Treasury Stock In connection with the June 29, 2004 refinancing transaction, the Company purchased 805,270 shares of its common stock from the underwriter for a purchase price of $298. The common stock has been accounted for as treasury stock. The treasury shares are being held for use in connection with any exercise of the New Warrants. 9. Warrants (Dollars in Thousands, Except Per Share and Per Warrant Amounts) On June 29, 2004, the Company issued $90,000 of 11.5% Senior Secured Notes together with the 90,000 New Warrants to purchase an aggregate of 805,230 shares of common stock of the Company. The aggregate purchase price of the 11.5% Senior Secured Notes and the 90,000 of New Warrants was $90,000. Each of the New Warrants entitles the holder to purchase 8.947 shares of the Company's common stock at an exercise price of $.01 per share through the June 15, 2011 expiration date. 18 VISKASE COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands) The New Warrants were valued for accounting purposes using a fair value method. Using a fair value method, each of the New Warrants was valued at $11.117 for an aggregate fair value of the warrant issuance of $1,001. Pursuant to the Company's 2003 plan of reorganization, holders of pre- petition common stock received warrants to purchase shares of common stock ("Old Warrants"). At September 30, 2005, Old Warrants exercisable for 304,127 shares of common stock are outstanding. The Old Warrants have a seven-year term expiring on April 2, 2010, and have an exercise price of $10.00 per share. 10. 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 ("Union Carbide") 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 and/or negligently failed to disclose to Viskase Canada the existence of contamination on the Site. In November 2000, the Ontario 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 and The Dow Chemical Company, corporate successor to Union Carbide ("Dow"), have been working with the MOE in investigating the PCB contamination. The Company and Dow reached an agreement for resolution of all outstanding matters between them whereby Dow repurchased the Site for $1,375 (Canadian), and is responsible for, and assumed the cost of remediation of the Site, and indemnified Viskase Canada and its affiliates, including the Company, in relation to all related environmental liabilities at the Site and Viskase Canada dismissed the action referred to above. The transaction was closed during May 2005, and resulted in a gain of $279 (US). In 1993, the Illinois Department of Revenue ("IDR") submitted a proof of claim against Envirodyne Industries, Inc. (now known as Viskase Companies, Inc.) and its subsidiaries in the United States Bankruptcy Court for the Northern District of Illinois ("Bankruptcy Court"), Bankruptcy Case Number 93 B 319, for alleged liability with respect to the IDR's denial of the Company's allegedly incorrect utilization of certain loss carry-forwards of certain of its subsidiaries. In September 2001, the Bankruptcy Court denied the IDR's claim and determined the debtors were not responsible for 1998 and 1999 tax liabilities, interest and penalties. IDR appealed the Bankruptcy Court's decision to the United States District Court, Northern District of Illinois, Case Number 01 C 7861, and in February 2002, the district court affirmed the Bankruptcy Court's order. IDR appealed the district court's order to United States Court of Appeals for the Seventh Circuit, Case Number 02- 1632. On January 6, 2004, the appeals court reversed the judgment of the district court and remanded the case for further proceedings. The matter is now before the Bankruptcy Court for further determination. As of September 30, 2005, the tax liabilities, interest and penalties claimed totaled approximately $2,600. 19 VISKASE COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands) 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. 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. In May 2004, the Company entered into a settlement agreement, without the admission of any liability ("Settlement Agreement"), with the plaintiffs. Under terms of the Settlement Agreement, the plaintiffs fully released the Company and its subsidiaries from all liabilities and claims arising from the civil action in exchange for the payment of a $300 settlement amount, which amount was reserved in the December 31, 2003 financial statements. In August 2001, the Department of Revenue of the Province of Quebec, Canada issued an assessment against Viskase Canada in the amount of $2,700 (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. The Notice of Objection found in favor of the Department of Revenue. The Company has appealed the decision. The ultimate liability for the Quebec sales tax lies with the customers of Viskase Canada during the relevant period. Viskase Canada could be required to pay the amount of the underlying sales tax prior to receiving reimbursement for such tax from our customers. The Company has, however, provided for a reserve of $300 (U.S.) for interest and penalties, if any, but has not provided for a reserve for the underlying sales tax. Viskase Canada is negotiating with the Quebec Department of Revenue to avoid having to collect the sales tax from customers who will then be entitled to credit for such sales tax collected. Those negotiations have resulted in Viskase Canada making a settlement offer, whereby Viskase Canada would pay $300 (Canadian) and there would be no collection of the underlying sales tax from the customers of Viskase Canada. The settlement offer was accepted by the Deputy Minister of Revenue of Quebec during November 2005. A settlement agreement has been executed between Viskase Canada Inc. and the Deputy Minister of Revenue of Quebec and the parties will file a Declaration of Settlement out of Court to dismiss the action. Under the Clean Air Act Amendments of 1990, various industries, including casings manufacturers, are or will be required to meet maximum achievable control technology ("MACT") air emissions standards for certain chemicals. MACT standards applicable to all U.S. cellulosic casing manufacturers were promulgated June 11, 2002. The Company submitted extensive comments to the EPA during the public comment period. Compliance with these new rules was required by June 13, 2005, although the Company has obtained a one-year extension for both of its facilities. To date, the Company has spent approximately $9,555 in capital expenditures for MACT, and expects to spend an additional $1,050, principally over the next 6 months, to become compliant with MACT rules at our two U.S. extrusion facilities. In addition, the Company is involved in various other legal proceedings arising out of our business and other environmental matters, none of which are expected to have a material adverse effect upon results of operations, cash flows or financial condition. 20 VISKASE COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands) 11. Earnings Per Share Following are the reconciliations of the numerators and denominators of the basic and diluted EPS (in thousands, except for number of shares and per share amounts):
3 Months 3 Months 9 Months 9 Months Ended Ended Ended Ended September September September September 30, 2005 30, 2004 30, 2005 30, 2004 --------- --------- --------- --------- NUMERATOR: Income (loss) available to common stockholders: Net income (loss) $3,609 $2,000 $218 ($15,103) --------- --------- --------- --------- Net income (loss) available to common stockholders for basic and diluted EPS $3,609 $2,000 $218 ($15,103) ========= ========= ========= ========= DENOMINATOR: Weighted average shares outstanding for basic EPS 9,715,954 9,632,022 9,692,212 10,142,026 Effect of dilutive securities 801,714 799,074 855,555 --------- --------- --------- --------- Weighted average shares outstanding for diluted EPS 10,517,668 10,431,096 10,547,767 10,142,026 ========== ========== ========== ==========
Common stock equivalents, consisting of the New Warrants for 805,230 shares, Old Warrants for 304,127 shares, 990,000 stock options issued to management, and 130,877 shares of unvested restricted stock are excluded for the nine months ended September 30, 2004 as they are anti-dilutive on the loss per share. The vested portion of the Restricted Stock is included in the weighted-average shares outstanding for basic earnings per share. 21 VISKASE COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands) 12. Stock-Based Compensation (Dollars in Thousands, Except Per Share Amounts) The Company's net income and net income per common share would have been reduced to the pro forma amounts indicated below if compensation cost for the Company's stock option plan had been determined based on the fair value at the grant date for awards in accordance with the provisions of SFAS No. 123.
9 Months Ended 9 Months Ended September 30, September 30, 2005 2004 -------------- -------------- Net income (loss): As reported $218 ($15,103) Pro forma $17 ($15,103) Income (loss) per share: As reported, basic $0.02 ($1.49) As reported, diluted $0.02 ($1.49) Pro forma, basic $0.00 ($1.49) Pro forma, diluted $0.00 ($1.49)
The fair values of the options granted during 2005 and 2004 were estimated on the date of grant using the binomial option pricing model. The assumptions used and the estimated fair values are as follows:
2005 2004 ---- ---- Expected term 10 years 5 years Expected stock volatility 14.88% 16.05% Risk-free interest rate 4.17% 3.44% Fair value per option $1.09 $0.54
The Company has granted non-qualified stock options to its chief executive officer for the purchase of 500,000 shares of its common stock under an employment agreement. The Company has granted non-qualified stock options to its management for the purchase of 490,000 shares of its common stock. Options were granted at, or above, the fair market value at date of grant and one-third vests on each of the first, second and third anniversaries of the date of grant, subject to acceleration in certain events. The options for its chief executive officer and those granted to management expire five years and ten years, respectively, from the date of grant. The Company's outstanding options were:
Weighted Shares Average Under Exercise Option Price ------ -------- Outstanding, January 1, 2005 500,000 $2.40 Granted 495,000 $2.90 Exercised 0 Forfeited 5,000 ------- Outstanding, September 30, 2005 990,000 $2.65 ======= =====
None of the options were exercisable as of September 30, 2005. 22 VISKASE COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands) 13. Business Segment Information and Geographic Area Information The Company primarily manufactures and sells cellulosic food casings. The Company's operations are primarily in North America, South America and Europe. Intercompany sales and charges (including royalties) have been reflected as appropriate in the following information. Certain items are maintained at the Company's corporate headquarters and are not allocated geographically. They include most of the Company's debt and related interest expense and income tax benefits. Other expense for the 9 months ended September 30, 2005 and September 30, 2004 includes net foreign exchange transaction losses of approximately $143 and $1,040, respectively. Geographic Area Information ---------------------------
9 Months 9 Months Ended Ended September 30, September 30, 2005 2004 ------------- ------------- Net sales United States $88,704 $90,606 South America 6,220 5,758 Europe 58,932 58,002 -------- -------- $153,856 $154,366 ======== ======== Operating income (loss) United States $8,299 $10,366 Canada (412) (525) South America (395) (712) Europe (1,108) (708) -------- -------- $6,384 $8,421 ======== ======== Identifiable assets United States $120,572 $111,595 Canada 28 591 South America 8,083 7,479 Europe 78,700 83,880 -------- -------- $207,383 $203,545 ======== ======== United States export sales (reported in North America net sales above) Asia $14,096 $13,680 South and Central America 3,687 3,666 Canada 6,102 5,686 Other international 3,092 2,930 -------- -------- $26,977 $25,962 ======== ========
23 VISKASE COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands) 14. Subsequent Event During November 2005, Viskase Canada Inc. and the Deputy Minister of Revenue of Quebec executed a settlement in the amount of $300 (Canadian) to resolve a sales tax assessment for the period July 1, 1997 to May 31, 2001 (refer to Contingencies, Note 10). The parties will file a Declaration of Settlement out of Court to dismiss the assessment action. 24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------------------------------------------------------------- In this filing, unless indicated otherwise, "Viskase" or the "Company" refers to Viskase Companies, Inc., and "we," "us" and "our" refer to Viskase and its subsidiaries. Results of Operations ---------------------- We are a worldwide leader in the manufacture and sale of cellulosic, fibrous and plastic casings for the processed meat industry. We currently operate seven manufacturing facilities and eight distribution centers throughout North America, Europe and South America and we derive approximately 60% of total net sales from customers located outside the United States. We believe we are one of the two largest manufacturers of non-edible cellulose casings for small-diameter processed meats and one of the three largest manufacturers of non-edible fibrous casings. Our management believes that the factors most critical to the success of our business are: * maintaining and building upon our reputation for providing a high level of customer and technical services; * maintaining and building upon our long-standing customer relationships, many of which have continued for decades; * developing additional sources of revenue through new products and services; * penetrating new regional markets; and * continuing to streamline our cost structure. Our net sales are driven by consumer demand for meat products and the level of demand for casings by processed meat manufacturers, as well as the average selling prices of our casings. Specifically, demand for our casings is dependent on population growth, overall consumption of processed meats and the types of meat products purchased by consumers. Average selling prices are dependent on overall supply and demand for casings and our product mix. Our cellulose and fibrous casing extrusion operations are capital-intensive and are characterized by high fixed costs. Our plastic casing extrusion and finishing operations are characterized by relatively high labor costs. The industry's operating results have historically been sensitive to the global balance of capacity and demand. The industry's extrusion facilities produce casings under a timed chemical process and operate continuously. We believe that the industry's current output is in the process of balancing with global demand and the recent downward trend in casing prices has stabilized. Recently, the Company announced it was restarting extrusion capacity at our Thaon-les-Vosges, France facility. This capacity will come on-line during the fourth quarter of 2005. The cost associated with the restart is estimated to be approximately $1.0 million. Our contribution margin varies with changes in selling price, input material costs, labor costs and manufacturing efficiencies. The total contribution margin increases as demand for our casings increases. Our financial results benefit from increased volume because we do not have to increase our fixed cost structure in proportion to increases in demand. For certain products, we operate at near capacity in our existing facilities. We regularly evaluate our capacity and projected market demand. The Company made the decision to selectively increase our extrusion capacity through a restart of Thaon-les- Vosges, France extrusion capacity to meet the worldwide demand for small- diameter casing. 25 We operate in a competitive environment. During the mid-1990's, we experienced significant pricing pressure and volume loss with the entrance of a foreign competitor into the United States market. The market for cellulosic casings experienced declines in selling price over the last ten years, which we believe only recently has stabilized. While the overall market volume has expanded during this period, the industry continued to experience pressure on pricing. Our financial performance moves in direct relation to our average selling price. We have continued to reduce our fixed cost structure in response to market and economic conditions. Since 1998, we have reduced annual fixed costs by approximately $40.0 million by: * closing our Chicago, Illinois plant and selling the facility; * reconfiguring our Loudon, Tennessee, Thaon-les-Vosges, France and Beauvais, France plants; * discontinuing our Nucel(r) operations; * closing our Lindsay, Ontario, Canada facility; and * reducing the number of employees by approximately 30%. Comparison of Results of Operations for Fiscal Quarters Ended September 30, 2005 and 2004. The following discussion compares the results of operations for the fiscal quarter ended September 30, 2005 to the results of operations for the fiscal quarter ended September 30, 2004. We have provided the table below in order to facilitate an understanding of this discussion. The table shows our results of operations for the second quarter of 2005 and 2004. The table (dollars in millions) is as follows:
Quarter Quarter % Ended Ended Change September 30, September 30, Over 2005 2004 2004 ------------- ------------- ------ NET SALES $52.2 $53.0 -1.4% COST AND EXPENSES Cost of sales 41.8 42.0 -0.5% Selling, general and administrative 7.3 7.4 -1.2% Amortization of intangibles .1 .3 -56.5% ----- ----- OPERATING INCOME 3.0 3.3 -8.5% Interest income .2 .1 56.5% Interest expense 3.2 3.4 -6.2% Other (income) expense, net (.7) (1.9) -59.0% Post-retirement benefits curtailment gain (.7) NM Income tax (benefit) (2.2) (.2) 1319.5% ----- ----- NET INCOME $3.6 $2.0 80.5% ===== =====
NM = Not meaningful when comparing positive to negative numbers or to zero. 26 Quarter Ended September 30, 2005 Versus Quarter Ended September 30, 2004 ------------------------------------------------------------------------ Net Sales. Our net sales for the third quarter of 2005 were $52.2 million, which represents a decrease of $0.8 million or 1.4% from the comparable prior year quarter. Net sales benefited $0.9 million due to foreign currency translation gains, offset by a $0.6 million decrease from volume and a $1.1 million decrease due to price and mix. Cost of Sales. Cost of sales for the third quarter of 2005 decreased 0.5% from the prior year due to the decreased sales level for the same period, and increased as a percent of net sales (from 79.2% in 2004 to 80.1% in 2005). The increase as a percent of sales can be attributed to an increase in energy, raw material and labor costs. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the third quarter of 2005 were comparable to the prior year period. Operating Income. The operating income for the third quarter of 2005 was $3.0 million, representing a decrease of $0.3 million from the prior year quarter. The decrease in the operating income resulted primarily from higher cost of sales. Interest Expense. Interest expense, net of interest income, for the third quarter of 2005 was $3.0 million, representing a decrease of $0.3 from the prior year quarter. The decrease in interest expense is due to increased interest income and an increase in capitalized interest of $0.2 million. Gain on Curtailment. The Company will terminate post-retirement health care medical benefits for all active employees and retirees in the United States who are covered by a collective bargaining agreement as of December 31, 2006. A ($0.7) million gain on the curtailment of these post-retirement health care benefits was recognized during the third quarter of 2005. Other (Income) Expense. Other income of approximately ($0.7) million for the third quarter of 2005 consists principally of a $0.4 million net gain related to foreign currency translation. Other income for the comparable quarter of 2004 of ($1.9) million consists principally of a net increase related to foreign currency translation. Income Tax (Benefit) Provision. During the third quarter of 2005, an income tax benefit of ($2.2) million was recognized on the income before income taxes of $1.4 million resulting principally from a benefit from the settlement of a Canadian tax issue and a provision for the results of operations of foreign subsidiaries. Primarily as a result of the factors discussed above, income for the third quarter of 2005 was $3.6 million compared to net income of $2.0 million for the third quarter of 2004. 27 Comparison of Results of Operations for Nine Months Ended September 30, 2005 and 2004. The following discussion compares the results of operations for the fiscal nine months ended September 30, 2005 to the results of operations for the fiscal nine months ended September 30, 2004. We have provided the table below in order to facilitate an understanding of this discussion. The table shows our results of operations for the first nine months of 2005 and 2004. The table (dollars in millions) is as follows:
9 Months 9 Months % Ended Ended Change September 30, September 30, Over 2005 2004 2004 ------------- ------------- ------ NET SALES $153.9 $154.4 -0.3% COST AND EXPENSES Cost of sales 122.8 121.7 0.9% Selling, general and administrative 22.0 22.8 -3.5% Amortization of intangibles .5 .8 -37.6% Restructuring expense 2.2 .7 225.4% ------ ------ OPERATING INCOME 6.4 8.4 -24.2% Interest income .5 .3 48.1% Interest expense 9.5 9.7 -3.0% Other (income) expense, net (.3) 1.4 NM Post-retirement benefits curtailment gain (.7) NM Loss on early extinguishment of debt 13.1 NM Income tax provision (benefit) (1.9) (.4) 370.7% ------- ------- NET (LOSS) $.2 ($15.1) NM ======= =======
NM = Not meaningful when comparing positive to negative numbers or to zero. Nine Months Ended September 30, 2005 Versus Nine Months Ended September 30, ---------------------------------------------------------------------------- 2004 ---- Net Sales. Our net sales for the first nine months of 2005 were $153.9 million, which represents a decrease of $0.5 million or 0.3% from the comparable prior year first nine months. Net sales benefited $2.7 million due to foreign currency translation gains, offset by a $1.7 million decrease due to price and mix and a $1.5 million decrease from volume. Cost of Sales. Cost of sales for the first nine months of 2005 increased 0.9% from the comparable prior year first nine months on a comparable sales level in both periods, and increased as a percent of net sales (from 78.8% in 2004 to 79.8% in 2005). The increase as a percent of sales can be attributed to an increase in energy, raw material and labor costs partially offset by operating efficiencies. Selling, General and Administrative Expenses. We were able to reduce selling, general and administrative expenses from 14.8% of sales in the first nine months of 2004 to 14.3% in the first nine months of 2005. This can be attributed to reductions from continuous cost saving programs, internal reorganizations that occurred in both March 2004 and January 2005, and elimination of certain post-retirement benefits that were effective as of December 31, 2004. Additionally, in the first nine months of 2004 there was an unusual income charge of $0.4 million consisting of a reversal of a legal liability recorded in fresh-start accounting that has been settled. 28 Operating Income. The operating income for the first nine months of 2005 was $6.4 million, representing a decrease of $2.0 million from the prior year first nine months. The decrease in the operating income resulted primarily from increased restructuring expenses and higher cost of sales, which were partially offset by improvements in selling, general and administrative expenses. Operating income for the first nine months of 2005 includes a restructuring charge of $2.2 million of which $1.7 million was related to one-time employee costs related to our transfer of Kentland, Indiana finishing operations to Monterrey, Mexico. Operating income the first nine months of 2004 includes a restructuring charge of $1.1 million, offset by a reversal of an unusual income charge of $0.4 million consisting of a reversal of a legal liability recorded in fresh-start accounting that has been settled. Interest Expense. Interest expense, net of interest income, for the first nine months of 2005 was $9.0 million, representing a decrease of $0.4 million. The decrease is primarily a result of increased capitalized interest expense. Other (Income) Expense. Other income of approximately ($0.3) million for the first nine months of 2005 consists principally of a $0.1 million net loss related to foreign currency translation and gain of $0.6 on sales of shares held in Europe. Other expense for the comparable period of 2004 of $1.4 million consists principally of a $1.0 million net loss related to foreign currency translation. Gain on Curtailment. The Company will terminate post-retirement health care medical benefits for all active employees and retirees in the United States who are covered by a collective bargaining agreement as of December 31, 2006. A ($0.7) million gain on the curtailment of these post-retirement health care benefits was recognized during the third quarter of 2005. Loss on Early Extinguishment of Debt. The loss on debt extinguishment for the first nine months of 2004 of $13.1 million consists of the losses on the early retirement of $55.5 million of the 8% Notes at a discount and of the early termination of the GECC capital lease. The 8% Notes were purchased at a discount to the principal amount, however, the purchase price exceeded the carrying value of the 8% Notes as established in Fresh-Start Accounting. There were no similar early extinguishments of debt during 2005. Income Tax Provision (Benefit). During 2005, an income tax benefit of ($1.9) million was recognized on the income before income taxes of $1.6 million resulting principally from a benefit from the settlement of a Canadian tax issue and a provision for the results of operations of foreign subsidiaries. Primarily as a result of the factors discussed above, income for the first nine months of 2005 was $.2 million compared to net loss of $15.1 million for the first nine months of 2004. Effect of Changes in Exchange Rates ----------------------------------- In general, our results of operations are affected by changes in foreign exchange rates. Subject to market conditions, we price our products in our foreign operations in local currencies, with the exception of the Brazilian export market and the U.S. export markets, which are priced in U.S. dollars. As a result, a decline in the value of the U.S. dollar relative to the local currencies of profitable foreign subsidiaries can have a favorable effect on our profitability, and an increase in the value of the U.S. dollar relative to the local currencies of profitable foreign subsidiaries can have a negative effect on our profitability. Exchange rate fluctuations decreased comprehensive income by $3.1 million for the first nine months of 2005 and $0.3 million for the comparable period of 2004. 29 Liquidity and Capital Resources ------------------------------- Cash and cash equivalents decreased by $7.5 million during the first nine months of 2005. Cash flows provided by operating activities were $2.7 million, used in investing activities were $9.1 million, and used in financing activities were $0.4 million. Cash flows used in operating activities were principally attributable to net loss, and seasonal increase in working capital offset by depreciation, amortization, and non-cash interest. Cash flows used in investing activities were principally attributable to capital expenditures offset by proceeds from the disposition of assets and the release of restricted cash. Cash flows used in financing activities principally consisted of the incurrence of financing fees. As of September 30, 2005, the Company had positive working capital of approximately $55.0 million including unrestricted cash of $22.8 million, with additional amounts available under its revolving credit facility. While the Company could decide to raise additional amounts through the issuance of new debt or equity, management believes that the existing resources available to it will be adequate to satisfy current and planned operations for at least the next twelve months. On June 29, 2004, the Company issued $90.0 million of 11.5% Senior Secured Notes that bear interest at a rate of 11.5% per annum, payable semi-annually in cash on June 15 and December 15. The 11.5% Senior Secured Notes mature on June 15, 2011. The 11.5% Senior Secured Notes will be guaranteed on a senior secured basis by all of our future domestic restricted subsidiaries that are not immaterial subsidiaries (as defined). The 11.5% Senior Secured Notes and the related guarantees (if any) are secured by substantially all of the tangible and intangible assets of the Company and guarantor subsidiaries (if any); and includes the pledge of the capital stock directly owned by the Company or the guarantors; provided that no such pledge will include more than 65% of any foreign subsidiary directly owned by the Company or the guarantor. The Indenture and the security documents related thereto provide that, to the extent that any rule is adopted, amended or interpreted that would require the filing with the SEC (or any other governmental agency) of separate financial statements for any of our subsidiaries due to the fact that such subsidiary's capital stock secures the 11.5% Senior Secured Notes, then such capital stock will automatically be deemed not to be part of the collateral securing the 11.5% Senior Secured Notes to the extent necessary to not be subject to such requirement. In such event, the security documents may be amended, without the consent of any holder of 11.5% Senior Secured Notes, to the extent necessary to release the liens on such capital stock. With limited exceptions, the 11.5% Senior Secured Notes require that the Company maintain a minimum annual level of EBITDA calculated at the end of each fiscal quarter as follows: Fiscal quarter ending Amount -------------------------- ------------ September 30, 2004 through September 30, 2006 $16.0 million December 31, 2006 through September 30, 2008 $18.0 million December 31, 2008 and thereafter $20.0 million unless the sum of (i) unrestricted cash of the Company and its restricted subsidiaries as of such day and (ii) the aggregate amount of advances that the Company is actually able to borrow under the Revolving Credit Facility on such day (after giving effect to any borrowings thereunder on such day) is at least $15.0 million. The minimum annual level of EBITDA covenant is not currently in effect as the Company's unrestricted cash and the amount of available credit under the Revolving Credit Facility exceed $15.0 million. The Company's EBITDA as of September 30, 2005 would have exceeded the required covenant level if the covenant had been in effect at that time. 30 The 11.5% Senior Secured Notes limit the ability of the Company to (i) incur additional indebtedness; (ii) pay dividends, redeem subordinated debt, or make other restricted payments, (iii) make certain investments or acquisitions; (iv) issue stock of subsidiaries; (v) grant or permit to exist certain liens; (vi) enter into certain transactions with affiliates; (vii) merge, consolidate, or transfer substantially all of our assets; (viii) incur dividend or other payment restrictions affecting certain subsidiaries; (ix) transfer, sell or acquire assets, including capital stock of subsidiaries; and (x) change the nature of our business. At any time prior to June 15, 2008, the Company may redeem, at its option, some or all of the 11.5% Senior Secured Notes at a make-whole redemption price equal to the greater of (i) 100% of the aggregate principal amount of the 11.5% Senior Secured Notes being redeemed and (ii) the sum of the present values of 105 3/4% of the aggregate principal amount of such 11.5% Senior Secured Notes and scheduled payments of interest on such 11.5% Senior Secured Notes to and including June 15, 2008, discounted to the date of redemption on a semi- annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 50 basis points, together with, in each case, accrued and unpaid interest and additional interest, if any, to the date of redemption. The make-whole redemption price as of September 30, 2005 is approximately 122%. On or after June 15, 2008, the Company may redeem, at its option, some or all of the 11.5% Senior Secured Notes at the following redemption prices, plus accrued and unpaid interest to the date of redemption: For the periods below Percentage On or after June 15, 2008 105 3/4% On or after June 15, 2009 102 7/8% On or after June 15, 2010 100% Prior to June 15, 2007, the Company may redeem, at its option, up to 35% of the aggregate principal amount of the 11.5% Senior Secured Notes with the net proceeds of any equity offering at 111 1/2% of their principal amount, plus accrued and unpaid interest to the date of redemption, provided that at least 65% of the aggregate principal amount of the 11.5% Senior Secured Notes remains outstanding immediately following the redemption. Within 90 days after the end of each fiscal year ending in 2006 and thereafter, for which the Company's Excess Cash Flow (as defined) was greater than or equal to $2.0 million, the Company must offer to purchase a portion of the 11.5% Senior Secured Notes at 101% of principal amount, together with accrued and unpaid interest to the date of purchase, with 50% of our Excess Cash Flow from such fiscal year ("Excess Cash Flow Offer Amount"); except that no such offer shall be required if the Revolving Credit Facility prohibits such offer from being made because, among other things, a default or an event of default is then outstanding thereunder. The Excess Cash Flow Offer Amount shall be reduced by the aggregate principal amount of 11.5% Senior Secured Notes purchased in eligible open market purchases as provided in the indenture. If the Company undergoes a change of control (as defined), the holders of the 11.5% Senior Secured Notes will have the right to require the Company to repurchase their 11.5% Senior Secured Notes at 101% of their principal amount, plus accrued and unpaid interest to the date of purchase. If the Company engages in asset sales, it must either invest the net cash proceeds from such sales in its business within a certain period of time (subject to certain exceptions), prepay indebtedness under the Revolving Credit Facility (unless the assets that are the subject of such sales are comprised of real property, fixtures or improvements thereon or equipment) or make an offer to purchase a principal amount of the 11.5% Senior Secured Notes equal to the excess net cash proceeds. The purchase price of each 11.5% Senior Secured Note so purchased will be 100% of its principal amount, plus accrued and unpaid interest to the date of purchase. 31 The Revolving Credit Facility contains various covenants which will restrict the Company's ability to, among other things, incur indebtedness, enter into mergers or consolidation transactions, dispose of assets (other than in the ordinary course of business), acquire assets, make certain restricted payments, prepay any of the 8% Notes at a purchase price in excess of 90% of the aggregate principal amount thereof (together with accrued and unpaid interest to the date of such prepayment), create liens on our assets, make investments, create guarantee obligations and enter into sale and leaseback transactions and transactions with affiliates, in each case subject to permitted exceptions. The Revolving Credit Facility also requires that we comply with various financial covenants, including meeting a minimum EBITDA requirement and limitations on capital expenditures in the event our usage of the Revolving Credit Facility exceeds 30% of the facility amount. The Revolving Credit Facility also requires payment of a prepayment premium in the event that it is terminated prior to maturity. The prepayment premium, as a percentage of the $20.0 million facility amount, is 2% through June 29, 2006, and 1% through June 29, 2007. Borrowings under the loan and security agreement governing this Revolving Credit Facility are subject to a borrowing base formula based on percentages of eligible domestic receivables and eligible domestic inventory. Under the Revolving Credit Facility, we will be able to choose between two per annum interest rate options: (i) the lender's prime rate and (ii) LIBOR plus a margin currently of 2.25% (which margin will be subject to performance based increases up to 2.50% and decreases down to 2.00%); provided that the minimum interest rate shall be at least equal to 3.00%. Letter of credit fees will be charged a per annum rate equal to the then applicable LIBOR rate margin less 50 basis points. The Revolving Credit Facility also provides for an unused line fee of 0.375% per annum. Indebtedness under the Revolving Credit Facility is secured by liens on substantially all of the Company's and the Company's domestic subsidiaries' assets, with liens (i) on inventory, account receivables, lockboxes, deposit accounts into which payments are deposited and proceeds thereof, which will be contractually senior to the liens securing the 11.5% Senior Secured Notes and the related guarantees pursuant to an intercreditor agreement, (ii) on real property, fixtures and improvements thereon, equipment and proceeds thereof, which will be contractually subordinate to the liens securing the 11.5% Senior Secured Notes and such guarantees pursuant to such intercreditor agreement, (iii) on all other assets, which will be contractually pari passu with the liens securing the 11.5% Senior Secured Notes and such guarantees pursuant to such intercreditor agreement. The 8% Notes bear interest at a rate of 8% per year, and 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 8% Notes (paid-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 8% Notes (paid-in-kind). Thereafter, interest will be payable in cash. The 8% Notes mature on December 1, 2008. On June 29, 2004, the Company repurchased $55.5 million aggregate principal amount of its 8% Notes, and the holders (i) released the liens on the collateral that secured the 8% Notes, (ii) contractually subordinated the Company's obligations under the 8% Notes to obligations under certain indebtedness, including the new 11.5% Senior Secured Notes and the Revolving Credit Facility; and (iii) eliminated substantially all of the restrictive covenants contained in the indenture governing the 8% Notes. The carrying value of the remaining 8% Notes outstanding at September 30, 2005 is $13.4 million. The 8% Notes were valued at market in fresh-start accounting. The discount to face value is being amortized using the effective-interest rate methodology through maturity with an effective interest rate of 10.46%. 32 The following table summarizes the carrying value (in millions) of the 8% Notes at December 31 assuming interest through 2006 is paid in the form of 8% Notes (paid-in-kind):
2005 2006 2007 ---- ---- ---- 8% Notes Principal $17.3 $18.7 $18.7 Discount (3.3) (2.3) (1.2) ------ ------ ------ Carrying value $14.0 $16.4 $17.5 ====== ====== ======
Letters of credit in the amount of $2.4 million were outstanding under letter of credit facilities with commercial banks, and were cash collateralized at September 30, 2005. We finance our working capital needs through a combination of internally generated cash from operations, cash on hand and our revolving credit facility. Our board of directors has approved a plan under which we will restructure our finishing operations by relocating finishing operations from our facility in Kentland, Indiana to a facility in Mexico. We expect to complete the restructuring by the end of 2006. The relocation of the finishing operations is intended to lower costs and optimize operations. The total cost of the restructuring, exclusive of capital expenditures, is expected to be approximately $10.0 million, substantially all of which will result in cash expenditures. We also expect to make capital expenditures of approximately $9.0 million to $10.0 million in connection with the restructuring. We began to incur these costs and capital expenditures in the second quarter of 2005 and expect to continue to incur them through the end of 2006. We believe that the restructuring will yield annual operating cost reductions of between $7.0 million and $8.0 million when the Mexico relocation is complete. Capital expenditures for the first nine months of 2005 and the first nine months of 2004 totaled $9.8 million and $3.9 million, respectively. The 2005 capital expenditures are expected to be $15 million including amounts for the relocation of finishing operations to Mexico. The 2005 capital expenditures are principally related to (i) the installation of environmental equipment to conform to MACT standards for casing manufacturers and (ii) capital expenditures for the relocation of finishing operations to Mexico. In 2004, we spent approximately $2.7 million annually on research and development programs, including product and process development, and on new technology development. The 2005 research and development and product introduction expenses are expected to be in the $3.0 million range on an annual basis. Among the projects included in the current research and development efforts are Smoke Master(r) small diameter and fibrous casings, Visflex(r) casings, specialty plastic films and the application of certain patents and technology for license by Viskase. Pension and Post-Retirement Benefits ------------------------------------ Our long-term pension and post-retirement benefit liabilities totaled $56.5 million at September 30, 2005. Expected annual cash contributions for pension and post-retirement benefit liabilities are expected to be (in millions):
2005 2006 2007 2008 2009 ---- ---- ---- ---- ---- Pension $3.8 $13.1 $8.7 $7.6 $3.0 Post-retirement benefits 1.2 1.0 0.6 0.5 0.5 ---- ---- ---- ---- ---- Total $5.0 $14.1 $9.3 $8.1 $3.5 ==== ===== ====== ======= ======
33 Other ----- As of September 30, 2005, aggregate maturities of debt for each of the next five years are (in thousands):
2005 2006 2007 2008 2009 Thereafter ---- ---- ---- ---- ---- ---------- 11.5% Senior Secured Notes $90,000 8% Notes $18,684 Other $227 121 ---- ---- ---- ------- ---- ------- $227 $18,684 $90,121 ==== ==== ==== ======= ==== =======
Critical Accounting Policies ---------------------------- The preparation of financial statements includes the use of estimates and assumptions that affect a number of amounts included in the Company's financial statements, including, among other things, pensions and other post- retirement benefits and related disclosures, inventories valued under the last-in, first-out method, reserves for excess and obsolete inventory, allowance for doubtful accounts, restructuring charges and income taxes. Management bases its estimates on historical experience and other assumptions that it believes are reasonable. 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 effect on the Company's consolidated financial statements. Revenue Recognition ------------------- The Company's revenues are recognized at the time products are shipped to the customer, under F.O.B. Shipping Point terms or under F.O.B. Port terms. Revenues are net of any discounts, rebates and allowances. The Company records all labor, raw materials, in-bound freight, plant receiving and purchasing, warehousing, handling and distribution costs as a component of cost of goods sold. 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 our evaluation of the financial condition of each customer, each 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, the age of the inventory 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. 34 Pension Plans and Other Post-Retirement Benefit Plans ----------------------------------------------------- Our North American operations have a defined benefit retirement plan that covers substantially all salaried and full-time hourly employees who were hired prior to April 1, 2003 and a fixed defined contribution plan and a discretionary profit sharing plan that covers substantially all salaried and full-time hourly employees who were hired on or after April 1, 2003. Our operations in Germany have a defined benefit retirement plan that covers substantially all salaried and full-time hourly employees. Pension cost is computed using the projected unit credit method. The discount rate used approximates the average yield for high quality corporate bonds as of the valuation date. Our funding policy is consistent with funding requirements of the applicable federal and foreign laws and regulations. Our North American operations have historically provided post-retirement health care and life insurance benefits. We accrue for the accumulated post- retirement benefit obligation that represents the actuarial present value of the anticipated benefits. Measurement is based on assumptions regarding such items as the expected cost of providing future benefits and any cost sharing provisions. We terminated post-retirement medical benefits as of December 31, 2004 for all active employees and retirees in the U.S. who were not covered by a collective bargaining agreement. On September 30, 2005 employees in the U.S. covered by a collective bargaining agreement ratified a new agreement to terminate post-retirement medical benefits as of December 31, 2006 for all active employees and retirees covered by the collective bargaining agreement. The weighted average plan asset allocation at December 31, 2004 and 2003, and target allocation (not weighted) for 2005, are as follows:
Percentage of Plan 2005 Assets Target Asset Category 2004 2003 Allocation ------------------------ ------ ------ ---------- Equity Securities 62.5% 58.5% 60% Debt Securities 35.2% 37.1% 40% Other 2.3% 4.4% 0% ------ ------ ---- Total 100.0% 100.0% 100%
Goodwill and Intangible Assets ------------------------------ Intangible assets that have an indefinite useful life are not amortized and are tested at least annually for impairment. As part of fresh-start accounting, the Company recognized intangible assets that are being amortized. Non-compete agreements in the amount of $1.2 million were amortized over the two year period ended March 31, 2005. 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 (i) building and improvements - 10 to 32 years, (ii) machinery and equipment - 4 to 12 years, (iii) furniture and fixtures - 3 to 12 years and (iv) auto and trucks - 2 to 5 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. 35 Long-Lived Assets ----------------- The Company continues to evaluate the recoverability of long-lived assets including property, plant and equipment, patents and other intangible assets. Impairments are recognized when the expected undiscounted future operating cash flows derived from long-lived assets are less than their carrying value. If impairment is identified, valuation techniques deemed appropriate under the particular circumstances will be used to determine the asset's fair value. The loss will be measured based on the excess of carrying value over the determined fair value. The review for impairment is performed at least once a year or when circumstances warrant. Other Matters ------------- We do 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, we lease certain casing manufacturing and finishing equipment, and certain real property, consisting of manufacturing and distribution facilities and office facilities. Substantially all such leases as of September 30, 2005 were operating leases, with the majority of those leases requiring us to pay maintenance, insurance and real estate taxes. Recent Accounting Pronouncements -------------------------------- In November 2004, the FASB issued SFAS No. 151 ("SFAS 151"), "Inventory Costs - an Amendment of ARB No. 43 Chapter 4." SFAS 151 requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling be recognized as current-period charges rather than being included in inventory regardless of whether the costs meet the criterion of abnormal as defined in ARB 43. SFAS 151 is applicable for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company plans to adopt this standard beginning the first quarter of fiscal year 2006 and does not believe the adoption will have a material impact on its financial statements as such costs have historically been expensed as incurred. In December 2004, the FASB issued SFAS No. 153 ("SFAS 153"), "Exchanges of Nonmonetary Assets - an Amendment of APB Opinion No. 29" which addresses the measurement of exchanges of nonmonetary assets and eliminates the exception from fair value accounting for nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of an entity are expected to change significantly as a result of the exchange. This statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005 and is not expected to have a significant impact on the Company's financial statements. In December 2004, the FASB issued SFAS No. 123 (revised 2004) ("SFAS 123R"), "Share-Based Payment." SFAS 123R sets accounting requirements for "share- based" compensation to employees, requires companies to recognize in the income statement the grant-date fair value of stock options and other equity- based compensation issued to employees and disallows the use of a fair value method of accounting for stock compensation. SFAS 123R is applicable for annual, rather than interim, periods beginning after June 15, 2005, as such, the Company must adopt in January 2006. The Company is currently evaluating the impact this statement will have on the financial statements. In March 2005, the FASB issued Interpretation No. 47 ("FIN 47"), "Accounting for Conditional Asset Retirement Obligations." FIN 47 clarifies that the term "conditional asset retirement obligation" as used in SFAS No. 143, "Accounting for Asset Retirement Obligations," refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005 and is not expected to have a significant impact on the Company's financial statements. 36 In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections." SFAS No. 154 replaced Accounting Principles Board Opinion, or APB, No. 20, "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements" and establishes retrospective application as the required method for reporting a change in accounting principle. SFAS No. 154 provided guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. SFAS No. 154 also addresses the reporting of a correction of an error by restating previously issued financial statements. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. 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 our 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 our products; changes in other costs; opportunities that may be presented to and pursued by us; determinations by regulatory and governmental authorities; the timing and cost of our finishing operations restructuring; and the ability to achieve other cost reductions and efficiencies. Related Party Transactions During the nine months ended September 30, 2005, we purchased $.096 million in telecommunication services from XO Communications, Inc., an affiliate of Carl C. Icahn, who may be deemed to be the beneficial owner of approximately 29.1% of the common stock. We believe that the purchase of the telecommunication services was on terms at least as favorable as we would expect to negotiate with an unaffiliated party. Arnos Corp., an affiliate of Carl C. Icahn, was the lender under a secured revolving credit facility that we terminated in 2004. We paid Arnos Corp. origination fees, interest and unused commitment fees of $0.144 million during 2004. We believe the terms of this facility were at least as favorable as those that we would have expected to negotiate with an unaffiliated party. On June 29, 2004 we repurchased 805,270 shares of common stock (representing approximately 7.34% of the issued and outstanding common stock on a fully diluted basis as of June 17, 2004) held by Jefferies & Company, Inc., the initial purchaser of the 11.5% Senior Secured Notes, or its affiliates for total consideration of $0.298 million. 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 ("Union Carbide") 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 and/or negligently failed to disclose to Viskase Canada the existence of contamination on the Site. 37 In November 2000, the Ontario 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 and The Dow Chemical Company, corporate successor to Union Carbide ("Dow"), have been working with the MOE in investigating the PCB contamination. The Company and Dow reached an agreement for resolution of all outstanding matters between them whereby Dow repurchased the Site for $1.375 million (Canadian), and is responsible for, and assumed the cost of remediation of the Site, and indemnified Viskase Canada and its affiliates, including the Company, in relation to all related environmental liabilities at the Site and Viskase Canada dismissed the action referred to above. The transaction was closed during May 2005, and resulted in a gain of $279,000 (US). In 1993, the Illinois Department of Revenue ("IDR") submitted a proof of claim against Envirodyne Industries, Inc. (now known as Viskase Companies, Inc.) and its subsidiaries in the United States Bankruptcy Court for the Northern District of Illinois ("Bankruptcy Court"), Bankruptcy Case Number 93 B 319, for alleged liability with respect to the IDR's denial of the Company's allegedly incorrect utilization of certain loss carry-forwards of certain of its subsidiaries. In September 2001, the Bankruptcy Court denied the IDR's claim and determined the debtors were not responsible for 1998 and 1999 tax liabilities, interest and penalties. IDR appealed the Bankruptcy Court's decision to the United States District Court, Northern District of Illinois, Case Number 01 C 7861; and in February 2002 the district court affirmed the Bankruptcy Court's order. IDR appealed the district court's order to United States Court of Appeals for the Seventh Circuit, Case Number 02-1632. On January 6, 2004, the appeals court reversed the judgment of the district court and remanded the case for further proceedings. The matter is now before the Bankruptcy Court for further determination. As of June 30, 2005, the tax liabilities, interest and penalties claimed totaled approximately $2.6 million. 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. 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. In May 2004, the Company entered into a settlement agreement, without the admission of any liability ("Settlement Agreement") with the plaintiffs. Under terms of the Settlement Agreement, the plaintiffs fully released the Company and its subsidiaries from all liabilities and claims arising from the civil action in exchange for the payment of a $0.3 million settlement amount, which amount was reserved in the December 31, 2003 financial statements. In August 2001, the Department of Revenue of the Province of Quebec, Canada issued an assessment against Viskase Canada in the amount of $2.7 million (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. The Notice of Objection found in favor of the Department of Revenue. The Company has appealed the decision. The ultimate liability for the Quebec sales tax lies with the customers of Viskase Canada during the relevant period. Viskase Canada could be required to pay the amount of the underlying sales tax prior to receiving reimbursement for such tax from our customers. The Company has, however, provided for a reserve of $0.3 million (US) for interest and penalties, if any, but has not provided for a reserve for the underlying sales tax. 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. Those negotiations have resulted in Viskase Canada making a settlement offer, whereby Viskase Canada would pay $0.3 million (Canadian) and there would be no collection of the underlying sales tax from the customers of Viskase Canada. The settlement offer was accepted by the Deputy Minister of Revenue of 38 Quebec during November 2005. A settlement agreement has been executed between Viskase Canada Inc. and the Deputy Minister of Revenue of Quebec and the parties will file a Declaration of Settlement out of Court to dismiss the action. Under the Clean Air Act Amendments of 1990, various industries, including casings manufacturers, are or will be required to meet maximum achievable control technology ("MACT") air emissions standards for certain chemicals. MACT standards applicable to all U.S. cellulosic casing manufacturers were promulgated June 11, 2002. The Company submitted extensive comments to the EPA during the public comment period. Compliance with these new rules was required by June 13, 2005, although the Company has obtained a one-year extension for both of its facilities. To date, the Company has spent approximately $9.6 million in capital expenditures for MACT, and expects to spend an additional $1.05 million, principally over the next 6 months, to become compliant with MACT rules at our two U.S. extrusion facilities. In addition, the Company is involved in various other legal proceedings arising out of our business and other environmental matters, none of which are expected to have a material adverse effect upon results of operations, cash flows or financial condition. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- The Company is exposed to certain market risks related to foreign currency exchange rates. In order to manage the risk associated with this exposure to such fluctuations, the Company occasionally uses derivative financial instruments. The Company does not enter into derivatives for trading purposes. The Company has prepared sensitivity analyses to determine the impact of a hypothetical 10% devaluation of the U.S. dollar relative to the European receivables, payables, sales and purchases denominated in U.S. dollars. Based on its sensitivity analyses at September 30, 2005, a 10% devaluation of the U.S. dollar would reduce the Company's consolidated balance sheet by approximately $246,000. From time to time 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, net and is immaterial. There were no gas future contracts as of September 30, 2005. ITEM 4. CONTROLS AND PROCEDURES ----------------------- We maintain a system of disclosure controls and procedures designed to provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Our management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2005. Based on that evaluation, our chief executive officer and chief financial officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. There have been no significant changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 39 PART II. OTHER INFORMATION Item 1 - Legal Proceedings ----------------- For a description of pending litigation and other contingencies, see Part 1, Note 10, Contingencies in Notes to Consolidated Financial Statements for Viskase Companies, Inc. and Subsidiaries. Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds ----------------------------------------------------------- None. 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 -------- 31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. 32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. 40 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 ---------------------- Gordon S. Donovan Vice President and Chief Financial Officer (Duly authorized officer and principal financial officer of the registrant) Date: November 14, 2005 41 Exhibit 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert L. Weisman, certify that: 1) I have reviewed this quarterly report on Form 10-Q of Viskase Companies, Inc.; 2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2005 /s/ Robert L. Weisman ------------------------------------------- Robert L. Weisman President and Chief Executive Officer 42 Exhibit 31.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Gordon S. Donovan, certify that: 1) I have reviewed this quarterly report on Form 10-Q of Viskase Companies, Inc.; 2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2005 /s/ Gordon S. Donovan ------------------------------------------------ Gordon S. Donovan Vice President and Chief Financial Officer 43 Exhibit 32.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying quarterly report on Form 10-Q of Viskase Companies, Inc. (the "Company") for the quarter ended September 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert L. Weisman, President and Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that, to my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly represents, in all material respects, the financial condition and results of operations of the Company. Date: November 14, 2005 /s/ Robert L. Weisman ------------------------------------- Robert L. Weisman President and Chief Executive Officer A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. 44 Exhibit 32.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying quarterly report on Form 10-Q of Viskase Companies, Inc. (the "Company") for the quarter ended September 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gordon S. Donovan, Vice President and Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that, to my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly represents, in all material respects, the financial condition and results of operations of the Company. Date: November 14, 2005 /s/ Gordon S. Donovan ------------------------------------------ Gordon S. Donovan Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. 45