<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D. C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
--------------------------------------------------
Commission file number 1-71
----------------------------------------------------------
BORDEN, INC.
New Jersey 13-0511250
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
180 East Broad Street, Columbus, OH 43215
-----------------------------------------
(Address of principal executive offices)
(614) 225-4000
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
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
--- ---
Number of shares of common stock, $0.01 par value, outstanding as of the close
of business on May 14, 1997: 198,974,994
1
<PAGE> 2
BORDEN, INC.
INTRODUCTION
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 Note 1 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 continues 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 II of this Quarterly Report on Form 10-Q because
Wise Holdings and Foods Holdings are guarantors of the Company's credit facility
and all of the Company's outstanding publicly held debt.
2
<PAGE> 3
BORDEN, INC.
<TABLE>
<CAPTION>
INDEX
-----
<S> <C>
PART I - FINANCIAL INFORMATION
BORDEN, INC. ("BORDEN") CONSOLIDATED AND BORDEN, INC. AND AFFILIATES COMBINED FINANCIAL STATEMENTS
Consolidated Statements of Operations, three months ended March 31, 1997 and 1996 ........ 4
Consolidated Balance Sheets, March 31, 1997 and December 31, 1996 ........................ 6
Consolidated Statements of Cash Flows, three months ended March 31, 1997 and 1996 ........ 8
Consolidated Statement of Shareholders' Equity, three months ended March 31, 1997 ........ 9
Combined Statements of Operations, three months ended March 31, 1997 and 1996 ............ 10
Combined Balance Sheets, March 31, 1997 and December 31, 1996 ............................ 11
Combined Statements of Cash Flows, three months ended March 31, 1997 and 1996 ............ 13
Combined Statement of Shareholders' Equity, three months ended March 31, 1997 ............ 14
Notes to Condensed Consolidated and Combined Financial Statements ........................ 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............ 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ........................................................................ 21
Item 6. Exhibits, Guarantor Financial Statements, and Reports on Form 8-K ........................ 22
</TABLE>
3
<PAGE> 4
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
BORDEN, INC.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
(In millions, except per share data) 1997 1996
------- -------
<S> <C> <C>
Net sales $ 661.3 $ 968.4
Cost of goods sold 490.9 701.1
------- -------
Gross margin 170.4 267.3
------- -------
Distribution expense 40.9 63.3
Marketing expense 48.4 115.2
General & administrative expense 42.7 52.1
Gain on divestiture (82.9)
------- -------
Operating income 38.4 119.6
------- -------
Interest expense 23.5 26.4
Affiliated interest income (5.0)
Other expense (income) 4.5 (6.1)
------- -------
Income from continuing operations
before income taxes 15.4 99.3
Income tax expense 10.1 50.1
------- -------
Income from continuing operations 5.3 49.2
------- -------
Discontinued operations:
Income (loss) from operations (4.9)
------- -------
Net income 5.3 44.3
Preferred stock dividends (18.4) (18.4)
------- -------
Net (loss) income applicable to common stock $ (13.1) $ 25.9
======= =======
</TABLE>
4
<PAGE> 5
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (CONTINUED)
BORDEN, INC.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
(In millions, except per share data) 1997 1996
-------- --------
<S> <C> <C>
Per Share Data
Income from continuing operations $ 0.03 $ 0.24
Discontinued operations:
Loss from operations (0.02)
-------- --------
Net income 0.03 0.22
Preferred stock dividends (0.09) (0.09)
-------- --------
Net (loss) income per common share $ (0.06) $ 0.13
======== ========
Dividends per common share $ 0.06
Dividends per preferred share $ 0.75 $ 0.75
Average number of common shares outstanding
during the period 199.0 199.0
-------- --------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
5
<PAGE> 6
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN, INC.
(In millions)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1997 1996
--------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 96.1 $ 125.0
Accounts receivable (less allowance for doubtful
accounts of $20.5 and $15.7, respectively) 365.7 355.1
Inventories:
Finished and in-process goods 137.9 142.3
Raw materials and supplies 75.8 77.4
Deferred income taxes 182.6 179.6
Other current assets 42.1 45.9
-------- --------
900.2 925.3
-------- --------
INVESTMENTS AND OTHER ASSETS
Investments in and advances to affiliated companies 105.9 106.8
Deferred income taxes 226.5 213.4
Other assets 87.0 89.0
Assets sold under contractual arrangement
(net of allowance of $878.0 and $868.7, respectively) 681.4 701.0
-------- --------
1,100.8 1,110.2
-------- --------
PROPERTY AND EQUIPMENT
Land 51.3 54.3
Buildings 258.3 267.5
Machinery and equipment 945.7 934.3
-------- --------
1,255.3 1,256.1
Less accumulated depreciation (686.4) (693.7)
-------- --------
568.9 562.4
-------- --------
INTANGIBLES
Intangibles resulting from business acquisitions 113.6 114.3
-------- --------
TOTAL ASSETS $2,683.5 $2,712.2
======== ========
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
6
<PAGE> 7
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN, INC.
(In millions)
<TABLE>
<CAPTION>
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
-------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt payable within one year $ 390.7 $ 414.0
Accounts and drafts payable 243.3 254.9
Income taxes 287.5 282.8
Other current liabilities 430.2 477.2
-------- --------
1,351.7 1,428.9
-------- --------
OTHER LIABILITIES
Liabilities sold under contractual arrangement 434.7 442.9
Long-term debt 644.6 567.8
Non-pension postemployment benefit obligations 282.8 285.9
Other long-term liabilities 135.5 126.6
-------- --------
1,497.6 1,423.2
-------- --------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock - Issued 24,574,751 614.4 614.4
Common stock - $0.01 par value
Authorized 300,000,000 shares
Issued 198,974,994 2.0 2.0
Paid in capital 375.0 379.9
Receivable from parent (443.6) (443.6)
Accumulated translation adjustment (35.1) (27.2)
Minimum pension liability and other (109.2) (109.2)
Accumulated deficit (569.3) (556.2)
-------- --------
(165.8) (139.9)
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,683.5 $2,712.2
======== ========
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
7
<PAGE> 8
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN, INC.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
(In millions) 1997 1996
------- -------
<S> <C> <C>
CASH FLOWS (USED IN) FROM OPERATING ACTIVITIES
Net income $ 5.3 $ 44.3
Depreciation and amortization 14.7 25.4
(Gain) on divestiture (82.9)
Unrealized (gain) on interest rate swap (4.9) (7.9)
Loss on net assets sold under contractual arrangement 9.3
Restructuring (2.2) (2.9)
Net change in assets and liabilities:
Trade receivables (29.1) (41.3)
Inventories 6.0 3.5
Trade payables (9.6) 14.6
Current and deferred taxes 4.3 35.9
Other assets 19.2 (30.4)
Other liabilities (59.9) 27.6
Discontinued operations working capital and
non-cash charges 30.1
------- -------
(46.9) 16.0
------- -------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES
Capital expenditures (28.5) (48.3)
Proceeds from the divestiture of businesses 13.7 134.6
Return of investment in unconsolidated affiliate 2.1
------- -------
(12.7) 86.3
------- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net short-term debt payments (1.2) (30.9)
Net long-term debt borrowing (payments) 50.3 (52.8)
Interest received from parent 12.7
Dividends paid (31.1) (18.4)
------- -------
30.7 (102.1)
------- -------
(Decrease) increase in cash and equivalents (28.9) 0.2
Cash and equivalents at beginning of period 125.0 146.2
------- -------
Cash and equivalents at end of period $ 96.1 $ 146.4
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Net interest paid $ 17.7 $ 26.9
Income taxes paid 5.9 6.5
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
8
<PAGE> 9
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
BORDEN, INC.
<TABLE>
<CAPTION>
(In millions)
Minimum
Preferred Common Paid In Receivable Accumulated Pension Accumulated Total
Stock Stock Capital from Translation Liability Deficit
Parent Adjustment and Other
------ ------ ------ ------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $614.4 $ 2.0 $379.9 $(443.6) $(27.2) $(109.2) $(556.2) $(139.9)
------ ------ ------ ------- ------ ------- ------- -------
Net income 5.3 5.3
Cash dividends - preferred (18.4) (18.4)
Translation adjustments (7.9) (7.9)
Interest accrued on notes from parent 7.8 7.8
Cash dividends - common stock (12.7) (12.7)
------ ------ ------ ------- ------ ------- ------- -------
Balance, March 31, 1997 $614.4 $ 2.0 $375.0 $(443.6) $(35.1) $(109.2) $(569.3) $(165.8)
====== ====== ====== ======= ====== ======= ======= =======
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
9
<PAGE> 10
COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
(In millions) 1997 1996
-------- --------
<S> <C> <C>
Net sales $1,143.6 $1,430.4
Cost of goods sold 785.5 987.6
-------- --------
Gross margin 358.1 442.8
-------- --------
Distribution expense 69.4 89.9
Marketing expense 189.2 255.2
General & administrative expense 70.9 73.8
Gain on divestiture (82.9)
-------- --------
Operating income 28.6 106.8
-------- --------
Interest expense 23.8 27.5
Other (income) expense (6.5) (7.4)
-------- --------
Income (loss) from continuing operations
before income taxes 11.3 86.7
Income tax expense 5.4 42.4
-------- --------
Net income 5.9 44.3
Preferred stock dividends (18.4) (18.4)
-------- --------
Net income (loss) applicable to common stock $ (12.5) $ 25.9
======== ========
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
10
<PAGE> 11
COMBINED BALANCE SHEETS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
(In millions)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1997 1996
-------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 118.7 $ 160.2
Accounts receivable (less allowance for doubtful
accounts of $27.2 and $23.0, respectively) 534.9 549.9
Inventories:
Finished and in-process goods 276.4 286.5
Raw materials and supplies 140.0 142.3
Deferred income tax 215.0 202.3
Other current assets 84.1 82.4
-------- --------
1,369.1 1,423.6
-------- --------
INVESTMENTS AND OTHER ASSETS
Investments in and advances to affiliated companies 105.9 106.8
Deferred income taxes 273.5 267.9
Other assets 103.4 106.9
-------- --------
482.8 481.6
-------- --------
PROPERTY AND EQUIPMENT
Land 72.7 75.9
Buildings 430.5 441.0
Machinery and equipment 1,513.5 1,504.3
-------- --------
2,016.7 2,021.2
Less accumulated depreciation (1,114.8) (1,116.1)
-------- --------
901.9 905.1
-------- --------
INTANGIBLES
Intangibles resulting from business acquisitions 490.6 495.7
-------- --------
TOTAL ASSETS $3,244.4 $3,306.0
======== ========
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
11
<PAGE> 12
COMBINED BALANCE SHEETS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
(In millions)
<TABLE>
<CAPTION>
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
--------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Debt payable within one year $ 400.6 $ 421.8
Accounts and drafts payable 372.8 412.5
Income taxes 292.7 304.0
Other current liabilities 614.0 646.1
-------- --------
1,680.1 1,784.4
-------- --------
OTHER LIABILITIES
Long-term debt 658.5 582.4
Non-pension postemployment benefit obligations 305.2 308.2
Other long-term liabilities 145.2 135.6
-------- --------
1,108.9 1,026.2
-------- --------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred Stock - Issued 24,574,751 614.4 614.4
Common stock - $0.01 par value
Authorized 300,000,000 shares
Issued 198,974,994 2.0 2.0
Paid in capital 678.2 683.1
Receivable from parent (443.6) (443.6)
Affiliate's interest in subsidiary 87.4 87.9
Accumulated translation adjustment (143.3) (121.2)
Minimum pension liability and other (109.2) (109.2)
Accumulated deficit (230.5) (218.0)
-------- --------
455.4 495.4
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,244.4 $3,306.0
======== ========
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
12
<PAGE> 13
COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
(In millions) 1997 1996
------- -------
<S> <C> <C>
CASH FLOWS (USED IN) FROM OPERATING ACTIVITIES
Net income (loss) $ 5.9 $ 44.3
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization 29.2 37.5
(Gain) on divestiture (82.9)
Unrealized (gain) on interest rate swap (4.9) (7.9)
Restructuring (2.2) (3.0)
Net change in assets and liabilities:
Trade receivables (0.2) (37.2)
Inventories 12.4 6.3
Trade payables (40.6) 5.0
Current and deferred taxes (13.2) 35.9
Other assets 20.2 (32.9)
Other liabilities (56.6) 50.9
------- -------
(50.0) 16.0
------- -------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES
Capital expenditures (37.2) (48.3)
Divestiture of businesses 13.7 134.6
------- -------
(23.5) 86.3
------- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net short-term debt borrowing 0.9 (30.9)
Net long-term debt borrowing 49.5 (52.8)
Interest received from parent 12.7
Dividends paid (31.1) (18.4)
------- -------
32.0 (102.1)
------- -------
Decrease (increase) in cash and equivalents (41.5) 0.2
Cash and equivalents at beginning of period 160.2 146.2
------- -------
Cash and equivalents at end of period $ 118.7 $ 146.4
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Net interest paid $ 21.7 $ 26.9
Income taxes paid 18.7 6.5
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
13
<PAGE> 14
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
BORDEN, INC. AND AFFILIATES
<TABLE>
<CAPTION>
(In millions)
Minimum
Preferred Common Paid In Receivable Affiliate's Accumulated Pension Accumulated Total
Stock Stock Capital from Interest In Translation Liability Deficit
Parent Sub. Adjustment and Other
------ ------ ------ ------- ----------- ----------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $614.4 $ 2.0 $683.1 $(443.6) $ 87.9 $(121.2) $(109.2) $(218.0) $495.4
------ ------ ------ ------- ------ ------- ------- ------- ------
Net income 5.9 5.9
Cash dividends - preferred (18.4) (18.4)
Translation adjustments (22.1) (22.1)
Interest accrued on notes
from parent 7.8 7.8
Cash dividends - common
stock (12.7) (12.7)
Affiliate's interest in
subsidiary (0.5) (0.5)
------ ------ ------ ------- ------ ------- ------- ------- ------
Balance, March 31, 1997 $614.4 $ 2.0 $678.2 $(443.6) $ 87.4 $(143.3) $(109.2) $(230.5) $455.4
------ ------ ------ ------- ------ ------- ------- ------- ------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
14
<PAGE> 15
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in millions except per share amounts and as otherwise indicated)
1. BASIS OF PRESENTATION
Borden, Inc. (the "Company") conducts operations in the following
businesses: adhesives and resins ("Chemical"), dairy ("BMG Dairies"),
decorative products and wallcoverings ("Decorative Products") and
consumer adhesives and business services ("Other"). Borden, Inc. and
Affiliates (the "Combined Companies") includes the financial condition
and results of operations of the Company with the financial condition
and results of operations of the Company's former international and
domestic food operations ("Foods") and former salty snacks business
("Wise").
The Company's principal lines of business formerly included Foods and
Wise. Subsidiaries of BWHLLC, an affiliate of the Company's parent,
together with subsidiaries of Wise Holdings, Inc. ("Wise Holdings") and
subsidiaries of Borden Foods Holdings Corporation ("Foods Holdings"),
purchased Wise and Foods on July 2, 1996 and October 1, 1996,
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 continues 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, the Combined Companies
financial condition and results of operations and cash flows. The
Combined Companies present financial information on a basis consistent
with that upon which credit was originally extended to the Company.
The accompanying unaudited interim consolidated and combined financial
statements contain all adjustments, consisting only of normal
adjustments, which in the opinion of management are necessary for a fair
statement of the results for the interim periods. Results for the
interim periods are not necessarily indicative of results for the full
years.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ASSETS AND LIABILITIES HELD UNDER CONTRACTUAL ARRANGEMENTS - Because
management of the Company exercises significant control over Wise and
Foods, the assets and liabilities of Wise and Foods, as of their
respective sale dates, are classified as "sold under contractual
arrangements" in the consolidated financial statements. In addition, any
future losses incurred by Wise and Foods will be recorded in the
consolidated financial statements to the extent of the Company's net
investment in Wise and Foods. At March 31, 1997, the Company's net
investment in Wise and Foods was $12.6 and $234.1, respectively. During
the first quarter of 1997 the Company recorded losses totaling $1.0 for
Wise and $8.3 for Foods. The losses are recorded as a non-operating item
in the consolidated results of operations.
The Combined Companies continue to report Wise and Foods at the
Company's historical values since they remain a member of the controlled
group and since in management's best estimate, future
15
<PAGE> 16
operating cash flows from Wise and Foods are expected to exceed the
historical carrying value of the business.
RECLASSIFICATION - Certain prior year amounts have been reclassified to
conform with the 1997 presentation.
3. DISCONTINUED OPERATION
On October 1, 1996, the Company sold Foods to Foods Holdings and its
subsidiaries for $550.0 less assets transferred and liabilities assumed
of $22.9. 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 realigning its current portfolio of businesses. In connection with
this process the valuation and the purchase price may be reevaluated. A
loss on disposal of $330.7 ($263.5 pretax) has been recorded as a loss
on discontinued operations in the consolidated financial statements in
the third quarter of 1996.
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.
The results indicated below for Foods have been reported separately as
discontinued operations in the consolidated statements of operations.
<TABLE>
<CAPTION>
Three months ended
March 31, 1996
----------------------------------------------------------------
<S> <C>
Net sales $ 462.0
Loss before income taxes 12.7
Income tax benefit (7.8)
Net loss from discontinued operations 4.9
----------------------------------------------------------------
</TABLE>
4. 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
16
<PAGE> 17
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 $30
million. 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 in litigation with the Internal Revenue
Service on proposed adjustments to the utilization of certain capital
losses in the Company's tax returns for the period 1989 to 1993. 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 believes, based
upon the information it currently possesses, and taking into account
its established reserves for estimated liability and its insurance
coverage, that the ultimate outcome of the foregoing proceedings and
actions is unlikely to have a materially adverse effect on the
Company's financial position or operating results.
OTHER COMMITMENTS - BCP Management, Inc., a wholly owned subsidiary of
the Company, is general partner of BCP and 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. BCP has entered into an agreement to convert
existing ownership interests in the partnership into shares of a newly
formed corporation. As a result of this transaction the Company would no
longer be the general partner of BCP. The transaction is subject to
unitholder approval.
17
<PAGE> 18
PART I FINANCIAL INFORMATION
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Following is a comparison of sales and operating income (loss) by business unit
on a consolidated and combined basis:
(dollars in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
SALES 1997 1996
<S> <C> <C>
Chemical $ 318.3 $ 277.0
BMG Dairies 203.8 222.4
Decorative Products 95.7 97.6
Other 17.8 16.1
-------- --------
Subtotal 635.6 613.1
Businesses held for sale 25.7 355.3(1)
-------- --------
CONSOLIDATED NET SALES $ 661.3 $ 968.4
======== ========
Foods 418.6 462.0
Wise (2) 63.7 70.5
Combining adjustments (3) (70.5)
-------- --------
COMBINED NET SALES $1,143.6 $1,430.4
======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
OPERATING INCOME (LOSS) 1997 1996
<S> <C> <C>
Chemical $ 30.8 $ 32.6
BMG Dairies 6.5 3.2
Decorative Products 7.1 9.3
Other 1.1 2.5
Corporate (8.9) 71.1
------- -------
Subtotal 36.6 118.7
Businesses held for sale 1.8 0.9(1)
------- -------
CONSOLIDATED OPERATING INCOME $ 38.4 $ 119.6
======= =======
Foods (8.4) (12.8)
Wise (2) (1.4) (4.1)
Combining adjustments (3) 4.1
------- -------
COMBINED OPERATING INCOME (LOSS) $ 28.6 $ 106.8
======= =======
</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.
18
<PAGE> 19
The Consolidated net sales from continuing operations for the quarter ended
March 31, 1997 decreased 31.7% from the first quarter of 1996. The decrease from
$968.4 million to $661.3 million was due mainly to the sale of businesses in
1996. The 67.9% decrease in the Company's operating income from $119.6 to $38.4
was caused primarily by the $82.9 million gain on the sale of a Spanish food
company in 1996.
Combined Companies net sales decreased $286.8 million to $1,143.6 million
primarily as a result of businesses sold during 1996. The $78.2 million decrease
in combined operating income is a result of the same factors that affected the
Company's operating income.
Chemical sales for 1997 increased 14.9% from $277.0 million to $318.3 million
due to increased volume in North American adhesives and resins, higher coatings
volume, and a partial pass through of higher raw material costs. Operating
income decreased 5.5% from $32.6 million to $30.8 million reflecting the higher
raw material costs and an increase in headcount for research and development to
support the growth in North American adhesives and resins.
Borden/Meadow Gold Dairies' 1997 sales of $203.8 million decreased 8.4% or $18.6
million due to lower sales volume, which was partially offset by a $3.2 million
favorable price variance. The lower sales volume was offset by higher gross
margins and lower operating costs, which resulted in a $3.3 million increase in
operating income from $3.2 million to $6.5 million.
1997 sales for Decorative Products decreased from 1996 by 1.9% or $1.9 million
to $95.7 million from 1996. This slight decrease was caused by a reduction in
sales volume to mass merchants, offset by higher volume from wallcovering trade
exports. Operating income was down 23.7% or $2.2 million to $7.1 million due to
the reduction in sales volume and to low-margin clearance sales in the first
quarter of 1997.
Other sales (principally consumer adhesives) increased 10.6% from $16.1 million
to $17.8 million. Operating income for the other segment decreased 56.0% from
$2.5 million to $1.1 million, due partially to higher infrastructure costs and
inventory cancellation costs.
Corporate operating results declined $80.0 million, from income of $71.1 million
to an $8.9 million loss. The difference is due mainly to the $82.9 million gain
on the sale of a Spanish food company in 1996.
Foods sales in 1997 declined 9.4% from $462.0 million to $418.6 million, mainly
due to the effort to reduce unprofitable sales volume in certain segments.
Operating loss improved 34.4% to $8.4 million from $12.8 million due primarily
to lower raw material and promotional costs, partially offset by lower volume.
Wise's 1997 sales decreased $6.8 million or 9.6% from $70.5 million to $63.7
million resulting from reduced marketing activity and higher promotional
pricing. Operating loss improved $2.7 million or 65.9% from $4.1 million to $1.4
million, the result of lower marketing expenses partially offset by the sales
decline.
19
<PAGE> 20
Other Non-operating Expense and Income Tax Expense
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
------------ --------
Three months ended March 31, Three months ended March 31,
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Other non-operating expense $ 23.0 $ 20.3 $ 17.3 $ 20.1
Income tax expense 10.1 50.1 5.4 42.4
------- ------- ------- -------
</TABLE>
Other non-operating expense in the consolidated and the combined financial
statements remained consistent from quarter to quarter. The fluctuation in
income tax expense reflects a 1996 tax cost associated with the gain on the sale
of a Spanish food company. The Company's 1997 effective tax rate of 66% is
attributable to nondeductible accounting charges associated with the net
investment in Foods and Wise. The Company's effective tax rate excluding the
nondeductible accounting charges is 40%.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Cash used in consolidated operating activities during the first quarter of 1997
was $46.9 million compared to cash generated of $16.0 million for the first
quarter of 1996. The first quarter 1997 operating cash flows from the combined
companies amounted to a usage of $50.0 million compared to cash generated of
$16.0 million in the first quarter of 1996. The decrease in cash flows was
caused primarily by the absence of cash generated by businesses sold during
1996 and increased cash outflows for working capital in 1997. This decrease
was partially offset by higher net income in the first quarter of 1997,
exclusive of gain on divestiture in 1996.
INVESTING ACTIVITIES
Cash used in consolidated investing activities amounted to $12.7 million in 1997
compared to cash generated from investing activities of $86.3 million in 1996.
The decrease is attributable to the $134.6 million in proceeds associated
primarily with the sale of a Spanish food company in 1996. This was partially
offset by a reduction in capital expenditures to $28.5 million in 1997 from
$48.3 million in 1996.
Combined investing cash flows in 1997 amounted to a use of $23.5 million
compared to a source of $86.3 million in 1996. The decrease is attributable to
the sale of a Spanish food company. This was partially offset by a $11.1 million
reduction in capital expenditures and by the collection of a receivable
associated with the 1996 sale of the Spanish food company.
FINANCING ACTIVITIES
The first quarter 1997 consolidated and combined financing cash flows amounted
to $30.7 million and $32.0 million, respectively. Net financing activities
included $75 million in borrowings from the revolving line of credit partially
offset by a $26.5 million repayment of medium term notes during the first
quarter of 1997. The 1996 financing out flows of $102.1 million reflect the
repayment of debt from the proceeds on the sale of a Spanish food company.
20
<PAGE> 21
Item 1: LEGAL PROCEEDINGS
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 now scheduled for September 1997. If the Company's position
is denied, the Company could incur tax liability of approximately $60 million,
plus interest. The IRS may also seek penalties. During the first quarter, ACM
Partnership v. Commissioner of Internal Revenue, a Tax Court case which the IRS
contends raises similar issues, was decided against the taxpayer. The taxpayer
in the ACM case has petitioned the Court for reconsideration of the decision.
Otherwise, there have been no material developments in the ongoing legal
proceedings that are discussed in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
The Company is involved in other litigation throughout the United States, which
is considered to be in the ordinary course of the Company's business.
The Company believes, based upon the information it presently possesses, and
taking into account its established reserves for estimated liability and its
insurance coverage, that the ultimate outcome of the foregoing proceedings and
actions is unlikely to have a materially adverse effect on the Company's
financial position or operating results.
21
<PAGE> 22
Item 6: 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-Q.
2. Exhibits
(27) Financial Data Schedule
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 debt.
22
<PAGE> 23
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
(Dollars in thousands) 1997 1996
<S> <C> <C>
Net sales $ 63,756 $ 70,547
Cost of goods sold 37,276 41,934
-------- --------
Gross margin 26,480 28,613
Distribution expense 6,216 6,454
Marketing expense 17,485 22,488
General & administrative expense 4,096 4,000
-------- --------
Operating loss (1,317) (4,329)
Interest expense 265 309
Other income (155) (52)
-------- --------
Loss before income taxes (1,427) (4,586)
Income tax benefit (542) (1,805)
-------- --------
Net loss $ ( 885) $ (2,781)
======== ========
Per Share Data
Net loss $ (8.85) $ (27.81)
Average number of common shares outstanding
during the period 100 100
</TABLE>
See Notes to Condensed Consolidated Financial Statements
23
<PAGE> 24
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
March 31, December 31,
ASSETS 1997 1996
- ------ ------- -------
<S> <C> <C> <C>
CURRENT Cash and cash equivalents $ 1,479 $ 3,027
ASSETS Accounts receivable (less allowance 25,091 23,771
for doubtful accounts of $1,371 and $1,345,
respectively)
Affiliated receivables 914 1,251
Inventories:
Finished and in-process goods 3,658 3,744
Raw materials and supplies 3,745 5,339
Prepaids and other current assets 5,080 4,196
------- -------
39,967 41,328
------- -------
PROPERTY Land 1,331 1,331
AND Buildings and improvements 4,751 4,583
EQUIPMENT Machinery and equipment 35,715 35,178
------- -------
41,797 41,092
Less: Accumulated depreciation 12,946 11,524
------- -------
28,851 29,568
------- -------
INTANGIBLES Trademarks (net of accumulated amortization of 17,747 17,865
AND $1,058 and $940 respectively)
OTHER ASSETS Other assets 1,168 1,918
------- -------
18,915 19,783
------- -------
TOTAL ASSETS $87,733 $90,679
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
24
<PAGE> 25
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
LIABILITIES AND SHAREHOLDER'S EQUITY 1997 1996
------- -------
<S> <C> <C> <C>
CURRENT Short-term affiliated borrowings $ 2,200
LIABILITIES Accounts and drafts payable 10,935 $15,924
Affiliated payables 1,265 2,163
Accrued liabilities 15,733 14,415
------- -------
30,133 32,502
------- -------
OTHER Affiliated long-term debt 10,145 10,145
Post-employment benefits other than pensions 10,022 9,928
Other long-term liabilities 1,702 1,472
Minority interest 667 683
------- -------
22,536 22,228
------- -------
Commitments and Contingencies
SHAREHOLDER'S Common stock - ($0.01 par value
EQUITY 100 shares authorized, issued
and outstanding)
Paid in capital 34,200 34,200
Retained earnings (from July 2, 1996) 864 1,749
------- -------
35,064 35,949
------- -------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $87,733 $90,679
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
25
<PAGE> 26
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
(Dollars in thousands) 1997 1996
------- -------
<S> <C> <C> <C>
CASH FLOWS Net loss $ (885) $(2,781)
FROM (USED IN) Adjustments to reconcile net loss to net cash
OPERATING from operating activities:
ACTIVITIES Minority interest share in income (16)
Depreciation 1,551 1,409
Amortization 118 118
Other non-cash (111) 24
Net change in assets and liabilities:
Accounts receivables (1,346) (4,130)
Affiliated receivables 337
Inventories 1,680 334
Prepaids and other current assets (884) (70)
Other assets 750 309
Accounts and drafts payable (4,989) 1,241
Affiliated payables (898) 1,598
Accrued liabilities 1,318 (967)
Post-employment benefits other than pensions 94 64
Other long-term liabilities 230 192
------- -------
(3,051) (2,659)
------- -------
CASH FLOWS Capital expenditures (897) (409)
FROM INVESTING Proceeds from sales of equipment 200 90
ACTIVITIES ------- -------
(697) (319)
------- -------
CASH FLOWS Other increases (decreases) in owner's investment 3,269
(USED IN) FROM Borrowings under affiliated revolving loan agreement 9,200
FINANCING Repayments under affiliated revolving loan agreement (7,000)
ACTIVITIES ------- -------
2,200 3,269
------- -------
Increase (decrease) in cash and equivalents $(1,548) $ 291
Cash and equivalents at beginning of period 3,027 601
------- -------
Cash and equivalents at end of period $ 1,479 $ 892
======= =======
SUPPLEMENTAL Cash paid:
DISCLOSURES Interest $ 333 $ 12
OF CASH FLOW
INFORMATION
</TABLE>
See Notes to Condensed Consolidated Financial Statements
26
<PAGE> 27
WISE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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, 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 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 stockholder continues 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.
The accompanying unaudited interim consolidated financial statements contain all
adjustments, consisting only of normal adjustments, which in the opinion of
management are necessary for a fair statement of the results for the interim
periods. Results for the interim periods are not necessarily indicative of
results for the full years.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 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 snacks
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 condensed consolidated financial statements of Wise include the financial
position of Wise Holdings, Inc. and subsidiaries as of March 31, 1997 and
December 31, 1996. These financial statements also include the statements of
operations and cash flows of Wise for the three months ended March 31, 1997, and
the salty snacks business of Borden, Inc. for the three months ended March 31,
1996.
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
sheets, statements of operations and cash flows of Wise on a stand-alone basis.
Reclassification
Certain prior year amounts have been reclassified to conform with the 1997
presentation.
27
<PAGE> 28
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 were included in
Owner's Investment.
Per Share Information
Net loss per common share at March 31, 1997 is computed by dividing net loss by
the weighted average number of common shares outstanding during the period ended
March 31, 1997. Net loss per common share at March 31, 1996 is computed assuming
that the shares were outstanding from July 2, 1996 to December 31, 1996.
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. 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 maturing in December
1997, at a variable interest rate equal to Borden's cost of similar borrowings
at 1/2% above a given bank's "base rate", and a $10.145 million term loan
maturing in 1999 with a fixed interest rate of 11% and 12% in 1997 and 1996,
respectively. A commitment fee of .375% is paid on the unused portion of the
revolving loan. Wise had $2,200 of borrowings under the revolving agreement at
March 31, 1997 and no borrowings at December 31, 1996. By agreement with Borden,
interest charges and commitment fees under the term loan were calculated as if
the borrowings were outstanding from January 1, 1996.
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, 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.
4. COMMITMENTS AND CONTINGENCIES
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
28
<PAGE> 29
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.
5. RELATED PARTIES
In addition to affiliated debt and lease agreements, Wise is engaged in various
transactions with Borden and its affiliated companies in the ordinary course of
business. 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 is included in affiliated payables and was $524 and
$703 at March 31, 1997 and December 31, 1996, respectively
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 charges to Wise for these costs in the first
quarter of 1997 and 1996:
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
1997 1996
<S> <C> <C>
Employee benefits $ 471 $ 368
Group and general insurance 1,240 1,583
Information services 48 0
Corporate staff departments and
overhead 362 357
------ ------
$2,121 $2,308
====== ======
</TABLE>
29
<PAGE> 30
BORDEN FOODS HOLDINGS CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
($ IN 000'S, EXCEPT PER SHARE DATA) 1997 1996
<S> <C> <C>
NET TRADE SALES $ 418,584 $ 462,038
COSTS AND EXPENSES
Cost of goods sold 256,287 286,100
Selling, general and administrative 147,220 160,849
Distribution expense 22,350 26,616
--------- ---------
OPERATING LOSS (7,273) (11,527)
Interest expense, net 3,993 3,545
Other, net (685) 192
--------- ---------
LOSS BEFORE INCOME TAXES (10,581) (15,264)
Income tax benefit (3,600) (6,174)
--------- ---------
NET LOSS ($ 6,981) ($ 9,090)
========= =========
PER SHARE INFORMATION:
Net loss per common share ($ 69,810) ($ 90,900)
Average number of common shares outstanding 100 100
during the period
</TABLE>
See accompanying notes to the condensed financial statements.
30
<PAGE> 31
BORDEN FOODS HOLDINGS CORPORATION
BALANCE SHEETS (UNAUDITED)
AS OF MARCH 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
ASSETS ($ IN 000'S) MARCH 31, DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 21,191 $ 33,234
Accounts receivable (net of allowance for
doubtful accounts of $5,844 and $5,944) 123,723 153,654
Other receivables 20,394 17,332
Inventories:
Finished and in-process goods 134,784 140,452
Raw materials and supplies 60,504 59,523
Deferred income taxes 21,552 17,559
Loans due from affiliates 4,836 9,349
Other amounts due from affiliates 3,728 24,972
Other current assets 37,586 32,435
----------- -----------
428,298 488,510
OTHER NON CURRENT ASSETS 9,802 10,329
PROPERTY AND EQUIPMENT
Land 22,964 23,147
Buildings and improvements 79,937 82,568
Machinery and equipment 241,720 243,212
----------- -----------
344,621 348,927
Less: accumulated depreciation (70,166) (66,606)
----------- -----------
274,455 282,321
----------- -----------
INTANGIBLES
Goodwill 159,901 161,296
Trademarks and other intangibles 202,453 203,987
----------- -----------
362,354 365,283
----------- -----------
$ 1,074,909 $ 1,146,443
=========== ===========
</TABLE>
See accompanying notes to the condensed financial statements
31
<PAGE> 32
BORDEN FOODS HOLDINGS CORPORATION
BALANCE SHEETS (UNAUDITED)
AS OF MARCH 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES & SHAREHOLDER'S EQUITY ($ IN 000'S) MARCH 31, DECEMBER 31,
1997 1996
----------- ----------
<S> <C> <C>
CURRENT LIABILITIES
Debt payable within one year $ 16,834 $ 15,707
Loans due to affiliates 62,634 56,396
Accounts and drafts payable 118,557 145,363
Other amounts due to affiliates 18,780 32,527
Accrued customer allowances 63,791 72,447
Other current liabilities 110,035 116,568
----------- ----------
390,631 439,008
LONG-TERM LIABILITIES
Long-term debt payable to Borden 166,990 166,990
Other long-term debt 6,958 6,701
Deferred income taxes 41,920 41,527
Non-pension postemployment obligations 12,827 12,906
Other noncurrent liabilities 10,691 11,053
Minority interest 3,958 3,540
----------- ----------
243,344 242,717
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY
Common stock ($.01 par; 100 shares authorized, issued and outstanding) -- --
Shareholder's investment in affiliate 87,590 87,859
Paid-in capital 346,013 349,475
Accumulated translation account 11,984 25,056
Retained earnings from October 1, 1996 (4,653) 2,328
----------- ----------
440,934 464,718
----------- ----------
$ 1,074,909 $1,146,443
=========== ==========
</TABLE>
See accompanying notes to the condensed financial statements
32
<PAGE> 33
BORDEN FOODS HOLDINGS CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------
($ IN 000'S) 1997 1996
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss (6,981) (9,090)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization 11,304 11,251
Change in assets and liabilities:
Accounts receivable 29,931 2,163
Other receivables (3,062) 1,896
Inventories 4,687 2,796
Deferred income taxes (3,993)
Other current assets (5,151) (2,483)
Accounts payable (26,806) (9,551)
Accrued customer allowances (8,656) 1,980
Other current liabilities (6,533) 13,475
Other amounts due to/from affiliates (2,866)
Long-term assets and liabilities 897 (972)
Other, net (6,413) 1,460
-------- --------
Net cash provided by (used for) operating activities (23,642) 12,925
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (7,726) (6,964)
-------- --------
Net cash used for investing activities (7,726) (6,964)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Other changes in owner's investment 1,777
Increase (decrease) in other long term debt 257 (7,542)
Increase in loans due to/from affiliates 17,942
Increase in debt payable within one year 1,127 463
-------- --------
Net cash provided by (used for) financing activities 19,326 (5,302)
-------- --------
Change in cash and equivalents (12,042) 659
Cash and equivalents at beginning of year 33,233 49,538
======== ========
Cash and equivalents at end of year $ 21,191 $ 50,197
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH RECEIVED (PAID) DURING THE YEAR FOR:
Interest, net (20,583) 1,890
Income taxes, foreign (1,455) (1,111)
</TABLE>
See accompanying notes to the condensed financial statements
33
<PAGE> 34
BORDEN FOODS HOLDINGS CORPORATION
NOTES TO THE CONDENSED 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.
In certain circumstances, allocation of income and gains may differ
from the ownership percentages indicated.
Effective October 1, 1996, Borden, in a taxable transaction, sold
Borden Foods and certain trademarks to BFC and the Investment LP,
respectively, for $550,000 less assets transferred and liabilities
assumed of $22,909. In connection with this sale, BFC 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 BFC. Borden will
continue to exercise significant financial control over BFC. 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.
BFC 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. BFC's 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.
The accompanying unaudited condensed financial statements contain all
adjustments, consisting only of normal adjustments, which in the
opinion of management are necessary for the fair presentation of
operating results for the interim period. Results for the interim
period are subject to significant seasonal variations and are not
necessarily indicative of results for the full year.
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 condensed
financial statements for Holdings as if it were a registrant. The
accompanying condensed financial statements for the three months ended
March 31, 1997 and 1996 were prepared on a purchase accounting basis
which allocated approximately $750 million, plus cash retained, less
debt assumed, of the December 1994 KKR purchase price to Holdings. The
34
<PAGE> 35
purchase price was allocated to tangible and intangible assets and
liabilities of Borden Foods based on independent appraisals and
management estimates.
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 4). The allocation of these costs, as well as intercompany
purchases and sales, cash infusions and withdrawals and other
transactions, were reflected in an Owner's Investment account through
September 30, 1996. In connection with the formation of Holdings and
the October 1,1996 sale, the net assets of Borden Foods have been
recapitalized to reflect the resulting capital structure.
The condensed financial statements include the accounts of Holdings
after elimination of material intercompany accounts and transactions.
Minority interest reflects the consolidation of international
operations in which BFC owns more than a 50% interest but less than a
100% interest. The portion of BFC and the Investment LP directly owned
by the 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 BFC's
management for $5,323, resulting in an ownership interest in the 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.
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 Holdings 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 were included in an Owner's Investment account. Taxes
related to foreign operations have been provided for in accordance
with SFAS No. 109.
Income tax benefits for the interim periods have been recorded in
accordance with APB No. 28, "Interim Financial Reporting," which
prescribes that each interim period is an integral part of the annual
period and that interim tax provisions be computed under the effective
rate approach.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS - In February 1997, the
Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128 (FAS No. 128), "Earnings Per Share," which
requires adoption in periods ending after December 15, 1997. The new
statement supersedes and simplifies the standards for computing
earnings per share (EPS) previously found in Accounting Principles
Board Opinion No. 15, "Earnings Per Share." It replaces the
presentation of primary EPS with a presentation of basic EPS. FAS No.
128 also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital
structures. Adoption of the new standard will have no effect on
Holdings' EPS calculation as shown in the accompanying financial
statements.
In addition, in February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 129 (FAS No.
129), "Disclosure of Information about Capital Structure," which
requires adoption in periods ending after December 15, 1997. The
statement establishes standards for disclosing
35
<PAGE> 36
information about an entity's capital structure. Adoption of the
standard will have no effect on Holdings' capital structure as shown
in the accompanying financial statements.
4. RELATED PARTIES
BFC is engaged in various transactions with Borden and its affiliates
in the ordinary course of business. Subsequent to January 1, 1996, a
subsidiary of Borden has provided certain administrative services to
BFC 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. BFC reimburses the Borden subsidiary for payments
for general disbursements, and general and group insurance and
postemployment benefit claims. The amount owed by BFC for reimbursement
of payments and for services was $10,531 and $11,678 as of March 31,
1997 and December 31, 1996, respectively.
BFC is generally self-insured for general insurance claims and
postemployment benefits other than pensions. The liabilities for these
obligations are included in Holdings' 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 BFC contributes. The U.S. employees participate
in the Borden retirement savings plan. Borden also provides certain
health and life insurance benefits for eligible employees. BFC has
recognized expenses associated with these benefits, certain of which
are determined and allocated by Borden's actuary. BFC 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.
Subsequent to January 1, 1996, BFC 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
$19,348 and $22,687 at March 31, 1997 and December 31, 1996,
respectively.
During 1996, BFC 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, provided for borrowings up to $250 million at a variable interest
rate equal to prime. Effective April 24, 1997 the revolving loan
facility was adjusted to allow for borrowings up to $100 million. 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
$38,450 and $24,360 at March 31, 1997 and December 31, 1996,
respectively. Commitment fees charged on the unused portion of the
revolving facility were $193 for the three months ended March 31, 1997.
The loan agreement contains certain restrictions on the activities of
BFC, 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 BFC and the use of proceeds from asset sales.
As an affiliated guarantor, Holdings' 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 $955 million at March 31,
1997.
In connection with the October 1, 1996 transaction, BFC issued $166,990
in long-term notes to Borden at a fixed 12% interest rate due on
November 30, 1999. Effective January 1, 1997, the interest rate on the
long-term notes
36
<PAGE> 37
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 Borden's cost of funds for similar
borrowings plus 0.25%; currently LIBOR plus 1.50%. Same day borrowings
will bear interest at Borden's cost of funds for similar borrowings;
currently prime plus 0.50%.
Interest expense on the long-term notes was $4,278 for the three months
ended March 31, 1997. 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 $3,701 and $20,849 as of
March 31, 1997 and December 31, 1996, respectively.
BFC performs certain administrative services on behalf of other Borden
affiliates. These services include sales administration, promotion,
purchasing, and research and development. BFC charged these affiliates
$1,881 and $2,250 for such services for the three month periods ended
March 31, 1997 and 1996, respectively. $1,014 and $1,261 were
receivable at March 31, 1997 and December 31, 1996, respectively. BFC
also sells certain merchandise to Borden affiliates, for which $2,714
and $12,984 were receivable at March 31, 1997 and December 31, 1996,
respectively.
Borden continues to provide executive, financial and strategic
management to BFC for which it charges a quarterly fee of $250.
5. ASSET WRITE-DOWNS AND BUSINESS REALIGNMENT
In December 1996, management approved the closure of certain domestic
pasta plants in 1997 in order to reduce its product line complexity and
manufacturing capacity. Accordingly, $27,817 was provided in 1996 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. No such charges were recorded in the three month
period ended March 31, 1997.
In March 1997, BFC 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 milk powder, processed cheese,
sweetened condensed milk and reconstituted lemon juice. 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.
6. COMMITMENTS AND CONTINGENCIES
In July 1995, a Fresno, California jury returned a verdict against BFC
for wrongful termination of a tomato packing agreement, for which $14.5
million was previously 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. BFC is contesting
the verdict.
BFC is involved in certain other legal proceedings arising through
the normal course of business. Other than that mentioned above,
management is of the opinion that the final outcomes of such
proceedings should not have a material impact on BFC's results of
operations or financial position.
37
<PAGE> 38
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BORDEN, INC.
Date: May 15, 1997 By/s/ William H. Carter
---------------------------------
William H. Carter
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
38
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