ITEM 1. BUSINESS --------
(a) General development of business: ------------------------------- General
Envirodyne Industries, Inc. is a Delaware corporation organized in 1970. As used herein, the "Company" means Envirodyne Industries, Inc. and its subsidiaries. The Company, through Viskase Corporation (Viskase), is the leading producer of cellulosic casings used in preparing and packaging processed meat products and is a major producer of heat shrinkable plastic bags and specialty films for packaging and preserving fresh and processed meat products, poultry and cheeses. The Company is also a leading domestic and international manufacturer of plasticized polyvinyl chloride (PVC) films, primarily for use in packaging food items. Through Sandusky Plastics, Inc. (Sandusky), the Company is a producer of thermoformed vending and promotional cups, plastic containers used in the packaging of cultured dairy and delicatessen products, and of horticultural trays and inserts. Finally, through Clear Shield National, Inc. (Clear Shield), the Company is a major domestic producer of disposable plastic cutlery, drinking straws, custom dining kits and related products. The market positions of the Company's subsidiaries set forth in this Form 10-K represent management's belief based upon internally generated information. No independent marketing information has been used to confirm the stated market position.
(b) Financial information about industry segments: --------------------------------------------- Reference is made to Part IV, Item 14, Note 21 of Notes to Consolidated Financial Statements.
(c) Narrative description of business: --------------------------------- The Company's operations include food packaging products (Viskase and Sandusky) and disposable foodservice supplies (Clear Shield).
VISKASE - - -------
General
Viskase developed the basic process for producing cellulosic casings and began commercial production in 1925. Since that time, management believes that Viskase has been the leading worldwide producer of cellulosic casings. In 1964 Viskase entered the specialty films business. Since then, it has continued to introduce new specialty film products to customers in the fresh and processed meat, poultry and cheese industries. Viskase also manufactures and sells PVC plastic film for wrapping fresh meats, poultry and other products.
Cellulosic Casings
Cellulosic casing products are used in the production of processed meat and poultry products, such as hot dogs, salami and bologna. To manufacture these products, meat is stuffed into the casings prior to smoking and cooking. The casings, which are non-edible, serve to hold the shape of the product during these processes. For certain products, such as hot dogs, the casings are removed and discarded prior to retail sale. Casings made of regenerated cellulose were developed by Viskase to replace casings made of animal intestines. Cellulosic casings generally afford greater uniformity, lower cost and greater reliability of supply.
The production of regenerated cellulose casings generally involves three principal steps: production of a viscose slurry from wood pulp, extrusion of a continuous tube during the regeneration process, and "shirring" of the final product. Shirring is a process of folding or compressing the casing in tubular form for subsequent use in high-speed stuffing machines. The production of regenerated cellulose involves a complex and continuous series of chemical and manufacturing processes, and Viskase believes that its facilities and expertise in the manufac- turing of extruded cellulose are important factors in maintaining its product quality and operating efficiencies.
Viskase's product line includes both NOJAX (R) cellulosic casings for small sausage products such as hot dogs and paper-reinforced cellulosic casings for large sausages, salami, hams and other processed meat products. Reinforced cellulosic casings are known in the meat industry as fibrous casings.
Specialty Film Products
Since developing a technology for the extrusion of bioriented plastic films in 1964, Viskase has continued to expand its product line of heat shrinkable bags made from its specialty films. These shrinkable bags are sold under the brand name PERFLEX (R). Viskase's shrinkable plastic bags are used by major poultry, fresh and processed meat and cheese producers to package and preserve their products during wholesale and retail distribution. Viskase also manufactures a thin gauge film used in wrapping applications at poultry processing plants under the brand name TRAY-LOC (R).
Viskase produces single layer and multilayer heat shrinkable plastic bags. Single layer film bags are used primarily to protect fresh and frozen whole turkeys and chickens from moisture loss and handling damage. Multilayer film bags, referred to in the food industry as "barrier bags," are made of layers of coextruded films, each of which contributes a special property. For example, individual layers can provide mechanical strength or can reduce the transmission of moisture, oxygen or ultraviolet light and can protect bagged products, such as fresh meats, from weight loss and spoilage.
As part of its service orientation, Viskase also provides graphic art and design services to its customers. Viskase's ability to print on the bags and films directly with designs, illustrations and text in up to eight colors further enhances the appeal of its customers' products.
PVC and Other Film Products
Viskase manufactures PVC stretch and single layer shrink films under the Filmco (R) brand name, used for wrapping grocery products and for packaging foods. In Europe, Viskase also converts oriented polypropylene films for use in packaging bakery goods.
International Operations
Viskase has seven manufacturing facilities located outside the continental United States, in Beauvais, France; Thaon, France; Lindsay, Ontario, Canada; Sedgefield, England (Great Britain); Swansea, Wales (Great Britain); Guarulhos, Brazil and Nuevo Laredo, Mexico.
The aggregate of domestic exports and net sales of foreign operations represents approximately 58% of Viskase's total net sales.
International sales and operations may be subject to various risks including, but not limited to, possible unfavorable exchange rate fluc- tuations, political instability, governmental regulations (including import and export controls), restrictions on currency repatriation, embargoes, labor relations laws and the possibility of governmental expropriation. Viskase's foreign operations generally are subject to taxes on the repatriation of funds.
International operations in certain parts of the world may be subject to international balance of payments difficulties that may raise the possi- bility of delay or loss in the collection of accounts receivable from sales to customers in those countries. Viskase believes its allowance for doubtful accounts makes adequate provision for the collectibility of receivables. Management believes that growth potential exists for many of Viskase's products outside the United States and that Viskase is well positioned to participate in these markets.
Sales and Distribution
Viskase has a broad base of customers, with no single customer accounting for more than 5% of sales. Viskase sells its products in virtually every country in the world. In the United States, Viskase has a staff of technical sales teams responsible for sales to fresh meat, processed meat and poultry producers. Approximately 50 distributors market Viskase products to customers in Europe, Africa, Asia, and Latin America. Its products are marketed through its own subsidiaries in the United Kingdom, Germany, France, Italy, Russia, Brazil, Mexico, Argentina and a joint venture in Australia.
In the United States, Viskase sells its PVC film products primarily to the retail grocery industry through packaging material distributors, food wholesalers and a direct sales force. Additionally the sales organization is supported by a technical service group. The United Kingdom operation sells directly and through distributors, primarily to the retail grocery and foodservice industries in Europe.
In the United States, Viskase operates casings service centers in Atlanta, Georgia, and Bensalem, Pennsylvania, as well as service centers within the Chicago, Illinois, and Pauls Valley, Oklahoma, plants. In Latin America, Viskase operates service centers in Nuevo Laredo, Mexico, and within the Guarulhos, Brazil, plant. In Europe, Viskase operates casings service centers in Milan, Italy, Pulheim, Germany, and Moscow, Russia. Viskase also operates a service center through a joint venture in Brisbane, Australia. These service centers provide finishing, inventory and delivery services to Viskase customers.
Competition
Viskase is the world's leading producer of cellulosic casings and is a major producer of films. Viskase seeks to maintain a competitive advan- tage by introducing new products having superior performance character- istics over competitive products, by responding quickly to customer product requirements, by providing customers with assistance in production or formulation problems, by producing niche products to fill particular individual customer requirements, by providing technical support services to its customers and by manufacturing products having outstanding quality and performance. From time to time, Viskase experiences reduced market share or reduced profits due to price competition.
Viskase's principal competitors in cellulosic casings are Devro-Teepak, Inc., located in Scotland with plants in the United States and Belgium, and Viscofan, S.A., located in Spain and Brazil. A new competitor, Alphacel, located in Spain, is expected to begin operations in 1997. Some of the other important competitors in the cellulosic casings industry are Kalle Nalo GmbH, a wholly owned subsidiary of Hoechst AG, located in Germany; Wolff Walsrode AG, a wholly owned subsidiary of Bayer AG, located in Germany; Oy Visko AB located in Finland; and Celanese Mexicana located in Mexico.
In the specialty films area, the largest producer of heat shrinkable bags is the Cryovac Division of W.R. Grace & Company. Cryovac developed heat shrinkable films and a vacuumizing process for applying them in the early 1960's. Cryovac sells bags on a worldwide basis to all segments of the food industry, including meat and poultry producers. American National Can Company, a subsidiary of Pechiney, is another competitor in the specialty films area. Management believes that Viskase is in the number two position in the world behind Cryovac in the sale of heat shrinkable bags.
In the PVC films area, major competitors in the United States and Europe include AEP-Borden, Inc.; Huntsman Film Products Corporation; Anchor Plastics and Linpac.
Viskase's primary competitors include several major corporations, some of which are larger and better capitalized than Viskase. Research and Development; Customer Support
Viskase's continuing emphasis on research and development is central to its ability to maintain industry leadership. In particular, Viskase focuses on the development of new products that increase customers' operating efficiencies, reduce their operating costs and expand their markets. Viskase's projects include development of new processes and products to improve its manufacturing efficiencies. Viskase's research scientists, engineers and technicians are engaged in continuing product and equipment development and also provide direct technical and educational support to its customers.
Viskase founded its Food Science and Quality Institute (Institute) in 1941 to assist the meat and poultry industry in the development of new food items and more efficient production and packaging methods using Viskase products. The Institute's staff works closely with Viskase's sales and marketing professionals providing responsible, high-quality technical service to, and support of, Viskase customers. The Institute is able to reproduce customers' products and processes in order to help customers to solve their problems and to experiment with new foods and production techniques. The Institute conducts Meat Science Seminars that are attended by Viskase customers and production, research and quality assurance personnel, as well as food scientists from leading academic institutions.
Seasonality
Historically, domestic sales and profits of Viskase have been seasonal in nature, increasing in the spring and summer months and again near the year-end holiday season. There has been a marked change in Viskase's demand pattern due to the increase in international and export sales. Viskase's sales are expected to be less seasonal in the future. Sales of specialty films to the fresh meat industry and sales outside of the United States follow a relatively stable pattern throughout the year. Sales of PVC films experience only minor seasonality with sales generally increasing during the second and third quarters.
Raw Materials
Raw materials used by Viskase include cellulose (from wood pulp), fibrous paper, petroleum based resins, plasticizers and various other chemicals. Viskase generally purchases its raw materials from a single or small number of suppliers with whom it maintains good relations. Certain primary and alternative sources of supply are located outside the United States. Viskase believes, but there can be no assurance, that adequate alternative sources of supply currently exist for all of Viskase's raw materials or raw material substitutes that Viskase could modify its processes to utilize.
SANDUSKY - - --------- Sandusky is a producer of thermoformed vending and promotional cups, plastic containers used in the packaging of cultured dairy and delicatessen products, and of horticultural trays and inserts. Sandusky sells a majority of its products to dairy product manufacturers for packaging items such as yogurt and cottage cheese and to supermarkets for in-store packaging of take-home foods. The containers are normally custom printed in various colors with product identification, company names, logos, nutritional information and universal product codes in accordance with the customers' requirements.
Sandusky sells directly to its dairy and non-food customers through its sales and marketing group. Delicatessen containers and horticultural products are sold both directly and through commissioned brokers. Sandusky markets its products primarily in the northeastern, southern and midwestern regions of the United States. Plastic container sales are somewhat seasonal in nature, with slightly higher delicatessen container sales in late spring and summer and higher dairy sales in the fourth quarter.
All of Sandusky's thermoformed products are produced at its Sandusky, Ohio plant. Thermoforming is a process by which plastic resin pellets are melted and extruded into sheet stock, which is then heated and formed into finished containers, lids and trays. The principal raw material used by Sandusky is prime high impact polystyrene, which currently is available from several domestic sources.
The dairy and delicatessen containers industry is highly fragmented. Sandusky competes in the manufacture and sale of dairy and delicatessen containers with several domestic manufacturers of thermoformed and injection molded plastic containers. Major competitive factors in the dairy and delicatessen container business are price, quality and customer service. Major competitive factors in the specialized thermoformed container business are price and technical and customer service capabilities.
In January 1997, Sandusky made a decision to withdraw from the manufacture and sale of injection molded products. Production at the Sandusky injection molding facility is scheduled to cease in April 1997. Most of the production equipment will be transferred to the Clear Shield operations.
CLEAR SHIELD - - ------------ Clear Shield, headquartered in Wheeling, Illinois, is a major domestic producer of disposable plastic cutlery, drinking straws, custom dining kits and related foodservice products. Clear Shield is one of the largest producers of plastic cutlery and drinking straws in the United States. These products are sold primarily to institutional users, principally consisting of major quick serve restaurant chains, schools, and hospitals, and also to consumers through retail outlets. Sales are made under registered trade names including CLEAR SHIELD (R) and CARNIVAL (R). Institutional customers include such leading quick serve restaurant chains as McDonald's Corporation, Burger King Corporation, Taco Bell, Hardee's, KFC Restaurants and Pizza Hut. In addition, retail customers include Wal-Mart Stores, Inc.; The Kroger Co. and other major retail companies.
Clear Shield's products are manufactured at plants in Wheeling, Illinois; Leominster, Massachusetts; and Shreveport, Louisiana. The company has announced plans to build a new plant in Twin Falls, Idaho to service the western region of the United States. The plant is expected to begin operations in early 1998. In the interim the company will service the western region from a distribution center located in Twin Falls.
Plastic cutlery is made by melting polystyrene or polypropylene beads, which are then injected into specially designed custom molds within high-speed injection molding machines. Drinking straws are made by extruding molten polypropylene through specially designed dies within high-speed extrusion machines. Certain completed products are then specially wrapped using high-speed wrapping machines. Raw materials used in the manufacturing process currently are available from alternative sources. Raw material costs, in particular of polystyrene and polypropy- lene, are a major portion of Clear Shield's production costs. Although Clear Shield is generally able to pass on most raw material cost increases to customers, there can be a delay that varies by customer and market.
Sales are made predominantly in the United States, currently east of the Rocky Mountains, using Clear Shield's own sales force augmented by a network of non-exclusive, independent sales representatives. The majority of Clear Shield's sales, consisting of bulk and individually packaged products for institutional users, generally is not seasonal. Sales of retail packaged products are seasonal, however, with the highest sales and operating profits historically being achieved in the second and third quarters.
While competitive pricing generally is of key importance, Clear Shield also competes by emphasizing responsive service to customers, by maintaining consistent quality in its products and by capitalizing on its efficient and flexible operations. These efficiencies stem largely from proprietary improvements to the manufacturing process, high-volume manufacturing facilities and a flexible work force that enable Clear Shield to produce and ship more than 50 million items per working day.
Clear Shield's primary competitors include several major corporations, some of which are larger and better capitalized than Clear Shield and, in some cases, offer a wider product line than Clear Shield. Clear Shield's competitors periodically engage in aggressive price discounting to gain business. Clear Shield believes, however, that such market conditions will not result in any long-term material loss of business for Clear Shield, although its profit margins may be affected from time to time.
General Business Matters
- - ------------------------ Employees - - --------- The Company generally maintains productive and amicable relationships with its 4,900 employees worldwide. One of Viskase's domestic plants, located in Loudon, Tennessee, is unionized, and its Canadian and European plants have unions. From time to time union organization efforts have occurred at other individual plant locations. Unions represent a total of approximately 1,500 of Viskase's 4,000 employees. None of Clear Shield's employees are represented by unions. Certain of the hourly production personnel of Sandusky's Ohio injection molding and thermoforming facilities are members of a union.
Trademarks and Patents - - ---------------------- Viskase holds patents on many of its major technologies, including those used in its manufacturing processes and the technology embodied in prod- ucts sold to its customers. Because it believes its ongoing market leadership depends heavily upon its technology, Viskase vigorously protects and defends its patents against infringement by competitors on an international basis. Viskase, as part of its research and development program, has developed and expects to continue to develop new proprietary technology and has licensed proprietary technology from third parties. Management believes these activities will enable Viskase to maintain its competitive position. Viskase also owns numerous trademarks and registered tradenames that are used actively in marketing its products. Viskase periodically licenses its process and product patents to competitors to generate royalty income.
The other Company operations also own trademarks and tradenames that are used actively in marketing products. Sandusky has patents on new product developments, but, with the exception of Viskase, patent protection is not currently material to any of the operations as now conducted.
Research and Development - - ------------------------ Research and development costs are expensed as incurred and, on a consolidated basis, totaled $6,841,000, $11,034,000, and $16,852,000, for 1996, 1995 and 1994, respectively. The majority of such costs are attributable to Viskase's extensive research and development program.
Viskase believes it has achieved and maintained its position as a leading producer of cellulosic casings and as a major domestic producer of specialty films for packaging meats through significant expenditures on research and development. The Company expects to continue its research and development efforts. The commercialization of certain of these product and process applications and related capital expenditures to achieve commercialization may require substantial financial commitments in future periods. Should these activities be curtailed or if capital resources are not available to develop its projects, Viskase's ability to maintain its present market share could be materially impaired.
Environmental Regulations - - ------------------------- In manufacturing its products, the Company employs certain hazardous chemicals and generates toxic and hazardous wastes. The use of these chemicals and the disposal of such waste are subject to stringent regulation by several governmental entities, including the United States Environmental Protection Agency (USEPA) and similar state, local and foreign environmental control entities. The Company is subject to various environmental, health and safety laws, rules and regulations including those of the United States Occupational Safety and Health Administration and USEPA. These laws, rules and regulations are subject to amendment and to future changes in public policy or interpretation, which may affect the operations of the Company. The Company uses its best reasonable efforts to comply with promulgated laws, rules and regulations and participates in the rulemaking process.
Certain of the Company's facilities are or may become potentially responsible parties with respect to other off-site waste disposal facilities.
As noted above, new environmental and health and safety laws can impose significant compliance costs, including forthcoming rules. Under the Clean Air Act Amendments of 1990, various industries, including casings manufacturers, will be required to meet air emissions standards for certain chemicals based on use of the "maximum achievable control technology" (MACT). MACT standards for casings manufacturers have not yet been proposed or promulgated; therefore, at this time no estimate of the cost of complying with MACT standards can be made. Such rules, however, will likely impose similar costs on all casings manufacturers in the United States.
Under the Resource Conservation and Recovery Act (RCRA), regulations have been proposed that, in the future, may impose design and/or operating requirements on the use of surface impoundments of wastewater. Two of Viskase's plants use surface impoundments. The Company does not foresee these regulations being imposed for several years.
Various state, local and foreign governments have enacted or are considering enacting laws, rules or regulations concerning the disposal of plastic products. While such legislative action has had a minor effect on certain product sales and may have further effect in the future, the Company is not aware of any existing legislative action that it currently expects to have a material adverse effect on the Company.
(d) Financial information about foreign and domestic operations and --------------------------------------------------------------- export sales ------------ Reference is made to Part IV, Item 14, Note 21 of Notes to Consolidated Financial Statements.
EXECUTIVE OFFICERS OF THE REGISTRANT - - ------------------------------------ The following table sets forth the names and ages of the Company's executive officers, together with the positions with the Company held by such executive officers, and a summary of their recent business experience. Under the Company's Amended and Restated By-Laws, the Company's officers are elected for such terms as may be determined from time to time by the Board of Directors.
On January 7, 1993, Envirodyne and its major domestic subsidiaries filed petitions under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"). On December 31, 1993, Envirodyne and the debtor subsidiaries consummated a plan of reorganization and emerged from bankruptcy. In addition, Emerald Acquisition Corporation (Emerald), the sole stockholder of Envirodyne prior to Envirodyne's emergence from bankruptcy, filed a petition under Chapter 11 of the Bankruptcy Code on August 20, 1993. The Emerald case is still pending before the Bankruptcy Court.
In addition to the positions with Envirodyne held by the persons specified below for the periods indicated, Messrs. Gustafson and Schuster have served as executive officers of Emerald, since May 1989.
ITEM 2.
ITEM 2. PROPERTIES ----------
VISKASE FACILITIES
LOCATION SQUARE FEET PRIMARY USE - - --------------- --------------- -------------------- Manufacturing Facilities
Aurora, Ohio 73,000 PVC film production Barceloneta, Puerto Rico 156,000 Idle plant facilities held for sale Beauvais, France (a) 235,000 Casings production and finishing Centerville, Iowa 223,000 Specialty films production and finishing Chicago, Illinois 991,000 Casings production, administration and research Guarulhos, Brazil 81,000 Specialty films production and casings finishing Kentland, Indiana 125,000 Casings finishing Lindsay, Ontario, Canada 166,000 Casings finishing and specialty films finishing Loudon, Tennessee 250,000 Casings production Nuevo Laredo, Mexico (a) 22,000 Casings finishing Osceola, Arkansas 223,000 Casings production and finishing Pauls Valley, Oklahoma 110,000 Casings finishing, specialty films production and finishing Sedgefield, England 87,000 PVC and OPP conversion Swansea, Wales (Great Britain) 77,000 Specialty films production and finishing Swansea, Wales (a) 28,000 Administrative facilities Thaon, France 239,000 Casings production and finishing
Service Centers - Domestic
Atlanta, Georgia (a) Bensalem, Pennsylvania Chicago, Illinois Pauls Valley, Oklahoma
Service Centers - Foreign
Brisbane, Australia (a) Guarulhos, Brazil Milan, Italy Pulheim, Germany (a) Nuevo Laredo, Mexico (a) Moscow, Russia (a) Headquarters
Worldwide: Chicago, Illinois Europe: Paris, France (a)
(a) Leased. All other properties are owned by the respective company or its subsidiaries. CLEAR SHIELD FACILITIES
LOCATION SQUARE FEET PRIMARY USE - - ---------------------- --------------- ----------------------- Leominster, Massachusetts 135,000 Cutlery, straws and combination kits Shreveport, Louisiana 148,000 Cutlery, straws and combination kits Wheeling, Illinois (two plants) 260,000 Cutlery, straws and combination kits; Headquarters
SANDUSKY FACILITIES
LOCATION SQUARE FEET PRIMARY USE - - ---------------------- --------------- ----------------------- Sandusky, Ohio 195,000 Thermoforming and headquarters Sandusky, Ohio 31,000 Warehouse Sandusky, Ohio (a) 97,000 Warehouse Sandusky, Ohio (a) 90,000 Injection molding and warehouse
- - ------------------------ (a) Leased. All other properties are owned by the respective company or its subsidiaries.
The Company's headquarters are located in leased facilities in Oak Brook, Illinois. The Company believes that its properties generally are suitable and adequate to satisfy the Company's present and anticipated needs. The Company's United States real property collateralizes the Company's obligations under various financing arrangements. For a discussion of these financing arrangements, refer to Part IV, Item 14, Note 9 of Notes to Consolidated Financial Statements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS -----------------
Viskase Jury Award
In late 1993, Viskase commenced a legal action against American National Can Company (ANC) in Federal District Court for the Northern District of Illinois, Eastern Division, 93C7651. Viskase claimed that ANC was infringing on various Viskase patents relating to multi-layer barrier plastic films used for fresh red meat, processed meat and poultry product applications. On November 8, 1996, after a three-week trial, a jury found that ANC had willfully infringed Viskase's patents and awarded Viskase $102.4 million in compensatory damages. On December 5, 1996, ANC posted a supersedeas bond in the amount of $108 million and the Court entered an order staying Viskase's enforcement of the judgment. The Court also entered an order permanently enjoining ANC from making or selling infringing products after December 23, 1996.
The judgment is not final and the parties are presently engaged in the post-judgment motion phase of the case. ANC has filed motions to reduce the damage award by at least $75 million or alternatively, grant ANC a new trial. Viskase is seeking a determination that the case be deemed "exceptional" and that the award be increased by approximately $46 million which includes compensatory damages for ANC's infringement during the period of October 1, 1996 through December 23, 1996 and additional damages for prejudgment interest, attorneys' fees and related expenses. Due to ANC's willful infringement of the patents, Viskase has asked the court to treble the compensatory award. These motions are all pending before the Court and rulings are expected in the second quarter 1997. Meanwhile post-judgment interest is accruing on the $102.4 million award from November 8, 1996 at an annual rate of 5.49%. The Company expects ANC to vigorously contest the award and to appeal any final judgment. The award and any pending claims for additional damages have not been recorded in the Company's financial statements.
Indemnification Claims
Litigation is pending with respect to events arising out of the Envirodyne bankruptcy case and the 1989 acquisition of Envirodyne by Emerald Acquisition Corporation (Emerald) with respect to which, although Envirodyne is not presently a party to such litigation, certain defendants have asserted indemnity rights against Envirodyne.
In ARTRA Group Incorporated v. Salomon Brothers Holding Company Inc, ---------------------------------------------------------------- Salomon Brothers Inc, D.P. Kelly & Associates, L.P., Donald P. Kelly, - - -------------------------------------------------------------------- Charles K. Bobrinskoy, James L. Massey, William Rifkind and Michael - - ------------------------------------------------------------------- Zimmerman, Case No. 93 A 1616, United States Bankruptcy Court for the - - --------- Northern District of Illinois, Eastern Division, ARTRA Group Incorporated (ARTRA) alleges breach of fiduciary duty and tortious inference in connection with the negotiation and consummation of the Plan of Reorganization (ARTRA I). In ARTRA Group Incorporated v. Salomon ------- ----------------------------------- Brothers Holding Company Inc, Salomon Brothers Inc, D.P. Kelly & - - ---------------------------------------------------------------- Associates, L.P., Donald P. Kelly, Charles K. Bobrinskoy and Michael - - -------------------------------------------------------------------- Zimmerman, Case No. 93 L 2198, Circuit Court of the Eighteenth Judicial - - --------- Circuit, DuPage County, Illinois, ARTRA alleges breach of fiduciary duty, fraudulent and negligent misrepresentation and breach of contract in connection with the 1989 acquisition of Envirodyne by Emerald (ARTRA ----- II). The plaintiff seeks damages in the total amount of $136.2 million - - -- plus interest and punitive damages of $408.6 million. D.P. Kelly & Associates, L.P. and Messrs. Kelly, Bobrinskoy, Massey, Rifkind and Zimmerman have asserted common law and contractual rights of indemnity against Envirodyne for attorneys' fees, costs and any ultimate liability relating to the claims set forth in the complaints. Upon a motion of the defendants, the Bankruptcy Court dismissed ARTRA's claims in ARTRA I. ------- ARTRA appealed to the U.S. District Court and on October 31, 1996, the U.S. District Court affirmed the Bankruptcy Court's decision. ARTRA has appealed to the U.S. Court of Appeals for the Seventh Circuit. All briefs have been filed and the parties are awaiting oral argument.
Envirodyne is continuing its evaluation of the merits of the indemnification claims against Envirodyne and the underlying claims in the litigation. Upon the undertaking of D.P. Kelly & Associates, L.P. to repay such funds in the event it is ultimately determined that there is no right to indemnity, Envirodyne is advancing funds to D.P. Kelly & Associates, L.P. and Mr. Kelly for the payment of legal fees in ARTRA I. ------- Although the Company is not a party to either case, the Company believes that the plaintiff's claims raise similar factual issues to those raised in the Envirodyne bankruptcy case which, if adjudicated in a manner similar to that in the Envirodyne bankruptcy case, would render it difficult for the plaintiff to establish liability or prove damages. Accordingly, the Company believes that the indemnification claims would not have a material adverse effect upon the business or financial position of the Company, even if the claimants were successful in establishing their right to indemnification.
Other
Since early 1993, the Antitrust Division of the United States Department of Justice has been investigating the disposable plastic cutlery industry. This investigation has resulted in the indictment and conviction of certain companies and individuals in the industry. Some indictments and criminal trials are pending. Although the United States Department of Justice has advised a former officer and an existing employee of Clear Shield National that they are targets of the investigation, neither person has been indicted. Clear Shield National is cooperating fully with the investigation.
In February 1996 Clear Shield National and three other plastic cutlery manufacturers were named as defendants in the following three civil complaints: Eisenberg Brothers, Inc., on behalf of itself and all others ------------------------------------------------------------ similarly situated, v. Amcel Corp., Clear Shield National, Inc., - - -------------------------------------------------------------- Dispoz-O Plastics Corp. and Benchmark Holdings, Inc. t/a Winkler - - ---------------------------------------------------------------- Products, Civil Action No. 96-728, United States District Court for the - - -------- Eastern District of Pennsylvania; St. Cloud Restaurant Supply Company v. ------------------------------------- Amcel Corp., Clear Shield National, Inc., Dispoz-O Plastics Corp. and - - --------------------------------------------------------------------- Benchmark Holdings, Inc. t/a Winkler Products, Case No. 96C 0777, - - --------------------------------------------- United States District Court for the Northern District of Illinois, Eastern Division; and Servall Products, Inc., on behalf of itself and ----------------------------------------------- all others similarly situated, v. Amcel Corporation, Clear Shield - - ----------------------------------------------------------------- National, Inc., Dispoz-O Plastics Corporation and Benchmark Holdings, - - -------------------------------------------------------------------- Inc. t/a Winkler Products, Civil Action No. 96-1116, United States - - ------------------------- District Court for the Eastern District of Pennsylvania. Each of the complaints alleges, among other things, that from October 1990 through April 1992 the defendants unlawfully conspired to fix the prices at which plastic cutlery would be sold. The Company has informed the plaintiffs that such claims as they relate to Clear Shield were discharged by the order of the Bankruptcy Court and Plan of Reorganization and that the plaintiffs are permanently enjoined from pursuing legal action to collect discharged claims.
On February 27, 1996, the plaintiff in the St. Cloud case voluntarily --------- dismissed the action without prejudice and refiled its action in the United States District Court for the Eastern District of Pennsylvania but did not name Clear Shield National as a defendant. On March 14, 1996, Eisenberg Brothers Inc., St. Cloud and Servall filed a motion in Clear Shield National's Bankruptcy proceeding in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division contending that the Bankruptcy Court's order did not discharge the plaintiff's claim. On March 19, 1997, the Bankruptcy Court denied their motion and granted the Company's cross motion for summary judgment. The time period for appeal by Eisenberg Brothers, Inc. et al. has not passed.
For a description of certain environmental matters affecting the Company, refer to Part I, Item 1, "Environmental Regulations."
The Company and its subsidiaries are involved in various other legal proceedings arising out of its business, none of which is expected to have a material adverse effect upon its business or financial position.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- Not applicable. PART II -------
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER ------------------------------------------------------------- MATTERS ------- (a) Market Information. Envirodyne's Common Stock is traded in the ------------------ over-the-counter market on the Nasdaq SmallCap Market. The high and low closing bid prices of the Common Stock during 1996 and 1995 are set forth in the following table. Such prices reflect interdealer prices without markup, markdown or commissions and may not represent actual transactions.
1996 First Quarter Second Quarter Third Quarter Fourth Quarter - - ------ ------------- -------------- ------------- -------------- High $3.63 $4.75 $4.75 $5.88 Low 2.88 3.25 3.50 3.88
1995 First Quarter Second Quarter Third Quarter Fourth Quarter - - ------ ------------- -------------- ------------- -------------- High $4.88 $4.75 $4.88 $4.63 Low 3.50 3.75 4.13 2.88
(b) Holders. As of March 14, 1997, there were approximately 243 holders ------- of record of Envirodyne's Common Stock.
(c) Dividends. Envirodyne has never paid a cash dividend on shares of --------- its Common Stock. The payment of dividends is restricted by the terms of various financing agreements to which the Company is a party. The Company has no present intention of paying dividends in the foreseeable future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA -----------------------
Results of Operations - - --------------------- The Company's 1996 net sales were $651.4 million, which represented a slight increase over the prior year's sales of $650.2 million.
Net sales in 1996 for Viskase decreased by .5% from the prior year. The benefits of stronger world-wide volumes were offset by lower pricing due to competitive pressures in both the domestic and European markets as well as lower casing volumes in the United States.
Viscofan, S.A., a Spanish small diameter casing producer entered the United States market in November 1994. The Company and its domestic competitors have experienced significant volume loss to Viscofan; management believes that Viskase will experience further pricing pressures as a result of Viscofan's presence in the domestic market. Viskase's management is aware of other smaller competitors which from time to time attempt penetrating the casing market. In 1997 it is expected that at least two of these will pursue such efforts. Although the Company does not expect to experience significant volume loss to these competitors, management believes that additional pricing pressures will result.
The British beef industry continues to be affected by concerns over bovine spongiform encephalopathy (BSE), or mad cow disease. While certain of our product lines in Europe are sold to customers in affected industries, Viskase's results have not been significantly impacted, nor does management expect any significant impact in the future.
Sandusky's sales increased by 2.4% due to an increase in vending and promotional cup sales. Dairy and deli container sales declined by 7.6%. Although the Company had expanded its injection molding capacity in recent years, competitive pressures coupled with the softness in the dairy industry resulted in management's decision to cease its injection molding operations and transfer most of the production assets to the Clear Shield operations.
Clear Shield's net sales increased by 3.6% over the prior year primarily due to volume increases from new business. Retail sales were particularly strong. These increases more than offset volume loss from softness in the quick serve restaurant market segment.
The Company's 1995 net sales were $650.2 million, which represented an 8.5% increase over the prior year's sales of $599.0 million.
Net sales in 1995 for Viskase increased 10.4% over the prior year due to the expansion of European, Latin American and Asian Pacific sales, selected price increases, increased worldwide film sales, combined with the favorable effects of foreign currency translation.
Net sales in 1995 for Sandusky declined by 15% due to an 11% reduction in dairy and deli container sales combined with the loss of Scott Paper Company's premoistened baby wipe container business. The loss in container sales is primarily attributed to a shift in demand from thermoformed to injection molded containers.
Clear Shield's net sales in 1995 increased by 10.4% primarily due to selling price increases along with an increase in the retail product group sales volume.
The Company's 1994 net sales were $599 million, which represented a 2.0% increase over the prior year's sales of $587.4 million.
Net sales for 1994 for Viskase increased 2.5% over the prior year due to the impact of increased film sales and foreign currency translation. Sandusky's sales declined 8.1% due to the reduction in the baby wipe container sales partially offset by an increase in dairy and deli container volumes. Clear Shield's net sales increased 3.9% primarily due to the impact of third and fourth quarter price increases combined with some volume increases in the wrapped cutlery and retail product lines.
Operating income for 1996 was $39.7 million, which represented an increase of $1.6 million from the prior year. Operating income in 1996 reflected lower selling, general and administrative expenses resulting primarily from lower research and development costs and certain cost- cutting measures which resulted in lower domestic selling, general and administrative expenses. The slight decline in gross margins in 1996 was due to continued lower pricing resulting from competitive pressures across most product lines in both domestic and foreign markets, offset by the benefit of shifts in European product mix towards the higher margin product lines. Operating income for 1995 was $38.1 million, which represented a decline of $10.5 million from the prior year. Operating income in 1994 benefitted from a net $8.7 million settlement of a patent infringement suit. The decline in gross margins in 1995 was due to price competition in domestic and foreign markets, lower casing volumes, continued effect of resin price increases through the third quarter of 1995, primarily at Clear Shield and Sandusky, and loss of dairy and deli container and baby wipe container volume. Operating income in 1995 reflected increased selling, general and administrative expenses result- ing from strategic expansion in foreign markets including Europe, Latin America and Australia, partially offset by lower research and development costs and the consolidation of Sandusky's manufacturing operations.
Operating income for 1994 was $48.7 million, which represented a decline of $5.0 million from the prior year. Pro forma operating income for 1993, giving effect to fresh start reporting and the implementation of the Plan of Reorgniazation with the related financing as if such events had taken place on January 1, 1993, was $54.6 million. The decline in gross margins in 1994 was due to the impact of price competition in dairy and deli containers and in foreign markets, reduced by baby wipe container sales and increased resin prices. Selling, general and administrative expenses in 1994 included $1.6 million of additional patent legal expenses (approximately $.8 million of which were legal expenses related to the $9.5 million patent infringement litigation settlement), expansion in Central and South America, additional corporate costs relating to increased insurance and other costs associated with Envirodyne's status as a public company following its emergence from bankruptcy, as well as increased expenditures on research and development.
On November 8, 1996, a jury awarded $102.4 million in damages to Viskase Corporation in its patent infringement lawsuit against ANC. Viskase brought suit against ANC. with respect to its infringement of various Viskase patents relating to multilayer barrier plastic films used for fresh red meat, processed meat and poultry product applications. The jury found that ANC had willfully infringed Viskase's patents. Envirodyne expects ANC to appeal the award. This award has not been recorded in the Company's financial statements. (Refer to Part I, Item 3, Legal Proceedings - Viskase Jury Award.)
Net interest expense for 1996 totaled $57.0 million, which represented an increase of $.3 million from 1995. The increase is attributable to borrowings at higher interest rates, which more than offset the effect of lower borrowing levels.
Other expense of $(3.0) million and $(1.7) million in 1996 and 1995, respectively, includes a $(2.0) million charge in 1996 for the termination of the management agreement with D.P. Kelly & Associates, L.P. and net foreign currency translation gains (losses) of $.7 and $(.1) million, respectively.
The 1995 extraordinary loss represents the write-off of unamortized financing fees related to the Company's senior secured bank facility that was refinanced by a private placement. The extraordinary loss of $4.2 million is net of a tax benefit of $2.6 million. (Refer to Part IV, Item 14, Note 9 of Notes to Consolidated Financial Statements.)
The Company has entered into forward foreign exchange contracts to hedge certain foreign currency transactions on a continuing basis for periods consistent with its committed foreign exchange exposures. The effect of this practice is to minimize the effect of foreign exchange rate movements on the Company's operating results. The Company's hedging activities do not subject the Company to additional exchange risk because gains and losses on these contracts offset losses and gains on the transactions being hedged. The cash flows from forward contracts are classified consistent with the cash flows from the transactions or events being hedged.
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options and other equity instruments to employees based on new fair value acounting rules. Although expense recognition for employee stock-based compensation is not mandatory, SFAS 123 requires companies that choose not to adopt the new fair value accounting to disclose pro forma net income and earnings per share under the new method. The Company has not adopted fair value accounting, and, accordingly, no compensation cost has been recognized for employee stock-based compensation. The Company has complied with the disclosure requirements of SFAS 123.
The 1996 and 1995 tax benefits consisted of the benefits of United States losses partially offset by the provision related to income from foreign subsidiaries. The 1994 tax provisions consisted of the provisions on income from the United States and foreign subsidiaries. A benefit of $6.7 million and $2.9 million, respectively, was provided on (loss) before income taxes and extraordinary items of $(20.4) million and $(20.2) million, respectively, for 1996 and 1995. Domestic cash income taxes paid in 1996, 1995 and 1994 were $438 thousand, $640 thousand and $1.5 million, respectively. Foreign cash income taxes paid in 1996, 1995 and 1994 were $1.2 million, $4.3 million and $3.5 million, respectively. The United States tax benefit is recorded as a reduction of the deferred tax liability and does not result in a refund of income taxes.
Liquidity and Capital Resources - - ------------------------------- Cash and equivalents increased by $11.5 million during the fiscal year ended December 26, 1996. Cash flows provided by operating activities of $56.3 million exceeded cash flows used in investing activities of $34.7 million and cash flows used in financing activities of $9.5 million. Cash flows provided by operating activities were principally attributable to the effect of depreciation and amortization and a decrease in operating assets and liabilities offset by the Company's loss from operations. The principal factors contributing to the decrease in operating assets and liabilities were the Company's program to manage and reduce receivable and inventory levels and an increase in accrued liabilities, specifically compensation and employee benefits and taxes payable. Cash flows used by financing activities were principally attributable to the repayment of Viskase's capital lease obligation and Viskase Limited's term loan. Cash flows used in investing activities consist principally of capital expenditures for property, plant and equipment.
The Company finances its working capital needs using internally generated cash from operations and can also borrow under its $20 million domestic revolving credit facility (Revolving Credit Facility). The availability of funds under the Revolving Credit Facility is subject to the Company's compliance with certain covenants (which are substantially similar to those included in the Indenture), to borrowing base limita- tions measured by accounts receivable and inventory of the Company and to reserves that may be established in the discretion of the lenders. Currently, there are no drawings under the Revolving Credit Facility. The available borrowing capacity under the Revolving Credit Facility was $20 million at December 26, 1996.
The Company anticipates that its operating cash flow will be sufficient to meet its operating expenses and to service its interest payments on the Senior Secured Notes and its other outstanding indebtedness. The Company will be required to satisfy its $80 million mandatory redemption obligation with respect to the Senior Secured Notes in 1999 and to pay the remaining principal amount of the Senior Secured Notes in 2000. Additionally, the Company's 10.25% Notes, of which $219.3 million principal amount is outstanding, will mature in December 2001. The Company expects that in order to make these payments it will be required to pursue one or more alternative strategies, such as refinancing its indebtedness, selling additional equity capital, reducing or delaying capital expenditures, or selling assets. There can be no assurance that any of these strategies could be effected on satisfactory terms, if at all.
Capital expenditures for fiscal 1996 and 1995 totaled $37.1 million and $34.5 million, respectively. Capital expenditures for 1997 are expected to be approximately $45 million and in future years $40 million.
The Company acquired the minority shareholder's interest in Viskase's Brazilian subsidiary for $4.2 million during the first quarter of 1994.
The Company has spent approximately $7 million to $17 million annually on research and development programs, including product and process development, and on new technology development during each of the past three years. The 1997 research and development and product introduction expenses are expected to be in the $8 million range. Among the projects included in the current research and development efforts is the application of certain patents and technology licensed by Viskase to the manufacture of cellulosic casings. The commercialization of these applications and the related fixed asset expense associated with such commercialization may require substantial financial commitments in future periods.
The Company and its subsidiaries are taking actions to provide that their computer systems are capable of processing for the periods the year 2000 and beyond. The costs associated with this are not expected to significantly affect operating cash flow.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- Financial statements and supplementary financial information meeting the requirements of Regulation S-X are listed in the index to financial statements and schedules, as included under Part IV, Item 14 of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- There were no disagreements on accounting and financial disclosure required to be disclosed under this Item. PART III --------
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------- The information required by this Item is set forth in the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this report (Proxy Statement) in the section entitled "Election of Directors," the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" and in the third paragraph of the section entitled "Certain Relationships and Related Transactions," and is incorporated herein by reference to the Proxy Statement. For information regarding executive officers of the Company, see the information set forth under "Executive Officers of the Registrant" in Part I of this report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION ---------------------- The information required by this Item is set forth in the Proxy Statement in the section entitled "Compensation of Directors and Executive Officers" and is incorporated herein by reference to the Proxy Statement. The information set forth in the Proxy Statement in the sections entitled "Compensation Committee Report on Executive Compensation" and "Performance Graph" is not required by this Item and is not incorporated by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- The information required by this Item is set forth in the Proxy Statement in the section entitled "Security Ownership" and is incorporated herein by reference to the Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- The information required by this Item is set forth in the Proxy Statement in the section entitled "Certain Relationships and Related Transactions" and is incorporated by reference to the Proxy Statement. See also Part IV, Item 14, Note 20 of Notes to Consolidated Financial Statements.
PART IV -------
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON ------------------------------------------------------ FORM 8-K -------- (a) 1. Financial statements: PAGE -------------------- ---- Report of independent accountants 28
Consolidated balance sheets, December 26, 1996 and December 28, 1995 29
Consolidated statements of operations, for December 29, 1995 to December 26, 1996; December 30, 1994 to December 28, 1995; and January 1 to December 29, 1994; 30
Consolidated statements of stockholders' equity (deficit), for December 29, 1995 to December 26, 1996; December 30, 1994 to December 28, 1995 and January 1 to December 29, 1994; 31
Consolidated statements of cash flows, for December 29, 1995 to December 26, 1996; December 30, 1994 to December 28, 1995; and January 1 to December 29, 1994; 32
Notes to consolidated financial statements 33
(a) 2. Financial statement schedules for the periods December 29, 1995 --------------------------------------------------------------- to December 26, 1996; December 30, 1994 to December 28, 1995; ------------------------------------------------------------ and January 1 to December 29, 1994: ---------------------------------- II Valuation and qualifying accounts 80
Schedules other than those listed are omitted because they are not required, are not applicable, or because equivalent information has been included in the financial statements and notes thereto or elsewhere herein.
(b) Reports on Form 8-K. -------------------- None.
(c) Exhibits: -------- Exhibit No Description of Exhibits Page - - ---------------------------------------------------------------------
2.1 Debtors First Amended Joint Plan of Reorganization as Twice Modified dated December 15, 1993 of Envirodyne Industries, Inc. and certain of its subsidiaries (incorporated herein by reference to Exhibit 2 to Form 8-K filed January 19, 1994 of Envirodyne Industries, Inc.) *
3.1 Amended and Restated Certificate of Incorporation of Envirodyne Industries, Inc. (incorporated herein by reference to Exhibit 3.1 to Form 8-K filed January 19, 1994, of Envirodyne Industries, Inc.). *
3.2 Amended and Restated By-Laws of Envirodyne Industries, Inc. (incorporated herein by reference to Exhibit 3.2 to Form 8-K filed March 20, 1997 of Envirodyne Industries, Inc.). *
4.1 Indenture dated as of December 31, 1993 between Envirodyne Industries, Inc. and Bankers Trust Company, as Trustee, relating to the 10-1/4% Notes Due 2001 of Envirodyne Industries, Inc. including form of 10-1/4% Note Due 2001 (incorporated herein by reference to Exhibit 4.1 to Form 8-K filed January 19, 1994 of Envirodyne Industries, Inc.). *
4.2 Warrant Agreement dated as of December 31, 1993 between Envirodyne Industries, Inc. and Bankers Trust Company, as Warrant Agent, relating to the Warrants to Purchase Common Stock of Envirodyne Industries, Inc., including form of Warrant to Purchase Common Stock (incorporated herein by reference to Exhibit 4.2 to Form 8-K filed January 19, 1994 of Envirodyne Industries, Inc.). *
4.3 Indenture dated as of June 20, 1995 (the "Indenture") between Envirodyne Industries, Inc. and Shawmut Bank Connecticut, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-4 of Envirodyne Industries, Inc. filed July 20, 1995). *
4.4 Forms of the Notes issued pursuant to the Indenture (included in Exhibit 4.3). *
4.5 Exchange and Registration Rights Agreement dated as of June 20, 1995 between Envirodyne Industries, Inc. and the purchasers of the Notes (incorporated by reference to Exhibit 4.5 to the Registration Statement on Form S-4 of Envirodyne Industries, Inc. filed July 20, 1995). *
4.6 Guaranty Agreement, dated as of June 20, 1995, made by Clear Shield National, Inc., Sandusky Plastics, Inc., Sandusky Plastics of Delaware, Inc., Viskase Corporation, Viskase Holding Corporation and Viskase Sales Corporation, in favor of BT Commercial Corporation, as Collateral Agent (incorporated by reference to Exhibit 4.6 to the Registration Statement on Form S-4 of Envirodyne Industries, Inc. filed July 20, 1995). *
4.7 Pledge Agreement, dated as of June 20, 1995, made by Envirodyne Industries, Inc. to BT Commercial Corporation, as Collateral Agent (incorporated by reference to Exhibit 4.7 to Amendment No. 2 to the Registration Statement on Form S-4 of Envirodyne Industries, Inc. filed September 21, 1995). *
4.8 Security Agreement, dated as of June 20, 1995, made by Envirodyne Industries, Inc. in favor of BT Commercial Corporation, as Collateral Agent (incorporated by reference to Exhibit 4.8 to Amendment No. 2 to the Registration Statement on Form S-4 of Envirodyne Industries, Inc. filed September 21, 1995). *
4.9 Form of Subsidiary Security Agreement, dated as of June 20, 1995, made by each applicable Subsidiary in favor of BT Commercial Corporation, as Collateral Agent (incorporated by reference to Exhibit 4.9 to Amendment No. 2 to the Registration Statement on Form S-4 of Envirodyne Industries, Inc. filed September 21, 1995). *
4.10 Intellectual Property Security Agreement, dated as of June 20, 1995, made by Viskase Corporation in favor of BT Commercial Corporation, as Collateral Agent (incorporated by reference to Exhibit 4.10 to Amendment No. 2 to the Registration Statement on Form S-4 of Envirodyne Industries, Inc. filed September 21, 1995). *
4.11 First Supplemental Indenture, dated as of October 13, 1995, between Envirodyne Industries, Inc. and Shawmut Bank Connecticut, National Association, as Trustee (incorporated by reference to Exhibit 4.11 to Amendment No. 3 to the Registration Statement on Form S-4 of Envirodyne Industries, Inc. filed October 17, 1995). *
4.12 Rights Agreement, dated as of June 26, 1996, between Envirodyne Industries, Inc. and Harris Trust and Savings Bank, as Rights Agent (incorporated herein by reference to Exhibit 4.1 of Form 8-K dated June 26, 1996). *
10.1 Participation Agreement dated as of December 18, 1990 among Viskase Corporation, as Lessee, Envirodyne Industries, Inc., as Guarantor, General Electric Capital Corporation, as Owner Participant, and The Connecticut National Bank, as Owner Trustee (incorporated herein by reference to Exhibit 10.24 to Form 8-K, filed January 22, 1991, of Envirodyne Industries, Inc.). *
10.2 Lease Agreement dated as of December 18, 1990 between The Connecticut National Bank, Owner Trustee, as Lessor and Viskase Corporation, as Lessee (incorporated herein by reference to Exhibit 10.25 to Form 8-K, filed January 22, 1991, of Envirodyne Industries, Inc.). *
10.3 Appendix A; Definitions relating to the Participation Agreement, the Lease and the Ground Lease (incorporated herein by reference to Exhibit 10.26 to Form 8-K, filed January 22, 1991, of Envirodyne Industries, Inc.). *
10.4 Ground Lease dated as of December 18, 1990 between Viskase Corporation, as Ground Lessor, and The Connecticut National Bank, as Ground Lessee (incorporated herein by reference to Exhibit 10.27 to Form 8-K, filed January 22, 1991, of Envirodyne Industries, Inc.). *
10.5 Guaranty Agreement dated as of December 18, 1990, among Envirodyne Industries, Inc.; Clear Shield National, Inc.; Sandusky Plastics of Delaware, Inc.; Viskase Sales Corporation, all as Guarantors; The Connecticut National Bank, as Owner Trustee; and General Electric Capital Corporation, as Owner Participant (incorporated herein by reference to Exhibit 10.28 to Form 8-K, filed January 22, 1991, of Envirodyne Industries, Inc.). *
10.6 Trust Agreement dated as of December 18, 1990 between General Electric Capital Corporation, as Owner Participant, and The Connecticut National Bank, as Owner Trustee (incorporated herein by reference to Exhibit 10.29 to Form 8-K, filed January 22, 1991, of Envirodyne Industries, Inc.). *
10.7 Envirodyne Industries, Inc. Non-Employee Directors' Compensation Plan (incorporated herein by reference to Appendix B of Envirodyne Industries, Inc.'s Proxy Statement for its 1996 Annual Meeting of Stockholders).+ *
10.8 Envirodyne Industries, Inc. 1993 Stock Option Plan, as amended and restated through March 27, 1996 (incorporated herein by reference to Appendix A of Envirodyne Industries, Inc.'s Proxy Statement for its 1996 Annual Meeting of Stockholders). + *
10.9 Envirodyne Industries, Inc. Corporate Office Management Incentive Plan for Fiscal Year 1996. + **
10.10 Envirodyne Industries, Inc. Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.34 to Form 10-Q for the fiscal quarter ended June 27, 1991, filed August 12, 1991, of Envirodyne Industries, Inc.). + *
10.11 Envirodyne Industries, Inc. Parallel Envirodyne Non- Qualified Thrift Plan (incorporated herein by reference to Exhibit 10.35 to Form 10-Q for the fiscal quarter ended June 27, 1991, filed August 12, 1991, of Envirodyne Industries, Inc.). + *
10.12 Note Agreement, dated as of June 20, 1995, between Envirodyne Industries, Inc. and each of the purchasers identified therein (incorporated by reference to Exhibit 10.10 to the Registration Statement on Form S-4 of Envirodyne Industries, Inc. filed July 20, 1995). *
10.13 Letter Agreement, dated as of June 20, 1995, between Envirodyne Industries, Inc. and certain purchasers of the Notes (incorporated by reference to Exhibit 10.11 to the Registration Statement on Form S-4 of Envirodyne Industries, Inc. filed July 20, 1995). *
10.14 Revolving Credit Agreement, dated as of June 20, 1995, between Envirodyne Industries, Inc. and The Prudential Insurance Company of America (incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-4 of Envirodyne Industries, Inc. filed July 20, 1995). *
10.15 Credit Agreement, dated as of June 20, 1995, among Envirodyne Industries, Inc., the lenders identified therein and BT Commercial Corporation, as Agent (incorporated by reference to Exhibit 10.13 to the Registration Statement on Form S-4 of Envirodyne Industries, Inc. filed July 20, 1995). *
10.16 Intercreditor and Collateral Agency Agreement, dated as of June 20, 1995, among BT Commercial Corporation, The Prudential Insurance Company of America, Shawmut Bank Connecticut, National Association, and certain other parties identified therein (incorporated by reference to Exhibit 10.14 to the Registration Statement on Form S-4 of Envirodyne Industries, Inc. filed July 20, 1995). *
10.17 GECC Intercreditor Agreement, dated as of June 20, 1995, among BT Commercial Corporation, General Electric Capital Corporation, Shawmut Bank Connecticut, National Association, Envirodyne Industries, Inc. and Viskase Corporation (incorporated by reference to Exhibit 10.15 to the Registration Statement on Form S-4 of Envirodyne Industries, Inc. filed July 20, 1995). *
10.18 First Amendment under Revolving Credit Agreement, dated as of June 20, 1995, between Envirodyne Industries, Inc. and The Prudential Insurance Company of America (incorporated by reference to Exhibit 10.16 to Amendment No. 3 to the Registration Statement on Form S-4 of Envirodyne Industries, Inc. filed October 17, 1995). *
10.19 Amendment No. 1 to Credit Agreement, dated as of June 20, 1995, between Envirodyne Industries, Inc. and BT Commercial Corporation, individually and as agent (incorporated by reference to Exhibit 10.17 to Amendment No. 3 to the Registration Statement on Form S-4 of Envirodyne Industries, Inc. filed October 17, 1995). *
10.20 Employment Agreement, dated March 27, 1996, between Envirodyne Industries, Inc. and F. Edward Gustafson.+ **
10.21 Envirodyne Industries, Inc. Corporate Office Severance Pay Policy. + **
11.1 Statement re computation of per share earnings. **
21.1 Subsidiaries of the registrant. **
23.1 Consent of Independent Accountants. **
* Previously filed, incorporated by reference. + Management contract or compensatory plan or arrangement. ** Filed herewith.
(d) Financial statement schedules required by Regulation S-X. --------------------------------------------------------- Index to financial statements of Viskase Holding Corporation and subsidiaries. 63
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ENVIRODYNE INDUSTRIES, INC. ---------------------------- (Registrant)
By: /s/ ---------------------------------------- F. Edward Gustafson Chairman, Chief Executive Officer and President
By: /s/ ---------------------------------------- Gordon S. Donovan Vice President, Chief Financial Officer and Treasurer
Date: March 21, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on this 21st day of March 1997.
/s/ /s/ - - --------------------------------- -------------------------------- F. Edward Gustafson Gordon S. Donovan Chairman of the Board, Chief Vice President, Chief Financial Executive Officer and President Officer and Treasurer (Principal (Principal Executive Officer) Financial and Accounting Officer)
/s/ /s/ - - --------------------------------- -------------------------------- Robert N. Dangremond (Director) Michael E. Heisley (Director)
/s/ /s/ - - --------------------------------- -------------------------------- Avram A. Glazer (Director) Gregory R. Page (Director)
/s/ /s/ - - --------------------------------- -------------------------------- Malcolm I. Glazer (Director) Mark D. Senkpiel (Director)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors Envirodyne Industries, Inc.
We have audited the consolidated financial statements and the financial statement schedules of Envirodyne Industries, Inc. and Subsidiaries listed in Item 14(a) of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. 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 examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Envirodyne Industries, Inc. and Subsidiaries as of December 26, 1996 and December 28, 1995, and the consolidated results of their operations and their cash flows for the period December 29, 1995 to December 26, 1996, December 30, 1994 to December 28, 1995 and January 1 to December 29, 1994, in conformity with generally accepted accounting principles. In addition, in our opinion the schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Chicago, Illinois March 20, 1997
ENVIRODYNE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ENVIRODYNE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
ENVIRODYNE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CHAPTER 11 REORGANIZATION PROCEEDINGS (dollars in thousands)
On January 6, 1993, a group of bondholders filed an involuntary petition for reorganization of Envirodyne Industries, Inc. under Chapter 11 of the United States Bankruptcy Code. On January 7, 1993 Viskase Corporation, Viskase Sales Corporation, Viskase Holding Corporation, Clear Shield National, Inc., Sandusky Plastics of Delaware, Inc., Sandusky Plastics, Inc. and Envirodyne Finance Company each filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the Bankruptcy Court). On December 17, 1993, the Bankruptcy Court confirmed the First Amended Joint Plan of Reorganization as twice modified (Plan of Reorganization) with respect to Envirodyne Industries, Inc. (Envirodyne) and certain of its subsidiaries. The Plan of Reorganization was consummated and Envirodyne and certain of its subsidiaries emerged from Chapter 11 on December 31, 1993 (Effective Date). For accounting purposes, the Plan of Reorganization was deemed to be effective as of December 31, 1993.
2. NATURE OF BUSINESS
Envirodyne manufactures food packaging products and foodservice supplies through three primary operating subsidiaries - Viskase, Sandusky and Clear Shield. The operations of these subsidiaries are primarily in North and South America and Europe. Viskase is a leading producer of cellulosic casings used in preparing and packaging processed meat products and is a major producer of heat shrinkable plastic bags and specialty films for packaging and preserving fresh and processed meat products, poultry and cheeses. The Company is also a leading domestic and international manufacturer of plasticized polyvinyl chloride (PVC) films, primarily for use in packaging food items. Through Sandusky, the Company is a producer of thermoformed plastic containers, used in the packaging of cultured dairy and delicatessen products, and of horticultural trays and inserts. Finally, through Clear Shield, the Company is a major domestic producer of disposable plastic cutlery, drinking straws, custom dining kits and related products.
International Operations
Viskase has seven manufacturing facilities located outside the continental United States, in Beauvais, France; Thaon, France; Lindsay, Ontario, Canada; Sedgefield, England (Great Britain); Swansea, Wales (Great Britain); Guarulhos, Brazil and Nuevo Laredo, Mexico.
The aggregate of domestic exports and net sales of foreign operations represents approximately 58% of Viskase's total net sales.
International sales and operations may be subject to various risks including, but not limited to, possible unfavorable exchange rate fluc- tuations, political instability, governmental regulations (including import and export controls), restrictions on currency repatriation, embargoes, labor relations laws and the possibility of governmental expropriation. Viskase's foreign operations generally are subject to taxes on the repatriation of funds.
International operations in certain parts of the world may be subject to international balance of payments difficulties which may raise the possibility of delay or loss in the collection of accounts receivable from sales to customers in those countries. Viskase believes that its allowance for doubtful accounts makes adequate provision for the collectibility of its receivables. Management believes that growth potential exists for many of Viskase's products outside the United States and that Viskase is well positioned to participate in these markets.
All of Sandusky's and Clear Shield's operations are located in the United States.
Sales and Distribution
Viskase sells its products in virtually every country in the world with principal markets in North America, Europe, Latin America and Asia Pacific. In the United States, Viskase has a staff of technical sales teams responsible for sales to fresh meat, processed meat and poultry producers. Approximately 50 distributors market Viskase products to customers in Europe, Africa, Asia, and Latin America. Its products are marketed through its own subsidiaries in the United Kingdom, Germany, France, Italy, Russia, Brazil, Mexico, Australia and Argentina.
In the United States, Viskase sells its PVC film products primarily to the retail grocery industry through packaging material distributors, food wholesalers and a direct sales force. Additionally the sales organization is supported by a technical service group. The United Kingdom operation sells directly and through distributors, primarily to the retail grocery and foodservice industries in Europe.
In the United States, Viskase operates casings service centers in Atlanta, Georgia, and Bensalem, Pennsylvania, as well as service centers within the Chicago, Illinois, and Pauls Valley, Oklahoma, plants. In Latin America, Viskase operates service centers in Monterrey, Mexico, and within the Guarulhos, Brazil, plant. In Europe, Viskase operates casings service centers in Milan, Italy, Pulheim, Germany, and Moscow, Russia. Viskase also operates a service center through a joint venture in Brisbane, Australia. These service centers provide finishing, inventory and delivery services to Viskase customers.
Sandusky's and Clear Shield's sales are predominantly in the United States.
Competition
Viskase is one of the world's leading producers of cellulosic casings and a major producer of films. From time to time, Viskase experiences reduced market share or reduced profits due to price competition; however, management believes that such market conditions will not result in any long-term material loss of business.
The dairy and delicatessen containers industry is highly fragmented. Sandusky competes in the manufacture and sale of dairy and delicatessen containers with several domestic manufacturers of thermoformed and injection molded plastic containers. Major competitive factors in the dairy and delicatessen container business are price, quality and customer service. Major competitive factors in the specialized thermoformed container business are price and technical and customer service capabilities.
Clear Shield's primary competitors include several major corporations, some of which are larger and better capitalized than Clear Shield and, in some cases, offer a wider product line than Clear Shield. Clear Shield's competitors periodically engage in aggressive price discounting to gain business. Clear Shield management believes, however, that such market conditions will not result in any long-term material loss of business for Clear Shield, although its profit margins may be affected from time to time.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Basis of presentation
Effective in 1990 Envirodyne adopted a 52/53 week fiscal year ending on the last Thursday of December. The 1993 financial statements include December 31, 1993 in order to present the effect of the consummation of the Plan of Reorganization.
(B) Principles of consolidation
The consolidated financial statements include the accounts of Envirodyne Industries, Inc. and its subsidiaries (the Company).
Reclassifications have been made to the prior years' financial statements to conform to the 1996 presentation.
(C) Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
(D) Cash equivalents (dollars in thousands)
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 $26,338 and $24,536 of short-term investments at December 26, 1996 and December 28, 1995, respectively.
(E) Inventories
Domestic inventories are valued primarily at the lower of last-in, first-out (LIFO) cost or market. Remaining amounts, primarily foreign, are valued at the lower of first-in, first-out (FIFO) cost or market.
(F) Property, plant and equipment
Property, plant and equipment are carried 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 who are directly associated with the project. Depreciation is computed on the straight-line method over the estimated useful lives of the assets ranging from 3 to 32 years. Upon retirement or other disposition, cost and related accumulated depreciation are removed from the accounts, and any gain or loss is included in results of operations.
(G) Deferred financing costs
Deferred financing costs are amortized on a straight-line basis over the expected term of the related debt agreement. Amortization of deferred financing costs is classified as interest expense.
(H) Patents
Patents are amortized on the straight-line method over an estimated average useful life of ten years.
The carrying value of patents is periodically reviewed by the Company and impairments are recognized when the expected undiscounted future operating cash flows derived from such patents is less than the carrying value. If impairment is identified, valuation techniques deemed appropriate under the particular circumstances will be used to determine the asset's fair value. The loss will be measured based on the excess of carrying value over the determined fair value. The review for impairment is performed at least on a quarterly basis.
(I) Excess reorganization value, net
Excess reorganization value is amortized on the straight-line method over 15 years. Accumulated amortization of excess reorganization value totaled $31 million and $20 million at December 26, 1996, and December 28, 1995, respectively.
The Company continues to evaluate the recoverability of excess reorganization value based on operating performance and undiscounted cash flows of the operating business units. Impairment will be recognized when the expected undiscounted future operating cash flows derived from such intangible is less than its carrying value. If impairment is identified, valuation techniques deemed appropriate under the particular circumstances will be used to determine the intangible's fair value. The loss will be measured based on the excess of carrying value over the determined fair value. The review for impairment is performed at least on a quarterly basis.
(J) Pensions
The North American operations of Viskase and the Company's operations in Europe have defined benefit retirement plans covering substantially all salaried and full time hourly employees. Pension cost is computed using the projected unit credit method.
The Company's funding policy is consistent with funding requirements of the applicable federal and foreign laws and regulations.
(K) Postretirement benefits other than pensions
The North American operations of Viskase have postretirement health care and life insurance benefits. Effective January 1, 1993, postretirement benefits other than pensions are accounted for in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions."
(L) Postemployment benefits
Effective December 31, 1993 and in conjunction with the Fresh Start Reporting, the Company adopted SFAS No. 112 "Employers Accounting for Postemployment Benefits." The impact of adopting SFAS No. 112 was not material.
(M) Income taxes
Income taxes are accounted for in accordance with SFAS No. 109. Tax provisions and benefits are recorded at statutory rates for taxable items included in the consolidated statements of operations regardless of the period for which such items are reported for tax purposes. Deferred income taxes are recognized for temporary differences between financial statement and income tax bases of assets and liabilities for which income tax benefits will be realized in future years.
(N) Net income (loss) per share
Net income (loss) per share of common stock is based upon the weighted average number of shares of common stock outstanding during the year. No effect has been given to options outstanding under the Company's stock option plans and warrants issued pursuant to the Plan of Reorganization as their effect is anti-dilutive.
(O) Revenue recognition
Sales to customers are recorded at the time of shipment net of discounts and allowances.
(P) Foreign currency contracts
The Company maintains a hedging program to partially hedge its forecasted foreign currency revenue cash flows. The hedging program principally addresses revenue cash flows within its European operations. The foreign exchange contracts are denominated predominantly in the major European currencies and have varying maturities up to eighteen months. The effect of this practice is to minimize the effect of foreign exchange rate movements on the Company's operating results. The Company's hedging activities do not subject the Company to additional exchange rate risk because gains and losses on these contracts offset losses and gains on the transactions being hedged. The cash flows from forward contracts accounted for as hedges of identifiable transactions or events are classified consistent with the cash flows from the transactions or events being hedged.
(Q) Stock-based compensation
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options and other equity instruments to employees based on new fair value acounting rules. Although expense recognition for employee stock-based compensation is not mandatory, SFAS 123 requires companies that choose not to adopt the new fair value accounting to disclose pro forma net income and earnings per share under the new method. The Company has not adopted fair value accounting, and, accordingly, no compensation cost has been recognized for employee stock-based compensation. The Company has complied with the disclosure requirements of SFAS 123 (refer to Note 16).
4. RECEIVABLES (dollars in thousands)
Receivables consisted primarily of trade accounts receivable and were net of allowances for doubtful accounts of $2,051 and $3,224 at December 26, 1996, and at December 28, 1995, respectively.
Envirodyne has a broad base of customers, with no single customer accounting for more than 5% of sales.
5. INVENTORIES (dollars in thousands)
Inventories consisted of: December 26, December 28, 1996 1995 ----------- ----------- Raw materials $14,960 $17,150 Work in process 29,057 32,800 Finished products 50,995 49,524 ------- ------- $95,012 $99,474 ======= =======
Approximately 55% and 54% of the Company's inventories at December 26, 1996, and December 28, 1995, respectively, were valued at LIFO. These LIFO values exceeded current manufacturing cost by approximately $4,000 at both December 26, 1996, and December 28, 1995. Inventories were net of reserves for obsolete and slow moving inventory of $4,397 and $3,818 at December 26, 1996, and December 28, 1995, respectively.
Raw materials used by Viskase include cellulose (from wood pulp), fibrous paper, petroleum based resins, plasticizers and various other chemicals. Viskase generally purchases its raw materials from a single or small number of suppliers with whom it maintains good relations. Certain primary and alternative sources of supply are located outside the United States. Viskase believes, but there can be no assurance, that adequate alternative sources of supply currently exist for all of Viskase's raw materials or raw material substitutes that Viskase could modify its processes to utilize.
The principal raw materials used by Sandusky and Clear Shield are thermoplastic resins, which are readily available from several domestic sources.
6. PROPERTY, PLANT AND EQUIPMENT (dollars in thousands)
December 26, December 28, 1996 1995 ----------- -------------
Property, plant and equipment: Land and improvements $ 15,644 $ 16,369 Buildings and improvements 84,778 81,767 Machinery and equipment 312,185 292,176 Construction in progress 25,889 15,938 Capital leases: Machinery and equipment 140,208 139,241 -------- -------- $578,704 $545,491 ======== ========
Maintenance and repairs charged to costs and expenses for 1996, 1995, and 1994 aggregated $34,887, $33,227 and $33,045, respectively. Depreciation is computed on the straight-line method over the estimated useful lives of the assets ranging from 3 to 32 years.
7. OTHER ASSETS (dollars in thousands)
Other assets were comprised of:
December 26, December 28, 1996 1995 ----------- ----------- Patents $50,000 $50,000 Less accumulated amortization 15,000 10,000 -------- -------- Patents, net 35,000 40,000 Other 7,809 5,589 -------- -------- $42,809 $45,589 ======== ========
Patents are amortized on the straight-line method over an estimated average useful life of ten years.
8. ACCRUED LIABILITIES (dollars in thousands)
Accrued liabilities were comprised of:
December 26, December 28, 1996 1995 ----------- -----------
Compensation and employee benefits $38,122 $31,997 Taxes 11,103 6,535 Accrued volume and sales discounts 14,959 13,218 Other 17,925 15,803 -------- -------- $82,109 $67,553 ======== ========
9. DEBT OBLIGATIONS (dollars in thousands)
On June 20, 1995, Envirodyne completed the sale of $160,000 aggregate principal amount of senior secured notes (Senior Secured Notes) to certain institutional investors in a private placement. The senior secured notes were issued pursuant to an indenture dated June 20, 1995 (Indenture) and consist of (i) $151,500 of 12% Senior Secured Notes due 2000 and (ii) $8,500 of Floating Rate Senior Secured Notes due 2000 (collectively, the Senior Secured Notes). Envirodyne used the net proceeds of the offering primarily to (i) repay the Company's $86,125 domestic term loan, (ii) repay the $68,316 of obligations under the Company's domestic and foreign revolving loans and (iii) pay transaction fees and expenses. Concurrently with the June 20, 1995 placement, Envirodyne entered into a new $20,000 domestic revolving credit facility (Revolving Credit Facility) and a new $28,000 letter of credit facility (Letter of Credit Facility). The Senior Secured Notes and the obligations under the Revolving Credit Facility and the Letter of Credit Facility are guaranteed by Envirodyne's significant domestic subsidiaries and secured by a collateral pool (Collateral Pool) comprised of: (i) all domestic accounts receivable (including intercompany receivables) and inventory; (ii) all patents, trademarks and other intellectual property (subject to non-exclusive licensing agreements); (iii) substantially all domestic fixed assets (other than assets subject to a lease agreement with General Electric Capital Corporation); and (iv) a senior pledge of 100% of the capital stock of Envirodyne's significant domestic subsidiaries and 65% of the capital stock of Viskase Europe Limited. Such guarantees and security are shared by the holders of the Senior Secured Notes and the holders of the obligations under the Revolving Credit Facility on a pari passu basis pursuant to an intercreditor agreement. Pursuant to such intercreditor agreement, the security interest of the holders of the obligations under the Letter of Credit Facility has priority over all other liens on the Collateral Pool.
The Company finances its working capital needs through a combination of cash generated through operations and borrowings under the Revolving Credit Facility. The availability of funds under the Revolving Credit Facility is subject to the Company's compliance with certain covenants (which are substantially similar to those included in the Indenture), borrowing base limitations measured by accounts receivable and inventory of the Company and reserves which may be established at the discretion of the lenders. Currently, there are no drawings under the Revolving Credit Facility. The available borrowing capacity under the Revolving Credit Facility was $20 million at December 26, 1996.
The Company recognized an extraordinary loss of $6,778 representing the write-off of deferred financing fees related to the June 20, 1995 debt refinancing. The extraordinary loss, net of applicable income taxes of $2,582, was included in the Company's Statement of Operations for the quarter ended June 29, 1995.
The $151,500 tranche of Senior Secured Notes bears interest at a rate of 12% per annum and the $8,500 tranche bears interest at a rate equal to the six month London Interbank Offered Rate (LIBOR) plus 575 basis points. The current interest rate on the floating rate tranche is approximately 11.4%. The interest rate on the floating rate tranche is reset semi-annually on June 15 and December 15. Interest on the Senior Secured Notes is payable each June 15 and December 15.
On June 15, 1999, $80,000 of the aggregate principal amount of the Senior Secured Notes is subject to a mandatory redemption. The remaining principal amount outstanding will mature on June 15, 2000.
In the event the Company has Excess Cash Flow (as defined) in excess of $5,000 in any fiscal year, beginning with fiscal 1995, Envirodyne will be required to make an offer to purchase Senior Secured Notes together with any borrowed money obligations outstanding under the Revolving Credit Facility, on a pro rata basis, in an amount equal to the Excess Cash Flow at a purchase price of 100% plus any accrued interest to the date of purchase. There was no Excess Cash Flow for fiscal 1996.
The Senior Secured Notes are redeemable, in whole or from time to time in part, at Envirodyne's option, at the greater of (i) the outstanding principal amount or (ii) the present value of the expected future cash flows from the Senior Secured Notes discounted at a rate equal to the Treasury Note yield corresponding closest to the remaining average life of the Senior Secured Notes at the time of prepayment plus 100 basis points; plus accrued interest thereon to the date of purchase. ----
Upon the occurrence of a Change of Control (which includes the acquisition by any person of more than 50% of Envirodyne's Common Stock), each holder of the Senior Secured Notes has the right to require the Company to repurchase such holder's Senior Secured Notes at a price equal to the greater of (i) the outstanding principal amount or (ii) the present value of the expected cash flows from the Senior Secured Notes discounted at a rate equal to the Treasury Note yield corresponding closest to the remaining average life of the Senior Secured Notes at the time of prepayment plus 100 basis points; plus accrued interest thereon ---- to the date of purchase.
The Indenture contains covenants with respect to Envirodyne and its subsidiaries limiting (subject to a number of important qualifications), among other things, (i) the ability to pay dividends or redeem or repurchase common stock, (ii) the incurrence of indebtedness, (iii) the creation of liens, (iv) certain affiliate transactions and (v) the ability to consolidate with or merge into another entity and to dispose of assets.
Borrowings under the Revolving Credit Facility bear interest at a rate per annum equal to the three month London Interbank Offered Rate (LIBOR) on the first day of each calendar quarter plus 300 basis points. The Revolving Credit Facility expires on June 20, 1998.
The Letter of Credit Facility expires on June 20, 1998. Fees on the outstanding amount of letters of credit are 2.0% per annum, with an issuance fee of 0.5% on the face amount of the letter of credit. There is a commitment fee of 0.5% per annum on the unused portion of the Letter of Credit Facility.
The $219,262 principal amount of 10-1/4% Notes were issued pursuant to an Indenture dated as of December 31, 1993 (10-1/4% Note Indenture) between Envirodyne and Bankers Trust Company, as Trustee. The 10-1/4% Notes are the unsecured senior obligations of Envirodyne, bear interest at the rate of 10-1/4% per annum, payable on each June 1 and December 1, and mature on December 1, 2001. The 10-1/4% Notes are redeemable, in whole or from time to time in part, at the option of Envirodyne, at the percentages of principal amount specified below plus accrued and unpaid interest to the redemption date, if the 10-1/4% Notes are redeemed during the twelve-month period commencing on January 1 of the following years:
Year Percentage 1997 103% 1998 102% 1999 101% 2000 and thereafter 100%
The 10-1/4% Note Indenture contains covenants with respect to Envirodyne and its subsidiaries limiting (subject to a number of important qualifications), among other things, (i) the ability to pay dividends on or redeem or repurchase capital stock, (ii) the incurrence of indebtedness, (iii) certain affiliate transactions and (iv) the ability of the Company to consolidate with or merge with or into another entity or to dispose of substantially all its assets.
Outstanding short-term and long-term debt consisted of:
December December 26, 1996 28, 1995 -------- -------- Short-term debt, current maturity of long-term debt and capital lease obligations:
Current maturity of Viskase Capital Lease Obligation $ 6,633 $ 6,012 Current maturity of Viskase Limited Term Loan (4.7%) 1,876 2,033 Other 2,782 4,459 ------- ------- Total short-term debt $11,291 $12,504 ======= ======= Long-term debt:
12% Senior Secured Notes due 2000 $160,000 $160,000 10.25% Senior Notes due 2001 219,262 219,262 Viskase Capital Lease Obligation 134,549 141,182 Viskase Limited Term Loan (4.7%) 4,690 7,115 Other 2,678 2,622 -------- -------- Total long-term debt $521,179 $530,181 ======== ========
The fair value of the Company's debt obligation (excluding capital lease obligations) is estimated based upon the quoted market prices for the same or similar issues or on the current rates offered to the Company for the debt of the same remaining maturities. At December 26, 1996, the carrying amount and estimated fair value of debt obligations (excluding capital lease obligations) were $387,539 and $390,265, respectively.
The average interest rate on short-term borrowing during 1996 was 9.7%.
On December 28, 1990, Viskase and GECC entered into a sale and leaseback transaction. The sale and leaseback of assets included the production and finishing equipment at Viskase's four domestic casing production and finishing facilities. The facilities are located in Chicago, Illinois; Loudon, Tennessee; Osceola, Arkansas and Kentland, Indiana. Viskase, as the Lessee under the relevant agreements, will continue to operate all of the facilities. Sales proceeds on the sale-leaseback transaction were $171.5 million; proceeds were used to repay approximately $154 million of bank debt and a $15 million convertible note outstanding at the time. The lease has been accounted for as a capital lease.
The principal terms of the sale and leaseback transaction include: (a) a 15-year basic lease term (plus selected renewals at Viskase's option); (b) annual rent payments in advance beginning in February 1991; and (c) a fixed price purchase option at the end of the basic 15-year term and fair market purchase options at the end of the basic term and each renewal term. Further, the Lease Documents contain covenants requiring maintenance by the Company of certain financial ratios and restricting the Company's ability to pay dividends, make payments to affiliates, make investments and incur indebtedness. Annual rental payments under the Lease will be approximately $19.2 million through 1997, $21.4 million in 1998 and $23.5 million through the end of the basic 15-year term. Viskase is required to provide credit support consisting of a standby letter of credit in an amount up to one year's rent through at least 1997. This credit support can be reduced up to $4 million currently if the Company achieves and maintains certain financial ratios. As of December 26, 1996, the Company had met the required financial ratios and the letter of credit has been reduced by $4 million. The letter can be further reduced in 1997 or eliminated after 1998 if the Company achieves and maintains certain financial ratios. Envirodyne and its other principal subsidiaries guaranteed the obligations of Viskase under the Lease.
The 1996 GECC lease payment of $19,227 was paid on February 28, 1997. Principal payments under the capital lease obligations for the years ended 1997 through 2001 range from approximately $7 million to $16 million.
The following is a schedule of minimum future lease payments under the capital lease obligations together with the present value of the net minimum lease payments as of December 26, 1996:
Year ending December
1997 $ 19,775 1998 21,812 1999 23,948 2000 23,948 2001 23,948 Thereafter 94,522 ======== Net minimum lease payments 207,953 Less: Amount representing interest (63,022) ======== $144,931 ========
Aggregate maturities of remaining long-term debt for each of the next five fiscal years are:
Total --------- 1997 $ 10,492 1998 12,214 1999 95,479 2000 95,756 2001 235,551
10. OPERATING LEASES (dollars in thousands)
The Company has operating lease agreements for machinery, equipment and facilities. The majority of the facilities leases require the Company to pay maintenance, insurance and real estate taxes.
Future minimum lease payments for operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 26, 1996, are:
1997 $2,248 1998 1,338 1999 641 2000 141 2001 69 Total thereafter - ------ Total minimum lease payments $4,437 ======
Total rent expense during 1996, 1995 and 1994 amounted to $5,026, $6,749, and $5,982, respectively.
11. RETIREMENT PLANS
The Company and its subsidiaries have defined contribution and defined benefit plans varying by country and subsidiary.
At December 26, 1996, the North American operations of Viskase maintained several non-contributory defined benefit retirement plans. The Viskase plans cover substantially all salaried and full-time hourly employees, and benefits are based on final average compensation and years of credited service. The Company's policy is to fund the minimum actuarially computed annual contribution required under the Employee Retirement Income Security Act of 1974 (ERISA).
As of the Viskase acquisition date, the former owner assumed the liability for the accumulated benefit obligation under its plans. The effect of expected future compensation increases on benefits accrued is recorded as a liability on the Company's consolidated balance sheet.
PENSIONS -- NORTH AMERICA (dollars in thousands):
Net pension cost for the Viskase North American plans consisted of:
December 29, December 30, January 1, 1995 to 1994 to to December 26, December 28, December 29, 1996 1995 1994 ----------- ----------- -----------
Service cost -- benefits earned during the year $ 3,301 $ 3,238 $ 3,662 Interest cost on projected benefit obligation 5,121 4,794 4,249 Actual (gain) loss on plan assets (4,712) (7,012) 874 Net amortization and deferral 1,061 4,086 (3,696) ------- ------- ------- Net pension cost $ 4,771 $ 5,106 $ 5,089 ====== ====== =======
The amounts included in the consolidated balance sheet for the North American plans of Viskase were:
December 26, December 28, 1996 1995 ----------- -----------
Actuarial present value of benefit obligation: Vested benefits $48,058 $45,208 Nonvested benefits 4,112 4,435 ------- ------- Accumulated benefit obligation 52,170 49,643 Effect of projected future compensation increases 22,840 16,566 ------- ------- Projected benefit obligation 75,010 66,209 Plan assets at fair value, primarily listed stocks and investment grade corporate bonds 51,896 43,190 ------- ------- Amount underfunded 23,114 23,019 Unrecognized gain 5,975 7,578 Unrecognized prior service costs 55 63 ------- ------- Accrued liability included in consolidated balance sheet $29,144 $30,660 ======= =======
Assumed discount rate 7.5% 7.5% Assumed long-term compensation factor 5.0% 4.5% Assumed long-term return on plan assets 8.5% 8.5%
SAVINGS PLANS (dollars in thousands):
The Company also has defined contribution savings and similar plans, which vary by subsidiary, and, accordingly, are available to substantially all full-time United States employees not covered by collective bargaining agreements. 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 $2,207, $2,134, and $2,109 in 1996, 1995, and 1994, respectively.
INTERNATIONAL PLANS (dollars in thousands):
The Company maintains various pension and statutory separation pay plans for its European employees. The expense for these plans in 1996, 1995 and 1994 was $1,972, $1,383 and $1,043, respectively. As of their most recent valuation dates, in plans where vested benefits exceeded plan assets, the actuarially computed value of vested benefits exceeded those plans' assets by approximately $2,204; conversely, plan assets exceeded the vested benefits in certain other plans by approximately $2,569.
OTHER POSTRETIREMENT BENEFITS (dollars in thousands):
The Company provides postretirement health care and life insurance benefits to Viskase's North American employees. The Company does not fund postretirement health care and life benefits in advance, and has the right to modify these plans in the future.
Effective January 1, 1993, the company adopted the provisions of SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 106 requires that the expected cost of these benefits must be charged to expense during the years that the employee renders service. In connection with the 1989 acquisition of the Company, an accrual of $15,000 had been recorded for the estimated postretirement benefits liability at the acquisition date. On January 1, 1993, an additional liability and transition obligation was recorded on a prospective basis for $6,500. The transaction obligation was to be amortized over 20 years. Subsequently, Fresh Start Reporting resulted in the write-off of the transition obligation and statement of the liability for postretirement health care and life insurance benefits at fair value. Net periodic postretirement benefit cost for 1996 and 1995 includes the following components:
Assumed discount rate 7.50% Assumed medical trend rate 10.50% in 1996 decreasing to 6.50% in 2004 Assumed long-term compensation factor 4.50%
The postretirement benefit obligation was determined by application of the terms of the various plans, together with relevant actuarial assumptions. The effect of a 1% annual increase in these assumed cost trend rates would increase the accumulated postretirement benefit obligation at December 26, 1996 and December 28, 1995 by $322 and $178, respectively, and the service and interest cost components for 1996 and 1995 by a total of $69 and $16, respectively.
EMPLOYEE RELATIONS
The Company generally maintains productive and amicable relationships with its 4,900 employees worldwide. One of Viskase's domestic plants, located in Loudon, Tennessee, is unionized, and all of its Canadian and European plants have unions. Employees at the Company's European plants are unionized with negotiations occurring at both local and national levels. Based on past experience and current conditions, the Company does not expect a protracted work stoppage to occur stemming from union activities; however, national events outside of the Company's control may give rise to such risk. From time to time union organization efforts have occurred at other individual plant locations.
Unions represent a total of approximately 1,500 of Viskase's 4,000 employees. None of Clear Shield's employees are represented by unions. Certain of the hourly production personnel at Sandusky's Ohio thermoforming and injection molding facilities are members of a union. As of December 26, 1996, approximately 1,425 of the Company's employees are covered by collective bargaining agreements that will expire within one year.
12. INCOME TAXES (dollars in thousands)
The provision (benefit) for income taxes consisted of:
December 29, December 30, January 1, 1995 to 1994 to to December 26, December 28, December 29, 1996 1995 1994 ----------- ----------- ----------- Current: Federal $ 200 Foreign $ 4,365 $ 950 4,652 State and local ------- ------ ------ $ 4,365 $ 950 4,852 ------- ------ ------ Deferred: Federal (9,911) (7,219) (194) Foreign 393 2,098 128 State and local (1,547) (1,329) 14 ------- ------- ------ (11,065) (6,450) (52) ------- ------- ------ $(6,700) $(5,500) $4,800 ======= ======= ======
The income tax benefit for the 1995 period was allocated between loss before extraordinary loss for $2,918 and to the extraordinary loss for $2,582.
A reconciliation from the statutory federal tax rate to the consolidated effective tax rate follows:
December 29, December 30, January 1, 1995 to 1994 to to December 26, December 28, December 29, 1996 1995 1994 ----------- ----------- -----------
Statutory federal tax rate (35.0)% (35.0)% 35.0% Increase (decrease) in tax rate due to: State and local taxes net of related federal tax benefit (4.9) (3.2) .8 Net effect of taxes relating to foreign operations 6.3 .8 140.3 Intangibles amortization 12.5 9.4 214.1 Other (11.8) 7.6 13.8 ----- ----- ----- Consolidated effective tax rate (32.9)% (20.4)% 404.0% ===== ===== =====
Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities for 1996 are as follows:
At December 26, 1996, the Company had $16,393 of undistributed earnings of foreign subsidiaries considered permanently invested for which deferred taxes have not been provided.
At December 26, 1996, the Company had federal income tax net operating loss carryforwards of approximately $88 million, which have been substantially offset by a valuation allowance. Such losses will expire in the year 2009, if not previously utilized. In addition the Company has alternative minimum tax credit carryforwards of $3.5 million. Alternative minimum tax credits have an indefinite carryforward period. Significant limitations on the utilization of the net operating loss carryforwards and the alternative minimum tax credit carryforwards exist under federal income tax rules.
Domestic (losses) after extraordinary loss and before income taxes were approximately $(30,323), $(30,138) and $(7,705) in 1996, 1995 and 1994, respectively. Foreign earnings or (losses) before income taxes were approximately $9,942, $3,118 and $8,893 in 1996, 1995 and 1994, respectively.
The Company joins in filing a United States consolidated federal income tax return including all of its domestic subsidiaries.
13. COMMITMENTS
As of December 26, 1996, the Company had capital expediture commitments outstanding of approximately $2.5 million.
14. CONTINGENCIES (dollars in thousands)
In late 1993, Viskase commenced a legal action against American National Can Company (ANC) in Federal District Court for the Northern District of Illinois, Eastern Division, 93C7651. Viskase claimed that ANC was infringing on various Viskase patents relating to multi-layer barrier plastic films used for fresh red meat, processed meat and poultry product applications. On November 8, 1996, after a three week trial, a jury found that ANC had willfully infringed Viskase's patents and awarded Viskase $102.4 million in compensatory damages. On December 5, 1996, ANC posted a supersedeas bond in the amount of $108 million and the Court entered an order staying Viskase's enforcement of the judgment. The Court also entered an order permanently enjoining ANC from making or selling infringing products after December 23, 1996.
The judgment is not final and the parties are presently engaged in the post-judgment motion phase of the case. ANC has filed motions to reduce the damage award by at least $75 million or alternatively, grant ANC a new trial. Viskase is seeking a determination that the case be deemed "exceptional" and that the award be increased by approximately $46 million which includes compensatory damages for ANC's infringement during the period of October 1, 1996 through December 23, 1996 and additional damages for prejudgment interest, attorneys' fees and related expenses. Due to ANC's willful infringement of the patents, Viskase has asked the court to treble the compensatory award. These motions are all pending before the Court and rulings are expected in the second quarter 1997. Meanwhile post-judgment interest is accruing on the $102.4 million award from November 8, 1996 at an annual rate of 5.49%. The Company expects ANC to vigorously contest the award and to appeal any final judgment. The award and any pending claims for additional damages have not been recorded in the Company's financial statements.
A class action lawsuit by former employees of subsidiary corporations comprising most of the Company's former steel and mining division (SMD) was pending as of the commencement of the bankruptcy case in which the plaintiffs were seeking substantial damages. In March 1996, Envirodyne completed a settlement of the lawsuit under which Envirodyne was released and discharged from all claims in exchange for 900,000 shares of Envirodyne common stock without any admission or finding of liability or wrongdoing.
Litigation is pending with respect to events arising out of the Envirodyne bankruptcy case and the 1989 acquisition of Envirodyne by Emerald Acquisition Corporation (Emerald) with respect to which, although Envirodyne is not presently a party to such litigation, certain defendants have asserted indemnity rights against Envirodyne.
In ARTRA Group Incorporated v. Salomon Brothers Holding Company Inc, ---------------------------------------------------------------- Salomon Brothers Inc, D.P. Kelly & Associates, L.P., Donald P. Kelly, - - -------------------------------------------------------------------- Charles K. Bobrinskoy, James L. Massey, William Rifkind and Michael - - ------------------------------------------------------------------- Zimmerman, Case No. 93 A 1616, United States Bankruptcy Court for the - - --------- Northern District of Illinois, Eastern Division, ARTRA Group Incorporated (ARTRA) alleges breach of fiduciary duty and tortious inference in connection with the negotiation and consummation of the Plan of Reorganization (ARTRA I). In ARTRA Group Incorporated v. Salomon ------- ----------------------------------- Brothers Holding Company Inc, Salomon Brothers Inc, D.P. Kelly &
- - ---------------------------------------------------------------- Associates, L.P., Donald P. Kelly, Charles K. Bobrinskoy and Michael - - -------------------------------------------------------------------- Zimmerman, Case No. 93 L 2198, Circuit Court of the Eighteenth Judicial - - --------- Circuit, DuPage County, Illinois, ARTRA alleges breach of fiduciary duty, fraudulent and negligent misrepresentation and breach of contract in connection with the 1989 acquisition of Envirodyne by Emerald (ARTRA ----- II). The plaintiff seeks damages in the total amount of $136.2 million - - -- plus interest and punitive damages of $408.6 million. D.P. Kelly & Associates, L.P. and Messrs. Kelly, Bobrinskoy, Massey, Rifkind and Zimmerman have asserted common law and contractual rights of indemnity against Envirodyne for attorneys' fees, costs and any ultimate liability relating to the claims set forth in the complaints. Upon a motion of the defendants, the Bankruptcy Court dismissed ARTRA's claims in ARTRA I. ------- ARTRA appealed to the U.S. District Court and on October 31, 1996, the U.S. District Court affirmed the Bankruptcy Court's decision. ARTRA has appealed to the U.S. Court of Appeals for the Seventh Circuit. All briefs have been filed and the parties are awaiting oral argument.
Envirodyne is continuing its evaluation of the merits of the indemnification claims against Envirodyne and the underlying claims in the litigation. Upon the undertaking of D.P. Kelly & Associates, L.P. to repay such funds in the event it is ultimately determined that there is no right to indemnity, Envirodyne is advancing funds to D.P. Kelly & Associates, L.P. and Mr. Kelly for the payment of legal fees in ARTRA I. ------- Although the Company is not a party to either case, the Company believes that the plaintiff's claims raise similar factual issues to those raised in the Envirodyne bankruptcy case which, if adjudicated in a manner similar to that in the Envirodyne bankruptcy case, would render it difficult for the plaintiff to establish liability or prove damages. Accordingly, the Company believes that the indemnification claims would not have a material adverse effect upon the business or financial position of the Company, even if the claimants were successful in establishing their right to indemnification.
Since early 1993, the Antitrust Division of the United States Department of Justice has been investigating the disposable plastic cutlery industry. This investigation has resulted in the indictment and conviction of certain companies and individuals in the industry. Some indictments and criminal trials are pending. Although the United States Department of Justice has advised a former officer and an existing employee of Clear Shield National that they are targets of the investigation, neither person has been indicted. Clear Shield National is cooperating fully with the investigation.
In February 1996 Clear Shield National and three other plastic cutlery manufacturers were named as defendants in the following three civil complaints: Eisenberg Brothers, Inc., on behalf of itself and all others ------------------------------------------------------------ similarly situated, v. Amcel Corp., Clear Shield National, Inc.,
- - -------------------------------------------------------------- Dispoz-O Plastics Corp. and Benchmark Holdings, Inc. t/a Winkler - - ---------------------------------------------------------------- Products, Civil Action No. 96-728, United States District Court for the - - -------- Eastern District of Pennsylvania; St. Cloud Restaurant Supply Company v. ------------------------------------- Amcel Corp., Clear Shield National, Inc., Dispoz-O Plastics Corp. and - - --------------------------------------------------------------------- Benchmark Holdings, Inc. t/a Winkler Products, Case No. 96C 0777, - - --------------------------------------------- United States District Court for the Northern District of Illinois, Eastern Division; and Servall Products, Inc., on behalf of itself and ----------------------------------------------- all others similarly situated, v. Amcel Corporation, Clear Shield - - ----------------------------------------------------------------- National, Inc., Dispoz-O Plastics Corporation and Benchmark Holdings, - - -------------------------------------------------------------------- Inc. t/a Winkler Products, Civil Action No. 96-1116, United States - - ------------------------- District Court for the Eastern District of Pennsylvania. Each of the complaints alleges, among other things, that from October 1990 through April 1992 the defendants unlawfully conspired to fix the prices at which plastic cutlery would be sold. The Company has informed the plaintiffs that such claims as they relate to Clear Shield were discharged by the order of the Bankruptcy Court and Plan of Reorganization and that the plaintiffs are permanently enjoined from pursuing legal action to collect discharged claims.
On February 27, 1996, the plaintiff in the St. Cloud case voluntarily --------- dismissed the action without prejudice and refiled its action in the United States District Court for the Eastern District of Pennsylvania but did not name Clear Shield National as a defendant. On March 14, 1996, Eisenberg Brothers Inc., St. Cloud and Servall filed a motion in Clear Shield National's Bankruptcy proceeding in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division contending that the Bankruptcy Court's order did not discharge the plaintiff's claim. On March 19, 1997, the Bankruptcy Court denied their motion and granted the Company's cross motion for summary judgment. The time period for appeal by Eisenberg Brothers, Inc. et al. has not passed.
The Company and its subsidiaries are involved in various legal proceedings arising out of its business and other environmental matters, none of which is expected to have a material adverse effect upon its results of operations, cash flows or financial position.
15. CAPITAL STOCK, PAID IN CAPITAL, AND WARRANTS
Authorized shares of preferred stock ($.01 par value per share) and common stock ($.01 par value per share) for the reorganized Envirodyne are 25,000,000 shares and 50,000,000 shares, respectively. 14,545,107 shares of common stock were issued and outstanding as of December 26, 1996. In accordance with the Plan of Reorganization, a total of 900,261, 64,460 and 15,000 additional shares of common stock were issued to the general unsecured creditors of Envirodyne during 1996, 1995 and 1994, respectively.
Envirodyne issued 1,500,000 warrants pursuant to the Plan of Reorganization, exercisable at any time until December 31, 1998. Each warrant was initially exercisable for one share of common stock at an initial exercise price of $17.25 per share. The exercise price and the number of shares of common stock for which a warrant is exercisable were adjusted as a result of the issuance of certain shares of Envirodyne after the consummation of the Plan of Reorganization, including the issuance of shares in settlement of the SMD lawsuit discussed in Note 14. Under terms of the warrant agreement, the exercise price has been adjusted from $17.25 to $16.08 per share and the number of common shares for which each warrant is exercisable has been adjusted from 1.000 share to 1.073 shares.
On June 26, 1996, the Board of Directors adopted a Shareholder Rights Plan (Plan). Under the Plan, the Board declared a dividend of one Common Stock Purchase Right (Right) for each outstanding common share of the Company. Rights were issued to the shareholders of record on June 26, 1996. The Rights are attached to and automatically trade with the outstanding shares of the Company's common stock.
The Rights will only become exercisable ten days after a public announcement that a person or group has acquired or obtained the right to acquire 41% or more of the Company's Common Stock or ten business days after a person or group commences a tender or offer that would result in such person or group owning 41% or more of the outstanding shares (even if no purchases actually occur).
When the Rights first become exercisable, each Right will entitle the holder thereof to buy from the Company one share of Common Stock for $20.00, subject to adjustment. If any person acquires 41% or more of the Company's Common Stock, other than pursuant to a tender or exchange offer for all outstanding shares of the Company approved by a majority of the independent directors not affiliated with a 40%-or-more stockholder, after receiving advice from one or more investment banking firms, each Right not owned by a 41%-or-more stockholder would become exercisable for shares of the Company having a market value of two times the exercise price of the Right. If the Company is involved in a merger or other business combination, or sells 50% or more of its assets or earning power to another person, at any time after the Rights become exercisable, the Rights will entitle the holder thereof to buy shares of common stock of the acquiring company having a market value of twice the exercise price of each Right.
Rights may be redeemed at a price of $0.001 per Right at any time prior to their expiration on June 26, 2006.
16. STOCK-BASED COMPENSATION (dollars in thousands)
The Company maintains several stock option plans and agreements. The plans provide for the granting of incentive and nonqualified stock options to employees, officers, and directors. Stock options have been granted at prices at or above the fair market value on the date of grant. Options generally vest in three equal installments beginning one year from the grant date and expire ten years from the grant date. Non- employee director options, however, vest on the date of grant. The options are subject to acceleration upon the occurrence of certain events, such acceleration event occurred in both November 1994 and August 1995.
The Company accounts for these plans under Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations. Accordingly, compensation expense is recognized using the intrinsic value-based method for options granted under the plans. The Company has adopted only the disclosure provisions required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123).
There were 651,170 shares of common stock reserved for future stock option grants at December 26, 1996.
As of December 26, 1996, total stock options outstanding have a weighted-average remaining contractual life of 9.86 years. The exercise price of options outstanding as of December 26, 1996 ranged from $3.50 to $5.06. The weighted average grant date fair value of options granted during fiscals 1996 and 1995 was $2.202 and $1.812, respectively.
As option prices per share have not been below the underlying stock price on the grant dates, no compensation expense associated with these plans has been recognized to date in accordance with APB 25.
Had the Company elected to apply the provisions of SFAS 123 regarding recognition of compensation expense to the extent of the calculated fair value of compensatory options, reported net income and earnings per share would have been reduced to the following amounts (only options granted in 1995 and 1996 are included in the calculation of pro forma net income and earnings per share):
1996 1995 -------- -------- (Loss) before extraordinary item $(13,682) $(17,323) Pro forma (loss) before extraordinary item (13,826) (17,356)
Net (loss) $(13,682) $(21,519) Pro forma net (loss) (13,826) (21,552)
PER SHARE AMOUNTS:
(Loss) before extraordinary item $(.96) $(1.28) Pro forma (loss) before extraordinary item (.97) (1.28)
Net (loss) $(.96) $(1.59) Pro forma net (loss) (.97) (1.59)
The effects of applying SFAS 123 in the above pro forma disclosure are not likely to be representative of the effects disclosed in future years as SFAS 123 does not apply to grants prior to 1995.
The fair value of each option granted during 1996 and 1995 is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: (1) expected volatility of 40.04% for both years, (2) risk-free interest rate equaling the 5-year treasury yield on the grant date, which ranged from 6.11% to 6.52% in 1996 and 5.97% to 7.06% in 1995, and (3) expected life of 5 years in both years. The Company has never declared dividends, nor does it currently expect to declare dividends in the foreseeable future.
Pursuant to the employment agreement between the Company and its chief executive officer, the Company issued 35,000 shares of common stock to its chief executive officer. These shares carry voting and dividend rights; however sale of the shares is restricted prior to vesting. Subject to continued employment, vesting occurs on March 27, 1999. The shares issued under the employment agreement have been recorded at fair market value on the date of grant with a corresponding charge to stockholders' equity for the unearned portion of the award. The fair market value per share was $3.50. The unearned portion is being amortized as compensation expense on a straight-line basis over the related vesting period. Compensation expense related to the plan totaled $31 during fiscal 1996.
The Company also has a stock compensation plan for the non-employee directors of the Company that was approved during fiscal 1996. These directors may elect to receive directors fees in the form of common stock of the Company based upon the average market price of the Company's common stock on the grant date. During fiscal 1996 30,386 shares of common stock were issued under this plan at $4.03 per share.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS (dollars in thousands)
The following table presents the carrying value and estimated fair value as of December 26, 1996 of the Company's financial instruments. (Refer to Notes 3 and 9.)
Carrying Estimated Value Fair Value -------- ---------- Assets: Cash and equivalents $ 41,794 $ 41,794 Foreign currency contracts 12,995 12,337
Liabilities: Long-term debt (excluding capital leases) 387,539 390,265
18. PATENT LITIGATION SETTLEMENT (dollars in thousands)
In 1989 certain competitors of Viskase filed a declaratory action challenging the validity and enforceability of a Viskase patent relating to casings used in the manufacture of food products. In May 1994, the trial court upheld the validity and enforceability of the Viskase patent and found infringement of the patent. Before the trial on damages was conducted, Viskase entered into agreements to settle the claims and grant licenses to the competitors. Under the terms of these agreements Viskase received $9,457 for past infringement and advance royalties and established royalty rates for future patent use.
19. RESEARCH AND DEVELOPMENT COSTS (dollars in thousands)
Research and development costs are expensed as incurred and totaled $6,841, $11,034 and $16,852 for 1996, 1995, and 1994, respectively.
20. RELATED PARTY TRANSACTIONS (dollars in thousands)
In March 1996, the Company terminated its management agreement with D.P. Kelly and Associates, L.P. (DPK). Upon termination of the agreement, the Company was required to pay the amount of $2,000 to DPK pursuant to provisions in the agreement. In addition to the above amount, the Company paid management fees to DPK during 1996 totaling $193. During each of 1995 and 1994, the Company paid DPK $770 for management services.
During fiscal 1996, 1995 and 1994, the Company made payments of approximately $18, $156, and $560, respectively, to an affiliate of DPK for the use of a jet aircraft on an as-needed basis.
During fiscal 1996, 1995, and 1994, the Company purchased product and services from affiliates of DPK in the amounts of approximately $904, $1,537, and $1,367, respectively. During fiscal 1996, 1995, and 1994, the Company sublet office space from DPK for which it paid approximately $139, $151, and $151, respectively, in rent. During fiscal 1996 and 1995, the Company reimbursed a non-affiliated medical plan in the aggregate amount of $41 and $79 for medical claims of Messrs. Kelly, Gustafson and Corcoran.
During fiscal years 1994 through 1996, the Company advanced funds to and made payments on behalf of DPK and Donald P. Kelly totaling approximately $171 for legal fees related to the litigation involving ARTRA Group Incorporated (refer to Note 14).
During fiscal 1996, the Company sold two autos to an affiliate of DPK. The total sum received was $135 and was based on the fair market value of the autos. A gain on the sale of $117 was recognized by the Company.
During fiscal years 1996, 1995 and 1994, Viskase Corporation, a wholly owned subsidiary of the Company, had sales of $19,795, $18,035 and $14,779, respectively, to Cargill, Inc. and its affiliates. Such sales were made in the ordinary course. During 1996 Cargill Financial Services Corporation had beneficial ownership of approximately 9.4% of the Company's outstanding Common Stock, and Gregory R. Page, President of the Red Meat Group of Excel Corp., a subsidiary of Cargill, Inc., is a director of the Company.
21. BUSINESS SEGMENT INFORMATION AND GEOGRAPHIC AREA INFORMATION (dollars in thousands)
Envirodyne primarily manufactures and sells polymeric food casings and plastic packaging films and containers (food packaging products) and disposable foodservice supplies. The Company's operations are primarily in North, South America and Europe. Intercompany sales and charges (including royalties) have been reflected as appropriate in the following information. Other income for 1996, 1995, and 1994 includes net foreign exchange transaction gains (losses) of approximately $687, $(61), and $2,707, respectively. Business Segment Information
December 29, December 30, January 1, 1995 to 1994 to to December 26, December 28, December 29, 1996 1995 1994 ----------- ----------- -----------
Net sales: Food packaging products $572,653 $574,266 $530,179 Disposable foodservice supplies 78,865 76,138 68,996 Other and eliminations (162) (192) (146) -------- -------- -------- $651,356 $650,212 $599,029 ======== ======== ======== Earnings before income taxes: Operating income: Food packaging products $37,310 $39,183 $ 48,145 Disposable foodservice supplies 7,342 4,959 6,514 Unallocated expenses, net -- primarily corporate (4,962) (6,007) (5,982) -------- -------- -------- 39,690 38,135 48,677
Interest expense, net 56,997 56,666 49,207 Other expense (income), net 3,075 1,710 (1,668) Minority interest in loss of subsidiary 50 -------- -------- -------- $(20,382) $(20,241) $ 1,188 ======== ======== ======== Identifiable assets: Food packaging products $762,233 $796,655 $814,731 Disposable foodservice supplies 69,725 69,812 71,530 Corporate and other, primarily cash equivalents 41,789 33,100 10,375 -------- -------- -------- $873,747 $899,567 $896,636 ======== ======== ======== Depreciation and amortization under capital lease and amortization of intangibles expense: Food packaging products $53,413 $51,404 $ 47,207 Disposable foodservice supplies 4,949 4,581 4,125 Corporate and other 58 76 55 -------- -------- -------- $58,420 $56,061 $ 51,387 ======== ======== ======== Capital expenditures: Food packaging products $32,934 $30,744 $ 28,534 Disposable foodservice supplies 4,135 3,687 4,012 Corporate and other 4 34 20 -------- -------- -------- $37,073 $34,465 $ 32,566 ======== ======== ========
Geographic Area Information
December 29, December 30, January 1, 1995 to 1994 to to December 26, December 28, December 29, 1996 1995 1994 ----------- ----------- -----------
Net sales: North America $423,092 $417,408 $407,761 South America 40,498 31,381 22,507 Europe 201,926 213,618 184,395 Other and eliminations (14,160) (12,195) (15,634) -------- -------- -------- $651,356 $650,212 $599,029 ======== ======== ======== Operating profit: North America $22,425 $22,504 $ 29,520 South America 1,883 524 (1,396) Europe 15,445 15,373 20,553 Other and eliminations (63) (266) -------- -------- -------- $39,690 $38,135 $ 48,677 ======== ======== ======== Identifiable assets: North America $633,201 $645,504 $639,831 South America 33,007 31,873 27,527 Europe 205,446 219,802 229,278 Other and eliminations 2,093 2,388 -------- -------- -------- $873,747 $899,567 $896,636 ======== ======== ======== United States export sales: (reported in North America sales above)
Asia $28,300 $22,509 $10,362 South and Central America 17,056 18,691 18,656 South Africa 9,484 Other International 259 219 147 -------- -------- -------- $45,615 $41,419 $38,649 ======== ======== ========
The total assets and net assets of foreign businesses were approximately $273,895 and $116,503 at December 26, 1996.
22. QUARTERLY DATA (unaudited)
Quarterly financial information for 1996 and 1995 is as follows (in thousands, except for per share amounts):
First Second Third Fourth Fiscal 1996 Quarter Quarter Quarter Quarter Annual - - ---------------- -------- -------- -------- -------- -------- Net Sales $159,736 $165,747 $163,825 $162,048 $651,356 Operating Income 9,294 9,275 8,708 12,413 39,690 Net income (loss) (5,927) (4,165) (3,924) 334 (13,682) Net income (loss) per share (.43) (.29) (.27) .02 (.96)
Net income (loss) per share amounts are computed independently for each of the quarters presented using weighted average shares outstanding during each quarter. The sum of the quarterly per share amounts in 1996 do not equal the total for the year because of rounding and 1996 stock issuances, as shown on the Consolidated Statement of Stockholders' Equity.
First Second Third Fourth Fiscal 1995 Quarter Quarter Quarter Quarter Annual - - -------------------- -------- -------- -------- -------- -------- Net Sales $155,824 $165,184 $166,688 $162,516 $650,212 Operating Income 8,689 10,089 8,653 10,704 38,135 Net (loss) (3,895) (7,513) (4,475) (5,636) (21,519) Net (loss) per share (.29) (.56) (.33) (.42) (1.59)
The second quarter net (loss) includes an extraordinary loss of $(4.2) million on debt extinguishment.
Net income (loss) per share amounts are computed independently for each of the quarters presented using weighted average shares outstanding during each quarter. The sum of the quarterly per share amounts in 1995 do not equal the total for the year because of rounding and 1995 stock issuances, as shown on the Consolidated Statement of Stockholders' Equity.
23. SUBSEQUENT EVENTS (dollars in thousands)
In March 1997 the Company announced that it was exploring the potential sale of Viskase Corporation's PVC film business. Viskase's plants in Aurora, Ohio, and Sedgefield, England, would be affected by a sale. Net sales of PVC films in 1996 totaled approximately $54 million.
In March 1997 Viskase Corporation received a subpoena from the Antitrust Division of the United States Department of Justice relating to a grand jury investigation of the sausage casings industry. Viskase Corporation is cooperating fully with the investigation.
24. SUBSIDIARY GUARANTORS
Envirodyne's payment obligations under the Senior Secured Notes are fully and unconditionally guaranteed on a joint and several basis (collectively, Subsidiary Guarantees) by Viskase Corporation, Viskase Holding Corporation, Viskase Sales Corporation, Clear Shield National, Inc., Sandusky Plastics, Inc. and Sandusky Plastics of Delaware, Inc., each a direct or indirect wholly-owned subsidiary of Envirodyne and each a "Guarantor." These subsidiaries represent substantially all of the operations of Envirodyne conducted in the United States. The remaining subsidiaries of Envirodyne generally are foreign subsidiaries or otherwise relate to foreign operations.
The obligations of each Guarantor under its Subsidiary Guarantee are the senior obligation of such Guarantor, and are collateralized, subject to certain permitted liens, by substantially all of the domestic assets of the Guarantor and, in the case of Viskase Holding Corporation, by a pledge of 65% of the capital stock of Viskase Europe Limited. The Subsidiary Guarantees and security are shared with the lenders under the Revolving Credit Agreement on a pari passu basis and are subject to the priority interest of the holders of obligations under the Letter of Credit Facility, each pursuant to an intercreditor agreement.
The following consolidating condensed financial data illustrate the composition of the combined Guarantors. No single Guarantor has any significant legal restrictions on the ability of investors or creditors to obtain access to its assets in the event of default on the Subsidiary Guarantee other than its subordination to senior indebtedness described above. Separate financial statements of the Guarantors are not presented because management has determined that these would not be material to investors. Based on the book value and the market value of the pledged securities of Viskase Corporation, Viskase Sales Corporation, Clear Shield National, Inc., Sandusky Plastics, Inc. and Sandusky Plastics of Delaware, Inc., these Subsidiary Guarantors do not constitute a substantial portion of the collateral and, therefore, the separate financial statements of these subsidiaries have not been provided. Separate audited financial statements of Viskase Holding Corporation are being filed within.
Investments in subsidiaries are accounted for by the parent and Subsidiary Guarantors on the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are therefore reflected in the parent's and Subsidiary Guarantors' investment accounts and earnings. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.
ENVIRODYNE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATING BALANCE SHEETS DECEMBER 26, 1996
ENVIRODYNE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATING CASH FLOWS FOR THE YEAR ENDED DECEMBER 26, 1996
ENVIRODYNE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATING CASH FLOWS FOR THE YEAR ENDED DECEMBER 28, 1995
ENVIRODYNE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATING CASH FLOWS FOR THE YEAR ENDED DECEMBER 29, 1994
VISKASE HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental schedule of noncash investing and financing activities:
Fiscal 1994 - - ----------- Viskase S.A. and its subsidiary Viskase Canada Inc.'s capital increased by $16 million due to the forgiveness of an Envirodyne loan. Viskase Corporation transferred equipment totaling $1.5 million, $174 thousand and $2.1 million to Viskase S.A., Viskase de Mexico S.A. de C.V., and Viskase Brasil Embalagens Ltda, respectively.
Fiscal 1995 - - ----------- Viskase Corporation transferred equipment totaling $497 thousand to Viskase S.A. Viskase Holding Corporation contributed capital consisting of $250 thousand of equipment to Viskase de Mexico S.A. de C.V.
Fiscal 1996 - - ----------- Viskase Corporation transferred equipment totaling $441 thousand to Viskase de Mexico S.A. de C.V.
The accompanying notes are an integral part of the consolidated financial statements.
VISKASE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Viskase Holding Corporation is a wholly owned subsidiary of Viskase Corporation. Viskase Corporation, in turn, is a wholly owned subsidiary of Envirodyne Industries, Inc. Viskase Holding Corporation serves as the direct or indirect parent company for the majority of Viskase Corporation's non-domestic operations. These subsidiaries are as follows:
Viskase Holding Corporation conducts its operations through its subsidiaries and, for the most part, has no assets or liabilities other than its investments, accounts receivable and payable with affiliates, and intercompany loan and advances.
On January 6, 1993, a group of bondholders filed an involuntary petition for reorganization of Envirodyne Industries, Inc. under Chapter 11 of the United States Bankruptcy Code. On January 7, 1993, several of the subsidiaries of Envirodyne Industries, Inc., including Viskase Holding Corporation, each filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the Bankruptcy Court). None of the subsidiaries of Viskase Holding Corporation entered into Chapter 11. On December 17, 1993, the Bankruptcy Court confirmed the First Amended Joint Plan of Reorganization as twice modified (Plan of Reorganization) with respect to Envirodyne Industries, Inc. (Envirodyne) and certain of its subsidiaries, including Viskase Holding Corporation. The Plan of Reorganization was consummated and Envirodyne and certain of its subsidiaries emerged from Chapter 11 on December 31, 1993 (Effective Date). For accounting purposes, the Plan of Reorganization was deemed to be effective as of December 31, 1993.
The Chapter 11 filing was related only to the Company's domestic operations and did not include the foreign subsidiaries and various inactive domestic subsidiaries.
2. NATURE OF BUSINESS
Viskase Holding Corporation's subsidiaries manufacture food packaging products. The operations of these subsidiaries are primarily in Europe and South and North America. Through its subsidiaries, the Company is a leading producer of cellulosic casings used in preparing and packaging processed meat products and is a major producer of heat shrinkable plastic bags and specialty films for packaging and preserving fresh and processed meat products, poultry and cheeses. The Company is also a leading international manufacturer of plasticized polyvinyl chloride (PVC) films, primarily for use in packaging food items.
International Operations
Viskase Holding Corporation's subsidiaries have seven manufacturing facilities located outside the continental United States, in Beauvais, France; Thaon, France; Lindsay, Ontario, Canada; Sedgefield, England (Great Britain); Swansea, Wales (Great Britain); Guarulhos, Brazil and Nuevo Laredo, Mexico.
International sales and operations may be subject to various risks including, but not limited to, possible unfavorable exchange rate fluctuations, political instability, governmental regulations (including import and export controls), restrictions on currency repatriation, embargoes, labor relations laws and the possibility of governmental expropriation. Viskase Holding Corporation's foreign operations generally are subject to taxes on the repatriation of funds.
International operations in certain parts of the world may be subject to international balance of payments difficulties which may raise the possibility of delay or loss in the collection of accounts receivable from sales to customers in those countries. Viskase Holding Corporation believes that its subsidiaries' allow- ance for doubtful accounts makes adequate provision for the collectibility of its receivables. Management believes that growth potential exists for many of Viskase's products outside the United States and that Viskase is well positioned to participate in these markets.
Sales and Distribution
Viskase Holding Corporation's subsidiaries' principal markets are in Europe, Latin America, North America and Asia Pacific.
The United Kingdom operation sells its PVC films directly and through distributors, primarily to the retail grocery and foodservice industries in Europe.
In Europe, Viskase Holding Corporation's subsidiaries operate casings service centers in Milan, Italy, Pulheim, Germany, and Moscow, Russia. The Company also operates a service center in Brisbane, Australia. These service centers provide finishing, inventory and delivery services to customers. The subsidiaries also use outside distributors to market their products to customers in Europe, Africa, Asia and Latin America.
Competition
From time to time, Viskase Holding Corporation's subsidiaries experience reduced market share or reduced profits due to price competition; however, management believes that such market conditions will not result in any long-term material loss of business.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Basis of presentation
Effective in 1990 Envirodyne Industries, Inc. adopted a 52/53 week fiscal year ending on the last Thursday of December. Viskase Holding Corporation's 1993 financial statements include December 31, 1993 in order to present the effect of the consummation of the Plan of Reorganization.
(B) Principles of consolidation
The consolidated financial statements reflect the accounts of Viskase Holding Corporation and its subsidiaries. All significant intercompany transactions and balances between and among Viskase Holding Corporation and its subsidiaries have been eliminated in the consolidation.
Reclassifications have been made to the prior years' financial statements to conform to the 1996 presentation.
(C) Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
(D) Cash equivalents (dollars in thousands)
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 $4,074 and $8,074 of short-term investments at December 26, 1996 and December 28, 1995, respectively.
(E) Inventories
Inventories, primarily foreign, are valued at the lower of first-in, first-out (FIFO) cost or market.
(F) Property, plant and equipment
Property, plant and equipment are carried at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the assets ranging from 3 to 32 years. Upon retirement or other disposition, cost and related accumulated depreciation are removed from the accounts, and any gain or loss is included in results of operations. Effective December 31, 1993 and in conjunction with the Fresh Start Reporting, property, plant and equipment was reported at the estimated fair value.
(G) Deferred financing costs
Deferred financing costs are amortized on a straight-line basis over the expected term of the related debt agreement. Amortization of deferred financing costs is classified as interest expense.
(H) Excess reorganization value and excess investment over net assets acquired, net
Excess reorganization value is amortized on the straight-line method over 15 years.
The Company continues to evaluate the recoverability of excess reorganization value based on operating performance and undiscounted cash flows of the operating business units. Impairment will be recognized when the expected undiscounted future operating cash flows derived from such intangible is less than its carrying value. If impairment is identified, valuation techniques deemed appropriate under the particular circumstances will be used to determine the intangible's fair value. The loss will be measured based on the excess of carrying value over the determined fair value. The review for impairment is performed at least on a quarterly basis.
(I) Pensions
The Company's operations in Europe have defined benefit retirement plans covering substantially all salaried and full time hourly employees. Pension cost is computed using the projected unit credit method.
The Company's funding policy is consistent with funding requirements of the applicable foreign laws and regulations.
(J) Postemployment benefits
Effective December 31, 1993 and in conjunction with the Fresh Start Reporting, the Company adopted SFAS No. 112 "Employers Accounting for Postemployment Benefits." The impact of adopting SFAS No. 112 was not material.
(K) Income taxes
Income taxes are accounted for in accordance with SFAS No. 109. Tax provisions and benefits are recorded at statutory rates for taxable items included in the consolidated statements of operations regardless of the period for which such items are reported for tax purposes. Deferred income taxes are recognized for temporary differences between financial statement and income tax bases of assets and liabilities for which income tax benefits will be realized in future years.
(L) Net income (loss) per share
Net income (loss) per share of common stock is based upon the weighted average number of shares of common stock outstanding during the year.
(M) Revenue recognition
Sales to customers are recorded at the time of shipment net of discounts and allowances.
(N) Foreign currency contracts The Company maintains a hedging program to partially hedge its forecasted foreign currency revenue cash flows. The hedging program principally addresses revenue cash flows within its European operations. The foreign exchange contracts are denominated predominantly in the major European currencies and have varying maturities up to eighteen months. The effect of this practice is to minimize the effect of foreign exchange rate movements on the Company's operating results. The Company's hedging activities do not subject the Company to additional exchange rate risk because gains and losses on these contracts offset losses and gains on the transactions being hedged. The cash flows from forward contracts accounted for as hedges of identifiable transactions or events are classified consistent with the cash flows from the transactions or events being hedged.
4. RECEIVABLES (dollars in thousands)
Receivables consisted primarily of trade accounts receivable and were net of allowances for doubtful accounts of $1,404 and $2,256 at December 26, 1996, and at December 28, 1995, respectively.
5. INVENTORIES (dollars in thousands)
Inventories consisted of: December 26, December 28, 1996 1995 ----------- ----------- Raw materials $ 3,728 $ 5,299 Work in process 11,395 13,342 Finished products 21,386 19,592 ------- ------- $36,509 $38,233 ======= =======
Inventories were net of reserves for obsolete and slow moving inventory of $1,283 and $1,331 at December 26, 1996 and December 28, 1995, respectively.
6. PROPERTY, PLANT AND EQUIPMENT (dollars in thousands)
December 26, December 28, 1996 1995 ----------- -----------
Property, plant and equipment: Land and improvements $ 5,394 $ 5,319 Buildings and improvements 30,349 30,236 Machinery and equipment 117,312 114,212 Construction in progress 4,916 283 Capital Leases: Machinery and equipment 204 367 -------- -------- $158,175 $150,417 ======== ========
Maintenance and repairs charged to costs and expenses for 1996, 1995, and 1994 aggregated $8,374, $10,288 and $10,748, respectively. Depreciation is computed on the straight-line method over the estimated useful lives of the assets ranging from 3 to 32 years.
7. ACCRUED LIABILITIES (dollars in thousands)
Accrued liabilities were comprised of:
December 26, December 28, 1996 1995 ----------- -----------
Compensation and employee benefits $10,287 $ 9,446 Taxes 6,073 1,585 Accrued volume and sales discounts 5,101 5,320 Inventory received not billed 2,805 1,205 Other 7,411 4,386 ------- ------- $31,677 $21,942 ======= =======
8. DEBT OBLIGATIONS (dollars in thousands)
As described in Note 1, Chapter ll Reorganization Proceedings, Envirodyne and certain of its domestic Subsidiaries (including Viskase Holding Corporation) emerged from Chapter 11 on December 31, 1993.
On June 20, 1995, Envirodyne completed the sale of $160,000 aggregate principal amount of senior secured notes to certain institutional investors in a private placement. The senior secured notes were issued pursuant to an indenture dated June 20, 1995 (Indenture) and consist of (i) $151,500 of 12% Senior Secured Notes due 2000 and (ii) $8,500 of Floating Rate Senior Secured Notes due 2000 (collectively, the Senior Secured Notes). Envirodyne used the net proceeds of the offering primarily to (i) repay the Company's $86,125 domestic term loan, (ii) repay the $68,316 of obligations under the Company's domestic and foreign revolving loans and (iii) pay transaction fees and expenses. Concurrently with the June 20, 1995 placement, Envirodyne entered into a new $20,000 domestic revolving credit facility (Revolving Credit Facility) and a new $28,000 letter of credit facility (Letter of Credit Facility). The Senior Secured Notes and the obligations under the Revolving Credit Facility and the Letter of Credit Facility are guaranteed by Envirodyne's significant domestic subsidiaries and secured by a collateral pool (Collateral Pool) comprised of: (i) all domestic accounts receivable (including intercompany receivables) and inventory; (ii) all patents, trademarks and other intellectual property (subject to non-exclusive licensing agreements); (iii) substantially all domestic fixed assets (other than assets subject to a lease agreement with General Electric Capital Corporation); and (iv) a senior pledge of 100% of the capital stock of Envirodyne's significant domestic subsidiaries and 65% of the capital stock of Viskase S.A. Such guarantees and security are shared by the holders of the Senior Secured Notes and the holders of the obligations under the Revolving Credit Facility on a pari passu basis pursuant to an intercreditor agreement. Pursuant to such intercreditor agreement, the security interest of the holders of the obligations under the Letter of Credit Facility has priority over all other liens on the Collateral Pool.
The Company finances its working capital needs through a combination of cash generated through operations and borrowings local unsecured credit facilities and intercompany loans.
The Company recognized an extraordinary loss of $1,030 representing the write-off of deferred financing fees related to the June 20, 1995 debt refinancing. The extraordinary loss, net of applicable income taxes of $340, was included in the Company's Statement of Operations for the quarter ended June 29, 1995.
The Viskase Limited term facility is with a foreign financial institution. The term facility, which is collateralized by substantially all of the assets of Viskase Limited, bears a variable interest rate and is payable in 16 equal semiannual installments that began in December 1992.
Outstanding short-term and long-term debt consisted of:
December 26, December 28, 1996 1995 ----------- -----------
Short-term debt and current maturity of long-term debt: Current maturity of Viskase Limited Term Loan (4.7%) $1,876 $2,033 Other 2,233 4,064 ------ ------ Total short-term debt $4,109 $6,097 ====== ====== Long-term debt: Viskase Limited Term Loan (4.7%) $4,690 $7,115 Other 164 606 ------ ------ Total long-term debt $4,854 $7,721 ====== ======
The fair value of the Company's debt obligation is estimated based upon the quoted market prices for the same or similar issues or on the current rates offered to the Company for the debt of the same remaining maturities. The fair values of debt obligations approximated their carrying values.
Aggregate maturities of remaining long-term debt for each of the next five fiscal years are:
Total ------ 1997 $3,211 1998 1,981 1999 1,875 2000 939 2001 -
9. OPERATING LEASES (dollars in thousands)
The Company has operating lease agreements for machinery, equipment and facilities. The majority of the facilities leases require the Company to pay maintenance, insurance and real estate taxes.
Future minimum lease payments for operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 26, 1996, are:
1997 $ 745 1998 247 1999 129 2000 6 2001 3 Total thereafter ------ Total minimum lease payments $1,130 ======
Total rent expense during 1996, 1995 and 1994 amounted to $2,905, $3,750, and $2,350, respectively.
10. RETIREMENT PLANS (dollars in thousands)
The Company maintains various pension and statutory separation pay plans for its European employees. The expense for these plans in 1996, 1995 and 1994 was $1,972, $1,383, and $1,043, respectively. As of their most recent valuation dates, in plans where vested benefits exceeded plan assets, the actuarially computed value of vested benefits exceeded those plans' assets by approximately $2,204; conversely, plan assets exceeded the vested benefits in certain other plans by approximately $2,569.
The Company's postretirement benefits are not material.
11. CONTINGENCIES (dollars in thousands)
In late 1993, Viskase commenced a legal action against American National Can Company (ANC) in Federal District Court for the Northern District of Illinois, Eastern Division, 93C7651. Viskase claimed that ANC was infringing on various Viskase patents relating to multi-layer barrier plastic films used for fresh red meat, processed meat and poultry product applications. On November 8, 1996, after a three week trial, a jury found that ANC had willfully infringed Viskase's patents and awarded Viskase $102.4 million in compensatory damages. On December 5, 1996, ANC posted a supersedeas bond in the amount of $108 million and the Court entered an order staying Viskase's enforcement of the judgment. The Court also entered an order permanently enjoining ANC from making or selling infringing products after December 23, 1996.
The judgment is not final and the parties are presently engaged in the post-judgment motion phase of the case. ANC has filed motions to reduce the damage award by at least $75 million or alternatively, grant ANC a new trial. Viskase is seeking a determination that the case be deemed "exceptional" and that the award be increased by approximately $46 million which includes compensatory damages for ANC's infringement during the period of October 1, 1996 through December 23, 1996 and additional damages for prejudgment interest, attorneys' fees and related expenses. Due to ANC's willful infringement of the patents, Viskase has asked the court to treble the compensatory award. These motions are all pending before the Court and rulings are expected in the second quarter 1997. Meanwhile post-judgment interest is accruing on the $102.4 million award from November 8, 1996 at an annual rate of 5.49%. The Company expects ANC to aggressively contest the award and to appeal any final judgment. The award and any pending claims for additional damages have not been recorded in the Company's financial statements.
The Company and its subsidiaries are involved in various legal proceedings arising out of its business and other environmental matters, none of which is expected to have a material adverse effect upon its results of operations, cash flows or financial position.
12. INCOME TAXES (dollars in thousands)
The provision (benefit) for income taxes consisted of:
December 29, December 30, January 1, 1995 to 1994 to to December 26, December 28, December 29, 1996 1995 1994 ----------- ----------- ----------- Current: Federal $1,909 $1,316 $4,479 Foreign 4,365 950 4,652 State and local 379 243 766 ------ ------ ------ 6,653 2,509 9,897 ------ ------ ------ Deferred: Federal Foreign 393 2,098 128 State and local ------- ------- ------- 393 2,098 128 ------- ------- ------- $ 7,046 $ 4,607 $10,025 ======= ======= =======
A reconciliation from the statutory federal tax rate to the consolidated effective tax rate follows:
December 29, December 30, January 1, 1995 to 1994 to to December 26, December 28, December 29, 1996 1995 1994 ----------- ----------- -----------
Statutory federal tax rate 35.0% 35.0% 35.0% Increase (decrease) in tax rate due to: State and local taxes net of related federal tax benefit 1.5 2.3 2.5 Net effect of taxes relating to foreign operations 7.9 30.4 11.1 Other (.6) .4 1.6 ---- ---- ---- Consolidated effective tax rate 43.8% 68.1% 50.2% ==== ==== ====
Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities for 1996 are as follows:
At December 26, 1996, the Company had $16,393 of undistributed earnings of foreign subsidiaries considered permanently invested for which deferred taxes have not been provided.
Domestic earnings or (losses) after extraordinary gain or loss and before income taxes were approximately $6,156, $3,937 and $12,634 in 1996, 1995 and 1994, respectively. Foreign earnings or (losses) before income taxes were approximately $9,942, $2,832 and $7,329 in 1996, 1995 and 1994, respectively.
13. RESEARCH AND DEVELOPMENT COSTS (dollars in thousands)
Research and development costs are expensed as incurred and totaled $1,282, $1,106, and $1,562, for 1996, 1995, and 1994, respectively.
14. RELATED PARTY TRANSACTIONS (dollars in thousands)
Intercompany loans and advances: - - -------------------------------
The 12% promissory notes due to Envirodyne are payable on demand. Interest is payable semiannually on June 30 and December 31.
The Viskase S.A. promissory note due to Envirodyne was payable on demand and bore interest at a rate of 10.00%. The note was repaid in fiscal 1996.
The $2.5 million Viskase United Kingdom Limited promissory note due to Envirodyne was payable on demand and bore interest at a rate of 8.00%. The balance of the note was repaid in fiscal 1996.
The Viskase Corporation advance to Viskase Holding Corporation is payable on demand.
License Agreements - - ------------------ Viskase Holding Corporation has been granted the right to license Viskase Corporation's patents and technology pursuant to a license agreement between Viskase Corporation and Viskase Holding Corporation.
Intercompany transactions: - - ------------------------- In 1996, 1995 and 1994, the Company was charged $999, $1,022 and $756, respectively, by Viskase Corporation for management services. In 1996, 1995 and 1994, the Company was charged $520, $687 and $100, respectively, by Envirodyne for management services.
During 1996, 1995 and 1994, the Company purchased semi-finished and finished inventory from Viskase Sales Corporation in the amount of $32,489, $26,953 and $23,114, respectively. In addition, during 1996, 1995 and 1994, the Company had sales of inventory to Viskase Sales Corporation in the amount of $7,842, $7,329 and $5,632, respectively.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying value and estimated fair value as of December 26, 1996 of the Company's financial instruments. (Refer to Notes 3 and 8.)
Carrying Estimated Value Fair Value -------- ----------- Assets: Cash and equivalents $16,171 $16,171 Foreign currency contracts 12,995 12,337
Liabilities: Long-term debt 7,742 7,742
16. PATENT LITIGATION SETTLEMENT (dollars in thousands)
In 1989 certain competitors of Viskase filed a declaratory action challenging the validity and enforceability of a Viskase patent relating to casings used in the manufacture of food products. In May 1994, the trial court upheld the validity and enforceability of the Viskase patent and found infringement of the patent. Before the trial on damages was conducted, Viskase entered into agreements to settle the claims and grant licenses to the competitors. Under the terms of these agreements Viskase received $9,457 for past infringement and advance royalties and established royalty rates for future patent use.
17. SUBSEQUENT EVENTS (dollars in thousands)
In March 1997 the Company announced that it was exploring the potential sale of Viskase Corporation's PVC film business. Viskase's plants in Aurora, Ohio, and Sedgefield, England, would be affected by a sale. Net sales of PVC films in 1996 totaled approximately $54 million.
In March 1997, Viskase Corporation received a subpoena from the Antitrust Division of the United States Department of Justice relating to a grand jury investigation of the sausage casings industry. Viskase Corporation has cooperated fully with the investigation.
ENVIRODYNE INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(in thousands)