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(Exact
name of registrant as specified in its charter)
Delaware
95-2677354
(State
or other jurisdiction of incorporation
or organization)
(I.R.S.
Employer Identification
No.)
8205
South Cass Avenue, Suite 115, Darien, IL
60561
(Address
of principal executive offices)
(Zip
Code)
Registrant's
telephone number, including area code: (630)
789-4900
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes £ No
T
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
£ No
T
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 T No
£
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. Yes T No
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer £
Accelerated
filer £
Non-accelerated
filer T
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes £
No
T
As
of
March 26, 2007 the aggregate market value of the voting stock held by
non-affiliates of the registrant was $16,198,787.
APPLICABLE
ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING
FIVE
YEARS: Indicate by check mark whether the registrant has filed all documents
and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes T
No
£
As
of
April 5, 2007, there were 29,458,257 shares outstanding of the registrant's
Common Stock, $.01 par value.
We
are a
leading provider of artificial casings and various plastics products for food
processors throughout the world. Our primary product, artificial casings, is
used for preparing processed meats like hot dogs, sausages, and deli meats.
Due
to the complexities and variations in our customers’ manufacturing processes, we
customize nearly all of our casings for use in a specific customer’s processing
plant.
Our
customers are located throughout the world and many of them have been buying
our
products for decades. We market our product through a combination of direct
sales representatives, distributors and agents, which enables us to sell our
products in virtually every country in the world.
In
addition to our casings business, we also make plastic barrier bags, other
high-end specialty plastics products for food suppliers, membranes for
laboratory dialysis and battery separators.
We
were
incorporated in Delaware in 1970 and are the successor company to the original
inventor of cellulosic casings in 1925. Unless the context otherwise requires,
references to “our company,”“we,”“us” and “our,” refer to us and our
consolidated subsidiaries and our predecessors.
On
November 13, 2002, Viskase Companies, Inc. (“VCI”) filed a prepackaged Chapter
11 bankruptcy in the United States Bankruptcy Court for the Northern District
of
Illinois, Eastern Division (“Bankruptcy Court”). The Chapter 11 filing was for
VCI only and did not include any of the Company’s domestic or foreign
subsidiaries. On December 20, 2002 the Bankruptcy Court confirmed VCI’s
Prepackaged Plan of Reorganization as Modified (“Plan”). VCI emerged from
Chapter 11 bankruptcy on April 3, 2003 (“Effective Date”).
Acquisition
of Majority Control of Our Common Stock
In
November 2006, the Company entered into an agreement to issue and sell an
aggregate of $24 million of Series A Preferred Stock of the Company to
affiliates of three shareholders of the Company, including an affiliate of
Carl
C. Icahn. See Part II, Item 8, Note 13 of Notes to Consolidated Financial
Statements for details of the transaction. This agreement required the Company
to conduct a rights offering of Common Stock, with the proceeds dedicated to
the
redemption of the Series A Preferred Stock along with associated dividends.
Prior to this transaction, Carl C. Icahn held beneficial ownership of
approximately 28.9% of our outstanding Common Stock. After giving effect to
the
rights offering and the related redemption and mandatory conversion of the
Series A Preferred Stock, Mr. Icahn benefitically owns approximately 67.0%
of
our outstanding common stock. In addition, four of our seven directors are
employed by affiliates of Mr. Icahn.
Additional
Information
Our
principal executive offices are located at 8250 South Cass Avenue, Suite 115,
Darien, Illinois60561, our telephone number is 1-630-874-0700 or 1-800-VISKASE
and our internet website is located at http://www.viskase.com.
The
Company historically has filed annual, quarterly, and special reports, proxy
statements and other information with the Securities and Exchange Commission
(SEC). As of March 22, 2007, the Company terminated its obligation to file
reports under the Securities Exchange Act of 1934 (the “Exchange Act”). You may
read and copy these materials at the Public Reference Room maintained by the
SEC
at Room 1580, 100 F Street N.E., Washington, D.C. 20549. You may call the SEC
at
1-800-SEC-0330 for more information on the operation of the public reference
room. The SEC maintains an Internet site at http://www.sec.gov
that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC. Copies of our filed
annual, quarterly and special reports are available at no charge through the
Investor Relations section of our web site at http://www.viskase.com.
Reference
is made to Part II, Item 8, Note 24 of Notes to Consolidated Financial
Statements.
(c)
Narrative
Description of
Business
General
We
participate in the small-diameter cellulosic, fibrous and plastic casings
market. Casings are used in the production of processed meat and poultry
products, such as hot dogs, sausages, salami, ham and bologna. In the
manufacturing of these products, a meat preparation is stuffed into a casing
and
then cooked, smoked or dried. The casing utilized dictates the size, consistency
of shape, and overall appearance and quality of the final meat product.
Small-diameter cellulosic, fibrous and plastic casings also permit high-speed
stuffing and processing of products on commercially available automated
equipment, which provides a meat processor with consistent product quality,
high
production output rates and lower manufacturing costs.
Products
Our
main
product lines are as follows:
NOJAX®
casings — Small-diameter cellulosic casings designed for the production of hot
dogs, wieners, frankfurters, viennas, cocktail sausages, coarse ground dinner
sausages and other small-diameter processed meats.
Fibrous
casings — Paper-reinforced cellulosic casings utilized in the manufacture of a
wide variety of cooked, smoked and dried processed meats, including large
sausages, bologna, salami, ham, pepperoni and deli meats.
VISFLEX®,
VISMAX® and VISLON® plastic casings — Plastic (polyamide) casings, each designed
with distinct performance characteristics targeted at a wide range of sausage,
deli meat and other processed meat and poultry applications.
We
also
manufacture other specialty cellulosic products, notably a family of large
cellulosic casings with limited applications for mortadella and specialty
sausages, as well as some non-food products targeted at dialysis membrane and
specialized battery separator market applications. Furthermore, on a limited
and
geographic basis, we sometimes take on distributor product lines of certain
allied products that serve as complementary supply items to casings. Examples
of
such products include an elastic netting line that we distribute in North
America and shrinkable barrier bags that we distribute in Italy.
The
production of regenerated cellulose casings generally involves four principal
steps: (i) production of a viscose slurry from wood pulp, (ii) regeneration
of
cellulosic fibers, (iii) extrusion of a continuous tube during the regeneration
process, and (iv) "shirring" of the final product. Shirring is a finishing
process that involves pleating and compressing the casing in tubular form for
subsequent use in high-speed stuffing machines. The production of regenerated
cellulose casings involves a complex and continuous series of chemical and
manufacturing processes, and Viskase believes that its facilities and expertise
in the manufacture of extruded cellulose are important factors in maintaining
its product quality and operating efficiencies.
In
2006,
we re-entered the market for heat shrinkable bags made from specialty plastic
films. Our heat-shrinkable plastic bags, sold primarily under the brand name
SEALFLEX™, are used to package and preserve products such as fresh and processed
meat products, poultry and cheese during wholesale and retail distribution.
We
participate in the multilayer segment to provide multilayer specialty plastic
bags.
The
production of specialty plastic films involve three principal steps: (i) plastic
resin pellets are melted and extruded into a tubular film; (ii) the tube is
“bi-oriented” where it is stretched both length-wise and width-wise to enhance
the heat-shrink characteristics of the final product; and (iii) the tube is
processed through a bag machine to form the individual bags.
As
part
of its service orientation, we also provide graphic art and design services
to
our customers. We are able to print designs, illustrations and text in multiple
colors directly on the specialty plastic bags. The use of a nylon platform
has
allowed us to offer superior optical and sealing properties in our
bags.
International
Operations
Viskase
has five manufacturing and/or finishing facilities located outside the
continental United States, in Monterrey, Mexico; Beauvais, France;
Thâon-les-Vosges, France; Caronno, Italy; and Guarulhos, Brazil. Net sales from
customers located outside the United States represented approximately 63% of
our
total net sales in 2006. Our operations in France are responsible for
distributing products, directly or through distributors, in Europe, Africa,
the
Middle East and parts of Asia. While overall consumption of processed meat
products in North America and Western Europe is stable, there is a potential
for
market growth in Eastern Europe, Latin America and Southeast Asia.
Sales
and
Distribution
Viskase
has a broad base of customers, with no single customer accounting for more
than
7% of our net sales. We are able to sell our products in most countries
throughout the world. In the United States, Viskase has a staff of technical
sales teams responsible for sales and service to processed meat and poultry
producers. Approximately 77 distributors market Viskase products to customers
in
Europe, Africa, the Middle East, Asia, and Latin America. Our products are
marketed through our own subsidiaries in France, Germany, Italy, Poland, Brazil,
and Mexico, and we maintain ten service and distribution centers located in
the
United States, Brazil, Canada, Germany, Italy and Poland. The service centers
perform limited finishing and provide sales, customer service, warehousing
and
distribution. Distribution centers provide only warehousing and distribution.
As
of December 31, 2006 and 2005, Viskase had backlog orders of approximately
$69.2
million and $42.8 million, respectively. Orders on backlog typically are filled
within 90-120 days.
Competition
Viskase
is one of the world's leading producers of cellulosic casings. While our
industry generally competes based on volume and price, we seek to maintain
a
competitive advantage and differentiate ourselves from our competitors by
manufacturing products that have higher quality and superior performance
characteristics when compared to our competitors' products; by being responsive
to customer product requirements; by providing technical support services to
our
customers for production and formulation requirements; and by producing niche
products to satisfy individual customer needs.
Viskase's
principal competitors in the cellulosic casing market are Viscofan, S.A.,
located in Spain with additional facilities in Germany, the Czech Republic,
the
United States, Mexico and Brazil; Kalle Nalo GmbH, located in Germany; Wolff
Walsrode, a wholly owned subsidiary of Dow Chemical, located in Germany; VT
Holding Group, located in Finland; and two Japanese manufacturers, Futamura
Chemical, marketed by Meatlonn, and Toho. Our primary competitors include
several corporations that are larger and better capitalized than we are and
thus
are less vulnerable to price reductions in the market. During the previous
ten
years, we have experienced reduced profits due to overcapacity in our industry
and intense competition based on price.
Research
and Development
We
believe our continuing emphasis on research and development is central to our
ability to maintain industry leadership. In particular, we have focused on
the
development of new products that increase our customers' operating efficiencies,
reduce their operating costs and expand their markets. Our research and
development projects also include the development of new processes and products
to improve our own manufacturing efficiencies. Our research scientists,
engineers and technicians are engaged in continuous product and equipment
development, and also provide direct technical and educational support to our
customers.
We
believe we have achieved and maintained our position as a leading producer
of
cellulosic casings for packaging meats through significant expenditures on
research and development. We expect to continue our research and development
efforts. The commercialization of certain of our product and process
applications, and related capital expenditures to achieve commercialization,
may
require substantial financial commitments in future periods. Research and
development costs for the Company are expensed as incurred and totaled $2.3
million, $2.3 million and $2.7 million for 2006, 2005 and 2004, respectively.
Historically,
our domestic sales and profits have been seasonal in nature, increasing in
the
spring and summer months. Sales outside of the United States follow a relatively
stable pattern throughout the year.
Raw
Materials
The
raw
materials we use include cellulose (derived from wood pulp), specialty fibrous
paper and various other chemicals. We generally purchase our raw materials
from
a single source or small number of suppliers with whom we maintain good
relations. Certain primary and alternative sources of supply are located outside
the United States. We believe, but there can be no assurance, that adequate
alternative sources of supply currently exist for all of our raw materials or
that raw material substitutes are available, which we could modify our processes
to utilize.
Employees
We
believe we maintain productive and amicable relationships with our approximately
1,582 employees worldwide. Approximately 995 of our 1,582 employees are union
members. One of our domestic facilities, located in Loudon, Tennessee, is
unionized. Our collective bargaining agreement covering union employees at
the
Loudon facility expires on September 30, 2010. Additionally, all of our
European, Brazilian and Mexican plants have national agreements with annual
renewals. Employees at our European plants have negotiations occurring at both
local and national levels.
Trademarks
and Patents
We
hold
patents on many of our major technologies, including those used in our
manufacturing processes and those embodied in products sold to our customers.
We
believe our ongoing market leadership is derived, in part, from our technology.
We vigorously protect and defend our patents against infringement on an
international basis. As part of our research and development program, we have
developed and expect to continue to develop new proprietary technology. We
believe these activities will enable us to maintain our competitive position.
However, we do not believe that any single patent or group of patents is
material to us. We also own numerous trademarks and registered trade names
that
are used actively in marketing our products. We periodically license our process
and product patents to competitors on a royalty basis.
Environmental
Regulations
In
manufacturing our products, we employ certain hazardous chemicals and generate
toxic and hazardous wastes. The use of these chemicals and the disposal of
such
wastes are subject to stringent regulation by several governmental entities,
including the United States Environmental Protection Agency (“EPA”) and similar
state, local and foreign environmental control entities. We are subject to
various environmental, health and safety laws, rules and regulations including
those of the United States Occupational Safety and Health Administration and
EPA. These laws, rules and regulations are subject to amendment and to future
changes in public policy or interpretation, which may affect our operations.
Certain
of our facilities are or may become potentially responsible parties with respect
to on-site and off-site waste disposal facilities and remediation of
environmental contamination.
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. We spent approximately $10.3 million in capital
expenditures for MACT compliance, and we are currently in compliance with MACT
standards.
Under
the
Resource Conservation and Recovery Act, regulations have been proposed that,
in
the future, may impose design and/or operating requirements on the use of
surface impoundments of wastewater. Two of our plants use surface impoundments.
We do not foresee these regulations being imposed in the near future.
On
December 18, 2006, the Parliament of the European Union passed regulation
2006/1907, Registration, Evaluation, and Authorization of Chemicals (“REACH”).
REACH covers the production and use of chemical substances, and applies to
manufacturers, importers and, in certain cases, downstream users. Once REACH
takes effect, beginning in June 2007, it will require all chemicals of one
ton
or more in annual volume that are manufactured in or imported into the European
Union to be tested for health and safety and registered with a new central
European authority, the European Chemicals Agency, located in Helsinki, Finland.
Registration deadlines vary based on the type of chemical and amount produced
or
imported and the entire program will be phased in over eleven
years.
REACH
also applies to all chemicals that are considered of very high concern to health
or the environment, regardless of volume. Depending on the substance in question
and its use, producers and importers may be obliged to investigate its affects
on human health and the environment. The most hazardous chemicals, including
carcinogens, reproductive toxins, or those that accumulate in humans or animals,
can only be used if authorized by the European Chemicals Agency. We believe
that
some of the chemicals we use in our manufacturing process may fall into this
category.
We
are
evaluating the potential effect of this regulation on our business, but at
this
time cannot determine the magnitude of the impact, if any.
(d)
Financial
Information About Geographic
Areas
Reference
is made to Part II, Item 8, Note 24 of Notes to Consolidated Financial
Statements.
We
emerged from bankruptcy in April 2003, have a history of losses and may not
become profitable.
We
emerged from bankruptcy in April 2003 and have a history of losses. We may
not
grow or achieve and maintain profitability in the near future, or at all. On
November 13, 2002, we filed a prepackaged plan of reorganization under Chapter
11 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern
District of Illinois, Eastern Division. On April 3, 2003, we consummated our
prepackaged plan of reorganization, as modified by the bankruptcy court, and
emerged from bankruptcy. If we cannot achieve and maintain profitability, the
value of an investment in our securities may decline. Should we file for
bankruptcy again in the future, the value of an investment in our securities
could decline even further.
We
face competitors that are better capitalized, and the continuous-flow nature
of
the casings manufacturing process forces competitors to compete based on volume,
which could adversely affect our revenues and
results.
We
face
competition in the United States and internationally from competitors that
may
have substantially greater financial resources than we have. The cellulosic
casings industry includes several competitors that are larger and better
capitalized than we are. Currently, our primary competitors include Viscofan,
S.A., Kalle Nalo GmbH, and VT Holding Group, although new competitors could
enter the market or competing products could be introduced. Although small
cellulosic prices appear to have stabilized during the past two years, and
there
have been some price increases in the small cellulosic segment of the industry
recently, since 1995 there had been steady declines in the prices of cellulosic
casing products generally. Also, although we believe that the current output
in
our industry is in balance with global demand, the continuous-flow nature of
the
casings manufacturing process has historically required competitors in our
industry to compete based on volume. We attempt to differentiate our products
on
the basis of product quality and performance, product development, service,
sales and distribution, but we, and competitors in our industry have used price
as a competitive factor in an attempt to obtain greater volumes. If prices
decline, we may not be able to achieve profitability, whereas certain of our
competitors who are better capitalized may be positioned to absorb such price
declines. Any of these factors could result in a material reduction of our
revenue, gross profit margins and operating results.
We
receive our raw materials from a limited number of suppliers, and problems
with
their supply could impair our ability to meet our customer’s product
demands.
Our
principal raw materials, paper and pulp, constitute an important aspect and
cost
factor of our operations. We generally purchase our paper and pulp from a single
source or a small number of suppliers. Any inability of our suppliers to timely
deliver raw materials or any unanticipated adverse change in our suppliers
could
be disruptive and costly to us. Our inability to obtain raw materials from
our
suppliers would require us to seek alternative sources. These alternative
sources may not be adequate for all of our raw material needs, nor may adequate
raw material substitutes exist in a form that our processes could be modified
to
use. These risks could materially and adversely affect our sales volume,
revenues, costs of goods sold and, ultimately, profit margins.
Our
failure to efficiently respond to industry changes in casings technology could
jeopardize our ability to retain our customers and maintain our market
share.
We
and
other participants in our industry have considered alternatives to cellulosic
casings for many years. As resin technology improves or other technologies
develop, alternative casings or other manufacturing methods may be developed
that threaten the long-term sustainability and profitability of our cellulosic
casings, our core product, and our fibrous casings. Our failure to anticipate,
develop or efficiently and timely integrate new technologies that provide viable
alternatives to cellulosic casings, including plastics and film alternatives,
may cause us to lose customers and market share to competitors integrating
such
technologies, which, in turn, would negatively impact our revenues and operating
results.
Sales
of our products could be negatively affected by problems or concerns with the
safety and quality of food products.
We
could
be adversely affected if consumers in the food markets were to lose confidence
in the safety and quality of meat products, particularly with respect to
processed meat products for which casings are used, such as hot dogs, deli
meats
and sausages. Outbreaks of, or even adverse publicity about the possibility
of,
diseases such as avian influenza and “mad cow disease,” food-borne pathogens
such as E. coli and listeria and any other food safety problems or concerns
relating to meat products, may discourage consumers from buying meat products.
These risks could also result in additional governmental regulations, and/or
cause production and delivery disruptions or product recalls. Each of these
risks could adversely affect the demand for our products, and consequently,
our
sales volumes and revenues.
Changing
dietary trends and consumer preferences could weaken the demand for our
products.
Various
medical studies detailing the health-related attributes of particular foods,
including meat products, affect the purchase patterns, dietary trends and
consumption preferences of consumers. These patterns, trends and preferences
are
routinely changing. For example, general dietary concerns about meat products,
such as the cholesterol, calorie, sodium and fat content of such products,
could
result in reduced demand for such products, which would, in turn, cause a
reduction in the demand for our products and a decrease in our sales volume
and
revenue.
Our
facilities are capital intensive, and we may not be able to obtain financing
to
fund necessary capital expenditures.
Our
business is capital intensive. We operate eight manufacturing facilities and
eleven distribution centers as part of our business. We are required to make
substantial capital expenditures and substantial repair and maintenance
expenditures to maintain, repair, upgrade and expand existing equipment and
facilities to keep pace with competitive developments. In addition, we are
required to invest in technological advances to maintain compliance with safety
standards and environmental laws or regulations. For example, we have already
spent in excess of $10.0 million on maximum achievable control technology
(“MACT”) to meet certain air emissions standards related to carbon disulfide
under the Clean Air Act Amendments of 1990. We spent approximately $13.2 million
for capital expenditures in 2006 and will spend approximately $8.4 million
in
2007 and $10.2 million in 2008. At some point in the future, we may be required
to obtain additional financing to fund capital expenditures. If we need to
obtain additional funds, we may not be able to do so on terms
favorable to
us, or
at all, which would ultimately negatively affect our production and operating
results.
We
are in the process of moving operations from our Kentland, Indiana facility
to
Monterrey, Mexico, which could affect our worldwide manufacturing capabilities
and divert attention and resources.
We
are
the process of relocating a majority of our United States finishing operations
from Kentland, Indiana to Monterrey, Mexico. We have experienced delays in
the
process that have resulted in higher costs and decreases in our level of
customer service. We believe that these delays have already resulted, and will
continue to result, in lost sales, decreased operating results due to the effect
of duplicative costs and lost margins and will have a negative effect on our
liquidity during 2007. During this period, we may have lower revenues due to
the
loss of finishing capacity resulting from machine transfers and a loss of
manufacturing efficiency due to training a new workforce in Mexico.
Business
interruptions at any of our production facilities could increase our operating
costs, decrease our sales or cause us to lose
customers.
The
reliability of our production facilities is critical to the success of our
business. In recent years, we have streamlined our productive capacity to be
better aligned with our sale volumes. At current operating levels, we have
little or no excess production capacity for certain products. If the operations
of any of our manufacturing facilities were interrupted or significantly delayed
for any reason, including labor stoppages, we may be unable to shift production
to another facility without incurring a significant drop in production. Such
a
drop in production would negatively affect our sales and our relationships
with
our customers. Similarly, inefficiencies in the initial operation of our Mexico
facility may adversely affect production volumes.
We
are subject to significant minimum contribution requirements and to market
exposure with respect to our U.S. defined benefit plan, both of which could
adversely affect our cashflow.
Although
the amount fluctuates, our aggregate minimum funding contribution requirement
for our U.S. defined benefit plan from 2007 through 2011 is approximately $30.2
million and our unfunded pension liability is $34.3 million. These amounts
could
increase or decrease due to market factors, including actual and expected
returns on plan assets, and the discount rate used to measure the
liability.
Our
international sales and operations expose us to political and economic risks
in
foreign countries, as well as to risks related to currency fluctuations, all
of
which could impair our ability to do business at the international
level.
We
currently have manufacturing or sales and distribution centers in seven foreign
countries, including Brazil, Canada, France, Germany, Italy, Mexico and Poland.
Our international sales and operations may be subject to various political
and
economic risks including, but not limited to: possible unfavorable exchange
rate
fluctuations or hyperinflation; changes in a country’s or region’s political or
economic conditions; governmental regulations, including import and export
controls; and tariffs.
Our
sales
to customers located outside the United States generally are subject to taxes
on
the repatriation of funds. In addition, international operations in certain
parts of the world may be subject to international balance of payments
difficulties that may raise the possibility of delay or loss in the collection
of accounts receivable from sales to customers in those countries. Net sales
to
customers located outside the United States represented approximately 64% of
our
total net sales in 2005 and approximately 63% of our total net sales in 2006.
Should
any of these risks occur, it could impair our ability to export our products
or
conduct sales to customers located outside of the United States and result
in a
loss of sales and profits from our international operations.
Continued
consolidation of our customers and increasing competition for those customers
may put pressures on our sales volumes and revenues.
In
recent
years, the trend among our customers has been towards consolidation within
the
meat processing industry. These consolidations have enhanced the purchasing
power of our customers who, not being contractually obligated to purchase our
products, tend to exert increased pressure with respect to pricing terms,
product quality and new products. As our customer base continues to consolidate,
the already high level of competition for the business of fewer customers is
expected to intensify. If we do not continue to enhance the value of our product
offering in a way that provides greater benefit to our customers, our sales
volume and revenues could decrease.
Consolidation
in our industry may have an impact on competition and put pressure on our
financial position.
Viscofan,
S.A. acquired the North American operations of Teepak LLC in January 2006,
and
VT Holding Group acquired Teepak Europe and Oy Visko AB in January 2007. As
a
result, both companies have strengthened their market share in the United States
and other key markets in which we participate. This could negatively affect
our
relationships with certain of our customers, which in turn could have a negative
impact on our financial position.
Continued
compliance with environmental regulations may result in significant costs,
which
could negatively affect our financial condition.
Our
operations are subject to extensive and increasingly stringent environmental,
health and safety laws and regulations pertaining to the discharge of substances
into the environment, the handling and disposition of wastes and land
reclamation and remediation of hazardous substance substances. We are also
subject to differing environmental regulations and standards due to the fact
that we operate in many different countries. Present and future environmental
laws and regulations applicable to our operations may require substantial
capital expenditures and may have a material adverse effect on our business,
financial condition and results of operations.
Failure
to comply with environmental laws and regulations can have serious consequences
for us, including criminal as well as civil and administrative penalties and
negative publicity. Liability under these laws and regulations involves inherent
uncertainties. In addition, continued government and public emphasis on
environmental issues can be expected to result in increased future investments
for environmental controls at ongoing operations, which will be charged against
income from future operations.
We
have
incurred, and will continue to incur, significant capital and operating
expenditures to comply with various environmental laws and regulations. For
example, we have spent in excess of $10 million on “maximum achievable control
technology” to meet certain air emissions standards related to carbon disulfide
under the Clean Air Act Amendments of 1990. Additional environmental
requirements imposed in the future could require currently unanticipated
investigations, assessments or expenditures, and may require us to incur
significant additional costs. As the nature of these potential future charges
is
unknown, management is not able to estimate the magnitude of any future costs,
and we have not accrued any reserve for any potential future costs.
Some
of
our facilities have been in operation for many years. During that time, we
and
previous owners of these facilities may have generated and disposed of wastes
that are or may be considered hazardous or may have polluted the soil or
groundwater at our facilities, including adjacent properties. Some environmental
regulations impose liability on certain categories of persons who are deemed
to
be responsible for the release of “hazardous substances” or other pollutants
into the environment, without regard to fault or to the legality of such
person’s conduct. Under certain circumstances, a party may be required to bear
more than its proportional share of cleanup costs at a contaminated site for
which it has liability if payments sufficient to remediate the site cannot
be
obtained from other responsible parties.
We
may be subject to significant tax assessments, which could affect our financial
condition.
The
Company has been assessed significant amounts for taxes due by the State of
Illinois, USA and the State of São Paulo, Brazil. Should we lose either of these
cases, it would affect our financial condition. See Part II, Item 8, Note 17
for
further information.
Our
intellectual property rights may be inadequate or violated, or we may be subject
to claims of infringement, both of which could negatively affect our financial
condition.
We
rely
on a combination of trademarks, patents, trade secret rights and other rights
to
protect our intellectual property. Our trademark or patent applications may
not
be approved and our trademarks or patents may be challenged by third parties.
We
cannot be certain that the steps we have taken will prevent the misappropriation
of our intellectual property, particularly in foreign countries where the laws
may not protect our rights as fully as the laws of the United States. From
time
to time, it has been necessary for us to enforce our intellectual property
rights against infringements by third parties, and we expect to continue to
do
so in the ordinary course of our business. We also may be subjected to claims
by
others that we have violated their intellectual property rights. Even if we
prevail, third party-initiated or Company-initiated claims may be time consuming
and expensive to resolve, and may result in a diversion of our time and
resources. The occurrence of any of these factors could diminish the value
of
our trademark, patent and intellectual property portfolio, increase competition
within our industry and negatively impact our sales volume and revenues. One
of
our patents, which was licensed to third parties, expired during the third
quarter of 2006. Royalty income during the first nine months of 2006 from this
patent was approximately $1.4 million.
Our
substantial level of indebtedness could adversely affect our results of
operations, cash flows and ability to compete in our industry, which could,
among other things, prevent us from fulfilling our obligations under our debt
agreements.
We
have
substantial indebtedness. In addition, subject to restrictions in the indenture
(“Indenture”) governing our 11.5% Senior Secured Notes due June 15, 2011 issued
on June 29, 2004 (“11.5% Senior Secured Notes”) and our revolving credit
facility, we may incur additional indebtedness. As of December 31, 2006, we
had
approximately $109.9 million ($113.7 million aggregate principal) of total
debt,
exclusive of additional indebtedness that we may borrow, and have borrowed,
under our revolving credit facility.
Our
high
level of indebtedness has important implications, including the following:
• if
we
fail to satisfy our obligations under our indebtedness, or fail to comply with
the restrictive covenants contained in the Indenture or our revolving credit
facility, it may result in an event of default, all of our indebtedness could
become immediately due and payable, and our lenders could foreclose on our
assets securing such indebtedness following the occurrence and during the
continuance of an event of default;
• a
default
under either of the Indenture or our revolving credit facility could trigger
cross-defaults under the other and under other key agreements or leases; and
• repayment
of our indebtedness may require us to dedicate a substantial portion of our
cash
flow from our business operations, thereby reducing the availability of cash
flow to fund working capital, capital expenditures, development projects,
general operational requirements and other purposes.
We
expect
to obtain the funds to pay our expenses and to repay our indebtedness primarily
from our operations and, in the case of our indebtedness, from refinancings
thereof. Our ability to meet our expenses and make these payments thus depends
on our future performance, which will be affected by financial, business,
economic and other factors, many of which we cannot control. Our business may
not generate sufficient cash flow from operations in the future and our
currently anticipated growth in revenue and cash flow may not be realized,
either or both of which could result in our being unable to repay indebtedness,
or to fund other liquidity needs. If we do not have enough funds, we may be
required to refinance all or part of our then existing debt, sell assets or
borrow more funds, which we may not be able to accomplish on terms acceptable
to
us, or at all. In addition, the terms of existing or future debt agreements
may
restrict us from pursuing any of these alternatives.
Despite
current indebtedness levels, we may still incur substantially more debt, which
could decrease cash or other collateral available to pay our current debt.
We
may
incur substantial additional indebtedness in the future. Although the Indenture
and our revolving credit facility contain restrictions on the incurrence of
additional indebtedness, these restrictions are subject to a number of
qualifications and exceptions, and the indebtedness incurred in compliance
with
these restrictions could be substantial. For example, we have the ability to
borrow up to $20.0 million under our revolving credit facility, which is secured
by liens on all of our North American personal and real property assets, with
certain exceptions. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operation” and “Financial Statements and Supplementary
Data.”
We
may not be able to generate the significant amount of cash needed to pay
interest and principal amounts on our debt.
Our
earnings were insufficient to cover our fixed charges for the twelve-month
period ended December 31, 2006. If our cash flow and capital resources are
insufficient to pay interest and principal under our revolving credit facility,
the 11.5% Senior Secured Notes, the 8% Senior Subordinated Secured Notes due
December 1, 2008 (“8% Notes”) and our other debt, we may be forced to reduce or
delay capital expenditures, sell assets, seek to obtain additional equity
capital or attempt to restructure our debt. While recent amendments to the
Indenture permit us to issue additional 11.5% Senior Secured Notes to repurchase
or otherwise refinance our 8% Notes, we can provide no assurance that we would
be able to do so. If any of those alternative measures do not permit us to
meet
our scheduled debt service obligations, including the scheduled maturity of
the
8% Notes on December 1, 2008, we could face substantial liquidity problems
and
the possibility of a default under our 11.5% Senior Secured Notes and revolving
credit facility. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
A
substantial portion of our business is conducted through foreign subsidiaries,
and our failure to generate sufficient cash flow from these subsidiaries, or
otherwise repatriate or receive cash from these subsidiaries, could result
in
our inability to repay our indebtedness.
Our
sales
to customers located outside the United States are conducted primarily through
subsidiaries organized under the laws of jurisdictions outside of the United
States. For the period ended December 31, 2006, our foreign restricted
subsidiaries contributed approximately 46% of our consolidated revenues. As
of
December 31, 2006, 42% of our consolidated assets, based on book value, were
held by foreign subsidiaries. Our ability to meet our debt service obligations
with cash from foreign subsidiaries will depend upon the results of operations
of these subsidiaries and may be subject to contractual or other restrictions
and other business considerations. In addition, dividend and interest payments
to us from our foreign subsidiaries may be subject to foreign withholding taxes,
which would reduce the amount of funds we receive from such foreign
subsidiaries. Dividends and other distributions from our foreign subsidiaries
may also be subject to fluctuations in currency exchange rates and restrictions
on repatriation, which could further reduce the amount of funds we receive
from
such foreign subsidiaries.
The
indenture governing our 11.5% Senior Secured Notes and the instruments governing
our other indebtedness impose significant operating and financial restrictions,
and a breach of any such restriction may result in a default, which could result
in the possible acceleration of repayment obligations and our secured creditors
receiving certain rights against our collateral.
The
indenture governing our 11.5% Senior Secured Notes and the credit agreement
governing our revolving credit facility impose significant operating and
financial restrictions on us. These restrictions restrict our ability to take
advantage of potential business opportunities as they arise and may adversely
affect the conduct of our current business. More specifically, they restrict
our
ability to, among other things: incur additional indebtedness or issue
disqualified capital stock; pay dividends, redeem subordinated debt or make
other restricted payments; make certain investments or acquisitions; grant
liens
on our assets; merge, consolidate or transfer substantially all of our assets;
and transfer, sell or acquire assets, including capital stock of our
subsidiaries.
The
credit agreement governing our revolving credit facility also requires us to
meet a number of financial ratios and tests. Compliance with these financial
ratios and tests may adversely affect our ability to adequately finance our
operations or capital needs in the future or to pursue attractive business
opportunities that may arise in the future. Our ability to meet these ratios
and
tests and to comply with other provisions governing our indebtedness may be
adversely affected by our operations and by changes in economic or business
conditions or other events beyond our control. Our failure to comply with our
debt-related obligations could result in an event of default under our
indebtedness, resulting in accelerated repayment obligations and giving our
secured creditors certain rights against our collateral.
The
interests of our controlling stockholder may be not aligned with those of other
stockholders.
To
our
knowledge, entities affiliated with Carl C. Icahn hold a total of approximately
67.0% of our outstanding shares of common stock. As a result, Mr. Icahn and
his
affiliates presently have and will continue to have voting power sufficient
to
control the election of the Company’s board of directors and stockholder voting
on decisions relating to fundamental corporate actions, including potential
mergers, consolidations or sales of all or substantially all of our assets.
Current, Mr. Icahn has designated four members of the Company’s board of
directors, which is comprised of seven directors. It is possible that the
interests of Mr. Icahn and his affiliates, as stockholders, could conflict
in
certain circumstances with those of other stockholders.
We
are no longer required to file reports with the Securities and Exchange
Commission.
On
March22, 2007, we filed Form 15 with the SEC which terminated our obligation to
file
reports under the Exchange Act. As a result, we will not be required to provide
financial reports or other special reports, such as Forms 10-K, 10-Q and 8-K
in
the future. Also, with the exception of providing the trustee of our 11.5%
Senior Notes with certain financial and other information on a periodic basis,
we will not be obligated to make such information available on our website
or in
any public forum. This may create limitations in the market for our securities,
which may cause our investors to be unable to sell their securities, or only
to
be able to sell them at a price lower than they might otherwise. Also, our
shareholders will be unable to determine the financial condition of our
business.
The
Company believes that its properties generally are suitable and adequate to
satisfy the Company's present and anticipated needs. The Company's United States
real property collateralizes the Company's obligations under various financing
arrangements. For a discussion of these financing arrangements, refer to Part
II, Item 8, Note 10 of Notes to Consolidated Financial Statements.
In
1993,
the Illinois Department of Revenue (“IDR”) filed 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.
The
IDR asserted it was owed, as of the petition date, $1.0 million in taxes, $0.4
million in interest and $0.3 million in penalties. The Company objected to
the
claim on various grounds. 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 denying the IDR claim. 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 on the
Company’s other objections to the claim. On November 16, 2005, the Bankruptcy
Court issued an opinion in which it denied the IDR’s claim to the extent it
seeks principal tax liability and found that no principal tax liability remains
due. However, because of certain timing issues with respect to the carryback
of
subsequent net operating loss used to eliminate the principal tax liabilities
in
1988 and 1989, the issue of the amount of interest and penalties (for
approximately 14 years), if any, has not been determined by the Bankruptcy
Court. The IDR has asserted that as of February 2006, approximately $0.4 million
was owed in interest. On June 21, 2006, the Bankruptcy Court issued an order
granting in part and denying in part the IDR claim. The Bankrutpcy Court order
determined the amount of interest due through May 2006 to be $0.3 million.
On
June 29, 2006, the IDR appealed the Bankruptcy Court November 16, 2005 order
with regard to the principal tax liability in 1988 and 1989. On October 31,2006, the United States District Court affirmed the Bankruptcy Court order.
The
Company intends to vigorously defend its position on the utilization of the
carryback of subsequent net operating losses to eliminate the principal tax
liabilities in 1988 and 1989 if the District Court's opinion is appealed. The
IDR has asserted that if it were successful on appeal, that the Company would
have liability to the IDR as of the beginning of 2005 in the amount of
approximately $2.9 million.
During
2005, Viskase Brasil Embalagens Ltda. (“Viskase Brazil”) received three tax
assessments by São Paulo tax authorities with respect to Viskase Brazil’s
alleged failure to pay Value Added and Sales and Services Tax (“ICMS”) levied on
the importation of raw materials and sales of goods in and out of the State
of
São Paulo. Two of the tax assessments relate to ICMS on the importation by
Viskase Brazil of raw materials through the State of Espírito Santo (“Import
Assessments”), and the disputed amount with respect to such assessments
aggregates R$16.6 million for taxes and R$16.3 million for penalties and
interest, or about $7.8 million and $7.6 million, respectively at exchange
rates
in effect on December 31, 2006. The third tax assessment also relates to ICMS
and alleges that Viskase Brazil arranged for the remittance of goods to
addresses other than those indicated on the relevant tax documents
(“Documentation Assessment”). The disputed amount under the Documentation
Assessment is R$0.2 million for taxes and R$1.7 million for penalties and
interest, or about $1.0 million and $0.8 million, respectively, at exchange
rates in effect on December 31, 2006. The attorneys representing Viskase Brazil
on these tax disputes have advised the Company that the likelihood of liability
with respect to the tax assessments is remote. In view of the magnitude of
the
assessments, Viskase Brazil sought the advice of another law firm with respect
to one of the Import Assessments and with respect to the Documentation
Assessment. The second law firm expressed its belief (i) that the likelihood
of
liability on the Import Assessment it reviewed either was possible tending
to
probable or was possible, depending on the theory of liability pursued by the
tax authorities, and (ii) that the likelihood of liability on the Documentation
Assessment was probable. Viskase believes that the two Import Assessments raise
essentially the same issues and therefore did not seek advice from the second
law firm with respect to the other Import Assessment. The Company has provided
a
reserve in the amount of $2.0 million as of December 31, 2006. Viskase Brazil
strongly denies the allegations set forth in the tax assessments and intends
to
vigorously defend itself. On October 25, 2006, Viskase Brazil presented oral
arguments before the Brazilian administrative tax panel.
In
December 2006, our Canadian subsidiary, Viskase Canada Inc., terminated
post-retirement health care and life insurance benefits for retirees of Viskase
Canada Inc. In February 2007, two former employees filed suit in the Ontario
Superior Court of Justice against Viskase Canada Inc. and Viskase Companies,
Inc. alleging these benefits were permanently vested as a condition of their
retirement. Further, they petitioned for class action status on behalf of all
similarly situated retirees. The complaint requests reinstatement of the
benefits, or unspecified damages in the alternative, and punitive damages of
$1.0 million. We intend to vigorously defend ourselves against this lawsuit
and
we have not accrued any amount on our statement of financial position with
regard to this complaint.
In
addition, the Company from time to time is involved in various other legal
proceedings, none of which are expected to have a material adverse effect upon
results of operations, cash flows or financial condition.
MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
(a)Market
Information.
The
Company’s Common Stock is traded in the over-the-counter market
and is
quoted on the Pink Sheets Electronic Quotation Service under the symbol
“VKSC”.
The
high and low closing bid prices of the Common Stock during 2006 and 2005 are
set
forth in the following table. Such prices reflect interdealer prices without
markup, markdown or commissions and may not represent actual
transactions.
2006
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
High
$
3.25
$
3.25
$
2.70
$
2.25
Low
2.61
2.60
2.20
1.45
2005
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
High
$
3.30
$
3.50
$
2.75
$
2.65
Low
2.85
2.19
1.80
2.12
(b)Holders.
As of
April 5, 2007, there were approximately 200 holders of record and approximately
400 beneficial holders of the Company’s Common Stock.
(c)Dividends.
We have
not paid dividends on our Common Stock, and we do not anticipate paying
dividends on our Common Stock in the foreseeable future. In addition, the terms
of our revolving credit facility and the indenture governing the 11.5% Notes
restrict our ability to pay dividends on the Common Stock.
(d)Equity
Compensation Plans.
For a
discussion of the Company’s Equity Compensation Plans, refer to Part III, Item
11.
Net
income (loss) available to common shareholders
416
(2,157
)
25,317
(46,627
)
151,873
(19,330
)
Per
share (loss) income from continuing
operations
-
basic
0.04
(0.22
)
2.53
(4.49
)
9.92
(1.26
)
-
diluted
0.03
(0.22
)
2.33
(4.49
)
9.92
(1.26
)
Cash
and equivalents
3,692
11,904
30,255
23,160
27,700
Restricted
cash
2,419
3,251
3,461
26,245
28,347
Working
capital
53,361
45,920
61,399
52,201
(174,203
)
Total
assets
203,755
197,840
213,432
212,093
218,681
Debt
obligations:
Short-term
debt (3)
(4)
3,978
182
384
21,303
227,343
Long-term
debt
105,916
103,299
100,962
100,652
85
Stockholders'
equity (deficit)
4,182
(26,679
)
(12,013
)
(41,100
)
(175,146
)
Redeemable
preferred stock
23,174
Cash
dividends per common share
none
none
none
none
none
none
(1)
For
a discussion on comparability of income from continuing operations
and net
income, please see “Item 7 - Management’s Discussion and Analysis of
Financial Condition and Results of
Operations.”
(2)
SFAS
No. 145 requires that gains and losses on debt extinguishment will
no
longer be classified as extraordinary for fiscal years beginning
after May15, 2002. The prior period extraordinary item in 2003 was reclassified
in
the consolidated statements of operations.
(3)
Year
2002 includes $163,060 of debt classified as current liabilities
subject
to compromise on the balance sheet.
(4)
Year
2002 includes $64,106 of long-term debt reclassified to current due
to
covenant restrictions.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results
of Operations
Company
Overview
We
are a
worldwide leader in the manufacture and sale of cellulosic, fibrous and plastic
casings for the
processed meat industry. We currently operate eight manufacturing
facilities and eight distribution centers throughout North America, Europe
and
South America and we derive approximately 64% 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. In
2006, we re-entered the market for the manufacture and sale of heat-shrinkable
plastic bags for the meat, poultry and cheese industry. 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 and competitive activity. 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, our product
mix
and competitive activity.
We
have
experienced little growth in revenues over the last three years (less than
1%
per year), with volume increases and currency gains due to a weakening dollar
offset partially by modest price decreases. Competition solely based on price,
which was prevalent in our industry since the mid-1990’s, stabilized in the last
three years and is showing signs of improvement for certain product
lines.
Operating
income has declined in the last three years due to increases in costs of sales
and restructuring expense. These increases were due to start up costs with
the
relocation to Mexico, wage inflation, higher energy costs and higher raw
materials costs, especially wood pulp.
For
many
years, primarily due to financial limitations on our ability to invest in new
equipment, our competitors gained most of the organic growth in our markets.
Management decided in 2005 to increase our productive capacity in an effort
to
participate in more of this growth. To accomplish this, we reopened our
extrusion facility in Thâon-les-Vosges, France at a total cost of about $2.1
million. Since then, by adding additional shifts and redeploying certain
equipment, we have been able to significantly increase, and sell, additional
output.
Factors
Affecting Operating Results and Outlook
The
following is a discussion of some of the key factors that have in the past
and
are likely in the future to affect operating results.
Selling
price.
Selling
price is the biggest driver of our operating income. We sell products that
typically have gross margins of less than 20%. Therefore, every dollar of a
price increase is worth the same amount of profit as is five dollars of new
sales. Given that we operate at or near capacity for most of our products,
and
as significant capacity increases will be far more expensive that the costs
associated with reopening extrusion in Thâon-les-Vosges, management focuses
intensely the selling prices of our products. We believe that pricing trends
for
our products are promising. Prices for our NOJAX® product line have been
increased for many customers by double-digit percentages for 2007.
Labor
costs.
In
recent years, we have taken many actions to reduce our labor costs to the
minimum sustainable level. With the exception of certain employees covered
by a
collective bargaining agreement, we have frozen our defined benefit pension
plan. We have made our defined contribution plan payments variable to financial
performance targets. We have moved manufacturing facilities to lower cost areas.
We have increased medical care deductibles and other employee costs, and we
have
cut our workforce to minimal levels. While we don’t believe further cuts are
advisable, we do believe our labor costs as a percentage of sales will be
maintained for the foreseeable future.
Raw
material and energy costs.
While
labor is the highest cost component of our product, materials and energy are
nearly as important. Prices for these key elements were stable for many years
until recently. In 2005 and 2006, we experienced dramatic increases in the
prices of energy, wood pulp and various chemicals. The timing of these increases
was poor for the Company, as most of our prices were set for our major customers
and only afterward did we experience cost increases. We continue to look for
additional suppliers for our key materials in order to obtain the lowest prices
available.
Charges
associated with our review of strategic alternatives and rights
offering.
We have
incurred significant additional administrative and other fees and expenses
in
connection with both of these projects.
The
following discussion compares the results of operations for the fiscal year
ended December 31, 2006 to the results of operations for the fiscal year ended
December 31, 2005, and compares the results of operations for the fiscal year
ended December 31, 2005 to the results of operations for the fiscal year ended
December 31, 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 2006, 2005 and 2004 fiscal years. The table (dollars in millions) is as
follows:
Net
Sales. Our net sales for 2006 were $210.4 million, which represents an increase
of $6.6 million or 3.2% from 2005. Net sales benefited $5.3 million from volumes
in the casings market and $1.5 million due to translation, offset by a $0.2
million decrease due to price and mix.
Cost
of
Sales. Cost of sales increased 5.6% over the prior year. The increase in cost
of
sales can be attributed to an increase in raw material costs and labor costs,
and from operating inefficiencies with the transfer of certain finishing
operations to Mexico, which we estimate were approximately $3.0 million. These
increases were offset by a $7.8 million reduction from the elimination of
certain postretirement medical benefits.
Selling,
General and Administrative Expenses. Selling, general and administrative
expenses increased $1.9 million from 2005 to 2006. The change can be attributed
to savings from internal reorganizations that equaled $3.9 million, but were
offset by $4.8 million of start up expense for our finishing operations in
Mexico, $0.5 million of expense for a review of strategic alternatives and
$0.5
million for labor cost increases.
Operating
Income. The operating income for 2006 was $1.0 million, representing a decrease
of $6.7 million from the prior year period. The reduction in the operating
income resulted primarily from the increase in expenses for the transfer of
our
finishing operations from U.S. to Mexico as described above and fixed asset
impairment charge of $2.4 million for the write down of our Kentland, Indiana
facility.
Interest
Expense. Interest expense, net of interest income, for 2006 totaled $13.3
million, which represented an increase of $1.1 million from the $12.2 million
for the comparable period of the prior year. The increase is principally due
to
the increase in interest expense from higher revolving loan borrowings and
a
decrease in interest income.
Other
Income. Other income of approximately $0.4 million for 2006 consists principally
of foreign transaction gains.
Gain
on
Curtailment. We terminated postretirement life insurance benefits as of December31, 2006 for all active employees and retirees in the United States, and the
Company eliminated the postretirement medical benefits and life insurance
benefits for all retirees in Canada. We recognized a $14.5 million gain on
the
curtailment of these postretirement benefits.
Income
Tax Provision. During 2006, a tax provision of $1.0 million was recognized
on
the income before income taxes of $2.6 million resulting principally from the
results of operations of foreign subsidiaries.
Primarily
as a result of the factors discussed above, net income for 2006 was $1.6 million
compared to net loss of $2.2 million for the period of 2005.
Adoption
of SEC Staff Accounting Bulletin No. 108 (“j No. 108”). We adopted SAB No. 108
in the fourth quarter of 2006, as described in detail in the Summary of
Significant Accounting Policies footnote to our financial statements. We have
historically not accrued for anniversary bonuses paid to employees of our French
subsidiary. These payments are made on each five year anniversary of service
with the Company, starting with the fifteenth year. With the assistance of
our
actuaries, we have determined that, for years prior to and including 2005,
we
should have accrued approximately $2.3 million as of December 31, 2005, which
would have resulted in a decrease of the deferred tax liability of approximately
$0.8 million. In addition, we made other adjustments in accordance with SAB
No.
108 as outlined below.
The
items
described as allowance for doubtful accounts, inventory obsolescence, and lower
of cost or market reserve all arose as the result of estimating the amount
of
reserves required for these items over a number of years at amounts different
than that actually required. The item described below as rent expense is the
impact of not accounting for rent expense on a straight-line basis for a lease
with an escalation clause entered into during 2001. The adjustment to accrued
pension liability is the result of an understatement of the minimum liability
under one of our qualified pension plans which has accumulated over a number
of
years.
Accrual
of French anniversary bonuses (described above), net of tax of
$785
$
(1,500
)
Reduction
of allowance for doubtful accounts
589
Reduction
in reserve for inventory obsolescence, net of tax of $151
50
Reduction
of lower of cost or market reserve
49
Increase
in deferred rent expense
(197
)
Increase
in accrued pension liability
192
$
(817
)
We
believe that the net effect of these adjustments were not material, either
quantitatively or qualitatively, in any of the years presented. In reaching
that
determination, we estimated the net after-tax effect of the various adjustments
for each year and compared them to total assets and revenues. Because our income
(loss) before income taxes and our net income (loss) include significant
variations, and range from years of significant losses to years of significant
income, we believe that a measurement based on revenues and assets is most
appropriate. In each case, the adjustments represented significantly less than
1% of both total assets and revenues.
2005
Versus 2004
Net
Sales. Our net sales for 2005 were $203.8 million, which represents a decrease
of $3.3 million or 1.6% from the comparable prior year. Net sales benefited
$2.8
million due to foreign currency translation gains, offset by a $3.1 million
decrease due to price and mix and a $3.0 million decrease from
volume.
Cost
of
Sales. Cost of sales for 2005 decreased 0.3% from the comparable prior year
period. However, cost of sales increased as a percent of net sales (from 79.8%
in 2004 to 80.7% in 2005). The increase as a percent of sales can be attributed
to an increase in energy, raw material and labor costs offset by operating
efficiencies and a $1.7 million reduction from the elimination of certain
postretirement medical benefits.
Selling,
General and Administrative Expenses. We were able to reduce selling, general
and
administrative expenses from $29.3 million in 2004 to $29.0 million in 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 postretirement benefits that were effective as of
December 31, 2004. Additionally, in 2004 there was an unusual income benefit
of
$0.4 million consisting of a reversal of a legal liability recorded in
fresh-start accounting that has been settled.
Operating
Income. The operating income for 2005 was $7.7 million, representing a decrease
of $3.4 million from the prior year. The decrease in the operating income
resulted primarily from increased restructuring expenses and lower gross margin,
which were partially offset by improvements in selling, general and
administrative expenses. Operating income for 2005 includes a restructuring
charge of $2.0 million of which $1.8 million was related to one-time employee
costs related to our transfer of Kentland, Indiana finishing operations to
Monterrey, Mexico. Operating income for 2004 includes a restructuring charge
of
$0.7 million, offset by a reversal of an unusual income benefit 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 2005 was $12.2 million,
representing a decrease of $0.4 million. The decrease is primarily a result
of a
$0.8 million increase in capitalized interest related to our capital
projects.
Other
Income. Other income of approximately $0.2 million for 2005 consists principally
of a $0.2 million expense related to foreign currency transactions, offset
by a
gain of $0.6 on sales of unrelated securities. Other income for 2004 of $1.2
million consists principally of a $1.5 million net gain related to foreign
currency transactions.
Gain
on
Curtailment. The Company will terminate postretirement 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 postretirement health care benefits
was
recognized during the third quarter of 2005. A
$0.9
million gain on the curtailment of the pension benefits associated with the
Kentland, Indiana plant shutdown was recognized on December 31,2005.
Income
Tax Expense (Benefit). During 2005, an income tax benefit of $0.5 million was
recognized on the loss before income taxes of $2.6 million resulting principally
from a $2.3 million 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, net loss was $2.2 million compared
to net income of $25.3 million for 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 mostly 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 increased comprehensive income
by $4.1 million in 2006 and decreased comprehensive income by $4.9 million
in
2005.
Liquidity
and Capital Resources
Cash
and
cash equivalents decreased by $8.2 million during 2006. Cash flows used in
operating activities were $23.2 million, used in investing
activities were $12.4 million, and provided by financing activities were $26.8
million. Cash flows used in operating
activities were principally attributable to decrease in working capital,
postretirement curtailment gain and foreign currency transaction gain, offset
by
depreciation and amortization and non-cash interest. Cash flows used in
investing activities were principally attributable to capital expenditures
offset by the release of restricted cash for an escrow account related to
Brazilian operations. Cash flows provided by financing activities principally
consisted of the issuance of preferred stock and the proceeds from the revolving
loan.
As
a
result of spending on certain non-recurring and ongoing projects (table below),
the Company needed an additional infusion of cash in November 2006. We obtained
this through our issuance of $24 million of Series A Preferred Stock. See Part
II, Item 8, Note 13 of Notes to Consolidated Financial Statements for additional
details on these transactions.
2005/2006
2007
Projected
Project
(millions)
(millions)
Move
of manufacturing facility from Kentland, Indiana to Monterrey,
Mexico
$
26.3
$
0.8
Other
capital expenditures
$
3.5
$
7.6
Research
and development costs
$
4.6
$
3.4
In
the
longer term, the Company has significant debt and not enough projected cash
flow
to pay off the principal balances when they come due. We intend to refinance
our
debt at maturity with other debt or equity instruments. However, if we are
unable to do so, we may be required to sell assets or delay capital
expenditures. We can provide no assurance that we would be able to refinance
our
indebtedness. See Part II, Item 8, Note 9 of Notes to Consolidated Financial
Statements for detailed information about the amounts, due dates, terms and
conditions of our debt.
As
of
December 31, 2006,
the
Company had positive working capital of approximately $53.4 million including
restricted cash of $2.4
million, with
additional amounts available under its revolving credit facility. 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.
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 postretirement
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.
Income
Taxes
Deferred
tax assets and liabilities are measured using enacted tax laws and tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax
assets and liabilities due to a change in tax rates is recognized in income
in
the period that includes the enactment date. In addition, the amounts of any
future tax benefits are reduced by a valuation allowance to the extent such
benefits are not expected to be realized on a more likely than not basis.
Pension
Plans and Other Postretirement Benefit Plans
Using
appropriate actuarial methods and assumptions, the Company’s defined benefit
pension plans are accounted for in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 87, Employers’ Accounting for Pensions, and
SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans. Non-pension postretirement benefits are accounted for
in
accordance with SFAS No. 106, Employers’ Accounting for Postretirement Benefits
Other Than Pensions.
Actual
results that differ from assumptions used are accumulated and amortized over
future periods and, accordingly, generally affect recognized expense and the
recorded obligation in future periods. Therefore, assumptions used to calculate
benefit obligations as of the end of a fiscal year directly impact the expense
to be recognized in future periods. The primary assumptions affecting the
Company’s accounting for employee benefits under SFAS Nos. 87, 106, and 158 as
of December 31, 2006 are as follows:
• Long-term rate of return on plan assets: The required
use of the expected long-term rate of return on plan assets may result in
recognized returns that are greater or less than the actual returns on those
plan assets in any given year. Over time, however, the expected long-term rate
of return on plan assets is designed to approximate actual earned long-term
returns. The Company uses long-term historical actual return information, the
mix of investments that comprise plan assets, and future estimates of long-term
investment returns by reference to external sources to develop an assumption
of
the expected long-term rate of return on plan assets. The expected long-term
rate of return is used to calculate net periodic pension cost. In determining
its pension obligations, the Company used a long-term rate of return on plan
assets of 8.5%.
• Discount rate: The discount rate is used to calculate future
pension and postretirement obligations. Discount rate assumptions used to
account for pension and non-pension postretirement benefit plans reflect the
rates available on high-quality, fixed-income debt instruments on December
31 of
each year. In determining its pension and other benefit obligations, the Company
used a discount rate of 5.75%.
Goodwill
and Intangible Assets
Goodwill
and intangible assets that have an indefinite useful life are not amortized
and
are tested at least annually for impairment. Due to the prepackaged nature
of
our bankruptcy plan, goodwill was tested for impairment by comparing the fair
value with its recorded amount. As a result of adopting SFAS No. 142, we used
a
discounted cash flow methodology for determining fair value. This methodology
identified an impairment of goodwill and intangible assets in the amount of
$49.4 million, which was written off in the fourth quarter of 2003. 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.
In
the
ordinary course of business, we lease certain equipment, and certain real
property, consisting of manufacturing and distribution facilities and office
facilities. Substantially all such leases as of December 31, 2006 were operating
leases, with the majority of those leases requiring us to pay maintenance,
insurance and real estate taxes.
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.
Off-Balance
Sheet Arrangements
We
do not
have off-balance sheet arrangements, financing or other relations with
unconsolidated entities or other persons.
Contingencies
The
Company from time to time is involved in various legal proceedings which require
us to evaluate the probability of potential losses from such proceedings and
to
make estimates as to the amounts of such potential losses. We describe some
of
these proceedings in “Item 3—Legal Proceedings.” Where losses are probable and
the amount of the loss can be reasonably estimated, we recognize expense based
on such estimates.
Contractual
Obligations Related to Debt, Leases and Related Risk Disclosure (in
millions):
Payment
Due by Pay Period
Contractual
Obligations
Total
Less
than 1 year
Years
2 & 3
Years
4 & 5
More
than 5 years
Long-term
debt
$
113.8
$
4.0
$
18.7
$
90.0
$
1.1
Cash
interest obligations
51.4
12.8
23.5
$
15.1
0.0
Pension
34.8
8.5
12.0
9.7
4.6
Post-retirement
benefits
0.1
0.1
0.0
0.0
0.0
Operating
leases
13.2
2.3
4.2
4.0
2.7
Capital
expenditures
1.2
1.2
Total
$
214.5
$
28.9
$
58.4
$
118.8
$
8.4
New
Accounting Pronouncements
In
September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.” SAB 108 was issued to
provide consistency between how registrants quantify financial statement
misstatements.
Historically,
there have been two widely-used methods for quantifying the effects of financial
statement misstatements. These methods are referred to as the “roll-over”
and “iron curtain” method. The roll-over method quantifies the amount by
which the current year income statement is misstated. Exclusive reliance
on an income statement approach can result in the accumulation of errors on
the
balance sheet that may not have been material to any individual income
statement, but which may misstate one or more balance sheet accounts. The
“iron curtain” method quantifies the error as the cumulative amount by which the
current year balance sheet is misstated. Exclusive reliance on a
balance sheet approach can result in disregarding the effects of errors in
the
current year income statement that results from the correction of an error
existing in previously issued financial statements. We have previously
used the “roll-over” method for quantifying identified financial statement
misstatements.
SAB
108
established an approach that requires quantification of financial statement
misstatements based on the effects of the misstatement on each of the company’s
financial statements and the related financial statement disclosures. This
approach is commonly referred to as the “dual approach” because it requires
quantification of errors under both the “roll-over” and “iron curtain”
methods.
SAB
108
allows registrants to initially apply the dual approach either by (1)
retroactively adjusting prior financial statements as if the dual approach
had
always been used or by (2) recording the cumulative effect of initially applying
the dual approach as adjustments to the carrying values of assets and
liabilities as of January 1, 2006 with an offsetting adjustment recorded to
the
opening balance of retained earnings. Use of this “cumulative
effect” transition method requires detailed disclosure of the nature and amount
of each individual error being corrected through the cumulative adjustment
and
how and when it arose.
We
adopted SAB No. 108 in the fourth quarter of 2006 and identified certain
misstatements that required adjustment under the provisions of the bulletin.
We
have historically not accrued for anniversary bonuses paid to employees of
our
French subsidiary. These payments are made on each five year anniversary of
service with the Company, starting with the fifteenth year. With the assistance
of our actuaries, we have determined that, for years prior to and including
2005, we should have accrued approximately $2.3 million as of December 31,2005,
which would have resulted in a decrease of the deferred tax liability of
approximately $0.8 million. In addition, we made other adjustments in accordance
with SAB No. 108 as outlined below.
The
items
described as allowance for doubtful accounts, inventory obsolescence, and lower
of cost or market reserve all arose as the result of estimating the amount
of
reserves required for these items over a number of years at amounts different
than that actually required. The item described below as deferred rent expense
is the impact of not accounting for rent expense on a straight-line basis for
a
lease with an escalation clause entered into during 2001. The adjustment to
accrued pension liability is the result of an understatement of the minimum
liability under one of our qualified pension plans which has accumulated over
a
number of years.
Amounts
in thousands
Description
of Adjustment
Adjustment
to 1/1/06 Accumulated Deficit
Accrual
of French anniversary bonuses (described above), net of tax of
$785
$
(1,500
)
Reduction
of allowance for doubtful accounts
589
Reduction
in reserve for inventory obsolescence, net of tax of $151
50
Reduction
of lower of cost or market reserve
49
Increase
in deferred rent expense
(197
)
Increase
in accrued pension liability
192
$
(817
)
We
believe that the net effect of these adjustments were not material, either
quantitatively or qualitatively, in any of the years presented. In reaching
that
determination, we estimated the net after-tax effect of the various adjustments
for each year and compared them to total assets and revenues. Because our income
(loss) before income taxes and our net income (loss) include significant
variations, and range from years of significant losses to years of significant
income, we believe that a measurement based on revenues and assets is most
appropriate. In each case, the adjustments represented significantly less than
1% of both total assets and revenues.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans—an Amendment of FASB Statements
No. 87, 88, 106, and 132(R),” which requires employers to: (a) recognize in its
statement of financial position an asset for a plan’s overfunded status or a
liability for a plan’s underfunded status; (b) measure a plan’s assets and its
obligations that determine its funded status as of the end of the employer’s
fiscal year; and (c) recognize changes in the funded status of a defined benefit
postretirement plan in the year in which the changes occur. Those changes will
be reported in comprehensive income of a business entity. The requirement to
recognize the funded status of a benefit plan and the disclosure requirements
are effective as of the end of the fiscal year ending after December 15, 2006
for entities with publicly traded equity securities. The requirement to measure
plan assets and benefit obligations as of the date of the employer’s fiscal
year-end statement of financial position is effective for fiscal years ending
after December 15, 2008. The Company has adopted SFAS No. 158 and recorded
an
increase of $1.0 million to the unfunded pension liability included in “Accrued
employee benefits” on the consolidated balance sheet as of December 31, 2006.
In
September 2006, the FASB issued FSP No. AUG AIR-1, “Accounting for Planned Major
Maintenance Activities”. This guidance eliminates one of the accounting methods
used to plan for major maintenance activities. This FSP should be applied to
the
first fiscal year beginning after December 15, 2006. The Company plans to adopt
this FSP on January 1, 2007. The Company does not expect that the adoption
of
this FSP will have a significant impact on its financial position and results
of
operations.
In
June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes--an Interpretation of FASB Statement No. 109” (“FIN48”). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in a
company’s financial statements in accordance with SFAS No. 109, “Accounting for
Income Taxes.” FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 is effective
for
fiscal years beginning after December 15, 2006. We are currently reviewing
this
new standard to determine its effects, if any, on our results of operations
or
financial position.
In
May
2005, the FASB issued SFAS No. 154 (“SFAS 154”), “Accounting Changes and Error
Corrections.” SFAS 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 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 154 also addresses the
reporting of a correction of an error by restating previously issued financial
statements. SFAS 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005, and did not
have
a significant impact on the Company’s financial statements.
In
December 2004, the FASB issued SFAS No. 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 the intrinsic value method of accounting for stock
compensation. SFAS 123R also requires the benefits of tax deductions in excess
of recognized compensation expense to be reported as a financing cash flow,
rather than as an operating cash flow as prescribed under the prior accounting
rules. This requirement reduces net operating cash flows and increases net
financing cash flows in periods after adoption. Total cash flow remains
unchanged from what would have been reported under prior accounting rules.
SFAS
123R is applicable for annual, rather than interim, periods beginning after
June15, 2005, and as such the Company adopted SFAS 123R in January 2006. The effect
of adopting this standard using the modified prospective methodology is to
expense $268 and $245 in 2006 and 2007, respectively. Prior to the adoption
of
SFAS 123R, the Company followed the intrinsic value method in accordance with
APB No. 25 to account for its employee stock options and share-based awards
in
2005. Accordingly, no compensation expense was recognized for share-based awards
granted in connection with the issuance of stock options under the Company’s
equity incentive plans. The adoption of SFAS 123R primarily resulted in a change
in the Company’s method of recognizing the fair value of share-based
compensation and estimating forfeitures for all unvested awards. Specifically,
the adoption of SFAS 123R resulted in the Company recording compensation expense
for employee stock options and employee share-based awards granted prior to
the
adoption using the Black-Scholes pricing valuation model.
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 adopted this standard beginning
the
first quarter of fiscal year 2006. The adoption of this standard did not have
a
material effect on our financial statements as such costs have historically
been
expensed as incurred.
Forward-Looking
Statements
This
report includes “forward-looking statements.” Forward-looking statements are
those that do not relate solely to historical fact.
Forward-looking statements in this report are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These
statements relate to future events or our future financial performance and
implicate known and unknown risks, uncertainties and other factors that may
cause the actual results, performances or levels of activity of our business
or
our industry to be materially different from that expressed or implied by any
such forward-looking statements
and
are not
guarantees of future performance.They
include, but are not limited to, any statement that may predict, forecast,
indicate or imply future results, performance, achievements or events. In some
cases, you can identify forward-looking statements by use of words such as
“believe,”“anticipate,”“expect,”“estimate,”“intend,”“project,”“plan,”“will,”“would,”“could,”“predict,”“propose,”“potential,”“may” or words or
phrases of similar meaning. Statements concerning our financial position,
business strategy and measures to implement that strategy, including changes
to
operations, competitive strengths, goals, plans, references to future success
and other similar matters are forward-looking statements. Forward-looking
statements may relate to, among other things:
our
ability to meet liquidity requirements and to fund necessary capital
expenditures;
•
the
strength of demand for our products, prices for our products and
changes
in overall demand;
•
assessment
of market and industry conditions and changes in the relative market
shares of industry participants;
•
consumption
patterns and consumer preferences;
•
the
effects of competition;
•
our
ability to realize operating improvements and anticipated cost savings,
including with respect to the planned termination of certain
postretirement medical and pension benefits and our finishing operations
restructuring;
•
pending
or future legal proceedings and regulatory matters, including but
not
limited to proceedings, claims or problems related to environmental
issues, or the impact of any adverse outcome of any currently pending
or
future litigation on the adequacy of our reserves or tax liabilities;
•
general
economic conditions and their effect on our
business;
•
changes
in the cost or availability of raw materials and changes in other
costs;
•
pricing
pressures for our products;
•
the
cost of and compliance with environmental laws and other governmental
regulations;
•
our
results of operations for future periods;
•
our
anticipated capital expenditures;
•
the
timing and cost of our finishing operations
restructuring;
•
our
ability to pay, and our intentions with respect to the payment of,
dividends on shares of our capital stock;
•
our
ability to protect our intellectual property; and
•
our
strategy for the future,
including
opportunities that may be presented to and pursued by us.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The
Company is exposed to certain market risks related to foreign currency exchange
rates. In order to manage the risk associated with this exposure to such
fluctuations, the Company occasionally uses derivative financial instruments.
The Company does not enter into derivatives for trading purposes.
The
Company also prepared sensitivity analyses to determine the impact of a
hypothetical 10% devaluation of the U.S. dollar relative to the European
receivables and payables denominated in U.S. dollars. Based on its sensitivity
analyses at December 31, 2006, a 10% devaluation of the U.S. dollar would affect
the Company’s 2006 consolidated net income by approximately $0.4 million and
would affect 2006 other comprehensive income by $3.2 million.
The
Company purchases gas futures contracts to lock in set rates on some of its
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 of December 31, 2006 there were no
open
gas contracts.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors
Viskase
Companies, Inc.
We
have
audited the accompanying consolidated balance sheets of Viskase Companies,
Inc.
(a Delaware corporation) and Subsidiaries as of December 31, 2006 and December31, 2005, and the related consolidated statements of income, stockholders’
equity (deficit) and cash flows for the years ended December 31, 2006, December31, 2005, and December 31, 2004. In connection with our audits, we have also
audited the schedule of valuation and qualifying accounts (the "Schedule").
These financial statements and schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
During
2006, the Company adopted Financial Accounting Standards Board Statements No.
123(R), Share-Based
Payments and No. 158, Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans,
as
discussed in Note 20 and Note 11, respectively, to the consolidated financial
statements. As discussed in Note 1 to the consolidated financial statements,
the
Company recorded a cumulative effect adjustment as of January 1, 2006, in
connection with the adoption of the Securities and Exchange Commission Staff
Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements.
In
our
opinion, the consolidated financial statements and schedule referred to above
present fairly, in all material respects, the financial position of Viskase
Companies, Inc. and Subsidiaries as of December 31, 2006 and December 31, 2005,
and the results of their operations and their cash flows for the years ended
December 31, 2006, December 31, 2005, and December 31, 2004, in conformity
with
accounting principles generally accepted in the United States of
America.
Short-term
debt including current portion of long-term debt and capital
leases
$
3,978
$
182
Accounts
payable
19,706
17,958
Accrued
liabilities
20,773
32,031
Deferred
income taxes
1,721
710
Total
current liabilities
46,178
50,881
Long-term
debt, net of current maturities
105,916
103,299
Accrued
employee benefits
41,193
61,429
Deferred
income taxes
6,049
8,357
Deferred
revenue
237
553
Stockholders’
equity (deficit):
Preferred
stock, subject to redemption:
Preferred
stock, $.01 par value; 12,307,692 shares issued and outstanding
at
December 31, 2006
123
Benefical
conversion feature
2,272
Paid
in capital
20,779
Common
stock
Common
stock, $.01 par value; 10,811,483 shares issued and 9,937,906
shares
outstanding at December 31, 2006; and 10,651,123 shares issued
and
9,715,954 shares outstanding at December 31, 2005
108
106
Common
stock distributable
9
Paid
in capital
3,327
1,895
Accumulated
deficit
(23,868
)
(23,467
)
Less
805,270 treasury shares, at cost
(298
)
(298
)
Accumulated
other comprehensive income (loss)
1,731
(4,907
)
Unearned
restricted stock issued for future service
(1
)
(8
)
Total
stockholders' equity (deficit)
4,182
(26,679
)
Total
Liabilities and Stockholders' Equity
$
203,755
$
197,840
The
accompanying notes are an integral part of the consolidated financial
statements.
Viskase
Companies, Inc. (formerly Envirodyne Industries, Inc.) is a Delaware corporation
organized in 1970. As used herein, the "Company" means Viskase Companies, Inc.
and its subsidiaries.
Nature
of Operations
The
Company is a producer of non-edible cellulosic and plastic casings and specialty
plastic bags used to prepare and package processed meat products, and provides
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 South
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 2006
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 postretirement
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 they believe
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 $198 and $10,711 of short-term
investments at December 31, 2006 and 2005, respectively. Restricted cash is
cash
held as collateral for outstanding letters of credit with a commercial
bank.
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.
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. 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. 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.
In
the
ordinary course of business, we lease certain equipment, and certain real
property, consisting of manufacturing and distribution facilities and office
facilities. Substantially all such leases as of December 31, 2006 were operating
leases, with the majority of those leases requiring us to pay maintenance,
insurance and real estate taxes.
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. In 2003, the Company recorded amortizable
intangibles consisting of non-compete agreements in the amount of $1,236
amortized over two years.
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
$1,129 and $1,427 at December 31, 2006 and 2005, respectively, are not deducted
from cash but are reflected in Accounts Payable on the consolidated balance
sheets.
Shipping
and Handling
The
Company periodically bills customers for shipping charges. These amounts are
included in net revenue, with the associated costs included in cost of
sales.
License
fees paid in advance are deferred and recognized on a straight line basis over
the life of the applicable patent. As of December 31, 2006, the remaining
balance of unearned revenue was $552 including $315 of short-term license fees
included in other current liabilities.
Pensions
and Other Postretirement Benefits
Using
appropriate actuarial methods and assumptions, the Company’s defined benefit
pension plans are accounted for in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 87, Employers’ Accounting for Pensions, and
SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans. Non-pension postretirement benefits are accounted for
in
accordance with SFAS No. 106, Employers’ Accounting for Postretirement Benefits
Other Than Pensions.
Actual
results that differ from assumptions used are accumulated and amortized over
future periods and, accordingly, generally affect recognized expense and the
recorded obligation in future periods. Therefore, assumptions used to calculate
benefit obligations as of the end of a fiscal year directly impact the expense
to be recognized in future periods. The primary assumptions affecting the
Company’s accounting for employee benefits under SFAS Nos. 87, 106, and 158 as
of December 31, 2006 are as follows:
• Long-term rate of return on plan assets: The required use of
the expected long-term rate of return on plan assets may result in recognized
returns that are greater or less than the actual returns on those plan assets
in
any given year. Over time, however, the expected long-term rate of return on
plan assets is designed to approximate actual earned long-term returns. The
Company uses long-term historical actual return information, the mix of
investments that comprise plan assets, and future estimates of long-term
investment returns by reference to external sources to develop an assumption
of
the expected long-term rate of return on plan assets. The expected long-term
rate of return is used to calculate net periodic pension cost. In determining
its pension obligations, the Company used a long-term rate of return on plan
assets of 8.5%.
• Discount rate: The discount rate is used to calculate future
pension and postretirement obligations. Discount rate assumptions used to
account for pension and non-pension postretirement benefit plans reflect the
rates available on high-quality, fixed-income debt instruments on December
31 of
each year. In determining its pension and other benefit obligations, the Company
used a discount rate of 5.75%.
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.
Comprehensive
income includes all other non-shareholder changes in equity. Changes in other
comprehensive income in 2006 and 2005 resulted from changes in foreign currency
translation adjustments and minimum pension liability.
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
During
2006, the Company adopted the provisions of, and began accounting for
stock-based compensation in accordance with, the Financial Accounting Standards
Board’s (“FASB”) Statement of Financial Accounting Standards No. 123—revised
2004 (“SFAS 123R”), “Share-Based Payment,” which replaced Statement of Financial
Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based
Compensation” and supersedes APB Opinion No. 25 (“APB 25”), “Accounting for
Stock Issued to Employees.” Under the fair value recognition provisions of this
statement, stock-based compensation cost is measured at the grant date based
on
fair value of the award and is recognized as an expense on a straight-line
basis
over the requisite service period, which is the vesting period. We elected
the
modified-prospective method, under which prior periods are not revised for
comparative purposes. The valuation provisions of SFAS 123R apply to new grants
and to grants that were outstanding as of the effective date and are
subsequently modified. Estimated compensation for grants that were outstanding
as of the effective date will be recognized over the remaining service period
using the compensation cost estimated for the SFAS 123 pro forma disclosures.
The effect of adopting this standard was to record compensation expense of
$268
in 2006.
Prior
to
the adoption of SFAS 123R, the Company used the instrinsic value method to
account for options granted to employees for the purchase of common stock.
No
compensation expense was 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, prior
to
the adoption of SFAS 123R, was as follows:
In
September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.” SAB 108 was issued to
provide consistency between how registrants quantify financial statement
misstatements.
Historically,
there have been two widely-used methods for quantifying the effects of financial
statement misstatements. These methods are referred to as the “roll-over”
and “iron curtain” method. The roll-over method quantifies the amount by
which the current year income statement is misstated. Exclusive reliance
on an income statement approach can result in the accumulation of errors on
the
balance sheet that may not have been material to any individual income
statement, but which may misstate one or more balance sheet accounts. The
“iron curtain” method quantifies the error as the cumulative amount by which the
current year balance sheet is misstated. Exclusive reliance on a
balance sheet approach can result in disregarding the effects of errors in
the
current year income statement that results from the correction of an error
existing in previously issued financial statements. We have previously
used the “roll-over” method for quantifying identified financial statement
misstatements.
SAB
108
established an approach that requires quantification of financial statement
misstatements based on the effects of the misstatement on each of the company’s
financial statements and the related financial statement disclosures. This
approach is commonly referred to as the “dual approach” because it requires
quantification of errors under both the “roll-over” and “iron curtain”
methods.
SAB
108
allows registrants to initially apply the dual approach either by (1)
retroactively adjusting prior financial statements as if the dual approach
had
always been used or by (2) recording the cumulative effect of initially applying
the dual approach as adjustments to the carrying values of assets and
liabilities as of January 1, 2006 with an offsetting adjustment recorded to
the
opening balance of retained earnings. Use of this “cumulative
effect” transition method requires detailed disclosure of the nature and amount
of each individual error being corrected through the cumulative adjustment
and
how and when it arose.
We
adopted SAB No. 108 in the fourth quarter of 2006 and identified certain
misstatements that required adjustment under the provisions of the bulletin.
We
have historically not accrued for anniversary bonuses paid to employees of
our
French subsidiary. These payments are made on each five year anniversary of
service with the Company, starting with the fifteenth year. With the assistance
of our actuaries, we have determined that, for years prior to and including
2005, we should have accrued approximately $2.3 million as of December 31,2005,
which would have resulted in a decrease of the deferred tax liability of
approximately $0.8 million. In addition, we made other adjustments in accordance
with SAB No. 108 as outlined below.
The
items
described as allowance for doubtful accounts, inventory obsolescence, and lower
of cost or market reserve all arose as the result of estimating the amount
of
reserves required for these items over a number of years at amounts different
than that actually required. The item described below as rent expense is the
impact of not accounting for rent expense on a straight-line basis for a lease
with an escalation clause entered into during 2001. The adjustment to accrued
pension liability is the result of an understatement of the minimum liability
under one of our qualified pension plans which has accumulated over a number
of
years.
Accrual
of French anniversary bonuses (described above), net of tax of
$785
$
(1,500
)
Reduction
of allowance for doubtful accounts
589
Reduction
in reserve for inventory obsolescence, net of tax of $151
50
Reduction
of lower of cost or market reserve
49
Increase
in deferred rent expense
(197
)
Increase
in accrued pension liability
192
$
(817
)
We
believe that the net effect of these adjustments were not material, either
quantitatively or qualitatively, in any of the years presented. In reaching
that
determination, we estimated the net after-tax effect of the various adjustments
for each year and compared them to total assets and revenues. Because our income
(loss) before income taxes and our net income (loss) include significant
variations, and range from years of significant losses to years of significant
income, we believe that a measurement based on revenues and assets is most
appropriate. In each case, the adjustments represented significantly less than
1% of both total assets and revenues.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans—an Amendment of FASB Statements
No. 87, 88, 106, and 132(R),” which requires employers to: (a) recognize in its
statement of financial position an asset for a plan’s overfunded status or a
liability for a plan’s underfunded status; (b) measure a plan’s assets and its
obligations that determine its funded status as of the end of the employer’s
fiscal year; and (c) recognize changes in the funded status of a defined benefit
postretirement plan in the year in which the changes occur. Those changes will
be reported in comprehensive income of a business entity. The requirement to
recognize the funded status of a benefit plan and the disclosure requirements
are effective as of the end of the fiscal year ending after December 15, 2006
for entities with publicly traded equity securities. The requirement to measure
plan assets and benefit obligations as of the date of the employer’s fiscal
year-end statement of financial position is effective for fiscal years ending
after December 15, 2008. The Company has adopted SFAS No. 158 and recorded
an
increase of $1.0 million to the unfunded pension liability included in “Accrued
employee benefits” on the consolidated balance sheet as of December 31, 2006.
In
September 2006, the FASB issued FSP No. AUG AIR-1, “Accounting for Planned Major
Maintenance Activities”. This guidance eliminates one of the accounting methods
used to plan for major maintenance activities. This FSP should be applied to
the
first fiscal year beginning after December 15, 2006. The Company plans to adopt
this FSP on January 1, 2007. The Company does not expect that the adoption
of
this FSP will have a significant impact on its financial position and results
of
operations.
In
June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes--an Interpretation of FASB Statement No. 109” (“FIN48”). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in a
company’s financial statements in accordance with SFAS No. 109, “Accounting for
Income Taxes.” FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 is effective
for
fiscal years beginning after December 15, 2006. We are currently reviewing
this
new standard to determine its effects, if any, on our results of operations
or
financial position.
In
May
2005, the FASB issued SFAS No. 154 (“SFAS 154”), “Accounting Changes and Error
Corrections.” SFAS 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 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 154 also addresses the
reporting of a correction of an error by restating previously issued financial
statements. SFAS 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005, and did not
have
a significant impact on the Company’s financial statements.
In
December 2004, the FASB issued SFAS No. 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 the intrinsic value method of accounting for stock
compensation. SFAS 123R also requires the benefits of tax deductions in excess
of recognized compensation expense to be reported as a financing cash flow,
rather than as an operating cash flow as prescribed under the prior accounting
rules. This requirement reduces net operating cash flows and increases net
financing cash flows in periods after adoption. Total cash flow remains
unchanged from what would have been reported under prior accounting rules.
SFAS
123R is applicable for annual, rather than interim, periods beginning after
June15, 2005, and as such the Company adopted SFAS 123R in January 2006. The effect
of adopting this standard using the modified prospective methodology is to
expense $268 and $245 in 2006 and 2007, respectively. Prior to the adoption
of
SFAS 123R, the Company followed the intrinsic value method in accordance with
APB No. 25 to account for its employee stock options and share-based awards
in
2005. Accordingly, no compensation expense was recognized for share-based awards
granted in connection with the issuance of stock options under the Company’s
equity incentive plans. The adoption of SFAS 123R primarily resulted in a change
in the Company’s method of recognizing the fair value of share-based
compensation and estimating forfeitures for all unvested awards. Specifically,
the adoption of SFAS 123R resulted in the Company recording compensation expense
for employee stock options and employee share-based awards granted prior to
the
adoption using the Black-Scholes pricing valuation model.
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 adopted this standard beginning
the
first quarter of fiscal year 2006. The adoption of this standard did not have
a
material effect on our financial statements as such costs have historically
been
expensed as incurred.
As
of
December 31, 2006 and 2005, cash equivalents and restricted cash of $198 and
$10,711 are invested in short-term investments, respectively.
3.
Receivables
Receivables
consisted primarily of trade accounts receivable and were net of allowances
for
doubtful accounts of $803 and $1,359 at December 31, 2006 and 2005,
respectively.
The
Company has a broad base of customers, with no single customer accounting for
more than 7% of sales or 4% of receivables.
Approximately
50% and 52% of the Company’s inventories at December 31, 2006 and 2005,
respectively, were valued at LIFO. Remaining inventories, primarily foreign,
are
valued at the lower of FIFO cost or market. At December 31, 2006 and 2005,
the
LIFO values exceeded current manufacturing cost by approximately $(461) and
$521, respectively. The Company has a reserve for LIFO inventories to the lower
of cost or market value of $194 and $556 at December 31, 2006 and 2005,
respectively.
Inventories
were net of reserves for obsolete and slow-moving inventory of $3,281 and $2,962
at December 31, 2006 and 2005, respectively.
Capitalized
interest for 2006, 2005, and 2004 totaled $796, $1,130, and $389 respectively.
Maintenance and repairs charged to costs and expenses for 2006, 2005, and 2004
aggregated $15,837, $14,564 and $15,310, respectively. Depreciation is computed
on the straight-line method over the estimated useful lives of the assets.
Estimated useful lives of land improvements range from 15 to 30 years; building
and improvements range from 10 to 32 years; and machinery and equipment,
including capital leases, range from 2 to 15 years.
6.
Assets
Held For Sale
Assets
held for sale include land and buildings. These properties had net book values
of $1,250 at December 31, 2006. Property held for sale with a net book value
of
$812 was disposed of during 2005, resulting in a gain of $279.
Patents
are amortized on the straight-line method over an estimated average useful
life
of 10 years. Amortization of patents for each of the next five years is
$460.
Short-term
debt including current maturities of long-term debt:
Revolving
loan
$
3,929
Current
maturities of capital leases
49
$
182
Total
short-term debt
$
3,978
$
182
Long-term
debt:
11.5%
Senior secured notes
$
89,357
$
89,214
8%
Notes
16,401
13,956
Other
158
129
Total
long-term debt
$
105,916
$
103,299
On
June29, 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 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 was allocated to the carrying value of the 11.5% Senior
Secured Notes as of June 29, 2004.
Revolving
Credit Facility
On
June29, 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
of 2.25% currently (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.
There
were borrowings under the Revolving Credit Facility of $3.9 million at December31, 2006. There were no borrowings in 2005.
Indebtedness
under the Revolving Credit Facility is secured by liens on substantially all
of
the Company and the Company’s domestic subsidiaries’ assets, with liens (i) on
inventory, accounts receivable, lockboxes, deposit accounts into which payments
are deposited and proceeds thereof, 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, 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, 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
minimum annual level of EBITDA covenant and limitations on capital expenditures
is not in effect as of December 31, 2006 as the Company’s borrowings under the
Revolving Credit Facility did not exceed 30% of the facility amount. However,
the Company would have been in compliance with these requirements had they
been
in effect.
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 1% through June 29, 2007.
On
March 28, 2006, the Company entered into an amendment of the Revolving
Credit Facility. Pursuant thereto, the Revolving Credit Facility was amended
in
certain respects in order to facilitate the continued relocation of certain
of
the Company’s finishing operations from its facility in Kentland, Indiana to a
new facility in Monterrey, Mexico operated by Viskase del Norte, S.A. de C.V.
(“Mexico Project”). Pursuant to the amendment, the lender also waived certain
technical events of default and provided certain consents, each relating to
the
Mexico Project.
On
November 7, 2006, the Company entered into a second amendment to the Revolving
Credit Facility. Pursuant thereto, the Revolving Credit Facility was amended
(i)
to permit the issuance and redemption of $24,000 of Series A Preferred Stock,
(ii) to permit the offering of $24,000 of Common Stock by the Company in
connection with and to redeem the Series A Preferred Stock, (iii) to add or
modify the definitions of Maquiladora,
Maquila
Program,
Capital Expenditures, Notes and Permitted Investments, (iv) to increase the
amount of the existing Permitted Investment and Permitted Indebtedness baskets,
and (v) to permit the issuance of additional 11.5% Senior Secured Notes to
refinance the 8% Subordinated Notes.
11.5%
Senior Secured Notes
On
June29, 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, commencing on December 15, 2004. 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
Notes, then such capital stock will automatically be deemed not to be part
of
the collateral securing the 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 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:
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 $10,000.
The
minimum annual level of EBITDA covenant is not in effect as of December 31,2006
as the Company’s unrestricted cash and the amount of available credit under the
Revolving Credit Facility exceed $10,000. However, the Company would have been
in compliance with this requirement had it been in effect.
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 December 31, 2006 is approximately 114%.
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:
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. The Company had
no
Excess Cash Flow for the year ended December 31, 2006.
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.
On
November 7, 2006, the Company entered into a First Supplemental Indenture to
amend the provisions of the 11.5% Senior Notes Indenture. Pursuant thereto,
the
Indenture was amended (i) to permit the issuance and redemption of $24,000
of
Series A Preferred Stock, (ii) to permit the offering of $24,000 of Common
Stock
by the Company in connection with and to redeem the Series A Preferred Stock,
(iii) to modify the definitions of Consolidated Net Income, Permitted
Indebtedness and Permitted Investment, (iv) to reduce the minimum annual level
of EBITDA for the periods ending December 31, 2006 though September 30, 2008
from $16,000 to $15,000, (v) to modify the proviso that such minimum annual
level of EBITDA covenant is in effect only when the amount of unrestricted
cash
and availability under the Revolving Credit Facility is below $10,000, (vi)
to
revise the required reporting to holders, (vii) to modify the Consolidated
Net
Worth and Fixed Charge Coverage Ratio requirement related to a merger,
consolidation or sale of assets and (viii) to permit the possible issuance
of
additional 11.5% Senior Secured Notes to refinance the 8% Subordinated Notes
due
2008.
8%
Notes
The
8%
Notes bear interest at a rate of 8% per year, and accrue interest from December1, 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
June29, 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
8%
Notes are unsecured by the collateral pool and accordingly, are effectively
subordinated to the 11.5% Senior Secured Notes.
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
with interest through 2006 paid in the form of 8% Notes (paid-in-kind):
2006
2007
2008*
8%
Notes
Principal
$
18,684
$
18,684
$
18,684
Discount
(2,283
)
(1,148
)
Carrying
value
$
16,401
$
17,536
$
18,684
*
2008
has a maturity date of December 1.
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 December31,2006.
The
Company finances its working capital needs through a combination of internally
generated cash from operations, cash on hand and it’s Revolving Credit Facility.
Aggregate
maturities of debt for each of the next five years are (1):
2007
2008
2009
2010
2011
Thereafter
Revolving
Credit Facility
$
3,929
11.5%
Senior Secured Notes
$
90,000
8%
Notes
$
18,684
Other
$
49
$
1,059
$
3,978
$
18,684
$
90,000
$
1,059
(1) Aggregate
maturities of debt represent amounts to be paid at maturity and not the current
carrying value of the debt.
10.
Operating
Leases
The
Company has operating lease agreements for machinery, equipment and facilities.
The majority of the facility leases require the Company to pay maintenance,
insurance and real estate taxes.
Future
minimum lease payments for operating leases that have initial or remaining
non-cancelable lease terms in excess of one year as of December 31, 2006,
are:
2007
$
2,254
2008
2,133
2009
2,131
2010
2,160
2011
1,817
Total
thereafter
2,711
Total
minimum lease payments
$
13,206
Total
rent expense during 2006, 2005 and 2004 amounted to $2,170, $2,822 and $2,409,
respectively.
11.
Retirement
Plans
The
Company and its subsidiaries have defined contribution and defined benefit
plans
varying by country and subsidiary.
Adoption
of Statement of Financial Accounting Standards No. 158
As
of
December 31, 2006, the Company adopted SFAS No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, which requires balance
sheet recognition of the over funded or under funded status of pension and
postretirement benefit plans. Under SFAS 158, actuarial gains and losses, prior
service costs or credits, and any remaining transition assets or obligations
that have not been recognized under previous accounting standards must be
recognized as Accumulated Other Comprehensive Income (Loss), net of tax effects,
until they are amortized as a component of net periodic benefit
cost.
The
incremental effect of adopting SFAS No. 158 on the Company’s financial
statements at December 31, 2006 is presented below:
The
Company’s operations in the United States and Canada have historically offered
defined benefit retirement plans and postretirement health care and life
insurance benefits to their employees. Most of these benefits have been
terminated, resulting in various reductions in liabilities and curtailment
gains
as described below.
The
defined benefit retirement plan for Canadian retirees was settled in April
2006
with the purchase of retiree annuity contracts for $374. In accordance with
SFAS
No. 88, Employers’ Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits, all amounts associated
with
the Canadian pension plan were removed from the Company’s balance
sheet.
The
defined benefit retirement plan for United States employees was closed to new
entrants on March 31, 2003, except those covered by a collective bargaining
agreement, for which the closure date was September 30, 2004. The early
retirement option under the U.S. plan was eliminated on April 1, 2004, except
for employees covered by a collective bargaining agreement, for which the
elimination date is December 31, 2007. The plan for U.S. participants not
covered by a collective bargaining agreement was frozen as of December 31,2006;
accordingly no additional benefits will earned after that date. A curtailment
gain of $1,721 was recognized as a result of this plan freeze.
Postretirement
medical benefits for U.S. employees not covered by a collective bargaining
agreement were terminated as of December 31, 2004, resulting in a $34,055
curtailment gain. Postretirement medical benefits for U.S. employees covered
by
a collective bargaining agreement were terminated as of December 31, 2006,
under
an agreement dated September 30, 2005. This resulted in a $668 curtailment
gain
for 2005, a reduction of $1,744 to cost of sales for 2005 and a $7,843 reduction
to cost of sales for 2006.
Postretirement
medical and life insurance benefits for Canadian retirees, and postretirement
life insurance benefits for U.S. retirees not covered by a collective bargaining
agreement, were terminated as of December 31, 2006. This resulted in a
curtailment gain of $12,792.
The
Company
recognized a one-time $974
curtailment gain related to the closing of our Kentland, Indiana finishing
operations. This curtailment gain was recognized as of December 31,2005.
Included
in accumulated other comprehensive income, net of tax, as of December 31, 2006
are the following amounts not yet recognized in net periodic benefit
cost:
Net
actuarial loss
$
6,160
Prior
service cost (credit)
($1,093
)
Amounts
included in other comprehensive income expected to be recognized as a component
of net periodic benefit cost for the year ending December 31, 2007
are:
Net
actuarial loss
$
5
Prior
service cost (credit)
($131
)
The
measurement date for all defined benefit plans is December 31. The year end
status of the plans is as follows:
Components
of net periodic benefit cost for the years ended December 31:
Pension
Benefits
Other
Benefits
2006
2005
2004
2006
2005
2004
Component
of net period benefit cost
Service
cost
$
1,351
$
1,737
$
1,730
$
42
$
177
$
918
Interest
cost
7,423
7,360
7,357
660
1,231
3,762
Expected
return on plan assets
(7,052
)
(7,236
)
(7,027
)
Amortization
of unrecoginzed translation obligation
0
0
0
0
2
0
Amortization
of prior service cost
(373
)
(365
)
(273
)
(10,214
)
(2,615
)
(230
)
Amortization
of actuarial (gain) loss
325
249
265
2,336
1,181
638
Curtailment
gain
(1,721
)
(974
)
0
(12,584
)
(668
)
(34,055
)
($47
)
$
771
$
2,052
($19,510
)
($692
)
($28,967
)
Weighted
average assumptions used to determine the benefit obligation and net periodic
benefit cost as of December 31:
Pension
Benefits
Other
Benefits
2006
2005
2004
2006
2005
2004
Discount
rate
5.75
%
5.49
%
5.74
%
5.25
%
5.20
%
5.82
%
Expected
return on plan assets
8.50
%
8.56
%
8.66
%
Rate
of compensation increase
3.50
%
3.50
%
3.50
%
The
company evaluates its discount rate assumption annually as of December 31 for
each of its retirement-related benefit plans based upon the yield of high
quality, fixed-income debt instruments.
The
Company’s expected return on plan assets is evaluated annually based upon a
study which includes a review of anticipated future long-term performance of
individual asset classes, and consideration of the appropriate asset allocation
strategy to provide for the timing and amount of benefits included in the
projected benefit obligation. While the study gives appropriate consideration
to
recent fund performance and historical returns, the assumption is primarily
a
long-term prospective rate.
For
measurement purposes, the annual rate of increase in the per capita cost of
covered health care benefits
was assumed to be 10.0% in 2005 for the U.S. plan and 7.0% in 2005 for the
Canadian plan. The Canadian rate was assumed to grade down to 5% by 2008 for
the
Canadian plan. As stated above, these plans have been terminated.
The
weighted average plan asset allocation at December 31, 2006 and 2005, and target
allocation (not weighted) for 2007, are as follows:
The
following table provides a summary of the estimated benefit payments for the
postretirement plans for the next five fiscal years individually and for the
following five fiscal years in the aggregate:
Year
Total
Estimated Pension Payments
Total
Estimated Postretirement Benefit Payments
2007
$
8,466
$
100
2008
6,441
0
2009
5,606
0
2010
4,963
0
2011
4,729
0
2012-2016
4,556
0
Savings
Plans
The
Company also has defined contribution savings and similar plans for eligible
employees, which vary by subsidiary. The Company’s aggregate contributions to
these plans are based on eligible employee contributions and certain other
factors. The Company expense for these plans was $698, $774 and $791 in 2006,
2005 and 2004, respectively.
International
Plans
The
Company maintains various pension and statutory separation pay plans for its
European employees. The expense for these plans in 2006, 2005 and 2004 was
$1,714, $2,144 and $1,318, respectively. As of their most recent valuation
dates, for those plans where vested benefits exceeded plan assets, the
actuarially computed value of vested benefits exceeded those plans’ assets by
approximately $4,919.
12.
Restructuring
Charges and Asset
Impairment
During
the fourth quarter of 2006, the company recognized a one-time impairment charge
of $2,343 for the Kentland plant to the fair market value of the facility.
The
restructuring expense of $1,919 was recognized for one-time employee costs
related to various restructurings to address the Company’s competitive
environment.
During
the second quarter of 2005, our board of directors approved a plan under which
we restructured our 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 the first quarter of 2007. 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 have made capital expenditures of approximately $10,344 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
incur approximately $800 of additional costs in the first quarter of 2007.
A
$1,787
charge for one-time employee costs related to the Kentland, Indiana 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.
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 12,307,692 shares of preferred stock were
issued and outstanding as of December 31, 2006. There were no shares of
preferred stock issued or outstanding at December 31, 2005. A total of
10,811,483 shares of common stock were issued and 9,937,906 were outstanding
as
of December 31, 2006. A total of 10,651,123 shares of common stock were issued
and 9,715,954 were outstanding as of December 31, 2005.
On
November 7, 2006, the Company issued $24,000 of preferred stock to certain
investors, including Koala Holding Limited Partnership (“Koala”), an affiliate
of Mr. Icahn. Under the purchase agreement for the preferred stock, we agreed
to
initiate a rights offering for common stock, the proceeds of which were to
be
used to redeem the preferred stock, along with accrued and unpaid dividends.
In
addition, the Company granted to Koala an option to purchase a sufficient number
of common shares such that Koala and its affiliates could hold at least 50.1%
of
our common shares subsequent to all rights offering transactions. The
transactions contemplated by the preferred stock offering gave effective voting
control to Mr. Icahn.
On
March7, 2007, the Company completed its rights offering, the proceeds of which were
used to redeem shares of preferred stock and payment of accrued but unpaid
dividends. Shares of preferred stock that were not redeemed, together with
accrued but unpaid dividends thereon, were automatically converted into shares
of common stock at a specified conversion price. The holders of the preferred
stock received 17,319,643 shares of common stock upon the conversion of their
preferred stock and an additional 1,948,460 shares of common stock upon the
conversion of the accrued but unpaid dividends on their preferred stock. Amounts
recorded for dividends payable on the statement of financial position were
computed by determining the 2006 portion of the total dividends to be paid
as
amortized over the four months for which the preferred stock was
outstanding.
In
April
2003, 660,000 shares of common stock were reserved for grant to management
and
employees under the Viskase Companies, Inc. Restricted Stock Plan. During that
month, the Company granted 330,070 shares of restricted common stock
(“Restricted Stock”) under the Restricted Stock Plan. Shares granted under the
Restricted Stock Plan vested 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 2006, 2005 and 2004, for the Company is $6, $6 and $6, 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.
Warrants
(Dollars in Thousands, Except Per Share and Per Warrant
Amounts)
On
June29, 2004, the Company issued $90,000 of 11.5% Senior Secured Notes together
with
the 90,000 Warrants to purchase an aggregate of 805,230 shares of common stock
of the Company (“New Warrants”). 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. As of December 31, 2006, 71,695 New Warrants, which entitle
the
holders to purchase 641,456 shares of the Company’s common stock, were
outstanding.
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 Bankruptcy Plan, holders of the Old Common Stock received Warrants to
purchase shares of New Common Stock. At December 31, 2006, 304,127 Warrants
are
outstanding. The Warrants have a seven-year term expiring on April 2, 2010,
and
have an exercise price of $10.00 per share.
The
reconciliation of income tax provision (benefit) attributable to earnings
differed from the amounts computed by applying the U.S. Federal statutory income
tax rate of 35% to earnings by the following amounts:
Temporary
differences and carryforwards that give rise to a significant portion of
deferred tax assets and liabilities for 2006 and 2005 are as
follows:
2006
2005
Current
deferred tax asset
Pension
and healthcare
$
4,674
$
7,331
Provisions
not currently deductible
1,320
2,804
Inventory
basis differences
70
0
Valuation
allowance
(6,064
)
(10,135
)
Total
current deferred tax asset
0
0
Non-current
deferred tax assets
Stock
option
$
94
$
0
Pension
and healthcare
10,117
18,493
Net
operating loss carryforwards
30,137
24,375
Valuation
Allowance
(24,635
)
(34,268
)
Total
non-current deferred tax assets
15,713
8,600
Total
deferred tax asset
$
15,713
$
8,600
Current
deferred tax liability
Inventory
basis differences
$
1,679
$
710
Self
ins. accruals and reserves
$
42
Total
current deferred tax liability
$
1,721
$
710
Non-current
deferred tax liability
Property,
plant, and equipment
$
17,465
$
13,581
Intangible
asset
1,006
1,300
Foreign
exchange and other
3,291
2,076
Total
non-current deferred tax liability
21,762
16,957
Total
deferred tax liability
$
23,483
$
17,667
The
net
deferred tax asset (liability) is classified in the balance sheet as
follows:
In
the
consolidated balance sheets, these deferred tax assets and liabilities are
classified as either current or non-current based on the classification of
the
related liability or asset for financial reporting. A deferred tax asset or
liability that is not related to an asset or liability for financial reporting,
including deferred taxes related to carryforwards, is classified according
to
the expected reversal date of the temporary differences as of the end of the
year.
A
valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. A valuation
allowance of $29.5 million has been recorded at December 31, 2006, as
management believes that it is more likely than not that all deferred tax assets
will be fully realized based on the expectation of taxable income in future
years. There were net operating loss carryforwards at December 31, 2006 and
2005 of $30.1 million and $24.4 million, respectively.
The
Company joins in filing a United States consolidated Federal income tax return
including all of its domestic subsidiaries.
16.
Commitments
As
of
December 31, 2006 and 2005, the Company had capital expenditure commitments
outstanding of approximately $1,200 and $3,994, respectively.
17.
Contingencies
In
1993,
the Illinois Department of Revenue (“IDR”) filed a proof of claim against
Envirodyne Industries, Inc. (our former name) 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. The IDR asserted it
was owed, as of the petition date, $998 in taxes, $357 in interest and $271
in penalties. The Company objected to the claim on various grounds.
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 denying the IDR claim. 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 on the Company’s other objections to the claim. On
November 16, 2005 the Bankruptcy Court issued an opinion in which
it denied the IDR’s claim to the extent it seeks principal tax
liability and found that no principal tax liability remains
due. However, because of certain timing issues with respect to
the carryback of subsequent net operating loss used to eliminate the
principal tax liabilities in 1988 and 1989, the issue of the amount of
interest and penalties (for approximately 14 years), if any, has not
yet been determined by the Bankruptcy Court. The IDR
has asserted that as of February 2006, approximately $432 was owed in
interest. The Company disputes this amount and intends to vigorously
defend its position on interest due. The IDR may appeal the Bankruptcy Court
order and has asserted that if it were successful on appeal, that the Company
would have liability to the IDR as of the beginning of 2005 in the amount of
approximately $2,900.
During
2005, Viskase Brasil Embalagens Ltda. (“Viskase Brazil”) received three tax
assessments by São Paulo tax authorities with respect to Viskase Brazil’s
alleged failure to pay Value Added and Sales and Services Tax (“ICMS”) levied on
the importation of raw materials and sales of goods in and out of the State
of
São Paulo. Two of the tax assessments relate to ICMS on the importation by
Viskase Brazil of raw materials through the State of Espírito Santo (“Import
Assessments”), and the disputed amount with respect to such assessments
aggregates R$16,588 for taxes and R$16,318 for penalties and interest, or about
$7,800 and $7,600, respectively, at exchange rates in effect on December 31,2006. The third tax assessment also relates to ICMS and alleges that Viskase
Brazil arranged for the remittance of goods to addresses other than those
indicated on the relevant tax documents (“Documentation Assessment”). The
disputed amount under the Documentation Assessment is R$188 for taxes and
R$1,690 for penalties and interest, or about $100 and $800, respectively, at
exchange rates in effect on December 31, 2006. The attorneys representing
Viskase Brazil on these tax disputes have advised the Company that the
likelihood of liability with respect to the tax assessments is remote. In view
of the magnitude of the assessments, Viskase Brazil sought the advice of another
law firm with respect to one of the Import Assessments and with respect to
the
Document Assessment. The second law firm expressed its belief (i) that the
likelihood of liability on the Import Assessment it reviewed either was possible
tending to probable or was possible, depending on the theory of liability
pursued by the tax authorities, and (ii) that the likelihood of liability on
the
Documentation Assessment was probable. Viskase believes that the two Import
Assessments raise essentially the same issues and therefore did not seek advice
from the second law firm with respect to the other Import Assessment. The
Company has provided a reserve in the amount of $2,000 as of December 31, 2006.
Viskase Brazil strongly denies the allegations set forth in the tax assessments
and intends to vigorously defend itself.
From
1988
through May 2005, we were involved in a lawsuit with various Union Carbide
companies related to environmental issues on a property we had purchased from
Union Carbide in 1986. In May 2005, we reached agreement with Dow Chemical
(successor to Union Carbide) under which Dow repurchased the site for $1,375
(Canadian) and accepted full liability for any environmental remediation of
the
property. This transaction resulted in a gain of $279 (U.S.).
In
2001,
the Province of Quebec, Canada claimed we had failed to collect and remit sales
taxes for the prior four years. In January 2006, we settled this lawsuit through
a payment of $300 (Canadian).
In
addition, the Company from time to time is involved in various other legal
proceedings, none of which are expected to have a material adverse effect upon
results of operations, cash flows or financial condition.
18.
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):
Common
stock equivalents, consisting of the Series A Preferred Stock under the rights
offering, and 805,230 of New Warrants are dilutive and the effect of these
dilutive securities have been included in weighted average shares for diluted
EPS using the treasury method for the Company. The Series A Preferred Stock
dividends, convertible stock dividend shares, and employee stock options were
not included in the weighted average shares for diluted EPS, because the effect
would be antidilutive.
The
vested portion of the Restricted Stock is included in the weighted-average
shares outstanding for basic earnings per share. Common stock equivalents,
consisting of the 2010 Warrants, exercisable for a total of 304,127 shares
of
common stock, and the unvested restricted stock, totaling 280,005 shares, issued
by the Company have been excluded as their effect is antidilutive. Non-vested
shares that vest based solely on continued employment and are not subject to
any
performance contingency are included in the computation of diluted EPS using
the
treasury stock method.
19.
Comprehensive
Gain (Loss)
The
following sets forth the changes in the components of other comprehensive income
(loss) and the related income tax provision:
2006
2005
2004
Other
comprehensive income (loss):
Minimum
pension liability adjustment (1)
$
1,021
Unrecognized
loss on pension benefits
1,507
($7,595
)
Foreign
currency translation adjustment (2)
4,110
(4,920
)
$
3,061
Other
comprehensive income (loss), net of tax
$
6,638
($12,515
)
$
3,061
(1) Minimum
pension liability adjustment, net of a related tax provision of $0 in 2006.
The
minimum pension liability adjustment is due to changes in plan return
assumptions and asset performance.
(2) Foreign
currency translation adjustments, net of related tax provision of $0 for all
periods.
20.
Stock-Based
Compensation (Dollars in
Thousands, Except Per Share
Amounts)
During
2006, the Company adopted the provisions of, and began accounting for
stock-based compensation in accordance with, the Financial Accounting Standards
Board’s (“FASB”) Statement of Financial Accounting Standards No. 123—revised
2004 (“SFAS 123R”), “Share-Based Payment,” which replaced Statement of Financial
Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based
Compensation” and supersedes APB Opinion No. 25 (“APB 25”), “Accounting for
Stock Issued to Employees.” Under the fair value recognition provisions of this
statement, stock-based compensation cost is measured at the grant date based
on
fair value of the award and is recognized as an expense on a straight-line
basis
over the requisite service period, which is the vesting period. We elected
the
modified-prospective method, under which prior periods are not revised for
comparative purposes. The valuation provisions of SFAS 123R apply to new grants
and to grants that were outstanding as of the effective date and are
subsequently modified. Estimated compensation for grants that were outstanding
as of the effective date will be recognized over the remaining service period
using the compensation cost estimated for the SFAS 123 pro forma
disclosures.
As
a
result of the adoption of SFAS 123R, our financial results were lower than
under
our previous accounting method for share-based compensation by the following
amounts:
Prior
to
the adoption of SFAS 123R, the Company used the intrinsic value method to
account for options granted to employees for the purchase of common stock.
No
compensation expense was 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, prior
to
the adoption of SFAS 123R, was as follows:
2005
2004
Net
(loss) income:
As
reported
($2,157
)
$
25,317
Pro
forma
($2,425
)
$
25,295
Basic
(loss) earnings per share:
As
reported
($0.22
)
$
2.53
Pro
forma
($0.25
)
$
2.33
Diluted
(loss) earnings per share:
As
reported
($0.22
)
$
2.53
Pro
forma
($0.25
)
$
2.33
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:
Estimate
Fair Values
2005
2004
Expected
term
10
years
5
years
Expected
stock volatility
14.88
%
16.05
%
Risk-free
interest rate
4.17
%
3.44
%
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 495,000 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 grant date, subject to
acceleration in certain events. These options for the 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:
As
of
December 31, 2006, we have $245 of total unrecognized compensation cost related
to unvested awards granted under our option plans that we expect to recognize
over a weighted average period of twelve months. The number of shares of common
stock reserved for stock options as of December 31, 2006 is 1,500,000
shares.
21.
Fair
Value of Financial
Instruments
The
following table presents the carrying value and estimated fair value as of
December 31, 2006, of the Company’s financial instruments (refer to Notes 2 and
9).
Carrying
Estimated
Value
Fair
Value
Assets
Cash
and cash equivalents
$
3,692
$
3,692
Restricted
cash
2,419
2,419
$
6,111
$
6,111
Liabilities
Long-term
debt
$
105,916
$
101,691
22.
Research
and Development Costs
Research
and development costs are expensed as incurred and totaled $2,345, $2,298 and
$2,697 for 2006, 2005, and 2004, respectively.
23.
Related-Party
Transactions
During
the year ended December 31, 2006 and 2005, the Company purchased $161 and $130,
respectively, in telecommunication services in the ordinary course of business
from XO Communications, Inc., an affiliate of Carl C. Icahn, who may be deemed
to be a beneficial owner of approximately 67.0% of the Company's common stock.
The Company believes that the purchase of the telecommunications services were
on terms at least as favorable as those that the Company would expect to
negotiate with an unaffiliated party.
Arnos
Corp., an affiliate of Carl C. Icahn, was the lender on the Company’s Old
Revolving Credit Facility. The Company paid Arnos Corp. origination fees,
interest and unused commitment fees of $144 during the year ended December31,2004. The Company believes that the terms of the former revolving credit
facility were at least as favorable as those that the Company would have
expected to negotiate with an unaffiliated party.
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 income for 2006, 2005 and 2004 includes net foreign exchange
transaction gains (losses) of approximately $522, $(193), and $1,451,
respectively.
Quarterly
financial information for 2006 and 2005 is as follows (in thousands, except
for
per share amounts):
First
Second
Third
Fourth
2006
Quarter
Quarter
Quarter
Quarter
Annual
Net
sales
$
50,470
$
53,451
$
54,726
$
51,744
$
210,391
Gross
margin
9,511
11,599
10,242
5,352
36,704
Operating
income (loss)
1,387
4,348
1,684
(6,403
)
1,016
Net
(loss) income available to common shareholder
(1,323
)
(130
)
(2,961
)
4,830
416
Net
(loss) income per share - basic
($0.14
)
($0.01
)
($0.30
)
$
0.47
$
0.04
Net
(loss) income per share - diluted
($0.14
)
($0.01
)
($0.30
)
$
0.22
$
0.03
First
Second
Third
Fourth
2005
Quarter
Quarter
Quarter
Quarter
Annual
Net
sales
$
49,524
$
52,100
$
52,232
$
49,913
$
203,769
Gross
margin
9,532
11,118
10,390
8,314
39,354
Operating
income (loss)
1,480
1,918
2,986
1,334
7,718
Net
(loss) income available to common shareholder
(1,128
)
(2,263
)
3,609
(2,375
)
(2,157
)
Net
(loss) income per share - basic
($0.12
)
($0.23
)
$
0.37
($0.20
)
($0.22
)
Net
(loss) income per share - diluted
($0.12
)
($0.23
)
$
0.34
($0.20
)
($0.22
)
Net
income (loss) per share amounts are computed independently for each of the
quarters presented using weighted average shares outstanding during each
quarter. The sum of the quarterly per share amounts do not agree principally
due
to losses within quarters, issuance of restricted stock in 2006 and 2005 and
issuance of common stock equivalents for diluted per share amounts in both
2006
and 2005.
During
2006, the Company recognized restructuring expense of $4,328. During the fourth
quarter of 2006, the Company recognized a one-time charge for the impairment
charge of $2,409 for the write down of the Kentland plant to the fair market
value of the facility. The remaining restructuring expense of $1,985 was
recognized for one- time employee costs related to various restructuring to
address the Company’s competitive environment.
These
restructuring events were recognized as $298, $114, $531, and $1,042 for first,
second, third, and fourth quarters respectively.
During
the fourth quarter of 2006, the elimination of United States and Canadian
postretirement life and medical benefits resulted in a $12,792 curtailment
gain,
and the Company recognized a $1,721 curtailment gain on the freeze of pension
benefits for all non union U.S. employees.
The
Company terminated postretirement benefits as of December 31, 2006 for all
active employees and all retirees in the United States who are covered by a
collective bargaining agreement. The termination of these United States
postretirement medical benefits resulted in a $698 curtailment gain in the
third
quarter of 2005. During 2006 and the fourth quarter of 2005, $7,843 and $1,744,
respectively, of unrecognized prior service costs and net actuarial loss related
to these postretirement medical benefits were amortized and recorded as a
reduction to cost of sales.
During
the fourth quarter of 2005, the Company recognized a $974 curtailment gain
recorded in the consolidated statements of operations for pensions related
to
the relocation of our finishing from Kentland, Indiana to a facility located
in
Monterrey, Mexico.
During
the second quarter of 2005, our board of directors 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 Monterrey, Mexico.
A
$1,787 charge for one-time employee costs related to the Kentland, Indiana
relocation was recorded.
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.
28.
Subsequent
Events
Viskase
Canada Retiree Litigation
In
December 2006, our Canadian subsidiary, Viskase Canada Inc., terminated
post-retirement health care and life insurance benefits for retirees of Viskase
Canada Inc.. In February 2007, two former employees filed suit in the Ontario
Superior Court of Justice against Viskase Canada Inc. and Viskase Companies,
Inc. alleging these benefits were permanently vested as a condition of their
retirement. Further, they petitioned for class action status on behalf of all
similarly situated retirees. The complaint requests reinstatement of the
benefits, or unspecified damages in the alternative, along with reimbursement
of
legal costs of $20 and punitive damages of $1,000. We believe the complaint
is
without merit, we intend to vigorously defend ourselves against this lawsuit
and
we have not accrued any amount on our statement of financial position with
regard to this complaint.
Termination
of Registration
On
March22, 2007, we filed Form 15 with the SEC, which terminated our obligation to
file
reports with the SEC. As a result, the Company is no longer required to file
reports such as Forms 10-K, 10-Q and 8-K.
Capital
Stock
On
November 7, 2006, the Company issued $24,000 of preferred stock. As part of
the
preferred stock issuance, the Company agreed to conduct a rights offering of
up
to $24,000 of common stock, the proceeds of which were to be used to redeem
the
preferred stock plus accrued and unpaid dividends. On February 27, 2007, the
rights offering was completed and $359 was received by the Company for stock
subscriptions, representing 183,942 shares of common stock. Under the terms
of
the preferred stock issuance and the rights offering, all outstanding shares
of
preferred stock not redeemed with the proceeds of the rights offering were
converted to common stock. The holders of preferred stock received 17,319,643
shares of common stock upon the conversion of their preferred stock and an
additional 1,948,460 shares of common stock upon the conversion of the dividend
on their preferred stock.
We
maintain a system of disclosure controls and procedures designed to provide
reasonable assurance that information we are required to disclose in the reports
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. We identified the
following control deficiency which constitutes a material weakness. In 2006,
we
determined that we had not accrued for anniversary bonuses paid to employees
of
our French subsidiary. These payments are made on each five year anniversary
of
service, starting with the fifteenth year. With the assistance of our actuaries,
we have determined that, for years prior to and including 2005, we should have
accrued approximately $2.3 million as of December 31, 2005, which also resulted
in a decrease of the deferred tax liability of approximately $0.8 million.
In
addition, we made other adjustments in accordance with SAB No. 108 which
resulted in a combined adjustment to beginning retained earnings for the year
ended December 31, 2006 of $0.8 million.
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures as of December 31, 2006. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were not effective at a reasonable assurance level
because of the absence of procedures to properly accrue for the anniversary
bonuses.
There
were no material changes to the Company’s internal control over financial
reporting during the fourth quarter of 2006.
Robert
L.
Weisman has been our President and Chief Executive Officer since October 2004.
From December 2002 to June 2004, he served as the Vice President, Innovation
and
Business Development for Sara Lee Corporation. Mr. Weisman also served as the
Chief Executive Officer, Sara Lee Bakery from May 2001 to December 2002 and
the
Group President of Sara Lee's Specialty Meat Companies from June 1996 through
May 2001.
Gordon
S.
Donovan was our Vice President and Chief Financial Officer from January 1997
through January 2007. Mr. Donovan also served as our Treasurer and Assistant
Secretary from November 1989 through January 2007, and as a Vice President
from
May 1995 through January 2007. Mr. Donovan was employed by us since 1987. Mr.
Donovan elected to retire as of January 31, 2007.
Charles
J. Pullin has served as our Vice President and Chief Financial Officer,
Secretary and Treasurer since February 2007. Prior to that, he served as our
Chief Information Officer from September 2004 to January 2007 and served as
Director, Strategic Financial Planning from December 2003 to August 2004. Prior
to joining the Company, from 2002 through 2003, Mr. Pullin served as Vice
President and Chief Financial Officer of OnlyOne, a telecommunications service
provider to small businesses. From 2000 through 2002, Mr. Pullin served as
Managing Director of QuantumShift, a telecommunications management
firm.
Henry
M.
Palacci has served as our Vice President and Chief Operating Officer since
August 2006 and served as our Vice President, Worldwide Strategic Planning
from
July 2005 to August 2006. He also served as a consultant to Viskase from March
2004 through June 2005. He was Director, Finance for MEMCO SA, a real estate
development company in Brussels, from January 2000 through September 2004 and
was a member of the MEMCO SA Board of Directors through October
2004.
Maurice
J. Ryan has served as our Vice President, Sales, North America since September
2000. He also served as our Vice President, U.S. and Canada Sales beginning
in
2000, our Vice President, West Region from 1997 to 2000, Vice President,
Strategic Accounts from 1995 to 1997 and our Vice President, Sales from 1993
to
1995. Mr. Ryan has been employed by us since 1977.
John
O.
Cunningham has served as our Vice President, Human Resources since October
2002.
He also served as our Director, Human Resources, Compensation and Benefits
from
September 1995 to September 2002. Mr. Cunningham has been employed by us since
1990.
Bernard
Lemoine has served as our Vice President of Worldwide Operations since August
2006 and Director of Operations since 1999. He is responsible for all Worldwide
Operations. Mr. Lemoine has been with Viskase in various positions since
1985.
Jean-Luc
Tillon has served as our President, Viskase S.A.S. since January 1999. He
previously served as our Director of Finance, Europe from January 1999 to June
2003 and as our Director of Sales and Marketing, Europe from July 2003 to March
2004. Mr. Tillon has been employed by us since 1986 and currently also serves
as
a director of Viskase Spa, Viskase Gmbh and Viskase Polska.
Directors
Vincent
J. Intrieri has served as Chairman of the Board of Directors and as a director
since April 2003. Since January 2005, he has been a Senior Managing Director
of
Icahn Associates Corp. and Icahn Partners, entities controlled by Carl C. Icahn,
who may be deemed to be a beneficial owner of approximately 29.52% of our Common
Stock. From March 2003 through December 2005, Mr. Intrieri served as a Managing
Director of Icahn Associates. Mr. Intrieri was portfolio manager of High River
Limited Partnership, an entity controlled by Mr. Icahn, from 1998 to March
2003.
From 1995 to 1998, he served as a portfolio manager for distressed investments
with Elliott Associates L.P., a New York investment fund. Mr. Intrieri currently
serves on the boards of XO Communications, Inc., a competitive local exchange
carrier that provides broadband communication services to small-to-large
enterprise customers; American Railcar Industries, Inc., a manufacturer of
covered hopper and tank cars; and Philip Services Corporation, a metal recycling
and industrial services company. Each of these companies are affiliated with
Mr.
Icahn.
Eugene
I.
Davis has been a director since April 2003. Since 1999, Mr. Davis has been
chairman and Chief Executive Officer of Pirinate Consulting Group, L.L.C.,
a
consulting firm that specializes in, among other things, crisis and turn-around
management, mergers and acquisitions and strategic planning services. From
January 2001 to December 2003, he was Chairman, Chief Executive Officer and
President of RBX Industries, Inc., a manufacturer and distributor of rubber
and
plastic based foam products, and prior to that served as RBX Industries' Chief
Restructuring Officer, and from 1998 to 1999, he served as Chief Operating
Officer of Total-Tel USA Communications, Inc. Mr. Davis has been the Chief
Executive Officer, Chief Operating Officer or President of other companies
including Murdock Communications Corporation and SmarTalk Teleservices, Inc.
RBX
Industries and SmarTalk Teleservices were debtors under the federal bankruptcy
code for which Mr. Davis was retained to provide turnaround management services.
Mr. Davis is currently a member of the CFN Liquidating Trust Committee for
the
former Contifinancial Corporation and its affiliates, and is a director of
Metals USA, Inc., Metrocall Holdings, Inc., Flag Telecom Group Limited,
Elder-Beerman Stores, Inc., Tipperary Corporation, Knology, Inc., TelCove,
Inc.,
Exide Technologies and a number of private companies. In addition, he is a
member of the Board of Advisors of PPM America Special Investment
Funds.
James
L.
Nelson has served as a director since April 2003. From March 1998 until July
2004, Mr. Nelson was Chairman and Chief Executive Officer of Orbit Aviation,
Inc., a company engaged in the acquisition and completion of Boeing 737 Business
Jets for private and corporate clients. From 1986 until the present, Mr. Nelson
has been Chairman and Chief Executive Officer of Eaglescliff Corporation, a
specialty investment banking, consulting and wealth management company. From
August 1995 until July 1999, he was Chief Executive Officer and Co-Chairman
of
Orbitex Management, Inc., a financial services company. Mr. Nelson currently
serves on the board of American Real Estate Partners L.P. (“AREP”), a
NYSE-listed limited partnership controlled by Mr. Icahn that is engaged in
a
variety of businesses including oil and gas exploration and production, casino
gaming, and the manufacture and sale of home textiles.
Peter
K.
Shea has served as a director since November 2006. Since December 2006, Mr.
Shea
has served as President of American Property Investors, Inc., which is the
general partner of AREP. Mr. Shea also has served as Head of Portfolio Company
Operations of AREP since December 2006. Since December 2006, Mr. Shea has served
as a director of each of the following companies, for which Mr. Icahn has a
controlling interest through the ownership of securities: XO Holdings, Inc.,
a
telecommunications services provider; American Railcar Industries, Inc., a
manufacturer of covered hopper and tank railcars; and, WestPoint International
Inc., a home textiles manufacturer. Mr. Shea has been an independent consultant
to various companies and an advisor to private equity firms since 2002. Mr.
Shea
also has served as a Director, Executive Chairman, Chief Executive Officer
or
President of a variety of companies, including, H.J. Heinz Company in Europe,
SMG Corporation, John Morrell & Company, United Brands Company, Premium
Standard Farms and New Energy Company of Indiana.
SungHwan
Cho has served as a director since November 2006. Since October 2006, Mr. Cho
has been Portfolio Company Associate at Icahn Associates Corp., an entity
controlled by Mr. Icahn. From 2004 to 2006, Mr. Cho served as Director of
Finance for Atari, Inc., a publisher of video game software. From 1999 to 2002,
Mr. Cho served as Director of Corporate Development and Director of Product
Development at Talk America, a telecommunications provider to small business
and
residential customers. Previously, Mr. Cho was an investment banker at Salomon
Smith Barney in New York and Tokyo. He is also a Director of Philip Services
Corporation, a metal recycling and industrial services company controlled by
Mr.
Icahn.
Mayuran
Sriskandarajah has served as a director since December 2006. Since February
2005, Mr. Sriskandarajah has served as an Analyst at Icahn Associates Corp.,
an
entity controlled by Mr. Icahn. From 2002 to 2005, Mr. Sriskandarajah served
as
a Senior Associate Consultant at Bain & Company, a management consulting
firm. Previously, Mr. Sriskandarajah was an investment banker at Wasserstein,
Perella & Company.
In
June
2003, the Company terminated its registration under Section 12(g) of the
Securities and Exchange Act of 1934 (“Exchange Act”) and, therefore, it has not
been subject to the reporting requirements of the Section 16(a) of the Exchange
Act, which would require the Company's executive officers and directors and
persons who own more than 10% of a registered class of the Company's equity
securities to file reports of their ownership thereof and changes in that
ownership with the SEC. As such, there were no required filings of Section
16(a)
reports by our directors, officers and persons who own more than 10% of the
Company’s equity securities.
Code
of Ethics
The
Company has adopted a written code of ethics, entitled “Business Integrity and
Ethics Policy,” which applies to all directors, officers and employees,
including our Chief Executive Officer and Chief Financial Officer. A copy of
the
code is filed as an exhibit to the Company’s Current Report on Form 8-K filed on
March 24, 2006. The Company will furnish to any shareholder, without charge,
a
copy of the code. A request for the code can be made by writing to the Company’s
Secretary, Viskase Companies, Inc., 8205 South Cass Avenue, Suite 115, Darien,
Illinois60561.
Audit
Committee
The
Board
of Directors has assigned the Audit Committee the following responsibilities:
to
review and recommend to the Board of Directors the selection of the Company’s
independent accountants; to review with the independent accountants the scope
and results of the annual audit engagement and the system of internal accounting
controls; and to direct and supervise special audit inquiries.
The
current members of the Audit Committee are Eugene I. Davis and James L. Nelson.
Mr. Davis served as Chairman during 2005; Mr. Nelson has served as Chairman
since the beginning of 2006.
The
Board
of Directors has determined that Mr. Davis is an audit committee financial
expert and is independent as that term is used in Item 7(d)(3)(iv) of Schedule
14A under the Exchange Act. While we are not a listed company, we have used
the
definition of “independent director” from the NASDAQ Stock Market for purposes
of making the forgoing determination.
Compensation
Committee Report
The
Board
of Directors formed a Compensation Committee in January 2007, consisting of
the
following members: Peter K. Shea (Chairman), James L. Nelson and SungHwan Cho.
The Committee does not have a charter at this time. During 2006, our entire
Board of Directors participated in deliberations concerning executive
compensation. Accordingly, the Board of Directors as a whole reviewed and
discussed the Compensation Discussion and Analysis with management. Based on
that review and discussion, the Board of Directors recommended that the
Compensation Discussion and Analysis be included in this annual report. This
report is provided by the Board of Directors:
SungHwan
Cho
Eugene
I.
Davis
Vincent
J. Intrieri
James
L.
Nelson
Peter
K.
Shea
Mayuran
Sriskandarajah
Robert
L.
Weisman
Compensation
Committee Interlocks and Insider Participation
The
Company’s Board of Directors did not maintain a Compensation Committee during
2006; compensation for executive officers was reviewed and approved by the
entire Board of Directors, including Mr. Weisman, the Company’s President and
Chief Executive Officer, except that Mr. Weisman did not participate in
deliberations regarding his own compensation. No executive officer of the
Company serves as a member of the board of directors or compensation committee
of any public entity that has one or more executive officers serving as a member
of the Company’s Board of Directors.
Compensation
Discussion and Analysis
Overview
The
Board
of Directors in the past has reviewed, and the Compensation Committee in the
future will review, compensation for executive officers on an annual basis,
subject to the terms of applicable employment agreements. The compensation
level
for the President and Chief Executive Officer is established based upon the
recommendation of our chairman, which is discussed with members of the Board
of
Directors. Compensation levels for other executive officers are established
based upon the recommendation of our President and Chief Executive Officer,
which is discussed with members of the Board of Directors. The Board of
Directors has not retained any compensation consultants to determine or
recommend the amount or form of executive compensation.
Compensation
Philosophy and Objectives
Our
executive compensation philosophy is designed to support our key business
objectives while maximizing value to our shareholders. The objectives of our
compensation structure are to attract and retain valuable employees, assure
fair
and internally equitable pay levels and provide a mix of base salary and other
forms of compensation that provide motivation and award performance. At the
same
time, we seek to optimize and manage compensation costs.
The
primary components of our executive compensation are base salary, annual cash
bonuses and stock options. Base salary is paid for ongoing performance
throughout the year and is determined based on job function and each executive’s
contribution to our performance and achievement of our overall business
objectives. Our annual bonuses are intended to reward particular achievement
during the year, motivate future performance and retain highly qualified key
employees. Stock options are granted to cause our executives to have an ongoing
stake in our long-term success.
Base
Salaries
Base
salaries for executive officers are determined based on job responsibilities
and
individual contribution. Job responsibilities are evaluated against similar
positions at companies of like size and base salaries generally are set at
approximately 20% below average market salaries. As described below, the minimum
base salary for Mr. Weisman is set contractually to be $270,384 per year. Base
salary is the only element of compensation that is used in determining the
amount of contributions permitted under our 401(k) plan.
Bonus
Our
Management Incentive Program (the “Program”) is intended to provide additional
compensation to eligible participants for their contribution to the achievement
of our objectives, to encourage and stimulate superior performance and to assist
in attracting and retaining highly qualified key employees. Our key managers,
including our executive officers, are eligible to participate in the Program.
The Program permits us to make cash awards to participants based upon a
percentage of each participant’s base salary, as measured against each
participant’s personal performance and our financial performance. Personal
performance is evaluated subjectively by the participant’s manager and all
performance ratings are reviewed collectively by executive management. Personal
performance of executive officers other than the President and Chief Executive
Officer is evaluated by the President and Chief Executive Officer, while the
personal performance of the President and Chief Executive Officer is evaluated
by the Chairman of the Board of Directors. Financial performance goals are
based
on certain adjusted EBITDA targets, as established by our Board of Directors
and
based on our annual business plan. These goals are meant to be aggressive but
achievable in light of current market conditions. Participants are entitled
to
payment of a partial award if, during a fiscal year, a participant, among other
things, dies, retires, becomes permanently disabled or leaves the Company due
to
position elimination, provided that the participant was an active employee
for a
minimum of thirty consecutive calendar days during such fiscal year. The plan
is
subject to the control and supervision of our President and Chief Executive
Officer and our Board of Directors.
Under
the
terms of our Program, bonuses are computed in accordance with the following
formula:
(Base
Salary) times (Bonus % of Salary) times (Company Performance % of Target) times
(Individual Performance Rating Factor)
The
percentage of salary for which each executive is eligible is as
follows:
Executive
Percentage
of Salary
Robert
L. Weisman
100%
Gordon
S. Donovan
45%
Henry
M. Palacci
50%
Charles
J. Pullin
40%
Maurice
J. Ryan
40%
Bernard
Lemoine
40%
For
2006,
the Company did not achieve the minimum Company Performance Target, therefore
no
bonuses were paid under the Program.
Stock
Options. The Board of Directors believes that equity-based compensation causes
our executives to have an ongoing stake in our long-term success. Our Stock
Option Plan was designed, in part, to optimize our profitability and growth
over
the longer term. During 2004 and 2005, the Company issued 995,000 options to
key
employees. Exercise prices for all options were set at the Company’s stock price
on the actual grant date. See “—Summary Compensation Table” for further
details.
Restricted
Stock. There were initially 660,000 shares of Common Stock reserved for grant
to
our 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 vested 12.5% on the grant date and vest 17.5%, 20%,
20% and 30% on the first, second, third and fourth anniversaries, respectively,
of the grant date, subject to acceleration upon the occurrence of certain
events. As of April 3, 2007, 100% of the restricted stock grants will be vested.
Messrs. Donovan and Ryan participated in this program. See “—Summary
Compensation Table” for further details.
Benefits
Our
US-based executive officers participate in a qualified 401(k) retirement savings
plan, and health, life and disability insurance plans that are offered to all
of
our eligible US employees. These are designed to help us attract and retain
our
workforce in a competitive environment. In addition, Messrs. Donovan and Ryan
participate in a defined benefit retirement plan, which was closed to new
entrants on April 1, 2004. Service credits under this plan were frozen as of
December 31, 2006.
Our
qualified 401(k) plan allows eligible US-based employees to contribute up to
25%
of their base salary, up to the limits imposed by the Internal Revenue Code
on a
pre-tax basis. We currently match, within prescribed limits, 100% of eligible
employees’ contributions up to 3% of their individual earnings, and 50% of
eligible employees’ contributions between 3% and 5% of their individual
earnings. Participants choose to invest their account balances from an array
of
investment options as selected by plan fiduciaries from time to time. The 401(k)
plan is designed to provide for distributions at retirement, or in a lump sum
for small amounts upon leaving the Company. Under certain circumstances, loans
are permitted.
We
contribute additional amounts to our qualified 401(k) plan for all eligible
US-based employees under certain conditions. Annually, we contribute $1,000
to
the plan for each participant as a supplement to future health care costs upon
retirement. Also, we contribute from 0% to 8% of base salary into the qualified
401(k) plan as a deferred profit-sharing program. These contributions are based
on financial performance against certain adjusted EBITDA targets as established
by our Board of Directors.
In
addition, Mr. Donovan participated in a Non-Qualified Plan designed to
supplement our retirement programs. This plan has been closed to new entrants
for many years.
Perquisites
Our
US-based executive officers participate in an automobile reimbursement program
which provides for monthly payments of $600, payment of certain operating
expenses, and a tax-gross up payment to neutralize the tax impact of the
payments. The program works in a similar manner for our European-based
executives, with slight differences for the tax adjustments.
The
following table sets forth information regarding compensation for the fiscal
years 2006, 2005 and 2004 awarded to, earned by or paid to the Principal
Executive Officer (Mr. Weisman), the Principal Financial Officer (Mr. Donovan)
and the other three most highly compensated executive officers for the fiscal
year 2006. Robert L. Weisman was appointed President and Chief Executive Officer
effective October 4, 2004.
Name
and Principal Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($)(5)
Option
Awards($)(6)
Change
in Pension Value and Nonqualified Deferred Compensation Earnings
($)(7)
All
Other Compensation
($)(8)
Total
($)
Robert
L. Weisman, President and
2006
$
257,508
$
89,899
$
30,116
$
377,523
Chief
Executive Officer (1)
2005
250,008
$
150,000
89,899
26,239
516,146
2004
61,510
44,714
22,475
1,563
130,262
Gordon
S. Donovan, Vice President,
2006
198,816
$
456
18,129
2,060
28,419
247,880
Chief
Financial Officer, Treasurer
2005
193,020
37,697
456
18,129
2,448
29,851
281,601
and
Assistant Secretary
(2)
2004
193,020
62,139
456
2,268
33,264
291,147
Maurice
J. Ryan, Vice President,
2006
149,436
7,770
100
18,129
16,480
23,594
215,509
Sales,
North America
2005
145,080
25,186
100
18,129
22,876
211,371
2004
145,080
41,516
100
22,910
209,606
Henry
M. Palacci, Vice President,
2006
189,400
18,129
26,537
234,066
Worldwide
Strategic Planning
(3)
2005
214,950
44,640
18,129
27,348
305,067
Bernard
Lemoine, Vice President,
2006
133,310
29,323
7,252
17,489
187,374
(1) Mr.
Weisman joined the company in October 2004.
(2) Mr.
Donovan resigned from the company in January 2007.
(4) Mr.
Lemoine assumed his responsibilities as an executive officer in August
2006.
(5) Amounts
listed as compensation are the prorata
amounts
recorded as compensation cost by the Company for the disclosed year. See
“Outstanding Equity Awards at Fiscal Year-End.”
(6) Compensation
for option values was computed using the prorata
amounts
recorded as compensation cost by the Company for the disclosed year. See
Footnote 20 of the financial statements for details on assumptions
used.
(7) For
Mr.
Ryan, amounts listed are solely for the change in defined benefit pension value
during 2006. For Mr. Donovan, amounts listed for all years represent
nonqualified deferred compensation earnings.
(8) All
other
compensation for each of the named executives includes the following
amounts:
Retirement
Program for Employees of Viskase Companies, Inc.
19
250,689
Maurice
J. Ryan
Retirement
Program for Employees of Viskase Companies, Inc.
30
599,227
There
were no payments or pension benefits paid to any executive officer during
2006.
Annual
benefits payable under the retirement program are calculated based on the
participant’s average base salary for the consecutive thirty-six month period
immediately prior to retirement. The annual benefits payable are based on a
straight-life annuity basis at normal retirement age, which under the plan
is 65
years of age. The benefits reported in this table are not subject to any
reduction for benefits paid by other sources, including social security. Entry
into this plan was closed for executives hired after March 31, 2003. For details
on assumptions underlying the computation of accumulated benefits, please refer
to Footnote 11 of the financial statements.
Employment
Agreements and Potential Payments upon Termination or
Change-in-Control
Employment
Agreement with Robert L. Weisman. On October 4, 2004, we entered into an
employment agreement with Robert L. Weisman. Pursuant to this agreement, Mr.
Weisman agreed to serve as our President and Chief Executive Officer. The
initial term of the agreement is three years, commencing on October 4, 2004
and
ending on October 4, 2007. However, Mr. Weisman’s employment is at will, and it
may be terminated by us for various reasons set forth in the agreement and
by
Mr. Weisman for any reason.
Under
the
agreement, Mr. Weisman receives an annual base salary of $270,384. This salary
may be increased annually based on reviews by the Board of Directors, but once
increased, may not be decreased below the new base amount. Mr. Weisman is also
eligible to participate in our: (i) Management Incentive Plan, a bonus program
calculated as a percentage of his base salary depending on our performance
and
our appraisal of his personal performance; and, (ii) other employee and fringe
benefit and/or profit sharing plans that we provide to other senior executive
employees, including medical and health plans. In addition, the agreement
provided that Mr. Weisman would receive stock options with respect to 500,000
shares of Common Stock, at an exercise price of $2.40 per share.
If
Mr.
Weisman’s employment is terminated by us for reasons other than disability or
“Cause,” as defined in the agreement, we will: (1) continue to pay Mr. Weisman
for six months at a per annum rate equivalent to his base salary; (2) provide
Mr. Weisman and his spouse medical and health insurance coverage for six months
or until Mr. Weisman receives such coverage from another employer, whichever
is
earlier; and (3) pay Mr. Weisman a pro rata portion of the bonus for which
he is
eligible. Pursuant to the agreement, Mr. Weisman is generally prohibited during
the term of the agreement, and for a period of twelve months thereafter, from
competing with us, soliciting any of our customers or inducing or attempting
to
persuade any of our employees to terminate his or her employment with us to
enter into competitive employment.
Severance
Benefit Agreement with Gordon S. Donovan. On January 3, 2006, we entered into
a
severance benefit agreement ("Severance Benefit Agreement") dated as of January3, 2006 with Gordon S. Donovan ("Executive"), the Company's Vice President
and
Chief Financial Officer.
Under
the
Severance Benefit Agreement, the Executive's employment by the Company shall
be
on an "at will" basis and may be terminated at any time subject to the terms
of
the Severance Benefit Agreement. In the event the Executive's employment is
terminated for Cause (as defined in the Severance Benefit Agreement) or as
a
result of the Executive's Disability (as defined), the Company shall pay Accrued
Compensation (as defined) through the termination date. In the event the
Executive's employment is terminated by the Company except for Cause or as
a
result of the Executive's Disability, then the Company shall pay to the
Executive Accrued Compensation plus six (6) months' base salary. In the event
the Executive's employment is terminated (i) by the Company within twelve (12)
months following a Change of Control (as defined), except for Cause or as a
result of the Executive's Disability, or (ii) by the Executive within twelve
months following a Change in Control for Good Reason (as defined), then in
lieu
of the severance specified in the immediately preceding sentence, the Company
shall pay to the Executive Accrued Compensation plus twelve (12) months' base
salary. In addition to the foregoing, the Executive shall be eligible to receive
the pro rata portion of the Executive's management incentive plan bonus for
the
year in which the termination occurs and such other benefits as are provided
by
the Company's then-current severance policy for employees at the Executive's
level.
On
January 31, 2006, Mr. Donovan retired from the Company. However, the Company
honored the provisions of his severance agreement as if he were terminated
except for Cause.
Severance
Benefit Agreement with Henry M. Palacci. On March 15, 2005, we entered into
an
agreement with Henry M. Palacci which provided that, should Mr. Palacci’s
position be eliminated through no fault of his own, he will be subject to the
Viskase Companies, Inc. Severance Plan effective July 22, 2003 which entitles
him to six months of pay continuation at his current base pay at the time of
the
job elimination. Further, should his position be eliminated, he will be entitled
to a relocation arrangement, which includes a guarantee of no loss on the sale
of his primary residence based on the fair market value.
In
the
event of termination without cause, for any reason including a change of
control, other US-based executive officers would receive continuation of pay
equal to two weeks of salary for every year of service with the Company. In
this
case, including Messrs. Weisman, Donovan and Palacci, the Company would continue
paying its portion of applicable health care and other benefit programs during
the pay continuation period. European-based executive officers, in the event
of
termination, would receive termination pay for one to two years depending on
the
circumstances of the termination and applicable law.
Compensation
of Directors
Name
Fees
Earned or Paid in Cash ($)
Total
($)
Vincent
J. Intrieri
$
19,500
$
19,500
Eugene
I. Davis
$
33,500
$
33,500
James
L. Nelson
$
36,000
$
36,000
Peter
K. Shea
$
-
$
-
SungHwan
Cho
$
-
$
-
Mayuran
Sriskandarajah
$
-
$
-
Jon
F. Weber(1)
$
20,500
$
20,500
(1)
Mr.
Weber resigned as a director in December
2006.
Each
director who is not an officer of the Company received an annual retainer of
$10,000 in 2006 and a fee of $1,000 for each attended meeting of the Board
of
Directors. Chairmen of committees of the Board of Directors received an annual
retainer of $1,500 in 2006. Directors also received a fee for each attended
meeting of a committee of the Board of Directors of $1,000 ($500 in the case
of
committee meetings occurring immediately before or after meetings of the full
Board of Directors). Directors who are officers of the Company do not receive
compensation in their capacity as directors.
As
of
November 8, 2006, the Company no longer pays director fees for directors
associated with affiliates of Mr. Icahn. Specifically, Messrs. Intrieri, Shea,
Cho and Sriskandarajah will not receive director fees from that
date.
The
Company did not hold an annual meeting of stockholders during 2006.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
following table sets forth information, as of March 26, 2007, with respect
to
the beneficial ownership of our common stock by (i) each director, (ii) our
principal executive officer, principal financial officer and our other most
highly compensated executive officers during the fiscal year ended December31,2006, (iii) all of our directors and executive officers as a group, and (iv)
each person who is known to us to be the beneficial owner of more than five
percent of our common stock. In June 2003, we terminated our registration under
Section 12(g) of the Exchange Act and, therefore, we have not been subject
to
the reporting requirements of the Exchange Act since that time. All information
below is taken from or based upon ownership filings previously made by such
persons with the SEC or upon information provided to us by such persons, but
because such persons have not been subject to the beneficial ownership reporting
requirements of the Exchange Act, complete and accurate information with respect
to current beneficial ownership provided may be unavailable. To our knowledge,
each of the holders of Common Stock listed below has sole voting and investment
power as to the shares of Common Stock owned, unless otherwise
noted.
All
directors and named executive officers
as a group (11 persons)
502,813
1.7
%
*Represents
less than 1%.
(1)
The
ownership indicated is derived from the terms of our Series A Preferred
Stock issuance in November 2006 and Common Stock rights offering,
which
concluded in March 2007, as well as from a Schedule 13D filed with
the SEC
on April 14, 2003. Mr. Icahn is the sole shareholder, director and
executive officer of Barberry Corp. ("Barberry"), which is the general
partner of each of High River Limited Partnership ("High River")
and
Meadow Walk Limited Partnership ("Meadow Walk"). In addition, Mr.
Icahn is
the beneficial owner of the shares of Common Stock held by Koala
Holding
Limited Partnership. As such, Mr. Icahn is in a position, directly
or
indirectly, to determine the investment and voting decisions with
respect
to the Common Stock owned by Barberry, High River, Koala and Meadow
Walk.
The ownership indicated includes 1,236,537 owned directly by Barberry,
1,331,656 owned directly by High River, 16,859,591 owned directly
by Koala
and 299,812 owned directly by Meadow Walk. The address for Mr. Icahn
is
c/o Icahn Associates Corp., 767 Fifth Avenue, 47th Floor, New York,
NewYork10153 and the address for each of Barberry, High River, Koala
and
Meadow Walk is 100 South Bedford Road, Mount Kisco, New York10549.
(2)
The
ownership indicated is derived from the terms of our Series A Preferred
Stock issuance in November 2006 and Common Stock rights offering,
which
concluded in March 2007, as well as from a Schedule 13G filed with
the SEC
on June 11, 2003. The address for Northeast Investors Trust is 50
Congress
Street, Boston, Massachusetts02109-4096.
(3)
The
ownership indicated is derived from the terms of our Series A Preferred
Stock issuance in November 2006 and Common Stock rights offering,
which
concluded in March 2007. The address for Grace Brothers Ltd. is 1560
Sherman Avenue, Suite 900, Evanston, Illinois60201-4809.
The
address for each of our officers and directors is c/o Viskase Companies,
Inc., 8205 South Cass Avenue, Suite 115, Darien, Illinois60561.
(5)
Mr.
Weisman was granted 500,000 Common Stock options pursuant to his
employment agreement, 333,333 shares of which are
vested.
(6)
Mr.
Donovan was granted 45,605 shares of Restricted Stock pursuant to
the
Restricted Stock Plan, which are all vested. Mr. Donovan also directly
owns warrants to purchase 160 shares of Common Stock and beneficially
owns
through our 401(k) plan, his IRA and his spouse's IRA, warrants to
purchase 324, 59 and 20 shares of Common Stock, respectively. Mr.
Donovan
disclaims beneficial ownership of the warrants to purchase 20 shares
of
Common Stock held in his spouse's IRA. Mr. Donovan was granted options
on
50,000 shares of Common Stock pursuant to the 2005 Stock Option Plan,
33,333 shares of which are vested or will become vested within 60
days of
this filing.
(7)
Mr.
Ryan was granted 10,000 shares of Restricted Stock pursuant to the
Restricted Stock Plan, all of which are vested or will become vested
within 60 days of this filing. Mr. Ryan was granted options on 50,000
shares of Common Stock pursuant to the 2005 Stock Option Plan, 33,333
shares of which are vested or will become vested within 60 days of
this
filing.
(8)
Mr.
Palacci was granted options on 50,000 shares of Common Stock pursuant
to
the 2005 Stock Option Plan, 33,333 shares of which are vested or
will
become vested within 60 days of this
filing.
(9)
Mr.
Lemoine was granted options on 20,000 shares of Common Stock pursuant
to
the 2005 Stock Option Plan, 13,333 shares of which are vested or
will
become vested within 60 days of this
filing.
During
the year ended December 31, 2006, we purchased $0.161 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 67.0%
of
our 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.
Koala
Holding Limited Partnership was the purchaser of $21,000,000 of the $24,000,000
shares of Series A Preferred Stock that we issued in November 2006.
The
board
of directors does not have an established policy for the approval of related
party transactions. However, the negotiation and approval of transactions that
the board considers to be significant in nature are generally delegated to
a
special committee of the board that consists entirely of disinterested
directors. In 2006, the issuance of the Series A Preferred Stock was approved
by
such a special committee, while the purchase of telecommunications services
was
not.
The
following table summarizes the fees for professional audit services rendered
by
Grant Thornton LLP for the audits of the financial statements for the years
ended December 31, 2006 and December 31, 2005, and fees billed to the Company
by
Grant Thornton LLP for other services during 2006 and 2005.
Description
2006
Amount
2005
Amount
Audit
fees
$
597,348
$
424,884
Audit-related
services
41,624
45,292
Total
audit and audit-related services
638,972
470,176
Tax
fees
All
other fees
Total
$
638,972
$
470,176
The
Audit
Committee pre-approves all audit fees, audit related services and other services
with Grant Thornton.
All
other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the
financial
statements and notes thereto or elsewhere herein.
Pursuant
to the requirements of Section 13 or 15(d) 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/Robert
L. Weisman
Robert
L. Weisman
Chief
Executive Officer and President
By:
/s/Charles
J. Pullin
Charles
J. Pullin
Vice
President, Chief Financial Officer, Treasurer and
Secretary
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities indicated on this 9th day of April 2007.
/s/
Robert L. Weisman
/s/
Charles J. Pullin
Robert
L. Weisman
Charles
J. Pullin
Chief
Executive Officer and President
Vice
President, Chief Financial Officer and Treasurer
Certificate
of Designations of Series A Preferred Stock (incorporated herein
by
reference to Exhibit 3.1 to Company’s Form 8-K, as filed with the
Commission on November 13, 2006)
Indenture,
dated as of June 29, 2004, among the Company, as issuer, and LaSalle
Bank National Association, as trustee and collateral agent (incorporated
herein by reference to Exhibit 4.1 to Company’s Amendment No. 1 to the
Registration Statement on Form S-4, as filed with the Commission
on
December 22, 2004)
4.3
Form
of 11 1/2% Senior Secured Notes due 2011 (incorporated herein by
reference to Exhibit 4.2 to Company’s Registration Statement on Form S-4,
as filed with the Commission on October 27, 2004)
4.4
Warrant
Agreement, dated as of June 29, 2004, by and between the Company and
Wells Fargo Bank, National Association, as warrant agent (incorporated
herein by reference to Exhibit 4.5 to Company’s Registration Statement on
Form S-1, as filed with the Commission on December 27,2004)
4.5
Warrant
Agreement, dated as of April 3, 2003 by and between the Company and
Wells Fargo Bank, National Association, as warrant agent (incorporated
herein by reference to Exhibit 4.7 to Company’s Registration Statement on
Form S-1, as filed with the Commission on December 27,2004)
Loan
and Security Agreement, dated as of June 29, 2004, by and between the
Company and Wells Fargo Foothill, Inc. (incorporated herein by reference
to Exhibit 10.1 to Company’s Amendment No. 1 to the Registration Statement
on Form S-4, as filed with the Commission on December 22,2004)
10.2
Intellectual
Property Security Agreement, dated as of June 29, 2004, by and
between the Company and Wells Fargo Foothill, Inc. (incorporated
herein by
reference to Exhibit 10.2 to Company’s Amendment No. 1 to the Registration
Statement on Form S-4, as filed with the Commission on December 22,2004)
10.3
Pledge
Agreement (domestic), dated as of June 29, 2004, by and between the
Company and Wells Fargo Foothill, Inc. (incorporated herein by reference
to Exhibit 10.3 to Company’s Amendment No. 1 to the Registration Statement
on Form S-4, as filed with the Commission on December 22,2004)
Pledge
Agreement (foreign), dated as of June 29, 2004, by and between the
Company and Wells Fargo Foothill, Inc. (incorporated herein by reference
to Exhibit 10.4 to Company’s Amendment No. 1 to the Registration Statement
on Form S-4, as filed with the Commission on December 22,2004)
Indenture,
dated as of April 3, 2003, among the Company, as issuer, and Wells
Fargo Minnesota National Association as trustee for $60,000,000 of
8% Senior Subordinated Secured Notes due 2008 (incorporated herein by
reference to Exhibit 10.6 to Company’s Registration Statement on Form S-4,
as filed with the Commission on October 27, 2004)
10.7
First
Supplemental Indenture, dated as of June 29, 2004, among the Company
and Wells Fargo Bank National Association (incorporated herein by
reference to Exhibit 10.7 to Company’s Amendment No. 1 to the Registration
Statement on Form S-4, as filed with the Commission on December 22,2004)
Parallel
Envirodyne Nonqualified Thrift Plan, dated as of January 1, 1987
(incorporated herein by reference to Exhibit 10.10 to Company’s
Registration Statement on Form S-4, as filed with the Commission
on
October 27, 2004)
Severance
Plan of the Company, dated as of July 22, 2003 (incorporated herein
by reference to Exhibit 10.14 to Company’s Amendment No. 1 to the
Registration Statement on Form S-4, as filed with the Commission
on
December 22, 2004)
10.13
Restructuring
Agreement, dated as of July 15, 2002, by and among the Company and
High River Limited Partnership, Debt Strategies Fund, Inc., Northeast
Investors Trust (incorporated herein by reference to Exhibit 10.15
to
Company’s Amendment No. 1 to the Registration Statement on Form S-4, as
filed with the Commission on December 22, 2004)
Intellectual
Property Security Agreement, dated as of June 29, 2004, by and
between the Company and LaSalle Bank National Association (incorporated
herein by reference to Exhibit 10.17 to Company’s Amendment No. 1 to the
Registration Statement on Form S-4, as filed with the Commission
on
December 22, 2004)
First
Amendment to The SAVE Program for Employees of Company (incorporated
herein by reference to Exhibit 10.3 to Company’s Form 8-K, as filed with
the Commission on May 25, 2005)
10.23
Second
Amendment to The SAVE Program for Employees of Company (incorporated
herein by reference to Exhibit 10.4 to Company’s Form 8-K, as filed with
the Commission on May 25, 2005)
10.24
Third
Amendment to The SAVE Program for Employees of Company (incorporated
herein by reference to Exhibit 10.5 to Company’s Form 8-K, as filed with
the Commission on May 25, 2005)
First
Amendment to Pledge Agreement, dated as of March 28, 2006, by and
between
the Company and Wells Fargo Foothill, Inc. (incorporated herein by
reference to Exhibit 10.3 to Company’s Form 8-K, as filed with the
Commission on April 4, 2006)
10.27
First
Amendment to Loan and Security Agreement, dated as of March 28, 2006,
by
and between the Company and Wells Fargo Foothill, Inc. (incorporated
herein by reference to Exhibit 10.2 to Company’s Form 8-K, as filed with
the Commission on April 4, 2006)
10.28
Amendment
to Pledge Agreement, dated as of March 17, 2006, by and between the
Company and LaSalle Bank National Association (incorporated herein
by
reference to Exhibit 10.1 to Company’s Form 8-K, as filed with the
Commission on April 4, 2006)
10.29
Series
A Preferred Stock Purchase Agreement, dated as of November 7, 2006,
by and
between the Company and the investors party thereto (incorporated
herein
by reference to Exhibit 10.1 to Company’s Form 8-K, as filed with the
Commission on November 13, 2006)
First
Amendment to Intercreditor Agreement, dated as of November 7, 2006,
by and
among Wells Fargo Foothill, Inc., LaSalle Bank National Association,
as
Collateral Agent, and the Company (incorporated herein by reference
to
Exhibit 10.4 to Company’s Form 8-K, as filed with the Commission on
November 13, 2006)