VISKASE COMPANIES, INC.
ANNUAL REPORT FOR 2009
This report has been prepared in accordance with Section 4.19 of the Indenture dated as of
December 21, 2009 among Viskase Companies, Inc. (the “Company”) and U.S. Bank National
Association as trustee and as collateral agent (the “Trustee”).
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VISKASE COMPANIES, INC.
Annual Report - 2009
Table of Contents
Section 1.
Cautionary Statement Regarding Forward-Looking Statements
Section 2.
Risk Factors
Page
3
4
Section 3.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
10
Section 4.
Consolidated Financial Statements
17
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SECTION 1.
CAUTIONARY STATEMENT REGARDING 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. Although it is not possible to identify all of the factors that may affect our financial position,
business strategy and measures to implement that strategy, such factors may include, among others, the
following:
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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;
market and industry conditions and changes in the relative market shares of industry participants;
consumption patterns and consumer preferences in our markets;
the effects of competition;
our ability to realize operating improvements and anticipated cost savings;
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;
general economic conditions and their effect on our business both in the United States and
global markets;
continued expansion of the middle class and an increasing shift towards protein-rich diets in the
emerging markets in which we compete;
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 ability engage in capital markets transactions;
our ability to protect our intellectual property; and
our ability to implement our strategy for the future, including capitalizing on opportunities that may
be presented to and pursued by us.
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SECTION 2. RISK FACTORS
You should read the following risk factors related to our business carefully in connection with evaluating
our business. While we believe we have identified and discussed below the key risk factors affecting our
business, there may be additional risks and uncertainties that are not presently known or that are not
currently believed to be significant that may adversely affect our business, performance or financial
condition in the future.
We face competitors that are better capitalized than we are, and the continuous-flow nature of the
casings manufacturing process forces competitors to compete based on price in order to
maintain 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 have experienced annual
increases since 2006, and we believe that the current output in our industry is generally in balance with
global demand and that levels of capacity utilization are high, the continuous-flow nature of the casings
manufacturing process has historically required competitors in our industry to compete based on price in
order to maintain volume, which could result in lower pricing in future years. 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.
Deteriorations of national and global general economic conditions or disruptions in credit and
other financial markets could adversely affect our business.
Our results of operations are affected by many economic factors, including the strength of economic
conditions and level of economic development in the markets in which we operate. Over the past 18
months, the United States and international markets have experienced a significant decline in economic
activity and a tightening of credit markets. Any further deterioration of national and global economic
conditions or disruptions in credit and other financial markets could result in a number of adverse effects
to our business and our results of operations, including, among other things:
making it more difficult or costly for us to obtain financing for our operations;
impairing the financial condition of some of our customers or suppliers, thereby increasing bad
debts or non-performance;
negatively impacting the demand for protein products, which could result in a reduction of sales,
operating income and cash flows; and
impairing the financial viability of our insurers.
We receive our raw materials from a limited number of suppliers, and problems with our suppliers
could impair our ability to meet our customers’ 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.
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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, which is 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 plastic 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 or poultry products, particularly with respect to processed meat or poultry 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
and poultry products may discourage consumers from buying such products. These risks could also result
in additional governmental regulations, 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 and
poultry 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 seven manufacturing facilities, nine distribution centers and
two service 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. We spent approximately $23.8 million for capital expenditures in 2009 and expect to spend
approximately $15.2 million in 2010. 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.
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 sales 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.
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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 cash flow.
Due to the recent declines in financial markets and a deterioration in the value of our plan assets, we
have seen a significant increase in our U.S. defined benefit pension funding liability. As of December 31,
2009, our aggregate minimum funding contribution requirement for our U.S. defined benefit plan from
2010 through 2014 was approximately $38.2 million and our unfunded pension liability was $40.8 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: 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; tariffs; limits on the repatriation of funds;
and taxes. 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 68% of our total net sales in 2009 and approximately 67% of
our total net sales in 2008.
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 pressure 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 volumes and revenues could decrease.
If we engage in strategic transactions, the terms of such transactions may not be advantageous to
our business or we may be unable to effectively integrate a new business.
In connection with our business strategies and goals of growth of our operations and market share, we
may seek to acquire, merge with, enter into partnerships with or enter into other similar transactions with,
other companies, including companies that complement our existing products, technologies or
distribution, or lower our costs, and we regularly engage in discussions with other companies or their
representatives with respect to such transactions. Nonetheless, we may be unable to identify and
successfully acquire, merge with, partner with or enter into other similar transactions with suitable
companies under terms advantageous to our business. If we do enter into such transactions, we may be
unable to efficiently and effectively integrate our business and achieve the anticipated synergies. The
integration of the businesses may also result in unforeseen difficulties that require a disproportionate
amount of our management’s attention and other resources, which, in turn, may negatively affect our
profitability.
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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.
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 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 federal Clean Air Act Amendments of 1990. Additional environmental requirements
imposed in the future, including pending legislation and regulations in the United States concerning the
emission of carbon dioxide and other greenhouse gases, could require currently unanticipated
investigations, assessments or expenditures and may require us to incur significant additional costs. As
the nature of these potential requirements and future charges is unknown, management is not able to
estimate the magnitude of future costs, and we have not accrued any reserve for any potential future
costs. At this time we cannot be certain that such legislation or regulations will not have a material
adverse effect on our business, financial condition or results of operations.
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.
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 (the “Indenture”)
governing our 9.875% Senior Secured Notes due 2018 (the “9.875% Senior Secured Notes”) and the
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credit agreement governing our revolving credit facility, we may incur additional indebtedness. As of
December 31, 2009, we had approximately $176.2 million of total debt, exclusive of additional
indebtedness that we may borrow under our revolving credit facility.
Our high level of indebtedness has important implications, including the following:
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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 the Indenture or our revolving credit facility could trigger cross-defaults
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 and our subsidiaries may still be able to incur
substantially more debt. This could further exacerbate the risks associated with our substantial
leverage.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although
the Indenture includes, and our revolving credit facility contains, restrictions on the incurrence of
additional indebtedness, these restrictions will be 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 $25 million under our revolving credit facility, which is secured by liens
on substantially all of our personal and real property assets, with certain exceptions. We may not be able
to generate the significant amount of cash needed to pay interest and principal amounts on our debt,
including the 9.875% Senior Secured Notes, which could result in our inability to fulfill our obligations
under our indebtedness.
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 year ended December 31,
2009, our foreign restricted subsidiaries contributed approximately 53% of our consolidated revenues. As
of December 31, 2009, 43% of our consolidated assets, based on carrying 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 particular, to the extent our foreign subsidiaries incur
additional indebtedness to expand their operations, the ability of our foreign subsidiaries to provide us
cash may be limited. 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
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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 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;
issue stock of subsidiaries;
grant or permit certain liens on our assets;
enter into certain transactions with affiliates;
merge, consolidate or transfer substantially all of our assets;
incur payment restrictions affecting certain of our subsidiaries;
transfer, sell or acquire assets, including capital stock of our subsidiaries; and
change the business we conduct.
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 the interests of other
stockholders or the interests of the holders of the 9.875% Senior Secured Notes.
To our knowledge, Icahn Enterprises, L.P. holds a total of approximately 71.4% of our outstanding shares
of common stock. As a result, Icahn Enterprises presently has and will continue to have voting power
sufficient to control the election of our 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. Currently, three employees and one former employee of Icahn Enterprises or affiliates of
Icahn Enterprises are designated members of our board of directors, which is comprised of seven
directors. In addition, Icahn Enterprises is the lender under our revolving credit facility. It is possible that
the interests of Icahn Enterprises and its affiliates could conflict in certain circumstances with the interests
of our other stockholders or the interests of the holders of the 9.875% Senior Secured Notes.
Our business operations could be significantly disrupted if members of our senior management
team were to leave.
Our success depends to a significant degree upon the continued contributions of our senior management
team. Our senior management team has extensive manufacturing, finance and engineering experience
as well as longstanding contacts in the industry and with our customers, and we believe that the depth of
our management team is instrumental to our continued success. While we have entered into an
employment agreement with our chief executive officer, the loss of any of the members of our senior
management team in the future could significantly impede our ability to successfully implement our
business strategy, financial plans, new product offerings, marketing and other objectives.
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SECTION 3. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read
in conjunction with our audited consolidated financial statements and related notes included elsewhere in
this report. The statements in this discussion regarding market conditions and outlook, our expectations
regarding our future performance, liquidity and capital resources and other non-historical statements are
subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties
described under “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors.” Our
actual results may differ materially from those contained in or implied by any forward-looking statements.
Company Overview
We are a worldwide leader in the production and sale of cellulosic, fibrous and plastic casings for the
processed meat and poultry industry. We currently operate seven manufacturing facilities and nine
distribution centers throughout North America, Europe and South America and we derive approximately
68% of total net sales from customers located outside the United States. We believe we are one of the
two largest manufacturers of non-edible cellulosic casings for processed meats and one of the three
largest manufacturers of non-edible fibrous casings. We also manufacture 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 processed meat and poultry 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 meat and poultry products and the types of meat and poultry 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 growth in revenues over the last two years due to price increases and stable
volume.
Gross profit has increased in recent years primarily due to the increase in selling price, moderating raw
material costs and increased efficiency in plant operations.
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. Accordingly, management
focuses intensely on the selling prices of our products.
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.
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We have increased medical care deductibles and other employee costs, and we have cut our workforce
to minimal levels. We believe that 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
2008, we experienced dramatic increases in the prices of energy, wood pulp and various chemicals. The
timing of these increases was inopportune for us, as most of our prices were set for our major customers
and only afterward did we achieve cost increases. We have experienced moderation of prices for raw
materials and energy in 2009. We continue to look for additional suppliers for our key materials in order
to obtain the lowest prices available.
Results of Operations
Fiscal Year Ended December 31, 2009 Compared to Fiscal Year Ended December 31, 2008.
The following discussion compares the results of operations for the fiscal year ended December 31, 2009
to the results of operations for the fiscal year ended December 31, 2008. We have provided the following
table in order to facilitate an understanding of this discussion (dollars in thousands):
Net Sales. Our net sales for fiscal 2009 were $299.3 million, which represents an increase of $15.9
million or 5.6% from fiscal 2008. Net sales benefited $33.9 million increase due to price and mix, offset
by a decrease of $12.1 million due to foreign currency translation and $5.9 million due to volumes.
Cost of Sales. Cost of sales for fiscal 2009 decreased 2.1% or $4.7 million over the prior fiscal year. The
decrease in cost of sales can be attributed to lower raw material costs.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased
$2.4 million from fiscal 2008 to fiscal 2009. The change can be attributed to an increase of $0.5 million
from the achievement of certain performance based compensation benefits and $1.2 due to pension plan
expense.
Asset Impairment Charges. The Company recognized an asset impairment charge of $1.4 million in fiscal
2009 on the realizable value of the Kentland, Indiana facility and a plastic extruder in its Monterrey,
Mexico facility.
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Year%Year%YearEndedChangeEndedChangeEndedDecember 31,OverDecember 31,OverDecember 31,20092008200820072007NET SALES$299.35.6%$283.413.2%$250.3COST AND EXPENSES Cost of sales 220.3-2.1%225.09.5%205.4Selling, general and administrative 39.46.5%37.016.1%31.8Amortization of intangibles .50.1%.50.1%.5Restructuring expense- NM- NM.1Asset impairment charge 1.41347.0%.1-89.4%.9OPERATING INCOME 37.780.6%20.981.0%11.5Interest income .1-78.5%.383.0%.2Interest expense 16.38.3%15.11.6%14.8Other income, net 2.7-50.7%5.5152.7%2.2Loss on early extinguishment of debt6.02573.5%.2NM- Income tax expense 1.5-84.7%9.8335.3%2.3NET INCOME (LOSS)$16.7903.1%$1.7NM($3.2)NM = Not meaningful when comparing positive to negative numbers or to zero.
Operating Income. The operating income for fiscal 2009 was $37.7 million, representing an increase of
$16.8 million from the prior fiscal year. The increase in the operating income resulted primarily from the
increases in net sales, pricing and mix, but offset by the increase in selling, general and administrative
expense.
Interest Expense. Interest expense, net of interest income, for 2009 totaled $16.2 million, which is an
increase of $1.5 million compared to the prior fiscal year. The increase is principally due to an increased
amount of long term borrowing with higher interest rates.
Other Income. Other income of approximately $2.7 million for fiscal 2009 consisted principally of $1.7
million of foreign currency translation gains and $1.0 gain from merger activity.
Income Tax Expense. During 2009, a tax provision of $1.5 million was recognized on income before
income taxes of $18.2 million resulting principally from the results of operations of foreign subsidiaries.
Primarily as a result of the factors discussed above, net income for fiscal 2009 was $16.7 million
compared to a net income of $1.7 million for fiscal 2008.
Fiscal Year Ended December 31, 2008 Compared to Fiscal Year Ended December 31, 2007
The following discussion compares the results of operations for the fiscal year ended December 31, 2008
to the results of operations for the fiscal year ended December 31, 2007. We have provided the following
table in order to facilitate an understanding of this discussion (dollars in thousands):
Net Sales. Our net sales for fiscal 2008 were $283.4 million, which represents an increase of $33.1
million or 13.2% from fiscal 2007. Net sales benefited by a $25.6 million increase due to price and mix,
$11.5 million due to foreign currency translation and were offset by a decrease of $4.0 million due to
volumes.
Cost of Sales. Cost of sales for fiscal 2008 increased 9.5% or $19.6 million over the prior fiscal year. The
increase in cost of sales can be attributed to the increase in volumes, raw material costs and labor costs.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased
$5.2 million from fiscal 2007 to fiscal 2008. The change can be attributed to $3.1 million from the
achievement of certain performance based compensation benefits, $1.4 million due to foreign currency
translation, and $0.5 million in legal expense to recover VAT tax refunds owed to the Company.
Operating Income. The operating income for fiscal 2008 was $20.9 million, representing an increase of
$9.4 million from the prior fiscal year. The increase in the operating income resulted primarily from the
increases in net sales volume, pricing, and translation, but was offset by the increase in selling, general,
and administrative expenses.
Interest Expense. Interest expense, net of interest income, for fiscal 2008 totaled $14.8 million, which is a
slight increase compared to the prior fiscal year. The increase is principally due to the increase in interest
income offset by an increased amount of long term borrowing with higher interest rates.
Other Income. Other income of approximately $5.5 million for fiscal 2008 consisted principally of foreign
currency translation gains.
Income Tax Expense. During fiscal 2008, a tax provision of $9.8 million was recognized in income before
income taxes of $11.5 million resulting principally from the results of operations of foreign subsidiaries.
Primarily as a result of the factors discussed above, net income for fiscal 2008 was $1.7 million compared to
a net loss of $3.2 million for fiscal 2007.
Off-Balance Sheet Arrangements
We do not have off-balance sheet arrangements, financing or other relations with unconsolidated entities
or other persons.
12
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. Where losses are probable and the amount of the loss can be reasonably estimated, we
recognize expense based on such estimates.
Effect of Changes in Exchange Rates
In general, our results of operations are affected by changes in foreign exchange rates. In addition to
those markets in which we price our products in U.S. dollars, we price our products in certain of our
foreign operations in Euros and Brazilian Reals. 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 $0.6 million in 2009 and decreased comprehensive income by $11.3 million in
2008.
Liquidity and Capital Resources
As of December 31, 2009, the Company had unrestricted cash and cash equivalents of $39.0 million and
restricted cash of $2.3 million, which secures letters of credit. For the year ended December 31, 2009,
cash flows provided by operating activities were $15.5 million and cash flows used in investing activities
were $23.2 million. Cash flows provided by financing activities were $33.2 million. Cash flows provided in
operating activities were principally attributable to a decrease in working capital offset by depreciation and
loss on early extinguishment of debt. Cash flows used in investing activities were principally attributable to
capital expenditures. Cash flows provided by financing activities principally consisted of the refinancing of
our 11.5% Senior Secured Notes less repayment of our revolving credit facility and a capital lease. 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. See Note 9 of Notes to Consolidated Financial Statements for detailed
information about the amounts, due dates, terms and conditions of our debt.
Set forth below is a table of our material capital expenditures and research and development costs for
fiscal 2008 and 2009 and projected commitments for fiscal 2010:
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.
13
Projected200820092010Project(millions)(millions)(millions)Move or expansion of manufacturing facility $ - $ 10.7 $ - Other capital expenditures $ 12.5 $ 13.1 $ 15.2 Research and development costs $ 3.0 $ 3.4 $ 3.8
Contractual Obligations
The following table reflects our future contractual cash obligations and commercial commitments as of
December 31, 2009 (dollars in thousands).
The timing of uncertain tax obligations are undeterminable at this time and excluded from the table above.
Critical Accounting Policies
The preparation of financial statements includes the use of estimates and assumptions that affect a
number of amounts included in the Company’s financial statements, including, among other things,
pensions and other postretirement benefits and related disclosures, 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.
14
Payment Due by Pay PeriodLess than More than Contractual ObligationsTotal 1 yearYear 2Year 3Year 4Year 55 yearsLong-term debt$176.5$0.3$0.0$0.0$0.0$0.0$176.2Cash interest obligations130.99.817.317.317.317.351.9Pension obligations38.33.68.59.98.47.90.0Operating leases10.23.02.62.01.00.61.0Capital leases2.60.80.80.60.30.10.0Total$358.5$17.5$29.2$29.8$27.0$25.9$229.1
During 2007, we adopted guidance on accounting for uncertainty in income taxes, which had no impact
on the Company’s financial statements. See Note 16 of Notes to Consolidated Financial Statements.
Pension Plans and Other Postretirement Benefit Plans
Using appropriate actuarial methods and assumptions, the Company’s defined benefit pension plans and
non-pension postretirement benefits are accounted for in accordance with GAAP.
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 GAAP as of December 31, 2009 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 8.25% for 2009 and 8.50% for
2008.
•
Discount rate: The discount rate is used to calculate future pension and postretirement
obligations. During 2007, the Company changed its discount rate assumption to use a Hewitt
yield curve. The Company used a discount rate of 5.9% for 2009 and 6.9% for 2008.
Intangible Assets
Intangible assets that have an indefinite useful life are not amortized and are tested at least annually for
impairment. We use a discounted cash flow methodology in determining fair value.
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, 2009 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 whenever events
or changes in circumstances indicate that the carrying amount of assets may not be recoverable.
15
Impairments are also recognized when the realizable value of assets held for sale is less than their
carrying value. The Company had an impairment charge of $1,447 for the assets held for sale during
2009 compared to a charge of $100 during 2008.
New Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance on accounting for the
consolidation of variable interest entities. This guidance changes how a reporting entity determines when
an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be
consolidated. This guidance will require a reporting entity to provide additional disclosures about its
involvement with variable interest entities and any significant changes in risk exposure due to that
involvement. This guidance will be effective at the start of a reporting entity’s first fiscal year beginning
after November 15, 2009, or January 1, 2010, for the Company. The Company does not expect the
adoption of this guidance to have a material effect on its consolidated results of operations or financial
position.
In August 2009, the FASB issued guidance on measuring liabilities at fair value. This guidance provides
clarification and guidance regarding how to value a liability when a quoted price in an active market is not
available for that liability. This guidance is effective for the first reporting period (including interim periods)
beginning after issuance (October 1, 2009 for the Company), and adoption is not expected
16
SECTION 4. CONSOLIDATED FINANCIAL STATEMENTS OF VISKASE COMPANIES, INC AND
SUBSIDIARIES
1.
Financial Statements:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 2009 and 2008
Consolidated Statements of Operations for the years ended
December 31, 2009, 2008 and 2007
Consolidated Statements of Stockholders' (Deficit) Equity for the years
ended December 31, 2009, 2008 and 2007
Consolidated Statements of Cash Flows for the years ended
December 31, 2009, 2008 and 2007
2.
Notes to Consolidated Financial Statements
17
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Viskase Companies, Inc.
We have audited the accompanying consolidated balance sheets of Viskase Companies, Inc. (a
Delaware corporation) and Subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the
related consolidated statements of operations, stockholders’ (deficit) equity and cash flows for each
of the three years in the period ended December 31, 2009. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United
States of America as established by the American Institute of Certified Public Accountants. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes 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.
In our opinion, the consolidated financial statements referred to above presented fairly, in all material
respects, the financial position of Viskase Companies, Inc. and Subsidiaries as of December 31, 2009
and 2008, and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2009, in conformity with accounting principles general accepted in the
United States of America.
Chicago, Illinois
April 8, 2010
Grant Thornton LLP
U.S. member firm of Grant Thornton International Ltd
18
VISKASE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except for Number of Shares and Per Share Amounts)
The accompanying notes are an integral part of the consolidated financial statements.
19
December 31,December 31,20092008ASSETSCurrent assets: Cash and cash equivalents $39,049$12,997Restricted cash 2,2832,283Receivables, net46,60744,703Inventories, net52,27643,384Other current assets 18,95812,056Total current assets 159,173115,423Property, plant and equipment164,778144,605Less accumulated depreciation56,88446,598Property, plant and equipment, net107,89498,007Asset held for sale5001,000Deferred financing costs, net6,9682,675Other assets2,1452,535Deferred tax asset970- Total Assets$277,650$219,640LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY Current liabilities:Short-term debt 262717Short-term portion capital lease obligation717532 Accounts payable25,19926,808Accrued liabilities36,69437,319Deferred income taxes- 1,110Total current liabilities62,87266,486Long-term debt, net of current maturities174,018128,397Capital lease obligation1,083959Accrued employee benefits45,49043,387Deferred income taxes- 748 Stockholders’ deficit :Common stock, $.01 par value; 36,592,341 sharesissued and 35,787,071 shares outstanding at December 31, 2009;and 36,334,449 shares issued and 35,529,229 sharesoutstanding at December 31, 2008366363Additional paid in capital32,47432,154Accumulated deficit(6,976)(23,707)Less 805,270 treasury shares, at cost(298)(298)Accumulated other comprehensive loss (31,379)(28,849)Total stockholders' deficit(5,813)(20,337)Total Liabilities and Stockholders' Deficit $277,650$219,640
VISKASE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except for Number of Shares and Per Share Amounts)
The accompanying notes are an integral part of the consolidated financial statements.
20
YearYearYearEndedEndedEndedDecemberDecemberDecember31, 200931, 200831, 2007 NET SALES$299,301$283,447$250,297Cost of sales220,340225,049205,433GROSS MARGIN78,96158,39844,864Selling, general and administrative39,35636,96231,835Amortization of intangibles460460461Restructuring expense - - 90Asset impairment charge1,447100944OPERATING INCOME37,69820,87611,534Interest income74344188Interest expense16,30915,06214,824Other income, net2,7355,5492,196Loss on early extinguishment of debt5,962223 - INCOME (LOSS) BEFORE INCOME TAXES18,23611,484(906)Income tax provision 1,5059,8162,255NET INCOME (LOSS) 16,7311,668(3,161) Less preferred dividends- - (1,507)INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS16,7311,668(4,668)WEIGHTED AVERAGE COMMON SHARES- BASIC 35,535,53431,162,19826,126,456PER SHARE AMOUNTS:EARNINGS (LOSS) PER SHARE- BASIC$0.47$0.05($0.18)WEIGHTED AVERAGE COMMON SHARES- DILUTED35,926,68331,558,01726,126,456PER SHARE AMOUNTS:EARNINGS (LOSS) PER SHARE- DILUTED$0.47$0.05($0.18)
VISKASE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(In Thousands)
21
CommonAccumulated otherTotalPreferredCommonstockPaid inTreasuryAccumulatedcomprehensive stockholders’stockstockdistributablecapitalstockdeficit(loss) income equity (deficit)Balance December 31, 2006$123$107$9$25,185($298)($22,214)$1,731$4,643Net loss(3,161)(3,161)Foreign currency translation adjustment 293293Pension liability adjustment, net of tax 7,3787,378 Comprehensive income4,510Redemption of preferred stock(123)(23,051)(23,174)Issuance of common stock 198 22,78122,979Stock option expense 1515Dividend payable 23(33) (10)Dividend paid(32)(32)Balance December 31, 2007- $305- $24,897($298)($25,375)$9,402$8,931Net income1,6681,668Foreign currency translation adjustment(11,312)(11,312)Pension liability adjustment, net of tax(26,939)(26,939) Comprehensive loss(36,583)Issuance of common stock586,9427,000Stock option expense315 315Balance December 31, 2008- $363- $32,154($298)($23,707)($28,849)($20,337)Net income16,73116,731Foreign currency translation adjustment566566Pension liability adjustment, net of tax(3,096)(3,096) Comprehensive income14,201Issuance of common stock3(3)- Stock option expense323323Balance December 31, 2009- $366- $32,474($298)($6,976)($31,379)($5,813)
VISKASE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
The accompanying notes are an integral part of the consolidated financial statements.
22
YearYearYearEndedEndedEndedDecemberDecemberDecember31, 200931, 200831, 2007Cash flows from operating activities:Net income (loss)$16,731$1,668($3,161) Adjustments to reconcile net income (loss) to net cash provided (used in) by operating activities:Depreciation11,34910,8359,636Stock-based compensation32331515Amortization of intangibles460460461Amortization of deferred financing fees1,1119351,335Deferred income taxes(2,801)1,261(7,741)Foreign currency translation gain (532)(7,696)(250)Loss on disposition of assets50962302Bad debt provision65781031Asset impairment charge1,447100944Loss on early extinguishment of debt5,962223- Non-cash interest on notes7471,3061,277Changes in operating assets and liabilities:Receivables(2,095)(793)(9,436)Inventories(8,174)(6,929)7,735Other current assets(6,734)3512,720Accounts payable(2,014)4,5223,995Accrued liabilities(777)5,19010,268Other(654)(5,432)(16,446)Total adjustments(1,216)5,5204,846Net cash provided by operating activities15,5157,1881,685Cash flows from investing activities:Capital expenditures(23,812)(12,479)(8,700)Proceeds from assets held for sale577- - Proceeds from disposition of assets1194110Net cash used in investing activities(23,224)(12,385)(8,590)Cash flows from financing activities:Issuance of common stock- 7,00022,979Redemption of preferred stock- - (23,174)Deferred financing costs(6,540)(203)(1,672)Preferred stock dividend- - (40)Proceeds from revolving loan4,9993,114- Proceeds from capital lease6,8151,891- Proceeds from long-term debt173,78418,50324,132Repayment of long-term debt(113,711)- - Repayment of short-term debt(25,454)(18,648)(12,113)Repayment of capital lease(6,674)(295)- Restricted cash- - 136Net cash provided by financing activities33,21911,36210,248Effect of currency exchange rate changes on cash542(609)406Net increase in cash and equivalents26,0525,5563,749Cash and equivalents at beginning of period12,9977,4413,692Cash and equivalents at end of period$39,049$12,997$7,441Supplemental cash flow information:Interest paid less capitalized interest$14,808$12,237$10,913Income taxes paid (refunded)$11,952$3,490($596)
1. Summary of Significant Accounting Policies
Nature of Operations
Viskase Companies, Inc. and its subsidiaries (“we” or 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 seven manufacturing facilities
and nine distribution centers in North America, South America and Europe 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.
Use of Estimates in the Preparation of Financial Statements
The financial statements are GAAP prepared in accordance with accounting principles generally
accepted in the United States of America and include 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, reserves for excess and
obsolete inventory, allowance for doubtful accounts and income taxes. Management bases its
estimates on historical experience and other assumptions that we 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 and 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 include $216 and $2,832 of short-term investments at December 31,
2009 and December 31, 2008, respectively. Of the cash held on deposit, essentially all of the cash
balance was in excess of amounts insured by the Federal Deposit Insurance Corporation or other
foreign provided bank insurance. The Company performs periodic evaluations of these institutions for
relative credit standing and has not experienced any losses as a result of its cash concentration.
Consequently, no significant concentrations of credit risk are considered to exist.
Receivables
Trade accounts receivable are classified as current assets and are reported net of allowance for
doubtful accounts and a reserve for returns. We record such allowances based on a number of
factors, including historical trends and specific customer situations.
Inventories
Inventories are valued at the lower of first-in, first-out (“FIFO”) cost or market.
Property, Plant and Equipment
The Company carries property, plant and equipment at cost less accumulated depreciation. Property
and equipment additions include acquisition of property and equipment and costs incurred for
computer software purchased for internal use including related external direct costs of materials and
services and payroll costs for employees directly associated with the project. 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
23
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, (iv) auto and
trucks - 2 to 5 years, and (v) leasehold improvements - shorter of lease or useful life.
In the ordinary course of business, we lease certain equipment, and certain real property, consisting
of manufacturing and distribution facilities and office facilities.
Deferred Financing Costs
Deferred financing costs are amortized 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.
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
whenever events or changes in circumstances indicate that the carrying amount of assets may not be
recoverable.
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 $1,401 and $1,646 at December
31, 2009 and December 31, 2008, 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.
Pensions and Other Postretirement Benefits
The Company’s uses appropriate actuarial methods and assumptions in accounting for its defined
benefit pension plans and non-pension postretirement benefits.
Actual results that differ from assumptions used are accumulated and amortized over future periods
and, affect recognized expense and the recorded obligation in those 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 GAAP as of December 31, 2009 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 8.25% for 2009 and 8.50% for 2008.
24
• Discount rate: The discount rate is used to calculate future pension obligations. The Company
used a Hewitt yield curve in determining its pension obligations. The Company used a discount rate
of 5.90% for 2009 and 6.90% for 2008.
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. Interest and penalties related to unrecognized tax
benefits are included as a component of tax expense.
Other Comprehensive Income
Comprehensive income includes all other non-shareholder changes in equity. Changes in other
comprehensive income 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. Allowances for doubtful accounts and sales returns are estimated by management
using historical experience rates.
Accounting for Stock-Based Compensation
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. Included in net income is a non-cash compensation expense of $323 in 2009, $315
in 2008 and $15 in 2007.
New Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance on accounting for
the consolidation of variable interest entities. This guidance changes how a reporting entity
determines when an entity that is insufficiently capitalized or is not controlled through voting (or
similar rights) should be consolidated. This guidance will require a reporting entity to provide
additional disclosures about its involvement with variable interest entities and any significant changes
in risk exposure due to that involvement. This guidance will be effective at the start of a reporting
entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for the
Company. The Company does not expect the adoption of this guidance to have a material effect on
its consolidated results of operations or financial position.
In August 2009, the FASB issued guidance on measuring liabilities at fair value. This guidance
provides clarification and guidance regarding how to value a liability when a quoted price in an active
market is not available for that liability. This guidance is effective for the first reporting period
(including interim periods) beginning after issuance (October 1, 2009 for the Company), and adoption
is not expected.
25
2. Cash and cash equivalents
As of December 31, 2009 and December 31, 2008, cash held in foreign banks was $6,504 and
$7,006, respectively.
3. Receivables
Receivables reserve activity:
The Company has a broad base of customers, with no single customer accounting for more than 5.2%
of sales or 7.2% of receivables.
4. Inventories
Inventories consisted of:
Inventories are recorded using the first–in, first-out (“FIFO”) method of accounting.
26
December 31, 2009December 31, 2008Cash and cash equivalents$39,049 $12,997 Restricted cash 2,2832,283 $41,332 $15,280 December 31, 2009December 31, 2008Accounts receivable, gross$48,759 $46,315 Less allowance for doubtful accounts (1,818)(1,300)Less allowance for sales returns(334)(312) $46,607 $44,703 December 31, 2009December 31, 2008December 31, 2007 Beginning balance$1,612 $981 $1,166 Provision657 810 3 Write-offs(156)(107)(136) Other39 (72)(52)Ending balance$2,152 $1,612 $981 December 31, 2009December 31, 2008Raw materials$7,916 $10,262 Work in process21,482 16,395 Finished products 22,878 16,727 $52,276 $43,384
Inventory reserves activity:
Inventories were net of reserves for obsolete and slow-moving inventory of $1,830 and $2,481 at
December 31, 2009 and 2008, respectively.
5. Property, Plant and Equipment
Capitalized interest for 2009, 2008, and 2007 totaled $663, $344, and $332 respectively.
Maintenance and repairs charged to costs and expenses for 2009, 2008, and 2007 aggregated
$19,280, $17,549 and $16,946, respectively.
6. Assets Held For Sale and Impairment Loss
During December 2009, the Company recognized an impairment loss on a plastic extruder in its
Monterrey, Mexico plant to the realizable market value and changed its classification to an asset held
for sale in the amount of $500.
On July 24, 2009, the Company sold its Kentland, Indiana facility for $625. This property, which was
closed in 2005, was classified as an asset held for sale in the 2008 financial statements for $1,000
and had been written down to the contract price as of June 30, 2009.
7. Other Assets
Amortization of intangible assets for each fiscal year 2010, 2011, 2012 and 2013 will be
approximately $460, $460, $460 and $114, respectively.
27
December 31, 2009December 31, 2008December 31, 2007 Beginning balance$2,587 $2,567 $3,475 Provision1,228 703 96 Write-offs(1,883)(621)(755) Other389 (62)(249)Ending balance$2,321 $2,587 $2,567 December 31, 2009December 31, 2008 Land and improvements $2,171 $2,161 Buildings and improvements 20,825 20,509 Machinery and equipment139,377 118,512 Construction in progress 2,405 3,423 $164,778 $144,605 December 31, 2009December 31, 2008Patents$4,598 $4,598 Less: Accumulated amortization(3,104)(2,644)Patents, net 1,494 1,954 Miscellaneous651 581 $2,145 $2,535
8. Accrued Liabilities
Accrued liabilities consisted of:
9. Debt Obligations (Dollars in Thousands, Except For Number of Shares and Warrants, and Per
Share, Per Warrant and Per Bond Amounts)
Outstanding short-term and long-term debt consisted of:
Revolving Credit Facility
On November 14, 2007, the Company entered into a $25,000 secured revolving credit facility
(“Revolving Credit Facility”) with an affiliate of Carl C. Icahn. The Revolving Credit Facility expires on
January 31, 2011. Borrowings under the loan and security agreement governing the 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, the interest rate
option is LIBOR plus a margin of 2.00% currently (which margin will be subject to performance based
increases up to 2.50%); provided that the minimum interest rate shall be at least equal to 3.00%. The
weighted average interest rate as of December 31, 2009 is 3.00%. The Revolving Credit Facility also
provides for an unused line fee of 0.375% per annum.
There were no borrowings under the Revolving Credit Facility at December 31, 2009 and $20,000 of
borrowings at December 31, 2008.
Indebtedness under the Revolving Credit Facility is secured by liens on substantially all of the
Company’s domestic and Mexican assets, with liens on (i) inventory, accounts receivable, lockboxes,
and deposit accounts (the “R/F Priority Collateral’) to be contractually senior to the liens securing the
9.875% Senior Secured Notes and the related guarantees pursuant to an intercreditor agreement, (ii)
real property, fixtures and improvements thereon, equipment and proceeds thereof,
to be
contractually subordinate to the liens securing the 9.875% Senior Secured Notes and such ( the “
Notes Priority”) guarantees pursuant to such intercreditor agreement, and (iii) all other assets, to be
28
December 31, 2009December 31, 2008Compensation and employee benefits$16,532 $15,529 Taxes13,647 15,712 Accrued volume and sales discounts1,731 1,753 Other 4,784 4,325 #$36,694 $37,319 December 31, 2009December 31, 2008Short-term debt including current maturities of long-term debt: Revolving credit facilities$262$717Total short-term debt$262$717Long-term debt: Revolving credit facilities- $20,000 9.875% Senior secured notes, net of discount$173,789- 11.5% Senior secured notes, net of discount- 108,196 Other229201Total long-term debt$174,018$128,397
contractually pari passu with the liens securing the 9.875% Senior Secured Notes and such
guarantees pursuant to such intercreditor agreement.
The Revolving Credit Facility contains various covenants which 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, 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
Company is in compliance with these requirements as of December 31, 2009.
In its foreign operations, the Company has unsecured lines of credit with various banks providing
approximately $6,000 of availability. There were borrowings of $262 under the lines at December 31,
2009.
9.875% Senior Secured Notes due 2018
On December 21, 2009, the Company issued $175,000 of 9.875% Senior Secured Notes. The
9.875% Senior Secured Notes bear interest at a rate of 9.875% per annum, payable semi-annually in
cash on January 15 and July 15, commencing on July 15, 2010. The 9.875% Senior Secured Notes
have a maturity date of January 15, 2018.
The notes and related guarantees by any of our future domestic restricted subsidiaries will be
secured by substantially all of our and those domestic restricted subsidiaries’ current and future
tangible and intangible assets, including all or a portion of the stock of our and their subsidiaries
(except that no more than 65% of the voting stock of any foreign subsidiary will constitute collateral
securing the notes). The liens on our assets and the assets of those domestic restricted subsidiaries
that secure the 9.875% Senior Secured Notes and any such guarantees will (i) in the case of the
Revolving Credit Facility Priority Collateral be contractually subordinated, pursuant to an intercreditor
agreement, to the liens thereon securing the Revolving Credit Facility, (ii) in the case of Notes Priority
Collateral be contractually senior, pursuant to such intercreditor agreement, to the liens thereon
securing Revolving Credit Facility, (iii) in the case of all other assets, be contractually pari passu,
pursuant to such intercreditor agreement, with the liens securing the Revolving Credit Facility, and (iv)
in each such case, be subject to certain prior liens. The Indenture will permit us to incur other senior
secured indebtedness and to grant liens on our assets under certain circumstances.
Prior to January 15, 2014, we may redeem, at our option, up to 35% of the aggregate principal
amount of the 9.875% Senior Secured Notes issued under the Indenture with the net proceeds of any
equity offering at 109.875% 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 9.875% Senior
Secured Notes issued under the Indenture dated December 21, 2009 remains outstanding
immediately following the redemption.
11.5% Senior Secured Notes due 2011
On June 29, 2004, the Company issued $90,000 of 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. On December 16, 2009, the Company filed a notice of
redemption effectively discharging the entire aggregate principal amount outstanding of its 11.5%
Senior Secured Notes plus accrued interest
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 New Warrants
expire on June 15, 2011. 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.
29
On June 2, 2008, the Company exchanged $7,964 aggregate principal amount of its 8% Senior Notes
plus accrued interest for $7,820 principal amount of its 11.5% Senior Secured Notes. The holders of
the exchanged 8% Senior Notes agreed that any accrued but unpaid interest on the exchanged 8%
Senior Notes was reflected in the principal amount of the new 11.5% Senior Secured Notes that were
issued, and accordingly the holders were not entitled to any separate payment with respect to such
accrued but unpaid interest. The issuance of the new 11.5% Senior Secured Notes in exchange for
the exchanged 8% Senior Notes was in full satisfaction and discharge of the Company’s obligations
to such holders with respect to the exchanged 8% Senior Notes.
On October 1, 2008, in connection with a tender and exchange offer of the 8% Senior Notes, the
Company issued $2,563 of 11.5% Senior Secured Notes.
On December 1, 2008, in connection with the redemption of the 8% Senior Notes, the Company
issued $10,150 of 11.5% Senior Secured Notes to an affiliate of Carl C. Icahn at a purchase price of
$8,120. The discount of $2,030 was amortized using the effective interest method.
Letter of Credit Facility
Letters of credit in the amount of $2,283 were outstanding under facilities with a commercial bank,
and were cash collateralized at December 31, 2009.
Debt Maturity
The Company finances its working capital needs through a combination of internally generated cash
from operations, cash on hand and our revolving credit facilities. The availability of funds under the
Revolving Credit Facility is subject to the Company’s compliance with certain covenants, borrowing
base limitations measured by accounts receivable and inventory of the Company, and reserves that
may be established at the discretion of the lender. The Company received a waiver for exceeding the
limitation on capital lease obligations for the quarter ended December 31, 2009.
The aggregate maturities of debt (1) for each of the next five years are:
(1) The aggregate maturities of debt represent amounts to be paid at maturity and not the current
carrying value of the debt.
10. Capital Lease Obligations
During 2008 and 2009, the Company entered into multiple separate capital lease obligations to
acquire certain equipment and building improvements for its manufacturing facilities. The equipment
leases have a term of 3 to 5 years and the building improvement lease has a term of 5 years. The
Company has determined the automobiles leased in the U.S. are capital leases with an average term
of 4 years.
The following is an analysis of leased property under capital leases by major classes.
30
20102011201220132014thereafterRevolving Credit Facility 9.875% Senior Secured Notes $175,000 Other262 1,158 $262 $176,158 Building and improvements$569Machinery and equipment2,119Less: Accumulated depreciation(965)$1,723
The following is a schedule by years of minimum future lease payments as of December 31, 2009.
11. 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.
Certain of these leases contain escalation clauses and renewal options.
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, 2009, are:
Total rent expense during 2009, 2008 and 2007 amounted to $3,190, $2,991 and $3,068,
respectively.
12. Retirement Plans
The Company and its subsidiaries have defined contribution and defined benefit plans varying by
country and subsidiary.
North American Plans
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.
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 be
earned after that date.
31
Year ending December 31,2010$8142011802201256820132802014125Thereafter0Total minimum payments required2,589Less amount representing interest(789)Present value of net minimum lease payments$1,8002010$3,192 20112,887 20122,070 2013908 2014610 Total thereafter358 Total minimum lease payments$10,025
The Canadian life insurance benefit was reinstated as of January 1, 2008.
Included in accumulated other comprehensive income, net of tax, as of December 31, 2009 are the
following amounts not yet recognized in net periodic benefit cost:
Net actuarial loss
$28,422
Prior service (credit) (699)
Amounts included in other comprehensive income expected to be recognized as a component of net
periodic benefit cost for the year ending December 31, 2010 are:
Net actuarial loss $1,706
Prior service (credit) (131)
The measurement date for all defined benefit plans is December 31. The year end status of the plans
is as follows:
The funded status of these pension plans as a percentage of the projected benefit obligation was 69
percent in 2009 compared to 67 percent in 2008.
32
200920082007Change in benefit obligation:Projected benefit obligation at beginning of year118,652121,647130,332Service cost224266251Interest cost7,8937,7357,428Actuarial loss (gain)13,468(3,300)(8,868)Benefits paid(7,751)(7,696)(7,496)Estimated benefit obligation at end of year$132,486$118,652$121,647Change in plan assets:Fair value of plan assets at beginning of year79,537103,45896,078Actual return (loss) on plan assets15,614(21,400)6,876Employer contribution4,2765,1758,000Benefits paid(7,751)(7,696)(7,496)Fair value of plan assets at end of year$91,676$79,537$103,458Unfunded status of the plan($40,810)($39,115)($18,189)Pension BenefitsNet amount recognizedAmounts recognized in statement of financial position:Current liabilities($62)($62)($62)Accrued benefit liabilityNoncurrent liabilities(40,748)(39,053)(18,127)Net amount recognized($40,810)($39,115)($18,189)200920082007Projected benefit obligation$132,486 $118,652 $121,647 Accumulated benefit obligation$131,683 $117,777 $120,934 Fair value of plan assets$91,676$79,537$103,458Pension Benefits
Components of net periodic benefit cost for the years ended December 31:
Weighted average assumptions used to determine the benefit obligation and net periodic benefit cost
as of December 31:
The Company evaluates its discount rate assumption annually as of December 31 for each of its
retirement-related benefit plans based upon a Hewitt yield curve.
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.
The Company’s overall investment strategy is to achieve growth through a mix of approximately 67
percent of investments for long-term growth and 33 percent for near-term benefit payments with a
wide diversification of asset types, fund strategies, and fund managers. The target allocations for
plan assets are 37 percent equity securities, 30 percent hedge funds and 33 percent to fixed income
investments. Equity securities primarily include investments in large-cap, mid-cap and small-cap
companies primarily located in the United States and international developed markets. Fixed income
securities include corporate bonds of companies from diversified industries, mortgage-backed
securities, and U.S. Treasuries. Other types of investments include investments in hedge funds that
follow several different strategies.
33
200920082007Component of net period benefit costService cost$224$266$251Interest cost7,8947,7347,427Expected return on plan assets(6,616)(8,710)(8,239)Amortization of prior service cost(131)(131)(131)Amortization of actuarial loss1,50435$2,875($838)($687)Pension Benefits200920082007Discount rate5.90%6.90%6.55%Expected return on plan assets8.25%8.50%8.50%Rate of compensation increase3.00%3.50%3.50%
The fair values of the Company’s pension plan asset allocation at December 31, 2009, by asset
category are as follows:
(a) This category comprises low-cost actively managed equity funds.
34
Fair Value Measurement atDecember 31, 2009 (in millions)Quoted Prices in Active Markets for Identical AssetsSignificant Observable InputsSignificant Unobservable InputsAsset Category Total(Level 1)(Level 2)(Level 3)Cash equivalents2,530 2,530 - - Equity securities:- U.S. companies8,159 8,159 - - International companies 9,046 9,046 - - Unclassified Common Stock28 28 - - U.S-Small Cap Growth1,334 - 1,334 - U.S-Large Cap Enhanced Core (a)11,142 - 11,142 - U.S-Large Cap Equity Growth (a)4,084 - 4,084 - Fixed income securities: U.S. Treasuries4,694 4,694 - - Mortgage-backed securities 5,439 - 5,439 - Aggregate bond fund13,983 - 13,983 - High yield fund5,973 5,973 - - Convertible Securities Convertible Preferred Stocks20 20 - - Other types of investments: Hedge funds 25,244 - - 25,244 Total 91,676$ 30,450$ 35,982$ 25,244$ Fair Value Measurements Using Significant Unobservable Inputs (Level 3)Combined Hedge Funds15,187 Relating to assets still held at the reporting date 5,145 Relating to assets sold during the period (88) Purchases, sales, and settlements5,000 25,244$ Beginning balance at December 31, 2008Actual return on plan assets:Ending balance at December 31, 2009
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:
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 $973,
$915 and $627 in 2009, 2008 and 2007, respectively.
International Plans
The Company maintains various pension and statutory separation pay plans for its European
employees. The expense for these plans in 2009, 2008, and 2007 was $863, $1,981 and $2,077,
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 $4,666.
13. Restructuring Charges and Asset Impairment
During December 2009, the Company recognized an impairment loss of $1,072 on a plastic extruder
in its Monterrey, Mexico plant to the realizable market value and changed its classification on the
balance sheet to an asset held for sale.
The Company had an asset impairment charge of $375 for the further write down of the Kentland, IN
facility to the contract price on June 30, 2009.
During the fourth quarter of 2007, the company recognized an impairment charge of $250 for the
further write down of the Kentland plant to the fair market value of the facility. The Company also
recognized asset impairment charges for an extrusion machine in Europe of $565 and printing
presses from our Kentland plant of $129.
During the second quarter of 2007, the Company revised the estimated expense accrued for the 2005
Kentland restructuring plan. The revised estimate resulted in before tax income of $415. The revision
was for severance owed to laid off employees. The other restructuring expense of $505 was
recognized during 2007 for one-time employee costs related to various restructurings to address the
Company’s competitive environment.
14. Capital Stock and Paid in Capital
Authorized shares of preferred stock ($0.01 par value per share) and common stock ($0.01 par value
per share) for the Company are 50,000,000 shares and 50,000,000 shares, respectively.
15. Warrants (Dollars in Thousands, Except Per Share and Per Warrant Amounts)
On June 29, 2004, the Company issued $90,000 of 11.5% Senior Secured Notes together with the
90,000 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,
35
YearTotal Estimated Benefit Payments2010$8,275 20118,366 2012 8,391 2013 8,456 2014 8,584
2011 expiration date. As of December 31, 2009, 15,955 New Warrants, which entitle the holders to
purchase 142,749 shares of the Company’s common stock, were outstanding.
In 2003, the Company issued warrants, expiring on April 2, 2010, to purchase shares of common
stock (the “2010 Warrants). At December 31, 2009, the outstanding 2010 Warrants are exercisable
for a total of 304,127 shares of common stock with an exercise price of $10.00 per share.
16. Income Taxes
Income tax provision (benefit) consisted of:
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:
36
200920082007CurrentFederal $ 147 $ 140 $ 2,239 Foreign 4,159 8,415 7,063 State and local Total current 4,306 8,555 9,302 Deferred Federal (23) (43) (2,489)Foreign (2,778) 1,304 (4,558)State and localTotal deferred (2,801) 1,261 (7,047) Total $ 1,505 $ 9,816 $ 2,255 Income (loss) before income taxes:200920082007Domestic $ (14,115) $ (14,007) $ (8,929)Foreign 32,351 25,491 8,953 Total $ 18,236 $ 11,484 $ 24 Computed income tax provision (benefit)6,383 4,644 8 State and local taxes, net of federal tax82 (469) (291) Foreign taxes, net(461) 2,057 (1,574) Valuation allowance(4,704) 273 6,826 Other, net205 3,311 (2,714) Total income tax expense (benefit)1,505 9,816 2,255 Computed income tax provision (benefit)35.0%35.0%35.0%State and local taxes, net of federal tax0.4%-4.1%-1214.3%Foreign taxes, net-2.5%17.9%-6558.6%Valuation allowance-25.8%2.4%28440.5%Other, net1.1%28.8%-11306.4%Effective income tax rate8.2%80.0%9396.2%
The effective income tax rate realized is generated by the $14,115 U.S. loss before income taxes,
which has a valuation allowance because management believes it is more likely than not that all of
the deferred tax assets will not be fully realized.
Temporary differences and net operating loss carryforwards that give rise to a significant portion of
deferred tax assets and liabilities for 2009 and 2008 are as follows:
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,
37
20092008Current deferred tax asset Pension and healthcare $599$572 Provisions not currently deductible4,0823,763 Inventory basis differences2,1302,241 Valuation allowance(6,811)(6,576)Total current deferred tax asset-$ -$ Non-current deferred tax assets Stock option$358$227 Pension and healthcare 5,0395,578 Foreign Exchange and Other- 1,090 Net operating loss carryforwards44,35649,231 Valuation Allowance(29,858)(37,166)Total non-current deferred tax assets19,89518,960Total deferred tax asset$19,895$18,960Current deferred tax liability Inventory basis differences-$ $1,110 Self ins. accruals and reserves- -Total current deferred tax liability-$ $1,110Non-current deferred tax liability Property, plant, and equipment$12,967$19,708 Intangible asset- - Foreign exchange and other5,957 - Total non-current deferred tax liability18,92419,708Total deferred tax liability$18,924$20,818As of December 31 20092008Current deferred tax assets- -Current deferred tax liability- ($1,110)Current deferred tax assets (liability), net-$ ($1,110)Non-current deferred tax assets$19,894$18,960Non-current deferred tax liability(18,924)(19,708)Non-current deferred tax assets (liability), net$970($748)Current deferred tax liability (net)-$ ($1,110)Non-current deferred tax liability (net)970(748)Net deferred tax liability$970($1,858)
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 $36,700 has been recorded at
December 31, 2009, as management believes that it is more likely than not that all deferred tax
assets will not be fully realized based on the expectation of taxable income in future years. There
were net operating loss carryforwards at December 31, 2009 and 2008 of $44,300 and $49,200,
respectively. The federal net operating loss carryforwards will start to expire in the year 2023.
The Company joins in filing a United States consolidated Federal income tax return including all of its
domestic subsidiaries.
Uncertainty in Income Taxes
Effective January 1, 2007, the Company adopted guidance on accounting for uncertainty in income
taxes. This guidance prescribes a recognition threshold and measurement approach for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return.
The uncertain tax positions as of December 31, 2009 totaled $8,185. The following table summarizes
the activity related to the unrecognized tax benefits:
In 2009, the Company recognized an approximate net increase of $1,765 to reserves for uncertain
tax positions.
Approximately $6,000 of the total gross unrecognized tax benefits represents the amount that, if
recognized, would affect the effective income tax rate in future periods. The Company and its
subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and foreign
jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for years
through 2005. Substantially all material state and local and foreign income tax matters have been
concluded for years through 2005. U.S. federal income tax returns for 2006 through 2009 are
currently open for examination.
The Company's continuing practice is to recognize interest and/or penalties related to income tax
matters in income tax expense. The Company recorded adjustments to interest and potential
penalties related to these unrecognized tax benefits during 2009, and in total, as of December 31,
2009, the Company has recorded a liability for interest and potential penalties of $1,500.
17. Contingencies
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.
38
(in thousands)31-Dec-09Unrecognized tax benefits as of January 1, 2009$6,420Increases in positions taken in a prior period 1,798 Decreases in positions taken in a prior period (1,810)Increases in positions taken in a current period 2,027 Decreases in positions taken in a current period - Decreases due to settlements (150)Decreases due to lapse of statute of limitations(100) Unrecognized tax benefits as of December 31, 2009$8,185
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 142,749 of New Warrants are dilutive and the effect of this
dilutive security has been included in weighted average shares for diluted EPS using the treasury
method for the Company.
The granted employee stock options were not included in the weighted average shares for diluted
EPS, because the effect would be antidilutive. Common stock equivalents, consisting of the 2010
Warrants, exercisable for a total of 304,127 shares of common stock have been excluded as their
effect is antidilutive.
19. Comprehensive (Loss) Gain
The following sets forth the changes in the components of other comprehensive (loss) income and
the related income tax provision:
(1) 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)
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. Included in net income is a non-cash compensation expense of $323 in 2009, $315
in 2008 and $15 in 2007.
39
DecemberDecemberDecember31, 200931, 200831, 2007 NUMERATOR:Net income (loss)16,7311,668(3,161)Less: preferred dividends (1,507)Net income (loss) available to common stockholders for basic and diluted EPS16,7311,668(4,668)DENOMINATOR:Weighted average shares outstanding for basic EPS35,535,53431,162,19826,126,456Effect of dilutive securities391,149395,819 595,882Weighted average shares outstandingfor diluted EPS35,926,68331,558,01726,722,338200920082007 Unrecognized (loss) gain on pension benefits(3,096)(26,939)7,378 Foreign currency translation adjustment (1)566 (11,312)293 Other comprehensive (loss) income, net of tax($2,530)($38,251)$7,671
The fair values of the options granted during 2009, 2007 and 2005 were estimated on the date of
grant using the binomial option pricing model. The assumptions used and the estimated fair values
are as follows:
In February 2009, the Company granted non-qualified stock options to its current chief financial
officer for the purchase of 300,000 shares of its common stock under an employment agreement.
Options were granted at the fair market value at date of grant and one-third vests on the first, second
and third anniversaries of the grant date, subject to acceleration in certain events. The options for the
chief financial officer expire on February 1, 2019.
In October 2007, the Company granted non-qualified stock options to its current chief executive
officer for the purchase of 1,500,000 shares of its common stock under an employment agreement.
Options were granted at the fair market value at date of grant and one-third vests on December 31st
of 2008, 2009, and 2010, subject to acceleration in certain events. The options for the chief executive
officer expire on October 29, 2017.
The Company has outstanding non-qualified stock options granted to its management for the
purchase of 255,000 shares of its common stock. Options were granted at, or above, the fair market
value at date of grant and one-third vested on each of the first, second and third anniversaries of the
grant date, subject to acceleration in certain events. The options granted to management expire ten
years from the date of grant.
The Company's outstanding options were:
Exercisable options as of December 31, 2009 were 1,255,000 with a weighted average share price of
$1.94.
21. Research and Development Costs
Research and development costs are expensed as incurred and totaled $3,442, $3,046 and $2,978
for 2009, 2008, and 2007, respectively.
40
200920072005Expected term10 years10.2 years10 yearsExpected stock volatility35.10%23.04%14.88%Risk-free interest rate2.87%4.39%4.17%Expected forfeiture rate0.00%14.00%35.00%Fair value$0.09$0.77$1.09Weighted AverageWeighted AverageShares Under Weighted AverageRemainingGrant-DateOptionExercise PriceContractual LifeFair ValueOutstanding, December 31, 2006926,6672.63$ 59 months0.72$ Vested and exercisable at Dec. 31, 2006475,556 2.55$ 48 months0.66$ Granted1,500,0001.70$ 122 months0.66$ ExercisedForfeited(38,334)2.90$ 87 months0.90$ Outstanding, December 31, 20072,388,3332.04$ 92 months0.68$ Vested and exercisable at Dec. 31, 2007763,328 2.57$ 39 months0.68$ Granted ExercisedForfeited(633,333)2.51$ 154 months0.62$ Outstanding, December 31, 20081,755,0001.87$ 103 months0.70$ Vested and exercisable at Dec. 31, 2008755,000 2.11$ 96 months0.76$ Granted300,0001.70$ 120 months0.09$ ExercisedForfeited Outstanding, December 31, 20092,055,0001.85$ 108 months0.61$ Vested and exercisable at Dec. 31, 20091,255,000 1.94$ 89 months0.72$
22. Related-Party Transactions
During the year ended December 31, 2009 and the year ended December 31, 2008, the Company
purchased $33 and $35, respectively, in telecommunication services in the ordinary course of
business from XO Communications, Inc., an affiliate of Carl C. Icahn. 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. As of December 31, 2009, Carl C.
Icahn’s beneficial ownership in the Company was approximately 71.4%.
Arnos Corp., an affiliate of Carl C. Icahn, was the lender on the Company’s Revolving Credit Facility
as of December 31, 2009. The Company paid Arnos Corp. interest and unused commitment fees of
$665 during the year ended December 31, 2009 and $1,107 during the year ended December 31,
2008. The Company believes that the terms of the Revolving Credit Facility are at least as favorable
as those that the Company would have expected to negotiate with an unaffiliated party.
On November 25, 2008, Barberry Corp., an affiliate of Carl C. Icahn, entered into a master lease
agreement with the Company. During July 2009, The Company completed the construction of the
cellulosic casing extrusion equipment in France. The total amount financed under the lease
agreement, including accrued interest, is $6,118. The Company has repaid the capital lease with
Barberry Corp. in conjunction with the 9.875% Senior Secured bond offering during December 2009.
The total payments, including fees and interest, amount to $6,327 during 2009.
23. 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 2009, 2008 and 2007 includes net foreign exchange transaction gains of approximately
$1,659, $5,815, and $2,994, respectively.
Geographic Area Information:
41
200920082007Net salesNorth America$154,686$142,170$141,365South America34,60628,58421,394Europe133,473136,768111,927Other and eliminations(23,464)(24,075)(24,389)$299,301$283,447$250,297Operating income North America$18,038$5,510$5,137South America5,2666,2454,680Europe14,3949,1212,514Other- - 133$37,698$20,876$12,464Identifiable assetsUnited States$157,861$120,630$118,943South America21,52415,03612,124Europe98,26583,97483,463$277,650$219,640$214,530
26. Quarterly Data (Unaudited)
Quarterly financial information for 2009 and 2008 is as follows (in thousands, except for per share
amounts):
Net income (loss) per share amounts are computed independently for each of the quarters presented
using weighted average shares outstanding during each quarter.
27. Subsequent Events
Viskase evaluated its December 31, 2009 consolidated financial statements for subsequent events
through April 8, 2010, the date the consolidated financial statements were available to be issued.
On January 15, 2010, Icahn Enterprises L.P. acquired the 71.4% controlling interest in the Company
from the affiliates of Mr. Icahn.
In connection with the acquisition, Icahn Enterprises L.P. assumed the Revolving Credit Facility from
Arnos Corporation, an Icahn affiliate, and is now the Company’s lender under the Revolving Credit
Facility.
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North America and Europe export sales:(reported in North America and Europe net sales above)Asia$31,008$24,592$23,130South and Central America14,09412,98810,090Canada8,8898,5958,715Other international1,6091,3743,510$55,600$47,549$45,445FirstSecondThirdFourth2009QuarterQuarterQuarterQuarterAnnualNet sales$68,578$76,578$77,237$76,908$299,301Gross margin18,08520,75021,33118,79578,961Operating income 8,25010,84011,2117,39737,698Net (loss) income available to common shareholder3,0523,8539,10672016,731Net (loss) income per share - basic $0.09$0.11$0.26$0.01$0.47Net (loss) income per share - diluted$0.08$0.11$0.25$0.03$0.47FirstSecondThirdFourth2008QuarterQuarterQuarterQuarterAnnualNet sales$66,718$74,363$74,172$68,194$283,447Gross margin12,97716,38815,07913,95458,398Operating income 4,0917,1565,7743,85520,876Net (loss) income available to common shareholder9472,709(110)(1,878)1,668Net (loss) income per share - basic $0.03$0.09$0.00($0.07)$0.05Net (loss) income per share - diluted$0.03$0.09$0.00($0.07)$0.05