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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: DECEMBER 31, 1996 Commission file number: 1-71
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BORDEN, INC.
New Jersey 13-0511250
- ---------------------------------------- ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
180 East Broad St., Columbus, OH 43215 614-225-4000
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
8 3/8% Sinking Fund Debentures New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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 any amendment to this Form 10-K. [x].
Aggregate market value in thousands of the voting stock held by
nonaffiliates of the Registrant based upon the average bid and asked prices of
such stock on March 21, 1997: $0.
Number of shares of common stock, par value $0.01 per share, outstanding as
of the close of business on March 21, 1997: 198,974,994
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated
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none none
===============================================================================
The Exhibit Index is located herein at sequential pages 77 through 80.
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BORDEN, INC.
INTRODUCTION
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The following filing with the Securities and Exchange Commission ("SEC") by
Borden, Inc. ("the Company") presents four separate financial statements:
Borden, Inc. Consolidated Financial Statements, Borden, Inc. and Affiliates
Combined Financial Statements, the Financial Statements of Wise Holdings, Inc.
("Wise Holdings") and the Financial Statements of Borden Foods Holdings
Corporation ("Foods Holdings"). The consolidated statements present the Company
after the effect of the sales of (i) the Company's former salty snacks business
("Wise") to Wise Holdings and its subsidiaries and (ii) the Company's former
domestic and international foods business ("Foods") to Foods Holdings and its
subsidiaries, as explained in Notes 1, 4 and 5 to the consolidated and combined
financial statements. The Company, Wise Holdings, and Foods Holdings are
controlled by BW Holdings, LLC ("BWHLLC"). The consolidated financial statements
are those of the Company, which is the SEC Registrant.
The Borden, Inc. and Affiliates ("the Combined Companies") combined financial
statements are included herein to present the Company on a combined historical
basis, including the financial position, results of operations and cash flows of
Wise and Foods. The Combined Companies financial statements are included because
management of the Company will continue to control significant financial and
managerial decisions with respect to Wise Holdings and Foods Holdings. The
Combined Companies financial statements do not reflect push-down accounting and
therefore present financial information on a basis consistent with that on which
credit was originally extended to the Company. Also, in accordance with rule
3-10 of Regulation S-X, the financial statements of Wise Holdings and Foods
Holdings are included in Part IV of this Registration Statement on Form 10-K
because Wise Holdings and Foods Holdings are guarantors of the Company's credit
facility and all of the Company's outstanding publicly held debt.
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BORDEN, INC.
INDEX
<TABLE>
<CAPTION>
PART I
<S> <C>
Item 1 - Business................................................................................. 4
Item 2 - Properties .............................................................................. 10
Item 3 - Legal Proceedings ....................................................................... 10
Item 4 - Submission of Matters to a Vote of Security Holders ..................................... 13
PART II
Item 5 - Market for the Registrant's Common Stock and Related Stockholder Matters ................ 13
Item 6 - Selected Financial Data ................................................................. 14
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................................ 15
Item 8 - Financial Statements and Supplementary Data ............................................. 25
BORDEN, INC. CONSOLIDATED ("THE REGISTRANT") AND BORDEN, INC. AND AFFILIATES
COMBINED FINANCIAL STATEMENTS
Consolidated Statements of Operations, years ended December 31, 1996,
1995 and 1994 ................................................................. 25
Consolidated Balance Sheets, December 31, 1996 and 1995 ........................... 27
Consolidated Statements of Cash Flows, years ended December 31, 1996,
1995 and 1994 ................................................................. 29
Consolidated Statements of Shareholders' Equity, years ended December 31, 1996,
1995 and 1994 ................................................................. 31
Combined Statements of Operations, years ended December 31, 1996,
1995 and 1994 ................................................................. 33
Combined Balance Sheets, December 31, 1996 and 1995 ............................... 34
Combined Statements of Cash Flows, years ended December 31, 1996,
1995 and 1994 ................................................................. 36
Combined Statements of Shareholders' Equity, years ended December 31, 1996,
1995 and 1994 ................................................................. 38
Notes to Consolidated and Combined Financial Statements ........................... 40
Independent Auditors' Reports...................................................... 63
Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ......................................................... 67
PART III
Item 10 - Directors and Executive Officers of the Registrant ...................................... 67
Item 11 - Executive Compensation .................................................................. 70
Item 12 - Security Ownership of Certain Beneficial Owners and Management .......................... 75
Item 13 - Certain Relationships and Related Transactions .......................................... 76
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K ........................ 76
</TABLE>
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PART I
Item 1. Business
- ------ --------
The Company was incorporated on April 24, 1899. The Company is engaged primarily
in manufacturing, processing, purchasing and distributing a broad range of
products through the following segments: dairy, chemical, decorative products
and other. The Combined Companies include the Wise and Foods businesses.
Corporate departments provide certain governance functions for all business
units. The Company's executive and administrative offices are located in
Columbus, Ohio. Production facilities are located throughout the United States
and in many foreign countries.
In September 1994 the Company entered into a merger agreement providing for the
acquisition of all of the Company's outstanding common stock by affiliates of
Kohlberg Kravis Roberts & Co. ("KKR") in exchange for shares of RJR Nabisco
Holdings Corp. ("RJR Holdings") common stock owned by affiliates of KKR. The
acquisition was completed on March 14, 1995, following approval of the merger of
an affiliate of KKR with and into the Company by shareholders of the Company at
a special meeting held on that date. The Company is currently controlled by
affiliates of KKR. In 1996, the Company's management made a definitive decision
to sell its Wise business. On October 1, 1996, the Company sold its Foods
business to Foods Holdings and classified this segment as a discontinued
operation in the Company's financial statements in accordance with generally
accepted accounting principles. Management of the Company will continue to
exercise significant financial and managerial control with respect to Wise
Holdings and Foods Holdings. In addition, Wise Holdings and Foods Holdings have
guaranteed the Company's obligations under its credit facility and its
outstanding publicly held debt securities.
Also in 1995, the Company began the process of redesigning its operating
structure. As a result of this redesign, management decided to divest certain
businesses that did not fit into the Company's long-term strategic plan.
Businesses included in the classification, "businesses held for sale," for the
segment data were the packaging and plastic films business, certain other
non-food operations and an equity interest in a Spanish food company (see Note
to the Consolidated and Combined Financial Statements). During the first
quarter of 1996 the Company sold substantially all of its interest in the
Spanish food company. On October 11, 1996, the Company sold its packaging and
plastic films business. The European bakery business was sold on December 18,
1996. These operations were reclassified to businesses held for sale for
segment reporting.
PRODUCTS
The dairy segment includes homogenized milk, ice cream, sherbet, yogurt, cottage
cheese, frozen novelties, lowfat dairy products, milk-based products for the
foodservice trade, and fruit juices and drinks.
The chemical segment includes adhesives for the forest products industry,
foundry and industrial resins, and UV curable coatings and specialty inks.
The decorative products segment includes residential wallcoverings, flexible
vinyl films and sheeting, and heat transfer paper.
The Company's other segment includes consumer adhesives. The Combined Companies'
other segment includes consumer adhesives and Wise.
The Combined Companies include the Company and its subsidiaries, together with
the Foods and Wise businesses. The Wise business includes salty snacks. The
Foods business includes pasta and sauces, processed cheese, non-dairy creamer,
sweetened condensed milk, reconstituted lemon and lime juices, bouillon,
confections, dehydrated soups and whole milk powder. Foods management has
announced its strategy to focus on grain-based
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meal solutions. Certain businesses not aligned with Foods' strategy are intended
to be divested over time. Among the businesses to be sold are its milk powder,
processed cheese, sweetened condensed milk and its reconstituted lemon juice
businesses.
MARKETING AND DISTRIBUTION
Domestic products included in the dairy segment are marketed primarily to retail
stores, and to a lesser extent, directly to wholesalers, through distributors,
and to institutions and government agencies. Domestic products for the Chemical
and other segments are sold throughout the United States to industrial users and
by in-house and independent sales forces to distributors, wholesalers, jobbers
and retailers. To the extent practicable, international distribution techniques
parallel those used in the United States. However, raw materials, production
considerations, pricing competition, government policy toward industry and
foreign investment, and other factors may vary substantially from country to
country.
The domestic Foods and Wise products are marketed primarily through food brokers
and distributors, and directly to wholesalers, retail stores, food service
businesses, food processors, institutions and government agencies. International
distribution techniques parallel those used in the United States. Raw materials,
production considerations, pricing competition, government policy toward
industry and foreign investment, and other factors may vary substantially from
country to country.
COMPETITION
The Company's and the Combined Companies' businesses in all industry segments
must deal with intense competition on local and national levels, both in the
United States and in foreign markets. Total advertising and promotion
expenditures in support of the Company's products were $447.5 million in 1996,
$655.2 million in 1995 and $666.6 million in 1994. The Combined Companies' total
advertising and promotion expenditures in support of products were $590.4
million in 1996, $655.2 million in 1995 and $666.6 million in 1994. Decreases
between years are the result of divestitures.
MANUFACTURING AND RAW MATERIALS
The primary raw material used by the dairy segment is raw milk. The primary raw
materials used by the chemical segment are methanol, phenol and formaldehyde.
The primary raw materials used by the decorative products segment are paper,
polyvinyl chloride resin, and various commodity chemicals. The primary raw
materials used by the other segment are methanol and polyvinyl alcohol. Raw
materials are generally available from numerous sources in sufficient quantities
but are subject to price fluctuations which cannot always be passed on to the
Company's customers. The primary raw materials used by the Foods and Wise
businesses are flour, tomato products, milk, cheese, oil and potatoes.
Long-term purchase agreements are used in certain circumstances to assure
availability of adequate raw material supplies at guaranteed prices, for both
the Company and the Combined Companies.
CUSTOMERS
The Company and the Combined Companies are not dependent on any single customer
or limited to a group of customers, the loss of which would have a material
adverse effect on their businesses. Their primary customers consist of food
brokers and distributors, mass merchants, retail stores and manufacturers.
PATENTS AND TRADEMARKS
The Company and the Combined Companies own various patents, trademark
registrations, and patent and trademark applications around the world that are
held for use or are currently used in their operations. A majority of the
patents relate to the development of new products and processes for
manufacturing and use thereof and will expire at various times between 1997 and
2005. No individual patent or trademark is considered to be material.
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RESEARCH AND DEVELOPMENT
Research and development expenditures were $41.1 million in 1996, $40.8 million
in 1995 and $30.3 million in 1994 for the Company and $50.1 million, $40.8
million and $30.3 million for the Combined Companies in 1996, 1995 and 1994,
respectively. The development and marketing of new products are carried out at
the operating unit level and integrated with quality controls for existing
product lines.
WORKING CAPITAL
Working capital for all segments is generally funded through operations and
short-term borrowings.
EMPLOYEES
At December 31, 1996, the Company had approximately 11,500 employees. The
Combined Companies' employees totaled approximately 20,000. Relationships with
union and non-union employees are generally good.
FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS
In the consolidated financial information presented below, the Foods segment is
shown as a discontinued operation in the Identifiable Assets at Year End,
Depreciation and Amortization Expense, and Capital Expenditures charts. The
Foods segment, consistent with treatment as a discontinued operation, is
excluded from the Sales to Unaffiliated Customers and Operating Income (Loss)
charts.
Businesses included in the Company's businesses held for sale classification are
the packaging and plastic films business, certain other non-food operations, an
equity interest in a Spanish food company and the Wise business through July 2,
1996.
In the combined financial information presented below, Foods is shown as a
distinct segment and Wise is included in the other segment.
INDUSTRY SEGMENTS:
- -----------------
<TABLE>
<CAPTION>
SALES TO UNAFFILIATED CUSTOMERS:
- ---------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
-------------------------------- --------------------------------
(Dollars in millions) 1996 1995 1994 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Foods $1,949.8 $1,836.2 $1,820.9
Dairy $ 910.9 $ 818.9 $ 875.1 910.9 818.9 875.1
Chemical 1,174.2 1,139.5 995.2 1,174.2 1,139.5 995.2
Decorative Products 365.0 354.1 314.9 365.0 354.1 314.9
Other 84.7 77.0 75.4 362.7 359.2 360.9
Businesses held for sale 1,146.5 1,718.3 2,179.9 1,002.5 1,436.1 1,894.4
-------- -------- -------- -------- -------- --------
$3,681.3 $4,107.8 $4,440.5 $5,765.1 $5,944.0 $6,261.4
- ---------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
OPERATING INCOME (LOSS):
- --------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
-------------------------------- -------------------------------
(Dollars in millions) 1996 1995 1994 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Foods $(19.9) $ (62.7) $ 61.0
Dairy $ 28.3 $ 23.7 $(168.2) 28.3 23.7 (168.2)
Chemical 127.8 140.2 125.8 127.8 140.2 125.8
Decorative Products 31.8 23.2 29.4 31.8 23.2 29.4
Other 9.2 10.8 11.3 6.4 (2.3) 21.9
Businesses held for sale 26.7 (11.9) (243.5) 32.7 1.2 (254.1)
Corporate 36.0 (367.1) (6.5) 52.7 (367.1) (6.5)
------ ------- ------- ------ ------ -------
$259.8 $(181.1) $(251.7) $259.8 $(243.8) $(190.7)
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
UNUSUAL OR INFREQUENTLY OCCURRING ITEMS INCLUDED
IN OPERATING INCOME (LOSS): (1)
- --------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
-------------------------------- -------------------------------
(Dollars in millions) 1996 1995 1994 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Foods $(22.8) $ (39.6) $ (23.4)
Dairy $(167.5) (167.5)
Chemical $ 1.6 4.8 1.6 4.8
Decorative Products 0.1 (0.1) 0.1 (0.1)
Other 1.8 1.8
Businesses held for sale 5.6 (135.8) 5.6 (135.8)
Corporate $62.0 (238.1) 71.7 $ 78.7 (238.1) 71.7
----- ------- ------- ----- ------ -------
$62.0 $(230.8) $(225.1) $ 55.9 $(270.4) $(248.5)
- --------------------------------------------------------------------------------------------------
<FN>
(1) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for further information concerning these items.
</TABLE>
<TABLE>
<CAPTION>
IDENTIFIABLE ASSETS AT YEAR END:
- ---------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
-------------------- --------------------
(Dollars in millions) 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foods $1,279.6 $1,151.9
Dairy $ 307.9 $ 286.6 307.9 286.6
Chemical 703.1 565.0 703.1 565.0
Decorative Products 244.2 226.4 244.2 226.4
Other 60.6 50.4 161.7 153.4
Businesses held for sale 96.0 1,005.7 96.0 902.7
-------- -------- -------- -------
1,411.8 2,134.1 2,792.5 3,286.0
Discontinued Operations 1,151.9
Corporate Assets 1,339.1 523.2 513.5 523.2
-------- -------- -------- --------
$2,750.9 $3,809.2 $3,306.0 $3,809.2
- ---------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
DEPRECIATION AND AMORTIZATION EXPENSE:
- -------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
------------------------------ ------------------------------
(Dollars in millions) 1996 1995 1994 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Foods $ 49.3 $ 48.7 $ 45.5
Dairy $ 14.7 $ 14.2 $ 29.2 14.7 14.2 29.2
Chemical 23.4 19.0 16.9 23.4 19.0 16.9
Decorative Products 6.6 6.0 5.5 6.6 6.0 5.5
Other 3.5 1.0 1.0 10.3 8.8 9.0
Businesses held for sale 53.9 61.4 89.0 50.6 53.6 81.0
Discontinued Operations 36.3 48.7 45.5
Corporate 0.5 6.3 6.2 0.5 6.3 6.2
------ ------ ------ ------ ------ ------
$138.9 $156.6 $193.3 $155.4 $156.6 $193.3
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CAPITAL EXPENDITURES:
- -------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
------------------------------ ------------------------------
(Dollars in millions) 1996 1995 1994 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Foods $ 50.2 $ 32.6 $ 30.4
Dairy $ 28.8 $ 13.8 $ 18.2 28.8 13.8 18.2
Chemical 92.8 59.7 35.3 92.8 59.7 35.3
Decorative Products 21.2 6.4 4.0 21.2 6.4 4.0
Other 1.4 1.1 0.6 7.2 3.8 1.5
Businesses held for sale 61.0 69.2 47.2 59.6 66.5 46.3
Discontinued Operations 31.9 32.6 30.4
Corporate 5.4 19.7 14.7 5.4 19.7 14.7
------ ------ ------ ------ ------ ------
$242.5 $202.5 $150.4 $265.2 $202.5 $150.4
- -------------------------------------------------------------------------------------------------
</TABLE>
GEOGRAPHIC SEGMENTS:
- -------------------
<TABLE>
<CAPTION>
SALES TO UNAFFILIATED CUSTOMERS:
- ---------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
-------------------------------- --------------------------------
(Dollars in millions) 1996 1995 1994 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $2,249.1 $2,599.8 $3,031.4 $3,680.4 $3,824.3 $4,270.0
Europe 936.5 1,005.7 856.8 1,150.4 1,200.6 968.3
Other 495.7 502.3 552.3 934.3 919.1 1,023.1
-------- -------- -------- -------- -------- --------
$3,681.3 $4,107.8 $4,440.5 $5,765.1 $5,944.0 $6,261.4
- ---------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
OPERATING INCOME (LOSS):
- --------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
------------------------------- -------------------------------
(Dollars in millions) 1996 1995 1994 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $160.0 $(209.8) $(436.7) $135.2 $(275.9) $(410.6)
Europe 61.0 31.5 64.5 72.4 23.8 64.6
Other 38.8 (2.8) 120.5 52.2 8.3 155.3
------ ------- ------- ------ ------- -------
$259.8 $(181.1) $(251.7) $259.8 $(243.8) $(190.7)
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
UNUSUAL OR INFREQUENTLY OCCURRING ITEMS
INCLUDED IN OPERATING INCOME (LOSS): (1)
- --------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
-------------------------------- -------------------------------
(Dollars in millions) 1996 1995 1994 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $62.0 $(151.1) $(301.2) $ 55.9 $(180.0) $(324.6)
Europe (22.0) 11.5 (32.7) 11.5
Other (57.7) 64.6 (57.7) 64.6
---- ------- ------- ------ ------- -------
$62.0 $(230.8) $(225.1) $ 55.9 $(270.4) $(248.5)
- --------------------------------------------------------------------------------------------------
<FN>
(1) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for further information concerning these items.
</TABLE>
<TABLE>
<CAPTION>
IDENTIFIABLE ASSETS:
- ---------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
-------------------- --------------------
(Dollars in millions) 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States $2,290.6 $1,553.0 $2,262.4 $2,222.8
Europe 267.5 761.2 412.7 921.5
Other 192.8 343.1 630.9 664.9
Discontinued operations 1,151.9
-------- -------- -------- --------
$2,750.9 $3,809.2 $3,306.0 $3,809.2
- ---------------------------------------------------------------------------------------
</TABLE>
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Item 2. Properties
- ------ ----------
As of December 31, 1996, the Company operated a domestic flexible vinyl and
sheeting production facility in Massachusetts and operated 6 foreign residential
wallcoverings and heat transfer paper production facilities located in Canada
and England.
As of December 31, 1996, the Company operated 27 domestic dairy facilities in 11
states. The most significant of these facilities are the milk processing
facilities in Texas and the milk and cultured products facilities in Utah and
Hawaii.
As of December 31, 1996, the Company operated 27 domestic resin production and
manufacturing facilities in 16 states, the most significant being the forest
products adhesive plants in Oregon and North Carolina and a specialty resins
plant in Kentucky. In addition, the Company operated 28 foreign resin production
and manufacturing facilities primarily in Canada, South America, Great Britain
and the Far East.
As of December 31, 1996, the Company operated 1 domestic facility which produces
and manufactures household, school and consumer glues in New York.
As of December 31, 1996, the Company operated 2 manufacturing and processing
facilities in 2 states included in businesses held for sale.
As of December 31, 1996, the Foods and Wise businesses operated 21 domestic food
manufacturing facilities in 14 states and Puerto Rico. The most significant of
these facilities are an Illinois plant producing caramel corn, bouillon and
dehydrated soup, pasta plants in Arizona, Massachusetts, Michigan, Minnesota and
Missouri, and a Pennsylvania plant that produces salty snacks. In addition, the
Foods business operated 18 foreign food manufacturing and processing facilities
located principally in Canada, Latin America and Western Europe.
While many of the Company's and the Combined Companies' manufacturing and
processing facilities are well maintained and effectively utilized, management
substantially increased capital spending during 1996 for new facilities and
improvements to existing facilities. See Management's Discussion and Analysis -
Liquidity and Capital Resources. Substantially all facilities are owned.
The Company and the Combined Companies are actively engaged in complying with
environmental protection laws, as well as various federal and state statutes and
regulations relating to manufacturing, processing and distributing their many
products. In connection with this, the Company incurred capital expenditures of
$6.5 million in 1996, $11.4 million in 1995 and $7.1 million in 1994. The
Company estimates that it will spend $3.3 million for environmental control
facilities during 1997. The Combined Companies incurred environmental capital
expenditures of $6.9 million in 1996, $11.4 million in 1995 and $7.1 million in
1994. The Combined Companies estimate $3.5 million in expenditures relating to
control facilities during 1997.
Item 3. Legal Proceedings
- ------ -----------------
Environmental Proceedings
- -------------------------
The Company has been notified that it is or may be a potentially responsible
party with respect to the cleanup of certain waste sites (currently
approximately 65 in number) in proceedings brought under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") or similar
state environmental laws. While the Company cannot predict with certainty the
total cost of such cleanup, the Company's ultimate liability will depend on many
factors including its volumetric share of waste, the financial viability of
other responsible parties, the remediation methods and technology used, the
amount of time necessary to accomplish remediation,
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and the availability of insurance coverage. The Company has recorded liabilities
for environmental remediation costs for these and other sites in amounts which
it believes are probable and reasonably estimable. Based on currently available
information and analysis, the Company believes that it is reasonably possible
that costs associated with such sites may exceed current reserves by amounts
that may prove insignificant or by amounts, in the aggregate, up to
approximately $30 million. This estimate of the range of reasonably possible
additional costs is less certain than the estimates upon which reserves are
based, and in order to establish the upper limit of such range, assumptions
least favorable to the Company among the range of reasonably possible outcomes
were used. In estimating both its current reserves for environmental remediation
and the possible range of additional costs, the Company has not assumed that it
will bear the entire cost of remediation of every site to the exclusion of other
known potentially responsible parties who may be jointly and severally liable.
The ability of other potentially responsible parties to participate has been
taken into account, based generally on the parties' probable contribution on a
per site basis. No attempt has been made to discount the estimated amounts to
net present value, and no amounts have been recorded for potential recoveries
from insurance carriers.
Private actions against the Company and numerous other defendants are pending in
U.S. District Court in Baton Rouge, Louisiana alleging personal injuries and
property damage in connection with a waste disposal site in Louisiana. Similar
actions are pending in state court in Camden, New Jersey in connection with a
waste disposal site in New Jersey and in state court in Los Angeles, California
in connection with a landfill site in Monterey Park, California (September 1994)
and in federal court in Columbus, Ohio (April 1996) in connection with a waste
disposal site.
The U.S. Environmental Protection Agency ("EPA") has issued a notice of
violation alleging the violation of air pollution regulations by a plant in
Massachusetts (September 1988).
A notice of violation has been issued by the Maine Department of Environmental
Protection (April 1991) alleging the violation of certain solid waste and
wetlands regulations at a Scarborough, Maine facility.
Borden Chemicals and Plastics Limited Partnership
- -------------------------------------------------
In 1987 the Company's basic chemical and polyvinyl chloride resin businesses
located at Geismar, Louisiana and Illiopolis, Illinois were acquired by the
Borden Chemicals and Plastics Limited Partnership ("BCP"). Under an
Environmental Indemnity Agreement ("EIA"), the Company has agreed, subject to
certain conditions and limitations, to indemnify BCP from certain environmental
liabilities arising from facts or circumstances that existed and requirements in
effect prior to November 30, 1987, and share on an equitable basis those arising
from facts or circumstances existing and requirements in effect both prior to
and after such date. No claim can be made by BCP under the EIA after November
30, 2002, and no claim can, with certain exceptions, be made with respect to the
first $500,000 of liabilities which the Company would otherwise be responsible
for thereunder in any year, but such excluded amounts may not exceed $3.5
million in the aggregate. Excluded amounts under the EIA have aggregated
approximately $3.5 million through December 31, 1996. Accordingly, certain BCP
legal proceedings are discussed below.
In 1985 the Louisiana Department of Environmental Quality ("LDEQ") and the
Company entered into a Settlement Agreement that called for the implementation
of a long-term groundwater and soil remediation program at the Geismar complex
to address contaminants. The Company and BCP have implemented the Settlement
Agreement, and have worked in cooperation with the LDEQ to remediate the
groundwater and soil contamination. The Settlement Agreement contemplated, among
other things, that the Company would install a series of groundwater monitoring
and recovery wells, and recovery trench systems. BCP is addressing issues raised
by the LDEQ concerning whether the extent of the groundwater contamination has
been identified. The Company has paid substantially all of the costs to date of
the Settlement Agreement with LDEQ. It is unknown how long the remediation
program will continue or whether the LDEQ will require BCP to incur costs to
take
11
<PAGE> 12
further remedial measures in response to data generated by the planned
additional testing. If the LDEQ requires BCP to take further remedial measures,
a portion of such costs may be covered under the EIA.
In February 1993, an EPA Administrative Law Judge held that the Illiopolis,
Illinois facility had violated CERCLA and the Emergency Planning and Community
Right to Know Act ("EPCRA") by failing to report certain relief valve releases
that occurred between February 1987 and July 1989, which BCP and the Company
believe are exempt from CERCLA and EPCRA reporting. BCP's petition for
reconsideration was denied, a penalty hearing has been scheduled, and further
appeals are possible if the parties cannot reach an agreement. Settlement
negotiations between the parties are ongoing. Management does not believe that
any ultimate penalty arising from this proceeding would have a material adverse
effect on the Company.
On October 27, 1994, the U.S. Department of Justice ("DOJ") acting on behalf of
the EPA, filed an action against BCP and its General Partner, BCP Management,
Inc., a wholly owned subsidiary of the Company, in U.S. District Court for the
Middle District of Louisiana. The complaint seeks civil penalties and corrective
action for alleged violations of the Resource Conservation and Recovery Act
("RCRA"), CERCLA and the Clean Air Act at the Geismar facility. Prior to the
filing of the complaint, BCP and the DOJ had engaged in settlement discussions,
and BCP expects that such discussions will continue. BCP plans to vigorously
defend against all the allegations. If unsuccessful, BCP could be subject to
penalties, costs for corrective action and costs needed to obtain a RCRA permit.
The maximum statutory penalties that would apply in a successful enforcement
action by the government would exceed $150.0 million. BCP believes, assuming it
is unsuccessful and based on information currently available to it, that the
more likely amount of any liability for civil penalties would not exceed several
million dollars. If unsuccessful, BCP could also be subject to costs for
facility-wide corrective action to address the contamination at the Geismar
complex. The cost of any corrective action could be material to BCP, depending
on the scope of such corrective action which cannot be determined at this time.
The extent to which any costs that may be incurred by BCP in any of the above
described legal proceedings will be subject to the EIA will depend, in large
part, on whether such costs or penalties are attributable to facts or
circumstances that existed and requirements in effect prior to November 30,
1987. The costs that may be subject to the EIA have not yet been determined.
Other Legal Proceedings
- -----------------------
The States of Ohio and Louisiana have suits pending against the Company (August
1993 and October 1994) alleging antitrust violations in connection with the sale
of milk to schools in certain of their school districts. Similar allegations by
the State of West Virginia were settled in June 1995 by payment of $70,000.
Federal Grand Jury investigations in Ohio (February 1993) and the Plains States
(September 1993) are dormant. Private antitrust suits alleging price fixing of
wholesale/retail accounts are pending in Florida (July 1993) and Virginia
(September 1993).
A former shareholder has sued the Company in U.S. District Court for the
Southern District of Florida (August 1995) claiming violations of securities
laws by failing to timely announce the proposed acquisition of the Company by
affiliates of Kohlberg Kravis Roberts & Co. Discovery is proceeding.
The Company and its former Directors were sued in U.S. District Court for the
Southern District of New York (December 1993) for alleged violations of the
Securities Exchange Act of 1934 in connection with certain 1993 financial
projections. A Motion to Dismiss filed by the defendants was granted by the
Judge Magistrate and approved by the District Court. Plaintiffs have appealed.
The Company was sued on November 1, 1995, in the U.S. District Court for the
Southern District of New York by the Quaker Oats Company and one of its
subsidiaries ("Quaker") in connection with the 1994 sale to Quaker of the
Company's Brazilian pasta business. The lawsuit alleges, among other things,
that the Company made
12
<PAGE> 13
misrepresentations and omissions to Quaker constituting securities fraud, common
law fraud, negligent misrepresentation and breach of contract. Quaker is seeking
rescission of its purchase as well as damages. Discovery is proceeding.
The Internal Revenue Service ("IRS") has proposed adjustments to the utilization
of certain capital losses in the Company's tax returns for the period 1989 to
1993. The Company filed a Petition for Readjustment in the U.S. Tax Court in
July 1995. Trial is currently scheduled for October 1997. If the Company's
petition is denied, the Company could incur tax liability of approximately $60
million, plus interest. The IRS also seeks penalties.
On July 19, 1995, a Fresno, California jury returned a verdict against the Foods
business for approximately $11.5 million for wrongful termination of a tomato
packing agreement. In granting the award for lost profits to Helm Tomatoes,
Inc., a Fresno based agribusiness, the jury found that while the Foods business
had a legal right to terminate the agreement, it was estopped from doing so by
an oral representation made by a former Foods employee. The Foods business
intends to seek to set aside the jury verdict.
The Company and the Combined Companies are involved in other litigation
throughout the United States which is considered to be in the ordinary course of
their business.
Management believes, based upon the information it currently possesses, and
taking into account its established reserves for estimated liability, that the
ultimate outcome of the foregoing environmental and legal proceedings and
actions is unlikely to have a material adverse effect on the financial position
or results of operations of the Company and the Combined Companies.
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
The Company's Annual Shareholder Meeting was held November 21, 1996. The
Company's Board of Directors was re-elected in its entirety by unanimous vote of
the 198,974,994 shares of the Company's common stock outstanding.
PART II
Item 5. Market for the Registrant's Common Equity and Related
- ------ -----------------------------------------------------
Stockholder Matters
-------------------
As a result of the merger on March 14, 1995, all common stock was cancelled and
retired and was de-listed from trading on exchanges in the United States, Japan,
and Switzerland. The Company's authorized common stock consists of 300,000,000
shares with a par value of $0.01 per share, 198,974,994 of which are issued and
outstanding and controlled by affiliates of KKR. No shares of such common stock
trade on any exchange. The only dividend paid during 1996 and 1995 was during
the fourth quarter of 1996 when the Company declared a $16.5 million dividend on
its common stock. The Company's ability to pay dividends on its common stock is
restricted by its credit agreement with certain banks. (See Note 7 to the
Consolidated and Combined Financial Statements.)
13
<PAGE> 14
Item 6. Selected Financial Data
- ------ -----------------------
- -------------------------------------------------------------------------------
FIVE YEAR SELECTED FINANCIAL DATA
(All dollar and share amounts in millions, except per share data)
The following represents five year selected financial data for the Company and
the Combined Companies, respectively.
<TABLE>
<CAPTION>
CONSOLIDATED FOR THE YEARS 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS
Net sales (1) $3,681.3 $4,107.8 $4,440.5 $4,381.2 $4,719.4
Income (loss) from
continuing operations (2) 75.5 (393.4) (594.4) (153.7) (232.7)
Loss applicable to common stock (3) (333.1) (424.9) (597.7) (630.7) (364.4)
- -------------------------------------------------------------------------------------------------------------
Income (loss) per common share
from continuing operations $0.38 $(2.05) $(4.14) $(1.09) $(1.62)
Loss per common share (1.67) (2.21) (4.16) (4.47) (2.54)
- -------------------------------------------------------------------------------------------------------------
Dividends:
Common share $0.083 $0.252 $ 0.90 $1.185
Preferred series A share 3.125 $2.392
Preferred series B share 1.32 1.32 1.32
- -------------------------------------------------------------------------------------------------------------
Average number of common shares
outstanding during the year 199.0 192.3 143.7 141.0 143.4
- -------------------------------------------------------------------------------------------------------------
FINANCIAL STATISTICS
Total assets (4) $2,750.9 $3,809.2 $4,004.4 $4,184.0 $5,246.0
Long-term debt 567.8 1,211.8 1,379.0 1,240.8 1,329.9
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
COMBINED COMPANIES FOR THE YEARS 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
SUMMARY OF EARNINGS
<S> <C> <C> <C> <C> <C>
Net sales $5,765.1 $5,944.0 $6,261.4 $6,226.2 $6,661.6
Income (loss) from
continuing operations 81.9 (442.5) (566.2) (97.0) (95.5)
Income (loss) applicable to common stock 5.1 (424.9) (597.7) (630.7) (364.4)
- -------------------------------------------------------------------------------------------------------------
FINANCIAL STATISTICS
Total assets $3,306.0 $3,809.2 $4,004.4 $4,184.0 $5,246.0
Long-term debt 582.4 1,211.8 1,379.0 1,240.8 1,329.9
- -------------------------------------------------------------------------------------------------------------
(1) The decrease in net sales of $426.5 or 10.4% to $3,681.3 in 1996 from
$4,107.8 in 1995 is primarily a result of the sale of six dairy plants during
1995, the sale of a wallcovering operation during the second quarter of 1996,
the sale of Wise during the third quarter of 1996, and the sale of the packaging
and plastic films business in the fourth quarter of 1996.
(2) The Company reported income from continuing operations of $75.5, an
improvement of $468.9 from the $393.4 loss from continuing operations recorded
in 1995. This improvement is the result of numerous unusual or non-recurring
charges incurred in 1995, including accrued losses for the divestiture of the
packaging and plastic films business and certain other non-food operations, and
an additional charge relating to a 1994 divestiture. The improvement of $201.0
or 33.8% from the 1994 loss from continuing operations of $594.4 to a loss of
$393.4 in 1995 is primarily the result of merger related expenses and expenses
incurred in conjunction with the 1994 credit line renegotiation.
(3) The 1996 loss applicable to common stock of $333.1 was primarily the result
of the loss on the sale of Foods to Foods Holdings.
(4) The decrease of $1,058.3 or 27.8% in total assets from $3,809.2 in 1995 to
$2,750.9 in 1996 was primarily caused by the sale of Wise, Foods, packaging and
plastic films and the European bakery businesses.
</TABLE>
14
<PAGE> 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------ -----------------------------------------------------------------------
of Operations
-------------
BACKGROUND
- ----------
Management's discussion and analysis presents an overview of the financial
results of the Company and the Combined Companies as well as the operating
results of each business unit. The Company's results include the Foods business
unit through the date of the sale to Foods Holdings as a discontinued operation
for all periods presented. The Wise business was not a separate segment of the
business and accordingly its operations are included in continuing operations
through the sale date, July 2, 1996. The Company's results of operations also
include the loss on the sale of Wise to an affiliate of KKR in continuing
operations and the loss on the sale of Foods to affiliates of KKR in
discontinued operations. From a Combined Companies perspective the Food and Wise
businesses are continuing. Accordingly the sales, including any losses on the
sales, are not reflected in the Combined Companies' financial statements.
The business units of the Company are identical to those listed in Item 1 of the
filing. The Combined Companies include the Foods and Wise results of operations
and combining adjustments to reflect the Wise loss on sale and the Wise
operating results previously included in businesses held for sale in the
Company's results of operations.
OVERVIEW
- --------
The following table presents Statement of Operations data of the Company and the
Combined Companies for the years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
-------------------------------- -------------------------------
(Dollars in millions) 1996 1995 1994 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $3,681.3 $4,107.8 $4,440.5 $5,765.1 $5,944.0 $6,261.4
Operating income (loss) 259.8 (181.1) (251.7) 259.8 (243.8) (190.7)
- --------------------------------------------------------------------------------------------------
</TABLE>
Sales
- -----
Consolidated net sales from continuing operations in 1996 decreased $426.5
million or 10.4% to $3,681.3 million from $4,107.8 million in 1995 primarily as
a result of businesses sold in 1995 and 1996. The 1995 consolidated net sales
decrease of $332.7 million from 1994 sales is also attributable to the
divestiture of businesses. Combined net sales from continuing operations in 1996
was consistent with 1995 sales. The 1995 combined net sales decrease versus 1994
was a result of the divestiture of businesses.
Operating Income
- ----------------
The Company reported operating income of $259.8 million in 1996 compared to
operating losses of $181.1 in 1995 and $251.7 in 1994. The Combined Companies
reported operating income of $259.8 million in 1996 compared to operating losses
of $243.8 million in 1995 and $190.7 million in 1994. The fluctuations in
operating income are attributable to numerous unusual or non-recurring charges
detailed in the chart below and in the results of operations by business unit.
15
<PAGE> 16
Unusual Items Included in Operating Income
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
------------------------------- -------------------------------
(Dollars in millions) 1996 1995 1994 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Included in Operating Income (Loss):
Gain (loss) on disposal of businesses
and plant closings $ 62.0 $(213.0) $ 59.3 $55.9 $(245.1) $ 59.3
Asset impairment (263.8) (8.2) (292.7)
Business redesign (27.9) (27.9)
Restructuring reversal (expense) 10.1 (20.6) 10.8 (15.1)
------- ------- ------- ----- ------- -------
$ 62.0 $(230.8) $(225.1) $55.9 $(270.4) $(248.5)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's 1996 gain on disposal of businesses of $62.0 million reflects the
sale of the remaining equity interest in the Spanish food company partially
offset by a loss of $16.7 million on Wise.
The Company's 1995 loss on disposal of businesses of $213.0 million includes
accrued losses for the divestiture of the packaging and plastic films business,
seven dairy plants, certain other non-food operations and an additional charge
relating to the 1994 sale of an international business. The sale or shutdown of
six dairies was completed during 1995 and the sale of the packaging and plastic
films business, one wallcovering facility and the seventh dairy plant was
completed in 1996.
In 1994 the Company recorded a net pretax gain of $59.3 million from the sale of
two international businesses and one domestic business.
Impairment writedowns of goodwill, plant and equipment of $152.8 million for
Borden/Meadow Gold Dairies ("BMG Dairies") and $111.0 million for dairy
facilities held for sale in 1994 were recorded due to ongoing and projected
operating losses reported by these businesses which indicated that the carrying
values of such assets were not expected to be recovered by their future cash
flows. Consistent with the Company's accounting policy, future cash flows were
measured at the business unit level at which the business is managed. Future
cash flows were based on forecasted trends for individual operations and assumed
capital spending in line with expected requirements.
The 1995 restructuring reversal of $10.1 million represents excess reserves for
completed restructuring programs. The 1994 net restructuring charges of $20.6
million included charges for headcount reductions and dairy plant closings,
partially offset by a reversal of prior restructuring charges. In addition, $9.8
million of restructuring charges reversed in 1994 related to discontinued
operations, partially offsetting the 1994 charge to loss on disposal. Management
reviewed the prior restructuring programs in light of events that occurred
during 1994 and determined that a portion of the reserves for these programs
would not be utilized.
The Combined Companies' $55.9 million gain on disposal in 1996 reflects the
transactions recorded by the Company with the exception of the $16.7 million
loss on the sale of Wise, which was not recognized by the Combined Companies. In
addition, the Combined Companies recognized a $26.0 million charge for the
closure of certain domestic Foods plants in 1997 partially offset by a gain of
$3.2 million on the sale of a Foods business late in 1996.
The Combined Companies' 1995 loss on disposal reflects the activity recorded by
the Company, as well as $32.1 million for the reserve for two Foods plants.
The asset impairment recorded by the Combined Companies in 1995 and 1994
reflected the impairment of Foods goodwill. In 1994 the Company and the Combined
Companies reversed previously recorded restructuring charges.
16
<PAGE> 17
Other Expense and Income Tax Expense
- ------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
-------------------------------- ------------------------------
(Dollars in millions) 1996 1995 1994 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Other expense $104.1 $173.2 $319.1 $103.1 $174.5 $322.6
Income tax expense 80.2 39.1 23.6 74.8 24.2 52.9
- -------------------------------------------------------------------------------------------------
</TABLE>
Other expense for 1996 totaled $104.1 million, down $69.1 million from the 1995
total of $173.2 million. The decrease is attributable to a reduction of $48.0
million in non-cash charges associated with interest rate swaps, a $22.3 million
reduction in interest expense attributable to lower debt levels, and a loss on
the sale of RJR Holdings shares of $22.0 million recorded in 1995. These
favorable variances were partially offset by a $33.6 million decrease in income
from an equity investment in Borden Chemicals and Plastics Limited Partnership
("BCP").
Other expense for 1995 decreased to $173.2 million from $319.1 million in 1994,
due primarily to merger-related expenses of $96.5 million and the $64.0 million
of expenses incurred in 1994 in conjunction with the renegotiation of the bank
credit line and for payments to terminate other debt agreements. Additionally,
other expense declined $25.1 million as a result of the $470.0 million reduction
in the Company's investment in TMI Associates, L.P., a limited partnership. This
variance was partially offset by the loss on sale of RJR Holdings shares of
$22.0 million and the unrealized swap loss of $35.9 million recorded in 1995.
Merger expenses incurred in 1995 of $4.1 million consisted of fees paid to
financial advisors in connection with the merger with affiliates of KKR. 1994
merger expenses of $96.5 million primarily included fees paid to KKR and
financial advisors and other incremental expenses directly related to the
merger.
BCP Management, Inc. ("BCPM") is the general partner in BCP and holds a 2%
equity interest in BCP. BCPM's results, which are included in other expense
(income) in the Consolidated and Combined Statements of Operations, increased
42.2% in 1995 to $33.7 million from $23.7 million in 1994. The 1995 increase
relates primarily to the record earnings reported by the BCP partnership which
was due to significant increases in selling prices for methanol and polyvinyl
chloride.
Income Tax Expense
- ------------------
Income tax expense in 1996 for both the Company and the Combined Companies is
higher than the statutory rates mainly from the write-off of assets with tax
basis lower than book basis.
Both the consolidated and combined statements show losses before income taxes
for 1995 and 1994 but still reflect income tax expense. The 1995 expense was
primarily due to provisions for previously unrepatriated foreign earnings
related to the Spanish food company and the Foods business units, the write-off
of assets with lower tax basis, and nondeductible merger expenses. The 1994
expense was a result of adjustments to prior estimates, nondeductible merger
expenses, write-off of assets with lower tax basis and U.S. taxation of foreign
source income.
17
<PAGE> 18
RESULTS OF OPERATIONS BY BUSINESS UNIT:
- --------------------------------------
Following is a comparison of net sales and operating income (loss) by business
unit for both the Company and the Combined Companies:
(Dollars in millions)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Twelve months ended December 31,
--------------------------------------------------------------
NET SALES 1996 1995 1994
- --------- ------ ------ -----
<S> <C> <C> <C>
BMG Dairies $ 910.9 $ 818.9 $ 875.1
Decorative Products 365.0 354.1 314.9
Chemical 1,174.2 1,139.5 995.2
Other 84.7 77.0 75.4
---------- ----------- -----------
Subtotal 2,534.8 2,389.5 2,260.6
Businesses held for sale 1,146.5(1) 1,718.3(1) 2,179.9(1)
-------- -------- --------
CONSOLIDATED NET SALES 3,681.3 4,107.8 4,440.5
Foods 1,949.8 1,836.2 1,820.9
Wise(2) 278.1 282.1 285.5
Combining adjustments(3) (144.1) (282.1) (285.5)
-------- -------- --------
COMBINED NET SALES $5,765.1 $5,944.0 $6,261.4
Twelve months ended December 31,
--------------------------------------------------------------
OPERATING INCOME (LOSS) 1996 1995 1994
- ----------------------- ------ ------ -----
BMG Dairies $ 28.3 $ 23.7 $ (168.2)
Decorative Products 31.8 23.2 29.4
Chemical 127.8 140.2 125.8
Other 9.2 10.8 11.3
Corporate 36.0 (367.1) (6.5)
---------- -------- --------
Subtotal 233.1 (169.2) (8.2)
Businesses held for sale 26.7(1) (11.9)(1) (243.5)(1)
---------- --------- -------
CONSOLIDATED OPERATING INCOME (LOSS) 259.8 (181.1) (251.7)
Foods (19.9) (62.7) 61.0
Wise(2) (2.8) (13.1) 10.6
Combining adjustments(3) 22.7 13.1 (10.6)
---------- --------- ---------
COMBINED OPERATING INCOME (LOSS) $ 259.8 $(243.8) $(190.7)
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes Wise results prior to sale to affiliate on July 2, 1996.
(2) Represents 100% of Wise results for the applicable period presented.
(3) Represents an adjustment to exclude the Wise results included with
consolidated results as well as loss on sale of Wise, which is not included
in the Combined Companies results.
BMG Dairies 1996 sales of $910.9 million increased $92.0 million or 11.2% from
1995. The increase is attributable to increased raw milk costs during the year
which were generally passed on to customers through higher product pricing. In
addition, sales volume improved slightly over the prior year. The 19.4% increase
in operating income is attributable to operating efficiencies and a favorable
sales mix.
18
<PAGE> 19
BMG Dairies sales of $818.9 million in 1995 decreased 6.4% from $875.1 million
in 1994 primarily as a result of sales volume reductions in Oklahoma and Texas.
Operating results improved to income of $23.7 million versus a loss of $168.2
million in 1994, primarily due to the 1994 charges of $152.8 million to write
down impaired assets and $14.7 million for restructuring. Excluding these
charges operating results improved as a result of reduced depreciation expense
resulting from the 1994 impairment writedown.
Decorative Products sales for 1996 rose to $365.0 million from $354.1 million in
1995. There was a decrease in sales in the North American wallcoverings
operation due to weak market conditions and a reduction in sales to mass
merchants. However, this was offset by an increase in the U.K. operation where
export sales to Eastern Europe were strong. Operating income increased $8.6
million to $31.8 million in 1996 as a result of the absence of $7.6 million in
one-time accounting charges taken in 1995 related to product samples,
merchandising costs, and inventory obsolescence, as well as increased sales and
a reduction in selling and marketing costs associated with mass merchants.
Sales for Decorative Products increased 12.4% in 1995 to $354.1 million from
$314.9 million in 1994 primarily due to additional volume with a mass
merchandiser, increases in export sales volumes and an overall price increase.
Operating income for 1995 declined 21.1% to $23.2 million from $29.4 million in
1994 primarily as a result of the one-time $7.6 million accounting charge
related to product samples, merchandising costs and inventory obsolescence.
Operating income was also affected by costs associated with establishing new
business, including racks, display units and the buy-back of competitors'
products, which was only partially offset by increased sales.
Chemical sales increased 3.0% in 1996 to $1,174.2 million from $1,139.5 million
in 1995. The increase is a result of a 16.3% increase in volume in North
American Forest Products partially offset by sales price declines resulting from
lower raw material costs which were passed on to customers. Increases in Forest
Products resulted from increased formaldehyde and wood fiber resins volume from
the opening of two new plants late in 1995, increased housing starts, and
additional demand for plywood and oriented fiber board. Chemical operating
income decreased $12.4 million or 8.8% to $127.8 million in 1996 from $140.2
million in 1995. The decline is primarily as a result of price competition in
Latin America and Spain, and accounting charges in Brazil and Australia.
Chemical sales of $1,139.5 million for 1995 increased 14.5% from 1994 sales of
$995.2 million, primarily due to increased selling prices resulting from higher
raw material costs, and increased sales volumes in specialty resins. Operating
income increased 11.4% to $140.2 million from $125.8 million in 1994, primarily
as a result of increased sales volumes and the ability to recover higher raw
material costs.
Other sales increased $7.7 million or 10.0% to $84.7 million in 1996 from $77.0
million in 1995. Operating income declined 14.8% from $10.8 million in 1995 to
$9.2 million in 1996. 1995 Other sales increased 2.1% to $77.0 million from
$75.4 million in 1994. Operating income for 1995 decreased 4.4% to $10.8 million
versus $11.3 million in 1994 primarily due to higher raw material and
promotional costs.
Corporate operating income improved $403.1 million to $36.0 million of income
for 1996, versus a loss of $367.1 million in 1995. The increase is due to the
absence of non-recurring charges recorded in 1995 for severance, general
insurance, legal and accounting fees associated with the Company's redesign,
litigation and environmental accruals, and also due to net gains on divested
businesses of $62.0 million in 1996 as compared to losses of $213.0 in 1995. The
1996 net gain on divestiture is primarily comprised of a gain on the sale of an
equity interest in a Spanish food company partially offset by the loss incurred
on the sale of Wise to an affiliate of the Company's principal stockholder.
19
<PAGE> 20
Corporate operating expenses increased in 1995 resulting in a $367.1 million
loss as compared to $6.5 million loss in 1994, due to charges recorded for
expenses related to the reorganization of the Company into the new business
structure, additional accruals for environmental remediation, and the losses on
divested businesses. The 1995 loss on divestiture of businesses of $213.0
million includes accrued losses for the divestiture of the packaging and plastic
films businesses, seven dairy plants, certain other non-food operations and an
additional charge relating to the 1994 sale of an international business. In
1994 the Company recorded a net pretax gain of $59.3 million from the sale of
two international businesses and one domestic business, which were not part of
the discontinued operations plan of 1993.
Sales for the operations classified as "Businesses held for sale" decreased $572
million to $1,147 million in 1996 as compared to $1,718 million in 1995. The
decrease was caused primarily by the divestiture of businesses, including Wise
and the packaging and plastic films business. Operating income was $26.7 million
in 1996, compared with a loss of $11.9 million in 1995. The improvement is
attributable to favorable operating results.
1995 sales for businesses held for sale of $1,718 million decreased overall from
1994 sales of $2,180 million, primarily due to divestitures during 1994 which
were partially offset by an increase in sales of packaging and plastic films
from 1994. The operating loss for 1995 of $11.9 million for these businesses
decreased from a loss of $243.5 million in 1994, primarily due to significant
charges for impairment of assets in 1994.
Sales for Foods increased $113.6 million or 6.2% to $1,949.8 million in 1996
from $1,836.2 million in 1995 due to increases in product lines within Foods'
Signature Flavors, International Foods, FunCheese, and Italian Foods business
units. The increase at Signature Flavors is atttributable to higher volumes in
soups/bouillon. The increase in International Foods is primarily attributable to
volume increases for non-dairy creamer and milk powder, as well as increased
selling prices in the Latin America region. FunCheese increases are primarily
attributable to sales volume and improved private label selling prices. The
increase in Italian Foods is due to volume increases in dry pasta.
The Foods operating loss of $19.9 million in 1996 improved from $62.7 million in
1995. The improvement is primarily attributable to lower promotional costs. The
remaining improvement is attributable to an improvement in Signature Flavors and
International Foods partially offset by decreases in the FunCheese and Italian
Foods operations. Signature Flavors improved $15.5 million over the prior year
due to higher volumes, price increases and favorable sales mix, and lower
distribution and promotion expenses. The International Foods improvement of $9.4
million is attributable to increased volumes and pricing in Asia Pacific,
increased non-dairy creamer volume, and improved operating efficiency in South
Africa. The decline in the Italian Foods business of $17.1 million is
attributable to increased packaging and semolina costs. The FunCheese decline of
$8.3 million is attributable to increased trade promotional spending related to
the introduction of a new product in 1996.
1995 sales for Foods of $1,836.2 million increased slightly compared with 1994
sales of $1,820.9 million, primarily resulting from increased sales for the
FunCheese unit and whole milk powder in Colombia, which were offset by lower
sales in Italian Foods and Signature Flavors. Sales for Italian Foods declined
due to lower volumes resulting from extremely competitive conditions. Signature
Flavors' decline was primarily related to lower sales of reconstituted lemon
juice. Sales for FunCheese increased due to higher sales volumes of single
wrapped cheese slices and substitute cheese products. Sales of whole milk powder
in Colombia increased due to strong volumes and the introduction of a new
product.
Foods reported an operating loss for 1995 of $62.7 million versus income of
$61.0 million for 1994 due to weak results in Italian Foods, Signature Flavors
and International whole milk powder exports, partially offset by favorable
results for FunCheese. Italian Foods' results were impacted severely by high
semolina costs and higher promotional costs related to strong competition.
Signature Flavors experienced declines in operating results for substantially
all product lines. The most significant declines occurred in reconstituted lemon
juice, boullion and
20
<PAGE> 21
dry soups, and condensed milk, all of which reflected overall volume declines
industrywide, private label competition and changes in merchandising strategy.
The decline in the whole milk powder export business relates primarily to a
change in distributors in the Far East which disrupted sales volumes and
increased competition in the Far East. Results for FunCheese improved due to
reduced production and distribution costs. 1995 results were also impacted by
$66.7 million in non-recurring charges.
1996 sales for Wise decreased 1.4% to $278.1 million from $282.1 million in 1995
as a result of the conversion of unprofitable company-owned routes to
independent distributors. Operating loss for 1996 improved $10.3 million to a
$2.8 million loss resulting from reduced promotional price support and lower
expenses relating to the route conversions.
Wise sales for 1995 were $282.1 million versus $285.5 million for 1994, with the
1.2% decrease resulting primarily from the impact of competitive promotions. The
operating loss for 1995 of $13.1 million versus income of $10.6 million for 1994
resulted primarily from increased promotional costs and increased costs in
packaging and raw materials.
CASH FLOWS
- ----------
Cash provided by the Company's operating activities during 1996 was $36.4
million compared to $82.3 million in 1995 and cash used of $242.7 million in
1994. The decrease between 1996 and 1995 is attributable to the Foods operations
being included for only nine months in 1996 compared to twelve months in 1995.
This is partially offset by the reduction of the loss between 1996 and 1995. The
improvement between 1995 and 1994 is primarily attributable to a decrease in the
amount of receivables sold.
Combined Companies' operating cash flows increased to $157.7 million in 1996
from $82.3 million in 1995 as a result of the significant turnaround in the
Combined Companies income from operations.
The Company's and the Combined Companies' capital expenditures increased
approximately 20% in 1996 to $242.5 million and $265.2 million, respectively.
The increase reflects management's commitment to build value in its core
businesses and its continued progress toward the redesign of operations which
began in 1995. The 1996 capital expenditures primarily related to increased
capacity in the Chemical operations, consolidation of operations for Dairy and
profit maintaining projects in the Foods business. The Company expects to
continue to spend at the same level in 1997 as in 1996. The 1997 budgeted
capital expenditures include plans to increase capacity in the Chemical
operations, updating equipment to increase manufacturing efficiencies in the
Dairy operations, new information systems and software company-wide, and several
profit maintaining projects in Foods.
Capital expenditures in 1995 increased 35% to $202.5 million from the 1994 total
of $150.4 million due to the Company's ability to invest more capital into the
businesses as a result of the capital infusion by affiliates of KKR.
Cash generated from the Company's divestitures totaled $478.6 million in 1996.
The divestiture activity is a result of management's redesign process which
began in 1995. The redesign resulted in the divestiture of the packaging and
plastic films business, several dairy plants, certain other non-food operations
and an equity interest in a Spanish food business. In addition, the 1996
divestiture proceeds include the sale of the European bakery business which was
not originally included in the 1995 plan.
The Company's 1996 investing cash flows also include $76.5 million received from
Foods Holdings for the repayment of affiliate debt and other receivables, a
portion of which related to the Foods transaction.
21
<PAGE> 22
The 1995 net inflow for investing activities includes $282.1 million related to
proceeds on the sale of an investment in RJR Holdings. Proceeds from divested
businesses in 1994 of $409.1 million consisted of a Brazilian pasta operation, a
Far East dairy business, three Foods operations, and businesses sold under the
1993 divestuture program.
The Company's and the Combined Companies' 1996 financing cash outflows of $370.2
million and $378.7 million, respectively, reflect debt and dividend payments.
The 1995 cash flows from financing generated a net use of $141.4 million, which
is the net result of a $994.7 million capital infusion from affiliates of KKR
used to repay debt and decrease minority interest. The 1994 financing cash flows
reflect the borrowing under the credit agreement signed December 1994.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of December 31, 1996, the Company and the Combined Companies had $1.2
billion in contractually committed lines of credit (the "Credit Agreement") of
which $1.1 billion was available. During 1996 the Credit Agreement was amended
and restated to permit the implementation of management's redesign plan.
Provisions under the Credit Agreement require Foods Holdings and Wise Holdings
to guarantee the Company's obligations under the Credit Agreement. The cash
available under the Credit Agreement will be used to repay debt in 1997 and
fund working capital needs.
The Company and the Combined Companies expect to have adequate liquidity to fund
working capital requirements, support capital expenditures, repay debt and pay
preferred dividends during 1997 and in future years due to cash flows from
operations, divestitures and amounts available under the Credit Agreement.
The Company expects to repay approximately $420 million of debt during 1997.
The debt consists of approximately $305 million in zero coupon convertible
notes due in 2002. Noteholders have an option to sell the notes to the Company,
and the Company is permitted to redeem the notes, beginning in May 1997.
The remainder of the repayment obligation consists of principal maturities
during 1997. In addition management expects to pay $73.7 million in preferred
dividends during 1997.
As of December 31, 1996, the Company and the Combined Companies had $140.7
million and $147.3 million, respectively, in deferred tax assets which related
to net operating loss and alternative minimum tax carryforwards. These
carryforwards are expected to reduce future tax liabilities.
The Foods business is in the process of evaluating and redesigning its current
portfolio of products to be more in line with consumer trends. Although
specifics have yet to be determined, management intends to divest certain
unaligned businesses. Management expects the proceeds from such dispositions to
exceed its current carrying cost. Management intends to use the proceeds from
the divestitures to build the core business through strategic acquisitions and
investments in the existing business. Also, management intends to simplify its
current manufacturing structure. A $26.0 million charge, substantially all of
which is noncash, has been provided for the closure of certain domestic Foods
plants in 1997. Management anticipates approximately $12 million in additional
charges in 1997 related to these closures, substantially all of which will be
cash.
22
<PAGE> 23
RISK MANAGEMENT
- ---------------
Foreign Exchange
- ----------------
International operations account for approximately one third of the Company's
sales and operating income. The Company is exposed to foreign exchange risk on
transactions that are denominated in a currency other than the business unit's
functional currency. Such transactions include foreign currency denominated
imports and exports of raw materials and finished goods (both intercompany and
third party), and loan payments (both intercompany and third party). In almost
all cases the functional currency is the unit's local currency.
It is the Company's policy to reduce foreign currency cash flow exposure due to
exchange rate fluctuations by hedging firmly committed foreign currency
transactions wherever economically feasible. The Company does not speculate in
foreign currencies. The Company does not hedge foreign currency translation or
foreign currency net assets and liabilities. The counterparties to the forward
contracts are financial institutions with investment grade credit ratings.
The Company monitors its foreign currency cash flow transactions and executes
forward contracts to reduce its foreign exchange exposures. The use of forward
contracts protects the Company's cash flows against unfavorable movements in
exchange rates, to the extent of the amount under contracts.
As of December 31, 1996, forward exchange contracts outstanding totaled $93.7
million for the Company and $247 million for the Combined Companies and will
generally mature within six months. In accordance with current accounting
standards, the Company and the Combined Companies defer unrealized gains and
losses arising from contracts that hedge existing and identified foreign
currency firm third party commitments until the related transaction occurs.
Gains and losses arising from contracts that hedge existing transactions are
recorded currently in income, and offset gains or losses arising from the
transactions being hedged.
Interest Rate Swaps
- -------------------
The Company has historically utilized interest rate swaps to lower funding costs
or to alter interest rate exposures between fixed and floating rates on
long-term debt. The Company does not enter into speculative swaps or other
financial contracts. As of December 31, 1996, $224.3 million notional amount of
interest rate swaps was outstanding. On average, during 1996, the Company paid
10.4% and received 5.5% on the swaps. Under interest rate swaps, the Company
agrees with the other parties to exchange, at specified intervals, the
difference between the fixed rate and floating rate interest amounts calculated
by reference to the agreed notional principal amount. These swaps mature on
various dates beginning December 31, 1999, and ending December 1, 2002. The
Company is exposed to credit related losses in the event of nonperformance by
the counterparties to these swaps, although no such losses are expected as the
counterparties are commercial finance companies having an investment grade
credit rating.
Commodity Futures Contracts
- ---------------------------
The Combined Companies use commodity futures contracts to hedge the price risks
associated with raw materials used in production, commitments and certain
transactions. The Combined Companies defer the impact of changes in the market
value of these contracts until the hedged transaction is completed. Changes in
market value of the commodity futures contracts are included in the measurement
amounts of qualifying subsequent purchases of raw materials. The Combined
Companies do not enter into these contracts for speculative purposes. These
contracts generally mature in less than one year. As of December 31, 1996, the
notional value of commodity futures contracts outstanding totaled $4.6 million.
Forward-Looking and Cautionary Statements
- -----------------------------------------
The Company and its officers from time to time make written or oral
forward-looking statements, including statements contained in the Company's
filings with the Securities and Exchange Commission. Investors should
23
<PAGE> 24
be aware of factors that could cause the Company's actual results to differ
materially from those projected in forward-looking statements made by or on
behalf of the Company. Such factors are primarily in the areas of liquidity,
legal, environmental and risk management.
24
<PAGE> 25
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
BORDEN, INC.
<CAPTION>
Year Ended
(In millions) December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $3,681.3 $ 4,107.8 $ 4,440.5
Cost of goods sold 2,660.3 3,013.8 3,172.6
-------- -------- --------
Gross margin 1,021.0 1,094.0 1,267.9
-------- -------- --------
Distribution expense 235.4 267.2 318.5
Marketing expense 410.2 462.3 635.1
General & adminstrative expense 177.6 342.7 340.9
(Gain) loss on divestiture (62.0) 213.0 (59.3)
Impairment loss 263.8
Restructuring (reversal) expense (10.1) 20.6
-------- -------- --------
Operating income (loss) 259.8 (181.1) (251.7)
-------- -------- --------
Interest expense 112.8 135.1 137.6
Minority interest 3.1 15.1 40.2
Other (income) expense (11.8) 23.0 141.3
-------- -------- --------
Income (loss) from continuing operations
before income taxes 155.7 (354.3) (570.8)
Income tax expense 80.2 39.1 23.6
-------- -------- --------
Income (loss) from continuing operations 75.5 (393.4) (594.4)
-------- -------- --------
Discontinued operations:
(Loss) income from operations (1.1) (40.3) 55.4
(Loss) income from disposal (330.7) 67.6 (58.7)
-------- -------- --------
Net loss (256.3) (366.1) (597.7)
Preferred stock dividends (76.8) (58.8)
-------- -------- --------
Net loss applicable to common stock $ (333.1) $ (424.9) $ (597.7)
========= ======== =========
- -------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated and Combined Financial Statements
25
<PAGE> 26
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
BORDEN, INC.
<TABLE>
<CAPTION>
Year Ended
(In millions, except per share data) December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share Data
- --------------
Income (loss) from continuing operations $ 0.38 $ (2.05) $ (4.14)
Discontinued operations:
(Loss) income from operations (0.20) 0.39
(Loss) income from disposal (1.66) 0.35 (0.41)
-------- -------- -------
Net loss (1.28) (1.90) (4.16)
Preferred stock dividends (0.39) (0.31)
-------- -------- --------
Net loss per common share $ (1.67) $ (2.21) $ (4.16)
======== ======== =========
Dividends per common share $ 0.083 $ 0.252
Dividends per preferred share 3.125 $ 2.392
Average number of common shares outstanding
during the period 199.0 192.3 143.7
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated and Combined Financial Statements
26
<PAGE> 27
CONSOLIDATED BALANCE SHEETS
BORDEN, INC.
<TABLE>
(In millions) December 31, 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $125.0 $ 146.2
Accounts receivable (less allowance for doubtful
accounts of $15.7 and $24.8, respectively) 355.1 660.1
Inventories:
Finished and in-process goods 142.3 336.2
Raw materials and supplies 77.4 184.1
Deferred income taxes 179.6 102.9
Other current assets 45.9 149.3
--------- --------
925.3 1,578.8
--------- --------
INVESTMENTS AND OTHER ASSETS
Investments in and advances to affiliated companies 106.8 36.7
Deferred income taxes 213.4 308.2
Other assets 89.0 110.2
Assets sold under contractual arrangement
(net of allowance of $863.9) 739.7
--------- ---------
1,148.9 455.1
--------- ---------
PROPERTY AND EQUIPMENT
Land 54.3 93.6
Buildings 267.5 562.4
Machinery and equipment 934.3 1,968.7
--------- ---------
1,256.1 2,624.7
Less accumulated depreciation (693.7) (1,465.8)
--------- ---------
562.4 1,158.9
--------- ---------
INTANGIBLES
(Net of accumulated amortization of $100.0 and $210.5, 114.3 616.4
respectively) --------- ---------
TOTAL ASSETS $ 2,750.9 $ 3,809.2
========= =========
- --------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated and Combined Financial Statements
27
<PAGE> 28
CONSOLIDATED BALANCE SHEETS
BORDEN, INC.
<TABLE>
<CAPTION>
(In millions, except per share data) December 31, 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Debt payable within one year $414.0 $ 140.4
Accounts and drafts payable 254.9 478.7
Income taxes 282.8 218.8
Other current liabilities 503.0 780.3
-------- --------
1,454.7 1,618.2
-------- --------
OTHER LIABILITIES
Liabilities sold under contractual arrangement 481.6
Long-term debt 567.8 1,211.8
Non-pension postemployment benefit obligations 285.9 331.8
Other long-term liabilities 89.9 145.9
Minority interest 10.9 33.0
-------- --------
1,436.1 1,722.5
-------- --------
Commitments and Contingencies (Note 17)
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock - Issued 24,574,751 shares 614.4 614.4
Common stock - $0.01 par value
Authorized 300,000,000 shares
Issued 198,974,994 shares 2.0 2.0
Paid in capital 379.9 312.7
Receivable from parent (443.6)
Accumulated translation adjustment (27.2) (129.6)
Minimum pension liability and other (109.2) (107.9)
Accumulated deficit (556.2) (223.1)
-------- --------
(139.9) 468.5
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,750.9 $3,809.2
======== ========
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated and Combined Financial Statements
28
<PAGE> 29
CONSOLIDATED STATEMENTS OF CASH FLOWS
BORDEN, INC.
<TABLE>
<CAPTION>
Year Ended
(In millions) December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net loss $ (256.3) $ (366.1) $ (597.7)
Adjustments to reconcile net loss to net
cash from operating activities:
Loss (income) on disposal of discontinued operations 263.5 (98.3)
Deferred tax provision on discontinued operations 67.2 30.7
Depreciation and amortization 138.9 156.6 193.3
(Gain) loss on divestiture, net (62.0) 213.0 94.7
Unrealized (gain) loss on interest rate swap (12.1) 35.9
Loss on sale of investment 22.0
Impairment losses 8.2 292.7
Restructuring (9.6) (52.5) (56.9)
Sale of receivables (150.0)
Trade receivables (26.9) (48.9) (91.8)
Inventories 2.6 15.3 (43.1)
Trade payables 31.3 (51.2) 57.5
Current and deferred taxes 28.2 (21.8) 24.0
Other assets 13.1 123.1 62.7
Other liabilities (65.5) (74.6) (43.1)
Discontinued operations, working capital
and non-cash charges (76.0) 190.9 15.0
---------- ---------- --------
36.4 82.3 (242.7)
---------- ---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment in RJR Holdings 282.1
Capital expenditures (242.5) (202.5) (150.4)
Proceeds from the divestiture of businesses 478.6 7.4 409.1
Purchase of businesses (7.0)
Return of investment in unconsolidated affiliate 76.5
---------- ---------- --------
312.6 80.0 258.7
---------- ---------- --------
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES
Net short-term debt payments (11.6) (191.5) (84.1)
Repayment of long-term debt (274.7) (436.1) (492.6)
Long-term debt financing 3.1 615.8
Issuance of minority interest 9.0
Purchase of TMI interest (19.2) (471.5)
Equity contribution 3.8 994.7
Dividends paid (77.5) (43.4) (35.6)
Issuance of stock under stock options and benefits
and awards plans 3.3 5.5
---------- ---------- --------
(370.2) (141.4) 9.0
---------- ---------- --------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 30
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
BORDEN, INC.
<TABLE>
<CAPTION>
Year Ended
(In millions) December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Decrease) increase in cash and equivalents (21.2) 20.9 25.0
Cash and equivalents at beginning of period 146.2 125.3 100.3
-------- -------- --------
Cash and equivalents at end of period $ 125.0 $ 146.2 $ 125.3
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest $ 82.3 $ 100.8 $ 144.0
Income taxes 25.8 51.7 8.0
Non-cash activity:
Reclassification of note from long-term to short-term 305.3
Proceeds relating to the Wise sale 44.3
Proceeds relating to the Foods sale 521.8
Proceeds from the sale of options recorded in equity 44.0
Investment in AEPI common stock 80.0
Capital contribution by parent 31.0
Proceeds from sale of European bakery
and Spanish food company 30.1
Investment in RJR Holdings stock $ 281.1
Treasury stock issued to KKR affiliates 309.5
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated and Combined Financial Statements
30
<PAGE> 31
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
BORDEN, INC.
(In millions)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Minimum
Preferred Common Treasury Paid In Accumulated Pension Retained Total
Stock Stock Stock Capital Translation Liability Earnings
Adjustment and Other (Deficit)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 0.0 $121.9 $(532.6) $88.1 $ (173.6) $ (95.5) $835.1 $243.4
- ------------------------------------------------------------------------------------------------------------------------------------
Stock issued for preferred Series B
converted, exercised options
and benefits and award plans 3.7 1.8 5.5
Treasury stock issued to KKR
affiliates 279.4 30.1 309.5
Translation adjustments 33.2 33.2
Minimum pension liability adjustment (11.8) (11.8)
Valuation allowance - securities (38.1) (38.1)
Net loss (597.7) (597.7)
Cash dividends - common (33.2) (33.2)
Stock rights redemption payment
$0.01 2/3 per right (2.4) (2.4)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $0.0 $121.9 $(249.5) $120.0 $(140.4) $(145.4) $201.8 $(91.6)
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of series A cumulative
preferred shares 614.4 (614.4) 0.0
Cancellation of common shares (121.9) 121.9 0.0
Issuance of new common shares 2.0 2.0
Cancellation of treasury shares 245.4 (245.4) 0.0
Stock issued for preferred Series B
converted, exercised options
and benefits and award plans 4.1 2.2 6.3
KKR additional capital contribution 928.4 928.4
Translation adjustments 10.8 10.8
Minimum pension liability adjustment (0.6) (0.6)
Valuation allowance - securities 38.1 38.1
Net loss (366.1) (366.1)
Cash dividends - preferred (58.8) (58.8)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $614.4 $2.0 $0.0 $312.7 $(129.6) $(107.9) $(223.1) $468.5
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 32
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
BORDEN, INC.
(In millions)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Minimum
Preferred Common Paid In Receivable Accumulated Pension Retained Total
Stock Stock Capital from Translation Liability Earnings
Parent Adjustment and Other (Deficit)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $614.4 $2.0 $312.7 $0.0 $(129.6) $(107.9) $(223.1) $468.5
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss (256.3) (256.3)
Cash dividends - preferred (76.8) (76.8)
Translation adjustments 102.4 102.4
Minimum pension liability adjustment (1.3) (1.3)
Note receivable from Wise transaction (34.2) (34.2)
Options sold to parent 44.0 (44.0) 0.0
Parent notes receivable from Foods
transaction (345.9) (345.9)
Interest accrued on notes from parent 8.7 (19.5) (10.8)
Common stock dividend (16.5) (16.5)
Capital contribution from parent 31.0 31.0
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $614.4 $2.0 $379.9 $(443.6) $(27.2) $(109.2) $(556.2) $(139.9)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated and Combined Financial Statements
32
<PAGE> 33
COMBINED STATEMENTS OF OPERATIONS
BORDEN, INC. AND AFFILIATES
<TABLE>
<CAPTION>
Year Ended
(In millions) December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 5,765.1 $ 5,944.0 $ 6,261.4
Cost of goods sold 3,933.8 4,119.9 4,221.5
--------- --------- ---------
Gross margin 1,831.3 1,824.1 2,039.9
--------- --------- ---------
Distribution expense 354.9 367.2 416.1
Marketing expense 990.3 1,013.3 1,136.7
General & adminstrative expense 282.2 444.9 429.3
(Gain) loss on divestiture (55.9) 245.1 (59.3)
Impairment loss 8.2 292.7
Restructuring (reversal) expense (10.8) 15.1
--------- --------- ----------
Operating income (loss) 259.8 (243.8) (190.7)
--------- --------- ----------
Interest expense 116.4 140.2 143.4
Minority interest 2.7 16.2 41.2
Other (income) expense (16.0) 18.1 138.0
--------- --------- ----------
Income (loss) from continuing operations
before income taxes 156.7 (418.3) (513.3)
Income tax expense 74.8 24.2 52.9
--------- --------- ----------
Income (loss) from continuing operations 81.9 (442.5) (566.2)
--------- --------- ----------
Discontinued operations:
Income from operations 8.8 27.2
Income (loss) from disposal 67.6 (58.7)
--------- --------- ----------
Net income (loss) 81.9 (366.1) (597.7)
Preferred stock dividends (76.8) (58.8)
--------- --------- ----------
Net income (loss) applicable to common stock $ 5.1 $ (424.9) $ (597.7)
========= ========= ==========
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated and Combined Financial Statements
33
<PAGE> 34
COMBINED BALANCE SHEETS
BORDEN, INC. AND AFFILIATES
<TABLE>
<CAPTION>
Year Ended
(In millions) December 31, 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 160.2 $ 146.2
Accounts receivable (less allowance for doubtful
accounts of $23.0 and $24.8, respectively) 549.9 660.1
Inventories:
Finished and in-process goods 286.5 336.2
Raw materials and supplies 142.3 184.1
Deferred income taxes 202.3 102.9
Other current assets 82.4 149.3
---------- ---------
1,423.6 1,578.8
---------- ---------
INVESTMENTS AND OTHER ASSETS
Investments in and advances to affiliated companies 106.8 36.7
Deferred income taxes 267.9 308.2
Other assets 106.9 110.2
---------- ---------
481.6 455.1
---------- ---------
PROPERTY AND EQUIPMENT
Land 75.9 93.6
Buildings 441.0 562.4
Machinery and equipment 1,504.3 1,968.7
---------- ---------
2,021.2 2,624.7
Less accumulated depreciation (1,116.1) (1,465.8)
---------- ---------
905.1 1,158.9
---------- ---------
INTANGIBLES
(Net of accumulated amortization of $201.5 and $210.5, respectively) 495.7 616.4
---------- ---------
TOTAL ASSETS $ 3,306.0 $ 3,809.2
========== =========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated and Combined Financial Statements
34
<PAGE> 35
COMBINED BALANCE SHEETS
BORDEN, INC. AND AFFILIATES
<TABLE>
<CAPTION>
Year Ended
(In millions) December 31, 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Debt payable within one year $ 421.8 $ 140.4
Accounts and drafts payable 412.5 478.7
Income taxes 304.0 218.8
Other current liabilities 671.9 780.3
---------- ----------
1,810.2 1,618.2
---------- ----------
OTHER LIABILITIES
Long-term debt 582.4 1,211.8
Non-pension postemployment benefit obligations 308.2 331.8
Other long-term liabilities 95.3 145.9
Minority interest 14.5 33.0
---------- ----------
1,000.4 1,722.5
---------- ----------
Commitments and Contingencies (Note 17)
SHAREHOLDERS' EQUITY
Preferred stock 614.4 614.4
Common stock 2.0 2.0
Paid in capital 683.1 312.7
Receivable from parent (443.6)
Affiliate's interest in subsidiary 87.9
Accumulated translation adjustment (121.2) (129.6)
Minimum pension liability and other (109.2) (107.9)
Accumulated deficit (218.0) (223.1)
---------- ----------
495.4 468.5
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,306.0 $ 3,809.2
========== ==========
- ----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated and Combined Financial Statements
35
<PAGE> 36
COMBINED STATEMENTS OF CASH FLOWS
BORDEN, INC. AND AFFILIATES
<TABLE>
<CAPTION>
Year Ended
(In millions) December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income (loss) $ 81.9 $ (366.1) $ (597.7)
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Reversal of reserve for disposal of discontinued operations (98.3)
Depreciation and amortization 155.4 156.6 193.3
(Gain) loss on divestiture, net (55.9) 245.1 94.7
Unrealized (gain) loss on interest rate swap (12.1) 35.9
Loss on sale of investment 22.0
Impairment losses 8.2 292.7
Restructuring (9.6) (52.5) (56.9)
Sale of receivables (150.0)
Trade receivables (14.8) 6.7 (40.8)
Inventories (16.1) 10.3 (44.4)
Trade payables 21.7 (27.0) 49.7
Current and deferred taxes 37.6 8.9 24.0
Other assets 51.8 129.5 74.8
Other liabilities (82.2) (4.7) (12.4)
Discontinued operations, working capital 7.7 (69.7)
--------- ---------- ---------
157.7 82.3 (242.7)
--------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment in RJR Holdings 282.1
Capital expenditures (265.2) (202.5) (150.4)
Proceeds from the divestiture of businesses 500.2 7.4 409.1
Purchase of businesses (7.0)
--------- ---------- ---------
235.0 80.0 258.7
--------- ---------- ---------
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES
Net short-term debt payments (19.7) (191.5) (84.1)
Repayment of long-term debt (281.1) (436.1) (492.6)
Long-term debt financing 3.1 615.8
Issuance of minority interest 15.0
Purchase of TMI interest (19.2) (471.5)
Equity contribution 3.8 994.7
Dividends paid (77.5) (43.4) (35.6)
Issuance of stock under stock options and benefits
and awards plans 3.3 5.5
--------- ---------- ---------
(378.7) (141.4) 9.0
--------- ---------- ---------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE> 37
COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)
BORDEN, INC. AND AFFILIATES
<TABLE>
<CAPTION>
Year Ended
(In millions) December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase in cash and equivalents 14.0 $ 20.9 $ 25.0
Cash and equivalents at beginning of year 146.2 125.3 100.3
------- ------- -------
Cash and equivalents at end of year $ 160.2 $ 146.2 $ 125.3
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest $ 83.1 $100.8 $144.0
Income taxes 37.2 51.7 8.0
Non-cash activity:
Reclassification of note from long-term to short-term 305.3
Proceeds relating to the Wise stock sale 34.2
Proceeds relating to the Foods stock sale 264.9
Proceeds from sale of interest in subsidiary to affiliate 81.0
Proceeds from the sale of options recorded in equity 44.0
Investment in AEPI common stock 80.0
Capital contribution by parent 31.0
Proceeds from sale of European bakery
and Spanish food company 30.1
Investment in RJR Holdings stock $ 281.1
Treasury stock issued to KKR affiliates 309.5
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated and Combined Financial Statements
37
<PAGE> 38
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
BORDEN, INC. AND AFFILIATES
(In millions, except per right data)
<TABLE>
<CAPTION>
Minimum
Preferred Common Treasury Paid In Accumulated Pension Retained Total
Stock Stock Stock Capital Translation Liability Earnings
Adjustment and Other (Deficit)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 0.0 $121.9 $(532.6) $88.1 $ (173.6) $ (95.5) $835.1 $243.4
- -----------------------------------------------------------------------------------------------------------------------------------
Stock issued for preferred Series B
converted, exercised options
and benefits and award plans 3.7 1.8 5.5
Treasury stock issued to KKR affiliates 279.4 30.1 309.5
Translation adjustments 33.2 33.2
Minimum pension liability adjustment (11.8) (11.8)
Valuation allowance - securities (38.1) (38.1)
Net loss (597.7) (597.7)
Cash dividends - common (33.2) (33.2)
Stock rights redemption payment,
$0.01 2/3 per right (2.4) (2.4)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $ 0.0 $121.9 $(249.5) $120.0 $(140.4) $(145.4) $201.8 $(91.6)
- -----------------------------------------------------------------------------------------------------------------------------------
Issuance of series A cumulative
preferred shares 614.4 (614.4) 0.0
Cancellation of common shares (121.9) 121.9 0.0
Issuance of new common shares 2.0 2.0
Cancellation of treasury shares 245.4 (245.4) 0.0
Stock issued for preferred Series B
converted, exercised options
and benefits and award plans 4.1 2.2 6.3
KKR additional capital contribution 928.4 928.4
Translation adjustments 10.8 10.8
Minimum pension liability adjustment (0.6) (0.6)
Valuation allowance - securities 38.1 38.1
Net loss (366.1) (366.1)
Cash dividends - preferred (58.8) (58.8)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $614.4 $2.0 $0.0 $312.7 $(129.6) $(107.9) $(223.1) $468.5
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 39
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
BORDEN, INC. AND AFFILIATES
(In millions)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Minimum
Preferred Common Paid In Receivable Affiliate's Accumulated Pension Retained Total
Stock Stock Capital from Interest In Translation Liability Earnings
Parent Sub. Adjustment and Other (Deficit)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $614.4 $2.0 $312.7 $0.0 $0.0 $(129.6) $(107.9) $(223.1) $468.5
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 81.9 81.9
Cash dividends - preferred (76.8) (76.8)
Translation adjustments 8.4 8.4
Minimum pension liability adjustment (1.3) (1.3)
Note receivable from Wise for stock
issuance 34.2 (34.2) 0.0
Options sold to parent 44.0 (44.0) 0.0
Notes receivable from Foods
transaction (345.9) (345.9)
Issuance of Foods common stock 264.9 264.9
Interest accrued on notes from parent 12.8 (19.5) (6.7)
Cash dividends - common stock (16.5) (16.5)
Capital contribution from parent 31.0 31.0
Affiliate's interest in subsidiary 87.9 87.9
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $614.4 $2.0 $683.1 $(443.6) $87.9 $(121.2) $(109.2) $(218.0) $495.4
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated and Combined Financial Statements
39
<PAGE> 40
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in millions except per share data)
1. BACKGROUND
In September 1994, Borden, Inc. (the "Company", the "Registrant") entered into a
merger agreement providing for the acquisition of all of the Company's
outstanding common stock by an affiliate of Kohlberg Kravis Roberts & Co.
("KKR"), (the "Acquisition"). The Acquisition was completed on March 14, 1995.
An affiliate of KKR owns 100% of the Company's outstanding common stock. The
Company is a Registrant under the Securities and Exchange Commission Rules and
Regulations as a result of public debt outstanding prior to the Acquisition and
therefore elected not to apply push-down accounting in its consolidated
financial statements.
At the time of the Acquisition, the Company's principal lines of business
included international and domestic food operations ("Foods") and a salty snacks
business ("Wise") as well as those described in Note 2, below, under Nature of
Operations. In 1995, the Company announced that it was considering the possible
sale of Wise and Foods to affiliates of BW Holdings LLC ("BWHLLC"), an affiliate
of the Company's parent. Subsidiaries of BWHLLC, Wise Holdings, Inc. ("Wise
Holdings") and Borden Foods Holdings Corporation ("Foods Holdings") purchased
Wise and Foods on July 2, 1996 and October 1, 1996, respectively (See Notes 4
and 5, respectively). As a result of these sales, Wise and Foods, as of their
respective sale dates, are no longer legally part of Borden, Inc. (the
"Registrant") on a consolidated basis. However, management of the Registrant
will continue to exercise significant operating and financial control over Wise
and Foods. In addition, Wise Holdings and Foods Holdings provide financial
guarantees to obligations under the Company's credit facility and all of the
Company's outstanding publicly held debt. Because of the aforementioned control
and guarantees, the Company has included, supplementally in this filing,
combined financial statements of Borden, Inc. and Affiliates (the "Combined
Companies") which present the financial condition and results of operations and
cash flows of the Company combined with the financial condition and results of
operations and cash flows of Wise and Foods. The Combined Companies financial
statements do not reflect push-down accounting and therefore present financial
information on a basis consistent with that upon which credit was originally
extended to the Company.
The consolidated and combined financial statements for the years ended December
31, 1994 and 1995 are the same as previously reported except for the
reclassification of the Foods results of operations and cash flows to
discontinued operations in the consolidated statements of operations and cash
flows.
2. NATURE OF OPERATIONS
The Company is engaged primarily in manufacturing, processing, purchasing and
distributing a broad range of products worldwide. The Company's principal lines
of business are dairy, chemical and decorative products. The chemical business
represents the largest line based on sales, identifiable assets and operating
income. The Combined Companies include the Foods and Wise businesses which are
engaged primarily in manufacturing, processing and distributing food products.
Domestic products for the dairy line of business are marketed primarily to
retail stores, and to a lesser extent, directly to wholesalers, through
distributors, and to institutions and government agencies. Domestic products for
the other lines of business are sold throughout the United States and Puerto
Rico to industrial users and, in the case of consumer products, by in-house and
independent sales forces to distributors, wholesalers, jobbers and retailers. To
the extent practicable, international distribution techniques parallel those
used in the United States and are concentrated in Western Europe, South America
and the Far East. The Foods and Wise products, included in the Combined
Companies, are marketed primarily through food brokers and distributors.
Approximately half of the Company's and the Combined Companies' manufacturing
and processing facilities are located in the United States and the other half
are located in Europe and other foreign countries. However, the Company's and
the Combined Companies products are predominantly sold in the United States. The
majority of the identifiable assets of the Company and the Combined Companies
are also located in the United States.
40
<PAGE> 41
The Company sold its packaging and plastic films business on October 11, 1996
and its European bakery business on December 18, 1996.
Information about the Company's industry and geographic segments is provided on
pages 4 to 9 and is an integral part of the Consolidated and Combined Financial
Statements.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed by the Company, as summarized below,
are in conformity with generally accepted accounting principles. The Combined
Companies' policies are consistent with those of the Company.
PRINCIPLES OF CONSOLIDATION AND COMBINATION - The consolidated financial
statements include the accounts of Borden, Inc. and its subsidiaries, after
elimination of material intercompany accounts and transactions. The combined
financial statements include the accounts of Borden, Inc., Foods and Wise, after
the elimination of material intercompany accounts and transactions. The
Company's proportionate share of the net earnings of unconsolidated 20% to 50%
owned companies is included in income. The carrying value in excess of the
applicable reporting entity's interest in the companies' underlying net assets
is amortized to reduce its proportionate share of net earnings. Investments of
less than 20% ownership are carried at cost.
USE OF ESTIMATES - 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 date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates included in the financial statements
include valuation of the Foods and Wise businesses, reserves for losses on
disposals of certain operations, valuation allowance for deferred tax assets and
general insurance liabilities. Other significant estimates include accruals for
trade promotion, litigation and environmental remediation. Actual results could
differ from those estimates.
CASH AND EQUIVALENTS - The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents. The effect of exchange rate changes on cash flows is not material.
INVENTORIES - Inventories are stated at the lower of cost or market. Cost is
determined using the average cost and first-in, first-out methods.
PROPERTY AND EQUIPMENT - Land, buildings and machinery and equipment are carried
at cost. Depreciation is recorded on the straight-line basis by charges to costs
and expenses at rates based on estimated useful lives of properties (average
rates for buildings 2.9%; machinery and equipment 6.0%). Major renewals and
betterments are capitalized. Interest costs for the Company and the Combined
Companies aggregating $2.0, $1.5 and $0.6 for the years ended December 31, 1996,
1995 and 1994, respectively, for the purchase and construction of long-term
assets were capitalized and are being amortized over the respective useful lives
of the related assets. Maintenance, repairs and minor renewals are expensed as
incurred.
INTANGIBLES - The excess of purchase price over net tangible assets of
businesses acquired ("goodwill") is carried as intangibles in the consolidated
balance sheets. It is the Company's policy to carry goodwill arising prior to
November 1, 1970 at cost, while goodwill arising after that date is amortized on
a straight-line basis over not more than forty years. Also included in
intangibles are certain trademarks, patents and other intangible assets used in
the operations of the businesses which amounted to $14.1 and $34.5 ($33.6 and
$34.5 for the Combined Companies) at December 31, 1996, and 1995, respectively.
These intangibles are amortized on a straight-line basis over the shorter of the
legal or useful life of the asset.
IMPAIRMENT - The Company periodically evaluates the recoverability of property,
equipment, and intangibles by assessing whether the carrying value can be
recovered over its remaining useful life through expected future undiscounted
operating cash flows of the underlying business. Any impairment loss required is
determined by comparing the carrying value of the asset to operating cash flows
on a discounted basis.
41
<PAGE> 42
REVENUE RECOGNITION - Revenues are recognized when products are shipped.
ADVERTISING AND PROMOTION EXPENSE - Production costs of future media advertising
are deferred until the advertising occurs. All other advertising costs are
expensed when incurred. Promotional expenses are generally expensed ratably over
the year in relation to revenues or other performance measures.
GENERAL INSURANCE - The Company and the Combined Companies are generally
self-insured for losses and liabilities relating to workers' compensation,
health and welfare claims, physical damage to property, business interruption
and comprehensive general, product and vehicle liability. Losses are accrued for
the estimated aggregate liability for claims incurred using certain actuarial
assumptions followed in the insurance industry and experience.
FOREIGN CURRENCY TRANSLATIONS - Assets and liabilities of foreign affiliates,
other than those located in highly inflationary economies, are translated at the
exchange rates in effect at the balance sheet date and the related translation
adjustments are reported as a component of shareholders' equity. Income and
expenses are translated at average exchange rates prevailing during the year.
For entities in highly inflationary countries; a combination of current and
historical rates is used in translating assets and liabilities. Related exchange
adjustments are included in net income.
The Company and the Combined Companies incurred realized and unrealized net
foreign exchange losses aggregating $1.2 and $1.9, respectively in 1996. The
Company and the Combined Companies realized and unrealized net foreign exchange
losses aggregated $1.0 and $20.1 in 1995 and 1994, respectively. The 1994 losses
were principally attributable to foreign exchange losses in Brazil.
INCOME TAXES - Income tax is based on reported results of operations before
income taxes. Deferred income taxes reflect the temporary difference between
amounts of assets and liabilities recognized for financial reporting purposes
and such amounts recognized for tax purposes. Deferred tax balances are adjusted
to reflect tax rates, based on current tax laws that will be in effect in the
years in which temporary differences are expected to reverse. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company uses two principal types of
derivatives: interest rate swaps (which effectively convert a portion of the
Company's variable rate obligations to fixed) and forward exchange contracts
(which reduce the Company's cash flow exposure to changes in foreign exchange
rates). The Company enters into interest rate swaps to lower funding costs or to
alter interest rate exposures between fixed and floating rates on long-term
debt. Under interest rate swaps, the Company agrees with other parties to
exchange, at specific intervals, the difference between fixed rate and floating
rate interest amounts calculated by reference to an agreed notional principal
amount. Interest rate swaps that are in excess of outstanding obligations are
marked to market through other income and expense. The fair value of forward
exchange contracts that hedge firm third party commitments are deferred and
recognized as part of the underlying transactions as they occur, those that
hedge existing transactions are recognized in income currently, and offset gains
and losses of transactions being hedged.
In addition to the above the Combined Companies use commodity futures contracts
to hedge the price risks associated with raw materials used in production,
commitments and certain transactions. The Combined Companies defer the impact of
changes in the market value of these contracts until the hedged transaction is
completed. Changes in market value of the commodity futures contracts are
included in the measurement amounts of qualifying subsequent purchases of raw
materials. The Combined Companies do not enter into these contracts for
speculative purposes. These contracts generally mature in less than one year.
EARNINGS PER SHARE - Earnings per common share are computed based on the
weighted average number of common shares outstanding.
CONCENTRATIONS OF CREDIT RISK - Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of temporary
cash investments and accounts receivable. The Company places its temporary cash
42
<PAGE> 43
investments with high quality institutions and, by policy, limits the amount of
credit exposure to any one institution. Concentrations of credit risk with
respect to accounts receivable are limited, due to the large number of customers
comprising the Company's customer base and their dispersion across many
different industries and geographies. The Company generally does not require
collateral or other security to support customer receivables.
RECENTLY ISSUED ACCOUNTING STATEMENT - In 1996, the American Institute of
Certified Public Accountants issued Statement of Position 96-1, "Environmental
Remediation Liabilities", which requires adoption no later than fiscal years
beginning after December 15, 1996. The new statement provides additional
guidance on the recognition of expenses relating to environmental liabilities.
Management believes the new statement will not materially impact the Company's
results of operations or cash flows.
RECLASSIFICATION - Certain prior year amounts have been reclassified to conform
with the 1996 presentation.
4. ASSET DIVESTITURES
In 1995 the Company began the process of redesigning its operating structure. As
a result of this redesign, management decided to divest certain businesses that
did not fit into the Company's long-term strategic plan. Businesses included in
this classification, "businesses held for sale," were the packaging and plastic
films business, certain other non-food operations and the equity interest in a
Spanish food company. In 1996, management made a definitive decision to sell its
European bakery and Wise businesses. These operations were reclassified to
businesses held for sale in the consolidated and combined financial statements.
During the first quarter of 1996, the Company sold its remaining equity interest
in the Spanish food company for $139.9 resulting in a pretax gain of $82.9
($42.1 net of tax).
On July 2, 1996, the Company sold Wise to Wise Holdings for $45.0. The purchase
price of the business was determined based upon an independent valuation by an
investment banking firm. The proceeds consisted of $34.2 of notes receivable
from the Company's parent, which are recorded as a reduction of equity, a $10.1
note receivable from Wise and $0.7 in cash. The excess of the book value over
the proceeds of $16.7 has been recorded as a loss on divestiture in the
consolidated financial statements.
Because management of the Company exercises significant control over the salty
snacks business, the assets and liabilities of Wise, at the date of sale, are
classified as "sold under contractual arrangements" in the consolidated
financial statements. In addition, any future losses incurred by Wise will be
recorded in the consolidated financial statements to the extent of the Company's
net investment in Wise. The Company's net investment in Wise as of December 31,
1996 was $10.2. The Combined Companies continue to report Wise at the Company's
historical values since Wise remains a member of the controlled group and since
in management's best estimate, future operating cash flows from Wise are
expected to exceed the historical carrying value of the business.
On October 11, 1996, the Company completed the sale of its packaging and plastic
films business, to AEP Industries Inc. ("AEPI"). The purchase price consisted of
$263.0 in cash and 2,412,818 shares of newly issued AEPI common stock valued at
$80.0 (approximately 34% of AEPI), its value at June 30, 1996, the date of the
definitive agreement.
On December 18, 1996, the Company sold its European bakery business. Proceeds
consisted of $99.4 in cash and $17.4 in a note receivable. The related gain on
the sale was not material. The note, due on June 30, 1998, has graduated
interest rates ranging from 7.5% to 12.5%, payable quarterly.
In December 1996 management approved the closure of certain domestic Foods
plants in 1997, which are not aligned with the Combined Companies' strategy.
Accordingly, $26.0 has been provided to write down the facilities to their net
realizable value. Management anticipates approximately $12.0 in additional cash
charges in 1997 related to these closures.
43
<PAGE> 44
5. DISCONTINUED OPERATIONS
On October 1, 1996, the Company sold Foods to Foods Holdings for $527.1.
Proceeds consisted of $354.8 of receivables and accrued interest from the
Company's parent recorded as a reduction of shareholders' equity, a note
receivable from Foods Holdings for $167.0, and cash of $5.3. The purchase price
of the business was determined based upon a valuation by an investment banking
firm. Foods management is evaluating and redesigning its current portfolio of
businesses. In connection with this redesign the valuation and the purchase
price may be reevaluated.
The loss on disposal of $330.7 including the excess of the book value over the
proceeds of $166.6, a tax effect of $67.2, and a write-off of the accumulated
translation adjustment of $96.9 has been recorded as a loss from discontinued
operations in the consolidated financial statements. Since Foods remains a
member of the controlled group and because management's best estimate of future
operating cash flows from Foods is expected to exceed the historical carrying
value of the business, no loss was incurred in the Combined Companies' financial
statements.
Because management of the Company exercises significant control over the Foods
business the assets and liabilities of Foods at the date of sale are classified
as "sold under contractual arrangements" in the consolidated financial
statements. In addition, any future losses incurred by Foods will be recorded in
the consolidated financial statements to the extent of the Company's net
investment in Foods. The Company's net investment in Foods as of December 31,
1996 was $247.9.
In 1993 the Company announced a program to divest the North American snacks
operations, seafood, jams and jellies, and various other businesses. During 1995
management made the decision to retain the remaining businesses classified as
discontinued operations and reversed the remaining reserve for loss on disposal,
resulting in pretax income from disposal of $98.3 ($67.6 net of tax).
The operating losses relating to the businesses in this program that were
retained by the Company and the Combined Companies and were previously
classified as discontinued operations have been reclassified to continuing
operations with an offsetting net of tax credit in income from discontinued
operations of $8.8 ($14.5 pretax) for the year ended December 31, 1995, and
$27.2 ($43.9 pretax) in 1994.
The December 1995 Consolidated Balance Sheets and Consolidated Statements of
Cash Flows for the years ended December 31, 1995 and 1994 have been reclassified
to reflect the decision to retain these businesses.
The results indicated below for the businesses divested have been reported
separately as discontinued operations in the consolidated statements of
operations.
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,376.5 $1,836.2 $1,988.0
(Loss) income before income taxes (19.5) (49.6) 101.4
Income tax (benefit) expense (18.4) (9.3) 46.0
Net (loss) income from discontinued operations (1.1) (40.3) 55.4
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
6. INVESTMENTS
As discussed in Note 4, on October 11, 1996, Borden sold its packaging and
plastic films business to AEPI. Proceeds included common stock of AEPI valued at
$80.0 at the transaction date. AEPI is a manufacturer of a wide range of plastic
film products which are used in a number of industrial, commercial and
agricultural applications and are sold throughout the United States, Europe and
the Far East. The investment balance was $81.5 at December 31, 1996, which
represents 2.4 million shares of AEPI common stock or 34% ownership.
44
<PAGE> 45
At December 31, 1996, the unamortized excess of the Company's investments over
its equity in the underlying net assets of AEPI was $46.3. Amortization is over
40 years and is included as a reduction of equity earnings of AEPI.
At December 31, 1994, the Company owned 51,106,768 common shares of RJR
Holdings with an aggregate cost of $309.5, which were classified as available
for sale and were marked to market at $281.1. An additional 179,940,461 shares
of RJR Holdings were contribued during the first quarter of 1995. In the first
quarter 1995 the Company sold all of its 231,047,229 shares of RJR Holdings
stock. The sale resulted in a pretax loss of $22.0.
45
<PAGE> 46
7. DEBT, LEASE OBLIGATIONS AND RELATED COMMITMENTS
Debt outstanding at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------- ----------------------------
Due within Due within
(In millions) Long-Term One Year Long-Term One Year
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Borrowings under credit line (at 6.9%
and 6.8%, respectively) $ 245.0
9 7/8% Notes due 1997 $ 78.1 78.1
Medium Term Notes, Series A
(at an average rate of
8.0% and 7.9%, respectively) 26.5 26.5 $40.0
Zero-Coupon Convertible Bonds due 2002 (1) 305.3 288.5
9.2% Debentures due 2021 $117.1 117.1
7.875% Debentures due 2023 250.0 250.0
Sinking fund debentures:
8 3/8% due 2016 78.5 78.5
9 1/4% due 2019 48.7 48.7
Industrial Revenue Bonds (at an
average rate of 8.4% for both years) 54.2 0.3 54.6 0.3
Other (at an average rate
of 8.5% and 7.4%, respectively) 19.3 0.1 24.8 9.5
- -------------------------------------------------------------------------------------------------------------------------------
Total current maturities
of long-term debt 410.3 49.8
Short-term debt (primarily foreign bank loans
at an average rate of 6.7% and 6.4%,
respectively) 3.7 90.6
- -------------------------------------------------------------------------------------------------------------------------------
Total debt - Consolidated $ 567.8 $414.0 $1,211.8 $140.4
- -------------------------------------------------------------------------------------------------------------------------------
Other Foods debt (at an average rate of 8.2%) 14.6 0.1
Foods short-term debt (primarily foreign bank
loans at an average rate of 9.5%) 7.7
- -------------------------------------------------------------------------------------------------------------------------------
Total debt - Combined $ 582.4 $421.8 $1,211.8 $140.4
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The zero-coupon bonds due 2002 are included in 1997 maturities at $305.3,
due to a put option to the Company in that year, which management
believes will be exercised.
In connection with the Acquisition, the Company re-negotiated an existing
agreement and entered into a new five year $2.075 billion Credit Agreement,
dated December 15, 1994, (the "Credit Agreement") with certain financial
institutions for whom Citibank is the Administrative Agent. The Credit Agreement
was amended on June 7, 1995, to reduce the amount available to $1.2 billion
including letters of credit, eliminate requirements for collateral and provide
for more favorable pricing terms. It was further amended and restated on May 7,
1996, to include provisions to allow for the sale of certain business units to
affiliates of the Company provided that entities of such business units become
guarantors of the Company's obligations under the Credit Agreement. Borrowing
rates under the Credit Agreement are a function of the Company's senior debt
ratings as reported by Moody's and Standard and Poors and the type of borrowing.
As of
46
<PAGE> 47
December 31, 1996, the applicable margins for LIBOR and Base Rate borrowings
were 1.25% and 0.50%, respectively. At December 31, 1996, there were no
borrowings outstanding under the Credit Agreement. Provisions under the Credit
Agreement require Foods Holdings and Wise Holdings to guarantee the Company's
obligations under the Credit Agreement.
The Credit Agreement, as amended, contains covenants that significantly limit or
prohibit, among other things, the Company's and its subsidiaries' ability to
incur indebtedness, make prepayments of certain indebtedness, pay dividends,
make investments, engage in transactions with affiliates, create liens, make
changes in its businesses or control of the Company, sell assets, engage in
mergers and consolidations and limits the uses of proceeds from asset sales and
certain debt and equity issuances. In addition, the Credit Agreement requires
that the Company limit its capital expenditures to certain specified amounts and
maintain other financial ratios, including a minimum ratio of EBITDA (Earnings
Before Interest, Taxes, Depreciation and Amortization) to interest expense and a
maximum ratio of total debt to EBIDTA.
As of December 31, 1996, the Company and the Combined Companies were in
compliance with the covenants.
Aggregate maturities of total debt and minimum annual rentals under operating
leases at December 31, 1996, for the Company and the Combined Companies are as
follows:
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
--------------------------------------- -----------------------------------------
MINIMUM RENTALS UNDER MINIMUM RENTALS UNDER
DEBT OPERATING LEASES DEBT OPERATING LEASES
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 $414.0 $21.7 $ 421.8 $30.1
1998 0.6 17.5 2.0 23.1
1999 11.6 13.9 13.0 17.7
2000 11.5 8.8 12.2 12.0
2001 1.1 6.7 1.7 8.6
2002 and thereafter 543.0 20.0 553.5 21.4
----- -----
$981.8 $1,004.2
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company had $1,086.1 available for borrowing under its five year credit
agreement at December 31, 1996, and incurred $3.3 of commitment fees during
1996.
8. INCOME TAXES
Comparative analysis of the Company's provision (benefit) for income taxes from
continuing operations follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED
------------------------------ ---------------------------------
1996 1995 1994 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal $ 3.2 $(70.8) $(81.6) $ 33.8 $ 71.5 $ 82.4
State and Local 3.4 2.3 (3.3) 6.0 0.0 11.4
Foreign 59.4 31.5 31.7 (25.6) 4.6 (17.0)
------- ------ ------ ------ ------ ------
$ 66.0 $(37.0) $(53.2) $ 14.2 $ 76.1 $ 76.8
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The income tax expense (benefit) from discontinued operations' loss on disposal
was $67.2, $30.7 and $(36.0) in 1996, 1995 and 1994, respectively.
The Combined Companies' provision (benefit) for income taxes from continuing
operations are as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED
------------------------------ ----------------------------------
1996 1995 1994 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal $ 70.9 $(91.8) $(53.8) $(43.2) $ 66.1 $ 71.1
State and Local 1.4 2.3 0.6 6.0 0.0 9.8
Foreign 67.3 41.5 41.5 (27.6) 6.1 (16.3)
------- ------ ------ ------ ------ ------
$139.6 $(48.0) $(11.7) $(64.8) $ 72.2 $ 64.6
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The income tax expense (benefit) from discontinued operations' loss on disposal
was $30.7 and $(36.0) in 1995 and 1994, respectively.
47
<PAGE> 48
Reconciliations of the Company's and the Combined Companies' differences between
income taxes computed at Federal statutory tax rates and provisions (benefits)
for income taxes are as follows:
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
-------------------------------- -------------------------------
(Dollars in millions) 1996 1995 1994 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income taxes computed at
Federal statutory tax rate $ 54.5 $(124.0) $(199.8) $ 54.9 $(146.4) $(179.6)
State tax provision, net of
Federal benefits 6.1 1.5 5.7 4.8 1.5 6.7
Foreign tax differentials 3.7 10.6 (1.0) 3.0 12.6 (1.7)
Foreign source income subject
to U.S. taxation 3.8 32.1 3.8 32.0
Write-offs of assets with lower
tax bases and differences
in tax rates 15.0 63.9 67.2 10.9 69.2 75.8
Losses and merger and other
expenses not deductible for tax 0.9 7.3 46.4 1.2 7.5 46.6
Adjustment of prior estimates (12.0) 55.5 (12.0) 55.6
Unrepatriated foreign earnings 88.0 17.5 88.0 17.5
Other - net
- ----------------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 80.2 $ 39.1 $ 23.6 $ 74.8 $ 24.2 $ 52.9
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The domestic and foreign components of the Company's and the Combined Companies'
income (loss) from continuing operations before income taxes are as follows:
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
--------------------------------- ---------------------------------
(Dollars in millions) 1996 1995 1994 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic $ 68.7 $(442.3) $(623.6) $ 46.2 $(525.1) $(596.2)
Foreign 87.0 88.0 52.8 110.5 106.8 82.9
------ ------- ------- ------ ------- -------
$155.7 $(354.3) $(570.8) $156.7 $(418.3) $(513.3)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The net current and non-current components of the Company's and the Combined
Companies' deferred income taxes recognized in the balance sheets at December
31, 1996 and 1995 follow:
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
------------------- -------------------
(Dollars in millions) 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net current asset $176.5 $ 99.7 $199.3 $ 99.7
Net non-current asset 201.1 278.3 259.9 278.3
------ ------ ------ ------
Net asset $377.6 $378.0 $459.2 $378.0
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE> 49
The tax effects of the Company's and the Combined Companies' significant
temporary differences and loss and credit carryforwards which comprise the
deferred tax assets and liabilities at December 31, 1996 and 1995 follow:
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
---------------------- ---------------------
(Dollars in millions) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Non-pension post-employment benefit
obligations $113.7 $136.0 $113.7 $136.0
Restructuring and other reserves 8.8 8.8
Divestiture reserve 46.2 30.3 46.2 30.3
Accrued and other expenses 197.4 58.9 218.4 58.9
Foreign property, plant and equipment 7.0 19.5 5.1 19.5
Minimum pension liability 9.1 69.0 9.1 69.0
Loss and credit carryforwards 140.7 362.8 147.3 362.8
Dairy impairment 41.7 56.5 41.7 56.5
Other prepaids 54.9 39.5 158.3 39.5
------- ------- ------- -------
Gross deferred tax assets 610.7 781.3 739.8 781.3
Valuation allowance (25.8) (72.3) (32.4) (72.3)
------- ------- ------- -------
584.9 709.0 707.4 709.0
LIABILITIES
Property, plant, equipment, and intangibles 81.1 158.1 72.8 158.1
Foreign property, plant, equipment/other 30.7 51.6 27.0 51.6
Certain foreign intangibles 9.1 25.5 6.7 25.5
Deferred gain on sale of partnership interest 17.6 17.6 17.6 17.6
Pension and health plan contributions 64.1 43.3 64.1 43.3
Other 4.7 34.9 60.0 34.9
-------- -------- -------- --------
Gross deferred tax liabilities 207.3 331.0 248.2 331.0
- ------------------------------------------------------------------------------------------------------------------------
Net asset $377.6 $378.0 $459.2 $378.0
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The net change in valuation allowance for the Company of $46.5 in 1996 is
primarily related to loss carryforwards that were fully reserved for foreign
operations of the packaging business and the foods business that were sold in
1996. The net change of $3.8 in 1995 and $9.8 in 1994 related to loss
carryforwards of foreign operations which were not expected to be realized.
The net change in valuation allowance for the Combined Companies of $39.9 in
1996 is primarily related to loss carryforwards that were fully reserved for
foreign operations of the packaging business that was sold in 1996. The net
change of $3.8 in 1995 and $9.8 in 1994 related to loss carryforwards of foreign
operation which are not expected to be realized.
The Company's net deferred tax asset at December 31, 1996 was $377.6. Of this
amount $392.9 represent net domestic deferred tax assets related to future tax
benefits. Included in the domestic deferred tax asset is $3.4 of net operating
loss carryforward for U.S. federal tax purposes, which begin expiring in 2010.
Realization of the domestic net operating loss is dependent upon generation of
approximately $8.6 of future income before the expiration date in 2010.
Realization of the entire net deferred tax asset is dependent on generation of
approximately $1,123.0 of future taxable income.
The Combined Companies' net deferred tax asset at December 31, 1996 was $459.2.
Of this amount $470.3 represents net domestic deferred tax assets related to
future tax benefits. Included in the domestic deferred tax asset is $3.4 of net
operating loss carryforward for U.S. federal tax purposes, which begin expiring
in 2010. Realization of the domestic net operating loss is dependent upon
generation of approximately $8.6 of future income before the expiration date in
2010. Realization of the entire net deferred tax asset is dependent on
generation of approximately $1,344.0 of future taxable income.
49
<PAGE> 50
Management believes that it is more likely than not that sufficient additional
income will be earned to fully realize this benefit. This belief is based on an
analysis of the future plans of the Company's and the Combined Companies' owners
and management, the expected future benefits resulting from the 1995 and earlier
restructuring programs, the effect of the divestitures of unprofitable
operations and various cost reduction plans. Management has considered the
limitations on loss carryforwards resulting from the change in ownership of the
Company in reaching this conclusion.
The Company has not recorded income taxes applicable to undistributed earnings
of foreign subsidiaries that are indefinitely reinvested in foreign operations.
Undistributed earnings permanently reinvested amounted to $249.0 at December 31,
1996. The determination of the tax effect relating to such earnings is not
practicable.
The Internal Revenue Service has examined the Company's and the Combined
Companies' tax returns for the period 1989-1993 and has proposed adjustments to
the utilization of certain capital losses. The Company and the Combined
Companies disagree with the position of the Service and are contesting the
proposed adjustments. The Company and the Combined Companies expect that the
ultimate resolution of this matter, after considering amounts already provided,
will not have a material effect on its financial statements.
9. PENSION AND RETIREMENT SAVINGS PLANS
Most U.S. employees of the Company and the Combined Companies are covered under
a noncontributory defined benefit plan ("the Borden, Inc. Plan"). The Borden,
Inc. Plan provides benefits for salaried employees based on eligible
compensation and years of credited service and for hourly employees based on
years of credited service. Certain employees in other countries are covered
under contributory and non-contributory defined benefit foreign plans.
Additionally, eligible salaried and hourly employees may contribute up to 5% of
their pay to the Company's retirement savings plans. (Certain longer service
salaried employees may contribute up to 7% of their pay.) The contributions are
matched at 50% by the Company.
Following are the components of the net pension expense recognized by the
Company:
<TABLE>
<CAPTION>
DOMESTIC FOREIGN
------------------------------------- ------------------------------------
1996 1995 1994 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost-benefits
earned during the period $ 7.9 $ 7.5 $10.3 $ 4.0 $ 4.6 $ 4.3
Interest cost on the projected
benefit obligation 27.6 31.6 30.8 11.9 12.6 10.9
Actual (return) loss on plan assets (26.9) (87.1) 9.2 (13.8) (15.4) (7.1)
Net amortization and deferral (1.2) 56.2 (48.8) 3.3 4.8 (3.6)
------ ------ ----- ------- ------ ------
$ 7.4 $ 8.2 $ 1.5 $ 5.4 $ 6.6 $ 4.5
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
In addition to the net pension expense in 1996, the Company recognized a net
curtailment and settlement gain of $2.2 reflecting the sale of the packaging and
plastic films business and the European bakery business.
There were no material differences in the domestic and foreign net pension
expense between the Company and the Combined Companies.
50
<PAGE> 51
The weighted average rates used to determine net periodic pension expense for
both the Company and the Combined Companies were as follows:
<TABLE>
<CAPTION>
DOMESTIC FOREIGN
------------------------------------- -------------------------------------
1996 1995 1994 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 6.8% 8.8% 7.5% 8.4% 8.9% 8.0%
Rate of increase in future
compensation levels 4.3% 5.3% 4.5% 4.9% 5.3% 4.7%
Expected long-term rate of
return on plan assets 7.8% 9.8% 9.0% 9.6% 10.0% 9.5%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Most employees not covered by the Company's plans are covered by collectively
bargained agreements which are generally effective for five years. Under
Federal pension law, there would be continuing liability to these pension
trusts if the Company ceased all or most participation in any such trust, and
under certain other specified conditions. The consolidated financial statements
included charges of $7.0, $4.1 and $5.1 in 1996, 1995 and 1994, respectively,
for payments to pension trusts on behalf of employees not covered by the
Company's plans. The combined financial statements included charges of $7.3,
$4.1 and $5.1 in 1996, 1995 and 1994, respectively.
The Company's and the Combined Companies' funding of its pension plans equals or
exceeds the minimum funding requirements imposed by Federal and foreign laws and
regulations. There were no material differences in the domestic plans' funded
status between the Company and the Combined Companies. The funded status of the
domestic plans was as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- --------------------
Accumulated Benefits Accumulated Benefits
DOMESTIC PLANS Exceed Plan Assets Exceed Plan Assets
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Plan assets at fair value $ 393.6 $ 400.4
Actuarial present value of:
Vested benefit obligations (391.1) (406.5)
Accumulated benefit obligations (408.6) (424.0)
Projected benefit obligations (408.8) (426.3)
Plan assets (less) than
projected benefit obligation (15.2) (25.9)
Unrecognized prior service cost (benefit) 3.1 (2.1)
Unrecognized loss 182.1 184.5
Unrecognized net transition (asset) (6.6) (9.6)
Minimum liability adjustment (178.3) (170.5)
- -----------------------------------------------------------------------------------------------
Net pension liability $ (14.9) $ (23.6)
- -----------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE> 52
The combined funded status of the foreign plans represents the combined plans
including Foods foreign plans. The funded status of these plans was as follows:
<TABLE>
<CAPTION>
1996 1996
CONSOLIDATED COMBINED 1995
-----------------------------------------------------------------------------------------------
Plan Assets Accumulated Plan Assets Accumulated Plan Assets Accumulated
Exceed Benefits Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed Accumulated Exceed
FOREIGN PLANS Benefits Plan Assets Benefits Plan Assets Benefits Plan Assets
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Plan assets at fair value $117.4 $ 11.1 $ 146.9 $ 13.5 $166.2 $ 15.0
Actuarial present value of:
Vested benefit obligations (99.4) (14.6) (118.7) (18.2) (118.4) (29.8)
Accumulated benefit oblig. (99.0) (14.7) (119.9) (18.7) (121.9) (31.7)
Projected benefit obligations (112.0) (15.0) (133.0) (20.2) (140.4) (34.8)
Plan assets (less) greater than
projected benefit obligation 5.4 (3.9) 13.9 (6.7) 25.8 (19.8)
Unrecognized prior service
cost (benefit) 0.3 0.3 0.3 (0.2) 0.4
Unrecognized loss 14.9 3.9 24.3 4.7 13.3 9.0
Unrecognized net transition
(asset) obligation (0.1) 0.1 (0.1) 0.2 0.1
Minimum liability adjustment (4.6) (4.6) (7.2)
- -----------------------------------------------------------------------------------------------------------------------------------
Net pension asset (liability) $ 20.5 $ (4.2) $ 38.1 $ (6.1) $ 39.0 $ (17.6)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average discount rates and rates of increase in future
compensation levels used in determining the projected benefit obligation for
domestic plans were for consolidated and combined 7.5% and 4.5%, respectively,
as of December 31, 1996, and 6.8% and 4.3%, respectively, as of December 31,
1995. The foreign plans weighted average discount rates and rates of increase
in future compensation levels were 8.2% and 4.7%, respectively as of December
31, 1996 and 8.3% and 4.9%, respectively, as of December 31, 1995. These rates
were the same for both consolidated and combined reporting.
Plan assets consist primarily of equity securities and corporate obligations.
In accordance with SFAS No. 87, the Company recorded an additional minimum
pension liability for underfunded plans, representing the excess of accumulated
benefits over plan assets and accrued pension costs, of $5.2 and $2.8 at
December 31, 1996 and 1995, respectively. This liability, which had no effect on
income, reduced equity by $1.3 and $0.6, net of income taxes, in 1996 and 1995,
respectively.
Charges to operations for matching contributions under the Company's retirement
savings plans in 1996, 1995 and 1994 amounted to $7.6, $16.1, and $9.7,
respectively. Charges to operations for matching contributions under the
Combined Companies retirement savings plans in 1996, 1995 and 1994 amounted to
$10.5, $16.1, and $9.7, respectively.
10. NON-PENSION POSTEMPLOYMENT BENEFITS
The Company provides certain health and life insurance benefits for eligible
domestic retirees and their dependents. The cost of postretirement benefits is
accrued during employees' working careers. Participants who are not eligible for
Medicare are provided with the same medical benefits as active employees, while
those who are eligible for Medicare are provided with supplemental benefits. The
postretirement medical benefits are contributory; the postretirement life
insurance benefit is noncontributory.
52
<PAGE> 53
The components of net postretirement benefit expense for 1996, 1995 and 1994 are
as follows:
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
(Dollars in millions) 1996 1995 1994 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 0.2 $ 1.1 $ 3.4 $ 0.2 $ 1.1 $ 3.4
Interest cost 11.3 13.3 17.9 11.8 13.3 17.9
Net amortization/deferral (13.7) (16.7) (9.6) (13.8) (16.7) (9.6)
- ---------------------------------------------------------------------------------------------------------------------------
Net postretirement (benefit) expense $ (2.2) $ (2.3) $ 11.7 $ (1.8) $ (2.3) $ 11.7
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The status of the Company's and Combined Companies' unfunded postretirement
benefit obligation at December 31, 1996, 1995 and 1994 was as follows:
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
(Dollars in millions) 1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of accumulated postretirement
benefit obligation:
Retirees $(157.1) $(147.7) $(175.1) $(147.7)
Fully eligible active plan participants (1.3) (3.6) (1.7) (3.6)
Other active plan participants (2.2) (27.3) (3.2) (27.3)
- ----------------------------------------------------------------------------------------------------------------------
(160.6) (178.6) (180.0) (178.6)
- ----------------------------------------------------------------------------------------------------------------------
Unrecognized prior service benefit (61.7) (72.7) (61.7) (72.7)
Unrecognized (gain) (46.8) (54.9) (46.5) (54.9)
- ----------------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit liability $(269.1) $(306.2) $(288.2) $(306.2)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The discount rate used in determining the accumulated postretirement benefit
obligation at December 31, 1996 and 1995 was 7.5% and 6.8%, respectively.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation at December 31, 1996 was 9.5% for 1997,
gradually declining to 5.5% by the year 2004. The comparable assumptions for the
prior year were 9.5% and 4.8%. A one percentage point increase in the health
care cost trend rate would increase the accumulated postretirement benefit
obligation of the Company and the Combined Companies as of December 31, 1996, by
$18.0 and the sum of the service and interest costs in 1996 by $1.4.
The Company provides certain other postemployment benefits, primarily medical
and life insurance benefits for long-term disabled employees, to qualified
former or inactive employees.
11. SHAREHOLDERS' EQUITY
Preferred Stock
- ---------------
On June 26, 1995, the Company issued 24,574,751 shares of series A Cumulative
Preferred Stock ("Preferred Stock"). Each share has a liquidation preference of
$25 and is entitled to cumulative dividends at an annual rate of 12%, payable
quarterly in arrears. There are 100,000,000 shares authorized at December 31,
1996. These shares are redeemable, in whole or in part, at the Company's
discretion at any date after June 26, 1998. The redemption price is 107% of the
issuance price in the first twelve months after such date, declining ratably in
each year to par at June 26, 2005.
Common Stock
- ------------
In December, 1994, affiliates of KKR acquired 90,131,307 shares of the Company's
$0.625 par value common stock. Thereafter, affiliates of KKR acquired an
additional 28,138,000 shares of such common stock.
53
<PAGE> 54
The Acquisition was completed on March 14, 1995. On that date all $0.625 par
value common stock, was cancelled and retired. The Company issued $0.01 par
value common stock to affiliates of KKR during 1995. At December 31, 1996 and
1995 common stock consisted of 300,000,000 shares authorized and 198,974,994
shares issued and outstanding.
During 1996 Foods Holdings and Wise Holdings were each capitalized with 100
shares of $0.01 par value common stock.
Other Shareholders' Equity
- --------------------------
In 1994 other shareholders' equity activity consisted primarily of accumulated
translation adjustments and valuation adjustments on investment securities. The
1995 activity included a $928.4 capital contribution from affiliates of KKR, and
the reversal of the valuation allowance on investment securities as the
securities were sold.
During 1996 the Company received notes receivable and accrued interest
receivable from its parent amounting to $399.6 recorded as a charge to equity.
Notes and accrued interest were received as proceeds from Wise Holdings and
Foods Holdings for the Wise and Foods businesses. The principal amount of the
notes is $34.2 and $345.9 with accrued interest amounting to $19.5. Interest is
received quarterly at 12% and the notes mature on September 29, 2005. The
Combined Companies issued capital in Wise and Foods in exchange for the Notes.
The Notes were initially used to capitalize Wise Holdings and Foods Holdings.
On August 16, 1996, the Company sold options valued at $44.0 to BWHLLC. The
options were issued on all of the common stock of Elmer's Holdings, Inc. and
Borden Decorative Products Holdings, Inc. for 110% of the August 16, 1996 fair
market value of the common stock. The options were issued at fair value and
expire in five years. The exercise price of the options is $54.1 for Elmer's
Holdings, Inc. and $108.4 for Borden Decorative Products Holdings, Inc. Proceeds
from the option sale consisted of a $44.0 note receivable from the Company's
parent. The principal amount of the note is $44.0 with interest received
quarterly at 12%. The principal is due September 29, 2005.
The Company declared common stock dividends during the fourth quarter of 1996
amounting to $16.5. The dividends were recorded as a charge to paid-in capital
to reflect a return of capital to the Company's parent.
In addition, $31.0 was recorded as a credit to paid-in capital representing tax
benefits contributed to the Company by its parent. The parent is included in the
Company's tax return and expense relating to the interest accrued on the Notes
was used to decrease the Company's tax liability.
The Combined Companies, in conjunction with the Foods transaction, recorded an
$87.9 credit to affiliate's interest in a subsidiary. The credit represents an
affiliate's minority interest in a 70% owned consolidated subsidiary of Foods.
12. STOCK OPTION PLANS AND OTHER STOCK-BASED COMPENSATION
Subsidiaries and affiliates of the Company and Combined Companies have issued
stock options under their individual stock option plans. Under these plans
equity in the BMG Dairies, Wise, Elmer's, Decorative Products and Chemical
business units were sold to key management personnel. Those participating were
granted fixed stock options to purchase additional shares at an exercise price
of $5. The options were issued at fair value, vest over five years and expire
ten years from the date of the grant. There are 7,157,034 options currently
outstanding among the five companies and 774,610 options available for future
grants.
Effective January 1, 1996 key employees of Foods and Borden, Inc. were offered
units and unit appreciation rights in their respective holding companies. The
unit appreciation rights ("UAR's") vest over five years, and any compensation
expense incurred in conjunction with the UAR's will be charged to the Company or
the Combined Companies. At December 31, 1996 there was no compensation expense
attributable to the UAR's. There were 24,030,800 UAR's outstanding in the
aggregate at December 31, 1996, and 690,160 UAR's available for future grants.
54
<PAGE> 55
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option plan.
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant date for awards in 1996 consistent with the
provisions of Statement of Financial Accounting Standards No. 123, the Company's
net loss and net loss per share would have been reduced to the pro forma amounts
presented below:
<TABLE>
<CAPTION>
1996
- ---------------------------------------------------------------
<S> <C>
Net loss - as reported $ (256.3)
Net loss - pro forma (261.1)
Net loss per share - as reported (1.28)
Net loss per share - pro forma (1.31)
- ---------------------------------------------------------------
</TABLE>
Pro forma net income for the Combined Companies is $77.1.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with risk free interest rates of 5.37% and
expected lives of five years.
Information regarding the 1996 option plans is as follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------------
Shares Weighted Average Price
--------- ----------------------
<S> <C> <C>
Options outstanding, beginning of year 0 $0
Options exercised 0 $0
Options granted 7,177,034 $5.18
Options forfeited (20,000) $5.00
---------- -----
Options outstanding, end of year 7,157,034 $5.18
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about fixed-price stock options at
December 31, 1996:
<TABLE>
<CAPTION>
Range of Fair Value Number Weighted Average Weighted Average Number
Exercise Price at Grant Outstanding Remaining Life Exercise Price Exercisable
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5.00 $ 1.16 6,895,034 4 years $ 5.00 0
$10.00 $ 0.13 262,000 4 years $10.00 0
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
13. DERIVATIVE FINANCIAL INSTRUMENTS
Interest Rate Swaps
- -------------------
The Company enters into interest rate swaps to lower funding costs or to alter
interest rate exposures between fixed and floating rates on long term debt.
Under interest rate swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between fixed rate and floating rate
interest amounts calculated by reference to an agreed notional principal amount.
The notional amount of interest rate swaps was $224.3 and $234.3 at December 31,
1996 and 1995, respectively. These swaps have maturities ranging from 1999 to
2002. The net impact of interest rate swaps was an increase for the Company's
and the Combined Companies' interest expense of $10.7 in 1996, $11.2 in 1995 and
$11.2 in 1994.
55
<PAGE> 56
The following table indicates the types of swaps used by the Company and their
weighted average interest rates. Variable rates change with market conditions
and may vary significantly in the future. The weighted average notional amounts
in 1996 were $224.3 for Receive fixed swaps and $5.8 for Pay fixed swaps. A 1%
increase in market interest rates would result in a $2.1 increase in the fair
value of the interest rate swap agreements. A 1% decline in the interest rates
would result in a $2.1 decrease in the fair value of the interest rate swap
agreements.
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
Receive fixed swaps
Average rate received 8.0% 8.0% 7.9%
Average rate paid 5.7% 6.6% 5.3%
Pay fixed swaps
Average rate paid 10.4% 10.2% 10.1%
Average rate received 5.5% 6.1% 4.6%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
An interest rate swap held by the Company no longer met the criteria for hedge
accounting and was marked to market during the first quarter of 1995. The
unrealized gain on this instrument of $12.1 in 1996 and the 1995 unrealized loss
of $35.9 were included in the consolidated statements of operations. The average
fair value of the interest rate swaps in 1996 was $(40.4). The Company does not
hold or issue derivative financial instruments for trading purposes, other than
the interest rate swap discussed above.
Foreign Exchange Contracts
- --------------------------
International operations account for a significant portion of the Company's
revenue and operating income. The Company is exposed to foreign exchange risk on
transactions which are denominated in a currency other than the operating unit's
functional currency. It is the Company's policy to reduce foreign currency cash
flow exposure due to exchange rate fluctuations by hedging anticipated and
firmly committed transactions wherever economically feasible (within the risk
limits established in the Company's policy).
The Company closely monitors its foreign currency cash flow transactions and
enters into forward contracts to buy and sell foreign currencies only to reduce
its foreign exchange exposure and protect the U.S. dollar value of such
transactions, to the extent of the amount under contract.
In accordance with current accounting standards, gains and losses arising from
contracts that hedge future transactions are deferred until the related
transactions occur. Those arising from contracts that hedge existing
transactions (i.e. outstanding payables denominated in foreign currency), are
recorded currently in income and offset the gains and losses that occur as
exchange rates change. The cash flows from forward contracts accounted for as
hedges of identifiable transactions are classified consistent with the cash
flows from the transaction being hedged.
At December 31, 1996 and 1995, the Company had $93.7 and $399.9 of notional
value, respectively, of forward foreign currency exchange contracts outstanding.
The Combined Companies had $247.0 and $399.9 of notional value, forward foreign
exchange contracts outstanding at December 31, 1996 and 1995, respectively.
These contracts are part of a worldwide program to minimize foreign currency
exchange operating income and balance sheet exposure. The unsecured contracts
mature within 12 months and are principally with banks. The Company is exposed
to credit loss in the event of non-performance by the other parties to the
contracts. The Company evaluates the creditworthiness of the counterparties'
financial condition and does not expect default by the counterparties.
Commodity Futures
- -----------------
The Combined Companies are exposed to risk from fluctuating prices for
commodities used primarily to manufacture salty snacks. Some of the risk is
hedged through commodity futures executed over the counter with
56
<PAGE> 57
various brokers. The Combined Companies utilize commodity futures to effectively
fix the price paid for oil, which is a principal component in the manufacturing
process, over the life of the contract. Cost of products sold reflect the
commodity cost including the effects of the commodity futures. As of December
31, 1996, $4.6 of commodity futures were outstanding, maturing through March
1997. The maturity of the contracts highly correlates to the actual purchases of
the commodity. Under such contracts the Combined Companies pay the counterparty
at a fixed rate, and receives from the counterparty a floating rate per hundred
pounds of oil; only the net differential is actually paid or received. The
amounts paid or received are calculated based on the notional amounts under the
contracts. The use of such commodity futures effectively protects the Combined
Companies against an increase in the price of the commodity, to the extent of
the notional amount under the contract. This also effectively prevents the
Combined Companies from benefiting in the event of a decrease in the price of
the commodity, to the extent of the notional amount under the contract. The fair
value of commodity futures as of December 31, 1996, was unfavorable $0.7 based
on dealer quotes. This fair value has not been recorded by the Combined
Companies as of December 31, 1996, and will be reflected in the cost of the
commodity as it is actually purchased.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying or notional amounts and fair values,
based on dealer quotes, of the Company's consolidated financial instruments at
December 31, 1996 and 1995. The fair value of a financial instrument is the
amount at which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale. Fair values
are determined from quoted market prices where available or other available
valuation methods. The carrying amounts of cash and cash equivalents, accounts
receivable, accounts payable and other accruals are considered reasonable
estimates of their fair values.
<TABLE>
<CAPTION>
1996 1995
---------------------- ---------------------
Carrying Fair Carrying Fair
NONDERIVATIVES Amount Value Amount Value
------- ------- ---------- --------
<S> <C> <C> <C> <C>
Assets
Investment securities $81.5 $132.7
Liabilities
Debt $981.8 $940.3 $1,352.2 $1,358.6
Notional Fair Notional Fair
Amount Value Amount Value
------- ------- ---------- --------
DERIVATIVES RELATING TO:
Foreign currency contracts - gain $ 46.4 $ 0.8 $220.2 $ 3.7
Foreign currency contracts - loss 47.3 (0.6) 179.7 (2.2)
Interest rate swap - loss 224.3 (38.2) 234.3 (52.4)
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE> 58
The carrying or notional amount of the Combined Companies' financial instruments
and their related fair values based on dealer quotes is as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------- ---------------------------
Carrying Fair Carrying Fair
NONDERIVATIVES Amount Value Amount Value
-------- ------- -------- -------
<S> <C> <C>
Assets
Investment securities $81.5 $132.7
Liabilities
Debt $1,004.2 $962.7 $1,352.2 $1,358.6
Notional Fair Notional Fair
Amount Value Amount Value
-------- ------- -------- -------
DERIVATIVES RELATING TO:
Foreign currency contracts - gain $ 151.7 $ 3.3 $220.2 $ 3.7
Foreign currency contracts - loss 95.3 (1.0) 179.7 (2.2)
Interest rate swap - loss 224.3 (38.2) 234.3 (52.4)
Commodity futures - loss 4.6 (0.7)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
15. SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
(Dollars in millions) 1996 1995 1994 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Depreciation and amortization $138.9 $156.6 $193.3 $155.4 $156.6 $193.3
Advertising and promotions 447.5 655.2 666.6 590.4 655.2 666.6
Research and development 41.1 40.8 30.3 50.1 40.8 30.3
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's depreciation and amortization includes amortization of $8.2, $19.7
and $29.2 for 1996, 1995 and 1994, respectively. The Combined Companies'
depreciation and amortization includes amortization of $19.8, $19.7 and $29.2
for 1996, 1995 and 1994, respectively.
The Company's advertising and promotions includes promotions of $391.6, $519.2
and $517.4 for 1996, 1995 and 1994, respectively. The Combined Companies'
advertising and promotions includes promotions of $514.0, $519.2 and $517.4,
respectively.
Other current liabilities include the following amounts:
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
(Dollars in millions) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
General insurance accruals $ 76.9 $ 120.7 $ 97.4 $ 120.7
Loss on disposal 113.9 159.0 94.5 159.0
- -------------------------------------------------------------------------------------
</TABLE>
16. RELATED PARTY TRANSACTIONS
Wise and Foods were sold to affiliates of the Company during 1996. As stated in
Note 1 to the consolidated and combined financial statements, the Combined
Companies continue to include Wise and Foods in their financial statements. The
effects of transactions among the business units of the Combined Companies and
Wise and Foods have been eliminated in the financial statements.
58
<PAGE> 59
The Company and the Combined Companies' financial statements include a $443.6
charge to equity for the principal and interest amounts of notes receivable from
the Company's parent (see Note 11). The Company incurred an equity charge for a
portion of the proceeds from the Wise and Foods sale transactions. The Combined
Companies' equity charge represents the proceeds associated with the sale of
Wise and Foods common stock. Both the Company and the Combined Companies include
$44.0 in notes receivable associated with the sale of options in two business
units.
Because of the Company's continuing control over Wise and Foods, their assets
and liabilities, at the date of sale, are classified as "sold under contractual
arrangements" in the consolidated financial statements. Any future losses
incurred by Wise and Foods will be recorded in the consolidated financial
statements to the extent of the Company's investment in Wise and Foods. The
investment balance consists of the assets and the liabilities at the date of
sale, a valuation allowance, and the net balance of any affiliated transactions.
The Company's net investment balance in Wise and Foods at December 31, 1996 was
$10.2 and $247.9, respectively.
The net investment in Foods and Wise includes a $167.0 and $10.1 term loan
receivable, respectively. An interest rate of 12%, payable quarterly, was
charged to Foods and Wise. The notes are due November 30, 1999. Interest was
accrued as of the beginning of 1996 and totalled $19.6 for Foods and $1.2 for
Wise. Foods also had a net loan outstanding from other international affiliates
of $22.7.
In third quarter 1996 the Company entered into a loan agreement to lend up to
$250.0 to Foods and $10.0 to Wise at interest rates at prime. Foods had $24.4
outstanding and Wise had no outstanding balance at December 31, 1996.
KKR renders management, consulting and financial services to the Company and its
businesses for an annual fee of $10.0, payable quarterly in arrears.
17. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS - The Company, like others in similar businesses, is
subject to extensive Federal, state and local environmental laws and
regulations. Although Company environmental policies and practices are designed
to ensure compliance with these laws and regulations, future developments and
increasingly stringent regulation could require the Company to make additional
unforeseen environmental expenditures.
Environmental accruals are routinely reviewed on an interim basis as events and
developments warrant and are subjected to a comprehensive review annually during
the fiscal fourth quarter.
LEGAL MATTERS - The Company has recorded liabilities for environmental
remediation costs in amounts which it believes are probable and reasonably
estimable. Based on currently available information and analysis, the Company
believes that it is reasonably possible that costs associated with such sites
may exceed current reserves by amounts that may prove insignificant or by
amounts, in the aggregate, up to approximately $30. In addition, the Company may
be held responsible for certain environmental liabilities incurred at Borden
Chemicals and Plastics Limited Partnership ("BCP") facilities which were
previously owned by the Company. The Company is also in litigation in connection
with the 1994 sale of its Brazilian pasta business to Quaker Oats Company. The
lawsuit alleges that the Company made misrepresentations and omissions of
significant information in connection with the sale. The Company does not expect
the outcome of the above cases to have a material impact on operations.
OTHER COMMITMENTS - A wholly owned subsidiary serving as general partner of
Borden Chemicals and Plastics Limited Partnership ("BCP") has certain fiduciary
responsibilities to BCP's unitholders. The Company believes that such
responsibilities will not have a material adverse effect on its financial
statements.
59
<PAGE> 60
18. SUBSEQUENT EVENT
On March 20, 1997 Borden Foods Holdings Corporation announced its intention to
sell certain businesses from its current portfolio to focus its efforts on
building the grain-based meal solution business which includes pasta, sauces,
bouillon and soup mixes. Among businesses to be sold are milk powder, processed
cheese, sweetened condensed milk and reconstituted lemon juice. The method of
dispositions, timing and pricing is currently being evaluated, however,
management expects proceeds from such dispositions to exceed its carrying cost.
60
<PAGE> 61
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents Quarterly Financial Data for the Company:
<TABLE>
<CAPTION>
1996 QUARTERS FIRST SECOND THIRD FOURTH
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales (1) $ 968.4 $1,005.8 $ 911.5 $ 795.6
- --------------------------------------------------------------------------------------------------------------------
Gross profit 204.0 229.6 186.7 165.3
- --------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 49.2 (2.6) 0.8 28.1
- --------------------------------------------------------------------------------------------------------------------
Discontinued operations:
(Loss) income from operations (4.9) (2.9) 6.7
Loss on disposal (2) (330.7)
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) 44.3 (5.5) (323.2) 28.1
- --------------------------------------------------------------------------------------------------------------------
Preferred stock dividends (18.4) (18.4) (18.4) (21.6)
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock 25.9 (23.9) (341.6) 6.5
- --------------------------------------------------------------------------------------------------------------------
Per share of common stock:
Income (loss) from continuing operations 0.25 (0.01) 0.14
Discontinued operations:
(Loss) income from operations (0.02) (0.01) 0.03
Loss on disposal (1.66)
Net income (loss) per common share 0.13 (0.12) (1.72) 0.04
Dividends per common share 0.08
Dividends per preferred share (3) 0.75 0.75 0.75 0.88
Average number of common shares outstanding 199.0 199.0 199.0 199.0
- --------------------------------------------------------------------------------------------------------------------
1995 QUARTERS FIRST SECOND THIRD FOURTH
- --------------------------------------------------------------------------------------------------------------------
Net sales $1,071.2 $1,061.6 $1,005.8 $ 969.2
- --------------------------------------------------------------------------------------------------------------------
Gross profit 201.4 221.8 199.8 203.8
- --------------------------------------------------------------------------------------------------------------------
Loss from continuing operations (56.0) (24.8) (11.4) (301.2)
- --------------------------------------------------------------------------------------------------------------------
Discontinued operations:
Income (loss) from operations 12.0 2.3 (11.8) (42.8)
Reversal of disposal reserve 37.9 29.7
- --------------------------------------------------------------------------------------------------------------------
Net (loss) income (6.0) (22.5) 6.5 (344.1)
- --------------------------------------------------------------------------------------------------------------------
Preferred stock dividends 0.0 (22.0) (18.4) (18.4)
- --------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock (6.0) (44.5) (11.9) (362.5)
- --------------------------------------------------------------------------------------------------------------------
Per share of common stock:
Loss from continuing operations (0.32) (0.13) (0.06) (1.51)
Discontinued operations:
Income (loss) from operations 0.07 0.01 (0.06) (0.22)
Reversal of disposal reserve 0.19 0.15
Net loss per common share (0.03) (0.22) (0.06) (1.82)
Dividends per preferred share (3) 1.02 0.75 0.75
Average number of common shares outstanding 177.3 199.0 199.0 199.0
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The decrease in net sales of $115.9 or 12.7% to $795.6 in the fourth quarter
from $911.5 in the third quarter of 1996 is primarily a result of the sale of
the packaging and plastic films business in the fourth quarter. The decrease in
net sales of $94.3 or 9.4% to $911.5 in the third quarter from $1,005.8 in the
second quarter of 1996 is primarily a result of the sale of Wise and a
wallcovering operation during the third quarter.
(2) The loss on disposal of $330.7 in the third quarter relates to the sale of
Foods.
(3) The 1995 quarterly earnings per share amounts do not add to the annual
amounts as a result of differences in average shares outstanding between the
quarterly and annual calculations.
61
<PAGE> 62
The following represents Quarterly Financial Data for the Combined Companies:
<TABLE>
<CAPTION>
1996 QUARTERS FIRST SECOND THIRD FOURTH
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $1,430.4 $1,457.0 $1,440.4 $1,437.3
- ------------------------------------------------------------------------------------------------------------------
Gross profit 352.9 370.3 359.0 394.2
- ------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 44.3 (5.5) 8.5 34.6
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) 44.3 (5.5) 8.5 34.6
- ------------------------------------------------------------------------------------------------------------------
Preferred stock dividends (18.4) (18.4) (18.4) (21.6)
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock 25.9 (23.9) (9.9) 13.0
- ------------------------------------------------------------------------------------------------------------------
1995 QUARTERS FIRST SECOND THIRD FOURTH
- ------------------------------------------------------------------------------------------------------------------
Net sales $1,493.5 $1,486.6 $1,458.7 $1,505.2
- ------------------------------------------------------------------------------------------------------------------
Gross profit 352.6 361.7 352.3 390.3
- ------------------------------------------------------------------------------------------------------------------
Loss from continuing operations (52.0) (22.9) (23.6) (344.0)
- ------------------------------------------------------------------------------------------------------------------
Discontinued operations:
Income from operations 8.0 0.4 0.4
Reversal of disposal reserve 37.9 29.7
- ------------------------------------------------------------------------------------------------------------------
Net (loss) income (6.0) (22.5) 6.5 (344.1)
- ------------------------------------------------------------------------------------------------------------------
Preferred stock dividends 0.0 (22.0) (18.4) (18.4)
- ------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock (6.0) (44.5) (11.9) (362.5)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
62
<PAGE> 63
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Shareholders of
Borden, Inc.
180 East Broad Street
Columbus, Ohio 43215
We have audited the accompanying consolidated balance sheets of Borden, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the related statements of
operations, shareholders' equity and cash flows for the years then ended. 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, such 1996 and 1995 financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1996
and 1995, and the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Columbus, Ohio
February 26, 1997
63
<PAGE> 64
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Shareholders of
Borden, Inc.
180 East Broad Street
Columbus, Ohio 43215
We have audited the accompanying combined balance sheets of Borden, Inc. and
subsidiaries, Borden Foods Holdings Corporation and subsidiaries and Wise
Holdings, Inc. and subsidiaries (affiliated corporations), all of which are
under common ownership and common management, as of December 31, 1996 and 1995,
and the related combined statements of operations, shareholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the companies' 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, such financial statements present fairly, in all material
respects, the combined financial position of Borden, Inc., Borden Foods Holdings
Corporation and Wise Holdings, Inc. (affiliated corporations) at December 31,
1996 and 1995, and the combined results of their operations and their combined
cash flows for the years then ended in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Columbus, Ohio
February 26, 1997, except for Note 18, as to which the date is March 20, 1997.
64
<PAGE> 65
REPORT OF INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
The Huntington Center
41 South High Street
Columbus, Ohio 43215
Board of Directors and
Shareholders of Borden, Inc.
In our opinion, the accompanying consolidated statements of operations, of cash
flows and of changes in shareholders' equity for the year ended December 31,
1994 present fairly, in all material respects, the results of operations and
cash flows of Borden, Inc. for the year ended December 31, 1994, in conformity
with generally accepted accounting principles. 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 of these statements in accordance with generally accepted
auditing standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above. We have
not audited the consolidated financial statements of Borden, Inc. for any
period subsequent to December 31, 1994.
PRICE WATERHOUSE LLP
February 16, 1995, except as to paragraph 1 of Note 1, the second sentence of
paragraph 2 and 3 of Note 11, which are as of March 15, 1995; except as to
paragraphs 2 and 3 of Note 1 and Note 5, which are as of March 24, 1997.
65
<PAGE> 66
REPORT OF INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
Two Easton Oval, Suite 500
Columbus, Ohio 43219
To the Board of Directors and
Shareholders of Borden, Inc. and Affiliates
In our opinion, the accompanying combined statements of operations, of cash
flows and of changes in shareholders' equity for the year December 31, 1994
present fairly, in all material respects, the results of operations and cash
flows of Borden, Inc. and Affiliates for the year ended December 31, 1994, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion of these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above. We have not audited the combined financial statements
of Borden, Inc. and Affiliates for any period subsequent to December 31, 1994.
PRICE WATERHOUSE LLP
February 16, 1995; except as to paragraph 1 of Note 1, the second sentence of
paragraph 2 and paragraph 3 of Note 11, which are as of March 15, 1995.
66
<PAGE> 67
Item 9. Changes in and Disagreements with Accountants on
- ------- ------------------------------------------------
Accounting and Financial Disclosure
-----------------------------------
A Form 8-K was filed on February 21, 1995, reporting a change in accountants.
PART III
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
Set forth below are the names and ages of the Directors and Executive Officers
of the Company as of March 14, 1997, and the positions and offices with the
Company currently held by each of them. Their terms of office extend to the next
Annual Meeting of the Board of Directors or until their successors are elected.
<TABLE>
<CAPTION>
Served
Age on In Present
Dec. 31, Position
Name Position & Office 1996 Since
- -------------- ------------------------------------ -------- -------
<S> <C> <C> <C>
C. R. Kidder Chairman of the Board, Director,
Chief Executive Officer and President 52 1995
H. R. Kravis Director 52 1994
A. Navab Director 31 1994
C. S. Robbins Director 38 1994
G. R. Roberts Director 53 1994
S. M. Stuart Director 37 1994
W. H. Carter Executive Vice President and
Chief Financial Officer 43 1995
R. L. de Ney Executive Vice President-Corporate
Strategy and Development 47 1995
R. C. Kesselman Executive Vice President; Chairman-
Wise Foods and Elmer's Products 53 1995
J. M. Saggese Executive Vice President; Chairman and
Chief Executive Officer-Borden Chemical;
Chairman - Borden Decorative Products 65 1990
D. A. Smith Executive Vice President; Chairman and
Chief Executive Officer-Borden Foods 50 1995
N.A. Reardon Senior Vice President-Human Resources
and Corporate Affairs 44 1997
R. P. Starkman Senior Vice President and Treasurer 42 1995
W.F. Stoll, Jr. Senior Vice President and General Counsel 48 1996
</TABLE>
67
<PAGE> 68
C. Robert Kidder was elected a Director, Chairman of the Board and Chief
Executive Officer of the Company on January 10, 1995. He was Chairman of the
Board of Duracell International Inc. and Duracell, Inc. from August 1991 through
October 1994 and served as Chairman of the Board and Chief Executive Officer of
both companies from April 1992 through September 30, 1994, Chairman of the
Board, President and Chief Executive Officer of both companies from August 1991
until April 1992, and President and Chief Executive Officer of both companies
from June 1988 until August 1991. He is also a director of Electronic Data
Systems Corporation, AEP Industries, Inc. and Dean Witter, Discover & Co. He is
a member of the Executive and Compensation Committees of the Borden Board.
Henry R. Kravis acted as Chairman of the Board of the Company from December 21,
1994 to January 10, 1995. He has been a General Partner of Kohlberg Kravis
Roberts & Co. and KKR Associates, L.P. since its establishment. He is also a
Director of AutoZone, Inc., Bruno's, Inc., Flagstar Companies, Inc., Flagstar
Corporation, Gillette Company, IDEX Corporation, K-III Communications Corp.,
Merit Behavioral Care Corporation, Newsquest Capital, PLC., Owens-Illinois,
Inc., Owens-Illinois Group, Inc., Safeway Inc., Sotheby's., Union Texas
Petroleum Holdings, Inc. and World Color Press, Inc. He is a member of the
Executive Committee of the Borden Board. Messrs. Kravis and Roberts are first
cousins.
Alexander Navab has been an Executive of Kohlberg Kravis Roberts & Co. since
June 1993. He was employed by James D. Wolfensohn Incorporated, an investment
banking firm, from September 1991 to June 1993. He is also a Director of
Newsquest Capital, PLC. and World Color Press, Inc. He is a member of the Audit
Committee of the Borden Board.
Clifton S. Robbins has been a General Partner of Kohlberg Kravis Roberts & Co.
and KKR Associates, L.P. since January 1995 and an Executive with Kohlberg
Kravis Roberts & Co. since 1987. He is also a Director of AEP Industries, Inc.,
IDEX Corporation, BCP Management, Inc., Kindercare Learning Centers, Inc., and
Newsquest Capital, PLC. He is Chairman of the Compensation Committee and a
member of the Executive Committee of the Borden Board.
George R. Roberts has been a General Partner of Kohlberg Kravis Roberts & Co.
and KKR Associates, L.P. since its establishment. He is also a Director of
AutoZone, Inc., Bruno's, Inc., Flagstar Companies, Inc., Flagstar Corporation,
IDEX Corporation, K-III Communications Corp., Merit Behavioral Care Corporation,
Newsquest Capital, PLC., Owens-Illinois, Inc., Owens-Illinois Group, Inc.,
Safeway Inc., Union Texas Petroleum Holdings, Inc. and World Color Press, Inc.
Messrs. Kravis and Roberts are first cousins.
Scott M. Stuart has been a General Partner of Kohlberg Kravis Roberts & Co. and
KKR Associates, L.P. since January 1995 and an Executive with Kohlberg Kravis
Roberts & Co. since 1986. He is also a Director of AEP Industries, Inc.,
Newsquest Capital, PLC. and World Color Press, Inc. He is Chairman of the Audit
Committe and is a member of the Executive and Compensation Committees of the
Borden Board.
William H. Carter was elected Executive Vice President and Chief Financial
Officer effective April 3, 1995. Prior to that, since 1987, he was a partner in
Price Waterhouse LLP. He is a Director of AEP Industries, Inc.
Richard L. de Ney was elected Executive Vice President-Corporate Strategy and
Development effective February 16, 1995. He joined the Company on January 10,
1995, as Executive Vice President-Administration. Prior to that he was a
Managing Director at Bear Stearns and Company, Inc. from 1987 to 1995.
Ronald C. Kesselman was elected an Executive Vice President of the Company March
5, 1996. He serves as Chairman of Wise Foods, Inc. and Elmer's Products, Inc.
From June 1994 to July 1995 he was President of the Company's North American
Snacks group. He joined the Company in January 1992 as Group Vice President for
Food Service Products and later that year added responsibility for Seafood
Products.
Joseph M. Saggese is an Executive Vice President of the Company, Chairman and
Chief Executive Officer of Borden Chemical, Inc. and Chairman of Borden
Decorative Products, Inc. Previously he served as President of the Worldwide
Packaging and Industrial Products division of the Company since July 1, 1990. He
has also served since July 1990 as Chairman, President and Chief Executive
Officer of BCP Management, Inc., a wholly owned subsidiary of the Company and
General Partner of Borden Chemicals and Plastics Limited Partnership.
Douglas A. Smith was elected an Executive Vice President of the Company
effective November 1, 1995, and serves as Chairman and Chief Executive Officer
of Borden Foods Corporation. Prior to joining the Company, he served as
President of Kraft Canada, Inc., formerly Kraft General Foods Canada, since
1991.
Nancy A. Reardon was elected Senior Vice President, Human Resources and
Corporate Affairs effective March 3, 1997.
68
<PAGE> 69
Previously Ms. Reardon was Senior Vice President-Human Resources and
Communications for Duracell International, Inc. from 1991 through February 1997.
Ronald P. Starkman was elected Senior Vice President and Treasurer of the
Company effective November 20, 1995. He was Senior Managing Director of
Claremont Capital Group, Inc. from December 1994 to November 1995. Prior to that
he was Senior Vice President-Investment Banking for Lehman Brothers from 1993 to
1994, and Vice President and Assistant Treasurer at American Express from 1986
to 1993.
William F. Stoll, Jr. was elected Senior Vice President and General Counsel
effective July 1, 1996. Prior to joining the Company he was a Vice President of
Westinghouse Electric Corporation since 1993, and served as its Deputy General
Counsel from 1988 to 1996.
69
<PAGE> 70
Item 11. Executive Compensation
- -------- ----------------------
The following table provides certain summary information concerning compensation
of the Company's Chief Executive Officer and the five other most highly
compensated Executive Officers as of December 31, 1996, (the "Named Executive
Officers") for the periods indicated.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-------------------------------------------------
OTHER
NAME AND ANNUAL
PRINCIPAL COMPENSATION
POSITION YEAR SALARY ($) BONUS ($) ($)
- -------- ---- ---------- --------- ------------
<S> <C> <C> <C> <C>
C.R. Kidder 1996 950,000 912,000 (1)160,655
Chairman, President & 1995 873,750 360,000 14,721
Chief Executive Officer
W.H. Carter 1996 370,000 250,137 5,753
Executive Vice President 1995 262,500 96,250 0
& Chief Financial Officer
R.L. de Ney 1996 372,500 237,597 0
Executive Vice 1995 339,792 NONE 5,253
President, Corporate
Strategy & Development
R.D. Kautto (5) 1996 278,167 189,569 0
Senior Vice President &
President & Chief
Executive Officer,
Borden Services Company
J.M. Saggese 1996 450,000 25,000 (2)59,006
Executive Vice 1995 390,833 340,393 0
President, Chairman & 1994 364,000 264,264 8,064
Chief Executive Officer,
Borden Chemical & Borden
Decorative Products
D.A. Smith (6) 1996 500,000 (7)500,000 256,205
Executive Vice
President, Chairman &
Chief Executive Officer,
Borden Foods Corporation
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
---------------------------------------------------
AWARDS PAYOUTS
------------------------------- ------------
RESTRICTED SECURITIES LONG TERM ALL
NAME AND STOCK UNDERLYING INCENTIVE OTHER
PRINCIPAL AWARD(S) OPTIONS/LSARS PLAN (LTIP) COMPENSATION
POSITION ($) (#) PAYOUTS ($) ($)
- -------- ---------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
C.R. Kidder NONE (4) NONE 199,576
Chairman, President & NONE NONE NONE 59,487
Chief Executive Officer
W.H. Carter NONE (4) NONE 16,319
Executive Vice President NONE NONE NONE 14,962
& Chief Financial Officer
R.L. de Ney NONE (4) NONE 42,204
Executive Vice NONE NONE NONE 28,122
President, Corporate
Strategy & Development
R.D. Kautto (5) NONE (4) NONE 22,279
Senior Vice President &
President & Chief
Executive Officer,
Borden Services Company
J.M. Saggese NONE (4) NONE 29,640
Executive Vice NONE NONE NONE 60,757
President, Chairman & NONE 21,000 NONE 31,119
Chief Executive Officer,
Borden Chemical & Borden
Decorative Products
D.A. Smith (6) NONE (4) NONE 123,506
Executive Vice
President, Chairman &
Chief Executive Officer,
Borden Foods Corporation
</TABLE>
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<PAGE> 71
(1) Includes $60,000 pursuant to the Executive Perquisite Benefit Plan and
$36,800 not paid to Mr. Kidder but allocable to his personal use of
Company aircraft.
(2) Includes $40,000 pursuant to the Executive Perquisite Benefit Plan and
$17,000 as compensation for discontinued perquisites.
(3) All other compensation consists of the following:
<TABLE>
<CAPTION>
EXECUTIVE FAMILY MATCHING CAPITAL
SURVIVOR CONTRIBUTIONS ACCUMULATION RELOCATION
YEAR PROTECTION PLAN (a) (RSP AND ESP) (b) ACCOUNT (c) EXPENSE
---- ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
C.R. Kidder 1996 0 45,850 0 153,726
1995 17,475 30,581 4,200 7,231
W.H. Carter 1996 0 16.319 0 0
1995 5,250 6,562 3,150 0
R.L. de Ney 1996 0 13,037 0 29,167
1995 6,824 11,943 4,200 5,155
R.D. Kautto 1996 0 750 0 21,529
J.M. Saggese 1996 0 29,640 0 0
1995 31,776 24,781 4,200 0
1994 15,905 11,014 4,200 0
D.A. Smith 1996 0 4,188 0 119,318
</TABLE>
(a) The Executive Family Survivor Protection Plan provided for
(i) a benefit of 2% of annual earnings each year (base pay
and short-term incentive bonus) payable at termination, and
(ii) a death benefit of one times earnings and the cost of
providing a preretirement annuity to a surviving spouse or
dependent children upon death of the executive as an
employee. This Plan has been discontinued.
(b) The Capital Accululation Account provided a benefit of $350
per month payable at termination in lieu of certain
previously provided medical benefits. This Plan has been
discontinued.
(4) No Executive Officer of the Company owns any stock of Borden, Inc., or
options to acquire stock in Borden, Inc. For information on equity
securities of Borden's parent or subsidiary entities owned by
management, see Item 12.
(5) Mr. Kautto was Senior Vice President-Human Resources and Corporate
Affairs the Registrant through March 2, 1997. He continues as President
71
<PAGE> 72
of Borden Services Company.
(6) Mr. Smith is considered an Executive Officer of the Registrant even though
Borden Foods Corporation is technically not a subsidiary of the
Registrant. The financial statements of Borden Foods Holdings
Corporation are included in the Registrant's Form 10-K, and its
financial performance is included in the Registrant's combined financial
statements.
(7) Includes $200,000 paid pursuant to terms of employment.
The Aggregated Option/SAR Exercises In Last Fiscal Year and For Year End
Option/SAR Values table has been eliminated since there were no option/SAR's
exercised during 1996 by any of the Named Executive Officers, and none of the
Named Executive Officers have options or SAR's to acquire Borden, Inc. stock.
The Long-Term Incentive Plans - Awards In Last Fiscal Year table has been
eliminated since the Registrant's long-term incentive plan has been
discontinued.
The Option/LSAR Grants In Last Fiscal Year table has been eliminated since there
were no grants of options or LSAR's by the Registrant during 1996 to the Named
Executive Officers.
72
<PAGE> 73
RETIREMENT BENEFITS
The Borden Employees Retirement Income Plan ("ERIP") for salaried employees was
amended as of January 1, 1987, to provide benefit credits of 3% of earnings
which are less than the Social Security wage base for the year plus 6% of
earnings in excess of the wage base and an additional 1.5% and 3% respectively
for certain older employees. Earnings include annual incentive awards paid
currently but exclude any long-term incentive awards. Benefits for service
through December 31, 1986 are based on the plan formula then in effect and have
been converted to opening balances under the plan. Both opening balances and
benefit credits receive interest credits at one-year Treasury bill rates until
the participant commences receiving benefit payments. For the year 1996, the
interest rate was 5.45%.
The Company's supplemental pension plan provides for a grandfathering of
benefits for certain key employees as of January 1, 1983, including certain
Executive Officers, that, generally speaking, provide for the payment of any
shortfall if the sum of (a) the pension actually payable on retirement under the
ERIP (and any excess or supplemental plans), together with (b) the amount
(converted to a pension equivalent) attributable to Company contributions that
would be standing to the employee's credit at retirement under the Company's
Retirement Savings Plan if the employee had contributed at the maximum permitted
rate eligible for Company matching from December 31, 1983 until retirement, does
not equal or exceed the sum of (c) the retirement income calculated on the basis
of the December 31, 1982, ERIP pension formula (with certain adjustments), and
(d) the amount (converted to a pension equivalent) attributable to company
contributions (equal to 3.3% of compensation) that would be standing to the
employee's credit at retirement had the Company's Retirement Savings Plan as in
effect on January 1, 1983, been in effect continuously to retirement. The
projected pension figure for J.M. Saggese appearing at the end of this section
includes the effect of the foregoing grandfathering.
The ERIP contains additional transitional provisions for employees who met
certain age and service requirements on January 1, 1987. The transitional
minimum benefit is a final average pay benefit for service prior to 1988 plus a
career average pay benefit based on each year's earning for years 1988 through
1996 (1% of each year's earnings up to the Social Security wage base plus 1-1/2%
of excess).
Benefits vest on a graded five-year schedule for employees hired prior to July
1, 1990. Benefits vest after completion of five years of employment for
employees hired on or after July 1, 1990.
The Company has supplemental plans which will provide those benefits which are
otherwise produced by application of the ERIP formula, but which, under Section
415 or Section 401 (a)(17) of the Internal Revenue Code, are not permitted to be
paid through a qualified plan and its related trust.
The supplemental plan also provides a pension benefit using the ERIP formula
based on deferred incentive compensation awards and certain other deferred
compensation, which are not considered as part of compensation under the ERIP.
The total projected annual benefits payable under the formulas of the ERIP at
age 65 without regard to the Section 415 or 401(a)(17) limits and recognizing
supplemental pensions as described above, are as follows for the Named Executive
Officers of the Company in 1996: W. H. Carter - $93,850, R. L. de Ney - $71,735,
R.D. Kautto - $38,583, C. R. Kidder - $124,954, J. M. Saggese - $259,484 and
D.A. Smith - $66,905.
73
<PAGE> 74
COMPENSATION OF DIRECTORS
Each director who is not currently an employee of the Company receives an annual
retainer of $45,000. Directors who are also employees of the Company receive no
remuneration for serving as directors.
Former directors who were not employees of the Company are provided, upon
attaining age 70, annual benefits through a funded grantor trust equal to their
final annual retainer if they served in at least three plan years. Such benefits
can continue for up to fifteen years.
EMPLOYMENT, TERMINATION AND
CHANGE IN CONTROL ARRANGEMENTS
The Company has a salary continuance arrangement (the "CORE Arrangement") with
two Executive Officers, Messrs. Saggese and Kautto, which provides payments for
three years after the date of a change in control, but not less than for one
year if employment is terminated without cause during that period. A change in
control occurred on January 20, 1995. The rights of these Officers under the
CORE Arrangement will expire as of January 20, 1998, if such Officers are not
terminated without cause by that date. The payments include salary, bonus and
other compensation and benefits. Payments could be reduced or eliminated by
compensation earned from other specified employment. Arrangements have also been
made for payment by the Company, upon certain conditions, of the legal expenses
of these employees if they are required to enforce the provisions of their CORE
Arrangements. If any excise tax (under Sec. 4999 of the Internal Revenue Code)
is imposed in respect of payments under the CORE Arrangement, the Company will
pay to such Officers an amount that will net the Officers the same sum as they
would have retained if the excise tax did not apply.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Robbins and Stuart are members of the Company's Compensation Committee.
Both gentlemen are general partners of KKR Associates, L.P. See "Certain
Relationships and Related Transactions." Mr. Kidder, Chairman and Chief
Executive Officer of the Company, became a member of the Compensation Committee
in April, 1996.
74
<PAGE> 75
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The following table sets forth certain information regarding the beneficial
ownership of the Registrant's Common Stock and other equity securities issued
by affiliated entities, as of March 14, 1997, by (a) persons known to the
Registrant to be the beneficial owners of more than five percent of the
outstanding voting stock of the Registrant, (b) each director of the
Registrant, (c) each of the Named Executive Officers of the Registrant during
the 1996 fiscal year of the Registrant and (d) all directors and executive
officers of the Registrant as a group. Except as otherwise noted, the persons
named in the table below have sole voting and investment power with respect to
all securities shown as beneficially owned by them.
<TABLE>
<CAPTION>
Name of Beneficial Ownership
Beneficial Owner of Equity Securities
---------------- --------------------------------------
Shares/Units Percent
------------ -------
<S> <C> <C> <C>
KKR Associates (1) 198,974,994 100.0
9 West 57th Street
New York, New York 10019
C. Robert Kidder (2) 369,569 *
Henry R. Kravis (1) -- *
George R. Roberts (1) -- *
Clifton R. Robbins (1) -- *
Scott M. Stuart (1) -- *
Alexander Navab -- *
William H. Carter (2) 84,337 *
Richard L. de Ney (2) 72,000 *
Randy D. Kautto (2) 48,192 *
Joseph M. Saggese (3) 200,000 *
Douglas A. Smith (4) 120,000 *
All Directors and Executive Officers
as a group (5) See (5) *
</TABLE>
- ----------
* Beneficial ownership does not exceed 1.0% of the respective class of
securities.
(1) The Borden Common Stock shown as beneficially owned by KKR Associates
is directly held by Borden Holdings, Inc., a Delaware corporation which
is wholly owned by BW Holdings, LLC, a Delaware limited liability
company, the managing member of which is a limited partnership, of
which KKR Associates is the sole general partner and as to which it
possesses sole voting and investment power. KKR Associates is also the
beneficial owner of 632,000,000 units of BW Holdings, LLC. KKR
Associates is a limited partnership of which Messrs. Edward A. Gilhuly,
Perry Golkin, James H. Greene, Henry R. Kravis, Robert I. MacDonnell,
Michael N. Michelson, Paul E. Raether, Clifton S. Robbins, George R.
Roberts, Scott M. Stuart and Michael T. Tokarz are the general
partners. Such persons may be deemed to share beneficial ownership of
the shares shown as owned by KKR Associates. The foregoing persons
disclaim beneficial ownership of any such shares.
(2) Represents units of BW Holdings, LLC beneficially owned by these
executive officers.
(3) Represents common shares of Borden Chemical Holdings, Inc. and Borden
Decorative Products Holdings, Inc. beneficially owned by the executive
in the aggregate, including 100,000 shares subject to currently
exercisable options.
(4) Represents units of Borden Foods Holdings, LLC beneficially owned by
the executive.
(5) Equity securities beneficially owned by all directors and executive
officers as a group consist of: 670,482 units of BW Holdings, LLC;
120,000 units of Borden Foods Holdings, LLC; 160,000 shares of Borden
Chemical Holdings, Inc. including 80,000 shares subject to currently
exercisable options; 40,000 shares of Borden Decorative Products
Holdings, Inc., including 20,000 shares subject to currently
exercisable options; 50,000 shares of Elmer's Products Holdings, Inc.,
including 25,000 shares subject to currently exercisable options; and
35,000 shares of Wise Foods Holdings, Inc., including 10,000 shares
subject to currently exercisable options. No director or executive
officer owns directly any stock of the Registrant or options to acquire
such stock.
75
<PAGE> 76
Pursuant to Rule 13d-3, stock options that are presently exercisable or
exercisable within 60 days after March 14, 1997, which are owned by each
individual are deemed to be outstanding for purposes of computing the percentage
of shares owned by that individual. Therefore, each percentage is computed based
on the sum of (i) the shares actually outstanding as of March 14, 1997, and (ii)
the number of Stock Options exercisable within 60 days of March 14, 1997, owned
by that individual or entity whose percentage of share ownership is being
computed, but not taking account of the exercise of Stock Options by any other
person or entity.
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
The Company made a loan of $400,000 in 1995 to Mr. Kautto in the form of a note
bearing interest at prime. Accrued interest is waived each year on the
anniversary of the note if Mr. Kautto remains employed. Principal payments
targeted at $133,333 each are due annually after three years. The amount of
each annual payment due is increased or decreased on formula based on the
amount that his annual bonus earned in the prior year differs from his targeted
bonus. The entire principal and unwaived interest are due upon termination of
employment. The loan is secured by any contractual payments due to Mr. Kautto
from the Company.
All of the Company's common stock is owned by a holding company which is owned
by an affiliate of KKR Associates, a New York limited partnership of which
Messrs. Edward A. Gilhuly, Perry Golkin, James H. Greene, Henry R. Kravis,
Robert I. MacDonnell, Michael N. Michelson, Paul E. Raether, Clifton S. Robbins,
George R. Roberts, Scott M. Stuart and Michael T. Tokarz are the general
partners. KKR Associates has sole voting and investment power with respect to
such shares. Messrs. Kravis, Robbins, Roberts and Stuart are directors of the
Company.
KKR renders management, consulting and financial services to the Company and its
businesses for an annual fee of $10 million, payable quarterly in arrears.
Messrs. Kravis, Roberts, Robbins and Stuart are general partners of KKR and Mr.
Navab is an executive of KKR.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------- ----------------------------------------------------------------
(a) List of documents filed as part of this report
----------------------------------------------
1. Financial Statements
--------------------
All financial statements of the registrant are set forth under
Item 8 of this Report on Form 10-K.
76
<PAGE> 77
2. Exhibits
--------
(3)(i) Restated Certificate of Incorporation dated
March 14, 1995 and Certificate of Amendment
of Restated Certificate of Incorporation
dated June 23, 1995, both incorporated
herein by reference from Exhibit (3) to the
June 30, 1995 Form 10-Q.
(ii) By-Laws incorporated herein by reference
from Exhibit (3)(ii) to the September 30,
1996 Form 10-Q.
(4)(i) Form of Indenture dated as of January 15,
1983, as supplemented by the First
Supplemental Indenture dated as of March 31,
1986, and the Second Supplemental Indenture,
dated as of June 26, 1996, relating to the
$200,000,000 8-3/8% Sinking Fund Debentures
due 2016, incorporated herein by reference
from Exhibits 4(a) and (b) to Amendment No.
1 to Registration Statement on Form S-3,
File No. 33-4381 and Exhibit 4(iv) to the
June 30, 1996 Form 10-Q.
(ii) Form of Indenture dated as of December 15,
1986, as supplemented by the First
Supplemental Debenture dated as of December
15, 1986, and the Second Supplemental
Indenture, dated as of June 26, 1996,
relating to the $315,000,000 Medium Term
Notes, Series A, and the 9 7/8% Notes due
November 1, 1997, incorporated herein by
reference from Exhibits 4(a) through (d) to
Amendment No. 1 to Registration Statement on
Form S-3, File No. 33-8775 and Exhibit 4(ii)
to the June 30, 1996 Form 10-Q.
(iii) Form of Indenture dated as of December 15,
1987, as supplemented by the First
Supplemental Indenture dated as of December
15, 1987 and the Second Supplemental
Indenture dated as of February 1, 1993, and
the Third Supplemental Indenture dated as of
June 26, 1996, incorporated herein by
reference from Exhibits 4(a) through (d) to
Registration Statement on Form S-3, File No.
33-45770, and Exhibit 4(iii) to the June 30,
1996 Form 10-Q, relating to the following
Debentures and Notes:
(a) The $150,000,000 9-1/4% Sinking
Fund Debentures due 2019.
(b) The $200,000,000 9-1/5% Debentures
due 2021.
(c) The $250,000,000 7-7/8% Debentures
due 2023.
(iv) Form of Indenture relating to Zero Coupon
Notes due 2002, dated as of May 21, 1992, as
supplemented by the First Supplemental
Indenture, dated as of June 26, 1996,
incorporated herein by reference from
Exhibit 4(iv) to the 1992 Form 10-K Annual
Report and Exhibit 4(i) to the June 30, 1996
Form 10-Q.
(v) Form of Lynx Equity Unit Agreement relating
to Zero Coupon Notes due 2002, dated as of
May 21, 1992, incorporated herein by
reference from
77
<PAGE> 78
Exhibit 4(v) to the 1992 Form 10-K Annual
Report.
(vi) Form of Indenture relating to Senior
Securities, incorporated herein by reference
from Exhibit 4.1 to the Company's
Registration Statement on Form S-3, File No.
33-57577.
(vii) Form of Indenture relating to Subordinated
Securities incorporated herein by reference
from Exhibit 4.2 to the Company's
Registration Statement on Form S-3, File No.
33-57577.
(viii) Amended and Restated Credit Agreement dated
as of May 7, 1996 to the Credit Agreement
dated as of December 15, 1994 among Borden,
Inc., Borden Foods Holdings Corporation,
Wise Holdings, Inc., and the lenders named
therein, Citibank, N.A., as administrative
agent for the Lenders, BT Securities
Corporation, Chase Securities Inc., Citicorp
Securities Inc. and Credit Suisse, as
arrangers, BT Securities and Chase
Securities as co- syndication agents and
Credit Suisse, as Issuing Bank and
documentation agent, incorporated by
reference to Exhibit 10(v) to the June 30,
1996 Form 10-Q.
(10)(i) Stockholders Agreement, dated as of June 20,
1996, by and among Borden, Inc. and J.
Brendan Barba, Paul M. Feeny, David
MacFarland, Robert Cron, Kenneth J. Avia,
Melanie K. Barba, John Powers, Lauren
Powers, Carolyn Vegliante and Lawrence Noll,
incorporated herein by reference to Exhibit
2 to Schedule 13D, dated July 1, 1996, File
No. 005-37385.
(ii) Voting Agreement, dated as of June 20, 1996,
by and among Borden, Inc. and EGS Partners
L.L.C., EGS Associates, L.P., BEV Partners,
L.P., JONAS Partners, L.P., William Ehrman,
Frederic Greenberg, Frederick Ketcher, Jonas
Gerstl, James McLauren, Beverly Ehrman,
Beverly Ehrman as custodian for Stephanie
Ehrman and Linda Greenberg, incorporated
herein by reference to Exhibit 3 to Schedule
13D, dated July 1, 1996, File No. 005-37385.
(iii) Governance Agreement, dated as of June 20,
1996, between Borden, Inc. and AEP
Industries Inc., incorporated herein by
reference to Exhibit 5 to Schedule 13D,
dated July 1, 1996, File No. 005-37385.
(iv) Employment Agreement with Mr. William F.
Stoll, Jr., Senior Vice President and
General Counsel, dated June 6, 1996,
incorporated by reference to Exhibit 10(vi)
to the June 30, 1996 Form 10-Q.
(v) Conveyance and Transfer Agreement, dated
October 1, 1996 among Borden, Inc., BDH One,
Inc., BDH Two, Inc., Borden Foods
Investments Corporation, Borden Foods
Holdings, LLC, Borden Foods Holdings
Corporation, Borden Foods Corporation, BFC
Investments L.P., and BDS Two, Inc.,
incorporated herein by reference to Exhibit
2.1 to Form 8-K, dated October 16, 1996,
File No. 001-00071.
(vi) Purchase Agreement, dated as of June 20,
1996, between Borden, Inc. and AEP
Industries Inc., incorporated herein by
reference to Exhibit 4 to
78
<PAGE> 79
Schedule 13D, dated July 1, 1996, File No.
005-37385.
(vii) 1996 Unit Incentive Plan for Key Employees
of Borden, Inc.
(viii) 1996 Management Incentive Plan.
(a) Borden, Inc.
(b) Borden Services Company.
(c) Borden Foods.
(d) Borden Chemical.
(ix) 1994 Management Incentive Plan incorporated
by reference to Exhibit 10(iv) to the
Company's 1993 Form 10-K Annual Report.
(x) Amendment to 1994 Management Incentive Plan,
incorporated by reference to Exhibit 10(xii)
to the Company's 1995 Form 10-K Annual
Report.
(xi) 1994 Stock Option Plan incorporated by
reference to Exhibit 10(v) to the 1993 Form
10-K Annual Report.
(xii) Executive Family Survivor Protection Plan as
amended through December 9, 1993
incorporated by reference to Exhibit 10(vi)
to the 1993 Form 10-K Annual Report.
(xiii) Executives Excess Benefits Plan as amended
through December 9, 1993 incorporated by
reference to Exhibit 10(vii) to the 1993
Form 10-K Annual Report.
(xiv) Executives Supplemental Pension Plan as
amended through December 9, 1993
incorporated by reference to Exhibit
10(viii) to the 1993 Form 10-K Annual
Report.
(xv) Advisory Directors Plan, incorporated herein
by reference from Exhibit 10(viii) to the
1989 Form 10-K Annual Report.
(xvi) Advisory Directors Plan Trust Agreement,
incorporated herein by reference from
Exhibit 10(ix) to the 1988 Form 10-K Annual
Report.
(xvii) Supplemental Benefit Trust Agreement as
amended through December 9, 1993
incorporated by reference to Exhibit 10(xi)
to the 1993 Form 10-K Annual Report.
(xviii) Amendment to Supplemental Benefit Trust
Agreement dated November 15, 1994
incorporated herein by reference to Exhibit
10(xvi) to the Company's 1994 Form 10-K
Annual Report.
(xix) Form of Indemnification Letter Agreements
entered into with former Directors of the
Company, incorporated herein by reference
from Exhibit 10(xii) to the 1988 Form 10-K
Annual Report.
(xx) (a) Agreement with Mr. A. S. D'Amato,
Chairman and Chief Executive Officer,
incorporated herein by reference from
Exhibit 10(i) to the June
79
<PAGE> 80
30, 1993 Form 10-Q.
(b) Amendment to Agreement with Mr. A.
S. D'Amato, incorporated herein by
reference from Exhibit 10(i) to the
September 30, 1993 Form 10-Q.
(c) Supplement to Agreement with Mr. A.
S. D'Amato incorporated by
reference to Exhibit 10(xiv) (a) to
the 1993 Form 10-K Annual Report.
(d) Form of salary continuance
arrangement with Executive
Officers, incorporated herein by
reference from Exhibit 10(ix)(c) to
the 1987 Form 10-K Annual Report.
(e) Description of arrangement with C.
Robert Kidder, Chairman of the
Board and Chief Executive Officer
incorporated herein by reference to
Exhibit 10(i) to the Company's 1994
Form 10-K Annual Report.
(f) Agreement with Mr. J. C. Van Meter,
Executive Vice President and Chief
Financial Officer, dated July 7,
1994 incorporated herein by
reference to Exhibit 10(j) to the
Company's 1994 Form 10-K Annual
Report.
(g) Letter agreement with Mr. Kautto
dated January 19, 1994 incorporated
herein by reference to Exhibit
10(m) to the Company's 1994 Form
10- K Annual Report.
(h) Summary of Terms of Employment for
W.H. Carter,incorporated by
reference to Exhibit 10(xxiii)(n)
to the 1995 Form 10-K Annual
Report.
(i) Summary of Terms of Employment for
D.A. Smith.
(j) Termination Agreement with A.L.
Miller dated May 1, 1995,
incorporated herein by reference to
Exhibit 10 to the Company's June
30, 1995 Form 10-Q.
(k) Termination Agreement with R.L.
Allen dated January 3,
1996,incorporated by reference to
Exhibit 10(xxiii)(p) to the 1995
Form 10-K Annual Report.
(xxi) Executive Perquisite Benefits Plan dated
January 1, 1996,incorporated by reference to
Exhibit 10(xxiv) to the 1995 Form 10-K
Annual Report.
(xxii) Consulting Agreement dated August 21, 1995
incorporated herein by reference to Exhibit
10 to the Company's September 30, 1995 Form
10-Q.
(21) Subsidiaries of Registrant.
(23)(i) Accountants' Consent.
(ii) Accountants' Consent.
(27) Financial Data Schedule.
80
<PAGE> 81
3. Financial Statement Schedules
-----------------------------
The following are the separate financial statements of Foods Holdings
and Wise Holdings filed in accordance with rule 3-10 of Regulation S-X.
Foods Holdings and Wise Holdings are guarantors of the Company's credit
facility and all of the Company's outstanding publicly-held dept.
81
<PAGE> 82
BORDEN FOODS
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 and 1995
AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1996
<PAGE> 83
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder
of Borden Foods Holdings Corporation
180 East Broad Street
Columbus, Ohio 43215
We have audited the accompanying balance sheets of Borden Foods as of December
31, 1996 and 1995, and the related statements of operations and of cash flows
for each of the three years in the period ended December 31, 1996, and the
statements of shareholder's equity and owner's investment for the years ended
December 31, 1996 and 1995. These financial statements are the responsibility of
Borden Foods' 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, such financial statements present fairly, in all material
respects, the financial position of Borden Foods at December 31, 1996 and 1995,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Columbus, Ohio
February 26, 1997 (March 20, 1997 as to the third paragraph in Note 5)
<PAGE> 84
BORDEN FOODS
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 ON PURCHASE ACCOUNTING BASIS
FOR THE YEAR ENDED DECEMBER 31, 1994 ON HISTORICAL COST BASIS
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------------------ -----------
($ IN 000'S, EXCEPT PER SHARE DATA) 1996 1995 1994
<S> <C> <C> <C>
NET TRADE SALES $1,949,841 $1,838,889 $1,822,216
COSTS AND EXPENSES
Cost of goods sold 1,195,672 1,112,211 1,052,302
Selling, general and administrative 639,517 662,762 598,392
Distribution expense 106,612 97,065 95,593
Asset write-downs 27,817 31,957
------------------------ -----------
OPERATING INCOME (LOSS) (19,777) (33,149) 43,972
Interest expense (income), net 10,952 (7,935) (2,186)
Other, net 851 (707) (268)
------------------------ -----------
Income (loss) before income taxes (31,580) (24,507) 46,426
Income tax provision (benefit) (16,347) (16,249) 23,614
------------------------ -----------
Net income (loss) ($15,233) ($8,258) $22,812
======================== ===========
PER SHARE INFORMATION:
----------------------
Net income (loss) per common share ($152,331) ($82,581) $228,120
Average number of common shares outstanding 100 100 100
during the period
</TABLE>
See accompanying notes to the financial statements
<PAGE> 85
BORDEN FOODS
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995 ON PURCHASE ACCOUNTING BASIS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
ASSETS ($ IN 000'S) 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $33,234 $49,538
Accounts receivable (net of allowance for
doubtful accounts of $5,944 and $7,128) 153,654 160,261
Other receivables 17,332 20,353
Inventories:
Finished and in-process goods 140,452 125,513
Raw materials and supplies 59,523 58,724
Deferred income taxes 17,559
Loans due from affiliates 9,349
Other amounts due from affiliates 24,972
Other current assets 32,435 35,913
------------------------
488,510 450,302
OTHER NON CURRENT ASSETS 10,329 12,260
PROPERTY AND EQUIPMENT
Land 23,147 23,494
Buildings and improvements 82,568 80,591
Machinery and equipment 243,212 222,153
------------------------
348,927 326,238
Less: accumulated depreciation (66,606) (35,056)
------------------------
282,321 291,182
------------------------
INTANGIBLES
Goodwill 161,296 168,253
Trademarks and other intangibles 203,987 209,693
------------------------
365,283 377,946
------------------------
$1,146,443 $1,131,690
========================
</TABLE>
See accompanying notes to the financial statements
<PAGE> 86
BORDEN FOODS
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995 ON PURCHASE ACCOUNTING BASIS
<TABLE>
- --------------------------------------------------------------------------------------------
LIABILITIES & SHAREHOLDER'S EQUITY/OWNER'S INVESTMENT ($ IN 000's) 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt payable within one year $15,707 $23,525
Loans due to affiliates 56,396
Accounts and drafts payable 145,363 151,502
Other amounts due to affiliates 32,527
Accrued customer allowances 72,447 71,544
Other current liabilities 116,568 103,389
----------------------
439,008 349,960
LONG-TERM LIABILITIES
Long-term debt payable to Borden 166,990
Other long-term debt 6,701 10,630
Deferred income taxes 41,527 600
Non-pension post employment obligations 12,906 13,459
Other non current liabilities 11,053 9,141
Minority interest 3,540 1,216
----------------------
242,717 35,046
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY/OWNER'S INVESTMENT
Owner's investment 745,763
Common stock ($.01 par; 100 shares authorized, issued and
outstanding) -
Shareholder's investment in affiliate 87,859
Paid-in capital 349,475
Accumulated translation account 25,056 921
Retained earnings from October 1, 1996 2,328
----------------------
464,718 746,684
----------------------
$1,146,443 $1,131,690
======================
</TABLE>
See accompanying notes to the financial statements
<PAGE> 87
BORDEN FOODS
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 ON PURCHASE ACCOUNTING BASIS
FOR THE YEAR ENDED DECEMBER 31, 1994 ON HISTORICAL COST BASIS
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
--------------------- ------------
($ IN 000'S) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($15,233) ($8,258) $22,812
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 46,075 44,780 46,130
Asset write-downs 27,817 31,957
(Increase) decrease in accounts receivable 6,607 5,175 (24,469)
Decrease in other receivables 3,021 2,300 15,804
Increase in inventories (15,738) (5,464) (2,061)
(Increase) decrease in other current assets 3,478 98 (3,555)
Increase (decrease) in accounts payable (6,139) 24,169 (7,835)
Increase in accrued customer allowances 903 40,664 37,686
Increase in other current liabilities 13,179 23,089 10,216
(Increase) decrease in long-term assets and
liabilities 5,614 (199) 351
Other, net (15,944) (6,814) 7,857
--------------------- --------
Net cash provided by operating activities 53,640 119,540 134,893
--------------------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (49,901) (31,311) (30,360)
Acquisition of assets from Borden (5,323)
Proceeds from the sale of businesses 13,480
--------------------- --------
Net cash used for investing activities (41,744) (31,311) (30,360)
--------------------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Other changes in Owner's Investment (21,776) (132,459) (132,114)
Management contribution 5,323
Increase (decrease) in other long-term debt (3,929) 867 766
Increase (decrease) in debt payable within one year (7,818) 1,362 (7,028)
--------------------- --------
Net cash used for financing activities (28,200) (130,230) (138,376)
--------------------- --------
Change in cash and equivalents (16,304) (42,001) (33,843)
Cash and equivalents at beginning of year 49,538 91,539 125,382
--------------------- --------
Cash and equivalents at end of year $33,234 $49,538 $91,539
===================== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH RECEIVED (PAID) DURING THE YEAR FOR:
Interest, net $3,330 $7,549 $2,139
Income taxes, foreign (6,525) (11,029) (10,161)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
On October 1, 1996, Borden sold Borden Foods and certain trademarks to BFC
and the Investment LP, respectively, for $550 million (less assets
transferred and liabilities assumed of $22,909). In connection with this
sale, Borden Foods issued long-term notes to Borden (see Note 4). During
1996, the LLC sold 1,080,000 Class A units to certain management employees
of Borden Foods. The issuance of notes and the proceeds from the sale of
Class A units were used along with the notes contributed to Borden Foods and
affiliates in 1996 to purchase the assets of the Foods operations.
Long-term debt issued $166,990
Notes contributed 345,900
Interest on notes contributed 8,878
Management contribution 5,323
--------
$527,091
========
</TABLE>
See accompanying notes to the financial statements
<PAGE> 88
BORDEN FOODS
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY/OWNER'S INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 ON PURCHASE ACCOUNTING BASIS
<TABLE>
<CAPTION>
OWNER'S INVESTMENT
---------------------------- SHAREHOLDER'S
($ IN 000'S) INTERCOMPANY INTERCOMPANY PAID-IN ACCUMULATED RETAINED INVESTMENT IN
BALANCES LOANS CAPITAL TRANSLATION EARNINGS AFFILIATE TOTAL
------------ ------------ ------- ----------- -------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BEGINNING BALANCE - JANUARY 1, 1995 $959,302 ($71,901) $887,401
Expenses allocated by Borden 35,640 35,640
Net collections made by Borden
on Borden Foods behalf (84,132) (84,132)
Net transfer of balances to Borden Foods
from Borden and affiliates 339 339
Foreign currency translation 921 921
Loans made to Borden and affiliates (59,049) (59,049)
Other intercompany changes (26,178) (26,178)
Net loss (8,258) (8,258)
-------- --------- --------- --------- --------- --------- ---------
ENDING BALANCE - DECEMBER 31, 1995 876,713 (130,950) 921 746,684
-------- --------- --------- --------- --------- --------- ---------
Net collections made by Borden
on Borden Foods behalf 8,604 8,604
Net transfer of balances to Borden Foods
from Borden and affiliates (105,689) (105,689)
Foreign currency translation 24,135 24,135
Short term borrowings from Borden 307,500 307,500
Repayments of short term borrowings (224,600) (224,600)
Other intercompany changes (33,000) (33,000)
Intercompany dividend to affiliate (89,016) 89,016 0
Net loss prior to September 30, 1996 (17,561) (17,561)
Recapitalization:
Management contribution (5,323) 5,323 0
Notes contributed (345,900) 264,900 81,000 0
Excess of owner's investment
over recapitalization (84,575) 84,575 0
Equity income in affiliate (1,536) 1,536 0
Issuance of debt to Borden (166,990) (166,990)
Amounts due to/from affiliates (81,930) 41,934 (39,996)
Deferred taxes (36,697) (36,697)
Net income subsequent to October 1, 1996 2,328 2,328
-------- --------- --------- --------- --------- --------- ---------
ENDING BALANCE - DECEMBER 31, 1996 $0 $0 $349,475 $25,056 $2,328 $87,859 $464,718
======== ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to the financial statements
<PAGE> 89
BORDEN FOODS
NOTES TO THE FINANCIAL STATEMENTS
($ IN 000'S)
1. BACKGROUND AND NATURE OF OPERATIONS
In September 1994, Borden, Inc. ("Borden") entered into a merger
agreement providing for the acquisition of all of Borden's outstanding
common stock by affiliates of Kohlberg Kravis Roberts & Co. ("KKR").
The acquisition was completed on March 14, 1995. Borden, a public
registrant as a result of public debt that was outstanding prior to the
acquisition, elected not to apply push down accounting in its
consolidated financial statements and as such, Borden's financial
statements (including Borden Foods through October 1, 1996) are
reported on Borden's historical cost basis. As discussed in the basis
of presentation, the accompanying financial statements have been
prepared on a purchase accounting basis from the date of KKR's
acquisition of Borden.
In 1996, Borden Foods Corporation ("BFC") was formed for the purposes
of acquiring and operating certain of Borden's food businesses ("Borden
Foods"). Borden Foods Holdings Corporation ("Holdings"), a wholly-owned
subsidiary of Borden Foods Holdings, LLC (the "LLC"), owns
approximately 98% of BFC; the remaining interest in BFC is owned
directly by the LLC. Borden Foods Investment LP (the "Investment LP"),
which is owned 30% by the LLC and 70% by BFC, was formed for the
purposes of acquiring and holding certain trademarks associated with
the operation of Borden Foods and holding a beneficial interest in a
subsidiary of Borden which holds certain other Borden Foods
trademarks.
Effective October 1, 1996, Borden, in a taxable transaction, sold
Borden Foods and certain trademarks to BFC and the Investment LP,
respectively, for $550 million less assets transferred and liabilities
assumed of $22,909. In connection with this sale, Borden Foods issued
long-term notes to Borden of $166,990 (see Note 4). The purchase price
was based on an independent valuation of Borden Foods. There was no
change in the book basis of Borden Foods' assets and liabilities as of
October 1, 1996 because the sale was between related parties and
Borden's principal stockholder will continue to control Borden Foods.
Borden will continue to exercise significant financial control over
Borden Foods. Holdings has fully and unconditionally guaranteed
obligations under Borden's Credit Facility and all of Borden's publicly
held debt on a pari passu basis. In connection with this guarantee,
Holdings will charge Borden an annual fee of $1,050.
Borden Foods is a manufacturer and distributor of a variety of food
products worldwide, including pasta, milk powder, processed cheese,
sweetened condensed milk, concentrated lemon juice and bouillon. Borden
Foods' operations include 34 production facilities, 15 of which are
located in the United States. The remaining facilities are located
primarily in Europe and Latin America. See Note 17 for further
geographic segment information.
2. BASIS OF PRESENTATION
As a result of the financial guarantee and in accordance with
Regulation S-X Rule 3-10, Borden is required to include in its filings
with the Securities and Exchange Commission separate financial
statements for Borden Foods as if it were a registrant. The
accompanying financial statements for 1996 and 1995 (successor
financial statements) were prepared on a purchase accounting basis
which allocates approximately $750 million, plus cash retained, less
debt assumed, of the December 1994 KKR purchase price to Borden Foods.
The purchase price has been allocated to tangible and intangible assets
and liabilities of Borden Foods based on independent appraisals and
management estimates. The 1994 Statement of Operations and Statement of
Cash Flows included herein (predecessor financial statements) are
prepared on Borden Foods' historical cost basis. Collectively, the
predecessor and successor financial statements are herein referred to
as the statements of "Borden Foods".
Prior to October 1, 1996, Borden Foods was managed as a division of
Borden. Under this structure, Borden incurred various costs related to
Borden Foods which included corporate and administrative expenses (see
Note
<PAGE> 90
4). The allocation of these costs, as well as intercompany purchases
and sales, cash infusions and withdrawals and other transactions, are
reflected in the Owner's Investment account through September 30,
1996. In connection with the formation of Borden Foods and the October
1, 1996 sale, the net assets of Borden Foods have been recapitalized
to reflect the resulting capital structure.
The financial statements include the accounts of Borden Foods after
elimination of material intercompany accounts and transactions.
Minority interest reflects the consolidation of international
operations in which Borden Foods owns more than a 50% interest but
less than a 100% interest. The portion of BFC and Investment LP
directly owned by LLC is recorded in Shareholder's Investment in
Affiliate as of October 1, 1996.
During 1996, the LLC sold equity interests to certain members of
Borden Foods' management for $5,323, resulting in an ownership
interest in LLC of approximately 2%.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - 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 date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
The most significant estimates in the accompanying financial
statements are the accruals for trade promotions, unfavorable
litigation, general insurance, and corporate allocations. Actual
results could differ from those estimates.
REVENUE RECOGNITION - Net trade sales are generally recognized when
products are shipped. Liabilities are established for estimated
returns, allowances and consumer and trade discounts when revenues are
recognized.
ADVERTISING COSTS - Production costs of future media advertising are
expensed on the first airdate or print release date of the
advertising. All other advertising is expensed as incurred.
CASH AND CASH EQUIVALENTS - All highly liquid investments purchased
with an original maturity of three months or less are considered cash
equivalents. Included in cash equivalents are time deposits of $13,002
and $20,556 at December 31, 1996 and 1995, respectively.
INVENTORIES - Finished goods inventories are stated at the lower of
cost or market with cost being determined using the average cost and
first-in, first-out methods. Raw material inventories are stated at
actual cost.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost and
where appropriate, include capitalized interest during construction.
Depreciation is recorded on the straight-line basis over useful lives
ranging from 3 to 10 years for machinery and equipment and 30 years
for buildings and improvements. Major renewals and betterments are
capitalized. Maintenance, repairs and minor renewals are expensed when
incurred. When properties are retired or otherwise disposed of,
related cost and accumulated depreciation are removed from the
accounts and any related gain or loss is recorded in the statements of
operations.
INTANGIBLES - The excess of KKR's purchase price over the value of net
tangible assets of Borden Foods is carried as intangibles in the
balance sheet. Trademarks and patents are amortized on a straight-line
basis over the shorter of their legal or useful lives; goodwill is
amortized on a straight-line basis over 40 years. Accumulated
amortization of intangibles was $19,448 and $9,724 at December 31,
1996 and 1995, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS - The carrying amount of plant and
equipment and intangibles is evaluated periodically in relation to the
future undiscounted cash flows of the underlying businesses.
Adjustments are made to fair value if the sum of expected undiscounted
cash flows is less than book value.
<PAGE> 91
GENERAL INSURANCE - Borden Foods is generally self-insured for losses
and liabilities relating to workers' compensation, health and welfare
claims, physical damage to property, business interruption and
comprehensive general, product and vehicle liability. Losses are
accrued for the estimated aggregate liability for claims incurred using
certain actuarial assumptions followed in the insurance industry and
Borden Foods' experience.
INCOME TAXES - Income taxes are accounted for using the liability
method in accordance with SFAS No. 109 "Accounting for Income Taxes".
Subsequent to October 1, 1996, Borden Foods is not included in the
domestic consolidated tax return for Borden and deferred income taxes
are recorded to recognize the future effects of temporary differences
which arise between financial statement assets and liabilities and
their bases for income tax reporting purposes. Prior to October 1,
1996, the domestic operations of Borden Foods were included in
Borden's consolidated tax return, and accordingly, income tax assets
and liabilities are included in Owner's Investment in the accompanying
financial statements. Taxes related to foreign operations have been
provided for in accordance with SFAS No. 109.
PENSION AND RETIREMENT SAVINGS PLANS - Most of the employees of Borden
Foods are covered under the Borden domestic pension plan, one of the
foreign plans sponsored by Borden Foods or one of the union-sponsored
plans to which Borden Foods contributes. Substantially all domestic
employees participate in Borden's retirement savings plans. Borden
Foods' cost of providing the retirement savings plans represents its
matching of eligible contributions made by participating employees and
is recognized as a charge to income in the year the cost is incurred.
NON-PENSION POSTEMPLOYMENT BENEFITS - Borden Foods provides certain
health and life insurance benefits for eligible retirees and their
dependents, the cost of which is accrued during the employees' working
careers. Borden Foods provides certain other postemployment benefits to
qualified former or inactive employees. The cost of such benefits
provided to former or inactive employees after employment, but before
retirement, are accrued when it is probable that a benefit will be
provided.
FOREIGN CURRENCY TRANSLATIONS - All assets and liabilities of foreign
operations are translated into U.S. dollars at fiscal year-end exchange
rates. Income and expense items are translated at average exchange
rates prevailing during the fiscal year. The resulting translation
adjustments are recorded in Shareholder's Equity/Owner's Investment.
DERIVATIVE FINANCIAL INSTRUMENTS - Borden Foods enters into forward
foreign exchange contracts to hedge transactions and firm commitments
denominated in foreign currencies. Gains and losses on forward
contracts which hedge foreign currency transactions are recognized in
income and offset the foreign exchange gains and losses on the
underlying transactions. Amounts recognized on forward contracts were
losses of $622 and $1,597 and a gain of $506 for the years ended
December 31, 1996, 1995 and 1994, respectively. Gains and losses on
forward contracts which hedge firm commitments are deferred and
included in the basis of the transactions underlying the commitments.
Amounts deferred on forward contracts were a loss of $389 and a gain of
$354 at December 31, 1996 and 1995, respectively.
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially
subject Borden Foods to concentrations of credit risk consist
principally of temporary cash investments and accounts receivable.
Borden Foods places its temporary cash investments with high quality
institutions and, by policy, limits the amount of credit exposure to
any one institution. Concentrations of credit risk with respect to
accounts receivable are limited due to the large number of customers
comprising Borden Foods' customer base and their dispersion across many
different industries and geographies. Borden Foods generally does not
require collateral or other security to support customer receivables.
STOCK-BASED COMPENSATION - The Financial Accounting Standards Board
has issued SFAS No. 123, "Accounting for Stock-Based Compensation",
which Borden Foods adopted for disclosure only effective January 1,
1996. As permitted by SFAS No. 123, Borden Foods will continue to
apply its current accounting policy of the intrinsic value method
under Accounting Principles Board Opinion No. 25 and will include the
additional disclosures required by SFAS No. 123.
<PAGE> 92
PER SHARE INFORMATION - Net income (loss) per common share is computed
by dividing net income (loss) by the weighted average number of common
shares outstanding during the period from October 1, 1996 to December
31, 1996 and assuming these shares were outstanding for the full
periods of 1994 and 1995 as well as the nine-month period ended
September 30, 1996.
4. RELATED PARTIES
Borden Foods is engaged in various transactions with Borden and its
affiliates in the ordinary course of business. Prior to January 1,
1996, certain general and administrative costs, such as group and
general insurance, retirement benefits, and corporate administrative
departments, were allocated to Borden Foods. A description of the
allocation methods for these costs follows.
Pension and group insurance benefits were charged to Borden Foods
based on allocations provided by Borden's actuary which were
determined from actual employee census data. General insurance
expenses, which include liability and property damage insurance, were
allocated based on actual claims costs and a pro-rata share of
Borden's catastrophic insurance coverage premiums. Corporate
information services and corporate staff department services were
allocated based on usage of resources such as personnel and data
processing equipment. For purposes of these financial statements,
certain other administrative expenses incurred by Borden in 1995 and
1994 have been allocated to Borden Foods based on a pro-rata share of
Borden's total sales. Management believes the allocation methods
described are reasonable. Amounts due to Borden resulting from these
allocations, as well as the sales and purchases of products and
materials to or from other Borden operations, are reflected in Owner's
Investment through September 30, 1996.
Subsequent to January 1, 1996, a subsidiary of Borden provides certain
administrative services to Borden Foods at negotiated fees. These
services include: processing of payroll and active and retiree group
insurance claims, administration of workers compensation claims, and
securing insurance coverage for catastrophic claims. Borden Foods
reimburses the Borden subsidiary for payments for general
disbursements, and general and group insurance and post employment
benefit claims. The amount owed by Borden Foods for reimbursement of
payments and for services was $11,678 as of December 31, 1996.
Borden Foods is generally self-insured for general insurance claims
and postemployment benefits other than pensions. The liabilities for
these obligations are included in Borden Foods' financial statements.
By agreement, Borden has retained the obligation for active group
insurance claims incurred in 1996 and paid in 1997.
Employee pension benefits are provided under the Borden domestic
pension plans to which Borden Foods contributes. The U.S. employees
participate in the Borden retirement savings plan. Borden also
provides certain health and life insurance benefits for eligible
employees. Borden Foods has recognized expenses associated with these
benefits, certain of which are determined and allocated by Borden's
actuary. Borden Foods has assumed an actuarially-determined portion of
Borden's U.S. net pension liability, however this amount is
considered to be an amount due to affiliate since Borden retains the
legal obligation for these benefits (see Note 9).
The following table summarizes the allocation of costs to Borden Foods
in 1995 and 1994 and the charges for these costs in 1996:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Employee benefits $4,931 $3,776 $5,507
Group and general insurance 12,947 16,799 18,090
Corporate staff departments
and overhead 16,728 15,065 11,850
------------- ------------- -------------
$34,606 $35,640 $35,447
============= ============= =============
</TABLE>
<PAGE> 93
Owner's Investment, on a historical cost basis, was $1,067,925 as of
December 31, 1993. The following table reconciles this amount to the
January 1, 1995 Owner's Investment balance as recorded on the Statement
of Changes in Shareholder's Equity/Owner's Investment included in the
accompanying financial statements:
<TABLE>
<S> <C>
Balance as of December 31, 1993 $1,067,925
Net Income for 1994 22,812
Change in accumulated translation (4,799)
Loans made to Borden affiliates (43,499)
Other intercompany changes (80,096)
Affiliated dividends (13,012)
--------------
Balance as of December 31, 1994 949,331
Purchase accounting adjustments (61,930)
==============
Balance as of January 1, 1995 $887,401
==============
</TABLE>
Adjustments for purchase accounting consist of a $43,029 decrease in
property and equipment, a $6,333 decrease in long-term assets and a
$12,568 decrease in intangible assets.
Prior to January 1, 1996, receipts, disbursements and the net cash
position of Borden Foods were managed by Borden. Accordingly, both cash
generated and required by Borden Foods' domestic operations are
recorded in Owner's Investment for such periods. There was no interest
expense allocated to Borden Foods with respect to such domestic
"lendings" or "borrowings". An allocation of interest was not practical
given the longevity of the Borden Foods operations and because Borden
had not historically identified a capital structure comprised of
separate elements of debt and equity applicable to Borden Foods as a
separate entity. Net domestic lendings or borrowings are reflected in
Owner's Investment through September 30, 1996.
Subsequent to January 1, 1996, Borden Foods manages its own receipts,
disbursements and net cash position. Cash balances in international
businesses which are not repatriated to the U.S. can be loaned to other
Borden affiliates at a variable rate (currently LIBOR plus 0.75%) for
generally a 30-day period. Net lendings or borrowings by international
businesses subsequent to October 1, 1996 are included in amounts due
from or to affiliates. Net loans due to international affiliates were
$22,687 at December 31, 1996.
During 1996, Borden Foods entered into a loan agreement (the "Loan
Agreement") to borrow funds from Borden under a revolving loan facility
and term loans. The revolving loan facility, which terminates on
December 31, 1997, provides for borrowings up to $250 million at a
variable interest rate equal to prime. A commitment fee based on a
variable rate tied to the public debt rating of Borden is charged on
the unused portion of the revolving loan facility. The outstanding
balance under the revolving loan facility was $24,360 at December 31,
1996. Commitment fees charged on the unused portion of the revolving
facility were $816 for 1996.
The loan agreement contains certain restrictions on the activities of
Borden Foods, including restrictions on liens, the incurrence of
indebtedness, mergers and consolidations, sales of assets, investments,
payments of dividends, changes in nature of business, prepayments of
certain indebtedness, transactions with affiliates, capital
expenditures, changes in control of Borden Foods and the use of
proceeds from asset sales.
As an affiliated guarantor, Borden Foods' aggregate liability shall not
exceed the greater of its outstanding affiliated borrowings or 95% of
its adjusted net assets while Borden or any other obligated parties
have obligations outstanding. Borden's outstanding credit facility and
public borrowings amounted to approximately $910,000 at December
31, 1996.
<PAGE> 94
In connection with the October 1, 1996 transaction, Borden Foods issued
$166,990 in long-term notes to Borden at a fixed 12% interest rate due
on November 30, 1999. Interest expense on the long-term notes was
$19,621 for 1996. By agreement with Borden, interest charges and
commitment fees under the Loan Agreement were calculated as if the
borrowings under the Loan Agreement were outstanding as of January 1,
1996. Amounts payable for such charges were $20,849 as of December 31,
1996.
Effective January 1, 1997, the interest rate on the long-term notes to
Borden was changed to 10.25%. Effective February 3, 1997, the interest
rate on the revolving loan facility also was changed: borrowings with
three days notice and which are outstanding at least 30 days will bear
interest at LIBOR plus 0.25%; same day borrowings will bear interest at
prime plus 0.50%.
Borden Foods performs certain administrative services on behalf of
other Borden affiliates. These services include sales administration,
promotion, purchasing and research and development. Holdings charged
these affiliates $7,438 for such services in 1996, of which $1,261 is
receivable at December 31, 1996. Borden Foods also sells certain
merchandise to Borden affiliates, for which $12,984 is receivable at
December 31, 1996.
Gross interest income of $8,878 is recorded in the 1996 statement of
operations relating to notes due from a KKR affiliate which were
contributed to Holdings on July 2, 1996 and which were contributed to
Borden in connection with the purchase of Borden Foods on October 1,
1996.
Borden Foods generated net losses in the first nine months of 1996. By
agreement, Borden will reimburse Borden Foods for the tax effect of
these losses as Borden Foods incurs tax liability on future net income.
The amount due from Borden under this arrangement of $10,727 is
included in amounts due from affiliates.
Borden continues to provide executive, financial and strategic
management to Borden Foods for which it charges an annual fee of
$1,000.
5. ASSET WRITE-DOWNS AND BUSINESS REALIGNMENT
In 1994, Borden Foods recorded a charge of $31,957 primarily relating
to the write-down of certain intangibles associated with a prior
acquisition in the processed cheese business and closure of a pasta
plant.
In December 1996, management approved the closure of certain domestic
pasta plants in 1997 in order to reduce its SKU complexity and
manufacturing capacity. Accordingly, $27,817 has been provided to write
down the facilities to their net realizable value. Management
anticipates certain additional costs to be incurred in 1997 related to
these plant closures.
In March 1997, Borden Foods announced its intention to sell certain
businesses from its current portfolio which are considered not to be
aligned with its great tasting, wholesome, grain-based meal solution
strategy. Among the businesses to be sold are its milk powder,
processed cheese, sweetened condensed milk and reconstituted lemon
juice businesses. The method of disposition, timing and estimated
proceeds are currently being evaluated. Management expects the proceeds
from such dispositions to exceed their current carrying cost.
<PAGE> 95
6. DEBT AND COMMITMENTS
Debt outstanding at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------- ---------------------------
Due Due
Long-term within Long-term within
one year one year
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Borrowings under loan agreement with
Borden (see Note 4) $166,990 $24,360 - -
Loans due to affiliates (see Note 4) - 32,036 - -
Foreign bank loans 3,773 15,707 7,837 23,525
Industrial Revenue Bonds 2,928 - 2,793 -
----------- ------------ ------------ -----------
Total debt $173,691 $72,103 $10,630 $23,525
=========== ============ ============ ===========
</TABLE>
The foreign bank loans bear interest at rates ranging from 3% to
15.25%. Fixed assets with a net book value of $4,422 at December 31,
1996 have been pledged as collateral on these loans. The Industrial
Revenue Bonds do not bear interest.
The foreign bank loans and industrial revenue bonds mature as follows:
<TABLE>
<C> <C>
1997 $15,707
1998 1,420
1999 1,446
2000 659
2001 426
2002 and beyond 2,750
=============
$22,408
=============
</TABLE>
7. LEASES
Borden Foods currently leases warehouse space, production facilities
and vehicles under long-term or month-to-month arrangements. Aggregate
maturities of minimum annual rentals under operating leases at December
31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $5,061
1998 3,367
1999 2,310
2000 1,929
2001 1,093
</TABLE>
<PAGE> 96
8. INCOME TAXES
Effective October 1, 1996, Borden Foods is recognized as a separate
legal entity for U.S. Federal income tax purposes. Prior to such time,
Borden Foods was included by Borden in determining U.S. taxable income
and all U.S. tax payments were made by Borden. Provisions for income
taxes and deferred tax assets and liabilities were determined as though
Borden Foods filed separate U.S. Federal and state corporate income tax
returns. Domestic income tax assets and liabilities determined on a
separate return basis are included in Owner's Investment prior to
October 1, 1996.
As stated in Note 2, the accompanying financial statements reflect the
assets of Borden Foods on a purchase accounting basis from December
31, 1994. The tax basis of Borden Foods' net assets was not affected
by the December 1994 KKR acquisition. Deferred tax assets and
liabilities at September 30, 1996 reflect the differences between the
purchase accounting book basis and the historical tax basis of Borden
Foods' net assets.
As a result of the October 1 purchase, the tax basis of Borden Foods'
net assets was increased to reflect the purchase price of $550 million
less assets transferred and liabilities assumed. The book basis of
Borden Foods' net assets did not change as a result of the October 1,
1996 transaction, as the sale was between related parties and Borden's
principal stockholder continued to control Borden Foods. Deferred tax
assets and liabilities were adjusted at October 1, 1996 to reflect the
change in the tax basis. The net adjustment of $23,126 was included in
Owner's Investment in accordance with Emerging Issues Task Force
(EITF) 94-10.
The income tax provision (benefit) for the periods ended December 31,
1996, 1995 and 1994 consists of the following:
<TABLE>
<CAPTION>
Successor Predecessor
------------------------------ -------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Current
Federal 14,020
State and local 2,543
Foreign 6,942 3,786 211
------------- ------------- -------------
23,505 3,786 211
Deferred
Federal (15,156)
State and local (2,840)
Foreign 524 (1,265) 3,539
------------- ------------- -------------
(17,472) (1,265) 3,539
------------- ------------- -------------
Total non affiliated provision 6,033 2,521 3,750
Domestic provision (benefit)
included in Owner's Investment (22,380) (18,770) 19,864
------------- ------------- -------------
Total $ (16,347) $(16,249) $23,614
============= ============= =============
</TABLE>
The domestic and foreign components of income before income taxes are
as follows:
<TABLE>
<CAPTION>
Successor Predecessor
------------------------------- --------------
1996 1995 1994
------------- ------------- --------------
<S> <C> <C> <C>
Domestic $(64,051) $(49,950) $32,942
Foreign 32,471 25,443 13,484
------------- ------------- -------------
Total $(31,580) $(24,507) $46,426
============= ============= ==============
</TABLE>
<PAGE> 97
The following table reconciles the maximum statutory U.S. Federal
income tax rate multiplied by income before taxes to the recorded
income tax expense:
<TABLE>
<CAPTION>
Successor Predecessor
--------------------------- --------------
1996 1995 1994
----------- ------------ --------------
<S> <C> <C> <C>
U.S. federal income tax at statutory rate $(11,053) $(8,577) $16,249
State income tax expense, net of federal benefit (2,488) (1,925) 1,568
Goodwill amortization & other nondeductibles 649 637 6,767
Foreign rate differentials (3,899) (6,384) (970)
Other 444
--------- ---------- -------------
Income tax (benefit) $(16,347) $(16,249) $23,614
========= ========== =============
</TABLE>
The net current and noncurrent components of deferred income taxes
recognized in the balance sheet at December 31, 1996 are as follows:
<TABLE>
<S> <C>
Net current asset $17,559
Net noncurrent liability (41,527)
-----------
Net liability $(23,968)
===========
</TABLE>
Temporary differences are associated with the financial statement's
assets and liabilities shown in the table below. Deferred income tax
assets and liabilities have been recorded in the following amounts as
follows:
<TABLE>
<CAPTION>
1996
-------------
<S> <C>
ASSETS:
Non pension post employment obligation $4,838
Litigation 5,655
Coupon accrual 4,736
General insurance 5,320
Incentive compensation 2,185
Loss and credit carryforwards 6,613
Other 4,015
---------
Gross deferred tax assets 33,362
Valuation allowance (6,613)
---------
26,749
LIABILITIES:
Property and equipment 42,849
Trademarks 2,142
Slotting allowances 1,580
Unremitted earnings of foreign subsidiaries 444
Other 3,702
---------
50,717
=========
NET LIABILITY $ (23,968)
=========
</TABLE>
Borden Foods has recorded a $6,613 valuation allowance for the foreign
net operating losses due to uncertainty as to whether the deferred tax
asset is realizable. The operating losses begin expiring in 1997.
<PAGE> 98
9. PENSION AND RETIREMENT SAVINGS PLANS
Most employees of Borden Foods participate in foreign and domestic
pension plans. For most salaried employees, benefits under these plans
generally are based on compensation and credited service. For most
hourly employees, benefits under these plans are based on specified
amounts per year of credited service.
Borden retains the obligation for the retirement benefits of Borden
Foods employees covered under Borden's domestic pension plan. An
actuarially determined pension liability which approximates the portion
of the total plan which relates to Borden Foods of $2,732 is included
in other non current liabilities at December 31, 1996.
Following are the components of the net pension expense recognized by
Borden for the domestic pension plan. Amounts provided for 1994
represent expense on a historical cost basis, while amounts for 1995
and 1996 represent expense calculated on a purchase accounting basis
(amounts in millions).
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------ -----------
<S> <C> <C> <C>
Service cost - benefits earned during the year $7.2 $6.4 $10.3
Interest cost on projected benefit obligation 27.4 31.2 30.8
Return on plan assets (26.9) (87.1) 9.2
Net amortization or deferral (5.5) 51.4 (48.8)
------- -------- -------
$2.2 $1.9 $1.5
======= ======== =======
</TABLE>
Amounts charged to Borden Foods for participation in this plan were
$1,764, $838 and $3,103 for the years ended December 31, 1996, 1995 and
1994, respectively.
The weighted average rates used to determine net periodic pension
expense for Borden's domestic pension plan were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Discount rate 6.8% 8.8% 7.5%
Rate of increase in future compensation levels 4.3% 5.3% 4.5%
Expected long-term rate of return on plan assets 7.8% 9.8% 9.0%
</TABLE>
Borden's funding of its pension plans equals or exceeds the minimum
funding requirements imposed by federal and foreign laws and
regulations. Plan assets consist primarily of equity securities and
corporate obligations. The funded status of Borden's domestic pension
plan on a purchase accounting basis was as follows (in millions):
<TABLE>
<CAPTION>
Accumulated Benefits
Exceed Plan Assets
1996 1995
----------- ------------
<S> <C> <C>
Plan assets at fair value $393.6 $400.4
Actuarial present value of:
Vested benefit obligation (383.1) (403.3)
Accumulated benefit obligation (400.4) (420.4)
Projected benefit obligation (400.4) (421.8)
--------- ---------
Plan assets less than projected benefit obligation (6.8) (21.4)
Unrecognized prior service cost 2.9 3.2
Unrecognized loss (benefit) 2.2 (0.8)
Minimum liability adjustment (5.1) (1.0)
--------- ---------
Net pension liability $(6.8) $(20.0)
========= =========
</TABLE>
<PAGE> 99
The weighted average discount rates and rates of increase in future
compensation levels used in determining the projected benefit
obligation for the domestic pension plan were 7.5% and 4.5%,
respectively, as of December 31, 1996 and 6.8% and 4.3%, respectively,
as of December 31, 1995.
Certain employees of Borden Foods participate in a Canadian pension
plan. Following are the components of the net pension expense for the
Borden Foods' Canadian pension plan. Amounts provided for 1996 and 1995
represent expense on a purchase accounting basis. Amounts provided for
1994 represent expense on a historical cost basis (in millions).
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
----------- ------------ -----------
<S> <C> <C> <C>
Service cost - benefits earned during the year $0.2 $0.2 $0.2
Interest cost on projected benefit obligation 1.2 1.2 1.1
Return on plan assets (3.2) (3.0) 0.8
Net amortization or deferral 1.4 1.1 (2.8)
------- -------- -------
$(0.4) $(0.5) $(0.7)
======= ======== =======
</TABLE>
The weighted average rates used to determine net periodic pension
expense for the Canadian pension plan were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------ -----------
<S> <C> <C> <C>
Discount rate 8.3% 10.0% 8.0%
Rate of increase in future compensation levels 5.3% 7.0% 5.0%
Expected long-term rate of return on plan assets 9.3% 11.0% 9.0%
</TABLE>
The funded status of the Canadian pension plan on a purchase accounting
basis was as follows (in millions):
<TABLE>
<CAPTION>
Plan Assets Exceed
Accumulated Benefits
1996 1995
----------- ------------
<S> <C> <C>
Plan assets at fair value $21.1 $19.1
Actuarial present value of:
Vested benefit obligation (15.5) (14.6)
Accumulated benefit obligation (15.8) (14.9)
Projected benefit obligation (16.0) (15.0)
---------- ----------
Plan assets greater than projected benefit obligation 5.1 4.1
Unrecognized loss (benefit) (0.4) 0.5
---------- ----------
Net pension asset $4.7 $4.6
========== ==========
</TABLE>
The weighted average discount rates and rates of increase in future
compensation levels used in determining the projected benefit
obligation for the Canadian pension plan were 7.75% and 4.75%,
respectively, as of December 31, 1996 and 8.25% and 5.25%,
respectively, for December 31, 1995.
Certain employees of Borden Foods participate in international pension
plans established in Colombia, South Africa, Panama and Ireland.
Following are the components of the net pension expense for Borden
Foods'
<PAGE> 100
international pension plans. Amounts provided for 1996 and 1995
represent expense on a purchase accounting basis. Amounts provided for
1994 represent expense on a historical cost basis (in millions).
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
----------- ------------ -----------
<S> <C> <C> <C>
Service cost - benefits earned during the year $0.3 $0.3 $0.3
Interest cost on projected benefit obligation 0.4 0.4 0.4
Return on plan assets (0.6) (0.6) (0.5)
---------- ----------- ----------
$0.1 $0.1 $0.2
========== =========== ==========
</TABLE>
The weighted average rates used to determine net periodic pension
expense for the international pension plans were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate 10.4% 10.3% 8.7%
Rate of increase in future compensation levels 7.0% 6.7% 3.6%
Expected long-term rate of return on plan assets 12.4% 13.1% 11.0%
</TABLE>
The funded status of the international pension plans on a purchase
accounting basis was as follows (in millions):
<TABLE>
<CAPTION>
1996 1995
--------------------------------- ---------------------------------
Plan Assets Accumulated Plan Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Plan Accumulated Exceed Plan
Benefits Assets Benefits Assets
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Plan assets at fair value $5.5 $0.3 $4.9 $0.5
Actuarial present value of:
Vested benefit obligation 3.9 0.7 2.8 0.9
Accumulated benefit obligation 4.5 0.8 3.2 1.1
Projected benefit obligation 5.2 1.2 4.2 1.6
-------------- -------------- ------------- -------------
Plan assets (less) greater than
projected benefit obligaton 0.3 (0.9) 0.7 (1.1)
Unrecognized (gain) loss 1.1 (0.1) 0.8 0.2
-------------- -------------- ------------- -------------
Net pension asset (liability) $1.4 $(1.0) $1.5 $(0.9)
============== ============== ============= =============
</TABLE>
The weighted average discount rates and rates of increase in future
compensation levels used in determining the projected benefit
obligation for the international pension plans were 8.1% and 5.3%,
respectively, as of December 31, 1996 and 8.9% and 6.0%, respectively,
for December 31, 1995.
Most employees not covered by one of the above plans are covered by
collectively bargained agreements which are generally effective for
five years. Under federal pension law, there would be continuing
liability to these pension trusts if Borden ceased all or most
participation in such trust, and under certain other specified
conditions. Charges to Borden Foods for payments to pension trusts on
behalf of employees not covered by Borden plans were not considered
significant.
Amounts charged to Borden Foods for matching contributions under the
Borden sponsored retirement savings plans were $2,319, $1,827 and
$2,404 for the years ended December 31, 1996, 1995, and 1994,
respectively.
<PAGE> 101
Eligible salaried and hourly non-bargaining employees may
contribute up to 5% of their pay (7% for certain longer service
salaried employees), which has been matched 50% by Borden since the
first quarter of 1994.
10. NON-PENSION POST EMPLOYMENT BENEFITS
Borden Foods provides certain health and life insurance benefits for
eligible domestic retirees and their dependents. The cost of these
benefits is accrued as a form of deferred compensation earned during
the period that employees render service.
Participants who are not eligible for Medicare are provided with the
same medical benefits as active employees, while those who are eligible
for Medicare are provided with supplemental benefits. The
postretirement medical benefits are contributory for retirements after
1983; the postretirement life insurance benefit is noncontributory.
Prior to January 1, 1996, amounts attributable to postretirement
benefits were commingled in one Borden-sponsored plan. Allocation of
liabilities for such benefits was made to Borden Foods based upon the
actuarially determined obligation relating to the Borden Foods'
domestic employees. The amount recorded on the balance sheet for such
liabilities was $11,500 at December 31, 1995. Effective January
1, 1996, the components of postretirement benefit expense and unfunded
postretirement obligation were accounted for separately for Borden
Foods.
The following represents the status of the total Borden unfunded
postretirement benefit obligation (including Borden Foods) as of
December 31, 1995, on a purchase accounting basis. The information
provided as of December 31, 1996 represents the status of Borden Foods
segregated plan on a purchase accounting basis. Amounts in millions:
<TABLE>
<CAPTION>
Borden Borden,
Foods Inc.
1996 1995
----------- ----------
<S> <C> <C>
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees $(10.4) $(147.7)
Fully eligible active plan participants (0.2) (3.6)
Other active plan participants (0.7) (27.3)
-------- --------
(11.3) (178.6)
Unrecognized prior service cost 0.0 (3.4)
Unrecognized net loss 0.1 22.2
-------- --------
Accrued postretirement liability $(11.2) $(159.8)
======== ========
</TABLE>
A portion of Borden's expense for postemployment and postretirement
benefits was allocated annually to Borden Foods in 1995 and 1994 (See
Note 4). The following are the components of annual expense for
postretirement benefits. Information provided for 1994 represents
annual expense for the total Borden plan on a historical cost basis,
while information provided for 1995 represents annual expense for the
total Borden plan on a purchase accounting basis. Information
provided for 1996 represents the segregated Borden Foods' plan on a
purchase accounting basis. Amounts in millions:
<PAGE> 102
<TABLE>
<CAPTION>
Year Ended December 31,
Borden Borden, Borden,
Foods Inc. Inc.
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Service cost $0.1 $1.1 $3.4
Interest cost 0.7 13.3 17.9
Net amortization and deferral 0.0 0.0 (9.6)
----------- ---------- ----------
$0.8 $14.4 $11.7
=========== ========== ==========
</TABLE>
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.5% and 6.75% for December 31, 1996 and 1995,
respectively.
The assumed health care cost trend rate used in measuring Borden
Foods' accumulated postretirement benefit obligation at December 31,
1996 was 9.5% for 1997, gradually declining to 5.5% in 2004 and
thereafter. The comparable assumptions for the prior year were
9.5% and 4.8%. A one percentage point increase in the health care cost
trend rate would increase Borden Foods' accumulated postretirement
benefit obligation as of December 31, 1996 by $1.1 and the sum of the
service and interest costs in 1996 by $0.1.
Borden Foods provides certain postemployment benefits, primarily
medical and life insurance benefits for long-term disabled employees,
to qualified former or inactive employees. The cost of benefits
provided to former or inactive employees after employment, but before
retirement, is accrued when it is probable that a benefit will be
provided. The amounts of such charges are not considered significant.
11. DERIVATIVE FINANCIAL INSTRUMENTS
Borden Foods enters into foreign exchange contracts to hedge
transactions denominated in foreign currencies. The purpose of these
foreign currency hedging activities is to protect against the risk that
the eventual cash flows that result from operating in foreign countries
will be adversely affected by changes in exchange rates. Foreign
exchange contracts are also entered into for funding purposes to fully
hedge loans between Borden Foods' international subsidiaries and
other Borden Affiliates.
The notional amounts of foreign exchange contracts were $153,295 and
$42,051 at December 31, 1996 and 1995, respectively. All of the
contracts mature in less than one year.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying or notional amount and fair
value of Borden Foods' financial instruments at December 31, 1996 and
1995. The fair value of a financial instrument is the amount at which
the instrument could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale. The
carrying amounts of cash and cash equivalents, accounts receivable and
payable, accrued liabilities and debt are considered reasonable
estimates of their fair values.
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
Notional Fair Notional Fair
Amount Value Amount Value
-------- ------ -------- -----
<S> <C> <C> <C> <C>
DERIVATIVES RELATING TO:
Foreign currency contracts - gains $105,322 $2,505 $19,070 $287
Foreign currency contracts - losses 47,973 (393) 22,981 (252)
---------- --------- --------- ------
$153,295 $2,112 $42,051 $35
========== ========= ========= ======
</TABLE>
<PAGE> 103
13. UNITS AND UNIT APPRECIATION RIGHTS
During 1996, a Unit Incentive Plan was formed which provides for the
granting of options, UARs, units and other unit-based grants to key
employees of Borden Foods and associated persons at the discretion of
the Board of Directors of Borden Foods.
During 1996, the LLC sold 1,080,000 Class A units to certain management
employees of Borden Foods under this Incentive Plan. The units are
generally restricted as to transfer and allow for the LLC, at its
discretion, to repurchase the units, upon certain conditions including
termination of the unitholder's employment, prior to full vesting after
five years.
Under the Incentive Plan, BFC issued Unit Appreciation Rights (UARs) to
the unitholders. The UAR entitles the holder to receive an amount in
cash equal to the excess of the market price (as defined in the UAR
agreement) of the Class A unit over the exercise price of the UAR. The
UARs vest ratably over five years and expire upon certain events,
including termination of the unitholder's employment, but in no case to
exceed ten years. Four UARs were issued for each unit purchased: one
UAR with an exercise price of $10 per unit and three UARs with an
exercise price of $20 per unit. At December 31, 1996, there were
1,080,000 UARs outstanding with an exercise price of $10 and 3,240,000
UARs outstanding with an exercise price of $20. For 1996, there was no
compensation expense recorded in relation to the issuance of UARs since
the exercise price exceeds the underlying value of the UARs.
14. LITIGATION
In July 1995, a Fresno, California jury returned a verdict against
Borden Foods for wrongful termination of a tomato packing agreement,
for which $14.5 million has been provided. In granting the award for
lost profits to Helm Tomatoes, Inc., the jury found that while the
business had a legal right to terminate the agreement, it was estopped
from doing this by an oral representation made by a former employee.
Borden Foods is contesting the verdict.
15. RISKS AND UNCERTAINTIES
Borden Foods has unconditional purchase obligations for raw materials
and packaging of $30,724 and $95,679 at December 31, 1996 and 1995,
respectively.
Raw materials, such as semolina, tomatoes, milk and cheese, account for
a high percentage of Borden Foods' total production costs. The Company
purchases a major portion of these materials under market sensitive
supply contracts, and therefore Borden Foods' operating results are
subject to short term fluctuations in these raw material market prices.
Because of the highly competitive and price sensitive nature of the
markets in which Borden Foods operates, Borden Foods' ability to pass
these raw material price increases through to the customer is limited
and often depends upon Borden Foods' competitors raising their prices
as well.
<PAGE> 104
16. SUPPLEMENTAL FINANCIAL DATA
<TABLE>
<CAPTION>
Successor Predecessor
------------------------------- -------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Research and development $21,867 $16,530 $11,126
Rent expense 5,472 5,360 3,099
Depreciation and amortization 46,075 44,780 46,130
Advertising 56,411 40,786 42,036
</TABLE>
17. GEOGRAPHIC SEGMENT INFORMATION
<TABLE>
<CAPTION>
Successor Predecessor
------------------------------- -------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
NET TRADE SALES:
United States $1,204,437 $1,143,565 $1,154,465
Canada 170,666 167,404 169,805
Europe 81,679 91,788 96,618
Asia 125,158 125,364 125,778
Africa 85,939 67,216 70,931
Latin America 281,962 243,552 204,619
------------ ------------ ------------
$1,949,841 $1,838,889 $1,822,216
============ ============ ============
OPERATING INCOME (LOSS):
United States $(49,197) $(55,100) $14,180
Canada 5,747 2,699 (9,683)
Europe 10,779 3,601 (1,073)
Asia (8,141) 9,265 20,822
Africa 3,336 1,301 6,833
Latin America 17,699 5,085 12,893
------------ ------------ ------------
$(19,777) $(33,149) $43,972
============ ============ ============
IDENTIFIABLE ASSETS:
United States $659,495 $659,842
Canada 75,795 64,798
Europe 138,280 181,591
Asia 59,295 25,171
Africa 25,346 24,699
Latin America 188,232 175,589
------------ ------------
$1,146,443 $1,131,690
============ ============
</TABLE>
Asian net trade sales included in the geographic segment information
above represent export shipments from Europe. Other sales/transfers
between geographic segments are not included.
<PAGE> 105
[WISE HOLDINGS, INC. AND SUBSIDIARIES LOGO]
WISE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1996
<PAGE> 106
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Shareholder of Wise Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Wise Holdings,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, owner's investment and shareholder's
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Wise Holdings, Inc. and
subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Columbus, Ohio
February 26, 1997
<PAGE> 107
WISE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
(PREDECESSOR BASIS)
(DOLLARS IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 278,054 $ 282,797 $ 285,423
Cost of goods sold 161,124 161,288 156,811
--------- --------- ---------
Gross margin 116,930 121,509 128,612
Distribution expense 25,864 30,514 32,543
Marketing expense 78,150 79,515 77,463
General & administrative expense 15,462 13,014 12,003
--------- --------- ---------
Operating income (loss) (2,546) (1,534) 6,603
Interest expense, net 1,218
Other (income) expense 307 (57) 234
--------- --------- ---------
Income (loss) before income taxes (4,071) (1,477) 6,369
Income tax expense (benefit) (490) (349) 2,580
--------- --------- ---------
Net income (loss) $ (3,581) $ (1,128) $ 3,789
========= ========= =========
Per Share Information
- ---------------------
Net income (loss) per common share $ (35.81) $ (11.28) $ 37.89
Average number of common shares outstanding
during the period 100 100 100
- ---------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 108
WISE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,027 $ 601
Accounts receivable (less allowance of $1,345 23,771 22,042
and $998)
Affiliated receivables 1,251
Inventories:
Finished goods 3,744 4,003
Raw materials 5,339 6,606
Prepaids and other current assets 4,196 5,371
------- -------
41,328 38,623
------- -------
PROPERTY AND EQUIPMENT
Land 1,331 1,297
Buildings and improvements 4,583 3,993
Machinery and equipment 35,178 30,835
------- -------
41,092 36,125
Less: Accumulated depreciation 11,524 5,767
------- -------
29,568 30,358
------- -------
INTANGIBLES AND OTHER ASSETS
Trademarks, (net of accumulated amortization 17,865 18,335
of $940 and $470)
Other assets 1,918 2,159
------- -------
19,783 20,494
------- -------
TOTAL ASSETS $90,679 $89,475
======= =======
- -----------------------------------------------------------------------
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 109
WISE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996 1995
- ----------------------------------------------------------------
<S> <C> <C>
LIABILITIES, OWNER'S INVESTMENT AND
SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts and drafts payable $15,924 $13,942
Affiliated payables 2,163
Accrued liabilities 14,640 15,024
------- -------
32,727 28,966
OTHER LIABILITIES
Affiliated long-term debt 10,145
Post-employment benefits other than pensions 9,928 10,053
Other long-term liabilities 1,247 1,139
Minority interest 683
------- -------
22,003 11,192
------- -------
Commitments and contingencies
OWNER'S INVESTMENT AND SHAREHOLDER'S EQUITY
Common stock - $0.01 par value,
100 shares authorized, issued and
outstanding --
Paid in capital 34,200
Owner's investment 49,317
Retained earnings (from July 2, 1996) 1,749
------- -------
35,949 49,317
------- -------
TOTAL LIABILITIES, OWNER'S
INVESTMENT AND SHAREHOLDER'S
EQUITY
$90,679 $89,475
======= =======
- ----------------------------------------------------------------
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 110
WISE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
(PREDECESSOR
BASIS)
(DOLLARS IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income (loss) $(3,581) $(1,128) $ 3,789
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Minority interest share in income 28
Depreciation 5,755 5,829 5,788
Amortization 470 470 797
Other noncash 755 (568) 436
Net change in assets and liabilities:
Accounts receivable (2,076) 1,129 (640)
Affiliated receivables (1,251)
Inventories 1,526 123 (410)
Prepaids and other current assets 1,175 (867) 464
Other assets 241 (194) 1,068
Accounts and drafts payable 1,982 1,697 (4,592)
Affiliated payables 2,163
Accrued liabilities (384) 1,932 1,161
Post-employment benefits other than pensions (125) 1,078 (485)
Other long-term liabilities 108 (1,187) (1,679)
------- ------- -------
6,786 8,314 5,697
------- ------- -------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (5,847) (2,956) (846)
Proceeds on sales of equipment 474 606 105
Acquisition of business (655)
------- ------- -------
(6,028) (2,350) (741)
------- ------- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Minority interest equity contribution from
management 655
Other increases (decreases) in owners investment 1,013 (6,234) (5,026)
------- ------- -------
1,668 (6,234) (5,026)
------- ------- -------
Increase (decrease) in cash and cash equivalents 2,426 (270) (70)
Cash and cash equivalents at beginning of period 601 871 941
------- ------- -------
Cash and cash equivalents at end of period $ 3,027 $ 601 $ 871
======= ======= =======
(continued)
- ---------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 111
WISE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
(PREDECESSOR BASIS)
(DOLLARS IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Noncash activity:
Acquisition of Wise net assets $(44,345)
Issuance of stock in exchange for notes of
principal stockholder 34,200
Issuance of note payable to finance purchase of
Wise net assets 10,145
Change in accounting basis as a result of
pushdown of KKR's acquisition of Wise
Value trademarks $ 16,306
Eliminate pre-existing intangibles (21,789)
Net writedown of property and equipment (9,429)
Cash Paid for Interest: 999
- ------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 112
WISE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OWNER'S INVESTMENT AND SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON INTERCOMPANY PAID IN RETAINED
(DOLLARS IN THOUSANDS) SHARES ACCOUNT CAPITAL EARNINGS TOTAL
------ ------- ------- -------- -----
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Predecessor Basis)
Balance, December 31, 1993 $72,828 $72,828
Net income 3,789 3,789
Net cash withdrawal by owner (5,026) (5,026)
-------- --------
(Predecessor Basis)
Balance, December 31, 1994 71,591 71,591
- --------------------------------------------------------------------------------------------------------------------------
Change in accounting basis as a result (14,912) (14,912)
of KKR's acquisition of Borden
Net loss (1,128) (1,128)
Net cash withdrawal by owner (6,234) (6,234)
-------- --------
Balance, December 31, 1995 49,317 49,317
- --------------------------------------------------------------------------------------------------------------------------
Net loss through July 1, 1996 (5,330) (5,330)
Net cash investment by owner 1,013 1,013
Recapitalization:
Issuance of common stock 100 (34,200) $34,200 -
Issuance of long-term debt (10,145) (10,145)
Minority interest (655) (655)
Net income from July 2, 1996 $1,749 $ 1,749
--- ------- ------- ------ --------
Balance, December 31, 1996 100 - $34,200 $1,749 $35,949
=== ======= ======= ====== =======
- --------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 113
WISE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except for per share information)
1. BACKGROUND AND NATURE OF OPERATIONS:
Wise Holdings, Inc. ("Wise") is a leading producer and distributor of salty
snacks in the eastern United States. Wise's product line includes potato chips,
cheese flavored baked and fried corn snacks, pretzels, tortilla chips, corn
chips, onion rings, pork rinds and other assorted snacks. Wise markets its
products under the brand names of WISE(R), CHEEZ DOODLES(R), QUINLAN(R), NEW
YORK DELI(R), KRUNCHERS!(R), BRAVOS(R), MOORE'S(R) AND WISE CHOICE(TM) and
conducts its business through three principal divisions: Wise, Moore's and
Caribbean Snacks. The Wise and Moore's divisions manufacture and distribute
primarily in the eastern United States. Caribbean Snacks, located in Puerto
Rico, serves as a distribution center throughout Puerto Rico and the Caribbean.
Wise's products are distributed through both independent and company-owned
distribution networks.
In September 1994, Borden, Inc. ("Borden") entered into a merger agreement,
culminating in December 1994, that provided for the acquisition of all of
Borden's outstanding common stock by affiliates of Kohlberg Kravis Roberts & Co.
("KKR"). Borden elected not to apply push down accounting in its consolidated
financial statements as a result of public debt that was outstanding prior to
the acquisition, and as such Borden's financial statements (including Wise) are
reported on Borden's historical cost basis. As discussed in the "Basis of
Presentation," Wise's financial statements have been prepared on a purchase
accounting basis from the date of KKR's acquisition of Borden. The effective
date of the merger agreement was January 1, 1995 for accounting and financial
statement presentation purposes.
Effective July 2, 1996, in a taxable transaction (the "Incorporation"), Borden
sold its salty snacks business ("Wise operations") to BWHLLC, a KKR affiliate,
for $45 million. The purchase price was based on an independent valuation of the
business. There was no change in the financial reporting basis of the assets and
liabilities as of July 2, 1996 from that described below under "Basis of
Presentation" because Borden's principal stockholders will continue to exercise
significant financial control over Wise. Wise will fully and unconditionally
guarantee obligations under Borden's credit facility and all of Borden's
publicly held debt on a pari passu basis. In connection with this guarantee,
Wise will receive an annual fee of $210.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
As a result of the financial guarantee, Borden is required to include in its
filings with the Securities and Exchange Commission separate financial
statements for Wise as if it were a registrant. The financial statements
subsequent to the purchase by KKR have been prepared on a purchase accounting
basis which allocates approximately $51 million of the original KKR purchase
price of Borden to the salty snack business. The purchase price has been
allocated to tangible and intangible assets and liabilities of Wise based on the
fair values at the date of acquisition. The predecessor financial statements for
1994 are presented using Borden's pre-acquisition historical cost basis
("Predecessor Basis").
The consolidated financial statements of Wise Holdings, Inc. collectively
include the financial position, operations and cash flows of Wise Holdings, Inc.
and subsidiaries for the period of July 2, 1996 through December 31, 1996, the
salty snack business of Borden, Inc. for the period of January 1, 1995 through
July 1, 1996 and the salty snack business of Borden, Inc. on a predecessor basis
for the period of January 1, 1994 through December 31, 1994.
Prior to the July 2, 1996 sale, Wise operated as a profit center of Borden.
Under this structure, Borden incurred various costs in connection with the
operation of Wise's business which included corporate controlled expenses, such
as accounting, legal, tax, credit and informational services departments and
executive management, which have been included in the consolidated financial
statements of Wise. Costs for these services have been allocated to Wise based
on usage of resources such as personnel and data processing equipment.
Management believes these amounts in the accompanying financial statements have
been allocated in a reasonable and consistent manner in order to depict balance
<PAGE> 114
sheets, statements of operations and cash flows of Wise on a stand-alone basis.
Prior to 1996, as a profit center of Borden, essentially all treasury functions
including financing for working capital and other cash needs were performed by
Borden. For years ended December 31, 1995 and 1994, allocation of interest
expense associated with this financing was not practical and therefore not
included in these financial statements.
The consolidated financial statements include the accounts of Wise and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include cash on deposit and all highly liquid
investments purchased with an original maturity of three months or less.
Inventories
- -----------
Finished goods and raw materials inventories are stated at the lower of cost or
market with cost being determined using the average cost method.
Property and Equipment
- ----------------------
Depreciation is recorded on the straight-line basis over the estimated useful
lives of the assets. The estimated useful lives are principally 10 to 40 years
for buildings and improvements and 3 to 13 years for equipment. Major renewals
and betterments are capitalized; maintenance, repairs and minor renewals are
expensed as incurred.
Trademarks
- ----------
Trademarks are amortized on a straight-line basis over not more than forty
years.
Revenue Recognition
- -------------------
Trade revenues are recognized when products are shipped.
Advertising and Promotion Expense
- ---------------------------------
Production costs of future media advertising are expensed on the first airdate
or print release date of the advertising. All other advertising and promotion
expenses are expensed as incurred.
Futures Contracts
- -----------------
Wise uses futures to hedge the price risks associated with raw materials used in
the production of salty snacks. Wise defers the impact of changes in the market
value of these contracts until such time as the hedged transaction is completed.
Changes in market value of the futures contracts are included in the measurement
amounts of qualifying subsequent purchases of raw materials. Wise does not enter
into these contracts for speculative purposes. These contracts generally mature
in less than one year.
Income Taxes
- ------------
Wise accounts for income taxes pursuant to Statement of Financial Accounting
Standard (FAS) No. 109, Accounting for Income Taxes, which uses the liability
method to calculate deferred income taxes. Subsequent to July 2, 1996, deferred
income taxes are recorded to recognize the future effects of temporary
differences which arise between financial statement assets and liabilities and
their basis for income tax reporting purposes. Prior to July 2, 1996, Wise was
included in Borden's consolidated tax return, and accordingly, income tax
liabilities and assets determined on a separate return basis are included in
Owner's Investment in the accompanying financial statements.
Per Share Information
- ---------------------
Net income (loss) per common share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding during the period from
July 2, 1996 to December 31, 1996 and assuming these shares were outstanding for
the full periods of 1994, 1995 and 1996.
Concentrations of Credit Risk
- -----------------------------
<PAGE> 115
Financial instruments which potentially subject Wise to concentrations of credit
risk consist principally of temporary cash investments, marketable securities,
and accounts receivable. Wise places temporary cash investments and marketable
securities with high quality institutions and performs ongoing evaluations of
the financial condition of the institutions. Wise, by policy, limits the amount
of credit exposure to any one institution. Concentrations of credit risk with
respect to accounts receivable are limited, however, a group of distributors
generally under common control comprise approximately 17% of net trade sales.
Wise generally does not require collateral or other security to support customer
receivables. Wise monitors its exposure to credit losses and maintains
allowances for anticipated losses.
Impairment of Long Lived Assets
- -------------------------------
Periodically and as circumstances warrant Wise evaluates the recoverability of
property, plant equipment and intangibles by assessing whether the carrying
value can be recovered over its remaining useful life through expected future
undiscounted cash flows. In the opinion of management, no such impairment
existed at December 31, 1996 and 1995.
Stock Options
- -------------
The Financial Accounting Standards Board has issued SFAS No. 123, Accounting for
Stock-Based Compensation, which was adopted by Wise, effective January 1, 1996.
As permitted by SFAS No. 123, Wise will continue to apply its current accounting
policy of the intrinsic value method under Accounting Principles Board Opinion
No. 25 and will include the additional disclosures required by SFAS No. 123.
Use of Estimates
- ----------------
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 date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
most significant estimates in Wise's financial statements are related to
allowance for doubtful accounts, accruals for trade promotions, general and
group insurance, income taxes, post-retirement benefits, asset lives and
corporate allocations. Actual results could differ from those estimates.
3. ACCRUED LIABILITIES:
Accrued liabilities were as follows:
<TABLE>
<CAPTION>
1996 1995
-----------------
<S> <C> <C>
Compensation $ 2,073 $ 1,187
General insurance 6,374 7,894
Advertising and promotion 2,576 2,988
Other 3,617 2,955
======= =======
Total $14,640 $15,024
======= =======
</TABLE>
4. AFFILIATED LONG-TERM DEBT
In conjunction with the Incorporation, Wise entered into a long-term loan
agreement (the "Loan Agreement") to borrow funds from Borden. The Loan Agreement
provides for a revolving loan facility of up to $10 million at a variable
interest rate equal to a given bank's "base rate", and a $10.145 million term
loan with a fixed 12% interest rate maturing in 1999. A commitment fee of .375%
is paid on the unused portion of the revolving loan. Wise had no borrowings
under the revolving agreement at December 31, 1996. By agreement with Borden,
interest charges and commitment fees under the Loan Agreement were calculated as
if the borrowings were outstanding from January 1, 1996. Effective January 1,
1997 the term loan rate changed to 11%.
The Loan Agreement contains certain restrictions on the activities of Wise and
its subsidiaries, including restrictions on liens, the incurrence of
indebtedness, mergers and consolidations, sales of assets,
<PAGE> 116
investments, payment of dividends, changes in nature of business, prepayments of
certain indebtedness, transactions with affiliates, capital expenditures,
changes in control of the Company and the use of proceeds from asset sales.
As an affiliate guarantor, Wise has guaranteed Borden's credit facility and all
of Borden's outstanding publicly held debt on a pari passu basis. Wise's
aggregate liability under this guarantee shall not exceed the greater of its
outstanding affiliated borrowings, or 95% of its adjusted net assets while
Borden or any other obligated parties have obligations outstanding. Borden's
outstanding credit facility and outstanding public borrowings amounted to
approximately $910,000 at December 31, 1996.
5. RETIREMENT INCOME PLANS
Most employees of Wise participate in pension plans sponsored by Borden or one
of the union-sponsored plans. For most salaried employees, benefits under these
plans generally are based on compensation and credited service. For most hourly
employees, benefits under these plans are based on specified amounts per year of
credited service.
A net pension asset or liability, which approximates the portion of the total
pension assets or liabilities of Borden which relates to the employees of Wise,
has been reflected in Wise's stand-alone balance sheets. The gross pension
obligation was allocated to Wise based upon the actuarially-determined
obligation relating to Wise's employees. The pension expense allocated to Wise
for Borden's plans was $477, $312, and $493 during 1996, 1995, and 1994,
respectively.
Most Wise employees that are not covered by Borden's plans are covered by
collectively bargained agreements which are generally effective for five years.
Under Federal pension law, there would be continuing liability to these pension
trusts if Wise or Borden ceased all or most participation in any trust, and
under certain other specified conditions. Operations were charged $236, $233 and
$214 in 1996, 1995 and 1994, respectively, for payments to pension trusts on
behalf of employees not covered by Borden plans.
Borden's funding of its pension plans equals or exceeds the minimum funding
requirements imposed by Federal and foreign laws and regulations. The funded
status of the Borden plan on a purchase accounting basis, at December 31 is as
follows:
<TABLE>
<CAPTION>
1996 1995
BORDEN BORDEN
----------------------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligations $ 383,065 $ 403,326
========= =========
Accumulated benefit obligations $ 400,371 $ 420,417
========= =========
Projected benefit obligations $ 400,458 $ 421,816
Plan assets at fair value 393,625 400,366
--------- ---------
Plan assets less than projected benefit
obligation (6,833) (21,450)
Unrecognized prior service cost 2,938 3,225
Unrecognized loss (gain) 2,213 (831)
Minimum liability adjustment (5,064) (995)
========= =========
Net pension asset (liability) $ (6,746) $ (20,051)
========= =========
</TABLE>
<PAGE> 117
The following are the components of the net pension expense recognized under the
Borden Plan:
<TABLE>
<CAPTION>
1994
1996 1995 BORDEN
BORDEN BORDEN (PREDECESSOR BASIS)
------------------------------------------
<S> <C> <C> <C>
Components of pension cost:
Service cost $ 7,233 $ 6,430 $ 10,295
Interest cost 27,371 31,165 30,832
Actual return on assets (26,843) (87,071) 9,146
Net amortization and deferral (5,551) 51,430 (48,789)
-------------------------------------------
Net Expense $ 2,210 $ 1,954 $ 1,484
===========================================
</TABLE>
The weighted average discount rates and rates of increase in future compensation
levels in determining the projected benefit obligation for the plans for years
ended December 31 were 7.5% and 4.5%, respectively for 1996, and 6.8% and 4.3%,
respectively for 1995. Plan assets consist primarily of equity securities and
corporate obligations.
Borden sponsors a defined contribution retirement savings plan in which eligible
salaried and hourly non-bargaining employees may contribute up to 5% of their
pay (7% of certain longer service salaried employees), which is generally
matched 50% by Borden. Charges to operations for matching contributions for Wise
employees under Borden's retirement savings plans for 1996, 1995 and 1994
amounted to $438, $744, and $725, respectively.
6. RETIREMENT HEALTH CARE AND LIFE INSURANCE
Wise uses Borden-sponsored plans to provide health and life insurance benefits
for eligible retirees and their dependents. The cost of providing these benefits
is recognized as a charge to income in the period the benefits were earned. Wise
provides certain post-employment benefits to qualified former or inactive
employees. Wise accrues the cost of benefits provided to former or inactive
employees after employment, but before retirement, when it is probable that a
benefit will be provided. The cost of providing these benefits is recognized as
a charge to income in the period the benefits were earned. The amounts of such
costs were not material.
Participants who are not eligible for Medicare are provided with the same
medical benefits as active employees, while those who are eligible for Medicare
are provided with supplemental benefits. The post-retirement medical benefits
are contributory for retirements after 1983; the post-retirement life insurance
is noncontributory.
Prior to January 1, 1996 amounts attributable to post-retirement benefits were
commingled in one Borden sponsored plan. Effective January 1, 1996, the
components of post-retirement benefit expense and unfunded post-retirement
obligation were accounted for separately for the Wise business. The gross
post-retirement obligation at December 31, 1995 was allocated to Wise based upon
the actuarially determined obligation relating to Wise's employees. The
post-retirement benefit expense allocated to Wise for the Borden plan was $548
and $1,565 during 1995 and 1994 respectively.
<PAGE> 118
The components of Wise's net post-retirement benefit expense for the year ended
December 31, 1996 and Borden's net post-retirement benefit expense for the years
ended December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1994
1996 1995 BORDEN
WISE BORDEN (PREDECESSOR BASIS)
-----------------------------------------------
<S> <C> <C> <C>
Service cost $ 8 $ 1,089 $ 3,427
Interest cost 543 13,347 17,903
Net amortization and deferral 18 -- (9,657)
-----------------------------------------------
Net post-retirement (benefit) expense $ 569 $ 14,436 $ 11,673
===============================================
</TABLE>
The status of Wise's unfunded post-retirement benefit obligation as of December
31, 1996 and Borden's unfunded post-retirement benefit obligation as of December
31, 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
WISE BORDEN
-----------------------
<S> <C> <C>
Actuarial present value of accumulated
post-retirement benefit obligation:
Retirees $ (7,534) $(147,682)
Fully eligible active plan participants (212) (3,643)
Other active plan participants (337) (27,271)
-----------------------
$ (8,083) $(178,596)
Unrecognized prior service benefit (3,473)
Unrecognized net gain 108 22,249
=======================
Accrued post-retirement benefit liability $ (7,975) $(159,820)
=======================
</TABLE>
The discount rate used in determining the accumulated post-retirement benefit
obligation at December 31, 1996 and 1995 was 7.5% and 6.8%, respectively.
The assumed health care cost trend used in measuring the accumulated
post-retirement benefit obligation at December 31, 1996 was 9.5%, gradually
declining to 5.5% by the year 2007. The comparable assumptions for the prior
year were 9.5%, declining to 4.8% by the year 2006. A one percentage point
increase in health care cost trend rate would increase the accumulated
post-retirement benefit obligation as of December 31, 1996 by $800 and the sum
of the service and interest costs in 1996 by $64.
7. FINANCIAL INSTRUMENTS
Futures Contracts
- -----------------
Wise is exposed to risk from fluctuating prices for raw materials used in the
production of salty snacks. Some of the risk is hedged through commodity futures
executed over the counter with various brokers. Wise utilizes commodity futures
to effectively fix the price Wise will pay for oil, which is a principal
component in the production process, over the life of the contract. Cost of
goods sold reflects the commodity cost including the effects of the commodity
futures. As of December 31, 1996, $3.4 million of commodity futures were
outstanding, maturing through March 1997. The maturity of the contracts highly
correlates to the actual purchases of the commodity. Under such contracts Wise
pays the counterparty at a fixed rate, and receives from the counterparty a
floating rate per hundred pounds of oil; only the net differential is actually
paid or received. The amounts paid or received are calculated based on the
notional amounts under the contracts. The use of such commodity futures
effectively protects Wise against an increase in the price of the commodity, to
the extent of the notional amount under the contract. This hedging strategy also
effectively prevents Wise from benefiting in the event of a decrease in the
price of the commodity, to the extent of the notional amount under the contract.
The fair value of commodity futures as of December 31, 1996 was unfavorable $491
(based on dealer quotes). This
<PAGE> 119
amount has been deferred by Wise as of December 31, 1996 and will be reflected
in the cost of the commodity as it is actually purchased. Total deferred losses
at December 31, 1996 relating to contracts closed but not yet amortized amounted
to $245.
Wise is exposed to credit-related losses in the event of nonperformance by
counterparties to financial instruments, but it does not expect any
counterparties to fail as all counterparties have investment grade credit
ratings.
Debt Guarantee
- --------------
As discussed in Note 4, Wise has guaranteed obligations under Borden's credit
facility and all of Borden's outstanding publicly held debt on a pari passu
basis. Management does not expect this guarantee will have a material adverse
effect on the consolidated results of operations or financial position of Wise.
Fair value was not assigned to this guarantee since there is no expected
funding.
Current Assets and Liabilities
- ------------------------------
The carrying amount for cash and cash equivalents, receivables, accounts payable
and accrued liabilities approximates fair value due to the short maturities of
these instruments. The fair value of long-term debt is estimated based on
current rates offered to Wise for debt of like maturities and approximates its
carrying value.
8. INCOME TAXES
Effective July 2, 1996, Wise is recognized as a separate legal entity for U.S.
Federal income tax purposes. Prior to such time, Wise operations were included
by Borden in determining taxable income and all U.S. tax payments were made by
Borden. Provisions for income taxes and deferred tax assets and liabilities were
determined as though Wise operations filed separate U.S. Federal and state
income tax returns. Income tax assets and liabilities determined on a separate
return basis are included in Owner's Investment prior to July 2, 1996.
The provision (credit) for income taxes consisted of:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------
<S> <C> <C> <C>
Federal $(261) $(284) $2,265
State and local (229) (65) 315
----------------------------------
Total $(490) $(349) $2,580
==================================
</TABLE>
A reconciliation of the statutory U.S. Federal income tax rate to the Wise
effective tax rate is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------
<S> <C> <C> <C>
Federal income tax statutory rate $ (1,425) $(517) $2,229
State and local income taxes,
less federal income tax benefit (149) (42) 205
Rate differential on tax benefit 963
Tax credits and other 121 210 146
===================================
Total $ (490) $(349) $2,580
===================================
</TABLE>
<PAGE> 120
All deferred tax amounts were recorded in Owner's investment prior to July 2,
1996. The temporary differences which give rise to deferred tax assets and
liabilities at December 31, 1996 consisted of the following:
<TABLE>
<CAPTION>
1996
------
<S> <C>
Deferred tax assets:
Employee benefits and related 3,921
General insurance 2,477
Other 1,136
------
Sub-total 7,534
Valuation allowance (6,713)
------
Total deferred tax assets 821
------
Deferred tax liabilities:
Depreciation and property 377
Trademarks 147
Other 297
------
Total deferred tax liabilities 821
------
Total -
======
</TABLE>
In a limited tax sharing agreement with Borden, Wise will be reimbursed for
taxes paid subsequent to July 2, 1996 up to an aggregate sum of $1,762. During
1996 Borden paid $951 in taxes on the behalf of Wise under this tax sharing
arrangement. The residual amount of $811 is included in affiliated receivables.
As a result of the taxable transaction on July 2, 1996, Wise's tax basis of
assets and liabilities were adjusted. Wise recorded the adjustment to deferred
taxes in Owner's Investment in accordance with Emerging Issues Task Force (EITF)
Issue No. 94-10. The net deferred tax asset was fully reserved at the
Incorporation date. At December 31, 1996, a valuation allowance of $6,713 was
recorded as a result of management's current determination that based on prior
operating losses that it is more likely than not that Wise will not fully
recognize certain deferred tax assets.
9. MINORITY INTEREST
As part of the Incorporation, Wise sold equity interests in Wise Foods Holdings,
Inc. ("Wise Foods"), a subsidiary, to key management personnel for consideration
of $655, resulting in an ownership percentage of 1.87%. In addition, options
issued which vest over five years, allow management to purchase additional
shares resulting in an ownership of up to 6% of the subsidiary. Wise Foods
imposes significant restrictions on transfers of shares of this common stock.
These shares are generally non-transferable prior to the fifth anniversary from
the initial purchase of the common stock. In addition, on or prior to the
vesting reference date, Wise Foods retains the right, but is not obligated, to
repurchase stock from the purchaser for various reasons, but principally upon
termination of employment. Management's ownership interest in Wise Foods is
recorded in the financial statements of Wise as minority interest and included
in Other Expense.
<PAGE> 121
10. COMMITMENTS AND CONTINGENCIES
Lease Obligations
Wise leases warehouses, office facilities, motor vehicles and various types of
equipment under operating leases. Lease terms generally range from one to five
years, although leases for trailers typically last eight years.
Future minimum annual rentals under operating leases at December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
MINIMUM RENTALS ON
OPERATING LEASES
NON-
AFFILIATED AFFILIATED
------------- -------------
<S> <C> <C>
1997 $1,533 $1,397
1998 850 1,134
1999 328 1,072
2000 277 1,028
2001 59 1,122
------ ------
Total $3,047 $5,753
====== ======
</TABLE>
The affiliated leases are part of a lease agreement that Borden has with a third
party lender. As such, Wise benefits through lower lease payments due to
Borden's volume purchasing ability and credit standing with the lender.
Total rental expenses for operating leases in 1996, 1995 and 1994 were $4,252,
$4,810, and $4,143, respectively.
General Insurance
- -----------------
Wise has insurance policies to cover potential losses and liabilities relating
to workers' compensation, health and welfare claims, physical damage to property
(other than autos), business interruption and comprehensive general, product and
vehicle liability. However, many of these policies have deductibles of $500 and
in some cases higher amounts. Losses are accrued for the estimated aggregate
liability for claims incurred using certain actuarial assumptions followed in
the insurance industry and Wise's experience.
Environmental Contingencies
- ---------------------------
Wise, like others in similar businesses, is subject to extensive Federal, state
and local environmental laws and regulations. Although Wise's environmental
policies and practices are designed to ensure compliance with these laws and
regulations, future developments and increasingly stringent regulation could
require Wise to make additional unforeseen environmental expenditures.
Environmental accruals are routinely reviewed on an interim basis as events and
developments warrant and are subject to an annual comprehensive review.
Litigation
- ----------
Wise is subject to various investigations, claims and legal proceedings covering
a wide range of matters in the ordinary course of its business activities. Each
of these matters are subject to various uncertainties and some of these matters
may be resolved unfavorably to Wise. Wise has established accruals for matters
that are probable and reasonably estimable. Management believes that any
liability that may ultimately result from the resolution of these matters in
excess of amounts provided will not have a material adverse effect on the
financial statements of Wise.
<PAGE> 122
11. RELATED PARTIES
In addition to the affiliated debt and lease agreements, Wise is engaged in
various transactions with Borden and its affiliated companies in the ordinary
course of business. Prior to January 1, 1996, certain general and administrative
costs, such as group and general insurance, retirement benefits, information
services and corporate administrative departments were allocated to Wise.
Subsequent to January 1, 1996, a subsidiary of Borden provides certain
administrative services to Wise at negotiated fees. These services include:
processing of payroll and active and retiree group insurance claims,
administration of workers compensation claims and securing insurance coverage
for catastrophic claims. Wise reimburses the Borden subsidiary for payments for
general disbursements, and general and group insurance and retirement benefit
claims. The amount owed by Wise for these services was $703 and is included in
affiliated payables at December 31, 1996.
Wise is generally self-insured for general insurance claims and post-employment
benefits other than pensions. The liabilities for these obligations are included
in Wise's financial statements. By agreement, Borden has retained the obligation
for active group insurance claims incurred in 1996 and paid in 1997.
The following table summarizes the allocation of costs to Wise in 1995 and 1994
and the charges for these costs in 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
--------------------------------------------
<S> <C> <C> <C>
Employee benefits $1,861 $ 2,045 $ 3,483
Group and general insurance 4,563 7,441 7,650
Information services 40 15 2,119
Corporate staff departments and
overhead 2,235 2,888 2,812
--------------------------------------------
$8,699 $12,389 $16,064
============================================
</TABLE>
In 1995 Wise assumed direct responsibility for expenses associated with
information services which were previously allocated by Borden. Charges for 1994
include allocations of divisional overhead of Borden's North American Snacks
Division which was eliminated under a Borden divestiture strategy.
12. COMMON STOCK AND STOCK OPTIONS
As part of the Incorporation, Wise issued one hundred shares of common stock,
representing 100% of its common stock, to BWHLLC in exchange for $34.2 million
in Borden Holdings' Notes (the "Notes"). Simultaneously with the Incorporation,
the Notes were transferred to Borden in exchange for the net assets of Borden's
salty snack business constituting the Wise operations.
During 1996, Wise Foods, a subsidiary of Wise, issued 6,971,000 shares of common
stock with a par value of $.01 per share. Shares amounting to 6,840,000 were
issued to Wise and 131,000 shares were issued to key members of management at $5
per share, along with the grant of options to purchase 262,000 shares of common
stock at an exercise price of $10 per share (the "1996 Option Plan"). The
options expire 10 years from the date of grant and vest ratably over 5 years.
The options are generally not transferable and exercisability of the options
will accelerate upon a change of control.
<PAGE> 123
Information regarding Wise Foods' 1996 Option Plan is summarized below:
<TABLE>
<CAPTION>
STOCK WEIGHTED AVERAGE
OPTIONS PRICE
------------------------------
<S> <C> <C>
Outstanding at 12/31/95 - -
Granted 262,000 $10
Exercised -
Canceled -
------------------------------
Outstanding at 12/31/96 262,000 $10
===============================
Exercisable at 12/31/96 -
=======
</TABLE>
The pro forma disclosure of net income and earnings per share, that would have
been recognized in the 1996 consolidated statement of operations if the fair
value-based method had been used, was not material.
13. SUPPLEMENTAL INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Advertising and promotion expenses $62,182 $63,010 $61,462
Research and development expenses 957 695 -
</TABLE>
<PAGE> 124
(b) Reports on Form 8-K
-------------------
On October 16, 1996 Borden, Inc. filed a Form 8-K announcing the sale of
its pasta and foods business to an affiliate of the Company's principal
stockholder, and the completion of the sale of the Company's packaging
and plastic films business to AEP Industries, Inc. Unaudited pro forma
condensed consolidated financial statements were filed to reflect the
effects of the above transactions.
<PAGE> 125
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BORDEN, INC.
By /s/ William H. Carter
----------------------------------------------------
William H. Carter, Executive Vice President
and Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
Date: March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities indicated, on the date set forth above.
Signature Title
- --------- -----
/s/ C. Robert Kidder Chairman of the Board and
- ------------------------------------ Chief Executive Officer
(C. Robert Kidder)
/s/ Henry R. Kravis Director
- ------------------------------------
(Henry R. Kravis)
/s/ George R. Roberts Director
- ------------------------------------
(George R. Roberts)
/s/ Clifton S. Robbins Director
- ------------------------------------
(Clifton S. Robbins)
/s/ Scott M. Stuart Director
- ------------------------------------
(Scott M. Stuart)
/s/ Alexander Navab Director
- ------------------------------------
(Alexander Navab)
<PAGE> 1
Exhibit 10(vii)
FORM OF
1996 UNIT INCENTIVE PLAN
FOR KEY EMPLOYEES OF
BORDEN, INC. AND ASSOCIATED PERSONS
1. PURPOSE OF PLAN
---------------
The 1996 Unit Incentive Plan for Key Employees of Borden, Inc.
and Associated Persons (the "PLAN") is designed:
(a) to promote the long term financial interests and growth of
Borden, Inc. (the "CORPORATION") and its Subsidiaries by attracting and
retaining management personnel with the training, experience and
ability to enable them to make a substantial contribution to the
success of the Corporation's business;
(b) to motivate management personnel by means of
growth-related incentives to achieve long range goals; and
(c) to further the identity of interests of Participants with
those of the direct and indirect equityholders of the Corporation
through opportunities to participate in increased value of, or
distributions by, the Corporation and/or its Associated Persons.
2. DEFINITIONS
-----------
As used in the Plan, the following words shall have the
following meanings:
(a) "ASSOCIATED PERSON" shall mean any Subsidiary of BW
Holdings, including, without limitation, the Corporation, or any other entity
designated by the Board of Directors, which may include, without limitation, a
successor to BW Holdings.
(b) "BW HOLDINGS" shall mean BW Holdings, LLC, a Delaware
limited liability company.
(c) "BW HOLDINGS UNIT" shall mean a Unit (as defined in the
Limited Liability Company Agreement of BW Holdings) of limited liability company
interest in BW Holdings.
(d) "BOARD OF DIRECTORS" means the Board of Directors
of the Corporation.
(e) "COMMITTEE" means the Compensation Committee of
the Board of Directors.
(f) "EMPLOYEE" means a person, including an officer, in the
regular full-time employment of the Corporation or one of its Subsidiaries who,
in the opinion of the Committee, is, or is expected, to be primarily responsible
for the management, growth
<PAGE> 2
or protection of some part or all of the business of the Corporation.
(g) "EQUIVALENT COMPANY" shall mean any Associated Person
that, at the relevant time, owns or operates, directly or indirectly,
substantially all of the business and assets of BW Holdings and its
Subsidiaries.
(h) "EXCHANGE ACT" means the Securities Exchange Act
of 1934, as amended.
(i) "FAIR VALUE" means such value of a BW Holdings Unit or
similar ownership interest in an Equivalent Company as determined in accordance
with any applicable resolutions or regulations of the Committee in effect at the
relevant time and in accordance with the provisions of a Grant Agreement.
(j) "GRANT" means an award made to a Participant pursuant to
the Plan and described in Paragraph 5, including, without limitation, an award
of a BW Holdings Unit Option, Unit Appreciation Right, Purchase BW Holdings Unit
or Other Unit-Based Grant, or any combination of the foregoing.
(k) "GRANT AGREEMENT" means an agreement between the
Corporation and a Participant that sets forth the terms, conditions and
limitations applicable to a Grant.
(l) "PARTICIPANT" means an Employee selected to participate in
the Plan by the Committee in its sole discretion and to whom one or more Grants
have been made and such Grants have not all been forfeited or terminated under
the Plan; PROVIDED, HOWEVER, a non-employee director of the Corporation or one
of its Subsidiaries may not be a Participant.
(m) "SUBSIDIARY" means any corporation, partnership or other
entity in an unbroken chain of corporations, partnerships or other entities
beginning with BW Holdings if each of the corporations, partnerships or other
entities, or group of commonly controlled corporations, partnerships or other
entities other than the last corporation, partnership or other entity in the
unbroken chain then owns 50% or more of the voting stock or other ownership
interests in one of the other corporations, partnerships or other entities in
such chain.
3. ADMINISTRATION OF PLAN
----------------------
(a) The Plan shall be administered by the Committee. The
Committee may adopt its own rules of procedure, and the action of a majority of
the Committee, taken at a meeting or taken without a meeting by a writing signed
by such majority, shall constitute action by the Committee. The Committee shall
have the power and authority to administer, construe and interpret the Plan, to
make rules for carrying it out and to make changes in such rules. Any such
interpretations, rules, and
-2-
<PAGE> 3
administration shall be consistent with the basic purposes of the Plan.
(b) The Committee may delegate to the Chief Executive Officer
and to other senior officers of the Corporation its duties under the Plan
subject to such conditions and limitations as the Committee shall prescribe,
except that only the Committee may designate and make Grants to Participants who
are subject to Section 16 of the Exchange Act.
(c) The Committee may employ attorneys, consultants,
accountants, appraisers, brokers or other persons. The Committee, the
Corporation, and the officers and directors of the Corporation shall be entitled
to rely upon the advice, opinions or valuations of any such persons. All actions
taken and all interpretations and determinations made by the Committee in good
faith shall be final and binding upon all Participants, the Corporation and all
other interested persons. No member of the Committee or the Board of Directors,
or the Board of Directors of any Associated Person, and none of the Corporation,
BW Holdings or any Associated Person shall be liable (personally or otherwise)
for any action, determination or interpretation made in good faith with respect
to the Plan or the Grants, and all such persons shall be fully protected by the
Corporation with respect to any such action, determination or interpretation.
4. ELIGIBILITY
-----------
The Committee may from time to time make Grants under the Plan
to such Employees and in such form and having such terms, conditions and
limitations as the Committee may determine in its sole discretion. No Grants may
be made under this Plan to non-employee directors of Corporation or any of its
Subsidiaries. Grants may be granted singly, in combination or in tandem. The
terms, conditions and limitations of each Grant under the Plan shall be set
forth in a Grant Agreement, in a form approved by the Committee, consistent,
however, with the terms of the Plan; PROVIDED, HOWEVER, such Grant Agreement
shall contain provisions dealing with the treatment of Grants in the event of
the termination, death or disability of a Participant, and may also include
provisions concerning the treatment of Grants in the event of a change of
control of the Corporation.
5. GRANTS
------
From time to time, the Committee will determine the forms and
amounts of Grants for Participants. Such Grants may take the following forms in
the Committee's sole discretion:
(a) BW HOLDINGS UNIT OPTIONS - These are options to purchase
BW Holdings Units. At the time of the Grant the Committee shall
determine, and shall have contained in the Grant Agreement or other
Plan rules, the option exercise period, the option exercise price, and
such other conditions
-3-
<PAGE> 4
or restrictions on the grant or exercise of the option as the Committee
deems appropriate, which may include the requirement that the grant of
options is predicated on the acquisition of Purchase BW Holdings Units
by the optionee.
(b) UNIT APPRECIATION RIGHTS - These are rights that entitle
the holder to receive payments from time to time from the Corporation
in amounts and at times corresponding to the amounts and times when
distributions on the BW Holdings Units are made. Generally, Unit
Appreciation Rights will provide for payments by the Corporation when
the aggregate distributions on each BW Holdings Unit exceeds a trigger
price specified in the Grant Agreement. The Committee, in the Grant
Agreement or by other Plan rules, may impose such conditions or
restrictions on the Unit Appreciation Rights, may provide for the
conversion of the Unit Appreciation Rights into BW Holdings Units, or
options to purchase BW Holdings Units or other ownership interests in
BW Holdings or any Associated Person, and may provide for such other
terms and conditions applicable to the Unit Appreciation Rights as it
deems appropriate. Unit Appreciation Rights may also be called "UARs"
in a Grant Agreement.
(c) PURCHASE BW HOLDINGS UNIT - Purchase BW Holdings Units are
BW Holdings Units offered to a Participant at such price as determined
by the Committee, the acquisition of which will make him eligible to
receive Grants under the Plan; PROVIDED, HOWEVER, that the price of
such Purchase BW Holdings Units may not be less than 50% of the fair
market value (as determined by the Committee) of the BW Holdings Units
on the date such Purchase BW Holdings Units are offered.
(d) OTHER UNIT-BASED GRANTS - The Committee may make other
Grants under the Plan pursuant to which BW Holdings Units (or similar
ownership interests of an Equivalent Company) are or may in the future
be acquired, or payments are or may in the future be made, in each
case, based on the performance or value of the Corporation and its
Associated Persons. The Committee, in the Grant Agreement or by other
Plan rules, may impose such conditions or restrictions on any such
Grant as it deems appropriate, consistent with the purposes of the
Plan. Such Other Unit-Based Grants may include, without limitation,
appreciation rights providing for payments to the Employee when a
specified value of the Units is achieved relative to a value specified
at the time of the Grant in the Grant Agreement.
6. LIMITATIONS AND CONDITIONS
--------------------------
(a) The number of BW Holdings Units available for Grants under
this Plan, and the number of such Units on which Grants under this Plan may be
based, shall be _________ but may
-4-
<PAGE> 5
be increased or decreased (but in no event decreased to a number lower than the
number of BW Holdings Units theretofore granted or with respect to which Grants
theretofore have been made under the Plan), by the Committee in its sole
discretion. Unless restricted by applicable law, the number of BW Holdings Units
related to Grants that are forfeited, terminated, cancelled or expire shall
immediately become available for Grants.
(b) No Grants shall be made under the Plan beyond ten years
after the effective date of the Plan, but the terms of Grants made on or before
the expiration thereof may extend beyond such expiration. At the time a Grant is
made or amended or the terms or conditions of a Grant are changed, the Committee
may provide for limitations or conditions on such Grant.
(c) Nothing contained herein shall affect the right of the
Corporation to terminate any Participant's employment at any time or for any
reason.
(d) Deferrals of Grant payouts may be provided for, at the
sole discretion of the Committee, in the Grant Agreements.
(e) Except as otherwise prescribed by the Committee, the
amounts of the Grants for any employee of a Subsidiary, along with interest,
dividend and other expenses accrued on deferred Grants shall be charged to the
Participant's employer during the period for which the Grant is made. If the
Participant is employed by more than one Subsidiary or by both the Corporation
and a Subsidiary during the period for which the Grant is made, the
Participant's Grant and related expenses will be allocated between the companies
employing the Participant in a manner prescribed by the Committee.
(f) Other than as specifically provided with regard to the
death of a Participant, no Grant or right to payment in respect thereof under
the Plan shall be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance or charge, and any attempt to do so
shall be void. No Grant or right to payment in respect thereof shall, prior to
receipt thereof by the Participant, be in any manner liable for or subject to
the debts, contracts, liabilities, engagements or torts of the Participant.
(g) Participants shall not be, and shall not have any of the
rights or privileges of, members of BW Holdings or equity holders in any
Associated Person in respect of any BW Holdings Units or interests in an
Associated Person purchasable in connection with any Grant unless and until such
Participant is registered as the owner thereof and, if applicable, certificates
representing any such BW Holdings Units or such other interests have been issued
by BW Holdings or such Associated Person to such Participants.
-5-
<PAGE> 6
(h) No election as to benefits or exercise of BW Holdings Unit
Options, Unit Appreciation Rights or other rights may be made during a
Participant's lifetime by anyone other than the Participant except by a legal
representative appointed for or by the Participant.
(i) Absent express provisions to the contrary, any grant under
this Plan shall not be deemed compensation for purposes of computing benefits or
contributions under any retirement plan of the Corporation or its Subsidiaries
and shall not affect any benefits under any other benefit plan of any kind or
subsequently in effect under which the availability or amount of benefits is
related to level of compensation. This Plan is not a "Retirement Plan" or
"Welfare Plan" under the Employee Retirement Income Security Act of 1974, as
amended.
(j) Unless the Committee determines otherwise, no benefit or
promise under the Plan shall be secured by any specific assets of the
Corporation or any of its Subsidiaries, nor shall any assets of the Corporation
or any of its Subsidiaries be designated as attributable or allocated to the
satisfaction of the Corporation's obligations under the Plan.
7. TRANSFERS AND LEAVES OF ABSENCE
-------------------------------
For purposes of the Plan, unless the Committee determines
otherwise: (a) a transfer of a Participant's employment without an intervening
period of separation among the Corporation and any Associated Person shall not
be deemed a termination of employment, and (b) a Participant who is granted in
writing a leave of absence shall be deemed to have remained in the employ of the
Corporation during such leave of absence.
8. ADJUSTMENTS
-----------
In the event that the Corporation (or any Equivalent Company)
consummates a Public Offering, or any similar event occurs, or there is a change
in the powers, designations, preferences and relative participating, optional or
other rights, if any, or the qualifications, limitations or restrictions of the
outstanding BW Holdings Units or equity interests in an Equivalent Company or a
reclassification, recapitalization or merger, change of control, or similar
event affecting the Corporation, BW Holdings or an Equivalent Company, the
Committee may adjust appropriately the outstanding Grants as it deems to be
equitably required, including without limitation converting the Grants into
common equity of, or grants of options or other rights to purchase ownership
interests in, the Corporation or the Equivalent Company that consummates a
Public Offering on such terms as the Committee deems to be appropriate in its
sole discretion.
-6-
<PAGE> 7
9. MERGER, CONSOLIDATION, EXCHANGE,
ACQUISITION, LIQUIDATION OR DISSOLUTION
---------------------------------------
In its absolute discretion, and on such terms and conditions
as it deems appropriate, coincident with or after the grant of any BW Holdings
Unit Option, Unit Appreciation Right or any Other Unit-Based Grant, the
Committee may provide that such BW Holdings Unit Option, Unit Appreciation Right
or Other Unit-Based Grant cannot be exercised or triggered after the merger or
consolidation of BW Holdings or the Corporation into another corporation, the
exchange of all or substantially all of the assets of BW Holdings or the
Corporation for the securities of another corporation, the sale of all or
substantially all the assets of BW Holdings or the Corporation, the acquisition
by another corporation of 80% or more of BW Holdings' or the Corporation's then
outstanding units or shares of voting stock or the recapitalization,
reclassification, liquidation or dissolution of BW Holdings or the Corporation,
and if the Committee so provides, it shall, on such terms and conditions as it
deems appropriate in its absolute discretion, also provide, either by the terms
of such BW Holdings Unit Option, Unit Appreciation Right or Other Unit-Based
Grant or by a resolution adopted prior to the occurrence of such merger,
consolidation, exchange, acquisition, recapitalization, reclassification,
liquidation or dissolution, that, for some period of time prior to such event,
such BW Holdings Unit Option, Unit Appreciation Right or Other Unit-Based Grant
shall be exercisable or able to be triggered as to all units or shares subject
thereto, notwithstanding anything to the contrary herein (but subject to the
provisions of Paragraph 6(b)) and that, upon the occurrence of such event, such
BW Holdings Unit Option, Unit Appreciation Right or Other Unit-Based Grant shall
terminate and be of no further force or effect; PROVIDED, HOWEVER, that the
Committee may also provide, in its absolute discretion, that even if the BW
Holdings Unit Option, Unit Appreciation Right or Other Unit-Based Grant shall
remain exercisable or able to be triggered after any such event, from and after
such event, any such BW Holdings Unit Option, Unit Appreciation Right or Other
Unit-Based Grant shall be exercisable or able to be triggered only for the kind
and amount of securities and/or other property, or the cash equivalent thereof,
receivable as a result of such event by the holder of Unit Appreciation Rights
immediately prior to such event or a number of units or shares of stock for
which such BW Holdings Unit Option or Other Unit-Based Grant could have been
exercised immediately prior to such event.
10. AMENDMENT AND TERMINATION
-------------------------
The Committee shall have the authority to make such amendments
to any terms and conditions applicable to outstanding Grants as are consistent
with this Plan provided that, except for adjustments under Paragraph 8 or 9
hereof, no such action shall modify such Grant in a manner adverse to the
Participant without
-7-
<PAGE> 8
the Participant's consent except as such modification is provided for or
contemplated in the terms of the Grant.
The Board of Directors may amend, suspend or terminate the
Plan except that no such action, other than an action under Paragraph 8 or 9
hereof, may be taken which would decrease the exercise price or trigger price of
outstanding BW Holdings Unit Options or Unit Appreciation Rights, change the
requirements relating to the Committee or extend the term of the Plan.
11. FOREIGN OPTIONS AND RIGHTS
--------------------------
The Committee may make Grants to Employees who are subject to
the laws of nations other than the United States, which Grants may have terms
and conditions that differ from the terms thereof as provided elsewhere in the
Plan for the purpose of complying with foreign laws.
12. WITHHOLDING TAXES
-----------------
The Corporation shall have the right to deduct from any cash
payment made under the Plan any federal, state or local income or other taxes
required by law to be withheld with respect to such payment. It shall be a
condition to the obligation of the Corporation to deliver BW Holdings Units upon
exercise of a BW Holdings Unit Option or exercise or settlement of any Other
Unit-Based Grant that the Participant pay to the Corporation such amount as may
be requested by the Corporation for the purpose of satisfying any liability for
such withholding taxes. Any Grant Agreement may (but is not required to) provide
that the Participant may elect, in accordance with any conditions set forth in
such Grant Agreement, to satisfy a portion or all of such withholding taxes in
the form of a reduced payment by the Corporation (including by reducing the
number of BW Holdings Units to be received upon exercise of a BW Holdings Unit
Option).
13. EFFECTIVE DATE AND TERMINATION DATES
------------------------------------
The Plan shall be effective on and as of the date of its
approval by the stockholders of the Corporation and shall terminate ten years
later, subject to earlier termination by the Board of Directors pursuant to
Paragraph 10.
-8-
<PAGE> 9
Exhibit 10(vii)
FORM OF
1996 STOCK PURCHASE AND OPTION PLAN
FOR KEY EMPLOYEES OF
BORDEN CHEMICAL HOLDINGS, INC. AND SUBSIDIARIES
1. PURPOSE OF PLAN
---------------
The 1996 Stock Purchase and Option Plan for Key Employees of
Borden Chemical Holdings, Inc. and Subsidiaries (the "PLAN") is designed:
(a) to promote the long term financial interests and growth of
Borden Chemical Holdings, Inc. (the "CORPORATION") and its subsidiaries
by attracting and retaining management personnel with the training,
experience and ability to enable them to make a substantial
contribution to the success of the Corporation's business;
(b) to motivate management personnel by means of
growth-related incentives to achieve long range goals; and
(c) to further the identity of interests of participants with
those of the stockholders of the Corporation through opportunities for
increased stock, or stock-based, ownership in the Corporation.
2. DEFINITIONS
-----------
As used in the Plan, the following words shall have the
following meanings:
(a) "GRANT" means an award made to a Participant pursuant to
the Plan and described in Paragraph 5, including, without limitation, an award
of an Incentive Stock Option, Stock Option, Stock Appreciation Right, Dividend
Equivalent Right, Restricted Stock, Purchase Stock, Performance Units,
Performance Shares or Other Stock Based Grant, or any combination of the
foregoing.
(b) "GRANT AGREEMENT" means an agreement between the
Corporation and a Participant that sets forth the terms, conditions and
limitations applicable to a Grant.
(c) "BOARD OF DIRECTORS" means the Board of Directors
of the Corporation.
(d) "COMMITTEE" means the Compensation Committee of
the Board of Directors.
(e) "COMMON STOCK" or "SHARE" means common stock of the
Corporation which may be authorized but unissued, or issued and reacquired.
<PAGE> 10
(f) "EMPLOYEE" means a person, including an officer, in the
regular full-time employment of the Corporation or one of its Subsidiaries who,
in the opinion of the Committee, is, or is expected, to be primarily responsible
for the management, growth or protection of some part or all of the business of
the Corporation.
(g) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
(h) "FAIR MARKET VALUE" means such value of a Share as
reported for stock exchange transactions and/or determined in accordance with
any applicable resolutions or regulations of the Committee in effect at the
relevant time.
(i) "PARTICIPANT" means an Employee, or other person having a
unique relationship with the Corporation or one of its Subsidiaries, to whom one
or more Grants have been made and such Grants have not all been forfeited or
terminated under the Plan; PROVIDED, HOWEVER, a non-employee director of the
Corporation or one of its Subsidiaries may not be a Participant.
(j) "STOCK-BASED GRANTS" means the collective reference to the
grant of Stock Appreciation Rights, Dividend Equivalent Rights, Restricted
Stocks, Performance Units, Performance Shares and Other Stock Based Grants.
(k) "STOCK OPTIONS" means the collective reference to
"Incentive Stock Options" and "Other Stock Options".
(l) "SUBSIDIARY" means any corporation other than the
Corporation in an unbroken chain of corporations beginning with the Corporation
if each of the corporations other than the last corporation in the unbroken
chain owns 50% or more of the voting stock in one of the other corporations in
such chain.
3. ADMINISTRATION OF PLAN
----------------------
(a) The Plan shall be administered by the Committee. None of
the members of the Committee shall be eligible to be selected for Grants under
the Plan, or have been so eligible for selection within one year prior thereto;
PROVIDED, HOWEVER, that the members of the Committee shall qualify to administer
the Plan for purposes of Rule 16b-3 (and any other applicable rule) promulgated
under Section 16(b) of the Exchange Act to the extent that the Corporation is
subject to such rule. The Committee may adopt its own rules of procedure, and
the action of a majority of the Committee, taken at a meeting or taken without a
meeting by a writing signed by such majority, shall constitute action by the
Committee. The Committee shall have the power and authority to administer,
construe and interpret the Plan, to make rules for carrying it out and to make
changes in such rules. Any such interpretations, rules, and administration shall
be consistent with the basic purposes of the Plan.
-2-
<PAGE> 11
(b) The Committee may delegate to the Chief Executive Officer
and to other senior officers of the Corporation its duties under the Plan
subject to such conditions and limitations as the Committee shall prescribe
except that only the Committee may designate and make Grants to Participants who
are subject to Section 16 of the Exchange Act.
(c) The Committee may employ attorneys, consultants,
accountants, appraisers, brokers or other persons. The Committee, the
Corporation, and the officers and directors of the Corporation shall be entitled
to rely upon the advice, opinions or valuations of any such persons. All actions
taken and all interpretations and determinations made by the Committee in good
faith shall be final and binding upon all Participants, the Corporation and all
other interested persons. No member of the Committee shall be personally liable
for any action, determination or interpretation made in good faith with respect
to the Plan or the Grants, and all members of the Committee shall be fully
protected by the Corporation with respect to any such action, determination or
interpretation.
4. ELIGIBILITY
-----------
The Committee may from time to time make Grants under the Plan
to such Employees, or other persons having a unique relationship with
Corporation or any of its Subsidiaries, and in such form and having such terms,
conditions and limitations as the Committee may determine. No Grants may be made
under this Plan to non-employee directors of Corporation or any of its
Subsidiaries. Grants may be granted singly, in combination or in tandem. The
terms, conditions and limitations of each Grant under the Plan shall be set
forth in a Grant Agreement, in a form approved by the Committee, consistent,
however, with the terms of the Plan; PROVIDED, HOWEVER, such Grant Agreement
shall contain provisions dealing with the treatment of Grants in the event of
the termination, death or disability of a Participant, and may also include
provisions concerning the treatment of Grants in the event of a change of
control of Corporation.
5. GRANTS
------
From time to time, the Committee will determine the forms and
amounts of Grants for Participants. Such Grants may take the following forms in
the Committee's sole discretion:
(a) INCENTIVE STOCK OPTIONS - These are stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended ("CODE"), to purchase Common Stock. In addition to other
restrictions contained in the Plan, an option granted under this
Paragraph 5(a), (i) may not be exercised more than 10 years after the
date it is granted, (ii) may not have an option price less than the
Fair Market Value of Common Stock on the date the option is granted,
(iii) must otherwise comply with Code Section 422, and (iv)
-3-
<PAGE> 12
must be designated as an "Incentive Stock Option" by the Committee. The
maximum aggregate Fair Market Value of Common Stock (determined at the
time of each Grant) with respect to which any Participant may first
exercise Incentive Stock Options under this Plan and any Incentive
Stock Options granted to the Participant for such year under any plans
of the Corporation or any Subsidiary in any calendar year is $100,000.
Payment of the option price shall be made in cash or in shares of
Common Stock, or a combination thereof, in accordance with the terms of
the Plan, the Grant Agreement, and of any applicable guidelines of the
Committee in effect at the time.
(b) OTHER STOCK OPTIONS - These are options to purchase Common
Stock which are not designated by the Committee as "Incentive Stock
Options". At the time of the Grant the Committee shall determine, and
shall have contained in the Grant Agreement or other Plan rules, the
option exercise period, the option price, and such other conditions or
restrictions on the grant or exercise of the option as the Committee
deems appropriate, which may include the requirement that the grant of
options is predicated on the acquisition of Purchase Shares under
Paragraph 5(e) by the Optionee. In addition to other restrictions
contained in the Plan, an option granted under this Paragraph 5(b), (i)
may not be exercised more than 10 years after the date it is granted
and (ii) may not have an option exercise price less than 50% of the
Fair Market Value of Common Stock on the date the option is granted.
Payment of the option price shall be made in cash or in shares of
Common Stock, or a combination thereof, in accordance with the terms of
the Plan and of any applicable guidelines of the Committee in effect at
the time.
(c) STOCK APPRECIATION RIGHTS - These are rights that on
exercise entitle the holder to receive the excess of (i) the Fair
Market Value of a share of Common Stock on the date of exercise over
(ii) the Fair Market Value on the date of Grant (the "BASE VALUE")
multiplied by (iii) the number of rights exercised as determined by the
Committee. Stock Appreciation Rights granted under the Plan may, but
need not be, granted in conjunction with an Option under Paragraph 5(a)
or 5(b). The Committee, in the Grant Agreement or by other Plan rules,
may impose such conditions or restrictions on the exercise of Stock
Appreciation Rights as it deems appropriate, and may terminate, amend,
or suspend such Stock Appreciation Rights at any time. No Stock
Appreciation Right granted under this Plan may be exercised less than 6
months or more than 10 years after the date it is granted except in the
event of death or disability of a Participant. To the extent that any
Stock Appreciation Right that shall have become exercisable, but shall
not have been exercised or cancelled or, by reason of any termination
of employment, shall have become non-exercisable, it shall be deemed to
-4-
<PAGE> 13
have been exercised automatically, without any notice of exercise, on
the last day of which it is exercisable, provided that any conditions
or limitations on its exercise are satisfied (other than (i) notice of
exercise and (ii) exercise or election to exercise during the period
prescribed) and the Stock Appreciation Right shall then have value.
Such exercise shall be deemed to specify that the holder elects to
receive cash and that such exercise of a Stock Appreciation Right shall
be effective as of the time of automatic exercise.
(d) RESTRICTED STOCK - Restricted Stock is Common Stock
delivered to a Participant with or without payment of consideration
with restrictions or conditions on the Participant's right to transfer
or sell such stock; PROVIDED that the price of any Restricted Stock
delivered for consideration and not as bonus stock may not be less than
50% of the Fair Market Value of Common Stock on the date such
Restricted Stock is granted or the price of such Restricted Stock may
be the par value. If a Participant irrevocably elects in writing in the
calendar year preceding a Grant of Restricted Stock, dividends paid on
the Restricted Stock granted may be paid in shares of Restricted Stock
equal to the cash dividend paid on Common Stock. The number of shares
of Restricted Stock and the restrictions or conditions on such shares
shall be as the Committee determines, in the Grant Agreement or by
other Plan rules, and the certificate for the Restricted Stock shall
bear evidence of the restrictions or conditions. No Restricted Stock
may have a restriction period of less than 6 months, other than in the
case of death or disability.
(e) PURCHASE STOCK - Purchase Stock are shares of Common Stock
offered to a Participant at such price as determined by the Committee,
the acquisition of which will make him eligible to receive under the
Plan, including, but not limited to, Other Stock Options; PROVIDED,
HOWEVER, that the price of such Purchase Shares may not be less than
50% of the Fair Market Value of the Common Stock on the date such
shares of Purchase Stock are offered.
(f) DIVIDEND EQUIVALENT RIGHTS - These are rights to receive
cash payments from the Corporation at the same time and in the same
amount as any cash dividends paid on an equal number of shares of
Common Stock to shareholders of record during the period such rights
are effective. The Committee, in the Grant Agreement or by other Plan
rules, may impose such restrictions and conditions on the Dividend
Equivalent Rights, including the date such rights will terminate, as it
deems appropriate, and may terminate, amend, or suspend such Dividend
Equivalent Rights at any time.
-5-
<PAGE> 14
(g) PERFORMANCE UNITS - These are rights to receive at a
specified future date, payment in cash of an amount equal to all or a
portion of the value of a unit granted by the Committee. At the time of
the Grant, in the Grant Agreement or by other Plan rules, the Committee
must determine the base value of the unit, the performance factors
applicable to the determination of the ultimate payment value of the
unit and the period over which Corporation performance will be
measured. These factors must include a minimum performance standard for
the Corporation below which no payment will be made and a maximum
performance level above which no increased payment will be made. The
term over which Corporation performance will be measured shall be not
less than six months.
(h) PERFORMANCE SHARES - These are rights to receive at a
specified future date, payment in cash or Common Stock, as determined
by the Committee, of an amount equal to all or a portion of the Fair
Market Value for all days that the Common Stock is traded during the
last forty-five (45) days of the specified period of performance of a
specified number of shares of Common Stock at the end of a specified
period based on Corporation performance during the period. At the time
of the Grant, the Committee, in the Grant Agreement or by Plan rules,
will determine the factors which will govern the portion of the rights
so payable and the period over which Corporation performance will be
measured. The factors will be based on Corporation performance and must
include a minimum performance standard for the Corporation below which
no payment will be made and a maximum performance level above which no
increased payment will be made. The term over which Corporation
performance will be measured shall be not less than six months.
Performance Shares will be granted for no consideration.
(i) OTHER STOCK-BASED GRANTS - The Committee may make other
Grants under the Plan pursuant to which shares of Common Stock (which
may, but need not, be shares of Restricted Stock pursuant to Paragraph
5(d)), are or may in the future be acquired, or Grants denominated in
stock units, including ones valued using measures other than market
value. Other Stock-Based Grants may be granted with or without
consideration; PROVIDED, HOWEVER, that the price of any such Grant made
for consideration that provides for the acquisition of shares of Common
Stock or other equity securities of the Corporation may not be less
than 50% of the Fair Market Value of the Common Stock or such other
equity securities on the date of grant of such Grant. Such Other
Stock-Based Grants may be made alone, in addition to or in tandem with
any Grant of any type made under the Plan and must be consistent with
the purposes of the Plan.
-6-
<PAGE> 15
6. LIMITATIONS AND CONDITIONS
--------------------------
(a) The number of Shares available for Grants under this Plan
shall be _________ shares of the authorized Common Stock as of the effective
date of the Plan. The number of Shares subject to Grants under this Plan to any
one Participant shall not be more than ________ shares. Unless restricted by
applicable law, Shares related to Grants that are forfeited, terminated,
cancelled or expire unexercised, shall immediately become available for Grants.
(b) No Grants shall be made under the Plan beyond ten years
after the effective date of the Plan, but the terms of Grants made on or before
the expiration thereof may extend beyond such expiration. At the time a Grant is
made or amended or the terms or conditions of a Grant are changed, the Committee
may provide for limitations or conditions on such Grant.
(c) Nothing contained herein shall affect the right of the
Corporation to terminate any Participant's employment at any time or for any
reason.
(d) Deferrals of Grant payouts may be provided for, at the
sole discretion of the Committee, in the Grant Agreements.
(e) Except as otherwise prescribed by the Committee, the
amounts of the Grants for any employee of a Subsidiary, along with interest,
dividend, and other expenses accrued on deferred Grants shall be charged to the
Participant's employer during the period for which the Grant is made. If the
Participant is employed by more than one Subsidiary or by both the Corporation
and a Subsidiary during the period for which the Grant is made, the
Participant's Grant and related expenses will be allocated between the companies
employing the Participant in a manner prescribed by the Committee.
(f) Other than as specifically provided with regard to the
death of a Participant, no benefit under the Plan shall be subject in any manner
to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or
charge, and any attempt to do so shall be void. No such benefit shall, prior to
receipt thereof by the Participant, be in any manner liable for or subject to
the debts, contracts, liabilities, engagements, or torts of the Participant.
(g) Participants shall not be, and shall not have any of the
rights or privileges of, stockholders of the Corporation in respect of any
Shares purchasable in connection with any Grant unless and until certificates
representing any such Shares have been issued by the Corporation to such
Participants.
(h) No election as to benefits or exercise of Stock Options,
Stock Appreciation Rights, or other rights may be made during a Participant's
lifetime by anyone other than the
-7-
<PAGE> 16
Participant except by a legal representative appointed for or by the
Participant.
(i) Absent express provisions to the contrary, any grant under
this Plan shall not be deemed compensation for purposes of computing benefits or
contributions under any retirement plan of the Corporation or its Subsidiaries
and shall not affect any benefits under any other benefit plan of any kind or
subsequently in effect under which the availability or amount of benefits is
related to level of compensation. This Plan is not a "Retirement Plan" or
"Welfare Plan" under the Employee Retirement Income Security Act of 1974, as
amended.
(j) Unless the Committee determines otherwise, no benefit or
promise under the Plan shall be secured by any specific assets of the
Corporation or any of its Subsidiaries, nor shall any assets of the Corporation
or any of its Subsidiaries be designated as attributable or allocated to the
satisfaction of the Corporation's obligations under the Plan.
7. TRANSFERS AND LEAVES OF ABSENCE
-------------------------------
For purposes of the Plan, unless the Committee determines
otherwise: (a) a transfer of a Participant's employment without an intervening
period of separation among the Corporation and any Subsidiary shall not be
deemed a termination of employment, and (b) a Participant who is granted in
writing a leave of absence shall be deemed to have remained in the employ of the
Corporation during such leave of absence.
8. ADJUSTMENTS
-----------
In the event of any change in the outstanding Common Stock by
reason of a stock split, spin-off, stock dividend, stock combination or
reclassification, recapitalization or merger, change of control, or similar
event, the Committee may adjust appropriately the number of Shares subject to
the Plan and available for or covered by Grants and Share prices related to
outstanding Grants and make such other revisions to outstanding Grants as it
deems are equitably required.
9. MERGER, CONSOLIDATION, EXCHANGE,
ACQUISITION, LIQUIDATION OR DISSOLUTION
---------------------------------------
In its absolute discretion, and on such terms and conditions
as it deems appropriate, coincident with or after the grant of any Stock Option
or any Stock-Based Grant, the Committee may provide that such Stock Option or
Stock-Based Grant cannot be exercised after the merger or consolidation of the
Corporation into another corporation, the exchange of all or substantially all
of the assets of the Corporation for the securities of another corporation, the
acquisition by another corporation of 80% or more of the Corporation's then
outstanding shares of voting stock or the recapitalization, reclassification,
-8-
<PAGE> 17
liquidation or dissolution of the Corporation, and if the Committee so provides,
it shall, on such terms and conditions as it deems appropriate in its absolute
discretion, also provide, either by the terms of such Stock Option or
Stock-Based Grant or by a resolution adopted prior to the occurrence of such
merger, consolidation, exchange, acquisition, recapitalization,
reclassification, liquidation or dissolution, that, for some period of time
prior to such event, such Stock Option or Stock-Based Grant shall be exercisable
as to all shares subject thereto, notwithstanding anything to the contrary
herein (but subject to the provisions of Paragraph 6(b)) and that, upon the
occurrence of such event, such Stock Option or Stock-Based Grant shall terminate
and be of no further force or effect; PROVIDED, HOWEVER, that the Committee may
also provide, in its absolute discretion, that even if the Stock Option or
Stock-Based Grant shall remain exercisable after any such event, from and after
such event, any such Stock Option or Stock-Based Grant shall be exercisable only
for the kind and amount of securities and/or other property, or the cash
equivalent thereof, receivable as a result of such event by the holder of a
number of shares of stock for which such Stock Option or Stock-Based Grant could
have been exercised immediately prior to such event.
10. AMENDMENT AND TERMINATION
-------------------------
The Committee shall have the authority to make such amendments
to any terms and conditions applicable to outstanding Grants as are consistent
with this Plan provided that, except for adjustments under Paragraph 8 or 9
hereof, no such action shall modify such Grant in a manner adverse to the
Participant without the Participant's consent except as such modification is
provided for or contemplated in the terms of the Grant.
The Board of Directors may amend, suspend or terminate the
Plan except that no such action, other than an action under Paragraph 8 or 9
hereof, may be taken which would, without shareholder approval, increase the
aggregate number of Shares available for Grants under the Plan, decrease the
price of outstanding Options or Stock Appreciation Rights, change the
requirements relating to the Committee or extend the term of the Plan.
11. FOREIGN OPTIONS AND RIGHTS
--------------------------
The Committee may make Grants to Employees who are subject to
the laws of nations other than the United States, which Grants may have terms
and conditions that differ from the terms thereof as provided elsewhere in the
Plan for the purpose of complying with foreign laws.
-9-
<PAGE> 18
12. WITHHOLDING TAXES
-----------------
The Corporation shall have the right to deduct from any cash
payment made under the Plan any federal, state or local income or other taxes
required by law to be withheld with respect to such payment. It shall be a
condition to the obligation of the Corporation to deliver shares upon the
exercise of an Option or Stock Appreciation Right, upon payment of Performance
units or shares, upon delivery of Restricted Stock or upon exercise, settlement
or payment of any Other Stock-Based Grant that the Participant pay to the
Corporation such amount as may be requested by the Corporation for the purpose
of satisfying any liability for such withholding taxes. Any Grant Agreement may
provide that the Participant may elect, in accordance with any conditions set
forth in such Grant Agreement, to pay a portion or all of such withholding taxes
in shares of Common Stock.
13. EFFECTIVE DATE AND TERMINATION DATES
------------------------------------
The Plan shall be effective on and as of the date of its
approval by the stockholders of the Corporation and shall terminate ten years
later, subject to earlier termination by the Board of Directors pursuant to
Paragraph 10.
-10-
<PAGE> 19
Exhibit 10(vii)
FORM OF
1996 UNIT INCENTIVE PLAN
FOR KEY EMPLOYEES OF
BORDEN FOODS CORPORATION AND ASSOCIATED PERSONS
1. PURPOSE OF PLAN
---------------
The 1996 Unit Incentive Plan for Key Employees of Borden Foods
Corporation and Associated Persons (the "PLAN") is designed:
(a) to promote the long term financial interests and growth of
Borden Foods Corporation (the "CORPORATION") and its Subsidiaries by
attracting and retaining management personnel with the training,
experience and ability to enable them to make a substantial
contribution to the success of the Corporation's business;
(b) to motivate management personnel by means of
growth-related incentives to achieve long range goals; and
(c) to further the identity of interests of Participants with
those of the direct and indirect equityholders of the Corporation
through opportunities to participate in increased value of the
Corporation and its Associated Persons.
2. DEFINITIONS
-----------
As used in the Plan, the following words shall have the
following meanings:
(a) "ASSOCIATED PERSON" shall mean any Subsidiary of BFH LLC,
including, without limitation, Borden Foods Holdings Corporation and the
Corporation, or any other entity designated by the Board of Directors in which
BFH LLC or an Associated Person has an interest, which may include, without
limitation, a successor to BFH LLC.
(b) "BFH LLC" shall mean Borden Foods Holdings, LLC, a
Delaware limited liability company.
(c) "BFH LLC UNIT" shall mean a Class A Unit or a Class B Unit
(each as defined in the Limited Liability Company Agreement of BFH LLC), as the
context may require.
(d) "BOARD OF DIRECTORS" means the Board of Directors
of the Corporation.
(e) "COMMITTEE" means the Compensation Committee of
the Board of Directors.
<PAGE> 20
(f) "EMPLOYEE" means a person, including an officer, in the
regular full-time employment of the Corporation or one of its Subsidiaries who,
in the opinion of the Committee, is, or is expected, to be primarily responsible
for the management, growth or protection of some part or all of the business of
the Corporation.
(g) "EQUIVALENT COMPANY" shall mean any Associated Person
that, at the relevant time, owns or operates, directly or indirectly,
substantially all of the business and assets of BFH LLC and its Subsidiaries.
(h) "EXCHANGE ACT" means the Securities Exchange Act
of 1934, as amended.
(i) "FAIR VALUE" means such value of a BFH LLC Unit or similar
ownership interest in an Equivalent Company as determined in accordance with any
applicable resolutions or regulations of the Committee in effect at the relevant
time and in accordance with the provisions of a Grant Agreement.
(j) "GRANT" means an award made to a Participant pursuant to
the Plan and described in Paragraph 5, including, without limitation, an award
of a BFH LLC Unit Option, Unit Appreciation Right, Purchase BFH LLC Unit or
Other Unit-Based Grant, or any combination of the foregoing.
(k) "GRANT AGREEMENT" means an agreement between the
Corporation and a Participant that sets forth the terms, conditions and
limitations applicable to a Grant.
(l) "PARTICIPANT" means an Employee selected to participate in
the Plan by the Committee in its sole discretion and to whom one or more Grants
have been made and such Grants have not all been forfeited or terminated under
the Plan; PROVIDED, HOWEVER, a non-employee director of the Corporation or one
of its Subsidiaries may not be a Participant.
(m) "SUBSIDIARY" means any corporation, partnership or other
entity in an unbroken chain of corporations, partnerships or other entities
beginning with BFH LLC if each of the corporations, partnerships or other
entities, or group of commonly controlled corporations, partnerships or other
entities other than the last corporation, partnership or other entity in the
unbroken chain then owns 50% or more of the voting stock or other ownership
interests in one of the other corporations, partnerships or other entities in
such chain.
3. ADMINISTRATION OF PLAN
----------------------
(a) The Plan shall be administered by the Committee. The
Committee may adopt its own rules of procedure, and the action of a majority of
the Committee, taken at a meeting or taken without a meeting by a writing signed
by such majority,
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<PAGE> 21
shall constitute action by the Committee. The Committee shall have the power and
authority to administer, construe and interpret the Plan, to make rules for
carrying it out and to make changes in such rules. Any such interpretations,
rules, and administration shall be consistent with the basic purposes of the
Plan.
(b) The Committee may delegate to the Chief Executive Officer
and to other senior officers of the Corporation its duties under the Plan
subject to such conditions and limitations as the Committee shall prescribe,
except that only the Committee may designate and make Grants to Participants who
are subject to Section 16 of the Exchange Act.
(c) The Committee may employ attorneys, consultants,
accountants, appraisers, brokers or other persons. The Committee, the
Corporation, and the officers and directors of the Corporation shall be entitled
to rely upon the advice, opinions or valuations of any such persons. All actions
taken and all interpretations and determinations made by the Committee in good
faith shall be final and binding upon all Participants, the Corporation and all
other interested persons. No member of the Committee or the Board of Directors,
or the Board of Directors of any Associated Person, and none of the Corporation,
BFH LLC or any Associated Person shall be liable (personally or otherwise) for
any action, determination or interpretation made in good faith with respect to
the Plan or the Grants, and all such persons shall be fully protected by the
Corporation with respect to any such action, determination or interpretation.
4. ELIGIBILITY
-----------
The Committee may from time to time make Grants under the Plan
to such Employees and in such form and having such terms, conditions and
limitations as the Committee may determine in its sole discretion. No Grants may
be made under this Plan to non-employee directors of Corporation or any of its
Subsidiaries. Grants may be granted singly, in combination or in tandem. The
terms, conditions and limitations of each Grant under the Plan shall be set
forth in a Grant Agreement, in a form approved by the Committee, consistent,
however, with the terms of the Plan; PROVIDED, HOWEVER, such Grant Agreement
shall contain provisions dealing with the treatment of Grants in the event of
the termination, death or disability of a Participant, and may also include
provisions concerning the treatment of Grants in the event of a change of
control of the Corporation.
5. GRANTS
------
From time to time, the Committee will determine the forms and
amounts of Grants for Participants. Such Grants may take the following forms in
the Committee's sole discretion:
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<PAGE> 22
(a) BFH LLC UNIT OPTIONS - These are options to purchase BFH
LLC Units. At the time of the Grant the Committee shall determine, and
shall have contained in the Grant Agreement or other Plan rules, the
option exercise period, the option exercise price, and such other
conditions or restrictions on the grant or exercise of the option as
the Committee deems appropriate, which may include the requirement that
the grant of options is predicated on the acquisition of Purchase BFH
LLC Units by the optionee.
(b) UNIT APPRECIATION RIGHTS - These are rights that on
exercise entitle the holder to receive the excess of (i) the Fair Value
on the date of exercise over (ii) the exercise price thereof multiplied
by (iii) the number of rights exercised. The Committee, in the Grant
Agreement or by other Plan rules, may impose such conditions or
restrictions on the exercise of Unit Appreciation Rights and may
provide for the conversion of the Unit Appreciation Rights into options
to purchase ownership in BFH LLC or any Associated Person as it deems
appropriate.
(c) PURCHASE BFH LLC UNIT - Purchase BFH LLC Units are BFH LLC
Units offered to a Participant at such price as determined by the
Committee, the acquisition of which will make him eligible to receive
Grants under the Plan; PROVIDED, HOWEVER, that the price of such
Purchase BFH LLC Units may not be less than 50% of the fair market
value (as determined by the Committee) of the BFH LLC Units on the date
such Purchase BFH LLC Units are offered.
(d) OTHER UNIT-BASED GRANTS - The Committee may make other
Grants under the Plan pursuant to which BFH LLC Units (or similar
ownership interests of an Equivalent Company) are or may in the future
be acquired, or payments are or may in the future be made, in each
case, based on the performance or value of the Corporation and its
Associated Persons. The Committee, in the Grant Agreement or by other
Plan rules, may impose such conditions or restrictions on any such
Grant as it deems appropriate, consistent with the purposes of the
Plan.
6. LIMITATIONS AND CONDITIONS
--------------------------
(a) The number of BFH LLC Units available for Grants under
this Plan initially shall be ___________, but may be increased or decreased (but
in no event decreased to a number lower than the number of Purchase BFH LLC
Units theretofore granted under the Plan), by the Committee in its sole
discretion. Unless restricted by applicable law, the number of BFH LLC Units
related to Grants that are forfeited, terminated, cancelled or expire shall
immediately become available for Grants.
(b) No Grants shall be made under the Plan beyond ten
years after the effective date of the Plan, but the terms of
-4-
<PAGE> 23
Grants made on or before the expiration thereof may extend beyond such
expiration. At the time a Grant is made or amended or the terms or conditions of
a Grant are changed, the Committee may provide for limitations or conditions on
such Grant.
(c) Nothing contained herein shall affect the right of the
Corporation to terminate any Participant's employment at any time or for any
reason.
(d) Deferrals of Grant payouts may be provided for, at the
sole discretion of the Committee, in the Grant Agreements.
(e) Except as otherwise prescribed by the Committee, the
amounts of the Grants for any employee of a Subsidiary, along with interest,
dividend and other expenses accrued on deferred Grants shall be charged to the
Participant's employer during the period for which the Grant is made. If the
Participant is employed by more than one Subsidiary or by both the Corporation
and a Subsidiary during the period for which the Grant is made, the
Participant's Grant and related expenses will be allocated between the companies
employing the Participant in a manner prescribed by the Committee.
(f) Other than as specifically provided with regard to the
death of a Participant, no Grant or right to payment in respect thereof under
the Plan shall be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance or charge, and any attempt to do so
shall be void. No Grant or right to payment in respect thereof shall, prior to
receipt thereof by the Participant, be in any manner liable for or subject to
the debts, contracts, liabilities, engagements or torts of the Participant.
(g) Participants shall not be, and shall not have any of the
rights or privileges of, members of BFH LLC or equity holders in any Associated
Person in respect of any BFH LLC Units or interests in an Associated Person
purchasable in connection with any Grant unless and until such Participant is
registered as the owner thereof and, if applicable, certificates representing
any such BFH LLC Units or such other interests have been issued by BFH LLC or
such Associated Person to such Participants.
(h) No election as to benefits or exercise of BFH LLC Unit
Options, Unit Appreciation Rights or other rights may be made during a
Participant's lifetime by anyone other than the Participant except by a legal
representative appointed for or by the Participant.
(i) Absent express provisions to the contrary, any grant under
this Plan shall not be deemed compensation for purposes of computing benefits or
contributions under any retirement plan of the Corporation or its Subsidiaries
and shall not affect any benefits under any other benefit plan of any kind or
subsequently in effect under which the availability or amount
-5-
<PAGE> 24
of benefits is related to level of compensation. This Plan is not a "Retirement
Plan" or "Welfare Plan" under the Employee Retirement Income Security Act of
1974, as amended.
(j) Unless the Committee determines otherwise, no benefit or
promise under the Plan shall be secured by any specific assets of the
Corporation or any of its Subsidiaries, nor shall any assets of the Corporation
or any of its Subsidiaries be designated as attributable or allocated to the
satisfaction of the Corporation's obligations under the Plan.
7. TRANSFERS AND LEAVES OF ABSENCE
-------------------------------
For purposes of the Plan, unless the Committee determines
otherwise: (a) a transfer of a Participant's employment without an intervening
period of separation among the Corporation and any Associated Person shall not
be deemed a termination of employment, and (b) a Participant who is granted in
writing a leave of absence shall be deemed to have remained in the employ of the
Corporation during such leave of absence.
8. ADJUSTMENTS
-----------
In the event that the Corporation (or any Equivalent Company)
consummates a Public Offering, or any similar event occurs, or there is a change
in the powers, designations, preferences and relative participating, optional or
other rights, if any, or the qualifications, limitations or restrictions of the
outstanding BFH LLC Units or equity interests in an Equivalent Company or a
reclassification, recapitalization or merger, change of control, or similar
event affecting the Corporation, BFH LLC or an Equivalent Company, the Committee
may adjust appropriately the outstanding Grants as it deems to be equitably
required, including converting the Grants into grants of options or other rights
to purchase ownership interests of the Corporation or the Equivalent Company
that consummates a Public Offering on such terms as the Committee deems to be
appropriate in its sole discretion.
9. MERGER, CONSOLIDATION, EXCHANGE,
ACQUISITION, LIQUIDATION OR DISSOLUTION
---------------------------------------
In its absolute discretion, and on such terms and conditions
as it deems appropriate, coincident with or after the grant of any BFH LLC Unit
Option or any Unit-Based Grant, the Committee may provide that such BFH LLC Unit
Option or Unit-Based Grant cannot be exercised after the merger or consolidation
of BFH LLC or the Corporation into another corporation, the exchange of all or
substantially all of the assets of BFH LLC or the Corporation for the securities
of another corporation, the sale of all or substantially all the assets of BFH
LLC or the Corporation, the acquisition by another corporation of 80% or more of
BFH LLC's or the Corporation's then outstanding units or shares of voting stock
or the recapitalization, reclassification,
-6-
<PAGE> 25
liquidation or dissolution of BFH LLC or the Corporation, and if the Committee
so provides, it shall, on such terms and conditions as it deems appropriate in
its absolute discretion, also provide, either by the terms of such BFH LLC Unit
Option or Unit-Based Grant or by a resolution adopted prior to the occurrence of
such merger, consolidation, exchange, acquisition, recapitalization,
reclassification, liquidation or dissolution, that, for some period of time
prior to such event, such BFH LLC Unit Option or Unit-Based Grant shall be
exercisable as to all units or shares subject thereto, notwithstanding anything
to the contrary herein (but subject to the provisions of Paragraph 6(b)) and
that, upon the occurrence of such event, such BFH LLC Unit Option or Unit-Based
Grant shall terminate and be of no further force or effect; PROVIDED, HOWEVER,
that the Committee may also provide, in its absolute discretion, that even if
the BFH LLC Unit Option or Unit-Based Grant shall remain exercisable after any
such event, from and after such event, any such BFH LLC Unit Option or
Unit-Based Grant shall be exercisable only for the kind and amount of
securities and/or other property, or the cash equivalent thereof, receivable as
a result of such event by the holder of a number of units or shares of stock
for which such BFH LLC Unit Option or Unit-Based Grant could have been
exercised immediately prior to such event.
10. AMENDMENT AND TERMINATION
-------------------------
The Committee shall have the authority to make such amendments
to any terms and conditions applicable to outstanding Grants as are consistent
with this Plan provided that, except for adjustments under Paragraph 8 or 9
hereof, no such action shall modify such Grant in a manner adverse to the
Participant without the Participant's consent except as such modification is
provided for or contemplated in the terms of the Grant.
The Board of Directors may amend, suspend or terminate the
Plan except that no such action, other than an action under Paragraph 8 or 9
hereof, may be taken which would decrease the exercise price of outstanding BFH
LLC Unit Options or Unit Appreciation Rights, change the requirements relating
to the Committee or extend the term of the Plan.
11. FOREIGN OPTIONS AND RIGHTS
--------------------------
The Committee may make Grants to Employees who are subject to
the laws of nations other than the United States, which Grants may have terms
and conditions that differ from the terms thereof as provided elsewhere in the
Plan for the purpose of complying with foreign laws.
12. WITHHOLDING TAXES
-----------------
The Corporation shall have the right to deduct from any cash
payment made under the Plan any federal, state or local income or other taxes
required by law to be withheld with respect
-7-
<PAGE> 26
to such payment. It shall be a condition to the obligation of the Corporation to
deliver BFH LLC Units upon exercise of a BFH LLC Unit Option or to make payment
upon exercise or settlement of any Unit Appreciation Right or Other Unit-Based
Grant that the Participant pay to the Corporation such amount as may be
requested by the Corporation for the purpose of satisfying any liability for
such withholding taxes. Any Grant Agreement may provide that the Participant may
elect, in accordance with any conditions set forth in such Grant Agreement, to
pay a portion or all of such withholding taxes in BFH LLC Units.
13. EFFECTIVE DATE AND TERMINATION DATES
------------------------------------
The Plan shall be effective on and as of the date of its
approval by the stockholders of the Corporation and shall terminate ten years
later, subject to earlier termination by the Board of Directors pursuant to
Paragraph 10.
-8-
<PAGE> 1
Exhibit 10(viii)(a)
BORDEN, INC.
1996 MANAGEMENT INCENTIVE PLAN
------------------------------
PLAN OVERVIEW
-------------
The objectives of the Management Incentive Plan are to align performance and
rewards and provide competitive, total cash compensation. The key performance
criteria which will be recognized under this plan are: financial performance for
Borden, Inc. and individual critical measurements which impact the advancement
of the organization.
TARGET INCENTIVE
Each participant will have a target incentive opportunity, stated as a
percentage of salary. The target incentive opportunity will be based on
financial performance measures accounting for 70% of the target incentive and
critical measurements accounting for 30% of the target incentive opportunity.
Based on actual performance, an award can be at, above, or below the target
incentive opportunity.
FINANCIAL PERFORMANCE - 70% OF TARGET INCENTIVE
There are two portions to the financial performance measures: 1) EBITDA
defined as earnings before interest and taxes plus depreciation and
amortization, and 2) asset management defined as the 13 month average
compared to the established asset management budget. EBITDA will be the
basis for determining the financial performance award and asset
management will be used to adjust that award.
CRITICAL MEASUREMENTS - 30% OF TARGET INCENTIVE
Each participant will have two to four individual critical measurement
goals consistent with the desired advancement of Borden, Inc.
performance, which will determine 30% of the target incentive award.
March 18, 1997
1
<PAGE> 2
TOTAL AWARD
The total award given to a participant is based on actual results achieved using
the sum of the financial performance award (EBITDA adjusted by asset management
performance), plus individual performance on critical measurement goals.
MANAGEMENT INCENTIVE PROGRAM - DETAILED INFORMATION
---------------------------------------------------
TARGET INCENTIVE
The annual target incentive opportunity for each participant is stated as a
percentage of salary (on December 31 of the plan year). Actual financial
performance and critical measurement performance will determine if awards are
paid at, above or below the established target incentive opportunity. The two
performance categories are weighted to focus participants on the appropriate
measures. Financial performance is weighted at 70% and critical measurement
goals at 30% of the target incentive opportunity.
<TABLE>
<CAPTION>
Example:
<S> <C> <C>
Salary: $70,000
Annual Incentive Target: 20%
Incentive Target: $14,000 (20% of $70,000)
Financial Award:
EBITDA (at budget): $ 9,800 (70% of $14,000)
Asset Management: $ 0 (Asset Management at budget - no adjustment)
Critical Measurement Award: $ 4,200 (30% of $14,000)
</TABLE>
March 18, 1997
2
<PAGE> 3
BORDEN, INC. FINANCIAL PERFORMANCE
The financial performance portion of the target incentive for Borden, Inc. is
based on an established EBITDA budget which is defined as earnings before
interest and taxes, plus depreciation and amortization. A financial performance
award is paid only if actual EBITDA reported is at least 80% of the established
Borden, Inc. EBITDA budget. If actual financial performance is at 120% of EBITDA
budget, the maximum financial performance award will be paid.
DETERMINING FINANCIAL AWARD BASED ON EBITDA
The primary basis for determining the financial award will be actual EBITDA
relative to the approved EBITDA budget. EBITDA has been selected because it
provides a measure of earnings that reflects performance of our business on a
day-to-day basis, since it excludes financing and tax considerations.
The following procedures will be followed in determining the financial
performance award based on EBITDA:
- EBITDA will be adjusted for accounting policy changes dictated
by the U.S. Securities and Exchange Commission (SEC), the U.S.
Financial Accounting Standards Board (FASB) or the Borden,
Inc. Chief Financial Officer.
- Special situations such as a provision for the sale or closing
of a plant or business may be proposed for exclusion.
March 18, 1997
3
<PAGE> 4
The relationship between the financial performance award relative to actual
EBITDA performance is as follows:
<TABLE>
<CAPTION>
PERCENT OF BUDGET PERCENT OF TARGET
EBITDA ACHIEVED AWARD EARNED
<S> <C> <C>
Threshold 80% 50%
Budget 100% 100%
Maximum 120% 200%
</TABLE>
- If the EBITDA budget is achieved, the financial performance
award at the target incentive level will be paid.
- If a minimum of 80% of the EBITDA budget is not achieved, no
financial performance award will be paid.
- If 80% of EBITDA is achieved, 50% of the financial performance
award will be paid.
- If 120% of EBITDA is achieved, the financial performance award
of 200% of target incentive will be paid. Since the financial
component of the award equals 70% of the target, this means
that up to 140% of target can be earned based on financial
results.
- Based on actual EBITDA performance compared to the EBITDA
budget established for Borden, Inc., the participant's
incentive award will be interpolated when performance is
between minimum (80%) and target (100%) , or target (100%) and
maximum (120%) performance based on the above table.
March 18, 1997
4
<PAGE> 5
<TABLE>
<CAPTION>
Example:
<S> <C>
Actual EBITDA Performance: 110% (halfway between EBITDA budget and 120% maximum)
Incentive Level: 150% (halfway between target and maximum opportunity)
Financial Incentive Award: $14,700 (150% of $9,800)
</TABLE>
ADJUSTING FINANCIAL AWARD BASED ON ASSET MANAGEMENT
Once your financial award based on EBITDA has been determined, it will be
subject to an adjustment based on asset management performance, where actual
asset management is compared to budgeted asset management.
The following procedures will be used in measuring asset management:
- Assets will be defined as follows: total assets (fixed assets
net of depreciation plus current assets) minus intangibles
(goodwill and other), minus cash, and minus current
liabilities (except for income taxes, drafts payable and
debt).
- Asset management will be computed on a 13-month average, from
December 1995 through December 1996.
If actual asset management is at the budgeted level, then the financial
performance award determined based on EBITDA will not be affected. However, if
actual asset management performance deviates from budget, the financial award
will be adjusted up to a maximum of plus or minus 20%, depending on the extent
of the deviation from the budgeted level.
March 18, 1997
5
<PAGE> 6
The following relationship will be used to determine the asset management
adjustment:
<TABLE>
<CAPTION>
PERCENT OF BUDGET INCENTIVE PERCENT
NET ASSETS ACHIEVED ADJUSTMENT
<S> <C> <C>
Threshold 110% -20%
Budget 100% 0%
Maximum 90% +20%
</TABLE>
- If asset management is at budget, no adjustment will be made
in the financial performance award.
- For every 1% that asset management performance exceeds budget,
the financial performance award will decrease by 2%, to a
maximum of -20% for asset management that is 10% or more above
budget.
- For every 1% that asset management performance is below
budget, the financial performance award will increase by 2%,
to a maximum of +20% for asset management that is 10% or more
below budget.
- If both EBITDA and asset management performance is achieved at
the maximum level, the maximum financial performance award
available is 168% of target (20% asset management adjustment
of a 140% maximum EBITDA award).
<TABLE>
<CAPTION>
Example:
<S> <C>
EBITDA Incentive: $14,700 (for EBITDA at 110% of budget)
Asset Management Performance: 4% below budget
Financial Award Adjustment: +8% (+2% for every 1% that assets are below budget)
Asset Management Award Amount: $1,176 (8% of $14,700)
</TABLE>
March 18, 1997
6
<PAGE> 7
CRITICAL MEASUREMENTS AWARD
As mentioned previously, 30% of the target incentive opportunity is based on the
participant's performance on critical measurements. Unlike EBITDA and asset
management, which are measured at the Borden, Inc. level, critical measurement
results are measured separately for each participant. Participants can receive
incentive payments for critical measurements in one of two ways:
1) When a minimum level of 80% of EBITDA is achieved, OR
2) Through establishment of a critical measurement incentive pool
if 80% of EBITDA is not achieved.
The critical measurements for each participant will be consistent and mutually
supportive for those within a unit. Each participant will establish goals on two
to four critical measures, which are expected to contribute to the sustained
future success of the business and can be measured objectively. Examples of
critical measurement categories include (but are not limited to):
- Improved reporting system
- Quality
- Customer satisfaction
- New financial control system
The process for setting goals on the critical measurements will start with the
Chief Executive Officer and his direct reports. These approved goals will
provide a framework for all participants to develop their critical measurements.
Consistent focus of critical measurements is important and therefore, managers
will assign weights to each of the critical measurements so that the some of the
weights adds to the 30% critical measurement target award.
At the end of the year, the critical measurement assessment will start with the
Chief Executive Officer and his direct reports. Assessment of critical
measurements for all other participants is expected to be generally consistent
with that of the top executives, with allowance for a range of individual
outcomes within a unit. After top management's assessments are completed, each
of the participants will be evaluated by their manager, who will determine the
impact on the incentive award. While the goals will have objective indicators of
success, there will also be managerial judgment regarding the degree to which
the strategic positioning of the company was improved, neutral or impeded during
the year.
March 18, 1997
7
<PAGE> 8
WHEN A MINIMUM LEVEL OF 80% EBITDA IS ACHIEVED
The process for determining awards will be as follows:
- If the critical measurement goals are achieved as expected,
target awards will be paid.
- If the critical measurement goals are not fully met, a partial
or no critical measurement award may be paid, depending on the
degree of shortfall.
- If the critical measurement goals are exceeded, higher
critical measurement awards may be paid.
- If exceptional performance on the critical measurements is
achieved, the maximum critical measurement award available is
60% (200% of the 30% target).
<TABLE>
<CAPTION>
Example:
<S> <C>
Critical Measurement Award Target: $4,200 (30% of target incentive)
Management Evaluation: Exceeds Expectations
Award Determination: 125%
Critical Measurement Award Amount: $5,250 (125% of $4,200)
</TABLE>
March 18, 1997
8
<PAGE> 9
ESTABLISHMENT OF A CRITICAL MEASUREMENT POOL - 80% OF EBITDA NOT ACHIEVED
As previously indicated, the amount of incentive awards that can be paid to all
Borden, Inc. participants based on critical measurements is not constrained when
at least 80% of the EBITDA budget is achieved. However, if 80% of the EBITDA
budget is not met, a critical measurement pool will be created in accordance
with the following schedule:
<TABLE>
<CAPTION>
CRITICAL
--------
% ACHIEVEMENT MEASUREMENT POOL
------------- ----------------
OF EBITDA AS A % OF TOTAL BORDEN
--------- ----------------------
BUDGET INCENTIVE AWARD
------ ---------------
<S> <C>
79 28% of Target
78 26% of Target
77 24% of Target
76 22% of Target
75 20% of Target
74 18% of Target
73 16% of Target
72 14% of Target
71 12% of Target
70 or below 10% of Target
</TABLE>
From this pool, critical measurement awards may be issued to individuals based
on their performance relative to their critical measurements. Any one individual
can receive an award from 0 up to 60% of target incentive. However, the awards
made by Borden, Inc. may not exceed the total dollars available in the critical
measurement pool.
March 18, 1997
9
<PAGE> 10
<TABLE>
<CAPTION>
Example of critical measurement pool for all Borden, Inc., participants:
<S> <C>
Total of all target incentive awards: $1,000,000
Actual EBITDA Performance: 79% (of budget)
Critical Measurement Pool %: 28% (from table)
Critical Measurement Pool: $ 280,000 (28% of $1,000,000)
</TABLE>
TOTAL AWARD
The total incentive award is the sum of the financial performance award
(comprised of EBITDA plus asset management performance) and the critical
measurement award.
- If performance is below the minimum acceptable level for all
components, awards will not be paid.
- If the financial performance components of EBITDA and asset
management are achieved at budget and the critical
measurements are achieved as expected, awards will be paid at
the target incentive level.
- The maximum available award is 228% of the target incentive
opportunity:
<TABLE>
<S> <C>
Financial performance award: 140% EBITDA (200% of 70% target)
28% Asset Management (20% of 140% EBITDA)
Critical measurements award: 60% (200% of 30% target)
</TABLE>
March 18, 1997
10
<PAGE> 11
Total Award Example:
Total Award = Financial Performance + Critical Measurement
Award
Total Award = (EBITDA Award + Asset Management Award) +
Critical Measurement Award
Total Award = ($14,700 + $1,176) + $5,250
Total Award = $21,126
AWARD PAYMENT
Award payments are subject to the following :
- Participants may elect to receive awards as a cash payment or
defer all or a portion of incentive compensation. See separate
Statement of Preference form to elect deferral of
compensation.
- All participants who elect cash payments will receive awards
net of all required federal, state and local taxes
If you have any questions concerning this incentive program, contact your
manager or your Human Resource Manager.
March 18, 1997
11
<PAGE> 12
BORDEN, INC. 1996 MANAGEMENT INCENTIVE PLAN
ADMINISTRATIVE GUIDELINES
-------------------------
1. Base Salary for Bonus Calculations
----------------------------------
December 31, 1996 Annual Base Salary will be used to calculate the
incentive
2. Eligibility
-----------
To be eligible to receive an incentive award under the program, you
must be an active associate as of the end of the measurement period
(i.e., December 31, 1996). The only exceptions to this rule are
detailed below under item number 5.
3. Pro-Rata Eligibility
--------------------
Where incentives are to be paid for partial periods, the incentive will
be calculated on a pro-rata basis. Eligibility for pro-rata payments is
detailed in items number 4, 5, and 6 below. Pro-rata calculations will
be done on whole months only.
4. New Hires, Transfers or Promotions During the Incentive Period
--------------------------------------------------------------
For New Hires or participants added to the Plan in the first through
third quarters, the bonus will be calculated on a pro-rated basis from
the date of hire, but only in whole months. Fourth quarter New Hires
will not be eligible for an award.
For Promotions and Transfers, the bonus will be pro-rated from the date
of promotion or transfer in whole months. This proration will apply to
both changes in target incentive percentage and to changes in goals.
For all pro-rations under this item, effective dates as of the first
through the fifteenth of the month will count the full month. Effective
dates as of the sixteenth through the last day of the month will not
include that month in the pro-ration calculation.
March 18, 1997
12
<PAGE> 13
5. Termination During the Incentive Period
---------------------------------------
If it is a Voluntary Termination, no bonus will be earned.
If it is an Involuntary Termination due to unsatisfactory performance
or cause, no bonus will be earned. Note: Achieving business results at
the expense of violations of laws, regulations or business ethics or
allowing any individuals to behave in this manner will be considered
cause for termination.
If it is an Involuntary Termination due to job elimination or
reorganization, the bonus will be paid, if earned, on a pro-rated basis
as of the termination date. Termination effective on the first through
the fifteenth of the month will not include the termination month in
the pro-rata calculation. Terminations effective on the sixteenth
through the last day of the month will include the termination month in
the pro-rata calculation. Payments will be made at the same time as
they are made to participants who continue to work for the Company
through the end of the year.
6. Death or Disability During the Incentive Period
-----------------------------------------------
The incentive earned as of the date of death will be paid, on a
pro-rated basis, to the estate of the participant at the same time
payments are made to associates who continue to work for the Company
through the end of the year.
Disabilities of 30 days or less will not have an impact on the
participant's ability to continue to be eligible for an incentive.
If a disability lasts more than 30 days, then the incentive will be
earned only for the period worked. The period worked will be determined
on a pro-rated basis up until the date of disability and from the date
of return to work. The pro-ration will operate in whole months where
the first through the fifteenth as the date of disability will not
count the month and the sixteenth through the end of the month as the
date of disability will count the month; and where the first through
the fifteenth as the date of return to work will count the month and
the sixteenth through the end of the month as the date of return to
work will not count the month. Incentive payments will be made at the
same time as they are made to participants who work full-time for the
Company through the end of the year.
March 18, 1997
13
<PAGE> 14
7. Adding Participants to the Plan
-------------------------------
New participants will be added to this program during the year as
recommended by the Senior Vice President Human Resources or Director
Compensation and Benefits and approved by the Chief Executive Officer.
The criteria for participation will be based on both similar job
classification as the list of current participants in this program and
a responsibility level commensurate with the participant's ability to
influence goal outcomes. Approval will be required for both the
addition of a participant to the program and the proposed participant's
target incentive level.
8. Timing of Payments
------------------
Bonus awards will be paid as quickly after the end of 1996 as possible.
Financial results will need to be finalized as appropriate by the
Borden, Inc. Controller and the independent auditors before bonuses can
be calculated and paid.
9. Financial Adjustments
---------------------
Actual financial results as reported on a GAAP basis will be utilized
for incentive award calculation with the following exceptions:
- Special situations, such as a provision for the sale or
closing of a plant or business, may be proposed for exclusion
IF THE PROPOSAL IS PRESENTED WHEN THE CHARGE IS TAKEN.
Exclusions will need to be approved by the Borden, Inc. Chief
Executive Officer and Chief Financial Officer.
- Accounting policy changes dictated by the U.S. Securities and
Exchange Commission (SEC), the U.S. Financial Accounting Board
(FASB), or the Borden, Inc. Chief Financial Officer may be
proposed for exclusion IF THE PROPOSAL IS PRESENTED WHEN THE
CHANGE IS MADE. Exclusions will need to be approved by the
Borden, Inc. Chief Executive Officer and Chief Financial
Officer
- If earnings were achieved in ways that are considered
undesirable (such as reducing budgeted advertising
expenditures where this would hurt the business), an
adjustment may be made at the discretion of the Borden, Inc.
Chief Executive Officer.
March 18, 1997
14
<PAGE> 15
10. All Plan Payments Subject to Discretion
---------------------------------------
Notwithstanding the attainment of financial results, or part or all of
the goals, all awards under the Plan are subject to the approval of the
Chief Executive Officer of Borden, Inc.
March 18, 1997
15
<PAGE> 1
Exhibit 10(viii)(b)
BORDEN SERVICES COMPANY
1996 MANAGEMENT INCENTIVE PLAN
------------------------------
PLAN OVERVIEW
-------------
The objectives of the Management Incentive Plan are to align performance and
rewards and provide competitive, total cash compensation. The key performance
criteria which will be recognized under this plan are: financial performance for
Borden Services Company and individual critical measurements which impact the
advancement of the organization.
TARGET INCENTIVE
Each participant will have a target incentive opportunity, stated as a
percentage of salary. The target incentive opportunity will be based on
financial performance measures accounting for 70% of the target incentive and
critical measurements accounting for 30% of the target incentive opportunity.
Based on actual performance, an award can be at, above, or below the target
incentive opportunity.
FINANCIAL PERFORMANCE - 70% OF TARGET INCENTIVE
The financial performance measurement will be based on earnings from
operations relative to budget - "EBIT" at the Borden Services Company
level excluding the results of Aviation Services. Hereafter in this
document, EBIT for Borden Services Company refers to earnings before
interst and taxes, excluding the results of Aviation Services.
CRITICAL MEASUREMENTS - 30% OF TARGET INCENTIVE
Each participant will have two to four individual critical measurement
goals consistent with the desired advancement of Borden Services
Company performance, which will determine 30% of the target incentive
award.
March 18, 1997
1
<PAGE> 2
TOTAL AWARD
The total award given to a participant is based on actual results achieved using
the sum of the financial performance award (EBIT), plus individual performance
on critical measurement goals.
MANAGEMENT INCENTIVE PROGRAM - DETAILED INFORMATION
---------------------------------------------------
TARGET INCENTIVE
The annual target incentive opportunity for each participant is stated as a
percentage of salary (on December 31 of the plan year). Actual financial
performance and critical measurement performance will determine if awards are
paid at, above or below the established target incentive opportunity. The two
performance categories are weighted to focus participants on the appropriate
measures. Financial performance is weighted at 70% and critical measurement
goals at 30% of the target incentive opportunity.
<TABLE>
<CAPTION>
Example:
<S> <C>
Salary: $70,000
Annual Incentive Target: 20%
Incentive Target: $14,000 (20% of $70,000)
Financial Award:
EBIT (at budget): $ 9,800 (70% of $14,000)
Critical Measurement Award: $ 4,200 (30% of $14,000)
</TABLE>
March 18, 1997
2
<PAGE> 3
BORDEN SERVICES COMPANY FINANCIAL PERFORMANCE
The financial performance portion of the target incentive for Borden Services
Company is based on an established EBIT budget which is defined as earnings
before interest and taxes and excluding the results of Aviation Services. A
financial performance award is paid only if actual EBIT reported is at least 80%
(as later defined) of the established Borden Services Company EBIT budget. If
actual financial performance is at 120% (as later defined) of EBIT budget, the
maximum financial performance award will be paid.
DETERMINING FINANCIAL AWARD BASED ON EBIT
The primary basis for determining the financial award will be actual EBIT
relative to the approved EBIT budget. EBIT has been selected because it provides
a measure of earnings that reflects performance of our business on a day-to-day
basis, since it excludes financing and tax considerations.
The following procedures will be followed in determining the financial
performance award based on EBIT:
- EBIT (both budget and actual) will be adjusted for accounting
policy changes dictated by the U.S. Securities and Exchange
Commission (SEC), the U.S. Financial Accounting Standards
Board (FASB) or the Borden, Inc. Chief Financial Officer.
- Special situations such as a provision for the sale or closing
of a plant or business may be proposed for exclusion.
March 18, 1997
3
<PAGE> 4
The relationship between the financial performance award relative to actual
Borden Services Company EBIT excluding Aviation Services is as follows:
<TABLE>
<CAPTION>
TOTAL BSC
PERCENT EBIT
ACHIEVED BEFORE ACTIVATION
<S> <C> <C>
50% -$1.5 million
100% $0
200% $1.5 million
</TABLE>
March 18, 1997
4
<PAGE> 5
- Because BSC has been purposely designed to have a break-even
budget for 1996, variances from budget will be treated on an
absolute basis.
- If the EBIT budget is achieved, the financial performance
award at the target incentive level will be paid.
- No financial performance award will be paid for achieving
losses greater than $1.5 million (defined as less than 80% of
budget).
- 50% of the financial performance award will be paid for
achieving EBIT that is $1.5 million below budget (defined ast
80% of budget).
- The financial performance award of 200% of target incentive
will be paid for EBIT of $1.5 million or more above budget
(defined as 120% of budget). Since the financial component of
the award equals 70% of the target, this means that up to 140%
of target can be earned based on financial results.
- Based on actual EBIT performance compared to the EBIT budget
established for Borden Services Company, the participant's
incentive award will be determined when performance is between
minimum (80%) and target (100%) , or target (100%) and maximum
(120%) performance based on the above graph.
<TABLE>
<CAPTION>
Example of Financial Incentive Award Calculation for Borden Services Company:
<S> <C>
BSC Actual EBIT $750,000
BSC Budgeted EBIT $ 0
Salary $ 70,000
Annual Incentive Target $ 14,000 (20% of $70,000)
</TABLE>
March 18, 1997
5
<PAGE> 6
<TABLE>
<S> <C>
Financial Incentive Award: $ 9,800 (70% of $14,000)
Actual EBIT Performance: 110% (halfway between EBIT budget and 120% maximum)
Incentive Level: 150% (halfway between target and maximum opportunity)
Financial Incentive Award: $ 14,700 (150% of $9,800)
CRITICAL MEASUREMENTS AWARD
</TABLE>
As mentioned previously, 30% of the target incentive opportunity is based on the
participant's performance on critical measurements. Unlike EBIT which is
measured at the Borden Services Company level, critical measurement results are
measured separately for each participant. Participants can receive incentive
payments for critical measurements in one of two ways:
1) When a minimum level of 80% of EBIT is achieved, OR
2) Through establishment of a critical measurement incentive pool
if 80% of EBIT is not achieved.
The critical measurements for each participant will be consistent and mutually
supportive for those within a unit. Each participant will establish goals on two
to four critical measurements, which are expected to contribute to the sustained
future success of the business and can be measured objectively. Examples of
critical measurement categories include (but are not limited to):
- Financial controls
- Market share
- Number or type of customers
- Quality
- Customer satisfaction
- New product introductions
- Customer retention
The process for setting goals on the critical measurements will start with the
Chief Executive Officer and his direct reports. These approved goals will
provide a framework for all participants to develop their critical measurements.
Consistent focus of critical measurements is important and therefore, managers
will assign weights to each of the critical measurements so that the sum of the
March 18, 1997
6
<PAGE> 7
weights adds to the 30% critical measurement target award.
At the end of the year, the critical measurement assessment will start with the
Chief Executive Officer and his direct reports. Assessment of critical
measurements for all other participants is expected to be generally consistent
with that of the top executives, with allowance for a range of individual
outcomes within a unit. After top management's assessments are completed, each
of the participants will be evaluated by their manager, who will determine the
impact on the incentive award. While the goals will have objective indicators of
success, there will also be managerial judgment regarding the degree to which
the strategic positioning of the company was improved, neutral or impeded during
the year.
WHEN A MINIMUM LEVEL OF 80% EBIT IS ACHIEVED
The process for determining awards will be as follows:
- If the critical measurement goals are achieved as expected,
target awards will be paid.
- If the critical measurement goals are not fully met, a partial
or no critical measurement award may be paid, depending on the
degree of shortfall.
- If the critical measurement goals are exceeded, higher
critical measurement awards may be paid.
- If exceptional performance on the critical measurements is
achieved, the maximum critical measurement award available is
60% (200% of the 30% target).
Example:
Critical Measurement Award Target: $4,200 (30% of
target incentive)
March 18, 1997
7
<PAGE> 8
<TABLE>
<S> <C>
Management Evaluation: Exceeds Expectations
Award Determination: 125%
Critical Measurement Award Amount: $5,250 (125% of $4,200)
</TABLE>
ESTABLISHMENT OF A CRITICAL MEASUREMENT POOL - 80% OF EBIT NOT ACHIEVED
As previously indicated, the amount of incentive awards that can be paid to all
Borden Services Company participants based on critical measurements is not
constrained when at least 80% of the EBIT budget is achieved. However, if 80% of
the EBIT budget is not met, a critical measurement pool will be created in
accordance with the following schedule:
<TABLE>
<CAPTION>
CRITICAL
--------
% ACHIEVEMENT MEASUREMENT POOL
------------- ----------------
OF EBIT AS A % OF TOTAL BORDEN
------- ----------------------
BUDGET INCENTIVE AWARD
------ ---------------
<S> <C>
79 28% of Target
78 26% of Target
77 24% of Target
76 22% of Target
75 20% of Target
74 18% of Target
73 16% of Target
72 14% of Target
71 12% of Target
70 or below 10% of Target
</TABLE>
8
<PAGE> 9
From this pool, critical measurement awards may be issued to individuals based
on their performance relative to their critical measurements. Any one individual
can receive an award from 0 up to 60% of target incentive. However, the awards
made by Borden Services Company may not exceed the total dollars available in
the critical measurement pool.
<TABLE>
<CAPTION>
Example of critical measurement pool for all Borden Services Company participants:
<S> <C>
Total of all target incentive awards: $ 500,000
Actual EBITDA Performance: 79% (of budget)
Critical Measurement Pool %: 28% (from table)
Critical Measurement Pool: $ 140,000 (28% of $500,000)
</TABLE>
TOTAL AWARD
The total incentive award is the sum of the financial performance award (based
on EBIT) and the critical measurement award.
- If performance is below the minimum acceptable level for all
components, awards will not be paid.
- If the financial performance of EBIT is achieved at budget and
the critical measurements are achieved as expected, awards
will be paid at the target incentive level.
- The maximum available award is 200% of the target incentive
opportunity:
<TABLE>
<S> <C> <C> <C>
Financial performance award: 140% EBIT (200% of 70% target)
Critical measurements award: 60% (200% of 30% target)
</TABLE>
March 18, 1997
9
<PAGE> 10
<TABLE>
<CAPTION>
Total Award Example:
<S> <C>
Total Award = Financial Performance (EBIT) + Critical
Measurement Award
Total Award = $14,700 + $5,250
Total Award = $19,950
</TABLE>
AWARD PAYMENT
Award payments are subject to the following :
- Participants may elect to receive awards as a cash payment or
defer all or a portion of incentive compensation. See separate
Statement of Preference form to elect deferral of
compensation.
- All participants who elect cash payments will receive awards
net of all required federal, state and local taxes
If you have any questions concerning this incentive program, contact your Team
Leader or your Human Resource Manager.
March 18, 1997
10
<PAGE> 11
BORDEN SERVICES COMPANY 1996 MANAGEMENT INCENTIVE PLAN
ADMINISTRATIVE GUIDELINES
-------------------------
1. Base Salary for Bonus Calculations
----------------------------------
December 31, 1996 Annual Base Salary will be used to calculate the
incentive
2. Eligibility
-----------
To be eligible to receive an incentive award under the program, you
must be an active associate as of the end of the measurement period
(i.e., December 31, 1996). The only exceptions to this rule are
detailed below under item number 5.
3. Pro-Rata Eligibility
--------------------
Where incentives are to be paid for partial periods, the incentive will
be calculated on a pro-rata basis. Eligibility for pro-rata payments is
detailed in items number 4, 5, and 6 below. Pro-rata calculations will
be done on whole months only.
4. New Hires, Transfers or Promotions During the Incentive Period
--------------------------------------------------------------
For New Hires or participants added to the Plan in the first through
third quarters, the bonus will be calculated on a pro-rated basis from
the date of hire, but only in whole months. Fourth quarter New Hires
will not be eligible for an award.
For Promotions and Transfers, the bonus will be pro-rated from the date
of promotion or transfer in whole months. This proration will apply to
both changes in target incentive percentage and to changes in goals.
For all pro-rations under this item, effective dates as of the first
through the fifteenth of the month will count the full month. Effective
dates as of the sixteenth through the last day of the month will not
include that month in the pro-ration calculation.
March 18, 1997
11
<PAGE> 12
5. Termination During the Incentive Period
---------------------------------------
If it is a Voluntary Termination, no bonus will be earned.
If it is an Involuntary Termination due to unsatisfactory performance
or cause, no bonus will be earned. Note: Achieving business results at
the expense of violations of laws, regulations or business ethics or
allowing any individuals to behave in this manner will be considered
cause for termination.
If it is an Involuntary Termination due to job elimination or
reorganization, the bonus will be paid, if earned, on a pro-rated basis
as of the termination date. Termination effective on the first through
the fifteenth of the month will not include the termination month in
the pro-rata calculation. Terminations effective on the sixteenth
through the last day of the month will include the termination month in
the pro-rata calculation. Payments will be made at the same time as
they are made to participants who continue to work for the Company
through the end of the year.
6. Death or Disability During the Incentive Period
-----------------------------------------------
The incentive earned as of the date of death will be paid, on a
pro-rated basis, to the estate of the participant at the same time
payments are made to associates who continue to work for the Company
through the end of the year.
Disabilities of 30 days or less will not have an impact on the
participant's ability to continue to be eligible for an incentive.
If a disability lasts more than 30 days, then the incentive will be
earned only for the period worked. The period worked will be determined
on a pro-rated basis up until the date of disability and from the date
of return to work. The pro-ration will operate in whole months where
the first through the fifteenth as the date of disability will not
count the month and the sixteenth through the end of the month as the
date of disability will count the month; and where the first through
the fifteenth as the date of return to work will count the month and
the sixteenth through the end of the month as the date of return to
work will not count the month. Incentive payments will be made at the
same time as they are made to participants who work full-time for the
Company through the end of the year.
March 18, 1997
12
<PAGE> 13
7. Adding Participants to the Plan
-------------------------------
New participants will be added to this program during the year as
recommended by the Chief Executive Officer and Chief Financial Officer
of Borden Services Company and approved by the Board of Directors. The
criteria for participation will be based on both similar job
classification as the list of current participants in this program and
a responsibility level commensurate with the participant's ability to
influence goal outcomes. Approval will be required for both the
addition of a participant to the program and the proposed participant's
target incentive level.
8. Timing of Payments
------------------
Bonus awards will be paid as quickly after the end of 1996 as possible.
Financial results will need to be finalized as appropriate by the
Borden, Inc. Controller and the independent auditors before bonuses can
be calculated and paid.
9. Financial Adjustments
---------------------
Actual financial results as reported on a GAAP basis will be utilized
for incentive award calculation with the following exceptions:
- Special situations, such as a provision for the sale or
closing of a plant or business, may be proposed for exclusion
if the proposal is presented when the charge is taken.
Exclusions will need to be approved by the BSC Board of
Directors and the Borden, Inc. Chief Executive Officer.
- Special situations, such as the financial impact upon BSC from
a loss of a significant portion of BSC's customer base, as the
result of Borden, Inc.'s management decisions, may be proposed
for adjustment if the impact can be reasonably measured. Such
adjustments will require the concurrence of both the CEO and
the CFO of Borden, Inc.
- Accounting policy changes dictated by the U.S. Securities and
Exchange Commission (SEC), the U.S. Financial Accounting Board
(FASB), or the Borden, Inc. Chief Financial Officer.
March 18, 1997
13
<PAGE> 14
- If earnings were achieved in ways that are considered
undesirable (such as reducing budgeted equipment maintenance
expenditures where this would hurt the business), an
adjustment may be made at the discretion of the BSC Board of
Directors.
- Favorable variances will not automatically be returned to
customers until a full understanding of a rebate upon the
final calculation of actual EBIT and its impact upon
incentives is fully understood, or after incentive accrual is
adjusted to actual.
10. All Plan Payments Subject to Discretion
---------------------------------------
Notwithstanding the attainment of financial results, or part or all of
the goals, all awards under the Plan are subject to the approval of the
Borden Services Company Board of Directors.
March 18, 1997
14
<PAGE> 1
BORDEN FOODS
The objective of the Borden Foods management incentive compensation plan is to
reaffirm the interest of the enterprise as a whole over short term self-interest
while optimizing the "whole system" versus sub-optimizing the pieces.
TARGET INCENTIVE
Each participant will have a target incentive opportunity, stated as a
percentage of salary (on December 31 of the plan year). Actual financial
performance of Borden Foods and contribution to three critical areas will
determine if awards are paid at, above, or below the established target
incentive opportunity.
BORDEN FOODS CORPORATION FINANCIAL PERFORMANCE
The financial performance of the target incentive for BFC is based on an actual
EBITDA (Earnings before interest and taxes, plus depreciation and amortization)
performance compared to the established EBITDA budget.
MANAGEMENT INCENTIVE PROGRAM - DETAILED INFORMATION
---------------------------------------------------
TARGET INCENTIVE
The annual target incentive opportunity for each participant is stated as a
percentage of salary (on December 31 of the plan year). Actual financial
performance and individual contribution to the BFC transformation process will
determine if awards are paid at, above or below the established target incentive
opportunity. .
<TABLE>
<CAPTION>
Example:
<S> <C>
Salary: $70,000
Annual Incentive Target: 20%
Incentive Target: $14,000 (20% of $70,000)
</TABLE>
<PAGE> 2
BFC FINANCIAL PERFORMANCE
The financial performance portion of the target incentive for BFC is based on an
established EBITDA budget which is defined as earnings before interest and
taxes, plus depreciation and amortization. A financial performance award is paid
only if actual EBITDA reported is at least 80% of the established Borden, Inc.
EBITDA budget. If actual financial performance is at 120% of EBITDA budget, the
maximum financial performance award will be paid.
DETERMINING FINANCIAL AWARD BASED ON EBITDA
The primary basis for determining the financial award will be actual EBITDA
relative to the approved EBITDA budget. EBITDA has been selected because it
provides a measure of earnings that reflects performance of our business on a
day-to-day basis, since it excludes financing and tax considerations.
The following procedures will be followed in determining the financial
performance award based on EBITDA:
- EBITDA will be adjusted for accounting policy changes
dictated by the U.S. Securities and Exchange Commission
(SEC), the U.S. Financial Accounting Standards Board (FASB)
or the Borden, Inc. Chief Financial Officer.
- Special situations such as a provision for the sale or
closing of a plant or business may be proposed for
exclusion.
The relationship between the incentive pool relative to actual EBITDA
performance is as follows:
<TABLE>
<CAPTION>
STRIKE POINTS ACTUAL EBITDA DEVIATION PERCENT OF TARGET AWARD
FROM BUDGET EARNED
<S> <C> <C>
Minimum EBITDA underachieved by 50% of Target Award
$20 million
Target EBITDA at budget 100% of Target Award
Maximum EBITDA overachieved by 200% of Target Award
$20 million
</TABLE>
<PAGE> 3
- If the EBITDA budget is achieved, the financial performance
award at the target incentive level will be paid.
- If the EBITDA budget is under achieved by more than $20
million, no incentive awards will be paid.
- If the EBITDA budget is under achieved by $20 million, 50% of
the total MIP participants' incentive target will be paid.
- If EBITDA is over achieved by $20 million, 200% of total MIP
participants' incentive targets will be paid.
- Based on actual EBITDA performance compared to the EBITDA
budget established for BFC, the incentive award pool will be
interpolated when performance is between minimum under
achievement by $20 million) and target (100%), or target
(100%) and maximum (over achievement by $20 million)
performance based on the above table.
Example:
Actual EBITDA Performance: $60.4 million (halfway
between EBITDA budget
and maximum)
Incentive Level: 150% (halfway between
target and maximum
opportunity)
Incentive Pool: 150% of the total
participants'
incentive targets
INDIVIDUAL PERFORMANCE
Each individual participant will be evaluated on three criteria:
- - Achievement of 1996 business or functional objectives in support of
BFC attaining financial EBITDA goals
- - Support of the BFC transformation process
- - Support of the BFC transformation process of the organization to the
next level.
Each participant will be measured using the performance rating scale below which
is aligned with performance rating percentage
<PAGE> 4
<TABLE>
<CAPTION>
PERFORMANCE GUIDELINE
RATING PERCENTAGE
<S> <C>
<2 0%
2 50%
3 100%
4 150%
5 200%
</TABLE>
Any performance ratings between the points indicated above will be interpolated.
Once an individual's performance has been rated on all three criteria using the
above scale, then a weighted average performance will be calculated by summing
the three ratings and dividing by three.
<TABLE>
<CAPTION>
Example:
<S> <C>
Objective criteria: Performance Rating:
Support of achieving EBITDA Goal 3
Support of Transformation process 4
Support of Transformation to next level 4
Weighted average performance 3.67
</TABLE>
Using the weighted average performance rating, and the guideline percentages,
the weighted average performance rating will be translated to an incentive
percentage which when multiplied by the incentive target will give a preliminary
payout.
<TABLE>
<CAPTION>
<S> <C>
Example:
Weighted average performance 3.67
Incentive percentage 133% (2/3 between 100% for 3 performance
and 150% for 4 performance
Incentive target $14,000 (20% of $70,000)
Preliminary Payout $18,620 (133% of $14,000)
</TABLE>
ADJUSTING THE PRELIMINARY PAYOUTS
The overall incentive pool available for payouts to individuals is limited by
BFC financial performance compared to budget. Once the preliminary payouts are
determined for each participant, it is likely that the sum of the preliminary
payouts will either exceed or fall below the established incentive pool.
<PAGE> 5
The total preliminary payout for all MIP participants will be divided by the
total MIP participants incentive target to obtain an adjustment factor.
All individual preliminary payouts will be multiplied by the adjustment factor
to realign awards with the total incentive target pool.
<TABLE>
<CAPTION>
Example:
<S> <C>
Individual Preliminary Payout $18,620
Total Preliminary payout $1,050,000
Total incentive target $1,000,000
Adjustment factor 95.2%
Adjusted Individual Payout $17,726 ($18,620 times 95.2%)
</TABLE>
TOTAL AWARD
Based on actual BFC financial performance versus EBITDA budget, the total
incentive pool will be established as outlined previously. Once the percent of
target award earned has been determined, the adjusted individual payout will be
multiplied by the percent of target award earned to calculate the final payment.
<TABLE>
<CAPTION>
Example:
<S> <C>
BFC Actual performance: $60.4 million
Incentive level 150%
Individual Incentive Payment $26,589
</TABLE>
ADMINISTRATIVE GUIDELINES
-------------------------
1. Base Salary for Bonus Calculations
----------------------------------
December 31, 1996 Annual Base Salary will be used to calculate the
incentive
2. Eligibility
To be eligible to receive an incentive award under the program, you
must be an active associate as of the end of the measurement period
(i.e., December 31, 1996). The only exceptions to this rule are
detailed below under item number 5.
3. Pro-Rata Eligibility
Where incentives are to be paid for partial periods, the incentive
will be calculated on a pro-rata basis. Eligibility for pro-rata
payments is detailed in items number 4, 5, and 6 below. Pro-rata
<PAGE> 6
calculations will be done on whole months only.
4. New Hires, Transfers or Promotions During the Incentive Period
--------------------------------------------------------------
For New Hires or participants added to the Plan, the bonus will be
calculated on a pro-rated basis from the date of hire, but only in
whole months.
For Promotions and Transfers, the bonus will be pro-rated from the date
of promotion or transfer in whole months. This pro-ration will apply to
both changes in target incentive percentage and to changes in goals.
For all pro-rations under this item, effective dates as of the first
through the fifteenth of the month will count the full month. Effective
dates as of the sixteenth through the last day of the month will not
include that month in the pro-ration calculation.
5. Termination During the Incentive Period
---------------------------------------
If it is a Voluntary Termination, no bonus will be earned.
If it is an Involuntary Termination due to unsatisfactory performance
or cause, no bonus will be earned. Note: Achieving business results at
the expense of violations of laws, regulations or business ethics or
allowing any individuals to behave in this manner will be considered
cause for termination.
If it is an Involuntary Termination due to job elimination or
reorganization, the bonus will be paid, if earned, on a pro-rated basis
as of the termination date. Termination effective on the first through
the fifteenth of the month will not include the termination month in
the pro-rata calculation. Terminations effective on the sixteenth
through the last day of the month will include the termination month in
the pro-rata calculation. Payments will be made at the same time as
they are made to participants who continue to work for the Company
through the end of the year.
6. Death or Disability During the Incentive Period
-----------------------------------------------
The incentive earned as of the date of death will be paid, on a
pro-rated basis, to the estate of the participant at the same time
payments are made to associates who continue to work for the Company
through the end of the year.
Disabilities of 30 days or less will not have an impact on the
participant's ability to continue to be eligible for an incentive.
If a disability lasts more than 30 days, then the incentive will be
earned only for the period worked. The period worked will be determined
on a pro-rated basis up until the date of disability and from the date
of return to work. The pro-ration will operate in whole months where
the first through the fifteenth as the date of disability will not
count the month and the sixteenth through the end of the month as the
date of disability will count the month; and where the first through
the fifteenth as the date of return to work will count the month and
the sixteenth through the end of the month as the date of return to
work will not count the month. Incentive payments will be
<PAGE> 7
made at the same time as they are made to participants who work
full-time for the Company through the end of the year.
7. Adding Participants to the Plan
-------------------------------
New participants will be added to this program during the year as
recommended by members of the Senior Management Team and reviewed and
approved by Vice President Human Resources, BFC and the Chief Executive
Officer. The criteria for participation will be based on both similar
job classification as the list of current participants in this program
and a responsibility level commensurate with the participant's ability
to influence goal outcomes. Approval will be required for both the
addition of a participant to the program and the proposed participant's
target incentive level.
8. Timing of Payments
------------------
Bonus awards will be paid as quickly after the end of 1996 as possible.
Financial results will need to be finalized as appropriate by the
Borden, Inc. Controller and the independent auditors before bonuses can
be calculated and paid.
9. Financial Adjustments
---------------------
Actual financial results as reported on a GAAP basis will be utilized
for incentive award calculation with the following exceptions:
- Special situations, such as a provision for the sale or
closing of a plant or business, may be proposed for exclusion
IF THE PROPOSAL IS PRESENTED WHEN THE CHARGE IS TAKEN.
Exclusions will need to be approved by the Borden, Inc. Chief
Executive Officer and Chief Financial Officer.
- Accounting policy changes dictated by the U.S. Securities and
Exchange Commission (SEC), the U.S. Financial Accounting Board
(FASB), or the Borden, Inc. Chief Financial Officer may be
proposed for exclusion IF THE PROPOSAL IS PRESENTED WHEN THE
CHANGE IS MADE. Exclusions will need to be approved by the
Borden, Inc. Chief Executive Officer and Chief Financial
Officer
- If earnings were achieved in ways that are considered
undesirable (such as reducing budgeted advertising
expenditures where this would hurt the business), an
adjustment may be made at the discretion of the Borden, Inc.
Chief Executive Officer.
10. All Plan Payments Subject to Discretion
---------------------------------------
Notwithstanding the attainment of financial results, or part or all of
the goals, all awards under the Plan are subject to the approval of the
Chief Executive Officer of Borden, Inc.
<PAGE> 1
EXHIBIT 10(viii)(d)
BORDEN CHEMICAL, INC.
1996 MANAGEMENT INCENTIVE PLAN
Each participant will have a target incentive opportunity, stated as a
percentage of salary. Awards at, above, or below target can be earned based on
performance, using the following approach:
- - Performance on earnings from operations relative to budget will
determine the participant's preliminary award. This preliminary award
can range down to zero and up to 200% of the individual's target award.
Earnings will be measured before interest and taxes, with depreciation
and amortization added back ("EBITDA"). EBITDA will be measured at the
company level, with each participant's award based on results at the
most relevant level(s).
- - Once the preliminary awards are determined, they can be adjusted by up
to + or - 20% based on performance on each of two types of measures.
The first adjustment factor is assets relative to budget. The second
adjustment factor is the individual's performance on non-financial
measures of strategic importance. If the preliminary award is at the
maximum of 200% of target and the maximum adjustment is earned on both
adjustment factors, then the award will be 280% of target (200% + [40%
x 200%]).
DETERMINING PRELIMINARY INCENTIVE AWARDS BASED ON EBITDA
- --------------------------------------------------------
The primary basis for determining awards will be EBITDA relative to budget.
EBITDA is earnings from operations before interest and taxes, plus depreciation
and amortization. This measure of earnings reflects how we do in running our
business on a day to day basis, since it excludes financing and tax
considerations.
The following procedures will be followed in measuring EBITDA:
- - Negative EBITDA budgets will be treated on an absolute basis (i.e., if
the budget is to lose $100, the losing $90 would be treated as a 10%
improvement).
- - Special situations, such as a provision for the sale or closing of a
plant or business, may be proposed for exclusion.
- - The treatment of foreign exchange for computing business unit results
will vary by location. Where business is conducted exclusively or
primarily in local currency, the plan exchange rate will be used when
measuring results. In all other cases, where business is done primarily
in U.S. dollars or in multiple currencies or the inflation rate is
high, the actual exchange rate will be used in computing results.
<PAGE> 2
- - Accounting policy changes dictated by the U.S. Securities and Exchange
Commission (SEC), the U.S. Financial Accounting Standards Board (FASB)
or the Borden, Inc. Chief Financial Officer.
The relationship between incentive awards relative to target and EBITDA relative
to budget will vary depending on the size of the EBITDA budget. For business
units with EBITDA budgets at or above $10 million, the relationship shown as
follows will be used:
<TABLE>
<CAPTION>
PERCENT OF EBITDA PERCENT OF TARGET
BUDGET ACHIEVED AWARD EARNED
<S> <C>
90% of EBITDA budget 50% of Target Award
100% of EBITDA budget 100% of Target Award
110% of EBITDA budget 200% of Target Award
</TABLE>
- - The target award is paid for meeting budget.
- - No award is paid for achieving less than 90% of budget.
- - 50% of the target award is paid for achieving 90% of budget.
- - Maximum award of 200% of target is paid for achieving 110% of budget.
- - Increased or decreased award percentages are used for EBITDA results
between 90% and 100%, and between 100% and 110%, based on interpolation
of the above table.
For business units with annual budgeted EBITDA below $10 million, the following
table will be used:
<TABLE>
<CAPTION>
ACTUAL EBITDA PERCENT OF TARGET
DEVIATION FROM BUDGET AWARD EARNED
<S> <C>
- -$1.0 million 50% of Target Award
EBITDA Budget 100% of Target Award
+1.0 million 200% of Target Award
</TABLE>
- - The target award is paid for meeting budget.
- - No award is paid for achieving less than $1.0 million below budget.
<PAGE> 3
- - 50% of the target award is paid for achieving EBITDA that is $1.0
million below budget.
- - Maximum award of 200% of target is paid for an increase of $1.0 million
above budget.
- - Increased or decreased award percentages are used for EBITDA results
between these levels and budget, are interpolated based on the above
table.
You can determine which of the two tables applies to you by checking the Budget
EBITDA listed under Incentive Measurements on the Participant Summary attached
to this information.
As an example of how the preliminary award determination would work, assume that
a participant has a salary of $70,000, and an annual bonus target of 20%. His
business unit has an EBITDA budget above $10 million, and the actual EBITDA is
105% of budget:
<TABLE>
<S> <C>
Salary $70,000
Annual Incentive Target 20%, or $14,000
EBITDA as % of Budget 105%
% Award Earned 150%
Preliminary Award $21,000
</TABLE>
ADJUSTING PRELIMINARY AWARDS BASED ON ASSET MANAGEMENT
- ------------------------------------------------------
Once awards based on EBITDA have been determined, they will be subject to
adjustments based on two types of measures. The first is asset management, where
actual assets will be compared to budgeted assets.
Assets will be defined as follows: total assets (fixed assets net of
depreciation plus current assets) minus intangibles (goodwill and other), minus
cash, and minus current liabilities (except for income taxes, drafts payable,
and debt).
Additional procedures for measuring assets include:
- - Assets will be computed on a 13-month average, from December 1995
through December 1996.
- - An asset will be removed from the fixed asset base when production has
ceased and it is determined that it is ready for sale.
- - Foreign exchange translations will be handled on the same basis as
EBITDA in each location.
If actual assets are at the budgeted level, then the preliminary award
determined based on EBITDA will not be affected. However, if assets deviate from
budget, the EBITDA-based award will be adjusted, by up to + or - 20%, depending
on the magnitude of the deviation from the
<PAGE> 4
assets budget. For business units with budgeted assets of $5 million or more,
the following relationship will be used to determine the adjustment:
- - No Adjustment if assets are at budget.
- - EBITDA-based award increases by 2% for every 1% that assets fall below
budget, up to +20% for assets that are 10% or more below budget.
- - EBITDA-based award decreases by 2% for every 1% that assets exceed
budget, down to - 20% for assets that are 10% or more above budget.
For business units with budgeted assets below $5 million, the following
relationship will be used:
- - No adjustment if assets are at budget.
- - EBITDA-based award increases by up to 20% when assets fall below budget
by $500,000 or more. This means that every $25,000 decrease in assets
results in a 1% increase in the award until the maximum of +20% is
achieved.
- - EBITDA-based award decreases by up to 20% when assets exceed budget by
$500,000 or more. This means that every $25,000 increase in assets
results in a 1% decrease in the award until the maximum of -20% is
achieved.
For the example used above, the participant's preliminary award based on EBITDA
was $21,000. Assume that the participant's business unit has budgeted assets
above $5 million, and that actual assets are 4% below budget. This means that
the EBITDA-based award would be adjusted upward by 8%, or $1,680 ($21,000 x 8%).
For those participants whose awards are based partially on their own business
unit's results and partially on the results of the company, the asset adjustment
for each unit will be applied to the EBITDA results for that unit to determine
each component of the award.
ADJUSTING PRELIMINARY AWARDS BASED ON CRITICAL MEASUREMENT
- ----------------------------------------------------------
The second type of adjustment factor is based on the participant's performance
on critical measurements. Unlike EBITDA and asset management, which are measured
at the company and business unit levels, critical measurement results are
measured separately for each participant. However, the critical measurements
will be consistent and mutually supportive for those within a unit.
Each participant will set goals on two to four critical measures that are
expected to contribute to
<PAGE> 5
the sustained future success of the company and that can be measured
objectively. Examples of critical measurement categories include (but are not
limited to):
- - Market Share
- - Number or type of customers
- - Quality
- - Customer satisfaction
- - New product introductions
- - Sale of assets at an attractive price
- - Health and safety improvements
- - New sales/promotion tracking system
- - New financial control system
- - Improved distribution system
The process for setting goals on the critical measures will start with the Chief
Executive Officer and his direct reports. These goals will provide a framework
for all participants to develop critical measures that support key company and
business unit strategic initiatives.
At the end of the year, performance on each of the critical measures will be
evaluated by the participant's manager, who will determine the impact on the
incentive award. While the goals will have objective indicators of success,
there will also be managerial judgment regarding the degree to which the
strategic positioning of the company was improved, neutral, or harmed during the
year. The process for determining awards will work as follows:
- - Each of the critical measures will be weighted in determining the
adjustment, which in total can range up to a maximum of + or - 20%.
- - The weighting of each of the critical measures is to be approved by the
participant's manager.
The critical measurement assessment will start with the Chief Executive Officer
and his direct reports. Critical measures for successive levels of participants
will be expected to be generally consistent with those of the top executives,
with allowance for a range of individual outcomes within a unit.
For the example we have been using, the participant's preliminary award based on
EBITDA was $21,000, and he received a +8% adjustment of $1,680 based on assets.
Assuming he receives a +10% ($21,000 x 10%=$2,100) adjustment based on
performance on the critical measures, then his total award for the year would
be:
<TABLE>
<CAPTION>
<S> <C>
EBITDA $ 21,000
Asset Adjustment $ 1,680
Critical Measurements $ 2,100
--------
Total $ 24,780
========
</TABLE>
Since the individual's target award was $14,000, this would represent 177% of
target.
For those participants whose awards are based partially on their own business
unit's results and partially on the results of the company, the critical
measurement will be applied to the sum of the
<PAGE> 6
EBITDA-based awards for the applicable business units.
The process for establishing and assessing the critical measures and goals is
outlined on the following page.
If you have any questions concerning this incentive program, contact your
manager or your Human Resource Manager.
<PAGE> 1
EXHIBIT 10(xx)(i)
BORDEN FOODS CORPORATION
SUMMARY OF TERMS OF EMPLOYMENT
FOR: DOUGLAS A. SMITH
Title: Chairman and CEO of Borden Foods Corporation
Base Salary: U.S. $500,000 per year, paid bimonthly
Start Date: On or before November 1, 1995
Start Bonus: Start bonus of U.S. $250,000 (gross) to offset
lost 1995 Kraft bonus income, to be paid after you
start with Borden, or later if you so elect.
Bonus Opportunity: You are eligible to participate in the Management
Incentive Plan with an opportunity to earn 60%, at
target, beginning January 1, 1996.
Bonus Guarantee: U.S. $250,000 guaranteed for 1996 under the
Management Incentive Plan with a maximum of U.S.
$600,000 or 2 times target of 60%.
Equity Investment: We will provide U.S. $200,000 (net) with which to
invest in the management equity plan.
Management Equity Plan share purchase limit of
U.S. $500,000.
Retirement/Savings Plan: As part of your employment agreement,
you agree to participate in our 401K
Retirement Savings program at a minimum
contribution level of 5% for 12 full months.
Company Agreements: Enclosed are a Security and Invention Agreement,
Ethics Agreement and Conflict of Interest
Agreement. Please review and sign these
agreements.
Relocation: Borden agrees to cover relocation expenses (up to
the limits of our policy) that are not covered by
your current company.
Severance: 2 years
Perquisites: Cash perquisite package of U.S. $30,000 annually.
Other: Business use of Borden Services aircraft.
Commuting expense reimbursement through June 1996.
Tax equalization through June 1996.
4 weeks vacation.
Offer Accepted: By:/s/ Douglas A. Smith Date: 10/26/95
<PAGE> 1
EXHIBIT 21
Page 1 of 4
BORDEN, INC.
SUBSIDIARIES OF REGISTRANT AS OF DECEMBER 31, 1996
--------------------------------------------------
<TABLE>
<CAPTION>
The percentage of State or other
voting securities jurisdiction of
owned, or other incorporation
Subsidiaries of Registrant: basis of control or organization
- --------------------------- ---------------- ---------------
<S> <C> <C>
BCP Finance Corporation 100 Delaware
BCP Management, Inc. 100 Delaware
BDS Two, Inc. 100 Delaware
BDS Three, Inc. 100 Delaware
BDH One, Inc. 100 Delaware
Borden Decorative Products Holdings, Inc. 98.7 Delaware
Borden Decorative Products, Inc. 100 Delaware
WDP Investments, Inc. 100 Delaware
Reebor Limited (U.K.) 50 United Kingdom
Borden Decorative U.K. IHC, Inc. 100 Delaware
Borden Decorative Products Holdings, Ltd. 100 United Kingdom
Borden Decorative Products Limited 100 United Kingdom
Crown Wallcoverings-Borden Pension
Trustee Ltd. 100 United Kingdom
Borden UK Common Investment Fund
Trustees Limited 100 United Kingdom
Storeys Decorative Products Ltd. 100 United Kingdom
Borden Wallcoverings Pension
Trustees Limited 100 United Kingdom
Borden Realty UK Limited 100 United Kingdom
JFI, Inc. 100 Illinois
BFE Corp. 100 Delaware
Re-Mi Foods, Inc. 100 Delaware
Sugeme, S.A. 8.0 Spain
BDH Two, Inc. 100 Delaware
BDS One, Inc. 100 Delaware
BFI Ltd., L.P. 100 Delaware
Borden Chemical Holdings, Inc. 95.5 Delaware
Borden Chemical Investments, Inc. 100 Delaware
Compania Quimica Borden Ecuatoriana, S.A. 83.3 Ecuador
Borden Chemical, Inc. 100 Delaware
Borden Chemical International, Inc. 100 Delaware
Compania Quimica Borden, S.A. 100 Panama
Borden Australia (Pty.) Ltd. 100 Australia
Borden Australia Superannuation (Pty) Limited 100 Australia
Borden Chemical (M.) Sdn. Bhd. 100 Malaysia
Borden Chemical Holdings Panama, S.A. 100 Panama
Borden Espana, S.A. 100 Spain
Italcolor, S.A. 100 Uruguay
Alba Quimica Industria e Comercio Ltda. 100 Brazil
Alba Amazonia S.A. Industrias Quimicas 100 Brazil
Alba Nordeste Industrias Quimica Ltda. 100 Brazil
The Wenham Corp., S.A. 100 Uruguay
Bexley Finance, S.A. 100 Panama
Bexley Comercio e Participacao Ltda. 100 Brazil
</TABLE>
80
<PAGE> 2
EXHIBIT 21
Page 2 of 4
BORDEN, INC.
SUBSIDIARIES OF REGISTRANT AS OF DECEMBER 31, 1996
--------------------------------------------------
<TABLE>
<CAPTION>
The percentage of State or other
voting securities jurisdiction of
owned, or other incorporation
Subsidiaries of Registrant: basis of control or organization
- --------------------------- ---------------- ---------------
<S> <C> <C>
Borden Chemie, S.A. 100 France
Borden International Philippines, Inc. 98 Philippines
Compania Casco S.A. Industrial y Comercial 99 Argentina
Gun Ei Borden International Resin Co. Ltd. 50 Japan
Borden Chemical U.K. IHC, Inc. 100 Delaware
Borden Chemical U.K. Ltd. 100 United Kingdom
Borden (Bray) Ltd. 100 Ireland
Borden Company Limited, The 100 Canada
Borden Company Limited, The 100 Ireland
Borden Foods Limited 100 Ireland
Borden International Packaging Ltd. 70 Ireland
Borden Exports Limited 100 Ireland
Borden International (Europe) Ltd. 100 Delaware
Borden International, Inc. 100 Delaware
Borden Japan, Inc. 100 Japan
Borden/Meadow Gold Dairies Holdings, Inc. 98.4 Delaware
Borden/Meadow Gold Dairies, Inc. 100 Delaware
Borden/Meadow Gold Dairies Investments, Inc. 100 Delaware
Meadow Gold Dairies Holding Company 100 Delaware
Meadow Gold Dairies, Inc. 100 Delaware
Elmer's Holdings, Inc. 98.5 Delaware
Elmer's Products, Inc. 100 Delaware
Elmer's Investments, Inc. 100 Delaware
Nedrob Affiliates, Inc. 100 Delaware
One Nedrob, Inc. 100 Delaware
Orchard Corporation of Hong Kong, The 100 Hong Kong
Productos Borden, Inc. 100 New Jersey
T.M.I. Associates, L.P. 100 Delaware
Zeelandia Investerings Partnership 100 New York
T. K. Partner, Inc. 100 Delaware
Zip Corporation 100 Delaware
Zcan Investments Ltd. 100 Canada
</TABLE>
NOTE: The above subsidiaries have been included in Borden's Consolidated
Financial Statements on a consolidated or equity basis as appropriate.
The names of certain subsidiaries, active and inactive, included in the
Consolidated Financial Statements and of certain other subsidiaries not
included therein, are omitted since when considered in the aggregate as
a single subsidiary they do not constitute a significant subsidiary.
81
<PAGE> 3
EXHIBIT 21
Page 3 of 4
THE FOLLOWING ARE SUBSIDIARIES INCLUDED IN THE BORDEN FAMILY OF COMPANIES
BUT NOT INCLUDED IN THE REGISTRANT.
BORDEN, INC.
-------------------------------
<TABLE>
<CAPTION>
The percentage of
voting securities
owned, or other State or other
basis of control jurisdiction of
by its immediate incorporation/
Subsidiaries of Registrant parent organization
- -------------------------- ------------------ ------------
<S> <C> <C>
OTHERS
- ------
Borden Foods Holdings Corporation 100 Delaware
Borden Foods Corporation 100 Delaware
Albadoro S.p.A. 100 Italy
Monder Aliment S.p.A. 100 Italy
Alisa, S.A. 100 Colombia
BDH One de Venezuela C. A. 100 Venezuela
Borden Belgium, N.V. 100 Belgium
Biscuiterie Muguet, N.V. (A) 100 Belgium
Borden Company A/S, The 100 Denmark
Cocio Chokolademaelk A/S 100 Denmark
Borden Ost A/S 100 Denmark
Borden Foods Puerto Rico, Inc. 100 Delaware
Codoveca C por A. 100 Dominican Republic
Borden International Foods (Asia-Pacific) Ltd. 100 Hong Kong
Compania Colombiana de Alimentos Lacteos, S.A. 100 Colombia
Compania Internacional de Ventas, S.A. 100 Panama
Borden (Proprietary) Limited 100 South Africa
Babelegi Processing (Pty.) Ltd. 100 South Africa
Borden Foods (Pty.) Ltd. 100 South Africa
Etiniser (Pty.) Ltd. 100 South Africa
Borden De Costa Rica S.A. 100 Costa Rica
Borden De Guatemala, S.A. 100 Guatemala
Compania Chiricana de Leche, S.A. 96.8 Panama
Inthesa, S.A. (D) 100 Panama
Productos Especiales, S.A. (D) 100 Panama
Estudios Marketing Internacional, S.A. 50 Panama
Ecumilk S.A. 100 Ecuador
</TABLE>
NOTES:
(A) Inactive companies.
(D) A nominee company; an inactive company originally created to hold stock
in another company.
82
<PAGE> 4
EXHIBIT 21
Page 4 of 4
BORDEN, INC.
---------------------------------
<TABLE>
<CAPTION>
The percentage of
voting securities
owned, or other State or other
basis of control jurisdiction of
by its immediate incorporation/
Subsidiaries of Registrant parent organization
- -------------------------- ----------------- ---------------
<S> <C> <C>
Fabrica de Productos Borden, S.A. 100 Panama
Helados Borden, S.A. 100 Panama
Pastas Alimenticias La Imperial, S.A. 100 Panama
Alimentos Nutritivos S.A. 100 Panama
Naxos S.A. 100 Panama
Qihe Dairy Corp. Ltd 50 Republic of China
Borden Redevelopment Corp. 100 Missouri
International Gourmet Specialties Company 100 New Jersey
Starflake Foods Company, Inc. 100 New York
Prince Company, Inc., The (A) 100 Massachusetts
BFC One Corporation 100 Delaware
BFC Two Corporation 100 Delaware
BFC Three Corporation 100 Delaware
BFC Four Corporation 100 Delaware
BFC Five Corporation 100 Delaware
BFC Six Corporation 100 Delaware
Wise Foods, Inc. 100 Delaware
Wise Foods Holdings, Inc. 100 Delaware
Wise Foods Investments, Inc. 100 Delaware
Caribbean Snacks, Inc. 100 Delaware
Wise Holdings, Inc.
Moore's Quality Snack Foods, Inc. (A) 100 Virginia
</TABLE>
NOTES:
(A) Inactive companies.
(D) A nominee company; an inactive company originally created to hold stock
in another company.
84
<PAGE> 1
EXHIBIT 23(i)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-57577 of Borden, Inc. on Form S-3 of our reports for Borden, Inc. and Wise
Holdings, Inc. dated February 26, 1997 and for Borden, Inc. and Affiliates
dated February 26, 1997, (except for Note 18, as to which the date is March 20,
1997) and Borden Foods Holdings Corporation dated February 26, 1997 (except
for Note 5, paragraph 3, as to which the date is March 20, 1997) appearing in
this Annual Report on Form 10-K of Borden, Inc. for the year ended December
31, 1996.
DELOITTE & TOUCHE LLP
March 26, 1997
<PAGE> 1
EXHIBIT 23(ii)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 33-57577) of
Borden, Inc. and Affiliates of our reports dated February 16, 1995, except as
to paragraph 1 of Note 1, the second sentence of paragraph 2 and paragraph 3 of
Note 11, which are as of March 15, 1995, appearing on page 66 of this Form 10-K
of this Form 10-K. We have not audited the combined financial statements of
Borden, Inc. and Affiliates for any period subsequent to December 31, 1994.
PRICE WATERHOUSE LLP
Columbus, Ohio
March 17, 1997
87
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 125
<SECURITIES> 0
<RECEIVABLES> 371
<ALLOWANCES> 16
<INVENTORY> 219
<CURRENT-ASSETS> 925
<PP&E> 1,256
<DEPRECIATION> 694
<TOTAL-ASSETS> 2,751
<CURRENT-LIABILITIES> 1,455
<BONDS> 568
<COMMON> 2
0
614
<OTHER-SE> (764)
<TOTAL-LIABILITY-AND-EQUITY> 2,751
<SALES> 3,681
<TOTAL-REVENUES> 3,681
<CGS> 2,660
<TOTAL-COSTS> 2,660
<OTHER-EXPENSES> 761
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 113
<INCOME-PRETAX> 156
<INCOME-TAX> 80
<INCOME-CONTINUING> 76
<DISCONTINUED> (331)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (333)
<EPS-PRIMARY> (1.67)
<EPS-DILUTED> (1.67)
</TABLE>
