1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to COMMISSION FILE NUMBER: 1-4219 ZAPATA CORPORATION (Exact name of Registrant as specified in its charter) STATE OF DELAWARE C-74-1339132 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1717 ST. JAMES PLACE, SUITE 550 77056 Houston, Texas (Zip Code) (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 940-6100 --------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ------------------------ Common Stock, $0.25 par value......................... NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None. On December 17, 1997, there were outstanding 22,909,870 shares of the Company's Common Stock, $0.25 par value. The aggregate market value of the Company's voting and non-voting common equity held by nonaffiliates of the Company is $86,010,664, based on the closing price in consolidated trading on December 17, 1997, for the Company's Common Stock. INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X] DOCUMENTS INCORPORATED BY REFERENCE: NONE. ================================================================================ 2 Zapata Corporation hereby amends Item 14 of its annual report on Form 10-K for the fiscal year ended September 30, 1997. Item 14, as so amended, is as follows: The financial statements of Envirodyne Industries, Inc. and subsidiaries, as referenced in Item 14, are also filed herewith. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) LIST OF DOCUMENTS FILED. All schedules have been omitted since the information required to be submitted has been included in the financial statements or notes or has been omitted as not applicable or not required. Page numbers that are referenced above, except for the "F" pages, refer to the page numbers contained in the Company's Form 10-K for the fiscal year ended September 30, 1997. (2) Exhibits. The exhibits indicated by an asterisk (*) are incorporated by reference. 2
PAGE ---- (1) (A) Consolidated financial statements, Zapata Corporation and subsidiary companies-- Report of Coopers & Lybrand L.L.P., independent accountants......................... 14 Consolidated balance sheet -- September 30, 1997 and 1996........................... 15 Consolidated statement of operations for the years ended September 30, 1997, 1996 and 1995................................................ 16 Consolidated statement of cash flows for the years ended September 30, 1997, 1996 and 1995................................................ 17 Consolidated statement of stockholders' equity for the years ended September 30, 1997, 1996 and 1995................................................ 18 Notes to consolidated financial statements.......................................... 19 (B) Consolidated financial statements, Envirodyne Industries, Inc. and subsidiary companies -- Report of Coopers & Lybrand L.L.P., independent accountants......................... F-1 Consolidated balance sheets--December 25, 1997 and December 26, 1996................ F-2 Consolidated statements of operations, for each of the 52 week periods ending December 25, 1997, December 26, 1996 and December 28, 1995....................... F-3 Consolidated statements of stockholders' equity, for each of the 52 week periods ending December 25, 1997, December 26, 1996 and December 28, 1995....................... F-4 Consolidated statements of cash flows, for each of the 52 week periods ending December 25, 1997, December 26, 1996 and December 28, 1995....................... F-5 Notes to consolidated financial statements.......................................... F-6 3 3
EXHIBIT NO. DESCRIPTION OF EXHIBITS ---------- ----------------------- 3(a)* -- Restated Certificate of Incorporation of Zapata filed with Secretary of State of Delaware May 3, 1994 (Exhibit 3(a) to Current Report on Form 8-K dated April 27, 1994 (File No. 1-4219)). 3(b)* -- Certificate of Designation, Preferences and Rights of $1 Preference Stock (Exhibit 3(c) to Zapata's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1993 (File No. 1-4219)). 3(c)* -- Certificate of Designation, Preferences and Rights of $100 Preference Stock (Exhibit 3(d) to Zapata's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1993 (File No. 1- 4219)). 3(d)* -- By-laws of Zapata, as amended effective November 11, 1996, are incorporated herein by reference to Exhibit 3(b) to Zapata's report on Form 10-K for the fiscal year ended September 30, 1996. Certain instruments respecting long-term debt of Zapata and its subsidiaries have been omitted pursuant to Regulation S-K, Item 601. Zapata hereby agrees to furnish a copy of any such instrument to the Commission upon request. 10(a)*+ -- Zapata 1990 Stock Option Plan (Exhibit 10(b) to Zapata's Annual Report on Form 10-K for the fiscal year ended September 30, 1990 (File No. 1-4219)). 10(b)*+ -- First Amendment to Zapata 1990 Stock Option Plan (Exhibit 10(c) to Zapata's Registration Statement on Form S-1 (Registration No. 33-40286)). 10(c)*+ -- Zapata Special Incentive Plan, as amended and restated effective February 6, 1992 (Exhibit 10(a) to Zapata's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 (File No. 1- 4219)). 10(d)*+ -- Zapata 1981 Stock Incentive Plan, as amended and restated effective February 12, 1986 (Exhibit 19(a) to Zapata's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1986 (File No. 1-4219)). 10(e)*+ -- Zapata Supplemental Pension Plan effective as of April 1, 1992 (Exhibit 10(b) to Zapata's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 (File No. 1-4219)). 10(f)*+ -- Zapata Annual Incentive Plan effective January 1, 1991 (Exhibit 10(h) to Zapata's Registration Statement on Form S-1 (Registration No. 33-40286)). 10(g)*+ -- Employment Agreement between Lamar C. McIntyre and Zapata dated as of October 1, 1994 (Exhibit 10(v) to Zapata's Annual Report on Form 10-K for the fiscal year ended September 30, 1994 (File No. 1-4219)). 10(h)* -- Stock Purchase Agreement dated as of August 7, 1995 between Zapata Corporation and Malcolm I. Glazer (Exhibit 10(o) to Zapata's Annual Report on Form 10-K for the fiscal year ended September 30, 1995 (File No. 1-4219)). 10(i)* -- Purchase and Sale Agreement dated March 26, 1996 by and among Cimarron Gas Holding Company, Conoco Inc. and Enogex Products Corporation (Exhibit 2.1 to Zapata's Current Report on Form 8-K dated April 9, 1996 (File No. 1-4219)). 10(j)* -- Amendment and Clarification of Purchase and Sale Agreement, Waiver and Closing Agreement dated April 9, 1996 (Exhibit 2.2 to Zapata's Current Report on Form 8-K dated April 9, 1996 (File No. 1-4219)). 10(k)* -- Agreement and Plan of Merger dated as of June 4, 1996 among Zapata, Zapata Acquisition Corp. and Houlihan's (Exhibit 2.1 to Zapata's Registration Statement on Form S-4 (Reg. No. 333- 06729)). 10(l)* -- Standstill Agreement dated April 30, 1996 between Zapata and Malcolm I. Glazer (Exhibit 10.18 to Zapata's Registration Statement on Form S-4 (Reg. No. 333-06729)). 4 + Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K. ++ Exhibits filed with the Company's Form 10-K for fiscal year ended September 30, 1997. (B) REPORTS ON FORM 8-K. Current Report on Form 8-K dated July 11, 1997 reporting (Items 2 and 7) that Zapata had completed the sale of its Bolivian oil and gas interests for $18.8 million. (C) FINANCIAL STATEMENT SCHEDULE. Filed herewith as a financial statement schedule is the schedule supporting Zapata's consolidated financial statements listed under paragraph (a) of this Item, and the Independent Accountants' Report with respect thereto. 4
10(m)* -- Irrevocable proxy dated June 4, 1996 granted by Malcolm I. Glazer to members of a Special Committee of the Board of Directors of Zapata (Exhibit 10.19 to Zapata's Registration Statement on Form S-4 (Reg. No. 333-06729)). 10(n)* -- Supplemental Agreement dated June 4, 1996 between Malcolm I. Glazer and Zapata (Exhibit 10.20 to Zapata's Registration Statement on Form S-4 (Reg. No. 333-06729)). 10(o)*+ -- 1996 Long-Term Incentive Plan of Zapata (Exhibit 10.21 to Zapata's Registration Statement on Form S-4 (Reg. No. 333-06729)). 10(p)*+ -- Employment Agreement between Joseph L. von Rosenberg III and Zapata effective as of June 1, 1996. 10(q)* -- Shareholders' Agreement dated May 30, 1997 by Malcolm I. Glazer and the Malcolm I. Glazer Family Limited Partnership in favor of Zapata (Exhibit 10(z) to Zapata's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997 (File No. 1-4219)). 21*++ -- Subsidiaries of the Registrant. 23(a)*++ -- Consent of Coopers & Lybrand L.L.P. 23(b) -- Consent of Coopers & Lybrand L.L.P. with respect to the consolidated financial statements of Envirodyne Industries, Inc. 24*++ -- Powers of attorney. 27*++ -- Financial Data Schedule. 5 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. ZAPATA CORPORATION (Registrant) By: /s/ Eric T. Furey ---------------------------------------- (Eric T. Furey Vice President, General Counsel and Corporate Secretary) April 8, 1998 5 6 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 Part IV, Item 14(a) 1 and (a) 2 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 25, 1997 and December 26, 1996, and the consolidated results of their operations and their cash flows for the periods December 27, 1996 to December 25, 1997, December 29, 1995 to December 26, 1996 and December 30, 1994 to December 28, 1995, 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, 1998 F-1 7 ENVIRODYNE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS F-2
December 25, December 26, 1997 1996 ----------- ----------- (in thousands) ASSETS Current assets: Cash and equivalents $ 24,407 $ 41,794 Receivables, net 75,039 79,174 Inventories 97,802 95,012 Other current assets 25,286 22,141 -------- -------- Total current assets 222,534 238,121 Property, plant and equipment, including those under capital leases 580,981 578,704 Less accumulated depreciation and amortization 145,855 116,896 -------- -------- Property, plant and equipment, net 435,126 461,808 Deferred financing costs, net 4,574 5,902 Other assets 39,193 42,809 Excess reorganization value, net 112,426 125,107 -------- -------- Total Assets $813,853 $873,747 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt including current portion of long-term debt and obligations under capital leases $ 12,880 $ 11,291 Accounts payable 41,734 37,015 Accrued liabilities 71,589 82,109 Current deferred income taxes 10,516 10,324 -------- -------- Total current liabilities 136,719 140,739 Long-term debt including obligations under capital leases 511,183 521,179 Accrued employee benefits 48,521 53,697 Deferred and noncurrent income taxes 26,510 54,487 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value; none outstanding Common stock, $.01 par value; 14,753,442 shares issued and outstanding at December 25, 1997 and 14,545,107 shares at December 26, 1996 148 145 Paid in capital 136,183 135,100 Accumulated (deficit) (48,458) (38,813) Cumulative foreign currency translation adjustments 3,098 7,305 Unearned restricted stock issued for future service (51) (92) -------- -------- Total stockholders' equity 90,920 103,645 -------- -------- Total Liabilities and Stockholders' Equity $813,853 $873,747 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. 8 ENVIRODYNE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS F-3
52 weeks 52 weeks 52 weeks December 27, December 29, December 30, 1996 to 1995 to 1994 to December 25, December 26, December 28, 1997 1996 1995 ----------- ----------- ----------- (in thousands, except for number of shares and per share amounts) NET SALES $612,868 $651,356 $650,212 COSTS AND EXPENSES Cost of sales 459,178 488,244 485,048 Selling, general and administrative 108,141 107,088 111,230 Amortization of intangibles and excess reorganization value 15,936 16,334 15,799 Restructuring charges 3,500 -------- -------- -------- OPERATING INCOME 26,113 39,690 38,135 Interest income 1,416 1,568 670 Interest expense 55,719 58,565 57,336 Other expense, net 3,755 3,075 1,710 -------- -------- -------- (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM (31,945) (20,382) (20,241) Income tax (benefit) (22,300) (6,700) (2,918) -------- -------- -------- (LOSS) BEFORE EXTRAORDINARY ITEM (9,645) (13,682) (17,323) Extraordinary (loss), net of tax (4,196) -------- -------- -------- NET (LOSS) $(9,645) $(13,682) $(21,519) ======= ======== ======== WEIGHTED AVERAGE COMMON SHARES 14,617,540 14,325,595 13,516,771 ========== ========== ========== PER SHARE AMOUNTS: (LOSS) BEFORE EXTRAORDINARY ITEM - BASIC AND DILUTED EARNINGS PER SHARE $(.66) $(.96) $(1.28) ===== ===== ====== NET (LOSS) - BASIC AND DILUTED EARNINGS PER SHARE $(.66) $(.96) $(1.59) ===== ===== ====== The accompanying notes are an integral part of the consolidated financial statements. 9 ENVIRODYNE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-4
Cumulative Unearned Foreign Restricted Currency Stock Total Common Paid in Accumulated Translation Issued For Stockholders' Stock Capital (Deficit) Adjustments Future Service Equity ------ -------- ----------- ------------- -------------- ------------ (in thousands) Balance December 29, 1994 $135 $134,865 $ (3,612) $ 3,961 $135,349 Net (loss) (21,519) (21,519) Issuance of Common Stock 1 (1) Translation adjustments 3,266 3,266 ---- -------- -------- ------ ---- ------- Balance December 28, 1995 136 134,864 (25,131) 7,227 117,096 Net (loss) (13,682) (13,682) Issuance of Common Stock 9 236 $ (92) 153 Translation Adjustment 78 78 ---- -------- -------- ------ ---- ------- Balance December 26, 1996 145 135,100 (38,813) 7,305 (92) 103,645 Net (loss) (9,645) (9,645) Issuance of Common Stock 3 1,083 41 1,127 Translation adjustment (4,207) (4,207) ---- -------- -------- ------ ---- ------- Balance December 25, 1997 $148 $136,183 $(48,458) $3,098 $(51) $90,920 ==== ======== ======== ====== ==== ======= The accompanying notes are an integral part of the consolidated financial statements. 10 ENVIRODYNE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS F-5
December 27, December 29, December 30, 1996 to 1995 to 1994 to December 25, December 26, December 28, 1997 1996 1995 -------------- -------------- ------------- (in thousands) Cash flows from operating activities: (Loss) before extraordinary item $ (9,645) $(13,682) $ (17,323) Extraordinary (loss) (4,196) -------- -------- --------- Net (loss) (9,645) (13,682) (21,519) Adjustments to reconcile net (loss) to net cash provided by operating activities: Depreciation and amortization under capital leases 43,373 42,086 40,262 Amortization of intangibles and excess reorganization value 15,936 16,334 15,799 Amortization of deferred financing fees and discount 1,770 2,272 2,196 Deferred and noncurrent income taxes (24,893) (11,065) (6,450) Loss on debt extinguishment 6,778 Foreign currency transaction loss (gain) 135 (810) (1,233) (Gain) loss on disposition of assets (64) 165 73 Changes in operating assets and liabilities: Accounts receivable 1,299 10,180 (839) Inventories (12,187) 4,383 12,741 Other current assets (3,916) (788) (1,837) Accounts payable and accrued liabilities (2,283) 12,463 (1,670) Other (3,879) (5,214) (5,334) -------- -------- --------- Total adjustments 15,291 70,006 60,486 -------- -------- --------- Total net cash provided by operating activities 5,646 56,324 38,967 Cash flows from investing activities: Capital expenditures (57,879) (37,073) (34,465) Proceeds from disposition of assets 41,867 2,356 86 ------- -------- --------- Net cash (used in) investing activities (16,012) (34,717) (34,379) Cash flows from financing activities: Issuance of common stock 1,127 153 Proceeds from revolving loan and long-term borrowings 2,814 2,186 207,922 Deferred financing costs (523) (142) (7,887) Repayment of revolving loan, long-term borrowings and capital lease obligations (9,490) (11,705) (181,375) -------- -------- --------- Net cash (used in) provided by financing activities (6,072) (9,508) 18,660 Effect of currency exchange rate changes on cash (949) (630) (212) -------- -------- --------- Net (decrease) increase in cash and equivalents (17,387) 11,469 23,036 Cash and equivalents at beginning of period 41,794 30,325 7,289 -------- -------- --------- Cash and equivalents at end of period $24,407 $ 41,794 $ 30,325 ======== ======== ========= Supplemental cash flow information and noncash investing and financing activities: Interest paid $ 54,937 $ 55,798 $ 55,030 Income taxes paid $ 5,291 $ 1,647 $ 4,895 Capital lease obligations (machinery and equipment) $ 2,814 $ 2,186 $ 2,081 The accompanying notes are an integral part of the consolidated financial statements. 11 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. 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. Through Sandusky, the Company is a producer of thermoformed promotional and vending cups, plastic containers used in the packaging of cultured dairy and delicatessen products, and of horticultural trays and inserts. 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 six manufacturing facilities located outside the continental United States, in Beauvais, France; Thaon, France; Lindsay, Ontario, Canada; Newton Aycliffe, England (Great Britain); Swansea, Wales (Great Britain) and Guarulhos, Brazil. The aggregate of domestic exports and net sales of foreign operations represents approximately 55% 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 100 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, Argentina, China and Chile. In the United States, Viskase operates distribution centers in Atlanta, Georgia, and Bensalem, Pennsylvania, as well as centers within the Chicago, Illinois, and Pauls Valley, Oklahoma, plants. In Latin America, Viskase operates a service center within the Guarulhos, Brazil, plant and distribution centers in Buenos Aires, Argentina, Santiago, Chile and Monterrey, Mexico. In the Asia-Pacific region, Viskase operates a service center in Brisbane, Australia and distribution centers in Beijing, China and Hong Kong, China. In Europe, Viskase operates service centers in Milan, Italy and Pulheim, Germany and distribution centers in Dublin, Ireland, Warsaw, Poland and Moscow, Russia. 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 specialty plastic 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. F-6 12 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. (B) Principles of consolidation The consolidated financial statements include the accounts of Envirodyne Industries, Inc. and its subsidiaries (the Company). Intercompany accounts and transactions have been eliminated in consolidation. (C) Reclassification Reclassifications have been made to the prior years' financial statements to conform to the 1997 presentation. (D) 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. (E) 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 $18,612 and $26,338 of short-term investments at December 25, 1997 and December 26, 1996, respectively. (F) 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. (G) 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. (H) 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. (I) Patents Patents are amortized on the straight-line method over an estimated average useful life of ten years. (J) Excess reorganization value, net Excess reorganization value is amortized on the straight-line method over 15 years. Accumulated amortization of excess reorganization value totaled $41 million and $31 million at December 25, 1997, and December 26, 1996, respectively. (K) Long-lived assets The Company continues to evaluate the recoverability of long-lived assets including property, plant and equipment, patents and excess reorganization. Impairments are recognized when the expected undiscounted future operating cash flows derived from long-lived assets are less than their carrying value. If impairment is identified, valuation techniques deemed appropriate under the particular circumstances will be used to determine the asset's fair value. The loss will be measured based on the excess of carrying value over the determined fair value. The review for impairment is performed at least once a year. (L) 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. (M) 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." (N) 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. (O) Net (loss) per share Net (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. (P) Revenue recognition Sales to customers are recorded at the time of shipment net of discounts and allowances. F-7 13 (Q) Foreign currency contracts The Company uses foreign exchange forward contracts to hedge some of its non-functional currency receivables and payables which are denominated in major currencies that can be traded on open markets. This strategy is used to reduce the overall exposure to the effects of currency fluctuations on cash flows. The Company's policy is not to speculate in financial instruments. Receivables and payables which are denominated in non-functional currencies are translated to the functional currency at month end and the resulting gain or loss is taken to other income and expense on the statement of operations. Gains and losses on hedges of receivables and payables are marked to market. The result is recognized in other income and expense on the statement of operations. (R) 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 accounting 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 18). (S) Other The Company will implement the provisions of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130), which will be effective for periods beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Management believes that adoption of SFAS No. 130 will not have a material effect on the Company. The Company will implement the provisions of Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131), which will be effective for periods beginning after December 15, 1997. SFAS No. 131 specifies revised guidelines for determining an entity's operating segments and the type and level of financial information to be disclosed. Management believes that adoption of SFAS No. 131 will not have a material effect on the Company. The Company will implement the provisions of Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" (SFAS No. 132), which will be effective for fiscal years beginning after December 15, 1997. SFAS No. 132 standardizes the disclosure requirements for pensions and other postretirement benefits, requires additional information on changes in the benefit obligation and fair values of plan assets and eliminates certain disclosures that are no longer useful. Management believes the adoption of SFAS No. 132 will not have a material effect on the Company. 4. RECEIVABLES (dollars in thousands) Receivables consisted primarily of trade accounts receivable and were net of allowances for doubtful accounts of $1,275 and $2,051 at December 25, 1997, and at December 26, 1996, 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 25, December 26, 1997 1996 ----------- ----------- Raw materials $16,847 $14,960 Work in process 29,297 29,057 Finished products 51,658 50,995 ------- ------- $97,802 $95,012 ------- ------- Approximately 59% and 55% of the Company's inventories at December 25, 1997, and December 26, 1996, respectively, were valued at LIFO. These LIFO values exceeded current manufacturing cost by approximately $6,500 and $4,000 at December 25, 1997, and December 26, 1996, respectively. Inventories were net of reserves for obsolete and slow moving inventory of $4,470 and $4,397 at December 25, 1997, and December 26, 1996, 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 25, December 26, 1997 1996 ----------- ----------- Property, plant and equipment: Land and improvements $ 10,669 $ 15,644 Buildings and improvements 75,359 84,778 Machinery and equipment 312,475 312,185 Construction in progress 42,785 25,889 Capital leases: Machinery and equipment 139,693 140,208 -------- -------- $580,981 $578,704 ======== ======== Capitalized interest in 1997 and 1996 is $2,110 and $873, respectively. Maintenance and repairs charged to costs and expenses for 1997, 1996, and 1995 aggregated $32,584, $34,887 and $33,227, respectively. Depreciation is computed on the straight-line method over the estimated useful lives of the assets ranging from 3 to 32 years. F-8 14 7. OTHER ASSETS (dollars in thousands) Other assets were comprised of: December 25, December 26, 1997 1996 ----------- ----------- Patents $50,050 $50,000 Less accumulated amortization 20,000 15,000 ------- ------- Patents, net 30,050 35,000 Other 9,143 7,809 ------- ------- $39,193 $42,809 ======= ======= 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 25, December 26, 1997 1996 ----------- ----------- Compensation and employee benefits $32,778 $38,122 Taxes 7,830 11,103 Accrued volume and sales discounts 14,315 14,959 Other 16,666 17,925 ------- ------- $71,589 $82,109 ======= ======= 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 collateralized 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 in 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 25, 1997. 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 11.7%. 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, 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 1997. 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 F-9 15 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 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. F-10 16 Outstanding short-term and long-term debt consisted of: F-11
December 25, December 26, 1997 1996 ----------- ----------- Short-term debt, current maturity of long-term debt and capital lease obligations: Current maturity of Viskase Capital Lease Obligation $ 9,675 $ 6,633 Current maturity of Viskase Limited Term Loan (3.2%) 1,629 1,876 Other 1,576 2,782 ------- ------- Total short-term debt $12,880 $11,291 ======= ======= 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 124,873 134,549 Viskase Limited Term Loan (3.2%) 2,443 4,690 Other 4,605 2,678 -------- -------- Total long-term debt $511,183 $521,179 ======== ======== 17 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 25, 1997, the carrying amount and estimated fair value of debt obligations (excluding capital lease obligations) were $383,852 and $391,763, respectively. The average interest rate on short-term borrowing during 1997 was 8.7%. 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 were approximately $19.2 million through 1997, and will be $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 25, 1997, the Company had met the required financial ratios and the letter of credit has been reduced by $2 million. The letter can be further reduced in 1998 or eliminated after 1999 if the Company achieves and maintains certain financial ratios. Envirodyne and its other principal subsidiaries guaranteed the obligations of Viskase under the Lease. The 1998 GECC lease payment of $21.4 million was paid on March 2, 1998. Principal payments under the capital lease obligations for the years ended 1998 through 2002 range from approximately $9.7 million to $17.5 million. The following is a schedule of minimum future lease payments under all capital lease obligations together with the present value of the net minimum lease payments as of December 25, 1997: Year ending December 1998 $ 21,782 1999 23,901 2000 23,913 2001 23,926 2002 23,940 Thereafter 70,574 -------- Net minimum lease payments 188,036 Less: Amount representing interest (51,423) -------- $136,613 ======== Aggregate maturities of remaining long-term debt for each of the next five fiscal years are: Total ------- 1998 $ 12,880 1999 96,235 2000 96,484 2001 235,969 2002 18,089 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 25, 1997, are: 1998 $2,740 1999 2,020 2000 1,274 2001 666 2002 87 Total thereafter - ------ Total minimum lease payments $6,787 ====== Total rent expense during 1997, 1996 and 1995 amounted to $4,506, $5,026, and $6,749, respectively. 11. RETIREMENT PLANS The Company and its subsidiaries have defined contribution and defined benefit plans varying by country and subsidiary. At December 25, 1997, 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. F-12 18 PENSIONS -- NORTH AMERICA (dollars in thousands): Net pension cost for the Viskase North American plans consisted of: During 1997 the Company sold its PVC business and instituted early retirement and workforce reduction programs resulting in a curtailment gain of $.7 million. F-13
December 27, December 29, December 30, 1996 to 1995 to 1994 to December 25, December 26, December 28, 1997 1996 1995 ----------- ----------- ----------- Service cost -- benefits earned during the year $3,783 $3,301 $3,238 Interest cost on projected benefit obligation 6,043 5,121 4,794 Actual (gain) loss on plan assets (9,537) (4,712) (7,012) Net amortization and deferral 4,840 1,061 4,086 ------ ------ ------ Net pension cost $5,129 $4,771 $5,106 ====== ====== ====== 19 F-14
The amounts included in the consolidated balance sheet for the North American plans of Viskase were: December 25, December 26, 1997 1996 ----------- ----------- Actuarial present value of benefit obligation: Vested benefits $65,040 $48,058 Nonvested benefits 4,948 4,112 ------- ------- Accumulated benefit obligation 69,988 52,170 Effect of projected future compensation increases 18,951 22,840 ------- ------- Projected benefit obligation 88,939 75,010 Plan assets at fair value, primarily listed stocks and investment grade corporate bonds 65,671 51,896 ------- ------- Amount underfunded 23,268 23,114 Unrecognized gain 1,788 5,975 Unrecognized prior service costs 47 55 ------- ------- Accrued liability included in consolidated balance sheet $25,103 $29,144 ======= ======= Assumed discount rate 7.25% 7.5% Assumed long-term compensation factor 4.25% 5.0% Assumed long-term return on plan assets 9.00% 8.5% 20 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 $2,304, $2,207, and $2,134 in 1997, 1996, and 1995, 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 1997, 1996 and 1995 was $1,216, $1,972, and $1,383, 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 $2,225; conversely, plan assets exceeded the vested benefits in certain other plans by approximately $2,503. 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 1997 and 1996 includes the following components: F-15 21 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 25, 1997 and December 26, 1996 by $375 and $322, respectively, and the service and interest cost components for 1997 and 1996 by a total of $61 and $69, respectively. F-16
Medical Life Total --------------------------- ---------------------------- ------------------------- 1997 1996 1995 1997 1996 1995 1997 1996 1995 -------- -------- -------- ------ ------- -------- ------ ------ ------ Components of net periodic postretirement benefit cost: Service cost -- benefits earned during the current year $ 606 $ 515 $ 413 $ 127 $ 163 $ 162 $ 733 $ 678 $ 575 Interest cost -- on accumulated post-retirement benefit obligation 1,641 1,404 1,182 412 499 472 2,053 1,903 1,654 Amortization of unrecognized net loss or (net gain) 42 15 (71) (143) (10) (16) (101) 5 (87) Amortization of prior service cost 72 73 (2) 5 5 (1) 77 78 (3) ------ ------ ------- ------ ------ ----- ------ ------- ------- Net periodic benefit cost $2,361 $2,007 $1,522 $ 401 $ 657 $ 617 $2,762 $ 2,664 $ 2,139 ====== ====== ======= ====== ====== ====== ====== ======= ======= Accumulated postretirement benefit obligations: Retirees $11,826 $ 9,565 $2,993 $3,402 $14,819 $12,967 Fully eligible active participants 2,512 2,043 1,811 2,173 4,323 4,216 Other active participants 9,601 8,422 1,215 1,712 10,816 10,134 ------ ------ ------ ------ ------- ------- Total 23,939 20,030 6,019 7,287 29,958 27,317 Unrecognized gains or (losses) (2,606) (322) 2,118 702 (488) 380 Unrecognized prior service costs (519) (616) (38) (45) (557) (661) ------ ------ ------ ------ ------- ------- Accrued postretirement benefit cost included in consolidated balance sheet $20,814 $19,092 $8,099 $7,944 $28,913 $27,036 ======= ======= ====== ======= ======= ======= Assumed discount rate 7.25% Assumed medical trend rate 10.00% in 1997 decreasing to 6.50% in 2004 Assumed long-term compensation factor 4.25% 22 EMPLOYEE RELATIONS The Company generally maintains productive and amicable relationships with its 4,550 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 750 of Viskase's 3,650 employees. None of Clear Shield's employees are represented by unions. Certain of Sandusky's hourly production personnel are members of a union. As of December 25, 1997, approximately 700 of the Company's employees are covered by collective bargaining agreements that will expire within one year. 12. RESTRUCTURING CHARGES During the third quarter of 1997, the Company's Viskase subsidiary committed to a plan of restructuring whereby it will adjust its operations from a segregated regional focus to a more congruent global focus. These actions are directly related to lowering Viskase's fixed costs. Restructuring actions identified resulted in charges to continuing operations of $3.5 million before tax and included costs associated with voluntary and involuntary severance expense and the consolidation of a finishing plant. For the year ended December 25, 1997, $1.8 million was incurred and charged against the reserve. 13. INCOME TAXES (dollars in thousands) The provision (benefit) for income taxes consisted of: December 27, December 29, December 30, 1996 to 1995 to 1994 to December 25, December 26, December 28, 1997 1996 1995 ----------- ----------- ----------- Current: Federal - - - Foreign $ 2,593 $ 4,365 $ 950 State and local - - - -------- ------- ------- $ 2,593 $ 4,365 $ 950 -------- ------- ------- Deferred: Federal (22,057) (9,911) (7,219) Foreign (1,307) 393 2,098 State and local (1,529) (1,547) (1,329) -------- ------- ------- (24,893) (11,065) (6,450) -------- ------- ------- $(22,300) $(6,700) $(5,500) ======== ======= ======= 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. F-17 23 A reconciliation from the statutory federal tax rate to the consolidated effective tax rate follows:
December 27, December 29, December 30, 1996 to 1995 to 1994 to December 25, December 26, December 28, 1997 1996 1995 ----------- ----------- ----------- 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 (3.1) (4.9) (3.2) Net effect of taxes relating to foreign operations 1.5 6.3 .8 Intangibles amortization 8.9 12.5 9.4 Valuation allowance decrease and other (42.1) (11.8) 7.6 ----- ------ ----- Consolidated effective tax rate (69.8)% (32.9)% (20.4)% ===== ===== =====
Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities for 1997 and 1996 are as follows: Year 1997 ------------------------------------------------------------------ Temporary Difference Tax Effected ---------------------------- ---------------------------------- Deferred Tax Deferred Tax Deferred Tax Deferred Tax Assets Liabilities Assets Liabilities ------------- ------------ ------------ ------------ Depreciation basis differences $272,482 $104,188 Inventory basis differences 29,563 11,530 Intangible basis differences 30,000 11,700 Lease transaction $134,548 $52,474 Pension and healthcare 53,296 20,834 Employee benefits accruals 13,355 5,208 Loss and other carryforwards 114,488 44,650 Other accruals and reserves 6,409 2,256 Foreign exchange and other 41,535 16,199 Valuation allowance 48,286 18,831 -------- -------- -------- -------- $322,096 $421,866 $125,422 $162,448 ======== ======== ======== ======== F-18
Year 1996 ------------------------------------------------------------------ Temporary Difference Tax Effected ---------------------------- ---------------------------------- Deferred Tax Deferred Tax Deferred Tax Deferred Tax Assets Liabilities Assets Liabilities ------------- ------------ ------------ ------------ Depreciation basis differences $286,750 $109,383 Inventory basis differences 30,096 11,775 Intangible basis differences 34,916 13,617 Lease transaction $141,182 $55,061 Pension and healthcare 55,235 21,593 Employee benefits accruals 15,119 5,896 Valuation allowances 3,721 1,451 Other accruals and reserves 2,569 921 Foreign exchange and other 38,354 14,958 -------- -------- -------- -------- $217,826 $390,116 $84,922 $149,733 ======== ======== ======== ======== 24 At December 25, 1997, the Company had $19,173 of undistributed earnings of foreign subsidiaries considered permanently invested for which deferred taxes have not been provided. At December 25, 1997, the Company had federal income tax net operating loss carryforwards of approximately $114 million, which have been substantially offset by a valuation allowance. Such losses will expire beginning in 2008 and running through 2012, 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 $(34,275), $(30,323) and $(30,138) in 1997, 1996 and 1995, respectively. Foreign earnings or (losses) before income taxes were approximately $2,330, $9,942 and $3,118 in 1997, 1996 and 1995, respectively. The Company joins in filing a United States consolidated federal income tax return including all of its domestic subsidiaries. 14. COMMITMENTS As of December 25, 1997, the Company had capital expediture commitments outstanding of approximately $3.4 million. 15. CONTINGENCIES 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's use of two different very low density polyethylene plastic resins in the manufacture of ANC's multi-layer barrier shrink film products was infringing various Viskase patents relating to multi-layer barrier plastic films used for fresh red meat, processed meat and poultry product applications. In November 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. The Court also entered an order permanently enjoining ANC from making or selling infringing products after December 23, 1996. On September 29, 1997, the Court set aside the jury verdict in part and ordered a retrial on certain issues. The Court upheld the jury finding on the validity of all of Viskase's patents and the jury finding that ANC had willfully infringed Viskase's patents by ANC's use of Dow Chemical Company's "Attane" brand polyethylene plastic resin in ANC's products. However, the Court ordered a new trial on the issue of whether ANC's use of Dow Chemical Company's "Affinity" brand polyethylene plastic resin infringed Viskase's patents and whether such conduct was willful. Because the jury rendered one general damage verdict, the Court ordered a retrial of all damage issues. By operation of the Court's order, the injunction in respect of ANC's future use of the "Affinity" brand resin was removed. No new trial date has been set. The Company expects ANC to vigorously contest this matter and to appeal any final judgment. No part of the pending claims have been recorded in the Company's financial statements. Through December 25, 1997, $4,140 in patent defense costs had been accrued and capitalized. In March 1997 Viskase Corporation received a subpoena from the Antitrust Division of the United States Department of Justice relating to a grand jury investigation of the sausage casings industry. Viskase Corporation is cooperating fully with the investigation. The Company and its subsidiaries are involved in various legal proceedings arising out of their business and other environmental matters, none of which is expected to have a material adverse effect upon results of operations, cash flows or financial position. 16. CAPITAL STOCK, PAID IN CAPITAL, AND WARRANTS Authorized shares of preferred stock ($.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. 14,753,442 shares of common stock were issued and outstanding as of December 25, 1997. A total of 208,335 shares were issued in 1997 for options exercised and directors' compensation. In accordance with the Plan of Reorganization, a total of 900,261, and 64,460 additional shares of common stock were issued to the general unsecured creditors of Envirodyne during 1996 and 1995, 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 a class action lawsuit by former employees of the Company's former steel and mining division. 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 Stockholder 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 stockholders 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. F-19 25 17. EARNINGS PER SHARE (dollars in thousands) In February 1997 the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share," which became effective for both interim and annual financial statement periods ending after December 15, 1997. As required by this Statement, the Company adopted the new standards for computing and presenting earnings per share (EPS) for 1997, and for all period earnings per share data presented. Following are the reconciliations of the numerators and denominators of the basic and diluted EPS. The exercise of options and warrants is not assumed as the result would be antidilutive, since the numerators in 1997, 1996 and 1995 are losses. 18. 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). F-20
52 weeks 52 weeks 52 weeks December 27, December 29, December 30, 1996 to 1995 to 1994 to December 25, December 26, December 28, 1997 1996 1995 ----------- ----------- ----------- Numerator: Loss available to common stockholders before extraordinary item $(9,645) $(13,682) $(17,323) Extraordinary (loss) (4,196) ------- -------- -------- Net loss available to common stockholders for basic and diluted EPS $(9,645) $(13,682) $(21,519) Denominator: Weighted average shares outstanding for basic EPS 14,617,540 14,325,595 13,516,771 Effect of dilutive securities 0 0 0 ---------- ---------- ---------- Weighted average shares outstanding for diluted EPS 14,617,540 14,325,595 13,516,771 ========== ========== ========== 26 A summary of the Company's stock option activity during the fiscal years ended as of December 25, 1997, December 26, 1996 and December 28, 1995 is presented below: As of December 25, 1997, total stock options outstanding have a weighted-average remaining contractual life of 7.91 years. The exercise price of options outstanding as of December 25, 1997 ranged from $3.50 to $7.25. The weighted average grant date fair value of options granted during fiscals 1997, 1996 and 1995 was $2.07, $2.20 and $1.81, respectively. Compensation expense associated with these plans has not 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 years 1995 and forward are included in the calculation of pro forma net income and earnings per share):
1997 1996 1995 ----------------------- ----------------------- --------------------- Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price -------- -------------- -------- -------------- ------ -------------- Outstanding at beginning of year 898,830 $4.60 424,230 $5.05 388,920 $5.06 Granted 65,000 6.46 536,500 4.26 97,200 5.02 Exercised (177,839) 4.89 Forfeited (50,967) 4.38 (61,900) 4.79 (61,890) 5.06 ------- ------- ------- Outstanding at year end 735,024 4.71 898,830 4.60 424,230 5.05 ======= ======= ======= Options exercisable at year end 368,884 4.84 392,730 5.04 424,230 5.05 ======= ======= ======= Future option grants available at year end 637,137 651,170 225,770 ======= ======= ======= 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 is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: (1) expected volatility of 36.39% in 1997 and 40.04% for both 1996 and 1995, (2) risk-free interest rate equaling the 5-year treasury yield on the grant date, which ranged from 5.77% to 6.50% in 1997, 6.11% to 6.52% in 1996 and 5.97% to 7.06% in 1995, and (3) the expected life of 5 years in 1997, 1996 and 1995. 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 $41 and $31 during fiscals 1997 and 1996, respectively. 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. Under this plan, during 1997 and 1996, 30,496 shares of stock were issued at $7.12 per share and 30,386 shares of common stock were issued at $4.03 per share, respectively. 19. FAIR VALUE OF FINANCIAL INSTRUMENTS (dollars in thousands) The following table presents the carrying value and estimated fair value as of December 25, 1997 of the Company's financial instruments. (Refer to Notes 3 and 9.) Carrying Estimated Value Fair Value ---------- ----------- Assets: Cash and equivalents $ 24,407 $ 24,407 Foreign currency contracts 10,575 10,146 Liabilities: Long-term debt (excluding capital lease obligations) 383,852 391,763 20. RESEARCH AND DEVELOPMENT COSTS (dollars in thousands) Research and development costs are expensed as incurred and totaled $7,173, $6,841 and $11,034 for 1997, 1996, and 1995, respectively. 21. RELATED PARTY TRANSACTIONS (dollars in thousands) During fiscal 1997 there were no payments to an affiliate of DPK for the use of a jet aircraft. During fiscal 1996 and 1995, the Company made payments of approximately $18 and $156, respectively, to an affiliate of DPK for the use of a jet aircraft on an as-needed basis. During fiscal 1997, 1996 and 1995, the Company purchased product and services from affiliates of DPK in the amounts of approximately $187, $904 and $1,537, respectively. During fiscal 1997, 1996 and 1995, the Company sublet office space from DPK for which it paid approximately $133, $139, and $151, respectively, in rent. During fiscal 1997, 1996 and 1995, the Company reimbursed a non-affiliated medical and benefit plan in the aggregate amount of $34, $41 and $79 for medical claims and benefits of certain officers. During fiscal 1997, 1996 and 1995, the Company advanced funds to and made payments on behalf of DPK and Donald P. Kelly in the amounts of $27, $1 and $52, respectively, for legal fees related to litigation for the period when Mr. Kelly was an executive officer of the Company. During fiscal years 1997, 1996 and 1995, Viskase Corporation, a wholly owned subsidiary of the Company, had sales of $21,825, $19,795 and $18,035, respectively, to Cargill, Inc. and its affiliates. Such sales were made in the ordinary course of business. During 1997 Cargill Financial Services Corporation had beneficial ownership of less than 5% of the Company's outstanding Common Stock, and Gregory R. Page, President of the Red Meat Group of Cargill, Inc., is a director of the Company. 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. 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 1995 the Company paid DPK $770 for management services. 22. BUSINESS SEGMENT INFORMATION AND GEOGRAPHIC AREA INFORMATION (dollars in thousands) Envirodyne primarily manufactures and sells cellulosic 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 expense for 1997, 1996, and 1995 includes net foreign exchange transaction gains (losses) of approximately $(2,117), $687, and $(61), respectively. F-21
1997 1996 1995 ----------- ---------- ---------- (Loss) before extraordinary item $(9,645) $(13,682) $(17,323) Pro forma (loss) before extraordinary item (9,909) (13,826) (17,356) Net (loss) (9,645) (13,682) (21,519) Pro forma net (loss) (9,909) (13,826) (21,552) PER SHARE AMOUNTS: (Loss) before extraordinary item - basic and diluted EPS $(.66) $(.96) $(1.28) Pro forma (loss) before extraordinary item - basic and diluted EPS (.68) (.97) (1.28) Net (loss) - basic and diluted EPS (.66) (.96) (1.59) Pro forma net (loss) - basic and diluted EPS (.68) (.97) (1.59) 27 Business Segment Information Geographic Area Information
December 27, December 29, December 30, 1996 to 1995 to 1994 to December 25, December 26, December 28, 1997 1996 1995 ----------- ----------- ----------- Net sales: Food packaging products $526,952 $572,653 $574,266 Disposable foodservice supplies 85,916 78,865 76,138 Other and eliminations (162) (192) -------- -------- -------- $612,868 $651,356 $650,212 ======== ======== ======== Earnings before income taxes: Operating income: Food packaging products $27,012 $37,310 $39,183 Disposable foodservice supplies 7,701 7,342 4,959 Unallocated expenses, net -- corporate (8,600) (4,962) (6,007) -------- -------- -------- 26,113 39,690 38,135 Interest expense, net 54,303 56,997 56,666 Other expense, net 3,755 3,075 1,710 -------- -------- -------- $(31,945) $(20,382) $(20,241) ======== ======== ======== Identifiable assets: Food packaging products $706,537 $762,233 $796,655 Disposable foodservice supplies 83,348 69,725 69,812 Corporate and other, primarily cash equivalents 23,968 41,789 33,100 -------- -------- -------- $813,853 $873,747 $899,567 ======== ======== ======== Depreciation and amortization under capital lease and amortization of intangibles expense: Food packaging products $53,984 $53,413 $51,404 Disposable foodservice supplies 5,301 4,949 4,581 Corporate and other 24 58 76 -------- -------- -------- $59,309 $58,420 $56,061 ======== ======== ======== Capital expenditures: Food packaging products $46,552 $32,934 $30,744 Disposable foodservice supplies 11,315 4,135 3,687 Corporate and other 12 4 34 -------- -------- -------- $57,879 $37,073 $34,465 ======== ======== ======== The total assets and net assets of foreign businesses were approximately $238,385 and $122,867 at December 25, 1997. 23. QUARTERLY DATA (unaudited) Quarterly financial information for 1997 and 1996 is as follows (in thousands, except for per share amounts): First Second Third Fourth Fiscal 1997 Quarter Quarter Quarter Quarter Annual - - ---------------- -------- -------- -------- -------- -------- Net Sales $154,539 $156,529 $155,004 $146,796 $612,868 Operating Income 7,414 7,629 2,670 8,400 26,113 Net income (loss) (2,553) (4,505) (3,753) 1,166 (9,645) Net income (loss) per share - basic and diluted (.18) (.31) (.26) .08 (.66) 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 - basic and diluted (.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 1997 and 1996 do not equal the total for the year because of rounding and stock issuances, as shown on the Consolidated Statement of Stockholders' Equity. 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. F-22
December 27, December 29, December 30, 1996 to 1995 to 1994 to December 25, December 26, December 28, 1997 1996 1995 ----------- ----------- ----------- Net sales: North America $417,673 $423,092 $417,408 South America 40,169 40,498 31,381 Europe 174,008 201,926 213,618 Other and eliminations (18,982) (14,160) (12,195) -------- -------- -------- $612,868 $651,356 $650,212 ======== ======== ======== Operating profit: North America $17,154 $22,425 $22,504 South America 2,108 1,883 524 Europe 10,817 15,445 15,373 Other and eliminations (3,966) (63) (266) -------- -------- -------- $26,113 $39,690 $38,135 ======== ======== ======== Identifiable assets: North America $592,790 $633,201 $645,504 South America 33,389 33,007 31,873 Europe 184,659 205,446 219,802 Other and eliminations 3,015 2,093 2,388 -------- -------- -------- $813,853 $873,747 $899,567 ======== ======== ======== United States export sales: (reported in North America sales above) Asia $25,282 $28,300 $22,509 South and Central America 14,191 17,056 18,691 Other International 305 259 219 -------- -------- -------- $39,778 $45,615 $41,419 ======== ======== ======== 28 ENVIRODYNE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATING BALANCE SHEETS DECEMBER 25, 1997 F-23
Guarantor Nonguarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations (1) Total --------- ------------ ------------ ------------ ------------- (in thousands) ASSETS Current assets: Cash and equivalents $ 19,004 $ 865 $ 4,538 $ 24,407 Receivables and advances, net 59,223 58,201 44,221 $ (86,606) 75,039 Inventories 63,967 35,029 (1,194) 97,802 Other current assets 1,746 12,612 10,928 25,286 -------- -------- -------- --------- -------- Total current assets 79,973 135,645 94,716 (87,800) 222,534 Property, plant and equipment including those under capital lease 145 442,506 138,330 580,981 Less accumulated depreciation and amortization 119 113,672 32,064 145,855 -------- -------- -------- --------- -------- Property, plant and equipment, net 26 328,834 106,266 435,126 Deferred financing costs 4,100 474 4,574 Other assets 36,779 2,414 39,193 Investment in subsidiaries 53,619 120,824 (174,443) Excess reorganization value 79,595 32,831 112,426 -------- -------- -------- --------- -------- $137,718 $701,677 $236,701 $(262,243) $813,853 ======== ======== ======== ========= ======== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Short-term debt including current portion of long-term debt and obligation under capital lease $ 10,233 $ 2,647 $ 12,880 Accounts payable and advances $ 121 86,514 41,706 $ (86,607) 41,734 Accrued liabilities 5,836 46,595 19,158 71,589 Current deferred taxes 10,581 (65) 10,516 -------- -------- -------- --------- -------- Total current liabilities 5,957 153,923 63,446 (86,607) 136,719 Long-term debt including obligation under capital lease 379,262 126,830 5,091 511,183 Accrued employee benefits 46,018 2,503 48,521 Deferred and noncurrent income taxes 13,084 (7,396) 20,822 26,510 Intercompany loans (1) (351,505) 339,995 11,510 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value; none outstanding Common stock, $.01 par value; 14,753,442 shares issued and outstanding 148 3 32,738 (32,741) 148 Paid in capital 136,183 88,816 88,280 (177,096) 136,183 Accumulated earnings (deficit) (48,458) (49,550) 9,273 40,277 (48,458) Cumulative foreign currency translation adjustments 3,098 3,038 3,038 (6,076) 3,098 Unearned restricted stock issued for future services (51) (51) -------- -------- -------- --------- -------- Total stockholders' equity 90,920 42,307 133,329 (175,636) 90,920 -------- -------- -------- --------- -------- $137,718 $701,677 $236,701 $(262,243) $813,853 ======== ======== ======== ========= ======== (1) Elimination of intercompany receivables, payables and investment accounts. 29 ENVIRODYNE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATING BALANCE SHEETS DECEMBER 26, 1996 F-24
Guarantor Nonguarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations (1) Total --------- ------------ ------------ ------------ ------------- (in thousands) ASSETS Current assets: Cash and equivalents $ 25,785 $ (162) $ 16,171 $ 41,794 Receivables and advances, net 61,960 70,258 46,032 $ (99,076) 79,174 Inventories 59,730 36,509 (1,227) 95,012 Other current assets 187 11,730 10,224 22,141 -------- -------- -------- --------- -------- Total current assets 87,932 141,556 108,936 (100,303) 238,121 Property, plant and equipment including those under capital lease 133 420,396 158,175 578,704 Less accumulated depreciation and amortization 95 86,715 30,086 116,896 -------- -------- -------- --------- -------- Property, plant and equipment, net 38 333,681 128,089 461,808 Deferred financing costs 5,144 758 5,902 Other assets 40,784 2,025 42,809 Investment in subsidiaries 64,433 123,236 (187,669) Excess reorganization value 87,702 37,405 125,107 -------- -------- -------- --------- -------- $157,547 $726,959 $277,213 $(287,972) $873,747 ======== ======== ======== ========= ======== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Short-term debt including current portion of long-term debt and obligation under capital lease $ 7,182 $ 4,109 $ 11,291 Accounts payable and advances $ 35 85,156 50,900 $ (99,076) 37,015 Accrued liabilities 6,197 44,235 31,677 82,109 Current deferred taxes 9,966 358 10,324 -------- -------- -------- --------- -------- Total current liabilities 6,232 146,539 87,044 (99,076) 140,739 Long-term debt including obligation under capital lease 379,262 137,063 4,854 521,179 Accrued employee benefits 49,366 4,331 53,697 Deferred and noncurrent income taxes 29,088 858 24,541 54,487 Intercompany loans (360,680) 340,000 20,681 (1) Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value; none outstanding Common stock, $.01 par value; 14,545,107 shares issued and outstanding 145 3 32,738 (32,741) 145 Paid in capital 135,100 87,899 87,871 (175,770) 135,100 Accumulated earnings (deficit) (38,813) (42,050) 7,872 34,178 (38,813) Cumulative foreign currency translation adjustments 7,305 7,281 7,281 (14,562) 7,305 Unearned restricted stock issued for future services (92) (92) -------- -------- -------- --------- -------- Total stockholders' equity 103,645 53,133 135,762 (188,895) 103,645 -------- -------- -------- --------- -------- $157,547 $726,959 $277,213 $(287,972) $873,747 ======== ======== ======== ========= ======== (1) Elimination of intercompany receivables, payables and investment accounts. 30 ENVIRODYNE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 25, 1997 ENVIRODYNE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATING CASH FLOWS FOR THE YEAR ENDED DECEMBER 25, 1997
Guarantor Nonguarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Total --------- ------------ ------------ ------------ ------------- (in thousands) NET SALES $413,567 $241,701 $(42,400) $612,868 COSTS AND EXPENSES Cost of sales 317,329 184,255 (42,406) 459,178 Selling, general and administrative $ 5,280 60,752 42,109 108,141 Amortization of intangibles and excess reorganization value 12,731 3,205 15,936 Restructuring charge 3,500 3,500 ------- -------- -------- -------- -------- OPERATING INCOME (LOSS) (5,280) 19,255 12,132 6 26,113 Interest income 729 687 1,416 Interest expense 43,270 10,940 1,509 55,719 Intercompany interest expense (income) (40,402) 37,384 3,018 Management fees (income) (4,692) 3,489 1,203 Other expense (income), net 793 (1,444) 4,400 6 3,755 Equity loss (income) in subsidiary 7,500 (1,403) (6,097) ------- -------- -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES (11,020) (29,711) 2,689 6,097 (31,945) Income tax provision (benefit) (1,375) (22,211) 1,286 (22,300) ------- -------- -------- -------- -------- NET INCOME (LOSS) $(9,645) $ (7,500) $ 1,403 $ 6,097 $ (9,645) ======= ======== ======== ======== ======== F-25
Guarantor Nonguarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Total --------- ------------ ------------ ------------ ------------- (in thousands) Net cash provided by (used in) operating activities $(16,544) $ 30,954 $(8,764) $ 5,646 Cash flows from investing activities: Capital expenditures (12) (40,434) (17,433) (57,879) Proceeds from disposition of assets 17,689 24,178 41,867 -------- --------- ------- -------- -------- Net cash provided by (used in) investing activities (12) (22,745) 6,745 (16,012) Cash flows from financing activities: Issuance of common stock 1,127 1,127 Proceeds from revolving loan and long term borrowings 2,814 2,814 Deferred financing costs (523) (523) Repayment of revolving loan, long-term borrowings and capital lease obligations (7,182) (2,308) (9,490) Increase (decrease) in Envirodyne loan and advances 9,171 (9,171) -------- --------- ------- -------- -------- Net cash provided by (used in) financing activities 9,775 (7,182) (8,665) (6,072) Effect of currency exchange rate changes on cash (949) (949) -------- --------- ------- -------- -------- Net increase (decrease) in cash and equivalents (6,781) 1,027 (11,633) (17,387) Cash and equivalents at beginning of period 25,785 (162) 16,171 41,794 -------- --------- ------- -------- ------- Cash and equivalents at end of period $ 19,004 $ 865 $ 4,538 $24,407 ======== ========= ======= ======== ======= 31 ENVIRODYNE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 26, 1996 ENVIRODYNE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATING CASH FLOWS FOR THE YEAR ENDED DECEMBER 26, 1996
Guarantor Nonguarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Total --------- ------------ ------------ ------------ ------------- (in thousands) NET SALES $418,732 $273,435 $(40,811) $651,356 COSTS AND EXPENSES Cost of sales 322,422 207,520 (41,698) 488,244 Selling, general and administrative $4,973 57,927 44,188 107,088 Amortization of intangibles and excess reorganization value 12,947 3,387 16,334 -------- -------- -------- --------- -------- OPERATING INCOME (LOSS) (4,973) 25,436 18,340 887 39,690 Interest income 1,061 507 1,568 Interest expense 43,504 12,813 2,248 58,565 Intercompany interest expense (income) (40,596) 37,394 3,202 Management fees (income) (7,226) 5,704 1,522 Other expense (income), net 850 646 1,579 3,075 Equity loss (income) in subsidiary 13,411 (5,538) (7,873) -------- -------- -------- --------- -------- INCOME (LOSS) BEFORE INCOME TAXES (13,855) (25,583) 10,296 8,760 (20,382) Income tax provision (benefit) (173) (11,285) 4,758 (6,700) -------- -------- -------- --------- -------- NET INCOME (LOSS) $(13,682) $(14,298) $ 5,538 $ 8,760 $(13,682) ======== ======== ======== ========= ======== F-26
Guarantor Nonguarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Total --------- ------------ ------------ ------------ ------------- (in thousands) Net cash provided by (used in) operating activities $(14,896) $ 30,440 $ 40,780 $ 56,324 Cash flows from investing activities: Capital expenditures (4) (27,496) (9,573) (37,073) Proceeds from sales of property, plant and equipment 136 1,767 453 2,356 -------- -------- -------- --------- -------- Net cash provided by (used in) investing activities 132 (25,729) (9,120) (34,717) Cash flows from financing activities: Issuance of common stock 153 153 Proceeds from revolving loan and long term borrowings 1,130 1,056 2,186 Deferred financing costs (142) (142) Repayment of revolving loan, long-term borrowings and capital lease obligations (6,489) (5,216) (11,705) Increase (decrease) in Envirodyne loan and advances 22,525 (22,525) -------- -------- -------- --------- -------- Net cash provided by (used in) financing activities 22,536 (5,359) (26,685) (9,508) Effect of currency exchange rate changes on cash (630) (630) -------- -------- -------- --------- -------- Net increase (decrease) in cash and equivalents 7,772 (648) 4,345 11,469 Cash and equivalents at beginning of period 18,013 486 11,826 30,325 -------- -------- -------- --------- -------- Cash and equivalents at end of period $ 25,785 $ (162) $ 16,171 $ 41,794 ======== ======== ======== ========= ======== 32 ENVIRODYNE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 28, 1995 ENVIRODYNE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATING CASH FLOWS FOR THE YEAR ENDED DECEMBER 28, 1995
Guarantor Nonguarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Total --------- ------------ ------------ ------------ ------------- (in thousands) NET SALES $417,756 $267,212 $(34,756) $650,212 COSTS AND EXPENSES Cost of sales 312,419 207,232 (34,603) 485,048 Selling, general and administrative $ 6,004 65,318 39,908 111,230 Amortization of intangibles and excess reorganization value 12,466 3,333 15,799 -------- -------- -------- --------- -------- OPERATING INCOME (LOSS) (6,004) 27,553 16,739 (153) 38,135 Interest income 203 12 455 670 Interest expense 40,081 13,902 3,353 57,336 Intercompany interest expense (income) (38,218) 34,007 4,211 Management fees (income) (8,086) 6,377 1,709 Other expense (income), net (2,400) 52 4,058 1,710 Equity loss (income) in subsidiary 19,571 216 (19,787) -------- -------- -------- --------- -------- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM (16,749) (26,989) 3,863 19,634 (20,241) Income tax provision (benefit) 1,264 (7,570) 3,388 (2,918) -------- -------- -------- --------- -------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (18,013) (19,419) 475 19,634 (17,323) Extraordinary loss, net of tax 3,506 690 4,196 -------- -------- -------- --------- -------- NET (LOSS) $(21,519) $(19,419) $ (215) $ 19,634 $(21,519) ======== ======== ======== ========= ======== F-27
Guarantor Nonguarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Total --------- ------------ ------------ ------------ ------------- (in thousands) Net cash provided by (used in) operating activities $(13,276) $ 32,242 $ 20,001 $ 38,967 Cash flows from investing activities: Capital expenditures (34) (27,842) (6,589) (34,465) Proceeds from sale of property, plant and equipment 39 47 86 -------- -------- -------- --------- -------- Net cash (used in) investing activities (34) (27,803) (6,542) (34,379) Cash flows from financing activities: Proceeds from revolving loan and long term borrowings 164,000 1,706 42,216 207,922 Deferred financing costs (6,721) (1,166) (7,887) Repayment of revolving loan, long-term borrowings and capital lease obligations (123,275) (7,512) (50,588) (181,375) Increase (decrease) in Envirodyne loan and advances (3,236) 3,236 -------- -------- -------- --------- -------- Net cash provided by (used in) financing activities 30,768 (5,806) (6,302) 18,660 Effect of currency exchange rate changes on cash (212) (212) -------- -------- -------- --------- -------- Net increase (decrease) in cash and equivalents 17,458 (1,367) 6,945 23,036 Cash and equivalents at beginning of period 555 1,853 4,881 7,289 -------- -------- -------- --------- -------- Cash and equivalents at end of period $ 18,013 $ 486 $ 11,826 $ 30,325 ======== ======== ======== ========= ======== 33 Financial statement schedules required by Regulation S-X VISKASE HOLDING CORPORATION AND SUBSIDIARIES Consolidated Financial Statements: Report of independent accountants Consolidated balance sheets, December 25, 1997 and December 26, 1996 Consolidated statements of operations, for December 27, 1996 to December 25, 1997; December 29, 1995 to December 26, 1996; and December 30, 1994 to December 28, 1995 Consolidated statements of stockholders' equity, for December 27, 1996 to December 25, 1997; December 29, 1995 to December 26, 1996; and December 30, 1994 to December 28, 1995 Consolidated statements of cash flows, for December 27, 1996 to December 25, 1997; December 29, 1995 to December 26, 1996; and December 30, 1994 to December 28, 1995; Notes to consolidated financial statements F-28 34 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Viskase Holding Corporation We have audited the consolidated financial statements of Viskase Holding Corporation and Subsidiaries as referenced in the Index of Financial Statements required by Regulation S-X, Viskase Holding Corporation and Subsidiaries. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with 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 Viskase Holding Corporation and Subsidiaries as of December 25, 1997 and December 27, 1996, and the consolidated results of their operations and their cash flows for the period December 27, 1996 to December 25, 1997, December 29, 1995 to December 26, 1996 and December 30, 1994 to December 28, 1995, in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Chicago, Illinois March 20, 1998 F-29 35 VISKASE HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS F-30
December 25, December 26, 1997 1996 (in thousands) ASSETS Current assets: Cash and equivalents $ 4,538 $ 16,171 Receivables, net 38,081 43,634 Receivables, affiliates 51,796 51,269 Inventories 35,029 36,509 Other current assets 10,928 10,224 -------- -------- Total current assets 140,372 157,807 Property, plant and equipment 138,330 158,175 Less accumulated depreciation 32,064 30,086 -------- -------- Property, plant and equipment, net 106,266 128,089 Deferred financing costs 474 758 Other assets 2,414 2,025 Excess reorganization value 32,831 37,405 -------- -------- Total Assets $282,357 $326,084 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt including current portion of long-term debt $ 2,647 $ 4,109 Accounts payable 15,438 13,736 Accounts payable and advances, affiliates 34,210 51,891 Accrued liabilities 19,158 31,677 Current deferred income taxes (65) 358 -------- -------- Total current liabilities 71,388 101,771 Long-term debt 5,091 4,854 Accrued employee benefits 2,503 4,331 Deferred and noncurrent income taxes 20,822 24,541 Intercompany loans 49,520 58,691 Commitments and contingencies Stockholders' equity: Common stock, $1.00 par value, 1,000 shares authorized; 100 shares issued and outstanding Paid in capital 103,463 103,463 Retained earnings 26,496 21,152 Cumulative foreign currency translation adjustments 3,074 7,281 -------- -------- Total stockholders' equity 133,033 131,896 -------- -------- Total Liabilities and Stockholders' Equity $282,357 $326,084 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. 36 VISKASE HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS F-31
52 weeks 52 weeks 52 weeks December 27, December 29, December 30, 1996 to 1995 to 1994 to December 25, December 26, December 28, 1997 1996 1995 ----------- ----------- ----------- (in thousands, except for number of shares and per share amounts) NET SALES $241,701 $273,435 $267,212 COSTS AND EXPENSES Cost of sales 184,255 207,520 207,232 Selling, general and administrative 36,604 38,386 36,288 Amortization of intangibles and excess reorganization value 3,205 3,387 3,333 -------- -------- -------- OPERATING INCOME 17,637 24,142 20,359 Interest income 687 507 455 Interest expense 1,509 2,248 3,353 Intercompany interest expense 3,018 3,202 4,199 Management fees 1,203 1,522 1,709 Other expense, net 3,400 1,579 3,754 -------- -------- -------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 9,194 16,098 7,799 Income tax provision 3,850 7,046 4,947 -------- -------- -------- INCOME BEFORE EXTRAORDINARY ITEM 5,344 9,052 2,852 Extraordinary loss, net of tax 690 -------- -------- -------- NET INCOME $ 5,344 $ 9,052 $ 2,162 ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements. 37 VISKASE HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY F-32
Cumulative Foreign Currency Total Common Paid in Retained Translation Stockholder's Stock Capital Earnings Adjustments Equity ------ ------- ---------- ------------- ------------- (in thousands) Balance December 29, 1994 - $103,463 $ 9,938 $3,912 $117,313 Net income 2,162 2,162 Translation adjustments 3,267 3,267 -------- ------- ------ -------- Balance December 28, 1995 - 103,463 12,100 7,179 122,742 Net income 9,052 9,052 Translation adjustments 102 102 -------- ------- ------ -------- Balance December 26, 1996 - 103,463 21,152 7,281 131,896 Net income 5,344 5,344 Translation adjustments (4,207) (4,207) -------- ------- ------ -------- Balance December 25, 1997 - $103,463 $26,496 $3,074 $133,033 ======== ======= ====== ======== The accompanying notes are an integral part of the consolidated financial statements. 38 VISKASE HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS F-33
December 27, December 29, December 30, 1996 to 1995 to 1994 to December 25, December 26, December 28, 1997 1996 1995 ------------ ----------- ----------- (in thousands) Cash flows from operating activities: Income before extraordinary item $ 5,344 $ 9,052 $ 2,852 Extraordinary loss 690 ------- ------- -------- Net income 5,344 9,052 2,162 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 10,286 10,687 11,202 Amortization of intangibles and excess reorganization value 3,205 3,387 3,333 Amortization of deferred financing fees and discount 201 227 208 Increase in deferred and noncurrent income taxes (1,307) 393 2,098 Loss on debt extinguishment 1,030 Foreign currency transaction loss 159 Loss (gain) on disposition of assets (372) (39) 30 Changes in operating assets and liabilities: Accounts receivable 2,717 11,078 (4,441) Accounts receivable, affiliates (4,270) (1,802) (2,847) Inventories (6,177) (743) 7,224 Other current assets (1,757) (1,787) (2,144) Accounts payable and accrued liabilities (2,364) 9,681 (6,926) Accounts payable, affiliates (14,861) 860 8,383 Other (409) (214) (790) ------- ------- -------- Total adjustments (15,108) 31,728 16,519 ------- ------- -------- Net cash provided by operating activities (9,764) 40,780 18,681 Cash flows from investing activities: Capital expenditures (17,433) (9,573) (6,589) Proceeds from disposition of assets 25,178 453 47 ------- ------- -------- Net cash (used in) investing activities 7,745 (9,120) (6,542) Cash flows from financing activities: Proceeds from revolving loan and long-term borrowings 2,814 1,056 42,216 Deferred financing costs (1,166) Repayment of revolving loan and long-term borrowings (2,308) (5,216) (50,588) Increase (decrease) in Envirodyne loan and advances (9,171) (22,525) 3,236 ------- ------- -------- Net cash provided by (used in) financing activities (8,665) (26,685) (6,302) Effect of currency exchange rate changes on cash (949) (630) (212) ------- ------- -------- Net increase in cash and equivalents (11,633) 4,345 5,625 Cash and equivalents at beginning of period 16,171 11,826 6,201 ------- ------- -------- Cash and equivalents at end of period $ 4,538 $16,171 $ 11,826 ======= ======= ======== - - --------------------------------------------------------------------------------------------------------------- Supplemental cash flow information: Interest paid $212 $791 $1,919 Income taxes paid $4,882 $1,209 $4,255 Supplemental schedule of noncash investing and financing activities: 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. Fiscal 1997 - - ----------- Viskase Corporation transferred equipment totaling $536 to Viskase S.A. Viskase de Mexico S.A. de C.V. transferred equipment totaling $213 to Viskase Corporation. The accompanying notes are an integral part of the consolidated financial statements. 39 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. 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. International Operations Viskase Holding Corporation's subsidiaries have six manufacturing facilities located outside the continental United States, in Beauvais, France; Thaon, France; Lindsay, Ontario, Canada; Newton Aycliffe, England (Great Britain); Swansea, Wales (Great Britain); and Guarulhos, Brazil. 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 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' 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. Sales and Distribution Viskase Holding Corporation's subsidiaries' principal markets are in Europe, Latin America, North America and Asia Pacific. In Europe, Viskase Holding Corporation's subsidiaries operate casings service centers in Milan, Italy, and Pulheim, Germany. The Company also operates a service center in Guarulhos, Brazil and Brisbane, Australia. These service centers provide finishing, inventory and delivery services to customers. Viskase Holding Corporation operates distribution centers in Buenos Aires, Argentina; Santiago, Chile; Beijing, China; Hong Kong, China; Dublin, Ireland; Monterrey, Mexico; Warsaw, Poland and Moscow, Russia. 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 1997 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 $37 and $4,074 of short-term investments at December 25, 1997 and December 26, 1996, 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 other income/expense. 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. (I) Long-lived assets The Company continues to evaluate the recoverability of property, plant and equipment and 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 assets are less than their carrying value. If impairment is identified, valuation techniques deemed appropriate under the particular circumstances will be used to determine the assets' fair value. The loss will be measured based on the excess of carrying value over the determined fair value. The review for impairment is performed at least once a year. (J) 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. (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. (L) Revenue recognition Sales to customers are recorded at the time of shipment net of discounts and allowances. (M) Foreign currency contracts The Company uses foreign exchange forward contracts to hedge some of its non-functional currency receivables and payables which are denominated in major currencies that can be traded on open markets. This strategy is used to reduce the overall exposure to the effects of currency fluctuations on cash flows. The Company's policy is not to speculate in financial instruments. Receivables and payables which are denominated in non-functional currencies are translated to the functional currency at month end and the resulting gain or loss is taken to other income/expense on the income statement. Gains and losses on hedges of receivables and payables are marked to market. The result is recognized in other income and expense on the income statement. (N) Other The Company will implement the provisions of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130), which will be effective for periods beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Management believes that adoption of SFAS No. 130 will not have a material effect on the Company. The Company will implement the provisions of Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" (SFAS No. 132), which will be effective for fiscal years beginning after December 15, 1997. SFAS No. 132 standardizes the disclosure requirements for pensions and other postretirement benefits, requires additional information on changes in the benefit obligation and fair values of plan assets and eliminates certain disclosures that are no longer useful. Management believes the adoption of SFAS No. 132 will not have a material effect on the Company. 4. RECEIVABLES (dollars in thousands) Receivables consisted primarily of trade accounts receivable and were net of allowances for doubtful accounts of $851 and $1,404 at December 25, 1997, and at December 26, 1996, respectively. 5. INVENTORIES (dollars in thousands) Inventories consisted of: December 25, December 26, 1997 1996 ----------- ----------- Raw materials $ 4,418 $ 3,728 Work in process 10,511 11,395 Finished products 20,100 21,386 ------- ------- $35,029 $36,509 ======= ======= Inventories were net of reserves for obsolete and slow moving inventory of $1,583 and $1,283 at December 25, 1997 and December 26, 1996, respectively. 6. PROPERTY, PLANT AND EQUIPMENT (dollars in thousands) December 25, December 26, 1997 1996 ----------- ----------- Property, plant and equipment: Land and improvements $ 3,372 $ 5,394 Buildings and improvements 24,124 30,349 Machinery and equipment 102,893 117,312 Construction in progress 7,834 4,916 Capital Leases: Machinery and equipment 107 204 -------- -------- $138,330 $158,175 ======== ======== Maintenance and repairs charged to costs and expenses for 1997, 1996, and 1995 aggregated $7,139, $8,374 and $10,288, 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 25, December 26, 1997 1996 ----------- ----------- Compensation and employee benefits $ 9,225 $10,287 Taxes 2,527 6,073 Accrued volume and sales discounts 3,281 5,101 Inventory received not billed 604 2,805 Other 3,521 7,411 ------- ------- $19,158 $31,677 ------- ------- 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 Envirodyne's $86,125 domestic term loan, (ii) repay the $68,316 of obligations under Envirodyne'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 collateralized 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 $160,000 aggregate principle amount of senior secured notes to certain institutional investors are still outstanding at December 25, 1997. The Company finances its working capital needs through a combination of cash generated through operations, 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 income tax benefits of $340, was included in Envirodyne'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 semiannual installments through June 2000. F-34
Name of Subsidiary Parent of Subsidiary Country of Business - - ------------------------------- --------------------------- --------------------- Viskase Argentina S.A. Viskase Holding Corporation Argentina Viskase (China) Limited Viskase Holding Corporation China Viskase (Chile) Embalagens Ltda. Viskase Holding Corporation Chile Viskase Australia Limited Viskase Holding Corporation Australia Viskase Brasil Embalagens Ltda. Viskase Holding Corporation Brazil Viskase Europe Limited Viskase Holding Corporation United Kingdom Viskase de Mexico S.A. de C.V. Viskase Holding Corporation Mexico Viskase S.A. Viskase Europe Limited France Viskase Gmbh Viskase S.A. Germany Viskase SPA Viskase S.A. Italy Viskase Canada Inc. Viskase S.A. Canada Viskase ZAO Viskase S.A. Russia Viskase Holdings Limited Viskase S.A. United Kingdom Filmco International Limited Viskase Holdings Limited United Kingdom Viskase Limited Viskase Holdings Limited United Kingdom Viskase (UK) Limited Viskase Limited United Kingdom Viskase Ireland Viskase Limited Ireland Envirodyne S.A.R.L. Viskase (UK) Limited France 40 Outstanding short-term and long-term debt consisted of: December 25, December 26, 1997 1996 ----------- ----------- Short-term debt and current maturity of long-term debt: Current maturity of Viskase Limited Term Loan (3.2%) $1,629 $1,876 Other 1,018 2,233 ------ ------ Total short-term debt $2,647 $4,109 ====== ====== Long-term debt: Viskase Limited Term Loan (3.2%) $2,443 $4,690 Other 2,648 164 ====== ====== Total long-term debt $5,091 $4,854 ====== ====== 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 approximate their carrying values. Aggregate maturities of remaining long-term debt for each of the next five fiscal years are: Total ------- 1998 $2,647 1999 2,628 2000 1,671 2001 419 2002 149 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 25, 1997, are: 1998 $1,415 1999 1,222 2000 887 2001 460 2002 47 Total thereafter ------ Total minimum lease payments $4,031 ====== Total rent expense during 1997, 1996 and 1995 amounted to $2,549, $2,905 and $3,750, 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 1997, 1996 and 1995 was $1,216, $1,972 and $1,383, 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 $2,225; conversely, plan assets exceeded the vested benefits in certain other plans by approximately $2,503. 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's use of two different very low density polyethylene plastic resins in the manufacture of ANC's multi-layer barrier shrink film products was infringing various Viskase patents relating to multi-layer barrier plastic films used for fresh red meat, processed meat and poultry product applications. In November 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. The Court also entered an order permanently enjoining ANC from making or selling infringing products after December 23, 1996. On September 29, 1997, the Court set aside the jury verdict in part and ordered a retrial on certain issues. The Court upheld the jury finding on the validity of all of Viskase's patents and the jury finding that ANC had willfully infringed Viskase's patents by ANC's use of Dow Chemical Company's "Attane" brand polyethylene plastic resin in ANC's products. However, the Court ordered a new trial on the issue of whether ANC's use of Dow Chemical Company's "Affinity" brand polyethylene plastic resin infringed Viskase's patents and whether such conduct was willful. Because the jury rendered one general damage verdict, the Court ordered a retrial of all damage issues. By operation of the Court's order, the injunction in respect of ANC's future use of the "Affinity" brand resin was removed. No new trial date has been set. The Company expects ANC to vigorously contest this matter and to appeal any final judgment. No part of the pending claims have been recorded in the Company's financial statements. 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. 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. RESTRUCTURING CHARGES During the third quarter of 1997, the Company's Viskase subsidiary committed to a plan of restructuring whereby it will adjust its operations from a segregated regional focus to a more congruent global focus. These actions are directly related to lowering Viskase's fixed costs. Restructuring actions identified resulted in charges to continuing operations of $1.5 million before tax and included costs associated with voluntary and involuntary severance expense and the consolidation of a finishing plant. For the year 1997, $1.1 million was incurred and charged against the reserve. 13. INCOME TAXES (dollars in thousands) The provision (benefit) for income taxes consisted of: December 27, December 29, December 30, 1996 to 1995 to 1994 to December 25, December 26, December 28, 1997 1996 1995 ----------- ----------- ----------- Current: Federal $2,159 $1,909 $1,316 Foreign 2,593 4,365 950 State and local 405 379 243 ------ ------ ------ 5,157 6,653 2,509 ------ ------ ------ Deferred: Federal - - - Foreign (1,307) 393 2,098 State and local - - - ------- ------ ------ (1,307) 393 2,098 ------- ------ ------ $ 3,850 $7,046 $4,607 ======= ====== ====== A reconciliation from the statutory federal tax rate to the consolidated effective tax rate follows: F-35
December 27, December 29, December 30, 1996 to 1995 to 1994 to December 25, December 26, December 28, 1997 1996 1995 ----------- ----------- ----------- 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 2.9 1.5 2.3 Net effect of taxes relating to foreign operations 3.8 7.9 30.4 Other .2 (.6) .4 Consolidated effective tax rate 41.9% 43.8% 68.1% 41 Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities for 1997 and 1996 are as follows: At December 25, 1997, the Company had $19,173 of undistributed earnings of foreign subsidiaries considered permanently invested for which deferred taxes have not been provided.
1997 Temporary Difference Tax Effected -------------------------------- ---------------------------- Deferred Tax Deferred Tax Deferred Tax Deferred Tax Assets Liabilities Assets Liabilities ------------- ------------ ------------ ------------ Depreciation basis differences $63,853 $22,823 Pension and healthcare 1,537 551 Other accruals, reserves, and other $7,776 441 $2,844 227 ------ ------- ------ ------- $7,776 $65,831 $2,844 $23,601 ====== ======= ====== ======= 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 after extraordinary gain or loss and before income taxes were approximately $6,505, $6,156 and $3,937 in 1997, 1996 and 1995, respectively. Foreign earnings before income taxes were approximately $2,689, $9,942 and $2,832 in 1997, 1996 and 1995, respectively. 14. RESEARCH AND DEVELOPMENT COSTS (dollars in thousands) Research and development costs are expensed as incurred and totaled $1,368, $1,282 and $1,106, for 1997, 1996, and 1995, respectively. 15. RELATED PARTY TRANSACTIONS (dollars in thousands) Intercompany loans and advances: December 25, December 26, 1997 1996 ----------- ----------- Viskase S.A. 12% promissory note due to Envirodyne $ 7,000 Viskase Europe Limited 12% promissory note due to Envirodyne $11,510 13,681 Advances: Viskase Corporation to Viskase Holding Corporation 38,010 38,010 ------- ------- $49,520 $58,691 ======= ======= The Viskase S.A. 12% promissory note due to Envirodyne is payable upon demand. The note was repaid in Fiscal 1997. The Viskase Europe Limited 12% promissory note due to Envirodyne is payable on demand. Interest is payable semiannually on June 30 and December 31. 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 1997, 1996 and 1995, the Company was charged $703, $999 and $1,022, respectively, by Viskase Corporation for management services. In 1997, 1996 and 1995, the Company was charged $500, $520 and $687, respectively, by Envirodyne for management services. During 1997, 1996 and 1995, the Company purchased semi-finished and finished inventory from Viskase Sales Corporation in the amount of $35,149, $32,489 and $26,953, respectively. In addition, during 1997, 1996 and 1995, the Company had sales of inventory to Viskase Sales Corporation in the amount of $6,524, $7,842 and $7,329, respectively. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying value and estimated fair value as of December 25, 1997 of the Company's financial instruments. (Refer to Notes 3 and 8.) Carrying Estimated Value Fair Value -------- ----------- Assets: Cash and equivalents $ 4,538 $ 4,538 Foreign currency contracts 10,575 10,148 Liabilities: Long-term debt excluding capital lease obligations 4,226 4,226 F-36
1996 Temporary Difference Tax Effected -------------------------------- ---------------------------- Deferred Tax Deferred Tax Deferred Tax Deferred Tax Assets Liabilities Assets Liabilities ------------- ------------ ------------ ------------ Depreciation basis differences $70,911 $25,206 Pension and healthcare 1,684 605 Other accruals, reserves, and other $6,457 3,813 $2,363 1,451 ------ ------- ------ ------- $6,457 $76,408 $2,363 $27,262 ====== ======= ====== ======= 42 ENVIRODYNE INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (in thousands) F-37
Balance at Provision Balance Beginning Charged to at End Description of Period Expense Write-offs Recoveries Other(1) of Period -------------------- ---------- ----------- ---------- ---------- ------- --------- 1997 for the year ended December 25 Allowance for doubtful accounts $2,051 $ 665 $(1,452) $ 13 $ (2) $1,275 1996 for the year ended December 26 Allowance for doubtful accounts 3,224 659 (2,293) 469 (8) 2,051 1995 for the year ended December 28 Allowance for doubtful accounts 2,136 1,403 (472) 6 151 3,224 1997 for the year ended December 25 Reserve for obsolete and slow moving inventory 4,397 1,944 (1,865) (6) 4,470 1996 for the year ended December 26 Reserve for obsolete and slow moving inventory 3,818 1,805 (1,210) (16) 4,397 1995 for the year ended December 28 Reserve for obsolete and slow moving inventory 5,353 1,264 (2,868) 69 3,818 (1) Foreign currency translation. 43 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBITS ---------- ----------------------- 3(a)* -- Restated Certificate of Incorporation of Zapata filed with Secretary of State of Delaware May 3, 1994 (Exhibit 3(a) to Current Report on Form 8-K dated April 27, 1994 (File No. 1-4219)). 3(b)* -- Certificate of Designation, Preferences and Rights of $1 Preference Stock (Exhibit 3(c) to Zapata's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1993 (File No. 1-4219)). 3(c)* -- Certificate of Designation, Preferences and Rights of $100 Preference Stock (Exhibit 3(d) to Zapata's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1993 (File No. 1- 4219)). 3(d)* -- By-laws of Zapata, as amended effective November 11, 1996, are incorporated herein by reference to Exhibit 3(b) to Zapata's report on Form 10-K for the fiscal year ended September 30, 1996. Certain instruments respecting long-term debt of Zapata and its subsidiaries have been omitted pursuant to Regulation S-K, Item 601. Zapata hereby agrees to furnish a copy of any such instrument to the Commission upon request. 10(a)*+ -- Zapata 1990 Stock Option Plan (Exhibit 10(b) to Zapata's Annual Report on Form 10-K for the fiscal year ended September 30, 1990 (File No. 1-4219)). 10(b)*+ -- First Amendment to Zapata 1990 Stock Option Plan (Exhibit 10(c) to Zapata's Registration Statement on Form S-1 (Registration No. 33-40286)). 10(c)*+ -- Zapata Special Incentive Plan, as amended and restated effective February 6, 1992 (Exhibit 10(a) to Zapata's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 (File No. 1- 4219)). 10(d)*+ -- Zapata 1981 Stock Incentive Plan, as amended and restated effective February 12, 1986 (Exhibit 19(a) to Zapata's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1986 (File No. 1-4219)). 10(e)*+ -- Zapata Supplemental Pension Plan effective as of April 1, 1992 (Exhibit 10(b) to Zapata's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 (File No. 1-4219)). 10(f)*+ -- Zapata Annual Incentive Plan effective January 1, 1991 (Exhibit 10(h) to Zapata's Registration Statement on Form S-1 (Registration No. 33-40286)). 10(g)*+ -- Employment Agreement between Lamar C. McIntyre and Zapata dated as of October 1, 1994 (Exhibit 10(v) to Zapata's Annual Report on Form 10-K for the fiscal year ended September 30, 1994 (File No. 1-4219)). 10(h)* -- Stock Purchase Agreement dated as of August 7, 1995 between Zapata Corporation and Malcolm I. Glazer (Exhibit 10(o) to Zapata's Annual Report on Form 10-K for the fiscal year ended September 30, 1995 (File No. 1-4219)). 10(i)* -- Purchase and Sale Agreement dated March 26, 1996 by and among Cimarron Gas Holding Company, Conoco Inc. and Enogex Products Corporation (Exhibit 2.1 to Zapata's Current Report on Form 8-K dated April 9, 1996 (File No. 1-4219)). 10(j)* -- Amendment and Clarification of Purchase and Sale Agreement, Waiver and Closing Agreement dated April 9, 1996 (Exhibit 2.2 to Zapata's Current Report on Form 8-K dated April 9, 1996 (File No. 1-4219)). 10(k)* -- Agreement and Plan of Merger dated as of June 4, 1996 among Zapata, Zapata Acquisition Corp. and Houlihan's (Exhibit 2.1 to Zapata's Registration Statement on Form S-4 (Reg. No. 333- 06729)). 10(l)* -- Standstill Agreement dated April 30, 1996 between Zapata and Malcolm I. Glazer (Exhibit 10.18 to Zapata's Registration Statement on Form S-4 (Reg. No. 333-06729)). 44 + Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K. ++ Exhibits filed with the Company's Form 10-K for fiscal year ended September 30, 1997.
10(m)* -- Irrevocable proxy dated June 4, 1996 granted by Malcolm I. Glazer to members of a Special Committee of the Board of Directors of Zapata (Exhibit 10.19 to Zapata's Registration Statement on Form S-4 (Reg. No. 333-06729)). 10(n)* -- Supplemental Agreement dated June 4, 1996 between Malcolm I. Glazer and Zapata (Exhibit 10.20 to Zapata's Registration Statement on Form S-4 (Reg. No. 333-06729)). 10(o)*+ -- 1996 Long-Term Incentive Plan of Zapata (Exhibit 10.21 to Zapata's Registration Statement on Form S-4 (Reg. No. 333-06729)). 10(p)*+ -- Employment Agreement between Joseph L. von Rosenberg III and Zapata effective as of June 1, 1996. 10(q)* -- Shareholders' Agreement dated May 30, 1997 by Malcolm I. Glazer and the Malcolm I. Glazer Family Limited Partnership in favor of Zapata (Exhibit 10(z) to Zapata's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997 (File No. 1-4219)). 21*++ -- Subsidiaries of the Registrant. 23(a)*++ -- Consent of Coopers & Lybrand L.L.P. 23(b) -- Consent of Coopers & Lybrand L.L.P. with respect to the consolidated financial statements of Envirodyne Industries, Inc. 24*++ -- Powers of attorney. 27*++ -- Financial Data Schedule.
1 EXHIBIT 23(b) CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of Zapata Corporation on Form S-3 (File 33-68034) and on Form S-8 (File Nos. 33-19085, 33-45251 and 333-43223) of our reports dated March 20, 1998, on our audits of (a) the consolidated financial statements and financial statement schedules of Envirodyne Industries, Inc. and Subsidiaries as of December 25, 1997 and December 26, 1996 and for the period December 27, 1996 to December 25, 1997 and December 29, 1995 to December 26, 1996, and December 30, 1994 to December 28, 1995 and (b) the consolidated financial statements and financial statement schedules of Viskase Holding Corporation and Subsidiaries as of December 25, 1997 and December 26, 1996 and for the period December 27, 1996 to December 25, 1997, December 29, 1995 to December 26, 1996, and December 30, 1994 to December 28, 1995, which reports are included in this Form 10-K/A. COOPERS & LYBRAND L.L.P. Chicago, Illinois April 7, 1998 6