VISKASE COMPANIES, INC.
ANNUAL REPORT 2010
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 - 2010
Table of Contents
Section 1.
Cautionary Statement Regarding Forward-Looking
Statements
Section 2.
Risk Factors
Section 3.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Section 4.
Consolidated Financial Statements
Page
3
4
10
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;
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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, or the impact of any adverse outcome of any
currently pending or future litigation on the adequacy of our reserves, our financial condition or the ability
to sell our products;
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 to 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 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 prices for small diameter cellulosic casings 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. 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 purchasing 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 $19.7 million for capital expenditures in 2010 and expect to spend
approximately $39.6 million in 2011. Depending on our use of cash and other liquidity considerations, we
may be required to obtain additional financing to fund future 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 production 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.
We continue to have a substantial funding liability with respect to our U.S. defined benefit pension plan.
As of December 31, 2010, our aggregate minimum funding contribution requirement for our U.S. defined
benefit plan from 2011 through 2015 is approximately $30.9 million and our unfunded pension liability was
$38.4 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 69% of our total net sales in 2010 and approximately 68% of
our total net sales in 2009.
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.
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
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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
credit agreement governing our revolving credit facility, we may incur additional indebtedness. As of
December 31, 2010, we had approximately $216.1 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 and our revolving credit facility contain, restrictions on the incurrence of additional
indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the
indebtedness incurred in compliance with these restrictions could be substantial. For example, we have
the ability to borrow up to $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,
2010, our foreign restricted subsidiaries contributed approximately 51% of our consolidated revenues. As
of December 31, 2010, 37% 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 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 agreements governing our other indebtedness impose significant operating and
financial restrictions, which may prevent us from pursuing certain business opportunities and may
hamper our operations.
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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, four 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 eight 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.” Our actual results may
differ materially from those contained in or implied by any forward-looking statements.
Company Overview
Viskase Companies, Inc. (“we” or the “Company”) is 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 69% 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. 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 in 2009 and
volume increases in 2010.
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 to make sure pricing remains competitive.
Labor costs. In recent years, we have taken many actions to reduce our labor costs to the minimum
sustainable level. We have frozen our defined benefit pension plan for all employees as of December 31,
2010. We have made our defined contribution plan payments variable to financial performance targets.
We have moved manufacturing facilities to lower cost areas. We have increased medical care deductibles
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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. We experienced some moderation of prices for raw materials and energy
in 2009 and 2010 following a dramatic increase in the prices of certain raw materials in 2008. 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, 2010 Compared to Fiscal Year Ended December 31, 2009.
The following discussion compares the results of operations for the fiscal year ended December 31, 2010
to the results of operations for the fiscal year ended December 31, 2009. We have provided the following
table in order to facilitate an understanding of this discussion (dollars in millions):
Net Sales. Our net sales for fiscal 2010 were $316.2 million, which represents an increase of $16.9 million,
or 5.7%, from fiscal 2009. The net sales increase consisted of $26.2 million due to volume, offset by
decreases of $8.3 million due to price and product mix and $1.0 million due to foreign currency translation.
Cost of Sales. Cost of sales for fiscal 2010 increased 5.7%, or $12.7 million over fiscal 2009. The increase
in cost of sales can be attributed to the higher sales volume and higher product material waste partially
offset by lower employee benefit costs.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased
$6.4 million, or 16.3%, for fiscal 2010. The Company has incurred increased legal expenses in fiscal 2010
of $4.8 million relating to a legal matter discussed below under “Contingencies” and expenses associated
with additional headcount, partially offset by lower employee compensation and benefits.
Operating Income. The operating income for fiscal 2010 decreased $0.7 million, or 1.8%, over fiscal 2009.
The decrease in the operating income resulted primarily from the increase in legal expenses partially offset
by the increase in gross profit.
Interest Expense. Interest expense, net of interest income, for fiscal 2010 totaled $20.5 million, which is an
increase of $4.3 million compared to fiscal 2009. The increase is principally due to an increased amount of
long term borrowing partially offset by lower interest rates on outstanding indebtedness.
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Year%Year%YearEndedChangeEndedChangeEndedDecember 31,OverDecember 31,OverDecember 31,20102009200920082008NET SALES$316.25.7%$299.35.6%$283.4COST AND EXPENSES Cost of sales 233.05.7%220.3-2.1%225.0Selling, general and administrative 45.816.3%39.46.5%37.0Amortization of intangibles .50.1%.50.1%.5Asset impairment charge - NM1.41347.0%.1OPERATING INCOME 37.0-1.8%37.780.6%20.9Interest income .3371.6%.1-78.5%.3Interest expense 20.827.4%16.38.3%15.1Other income, net .1-94.9%2.7-50.7%5.5Post retirement benefits curtailment gain.6NM- NM- Loss on early extinguishment of debt- NM6.0NM- Income tax expense 1.711.4%1.5-84.7%9.8NET INCOME$15.6-6.6%$16.7903.1%$1.7NM = Not meaningful when comparing positive to negative numbers or to zero.
Other Income. Other income, net of other expense, of approximately $0.1 million for fiscal 2010 decreased
$2.6 million compared to fiscal 2009. The decrease is due principally to the reduction of foreign currency
translation gain.
Post Retirement Benefits Curtailment Gain. During fiscal 2010, a curtailment gain of $0.6 million was
recognized for the freeze of the defined benefit pension plan for U.S. employees covered by a collective
bargaining agreement.
Income Tax Expense. A tax provision of $1.7 million was recognized for fiscal 2010 on income before
income taxes of $17.3 million resulting principally from the income tax expense on the results of operations
of foreign subsidiaries.
Primarily as a result of the factors discussed above, net income for fiscal 2010 was $15.6 million compared
to net income of $16.7 million for fiscal 2009.
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.
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 by a $33.9 million increase due to price and mix, partially
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.
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, partially 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 a $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.
Off-Balance Sheet Arrangements
We do not have off-balance sheet arrangements, financing or other relations with unconsolidated entities
or other persons, except for operating leases included in the contractual obligations table.
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.
We are a party in the case Viskase Companies, Inc. v. World Pac International AG, et al., Case No.: 09-
CV-5022, in the United States District Court for the Northern District of Illinois, Eastern Division (the
“Court,” with the case being referred to herein as the “World Pac Litigation”). In the World Pac Litigation,
we are seeking, along with other remedies, a declaratory judgment that the Company‟s Viscoat products
do not infringe U.S. Patent No. 6,200,613 (the “‟613 Patent”) owned by defendant World Pac International
USA (“World Pac”). In response, World Pac filed a counterclaim seeking unspecified damages for the
infringement of the „613 Patent and seeking injunctive and other relief. On February 3, 2011, the Court
granted summary judgment in our favor on the basis of the invalidity of the „613 Patent. On March 4, 2011,
World Pac filed a notice of appeal with respect to the summary judgment.
In addition, from time to time we are involved in various other legal proceedings, none of which is currently
expected to have a material adverse effect upon results of operations, cash flows or financial condition.
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 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.
Financial Instruments
The Company purchases gas futures contracts to lock in set rates on some of its gas purchases. The
Company uses this strategy to minimize its exposure to volatility in natural gas. These products are not
linked to specific assets and liabilities that appear on the balance sheet or to a forecasted transaction and,
therefore, do not qualify for hedge accounting. As of December 31, 2010, there were open gas contracts
totaling $0.7 million.
Liquidity and Capital Resources
As of December 31, 2010, the Company had unrestricted cash and cash equivalents of $87.8 million and
restricted cash of $2.2 million, which secures letters of credit. For the year ended December 31, 2010, cash
flows provided by operating activities were $30.0 million and cash flows used in investing activities were
$19.7 million. Cash flows provided by financing activities were $38.8 million principally due to the receipt of
$40.4 in proceeds from a debt offering. Cash flows provided by operating activities were principally
attributable to an increase in working capital and net income offset by depreciation. Cash flows used in
investing activities were principally attributable to capital expenditures.
Set forth below is a table of our material capital expenditures and research and development costs for
fiscal 2009 and 2010 and projected commitments for fiscal 2011:
Management believes that the existing resources available to the Company will be adequate to satisfy current
and planned operations for at least the next twelve months.
13
Projected200920102011Project(millions)(millions)(millions)Manufacturing growth capital expenditures $ 10.7 $ 8.6 $ 29.4 Other capital expenditures $ 13.1 $ 11.1 $ 10.2 Research and development costs $ 3.4 $ 3.6 $ 3.8
Contractual Obligations
The following table reflects our future contractual cash obligations and commercial commitments as of
December 31, 2010 (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, 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 in accordance with the terms of the sale, primarily upon
shipment to the customer. 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. Interest and penalties related to unrecognized tax benefits are included as a component of tax
expense.
14
Payment Due by Pay PeriodLess than More than Contractual ObligationsTotal 1 yearYear 2Year 3Year 4Year 55 yearsLong-term debt$216.1$0.0$0.0$0.0$0.0$0.0$216.1Cash interest obligations149.221.221.221.221.221.243.2Pension obligations39.07.86.27.67.24.45.8Operating leases14.13.02.31.21.00.75.9Capital leases2.21.00.70.40.10.00.0Total$420.6$33.0$30.4$30.4$29.5$26.3$271.0
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 generally accepted accounting
principles (“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, 2010 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 U.S. plan assets of 8.00% for 2010 and 8.25% for 2009. The Company
used a long-term rate of return on French plan assets of 3.50% for 2010 and 4.00% for 2009.
• Discount rate: The discount rate is used to calculate future pension and postretirement obligations.
The Company used a Hewitt yield curve in determining its pension obligations. The Company used a
discount rate of 5.49% for 2010 and 5.9% for 2009.
• Curtailment accounting: The accounting for the estimated curtailment gain uses the primary
assumptions listed above that were used to calculate the net periodic pension cost and obligations.
Fair Value Measurements
FASB guidance establishes a three-tiered hierarchy of inputs to establish a classification of fair
value measurements for disclosure purposes. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy under FASB guidance are as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the
reporting entity has the ability to access at the measurement date. An active market for the asset or liability
is a market in which transactions for the asset or liability occur with sufficient frequency and volume to
provide pricing information on an ongoing basis.
Level 2 - Inputs are other than quoted prices included within Level 1 that are observable for the asset or
liability, either directly or indirectly, including:
•
Quoted prices for similar assets or liabilities in active markets.
•
•
•
Quoted prices for identical or similar assets or liabilities in inactive markets.
Inputs other than quoted prices that are observable for the assets or liabilities (including
volatilities).
Inputs that are derived principally from or corroborated by observable market data by
correlation or other means.
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable
for substantially the full term of the asset or liability.
15
Level 3 - Inputs are unobservable for the asset or liability (including the entity's own assumptions about the
assumptions that market participants would use in pricing the asset or liability) and significant to the fair
value measurement.
The asset's or liability's fair value measurement level within the fair value hierarchy is based on the lowest
level of any input that is significant to the fair value measurement. Valuation techniques used need to
maximize the use of observable inputs and minimize the use of unobservable inputs.
The Company uses fair value measurements in determing the value of it‟s pension plan assets.
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, (iv) auto
and trucks - 2 to 5 years and (v) leasehold improvements- shorter of lease or useful life. 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. Most of such leases as of December 31, 2010
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 and patents. 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.
New Accounting Pronouncements
There have been no recent accounting pronouncements or changes in accounting pronouncements during
the year ended December 31, 2010 that are of significance or potential significance to the Company.
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, 2010 and 2009
Consolidated Statements of Operations for the years ended
December 31, 2010, 2009 and 2008
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 2010, 2009 and 2008
Consolidated Statements of Cash Flows for the years ended
December 31, 2010, 2009 and 2008
2.
Notes to Consolidated Financial Statements
17
18
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, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2010. 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 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 present fairly, in all material respects, the financial position of Viskase Companies, Inc. and Subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles general accepted in the United States of America. /s/ Grant Thornton LLP Chicago, Illinois March 21, 2011
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 31,20102009ASSETSCurrent assets: Cash and cash equivalents $87,823$39,049Restricted cash 2,1832,283Receivables, net48,28446,607Inventories, net54,94752,276 Deferred income taxes4,8576,774Other current 17,01418,958Total current assets 215,108165,947Property, plant and equipment180,031164,778Less accumulated depreciation67,46856,884Property, plant and equipment, net112,563107,894Asset held for sale500500Deferred financing costs, net7,3486,968Other assets1,5342,145Deferred income taxes, net of current187165Total Assets$337,240$283,619LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities:Short-term debt - 262Short-term portion capital lease obligation815717Accounts payable25,54525,199Accrued liabilities41,19836,694Total current liabilities67,55862,872Long-term debt214,479174,018Capital lease obligation, net of current portion9951,083Accrued employee benefits43,61045,490Deferred income taxes5,3785,969Stockholders‟ equity (deficit) :Common stock, $.01 par value; 36,592,341 sharesissued and 35,787,071 shares outstanding at December 31, 2010and at December 31,2009366366Additional paid in capital32,79832,474Retained earnings (Accumulated deficit)8,643(6,976)Less 805,270 treasury shares, at cost(298)(298)Accumulated other comprehensive loss (36,289)(31,379)Total stockholders' equity (deficit)5,220(5,813)Total Liabilities and Stockholders' Equity (Deficit) $337,240$283,619
VISKASE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
The accompanying notes are an integral part of the consolidated financial statements.
20
YearYearYearEndedEndedEndedDecemberDecemberDecember31, 201031, 200931, 2008 NET SALES$316,215$299,301$283,447Cost of sales232,955220,340225,049GROSS MARGIN83,26078,96158,398Selling, general and administrative45,78339,35636,962Amortization of intangibles460460460Asset impairment charge- 1,447100OPERATING INCOME37,01737,69820,876Interest income34974344Interest expense20,77116,30915,062Other income, net1392,7355,549Post retirement benefits curtailment gain562- - Loss on early extinguishment of debt- 5,962223 INCOME BEFORE INCOME TAXES17,29618,23611,484Income tax provision 1,6771,5059,816NET INCOME $15,619$16,731$1,668WEIGHTED AVERAGE COMMON SHARES- BASIC 35,787,07135,535,53431,162,198PER SHARE AMOUNTS:EARNINGS PER SHARE- BASIC$0.44$0.47$0.05WEIGHTED AVERAGE COMMON SHARES- DILUTED37,119,99035,926,68331,558,017PER SHARE AMOUNTS:EARNINGS PER SHARE- DILUTED$0.42$0.47$0.05
VISKASE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In Thousands)
21
Accumulated otherTotalCommonPaid inTreasuryAccumulatedcomprehensive stockholders‟stockcapitalstockdeficit(loss) income equity (deficit)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)Net income15,61915,619Foreign currency translation adjustment(3,982)(3,982)Pension liability adjustment, net of tax(928)(928) Comprehensive income10,709Stock option expense324324Balance December 31, 2010$366$32,798($298)$8,643($36,289)$5,220
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, 201031, 200931, 2008Cash flows from operating activities:Net income $15,619$16,731$1,668 Adjustments to reconcile net income to net cash provided by operating activities:Depreciation12,35911,34910,835Stock-based compensation324323315Amortization of intangibles460460460Amortization of deferred financing fees9441,111935Deferred income taxes1,261(2,801)1,261Foreign currency translation gain - (532)(7,696)Loss on disposition of assets13950962Bad debt provision109657810Postretirement curtailment gain(562)- - Asset impairment charge- 1,447100Loss on early extinguishment of debt- 5,962223Non-cash interest on notes567471,306Changes in operating assets and liabilities:Receivables(3,426)(2,095)(793)Inventories(4,354)(8,174)(6,929)Other current assets1,569(6,734)351Accounts payable1,250(2,014)4,522Accrued liabilities5,164(777)5,190Other(993)(654)(5,432)Total adjustments14,300(1,216)5,520Net cash provided by operating activities29,91915,5157,188Cash flows from investing activities:Capital expenditures(19,738)(23,812)(12,479)Proceeds from assets held for sale- 577- Proceeds from disposition of assets991194Net cash used in investing activities(19,639)(23,224)(12,385)Cash flows from financing activities:Issuance of common stock- 7,000Deferred financing costs(1,324)(6,540)(203)Proceeds from revolving loan8704,9993,114Proceeds from capital lease8196,8151,891Proceeds from long-term debt40,400173,78418,503Repayment of long-term debt- (113,711)- Repayment of short-term debt(1,132)(25,454)(18,648)Repayment of capital lease(893)(6,674)(295)Restricted cash100- - Net cash provided by financing activities38,84033,21911,362Effect of currency exchange rate changes on cash(346)542(609)Net increase in cash and equivalents48,77426,0525,556Cash and equivalents at beginning of period39,04912,9977,441Cash and equivalents at end of period$87,823$39,049$12,997Supplemental cash flow information:Interest paid less capitalized interest$12,040$14,808$12,237Income taxes (refunded) paid($1,568)$11,952$3,490
1. Summary of Significant Accounting Policies
Nature of Operations
Viskase Companies, Inc. together with its subsidiaries (“we” or the “Company”) is a producer of non-
edible cellulosic and plastic casings 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 prepared in accordance with generally accepted accounting principles
(“GAAP”) 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 $201 and $216 of short-term investments at December 31, 2010 and
December 31, 2009, 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 the
23
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 as expense using the effective interest rate method over the
expected term of the related debt agreement. Amortization of deferred financing costs is classified as
interest.
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 and patents. 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 $265 and $1,401 at December 31,
2010 and December 31, 2009, 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 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, 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 as of December 31, 2010 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 U.S. plan assets of 8.00% for 2010 and 8.25% for 2009. The Company used a
long-term rate of return on French plan assets of 3.50% for 2010 and 4.00% for 2009.
24
• Discount rate: The discount rate is used to calculate future pension and postretirement obligations.
The Company used a Hewitt yield curve in determining its pension obligations. The Company used a
discount rate of 5.49% for 2010 and 5.90% for 2009.
• Curtailment accounting: The accounting for the estimated curtailment gain uses the primary
assumptions listed above that were used to calculate the net periodic pension cost and obligations.
Fair Value Measurements
FASB guidance establishes a three-tiered hierarchy of inputs to establish a classification of fair
value measurements for disclosure purposes. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy under FASB guidance are as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the
reporting entity has the ability to access at the measurement date. An active market for the asset or
liability is a market in which transactions for the asset or liability occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
Level 2 - Inputs are other than quoted prices included within Level 1 that are observable for the asset or
liability, either directly or indirectly, including:
•
•
•
•
Quoted prices for similar assets or liabilities in active markets.
Quoted prices for identical or similar assets or liabilities in inactive markets.
Inputs other than quoted prices that are observable for the assets or liabilities (including
volatilities).
Inputs that are derived principally from or corroborated by observable market data by
correlation or other means.
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable
for substantially the full term of the asset or liability.
Level 3 - Inputs are unobservable for the asset or liability (including the entity's own assumptions about
the assumptions that market participants would use in pricing the asset or liability) and significant to the
fair value measurement.
The asset's or liability's fair value measurement level within the fair value hierarchy is based on the
lowest level of any input that is significant to the fair value measurement. Valuation techniques used
need to maximize the use of observable inputs and minimize the use of unobservable inputs.
The Company uses fair value measurements in determing the value of it‟s pension plan assets.
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.
25
Other Comprehensive Income
Comprehensive income includes all other non-shareholder changes in equity. Changes in other
comprehensive income in 2010 and 2009 resulted from changes in foreign currency translation and
minimum pension liability.
Revenue Recognition
The Company‟s revenues are recognized in accordance with the terms of the sale, primarily upon
shipment to the customer. 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
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.
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 $324 in 2010, $323 in 2009,
and $315 in 2008.
Financial Instruments
The Company purchases gas futures contracts to lock in set rates on some of its gas purchases. The
Company uses this strategy to minimize its exposure to volatility in natural gas. These products are not
linked to specific assets and liabilities that appear on the balance sheet or to a forecasted transaction
and, therefore, do not qualify for hedge accounting. As of December 31, 2010 there were open gas
contracts totaling $705.
New Accounting Pronouncements
There have been no recent accounting pronouncements or changes in accounting pronouncements
during the year ended December 31, 2010 that are of significance or potential significance to the
Company.
2. Cash and cash equivalents
As of December 31, 2010 and December 31, 2009, cash held in foreign banks was $11,555 and
$6,504, respectively.
26
December 31, 2010December 31, 2009Cash and cash equivalents$87,823 $39,049 Restricted cash 2,1832,283 $90,006 $41,332
3. Receivables
Receivables reserve activity:
The Company has a broad base of customers, with no single customer accounting for more
than 6.4% of sales in 2010 or 5.4% of receivables as of December 31, 2010.
4. Inventories
Inventories, net of reserves, consisted of:
Inventory reserves activity:
27
December 31, 2010December 31, 2009Accounts receivable, gross$50,487 $48,759 Less allowance for doubtful accounts (1,850)(1,818)Less allowance for sales returns(353)(334) $48,284 $46,607 December 31, 2010December 31, 2009December 31, 2008 Beginning balance$2,152 $1,612 $981 Provision109 657 810 Write-offs(22)(156)(107) Other(36)39 (72)Ending balance$2,203 $2,152 $1,612 December 31, 2010December 31, 2009Raw materials$10,576 $7,916 Work in process22,343 21,482 Finished products 22,028 22,878 $54,947 $52,276 December 31, 2010December 31, 2009December 31, 2008 Beginning balance$2,321 $2,587 $2,567 Provision950 1,228 703 Write-offs(775)(1,883)(621) Other(400)389 (62)Ending balance$2,096 $2,321 $2,587
5. Property, Plant and Equipment, Net
Accumulated depreciation consisted of:
Capitalized interest for 2010, 2009, and 2008 totaled $518, $663, and $344 respectively. Maintenance
and repairs charged to costs and expenses for 2010, 2009, and 2008 aggregated $18,882, $19,280
and $17,549, 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 due to a change in the mix of the Company‟s product line. The Company
wrote down the asset to the realizable market value based on potential resale 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 patents for fiscal years 2011, 2012 and 2013 will be approximately $460,
$460 and $114, respectively.
28
December 31, 2010December 31, 2009 Land and improvements $2,141 $2,171 Buildings and improvements 21,802 20,825 Machinery and equipment149,585 139,377 Construction in progress 6,503 2,405 $180,031 $164,778 December 31, 2010December 31, 2009 Land and improvements $185 $178 Buildings and improvements 5,426 4,702 Machinery and equipment61,857 52,004 $67,468 $56,884 December 31, 2010December 31, 2009Patents$4,598 $4,598 Less: Accumulated amortization(3,564)(3,104)Patents, net 1,034 1,494 Miscellaneous500 651 $1,534 $2,145
8. Accrued Liabilities
Accrued liabilities consisted of:
9. Debt Obligations
Outstanding short-term and long-term debt consisted of:
Revolving Credit Facility
The Company is a party to a $25,000 secured revolving credit facility (“Revolving Credit Facility”) with
Icahn Enterprises L.P. 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 Revolving
Credit Facility also provides for an unused line fee of 0.375% per annum. The maturity date of the
Revolving Credit Facility is January 31, 2012.
There were no borrowings under the Revolving Credit Facility at December 31, 2010 and December 31,
2009.
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 “RCF 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 ( the “Notes Priority
Collateral”), to be contractually subordinate to the liens securing the 9.875% Senior Secured Notes and
such guarantees pursuant to such intercreditor agreement, and (iii) all other assets, to be 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
29
December 31, 2010December 31, 2009Compensation and employee benefits$15,011 $16,532 Taxes payable9,992 13,647 Accrued volume and sales discounts1,467 1,731 Accrued interest9,798 533 Other 4,930 4,251 #$41,198 $36,694 December 31, 2010December 31, 2009Short-term debt including current maturities of long-term debt: Revolving credit facilities- $262Total short-term debt- $262Long-term debt: 9.875% Senior secured notes, net of discount$214,245173,789 Other234229Total long-term debt$214,479$174,018
(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 the
Revolving Credit Facility covenants as of December 31, 2010.
In its foreign operations, the Company has unsecured lines of credit with various banks providing
approximately $8,000 of availability. There were no borrowings under the lines of credit at December
31, 2010 and $262 of borrowings 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 due 2018
(“Notes”). A portion of the proceeds from the issuance was used to retire the previously outstanding
11.5% Senior Secured Notes. On May 3, 2010, the Company issued an additional $40,000 of 9.875%
Senior Secured Notes. The 9.875% Senior Secured Notes issued on May 3, 2010 were issued under
the same indenture agreement as the 9.875% Senior Secured Notes issued on December 21, 2009.
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. The 9.875% Senior Secured Notes have a maturity date of January
15, 2018.
The 9.875% Senior Secured 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). 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 RCF 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 the 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 agreement governing the 9.875% Senior Secured Notes permits 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 agreement 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 agreement governing the 9.875% Senior Secured Notes remains
outstanding immediately following the redemption.
Letter of Credit Facility
Letters of credit in the amount of $2,183 were outstanding under facilities with a commercial bank, and
were cash collateralized at December 31, 2010.
Debt Maturity
The aggregate maturities of debt (1) for each of the next five years are:
30
(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 the past three years, 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 that automobiles leased by the Company are capital leases with an average
term of 4 years.
The following is an analysis of leased property under capital leases by major classes.
The following is a schedule by years of minimum future lease payments as of December 31, 2010.
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, 2010, are:
31
20112012201320142015thereafter9.875% Senior Secured Notes $215,000 Other1,075 $216,075 Building and improvements$525Machinery and equipment2,722Less: Accumulated depreciation(1,410)$1,837Year ending December 31,2011$95820126932013419201412620158Thereafter- Total minimum payments required$2,203Less amount representing interest(393)Present value of net minimum lease payments$1,810
Total rent expense during 2010, 2009 and 2008 amounted to $3,262, $3,190 and $2,991 respectively.
12. Retirement Plans
The Company and its subsidiaries have defined contribution and defined benefit plans varying by
country and subsidiary.
The Company‟s operations in the United States, France and Canada 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.
On September 30, 2010, employees in the U.S. covered by a collective bargaining agreement ratified a
new agreement that, among other things, freezes the defined benefit pension plan as of December 31,
2010. All other participation in the plans had previously been frozen.
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, 2010 are the
following amounts not yet recognized in net periodic benefit cost:
Amounts included in other comprehensive income expected to be recognized as a component of net
periodic benefit cost for the year ending December 31, 2011 are:
The measurement date for all defined benefit plans is December 31. The year end status of the plans
is as follows:
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2011$2,984 20122,338 20131,178 20141,012 2015689 Total thereafter5,919 Total minimum lease payments$14,120 U.S. Pension Benefits Non U.S. Pension BenefitsNet actuarial loss $27,605 $1,052 Prior service credit (6)- U.S. Pension Benefits Non U.S. Pension BenefitsNet actuarial loss $1,789 $36
The funded status of these pension plans as a percentage of the projected benefit
obligation was 72 percent in 2010 compared to 69 percent in 2009.
Components of net periodic benefit cost for the years ended December 31:
33
Non U.S. Pension Benefits2010200920102009Change in benefit obligation:Projected benefit obligation at beginning of year132,486118,6524,9504,240Service cost303224218187Interest cost7,5107,894250248Actuarial loss 4,19513,467418671Benefits paid(7,828)(7,751)(172)(396)Currency translation- - (359)- Estimated benefit obligation at end of year$136,666$132,486$5,305$4,950Change in plan assets:Fair value of plan assets at beginning of year91,67679,5374,8783,891Actual return on plan assets10,79415,614159156Employer contribution3,6724,276- 831Benefits paid(7,828)(7,751)- - Currency translation- - (353)- Fair value of plan assets at end of year$98,314$91,676$4,684$4,878Unfunded status of the plan($38,352)($40,810)($621)($72)U.S. Pension Benefits U.S. Pension Benefits Non U.S. Pension Benefits2010200920102009Net amount recognizedAmounts recognized in statement of financial position:Current liabilities($62)($62)- - Noncurrent liabilities(38,291)(40,748)(621)(73)Net amount recognized($38,353)($40,810)($621)($73)Information for defined benefit plans with accumulated benefit obligations in excess of plan assets:U.S. Pension Benefits Non U.S. Pension Benefits2010200920102009Projected benefit obligation$136,666 $132,486 $5,305 $4,950 Accumulated benefit obligation$136,666 $131,638 $3,916 - Fair value of plan assets$98,314$91,676$4,684$4,878Information for defined benefit plans with projected benefit obligations in excess of plan assets:U.S. Pension Benefits Non U.S. Pension Benefits2010200920102009Projected benefit obligation$136,666 $132,486 $5,305 $4,950 Fair value of plan assets$98,314$91,676$4,684$4,878
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.
In accordance with FASB guidance, Plan management uses the following methods and significant
assumptions to estimate fair value of investments.
Mutual funds - Valued at the net asset value (“NAV”) of shares held by the Plan at year-end, which is
obtained from an active market.
Collective trust funds - Value provided by the administrator of the fund. The NAV is based on the value
of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of
shares outstanding. The NAV's unit price is quoted on a private market that is not active.
Hedge funds - Value provided by the administrator of the fund. The pricing for these funds is provided
monthly by the fund to determine the quoted price.
The fair values of the Company‟s pension plan asset allocation at December 31, 2010 and 2009, by
asset category are as follows:
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Non U.S. Pension Benefits201020092008201020092008Component of net period benefit costService cost$303$224$266$218$187$195Interest cost7,5107,8947,734250248176Expected return on plan assets(7,411)(6,616)(8,710)(180)(156)(145)Amortization of prior service cost(131)(131)(131)- - - Amortization of actuarial loss1,6291,504310 - - Curtailment Income(562)- - - - - $1,338$2,875($838)$298$279$226U.S. Pension BenefitsU.S. Pension Benefits Non U.S. Pension Benefits2010200920102009Discount rate5.49%5.90%5.49%5.50%Expected return on plan assets8.00%8.25%3.50%4.00%Rate of compensation increase3.00%3.00%3.00%3.00%
35
Fair Value Measurement atDecember 31, 2010Quoted Prices in Active Markets for Identical AssetsSignificant Observable InputsSignificant Unobservable InputsAsset Category Total(Level 1)(Level 2)(Level 3)Cash equivalents1,921 1,921 - - Equity securities: U.S. companies10,184 10,184 - - International companies 4,781 4,781 - - U.S-Small Cap Growth1,430 - 1,430 - U.S-Large Cap Enhanced Core11,904 - 11,904 - U.S-Large Cap Equity Growth 6,450 - 6,450 - U.S-Mutual Funds 6,509 - 6,509 - Fixed income securities: Government Treasuries7,382 7,382 - Mortgage-backed securities 2,478 - 2,478 - Aggregate bond fund9,747 - 9,747 - High yield fund12,630 12,630 Other types of investments: Hedge funds 27,582 - - 27,582 Total 102,998$ 36,898$ 38,518$ 27,582$ Fair Value Measurements Using Significant Unobservable Inputs (Level Combined Hedge Funds25,244 Relating to assets still held at the reporting date 2,338 27,582$ Beginning balance at December 31, 2009Actual return on plan assets:Ending balance at December 31, 2010
The following table provides a summary of the estimated benefit payments and Company contributions
for the postretirement plans for the next five fiscal years individually and for the following five fiscal
years in the aggregate:
36
Fair Value Measurement atDecember 31, 2009Quoted 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 9,443 9,443 - - Unclassified Common Stock28 28 - - U.S-Small Cap Growth1,334 - 1,334 - U.S-Large Cap Enhanced Core 11,142 - 11,142 - U.S-Large Cap Equity Growth 4,084 - 4,084 - Fixed income securities: Goverment Treasuries8,777 8,777 - - Mortgage-backed securities 5,837 - 5,837 - 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 96,554$ 34,930$ 36,380$ 25,244$ Fair Value Measurements Using Significant Unobservable Inputs (Level 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
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 $961,
$973 and $915 in 2010, 2009 and 2008, respectively.
International Plans
The Company maintains various pension and statutory separation pay plans for its European
employees. The expense, not including the French pension plan, in 2010, 2009, and 2008 was $1,021,
$584 and $1,755, 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 $4,607.
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.
14. Capital Stock, Treasury 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.
In 2004, the Company purchased 805,270 shares of its common stock from the underwriter for a
purchase price of $298. The common stock has been accounted for as treasury stock.
15. Warrants (Dollars in Thousands, Except Per Share and Per Warrant Amounts)
On June 29, 2004, in connection with the issuance of indebtedness, the Company issued 90,000
Warrants to purchase an aggregate of 805,230 shares of common stock of the Company (“Warrants”).
Each of the Warrants entitles the holder to purchase 8.947 shares of the Company's common stock at
an exercise price of $0.01 per share through the June 15, 2011 expiration date. As of December 31,
2010, 15,955 Warrants, which entitle the holders to purchase 142,749 shares of the Company‟s
common stock, were outstanding.
37
Total Estimated Benefit PaymentsTotal Estimated Company ContributionsU.S.Non-U.S U.S.Non-U.S 2011$8,252 $111 $7,186 $621 20128,369 409 5,802 386 2013 8,434 362 7,179 404 2014 8,545 544 6,799 413 2015 8,602 418 3,977 425
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:
38
201020092008CurrentDomestic $ 305 $ 147 $ 140 Foreign 111 4,159 8,415 Total current 416 4,306 8,555 Deferred Domestic (11) (23) (43)Foreign 1,272 (2,778) 1,304 Total deferred 1,261 (2,801) 1,261 Total $ 1,677 $ 1,505 $ 9,816 Income (loss) before income taxes:201020092008Domestic $ 1,192 $ (14,115) $ (14,007)Foreign 16,104 32,351 25,491 Total $ 17,296 $ 18,236 $ 11,484 Computed income tax provision 6,053 6,383 4,644 State and local taxes, net of federal tax127 82 (469) Foreign taxes, net(106) (3,813) 2,057 Valuation allowance(1,987) (900) 3,321 Uncertain tax positions- (benefit) expense(2,680) 1,823 247 Other, net270 (2,070) 16 Total income tax expense 1,677 1,505 9,816 Computed income tax provision 35.0%35.0%35.0%State and local taxes, net of federal tax0.7%0.4%-4.1%Foreign taxes, net-0.6%-20.9%17.9%Valuation allowance-11.5%-4.9%28.9%Uncertain tax positions- (benefit) expense-15.5%10.0%2.2%Other, net1.6%-11.4%0.1%Effective income tax rate9.7%8.3%80.0%
Temporary differences and net operating loss carryforwards that give rise to a significant portion of
deferred tax assets and liabilities for 2010 and 2009 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, 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 U.S. based valuation allowance of $36,489 has been recorded at
December 31, 2010, 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. During the first
quarter 2010, the Company removed a valuation allowance against the deferred tax assets of its
Brazilian subsidiary. This resulted in an income tax benefit of $812.
There were gross U.S. fedral net operating loss carryforwards at December 31, 2010 and
December 31, 2009 of $105,143 and $105,682, respectively, with amounts beginning to expire in the
year 2025. There Company has gross foreign net operating loss carryforwards at December 31, 2010
39
20102009Deferred tax asset Provisions not currently deductible4,6714,082 Inventory basis differences2,7292,130 Foreign exchange and other(13)14 Stock option$473$355 Pension and healthcare 4,3405,638 Net operating loss carryforwards41,68444,356 Valuation Allowance(36,502)(36,669)Total deferred tax asset$17,382$19,906Deferred tax liability Property, plant, and equipment(12,526)(12,967) Foreign exchange and other(5,190)(5,969)Total deferred tax liability($17,716)($18,936)($334)$970As of December 31 20102009Current deferred tax assets$4,857$6,774Current deferred tax liability- -Current deferred tax assets (liability), net$4,857$6,774Non-current deferred tax assets$187$165Non-current deferred tax liability(5,378)(5,969)Non-current deferred tax assets (liability), net($5,191)($5,804)Current deferred tax asset (net)$4,857$6,774Non-current deferred tax liability (net)(5,191)(5,804)Net deferred tax liability($334)$970
and December 31, 2009 of $3,520 and $10,655, respectively. There is an unlimited carryforward period
for the foreign net operating losses.
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, 2010 totaled $4,531. The following table
summarizes the activity related to the unrecognized tax benefits and has been modified to
exclude penalties and interest from the January 1, 2010 balance.
In 2010, the Company recognized an approximate net decrease of $2,149 to reserves for uncertain tax
positions.
Approximately $2,700 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 2006. Substantially all material state and local and foreign income tax matters have been
concluded for years through 2006. U.S. federal income tax returns for 2007 through 2010 are currently
open for examination. Based on the expiration of the statute of limitations for certain jurisdictions, it is
reasonably possible that the unrecognized tax benefits will decrease in the next twelve months by
approximately $516.
The Company's continuing practice is to recognize interest and/or penalties related to income tax
matters in income tax expense. During the years ended December 31, 2010, 2009, and 2008, The
Company recorded adjustments for interest and potential penalties to income tax (benefit) or expense
of ($737), $518, and ($71) related to these unrecognized tax benefits. As of December 31, 2010 and
December 31, 2009, the Company has recorded a liability for interest and potential penalties of $767
and $1,505, respectively.
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.
We are a party in the case Viskase Companies, Inc. v. World Pac International AG, et al., Case No.: 09-
CV-5022, in the United States District Court for the Northern District of Illinois, Eastern Division (the
“Court,” with the case being referred to herein as the “World Pac Litigation”). In the World Pac
Litigation, we are seeking, along with other remedies, a declaratory judgment that the Company‟s
Viscoat products do not infringe U.S. Patent No. 6,200,613 (the “‟613 Patent”) owned by defendant
40
(in thousands)December 31, 2010Unrecognized tax benefits as of January 1, 2010$6,680Increases in positions taken in a prior period 25 Decreases in positions taken in a prior period (102)Increases in positions taken in a current period 899 Decreases in positions taken in a current period - Decreases due to settlements (150)Decreases due to lapse of statute of limitations(2,821) Unrecognized tax benefits as of December 31, 2010$4,531
World Pac International USA (“World Pac”). In response, World Pac filed a counterclaim seeking
unspecified damages for the infringement of the „613 Patent and seeking injunctive and other relief. On
February 3, 2011, the Court granted summary judgment in our favor on the basis of the invalidity of the
„613 Patent. On March 4, 2011, World Pac filed a notice of appeal with respect to the summary
judgment.
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 warrants and granted employee stock options are
dilutive and the effect of these dilutive securities has been included in weighted average
shares for diluted EPS using the treasury method for the Company.
19. 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 $324 as of December 31, 2010
and $323 as of December 31, 2009. The total unrecognized non-cash compensation expense is
expected for the year ended December 31, 2011 and December 31, 2012 will be $9 and $1,
respectively.
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. 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
41
DecemberDecemberDecember31, 201031, 200931, 2008 NUMERATOR:Net income 15,61916,7311,668Net income for basic and diluted EPS15,61916,7311,668 DENOMINATOR:Weighted average shares outstanding for basic EPS35,787,07135,535,53431,162,198Effect of dilutive securities1,332,919391,149 395,819Weighted average shares outstandingfor diluted EPS37,119,99035,926,68331,558,017200920072005Expected 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$1.09
were granted at the fair market value at date of grant and are fully vested. 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 are fully vested. The options granted to management expire ten years from the date
of grant.
The Company's outstanding options were:
Vested and exercisable options as of December 31, 2010 were 1,855,000 with a weighted average
exercise price of $1.86.
20. Research and Development Costs
Research and development costs are expensed as incurred and totaled $3,569, $3,442 and $3,046 for
2010, 2009, and 2008, respectively.
21. Related-Party Transactions
On January 15, 2010, Icahn Enterprises L.P. acquired the 71.4% controlling interest in the Company
from other affiliates of Carl C. Icahn.
In connection with the acquisition, Icahn Enterprises L.P. assumed the Revolving Credit Facility from
Arnos Corporation, an affiliate of Carl C. Icahn, and is now the Company‟s lender under the Revolving
Credit Facility.
During the year ended December 31, 2010, the year ended December 31, 2009 and the year ended
December 31, 2008, the Company purchased $31, $33 and $35, respectively, in telecommunication
services in the ordinary course of business from XO Communications, Inc., an affiliate of Icahn
Enterprises L.P. 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.
Icahn Enterprises L.P. was the lender on the Company‟s Revolving Credit Facility as of December 31,
2010. The Company paid Icahn Enterprises L.P. service and unused commitment fees of $121 during
the year ended December 31, 2010. The Company believes that the terms of the Revolving Credit
Facility are at least as favorable as those that the Company would expect to negotiate with an
unaffiliated party.
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Weighted AverageWeighted AverageShares Under Weighted AverageRemainingGrant-DateOptionExercise PriceContractual LifeFair ValueOutstanding, December 31, 20072,388,3332.04$ 92 months0.68$ Vested and exercisable at Dec. 31, 2007763,328 2.57$ 39 months0.68$ Granted- Exercised- Forfeited(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$ Exercised- Forfeited- Outstanding, December 31, 20092,055,0001.85$ 108 months0.61$ Vested and exercisable at Dec. 31, 20091,255,000 1.94$ 89 months0.72$ Granted- Exercised- Forfeited- Outstanding, December 31, 20102,055,0001.85$ 96 months0.61$ Vested and exercisable at Dec. 31, 20101,855,000 1.86$ 80 months0.67$
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.
22. 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.
Geographic Area Information:
43
201020092008Net salesNorth America$166,222$154,686$142,170South America38,35634,60628,584Europe135,651133,473136,768Other and eliminations(24,014)(23,464)(24,075)$316,215$299,301$283,447Operating income North America$18,968$18,038$5,510South America4,1015,2666,245Europe13,94814,3949,121Other- - $37,017$37,698$20,876Identifiable assetsNorth America$213,159$159,021$120,630South America25,03021,52415,036Europe99,051103,07483,974$337,240$283,619$219,640North America and Europe export sales:(reported in North America and Europe net sales above)Asia$37,783$31,008$24,592South and Central America13,87414,09412,988Canada8,5538,8898,595Other international7,6111,6091,374$67,821$55,600$47,549
23. Quarterly Data (Unaudited)
Quarterly financial information for 2010 and 2009 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.
24. Total Comprehensive Income (Loss)
Total comprehensive income (loss) consisted of:
25. Interest Expense, Net
Net interest expense consisted of:
44
FirstSecondThirdFourth2010QuarterQuarterQuarterQuarterAnnualNet sales$80,469$80,458$78,591$76,697$316,215Gross margin21,66322,57519,72419,29883,260Operating income 10,72110,9718,5046,82137,017Net income 5,8593,9962,8182,94615,619Net income per share - basic $0.16$0.11$0.08$0.08$0.44Net income per share - diluted$0.16$0.11$0.08$0.08$0.42FirstSecondThirdFourth2009QuarterQuarterQuarterQuarterAnnualNet sales$68,578$76,578$77,237$76,908$299,301Gross margin18,08520,75021,33118,79578,961Operating income 8,25010,84011,2117,39737,698Net income3,0523,8539,10672016,731Net income per share - basic $0.09$0.11$0.26$0.01$0.47Net income per share - diluted$0.08$0.11$0.25$0.03$0.47December 31, 2010December 31, 2009December 31, 2008Net income$15,619$16,731$1,668Foreign currency translation adjustment(3,982)566 (26,939)Pension liability adjustment(928)(3,096)(11,312) Comprehensive income (loss)$10,709$14,201($36,583)December 31, 2010December 31, 2009December 31, 2008Interest expense$21,289$16,972$15,406Less Capitalized interest(518)(663)(344) Interest expense, net$20,771$16,309$15,062
26. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consisted of:
27. Subsequent Events
Viskase evaluated its December 31, 2010 consolidated financial statements for subsequent events
through March 1, 2011, the date the consolidated financial statements were available to be issued.
Subsequent to year end, the Company committed to a plant expansion of approximately $11,000 plus a
long term lease commitment with a present value of $1,800.
45
December 31, 2010December 31, 2009Minimum pension liability adjustment($28,651)($27,723)Foreign currency translation adjustment (7,638)(3,656) Accumulated other comprehensive (loss) ($36,289)($31,379)