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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, 1997 Commission file number: 1-71
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BORDEN, INC.
New Jersey 13-0511250
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(State of incorporation) (I.R.S. Employer Identification No.)
180 East Broad St., Columbus, OH 43215 614-225-4000
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(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
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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 27, 1998: $0.
Number of shares of common stock, par value $0.01 per share, outstanding as of
the close of business on March 27, 1998: 198,974,994
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated
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none none
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The Exhibit Index is Located herein at sequential pages 78 through 81.
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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 sale 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 pushdown 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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<TABLE>
<CAPTION>
BORDEN, INC.
INDEX
<S> <C> <C>
PART I
Item 1 - Business................................................................................. 4
Item 2 - Properties............................................................................... 9
Item 3 - Legal Proceedings........................................................................ 9
Item 4 - Submission of Matters to a Vote of Security Holders......................................12
PART II
Item 5 - Market for the Registrant's Common Stock and Related Stockholder Matters.................12
Item 6 - Selected Financial Data..................................................................13
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................14
Item 8 - Financial Statements and Supplementary Data
BORDEN, INC. CONSOLIDATED ("THE REGISTRANT") AND BORDEN, INC. AND AFFILIATES
COMBINED FINANCIAL STATEMENTS
Consolidated Statements of Operations, years ended December 31, 1997,
1996 and 1995.........................................................................26
Consolidated Balance Sheets, December 31, 1997 and 1996..................................28
Consolidated Statements of Cash Flows, years ended December 31, 1997,
1996 and 1995.........................................................................30
Consolidated Statements of Shareholders' Equity, years ended December 31, 1997,
1996 and 1995.........................................................................32
Combined Statements of Operations, years ended December 31, 1997,
1996 and 1995.........................................................................34
Combined Balance Sheets, December 31, 1997 and 1996......................................35
Combined Statements of Cash Flows, years ended December 31, 1997
and 1996..............................................................................37
Combined Statements of Shareholders' Equity, years ended December 31, 1997,
1996 and 1995.........................................................................39
Notes to Consolidated and Combined Financial Statements..................................41
Independent Auditors' Reports............................................................67
PART III
Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..............................................................69
Item 10 - Directors and Executive Officers of the Registrant......................................69
Item 11 - Executive Compensation..................................................................72
Item 12 - Security Ownership of Certain Beneficial Owners and Management..........................75
Item 13 - Certain Relationships and Related Transactions..........................................77
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................77
</TABLE>
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PART I
Item 1. Business
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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: chemical, and consumer products and
services. The Combined Companies includes 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 (the "Merger") by shareholders of
the Company at a special meeting held on that date. The Company is currently
controlled by affiliates of KKR.
On July 2, 1996, the Company sold its Wise business to Wise Holdings and
classified the salty snacks business in the "businesses held for sale" segment
for all periods prior to this date. 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 continues 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.
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 4 to the consolidated and
combined financial statements). During the first quarter of 1996, the Company
sold its interest in the Spanish food company. During the fourth quarter of
1996, the Company sold its packaging and plastic films business and a European
bakery business. These operations were included in businesses held for sale for
segment reporting. On September 4, 1997, the Company sold its Borden/Meadow Gold
Dairies business. On March 13, 1998, the Company sold its decorative
wallcoverings business. Both businesses are included in discontinued operations
for all periods presented.
PRODUCTS
The chemical segment includes formaldehyde, melamine, resins, coatings and
other specialty and industrial chemicals.
The Company's consumer products and services segment includes consumer adhesives
and infrastructure management services. The Combined Companies' consumer
products and services segment includes consumer adhesives, infrastructure
management services and Wise salty snacks.
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The Combined Companies includes the Company and its subsidiaries, together with
the Foods and Wise businesses. In 1996, Foods management announced its strategy
to focus on grain-based meal solutions and therefore its intent to divest all
businesses not aligned with this strategy (the "Unaligned" businesses.) The
ongoing Foods business includes pasta and sauces, bouillon, and dehydrated
soups. Foods' principal Unaligned businesses included in 1997 results are
processed cheese, candy coated popcorn, non-dairy creamer, sweetened condensed
milk, reconstituted lemon and lime juices, and milk powder. Certain of these
principal Unaligned businesses were sold in December 1997, with the remaining
sales expected to occur early in 1998.
MARKETING AND DISTRIBUTION
Domestic products for the chemical, and consumer products and services 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. To the extent
practicable, 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 $25.1 million in 1997,
$69.5 million in 1996 and $87.1 million in 1995. The Combined Companies' total
advertising and promotion expenditures in support of products were $367.2
million in 1997, $489.8 million in 1996 and $540.1 million in 1995. Decreases
between years are the result of divestitures.
MANUFACTURING AND RAW MATERIALS
The primary raw materials used by the chemical segment are methanol, phenol,
urea and formaldehyde. The primary raw materials used by the consumer products
and services 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 do not depend on any single customer nor
is their business 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, 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 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 1998 and 2005. No
individual patent or trademark is considered to be material.
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RESEARCH AND DEVELOPMENT
Research and development expenditures were $24.9 million in 1997, $26.5 million
in 1996 and $33.1 million in 1995 for the Company and $44.4 million, $49.2
million and $40.0 million for the Combined Companies in 1997, 1996 and 1995,
respectively. The development and marketing of new products are carried out at
the operating unit level and integrated with quality control for existing
product lines.
WORKING CAPITAL
Working capital for all segments is generally funded through operations and
borrowings under the Company's credit facility.
EMPLOYEES
At December 31, 1997, the Company had approximately 8,000 employees. The
Combined Companies' employees totaled approximately 15,000. 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 both the Depreciation and Amortization
Expense chart and the Capital Expenditures chart, for the periods presented
prior to its October 1, 1996, sale. The Dairy and Decorative Products businesses
were discontinued in 1997, and all periods presented have been restated to
reflect this accounting treatment. Therefore, Dairy and Decorative Products
results are excluded from statements of operations related tables below. 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
prior to 1997 are the European bakery business, the packaging and plastic films
business, an equity interest in a Spanish food company and the Wise business
through July 2, 1996. Certain other non-food operations are included in this
category for all periods presented. The Wise business is included in the
consumer products and services segment of the Combined Companies' segment
information.
In the combined financial information presented below, Foods is shown as a
distinct segment and Wise is included in the consumer products and services
segment.
INDUSTRY SEGMENTS:
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<TABLE>
<CAPTION>
SALES TO UNAFFILIATED CUSTOMERS:
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CONSOLIDATED COMBINED
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(Dollars in millions) 1997 1996 1995 1997 1996 1995
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<S> <C> <C> <C> <C> <C> <C>
Foods ongoing $ 764.4 $ 884.0 $ 869.4
Foods Unaligned 987.3 1,065.8 969.5
Chemical $1,290.8 $1,174.2 $1,139.5 1,290.8 1,174.2 1,139.5
Consumer products and services 92.6 84.7 77.0 334.8 330.3 327.0
Businesses held for sale 104.3 1,129.1 1,685.6 104.3 1,002.5 1,435.6
--------- --------- ---------- --------- ---------- ----------
$1,487.7 $2,388.0 $2,902.1 $3,481.6 $ 4,456.8 $ 4,741.0
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</TABLE>
<TABLE>
<CAPTION>
OPERATING INCOME (LOSS):
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CONSOLIDATED COMBINED
---------------------------- -------------------------
(Dollars in millions) 1997 1996 1995 1997 1996 1995
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<S> <C> <C> <C> <C> <C> <C>
Foods ongoing $ (32.4) $ (72.9) $ (77.6)
Foods Unaligned 230.6 52.6 15.0
Chemical $ 109.8 $ 127.2 $ 140.2 109.8 127.2 140.2
Consumer products and services 2.8 9.2 10.8 6.4 6.4 (2.3)
Businesses held for sale 1.8 24.3 (11.9) 1.8 30.4 1.2
Corporate (14.9) 35.7 (375.1) (14.9) 52.4 (375.1)
---------- -------- --------- --------- -------- ---------
$ 99.5 $ 196.4 $ (236.0) $ 301.3 $ 196.1 $ (298.6)
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</TABLE>
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<TABLE>
<CAPTION>
SIGNIFICANT OR UNUSUAL ITEMS AFFECTING COMPARABILITY OF OPERATING INCOME: (1)
- ------------------------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
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(Dollars in millions) 1997 1996 1995 1997 1996 1995
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<S> <C> <C> <C> <C> <C> <C>
Foods ongoing $ 3.1 $ (26.0) $ (32.1)
Foods Unaligned 137.8 3.2 (7.5)
Chemical $ (16.0) $ 1.6 (16.0) 1.6
Businesses held for sale 5.6 5.6
Corporate $ 62.0 (238.1) 78.7 (238.1)
-------- ---------- ---------- -------- -------- --------
$ (16.0) $ 62.0 $ (230.9) $ 124.9 $ 55.9 $ (270.5)
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</TABLE>
(1) See page 20 of the Management's Discussion and Analysis of Financial
Condition and Results of Operations for further information concerning these
items.
<TABLE>
<CAPTION>
IDENTIFIABLE ASSETS AT YEAR END:
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CONSOLIDATED COMBINED
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(Dollars in millions) 1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Foods ongoing $ 688.2 $ 860.6
Foods Unaligned 345.7 419.0
Chemical $ 904.6 $ 703.1 904.6 703.1
Consumer products and services 71.6 60.6 184.3 161.7
Businesses held for sale 97.0 96.0 97.0 96.0
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1,073.2 859.7 2,219.8 2,240.4
Discontinued operations 165.2 321.6 165.2 321.6
Corporate assets 967.5 1,308.7 664.7 522.7
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$2,205.9 $2,490.0 $ 3,049.7 $ 3,084.7
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</TABLE>
<TABLE>
<CAPTION>
DEPRECIATION AND AMORTIZATION EXPENSE:
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CONSOLIDATED COMBINED
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(Dollars in millions) 1997 1996 1995 1997 1996 1995
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<S> <C> <C> <C> <C> <C> <C>
Foods ongoing $ 34.6 $ 34.3 $ 33.6
Foods Unaligned 15.8 15.0 15.1
Chemical $ 28.6 $ 23.4 $ 19.0 28.6 23.4 19.0
Consumer products and services 4.0 3.5 1.0 11.0 10.3 8.8
Businesses held for sale 5.2 53.9 61.4 5.2 50.6 53.6
Discontinued operations 19.9 57.6 68.9 19.9 21.3 20.2
Corporate 1.1 0.5 6.3 1.1 0.5 6.3
------- ------- ------- -------- -------- -------
$ 58.8 $ 138.9 $ 156.6 $ 116.2 $ 155.4 $ 156.6
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</TABLE>
<TABLE>
<CAPTION>
CAPITAL EXPENDITURES:
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CONSOLIDATED COMBINED
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(Dollars in millions) 1997 1996 1995 1997 1996 1995
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<S> <C> <C> <C> <C> <C> <C>
Foods ongoing $ 19.6 $ 33.4 $ 16.3
Foods Unaligned 15.7 16.8 16.4
Chemical $ 80.8 $ 92.8 $ 59.7 80.8 92.8 59.7
Consumer products and services 11.6 1.4 1.1 16.8 7.2 3.8
Businesses held for sale 3.6 61.0 69.2 3.6 59.6 66.5
Discontinued operations 29.3 81.9 52.8 29.3 50.0 20.1
Corporate 4.4 5.4 19.7 4.4 5.4 19.7
--------- ---------- ------- ------- --------- --------
$ 129.7 $ 242.5 $ 202.5 $ 170.2 $ 265.2 $ 202.5
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</TABLE>
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<TABLE>
<CAPTION>
GEOGRAPHIC SEGMENTS:
SALES TO UNAFFILIATED CUSTOMERS:
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CONSOLIDATED COMBINED
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(Dollars in millions) 1997 1996 1995 1997 1996 1995
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<S> <C> <C> <C> <C> <C> <C>
United States $ 969.0 $ 1,167.1 $ 1,576.6 $ 2,340.9 $ 2,583.5 $ 2,804.0
Europe 120.7 755.3 848.3 307.1 969.3 1,043.2
Latin America 175.2 175.8 175.2 398.7 391.7 375.2
Other 222.8 289.8 302.0 434.9 512.3 518.6
--------- --------- ---------- -------- --------- --------
$ 1,487.7 $ 2,388.0 $ 2,902.1 $ 3,481.6 $ 4,456.8 $ 4,741.0
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</TABLE>
<TABLE>
<CAPTION>
OPERATING INCOME (LOSS):
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CONSOLIDATED COMBINED
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(Dollars in millions) 1997 1996 1995 1997 1996 1995
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<S> <C> <C> <C> <C> <C> <C>
United States $ 57.0 $ 145.0 $ (303.5) $ 223.5 $ 117.8 $ (379.8)
Europe 2.7 19.9 19.4 13.6 38.9 25.6
Latin America 20.2 6.5 12.4 41.0 12.0 21.0
Other 19.6 25.0 35.7 23.2 27.4 34.6
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$ 99.5 $ 196.4 $ (236.0) $ 301.3 $ 196.1 $ (298.6)
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</TABLE>
<TABLE>
<CAPTION>
SIGNIFICANT OR UNUSUAL
ITEMS AFFECTING COMPARABILITY OF OPERATING INCOME: (1)
- ------------------------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
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(Dollars in millions) 1997 1996 1995 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $ 62.0 $(151.2) $ 140.9 $ 55.9 $ (180.1)
Europe $ (16.0) (22.0) (16.0) (32.7)
Latin America (57.7) (57.7)
-------- -------- --------- --------- -------- --------
$ (16.0) $ 62.0 $(230.9) $ 124.9 $ 55.9 $ (270.5)
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</TABLE>
(1) See page 20 of the Management's Discussion and Analysis of Financial
Condition and Results of Operations for further information concerning these
items.
<TABLE>
<CAPTION>
IDENTIFIABLE ASSETS:
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CONSOLIDATED COMBINED
---------------------------- -------------------------
(Dollars in millions) 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
United States $ 1,734.6 $ 2,108.8 $ 2,150.4 $ 2,132.0
Europe 173.6 186.8 296.8 335.7
Latin America 130.1 102.0 238.9 235.3
Other 167.6 92.4 363.6 381.7
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$ 2,205.9 $ 2,490.0 $ 3,049.7 $ 3,084.7
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</TABLE>
IMPACT OF THE YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. See Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations for
further discussion of this issue and its effects on the Company's businesses.
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Item 2. Properties
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As of December 31, 1997, the Company operated 27 domestic resin production and
manufacturing facilities in 16 states, the most significant being a specialty
resins plant in Kentucky. In addition, the Company operated 27 foreign resin
production and manufacturing facilities primarily in Canada, South America,
Great Britain, Australia and the Far East.
As of December 31, 1997, the Company operated 1 domestic facility for producing
and manufacturing household, school and consumer glues, in New York.
As of December 31, 1997, the Company operated 2 manufacturing and processing
facilities in 2 states included in businesses held for sale.
As of December 31, 1997, the Foods and Wise businesses operated 14 domestic food
manufacturing facilities in 9 states and Puerto Rico. In addition, the Foods
business operated 19 foreign food manufacturing and processing facilities
located principally in Canada, Latin America and Western Europe. The above
includes 20 international and domestic Foods plants that are considered
Unaligned businesses.
As of December 31, 1997, the Company operated a domestic flexible vinyl and
sheeting production facility in Massachusetts and 6 foreign residential
wallcoverings and heat transfer paper production facilities located in Canada
and the United Kingdom. These facilities are classified as discontinued
operations.
The Company's and the Combined Companies' manufacturing and processing
facilities are generally well maintained and effectively utilized. 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
$8.3 million in 1997, $6.5 million in 1996 and $11.4 million in 1995. The
Company estimates that it will spend $5.7 million for environmental control
facilities during 1998. The Combined Companies incurred environmental capital
expenditures of $12.0 million in 1997, $6.9 million in 1996 and $11.4 million in
1995. The Combined Companies estimate $8.8 million in expenditures relating to
control facilities during 1998.
Item 3. Legal Proceedings
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Environmental Proceedings
- -------------------------
The Company has been notified that it is or may be a potentially responsible
party with respect to the cleanup of approximately 55 waste sites 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, and the availability of insurance coverage. The Company has
recorded $23.3 million of liabilities for environmental remediation costs for
these and other sites in amounts that 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 $20 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
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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
1996). A federal court action in Columbus, Ohio (April 1996) in connection with
a waste disposal site was resolved in 1997 for a de minimis payment.
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"). A wholly owned
subsidiary of the Company serves as general partner of BCP and has certain
fiduciary responsibilities to BCP's unitholders. 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.
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 further remedial measures in response to data generated by planned
additional testing. If the LDEQ requires BCP to take further remedial measures,
a portion of such costs may be covered under the EIA. The extent to which any
costs for further remedial measures required by LDEQ will be covered by the
Environmental Indemnity Agreement will depend, in large part, on whether such
remedial measures respond to facts or circumstances that existed and
requirements in effect prior to November 30, 1987, the date of the sale by the
Company of the Geismar and Illiopolis plants to the Partnership.
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.
10
<PAGE> 11
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 sought 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. On
March 11, 1998, BCP and the DOJ reached an agreement in principle to resolve the
enforcement action brought by the DOJ against BCP, and the Declaratory Judgement
Action brought by BCP against the United States. The agreement provides for
payment of a civil penalty by BCP of $3.6 million, but it does not include any
admission of wrongdoing. The agreement also provides for a specific and detailed
program of groundwater and other remediation at the Geismar facility that is
consistent with various actions undertaken previously, currently being
undertaken, and planned to be undertaken in the future, by BCP. Under certain
circumstances, EPA and LDEQ may require investigation and remediation beyond the
specific terms of the agreement. BCP, however, believes that the technical
information and facts known to it regarding the nature of contamination at the
site, and the need for remediation, make it unlikely that investigation and
remediation beyond that which BCP has already planned and accounted for will be
required. The parties also agreed that BCP will undertake two Supplemental
Environmental Projects not required by law. One will involve an innovative
program that will result in BCP ceasing to inject certain permitted substances
into underground injection wells. Another will involve BCP providing certain
technological and emergency preparedness equipment to local organizations. The
parties have also agreed that BCP will seek a permit for its VCR unit and
related tanks at the Geismar facility and will continue to remain in compliance
with all applicable environmental laws. Under the EIA, the Company will
reimburse BCP for the costs incurred in connection with the remediation program.
The Company has previously accrued amounts sufficient to cover the estimated
cost of the remediation.
Other Legal Proceedings
- -----------------------
The State of Louisiana has a suit pending against the Company (October 1996)
alleging antitrust violations in connection with the sale of milk to schools in
certain school districts in Louisiana. A private antitrust suit alleging price
fixing of wholesale/retail accounts in Florida (July 1993) was dismissed, but
awaits entry of a final order.
A suit by a former shareholder against the Company in U.S. District Court for
the Southern District of Florida (August 1996) claiming violations of securities
laws by failing to timely announce the proposed acquisition of the Company by
affiliates of Kohlberg Kravis Roberts & Co. has been resolved through a
settlement and was dismissed in December 1997.
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' appeal was
dismissed in December 1997.
On July 19, 1995, a Fresno, California jury returned a verdict against the
Combined Companies' 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. Foods is contesting the verdict.
In November 1997, the Company resolved litigation with the Internal Revenue
Service over the utilization of certain capital losses in the Company's tax
returns for the period 1989 to 1993 by agreeing to the payment of certain taxes
and interest of approximately $100 million. This was fully accrued by the
Company in a prior year.
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.
11
<PAGE> 12
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, 1997. 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 Company declared $51.4 million in dividends on common
stock during 1997 and $16.5 million during 1996. The Company's ability to pay
dividends on its common stock is restricted by its credit agreement with certain
banks. See Notes 8 and 12 to the Consolidated and Combined Financial Statements.
12
<PAGE> 13
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, restated for discontinued operations. For matters
impacting comparability between years see pages 7 and 8.
<TABLE>
<CAPTION>
CONSOLIDATED FOR THE YEARS 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS
Net sales $1,487.7 $2,388.0 $2,902.1 $3,270.4 $3,676.3
Income (loss) from
continuing operations 17.2 44.7 (428.2) (505.0) (204.5)
Income (loss) applicable to common stock 147.6 (333.1) (424.9) (597.7) (630.7)
- ---------------------------------------------------------------------------------------------------------------------
Basic and diluted income (loss) per common share
from continuing operations 0.09 0.23 (2.22) (3.51) (1.45)
Basic and diluted income (loss) per common share 0.74 (1.67) (2.21) (4.16) (4.47)
- ---------------------------------------------------------------------------------------------------------------------
Dividends
Common share $ 0.26 $ 0.08 $ 0.25 $ 0.90
Preferred series A share 2.98 3.13 $ 2.39
Preferred series B share 1.32 1.32
- ---------------------------------------------------------------------------------------------------------------------
Average number of common shares
outstanding during the year 199.0 199.0 192.3 143.7 141.0
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL STATISTICS
Total assets $2,205.9 $2,490.0 $3,207.9 $3,670.0 $4,275.1
Long-term debt 788.3 567.2 1,200.1 1,368.0 1,233.9
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
COMBINED FOR THE YEARS 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS
Net sales $3,481.6 $4,456.8 $4,741.0 $5,092.6 $5,519.6
Income (loss) from
continuing operations 93.1 45.0 (469.2) (466.9) (139.2)
Income (loss) applicable to common stock 131.1 5.1 (424.9) (597.7) (630.7)
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL STATISTICS
Total assets 3,049.7 3,084.7 3,617.9 3,911.8 4,495.4
Long-term debt 794.9 581.8 1,210.7 1,377.8 1,242.9
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
-------------
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
-------------------------- --------------------------
(Dollars in millions) 1997 1996 1995 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET SALES
Ongoing businesses $ 1,383.4 $ 1,258.9 $ 1,216.5 $ 2,390.0 $ 2,388.5 $ 2,335.9
Businesses held for sale
and Unaligned Foods businesses 104.3 1,129.1 1,685.6 1,091.6 2,068.3 2,405.1
---------- --------- --------- ---------- --------- ----------
Total $ 1,487.7 $ 2,388.0 $ 2,902.1 $ 3,481.6 $ 4,456.8 $ 4,741.0
========== ========= ========= ========== ========= ==========
OPERATING INCOME
Ongoing businesses $ 112.6 $ 136.4 $ 151.0 $ 83.8 $ 60.7 $ 60.3
Corporate (14.9) 35.7 (375.1) (14.9) 52.4 (375.1)
Businesses held for sale
and Unaligned Foods businesses 1.8 24.3 (11.9) 232.4 83.0 16.2
---------- --------- --------- ---------- --------- ----------
Total $ 99.5 $ 196.4 $ (236.0) $ 301.3 $ 196.1 $ (298.6)
============ ========== ========== =========== ========== ===========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED
Net Sales
- ---------
The Company made several changes in 1996 and 1997 to focus on its business
strategy. As a result, the Company's total net sales in 1997 were dramatically
less than in 1996, primarily due to businesses sold during 1996 as part of the
effort to sharpen its business focus. As illustrated in the table above, total
consolidated sales dropped from $2,388.0 million to $1,487.7 million, a decrease
of $900.3 million, or 38%. This decrease was caused completely by the absence of
sales in 1997 from businesses divested in late 1996, also shown in the table.
The Company's sales from ongoing businesses showed an increase of $124.5 million
or 10%, primarily related to increased sales in the Company's Chemical business
unit.
The decrease in total net sales from 1995 to 1996, a change of $514.1 million or
18%, is also the result of businesses sold in late 1995 and 1996. Sales from
ongoing businesses improved $42.4 million or 3%. This activity is discussed
further, segregated by business unit, later in this section.
Operating Income
- ----------------
The Company's total operating income, on a consolidated basis, decreased $96.9
million or 49% from 1996 to 1997. This was caused mainly by the absence of
income from businesses sold in late 1996, the effects of one-time charges (a net
gain on the sale of businesses in 1996 and an impairment charge taken by the
Chemical business unit in 1997), and to a lesser extent by a $7.8 million
decline in operating income from ongoing businesses. Absent the effect of a net
gain of $62.0 million on the sale of businesses in 1996 and the $16.0 million
impairment charge in 1997, the Company's operating income declined from $134.4
million to $115.5 million, mainly due to the absence of operating results from
businesses sold and investments in information systems made by all business
units.
In 1996 operating income increased $432.4 million from 1995 levels. The ongoing
operations actually posted an aggregate decrease of $14.6 million from 1995 to
1996, mainly due to the effect of price competition on margins in the Chemical
business. These decreases were more than offset by the absence of losses of
$213.0 million recorded in 1995 related to the disposition of several businesses
and the $62.0 million net gain recorded on the sale of certain businesses in
1996. In addition, businesses held for sale operating income rose $36.2 million
in 1996 due to both operating improvements and the divestiture of operations
that generated operating losses in 1995.
14
<PAGE> 15
COMBINED
Net Sales
- ---------
The Combined Companies' total sales were $975.2 million or 22% lower in 1997
than in 1996. This change is primarily the result of businesses sold in late
1996. Ongoing sales when compared to 1996 remained flat, with an increase in the
Chemical unit offset by a decline in Foods sales. This activity is discussed
further, segregated by business unit, later in this section.
The Combined Companies' sales decreased $284.2 million or 6% from 1995 to 1996
due to divestitures that occurred in 1995 and 1996. This sales decline was
partially offset by improved sales results in the Combined Companies'
operations, as described later in this section.
Operating Income
- ----------------
Operating income for the Combined Companies rose by $105.2 million in 1997. The
increase is due mainly to a significant improvement in Foods' results (of which
$18.3 million related to a reduction in the amount of estimated trade promotion
liabilities), a $66.7 million increase in net gains on the sale of businesses in
1997 versus 1996, a $16.0 million impairment charge taken by Chemical in 1997,
and the absence of income from businesses sold late in 1996.
The Combined Companies' operating income increased $494.7 million from 1995 to
1996. This dramatic improvement was due mainly to the absence of large losses
incurred on business divestitures in 1995, plus gains realized on divestitures
in 1996. The improvement was partially offset by small decreases in operating
income from ongoing operations.
15
<PAGE> 16
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 1997 1996 1995
- --------- ---- ---- ----
<S> <C> <C> <C>
Chemical $ 1,290.8 $ 1,174.2 $ 1,139.5
Consumer products and services 92.6 84.7 77.0
----------- ----------- -----------
Subtotal - ongoing businesses (Consolidated Company) 1,383.4 1,258.9 1,216.5
Businesses held for sale(1) 104.3 1,129.1 1,685.6
------------ ------------ ------------
CONSOLIDATED NET SALES $ 1,487.7 $ 2,388.0 $ 2,902.1
========== =========== ===========
Foods ongoing businesses 764.4 884.0 869.4
Foods Unaligned businesses 987.3 1,065.8 969.5
------------- ------------ -------------
Total Foods 1,751.7 1,949.8 1,838.9
Wise (2) 242.2 245.6 250.0
Combining adjustments (3) (126.6) (250.0)
----------- ------------- --------------
COMBINED NET SALES $ 3,481.6 $ 4,456.8 $ 4,741.0
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Twelve months ended December 31,
----------------------------------------------
OPERATING INCOME (LOSS) 1997 1996 1995
- ----------------------- ---- ---- ----
<S> <C> <C> <C>
Chemical $ 109.8 $ 127.2 $ 140.2
Consumer products and services 2.8 9.2 10.8
Corporate (14.9) 35.7 (375.1)
------------ ----------- ----------
Subtotal - ongoing businesses (Consolidated Company) 97.7 172.1 (224.1)
Businesses held for sale (1) 1.8 24.3 (11.9)
------------ ----------- ----------
CONSOLIDATED OPERATING INCOME (LOSS) $ 99.5 $ 196.4 $ (236.0)
============ =========== ==========
Foods ongoing businesses (32.4) (72.9) (77.6)
Foods Unaligned businesses 108.0 49.4 15.0
Gains on sale of Unaligned Foods businesses 122.6 3.2
------------ ----------- ----------
Total Foods 198.2 (20.3) (62.6)
Wise (2) 3.6 (2.8) (13.1)
Combining adjustments (3) 22.8 13.1
------------ ----------- ----------
COMBINED OPERATING INCOME (LOSS) $ 301.3 $ 196.1 $ (298.6)
============ =========== ==========
- ----------------------------------------------------------------------------------------------------------------------
</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.
16
<PAGE> 17
1997 vs. 1996
- -------------
Chemical
- --------
Chemical had a successful year from a sales perspective. Improved sales in 1997
reflected increased consumer demand for products coupled with increased capacity
to meet that demand due to plant expansion and an acquisition. Sharply higher
raw material costs and intense industry competition, which kept a ceiling on
selling prices, contributed to narrower margins and correspondingly lower
operating income.
Chemical sales increased $116.6 million or 10% in 1997. Modest selling price
increases contributed $6.2 million to this improvement. The remainder was
primarily due to volume increases in virtually all product lines. Demand was
particularly strong for plywood and oriented strand board due to continued
strong housing starts in the U.S. Formaldehyde volume also improved as a result
of increased capacity from the start-up of a new formaldehyde plant in 1997 and
two other plant expansions. This increased capacity allowed Chemical to meet
existing customer demand. Also contributing $7.4 million to the increased sales
was the acquisition of Melamine Chemicals in November 1997.
The addition of Melamine Chemicals secured the supply of a crucial raw material
for the Company's current business and allowed the Company to expand in the
growing specialty business of melamine resins. In February 1998, the Chemical
business also acquired a Sun Coast Industries, Inc. division that manufactures
melamine-based products, which will further expand the Company's growth in this
market.
Operating income for the Chemical business decreased $17.4 million or 14% for
1997, despite 10% sales growth. The decline was mainly the result of a $16.0
million impairment charge related to certain international operations, offset,
in part by the absence of non-recurring charges and improved business processes
in Latin America. The remaining decline was due to lower margins, caused by a
steep rise in raw materials costs. Efforts to pass on the cost increase to
customers were only partially successful because of intense industry competition
coupled with customers' resistance to large price increases because of difficult
operating conditions facing them in the forest products industry. Although
margins have dropped, Chemical has maintained market share and its management is
currently working on a strategy to improve margins. Management does not believe
raw material costs will continue to rise in 1998. Also contributing to the
operating income decline were infrastructure costs incurred to implement
worldwide information systems and for plant consolidation costs. Both
investments were made to improve operating efficiency and synergies, allowing
Chemical to further its global focus strategy.
Consumer products and services
- ------------------------------
Consumer products and services sales increased $7.9 million in 1997. The 9%
increase was due mainly to the introduction of new consumer adhesives products
in 1997 and growth in core products.
Consumer products and services operating income in 1997 decreased $6.4 million
or 70% from 1996. This decline was due mainly to expenses charged in 1997 for
systems development and implementation in the infrastructure management services
business, and for development costs for new product introductions in the
consumer adhesives business. The system implementation primarily consisted of
the PeopleSoft Human Resources Management Systems. Also contributing to the
lower operating income were higher than normal costs due to the introduction of
new products.
Corporate
- ---------
Corporate operating results declined $50.6 million in 1997 to a loss of $14.9
million. This change was caused primarily by two large one-time income items in
1996. In 1996 the Company recorded a net gain of $62.0 million on the sales of
a) the salty snacks business to Wise Holdings, Inc., an affiliate of the
Company's parent, and b) an equity interest in a Spanish food company to a third
party. With the effects of these items removed, corporate operating loss of
$14.9 million shows an $11.4 million improvement from a $26.3 million loss in
1996. This increase is the result of improved management and settlement of
assets and liabilities retained from business units that were sold in prior
years. This improvement was approximately $24.3 million, offset in part by a
$12.9 million increase in administrative and other expenses. Of the $24.3
million, $8.7 million relates to the settlement of reserves for
17
<PAGE> 18
amounts less than previously estimated, $10.5 million relates to cash recoveries
from insurance carriers and other parties, and $5.1 million relates to sales of
idle property. The increase in administrative and other expenses relates
primarily to increased benefit related expenses of $6.9 million and severance
costs for corporate downsizing as well as system implementation costs.
Businesses held for sale
- ------------------------
Businesses held for sale showed large fluctuations in both sales and operating
income from 1996 to 1997. The $1,024.8 million or 91% decrease in sales was the
result of several divestitures in late 1996, including the European bakery
business, the packaging and plastic films business, and the remaining eastern
dairy businesses. Adding to this difference was the inclusion in 1996 of six
months of Wise sales, amounting to $126.6 million. Operating income for the
businesses held for sale decreased $22.5 million or 93% in 1997. This decline
was also the result of the sale of businesses in late 1996. Management expects
to complete the sale of the remaining businesses held for sale in 1998.
Foods
- -----
Foods sales decreased $198.1 million or 10% from 1996 due to a $119.6 million
decline in ongoing business sales and a $78.5 million decline in sales of
Unaligned businesses. Sales from ongoing businesses declined as expected due to
a reduction in pasta volume caused by management's decision to exit the
unprofitable private label business and exit from unprofitable markets and by
the elimination of low margin product lines. Sales from businesses held for sale
declined due to softer volumes resulting from reduced trade promotion and
couponing in the cheese and non-dairy creamer product lines.
Foods 1997 operating income improved from a $20.3 million operating loss in 1996
to $198.2 million of operating income. Factors contributing to this $218.5
million improvement include improved results in both ongoing and Unaligned
businesses and gains on business divestitures. Ongoing business improvement was
primarily in the pasta business, where lower raw material costs and elimination
of unprofitable sales volume, coupled with improved promotional and trade
management, reduced operating losses by $40.5 million from a $72.9 million
operating loss in 1996 to a $32.4 million operating loss in 1997. $3.1 million
of the improvement relates to a change in estimate of required trade promotion
reserves. Operating income from Unaligned Foods businesses increased $58.6
million or 119% from 1996 due to higher margins achieved from increases in
selling prices, reduced trade promotion spending and a $15.2 million reduction
in estimates for required trade promotion reserves as a result of improved trade
spending management.
The $122.6 million gain on sale of Unaligned food businesses primarily includes
gains related to the sales of the Foods domestic cheese business and Cracker
Jack business, each completed in December 1997.
Management intends to grow the business by focusing on grain-based meal
solutions through new product innovations. In 1998, Foods' ongoing operations
are expected to be slightly profitable due to the continuing improvements of
pasta conversion costs begun in 1996.
Wise
- ----
Wise sales declined $3.4 million or 1% from 1996 to 1997. This sales decline is
mainly the result of lower volume, which is an ongoing reflection of the
decrease in promotional spending that began in the second half of 1996. Some of
this lost volume was regained in the second half of 1997, when sales rose to
$122.9 million from $119.3 million in the first half.
Operating income for Wise improved to $3.6 million from a loss in 1996. This
improvement reflected reduction in trade spending, along with reduced materials
costs in 1997, offset in part by higher administrative expenses. Management
expects profitability to be stable or increase slightly in 1998 due to improved
manufacturing efficiencies in 1997, better sales mix, and other cost saving
initiatives.
18
<PAGE> 19
1996 vs. 1995
- -------------
Chemical
- --------
Chemical sales increased $34.7 million or 3% from 1995 to 1996. This increase
was due mainly to higher sales volume in resins used in plywood and oriented
strand board. This volume increase was due to strong housing starts in the U.S.
The opening of two formaldehyde plants in late 1995, which added capacity to
meet customer demand, also benefited sales volume. Chemical operating income
decreased $13.0 million or 9% in 1996, primarily due to price competition in
Latin America and Spain, and accounting charges in Brazil and Australia.
Consumer products and services
- ------------------------------
Consumer products and services sales for 1996 increased $7.7 million or 10% from
1995. This increase was the result of the addition of the services business in
1996 and higher sales volume for adhesives.
Consumer products and services operating income for 1996 decreased $1.6 million
or 15% from 1995, mainly due to startup costs for the services business.
Corporate
- ---------
Corporate operating income improved $410.8 million to $35.7 million of income
for 1996, versus a loss of $375.1 million in 1995. The increase is due to the
absence of $238.1 million 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 million 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.
Businesses held for sale
- ------------------------
Businesses held for sale showed a sales decrease of $556.5 million in 1996, a
change of 33% from 1995. This reduction was the result of divestitures of
businesses: the packaging and plastic films business sold in October 1996, the
salty snacks business sold in June 1996, and the eastern dairy businesses sold
during 1995. Operating results improved from a loss of $11.9 million in 1995 to
$24.3 million of income in 1996. This change was due partially to the
divestiture of businesses that had generated losses in 1995 and partially to
cost saving efforts in the remaining businesses.
Foods
- -----
Foods sales increased $110.9 million from 1995 to 1996. The 6% increase was due
to higher volumes in virtually all product lines, namely dry pasta, soups and
bouillon, cheese, non-dairy creamer and milk powder. Additionally, Foods
received improved prices for many product lines, especially private label cheese
and milk powder in the Latin America region. Foods continuing operations
improved from $869.4 million to $884.0 million during this period.
Foods operating income for 1996 increased by $42.3 million or 68%, but still
resulted in a loss of $20.3 million. This improvement was primarily the result
of lower promotional costs in 1996. The remaining increase is attributable to an
improvement in the domestic and international Unaligned businesses. An
international improvement of $9.4 million reflected higher volumes and margins
in the Asia Pacific region and improved operating efficiencies in Latin America.
The domestic Unaligned businesses increase of $7.2 million was caused by
improved sales volumes and prices as well as a favorable sales mix and reduced
trade spending. This improvement was partially offset by lower cheese income due
to the launch of new products in 1996.
Wise
- ----
Wise sales in 1996 decreased $4.4 million or 2%. The slight decline was the
result of an effort to reduce unprofitable volume by converting certain
company-owned routes that were generating losses to independent distributors.
19
<PAGE> 20
Wise operating results in 1996 improved to a loss of $2.8 million from a loss of
$13.1 million in the previous year. This improvement was mainly the result of
cost saving efforts such as the sale of unprofitable company-owned routes to
independent distributors.
<TABLE>
<CAPTION>
SIGNIFICANT OR UNUSUAL ITEMS INCLUDED IN OPERATING INCOME
- ---------------------------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
-------------------------- --------------------------
(Dollars in millions) 1997 1996 1995 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gain (loss) on disposal of businesses
and plant closings $ 62.0 $(213.0) $ 122.6 $55.9 $(245.1)
Asset impairment $ (16.0) (16.0) (8.2)
Business redesign (27.9) (27.9)
Changes in estimate 18.3
Restructuring (expense) reversal 10.0 10.7
-------- ------- ------- ------- ----- -------
$ (16.0) $ 62.0 $(230.9) $ 124.9 $55.9 $(270.5)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
1997
- ----
The Company's and Combined Companies' $16.0 million impairment charge related to
certain international operations. In addition to the $122.6 million net gain on
the sale of Unaligned Foods businesses, Foods reduced accruals and marketing
expense for trade promotions in the combined financial statements by $18.3
million.
1996
- ----
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 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.
1995
- ----
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 1995 sale of an international business. The sale or shutdown of
six dairies was completed during 1995 and the sale or closure of the packaging
and plastic films business, one wallcovering facility and a seventh dairy plant
was completed in 1996. The Combined Companies' 1995 loss on disposal reflects
the activity recorded by the Company, as well as a $32.1 million reserve for two
Foods plants.
The Company and the Combined Companies charged $27.9 million for expenses
related to the reorganization of the Company into a new business structure.
The Combined Companies recorded an $8.2 million charge related to the impairment
of Foods goodwill.
The 1995 restructuring reversal of $10.0 million represents excess reserves for
completed restructuring programs.
NON-OPERATING EXPENSES AND INCOME TAXES
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
-------------------------- ---------------------------
(Dollars in millions) 1997 1996 1995 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest expense $ 93.0 $ 112.8 $ 133.7 $ 93.3 $ 116.4 $ 138.8
- ---------------------------------------------------------------------------------------------------------------------
Affiliated interest income (26.5) (4.0)
Other non-operating expense (6.4) (7.7) 29.7 (9.1) (16.7) 26.9
----------- ---------- ------- --------- -------- --------
$ 60.1 $ 101.1 $ 163.4 $ 84.2 $ 99.7 $ 165.7
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
Consolidated non-operating expense for the year ended December 31, 1997, totaled
$60.1 million, down $41.0 million from the 1996 total of $101.1 million. The
decrease is attributable to a reduction in interest expense and an increase in
affiliated interest income. Interest expense, as a result of lower debt levels,
decreased $19.8 million from the 1996 total and affiliated interest income
increased $22.5 million as a note receivable from the Foods operations was
outstanding for twelve months in 1997 versus only three months in 1996. Combined
non-operating expense decreased by the factors noted above with the exception of
affiliated interest income.
Consolidated non-operating expense for the year ended December 31, 1996, totaled
$101.1 million, down $62.3 million from the 1995 total of $163.4 million. The
decrease is attributable to a reduction of $48.0 million in non-cash charges
associated with interest rate swaps, a $20.9 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. Combined
non-operating expense fluctuated by the factors noted for the consolidated.
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
-------------------------- ---------------------------
(Dollars in millions) 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Income tax expense $ 22.2 $ 50.6 $ 28.8 $124.0 $ 51.4 $ 4.9
- ---------------------------------------------------------------------------------------------------------------------
Effective tax rate 56% 53% * 57% 53% *
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
*Not meaningful
Income Tax Expense
- ------------------
Significantly lower income tax expense was incurred by the Company in 1997 when
compared to 1996. This was primarily the result of lower earnings before taxes.
The high effective tax rate in 1997 is primarily due to foreign tax rate
differentials caused primarily by an impairment charge recorded for which there
was no related tax benefit. The 1996 effective tax rate reflects the write-off
of assets with lower tax basis than book basis as well as foreign tax rate
differentials.
Combined income tax expense increased in 1997 when compared to 1996 primarily as
a result of higher earnings before taxes and a higher effective tax rate. The
effective tax rate in 1997 primarily reflects the write-off of assets with
lower tax basis than book basis. The 1996 rate reflects the write-off of assets
with lower tax basis than book basis as well as foreign tax rate differentials.
Income tax expense in 1996 increased when compared to 1995 for both the Company
and the Combined Companies primarily as a result of both recording pre-tax
income in 1996 as opposed to a pre-tax loss in 1995. The provision recorded in
1995, despite the pre-tax loss, was primarily due to provisions for previously
unrepatriated foreign earnings, the write off of assets with lower tax basis,
and non-deductible merger expense.
CASH FLOWS
Operating
- ---------
1997 vs. 1996
- -------------
Operating cash flows used by the Company and the Combined Companies were $97.0
million and $52.6 million during 1997 compared to cash provided by the Company
and Combined Companies of $92.9 million and $165.6 million during 1996. The
decreases from 1996 are attributable to the absence of cash flows from
businesses that were divested in 1997 and late in 1996, the payment of certain
taxes, and the settlement of various litigation and benefit related liabilities.
Divestitures include the packaging and plastic films business, which was
divested in the fourth quarter of 1996, and the dairy business, which was sold
in the third quarter of 1997. 1997 cash flows also include a $75.0 million
outflow relating to certain taxes and interest reflecting the Company's and the
Combined Companies' reduction of claimed capital losses in the 1989 to 1993 tax
returns. The Company agreed to an approximate $100.0 million payment, the
remainder of which will be paid in 1998, partially offset by a tax refund
21
<PAGE> 22
owed to Borden by the federal government. This amount was fully accrued in a
prior year. Also included in the 1997 use of cash was approximately $40.0
million relating to the settlement of various litigation and approximately $23.0
million of payments for self-insured liabilities, primarily workers compensation
claims.
1996 vs. 1995
Cash provided by the Company's operating activities during 1996 was $92.9
million compared to $114.2 million in 1995. The decrease between 1996 and 1995
is attributable to the Foods operations being included in the consolidated
results for only nine months in 1996 compared to twelve months in 1995. This was
partially offset by the improved operating results from 1995 to 1996.
Combined Companies' operating cash flows increased to $165.6 million in 1996
from $71.2 million in 1995 as a result of the significant turnaround in the
Combined Companies' income from operations.
Investing
- ---------
1997 vs. 1996
The consolidated investing activities generated cash of $430.8 million in 1997
compared to $312.6 million in 1996. The increase is attributable to a decline in
the Company's capital expenditures of $112.8 million, as net
acquisition/divestiture activity yielded comparable results from year to year.
The decline in capital expenditures relates to businesses divested in 1996. The
net acquisition/divestiture activity in 1997 and 1996 totaled $560.5 million and
$555.1 million, respectively.
The 1997 net acquisition/divestiture activity reflects the following: proceeds
from the sale of the Company's dairy business of $430.0 million ($405.2 million
net of expenses), $40.0 million from the sale of a trademark, $13.4 million
from the collection of a receivable on a 1996 divestiture, $186.1 million return
on investment in affiliate as Foods repaid affiliated debt using proceeds from
sales of two of its Unaligned businesses (See Combined Companies below),
partially offset by funds used of $90.9 million (net of approximately $30.0
million of cash acquired) primarily to acquire Melamine Chemicals in the fourth
quarter of 1997.
The 1996 divestiture cash inflow reflects $478.6 million from the divestiture of
the Company's packaging and plastic films business, the European bakery business
and certain other food and non-food operations, and $76.5 million repayment of
affiliate debt from Foods.
The Combined Companies' investing activities generated cash of $360.9 million in
1997 compared to $235.0 million in 1996. Again, the increase is primarily
attributable to a decline in capital expenditures resulting from divested
businesses in 1996, while other investing activity remained constant. The
Combined Companies investing cash inflows for 1997 and 1996 were explained above
within the Company's discussion, with the exception of Foods' two divestitures
(Cracker Jack and the domestic cheese business) made in late 1997, which
generated proceeds of $185.1 million, and the sale of two plants, which
generated $10.0 million in cash.
Subsequent to December 31, 1997, the Company and Combined Companies received
proceeds totaling $310.0 million and $1.0 billion, respectively, for
divestitures of businesses. The Company received approximately $310.0 million of
cash on March 13, 1998, for the sale of its Decorative Products business (see
Note 5.) The Combined Companies received approximately $377.0 million from the
sale of its Signature Flavor product lines (including the Eagle Brand, Cremora,
ReaLemon, Kava and None Such grocery lines) to Eagle Family Foods and $313.0
million from the sale of Foods' worldwide KLIM milk powder business, its
non-dairy coffee creamer business in South Africa and a Puerto Rican ice cream
business to Nestle (see Note 4.)
A portion of the Combined Companies' proceeds was used to repay revolving bank
debt and over the longer term it is expected to fund strategic acquisitions.
Approximately $270.0 million of the Combined Companies' proceeds is expected to
be distributed to an affiliate that is not within the Combined Companies
controlled group and has an ownership interest in the trademarks that were sold
with the divested businesses. In addition, approximately $350.0 million of the
proceeds is expected to be loaned, on a short term basis at rates that
approximate market conditions, to Corning Consumer Products Company ("CCPC"),
which is expected to be purchased by the Company's parent on April 1, 1998. A
portion of the loan will be repaid shortly after the closing using proceeds from
a bank credit facility currently being arranged by CCPC. CCPC will pay the
remaining amount using proceeds from a public debt offering, which is expected
to be completed within 30 days of the closing. (See Note 17.)
22
<PAGE> 23
The Company's and Combined Companies' planned 1998 capital expenditures are
approximately $115.0 million and $160.0 million, respectively. The budgeted 1998
capital expenditures include plans to increase capacity in the Chemical
operations and profit maintaining, manufacturing efficiency, and information
systems projects in all businesses. The capital expenditures will be financed
through operations and the available line of credit.
The Company's and the Combined Companies capital expenditures were consistent
with 1996, taking into consideration businesses that were divested during 1997
and 1996.
1996 vs. 1995
The Company's and the Combined Companies' capital expenditures increased
approximately 20% from 1995 to 1996. The increase reflected management's
commitment to build value in its core businesses and continued progress toward
the redesign of operations that began in 1995.
Financing
- ---------
1997 financing activities used $259.7 million on a consolidated basis and $254.4
million on a combined basis. Cash from investing activities was primarily used
to repay debt and pay preferred dividends. The Company received $50.8 million of
interest on a note receivable from the Company's parent, funded by $50.8 million
in common stock dividends.
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 $141.4 million cash outflow in 1995 resulted from the $994.7 million capital
infusion from affiliates of KKR used to repay debt and decrease minority
interest.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company and the Combined Companies had $1.0 billion
in contractually committed lines of credit (the "Credit Agreement") of which
$619.9 million (net of $145.1 million in letters of credit) was available. The
cash available under the Credit Agreement may be used for strategic acquisitions
and to fund working capital needs and capital expenditures.
In July 1997, the Credit Agreement was restructured into a $950.0 million
five-year revolver (maturing July 13, 2002) and a $50.0 million 364-day
convertible revolver. Pricing under the LIBOR based borrowing option was reduced
from LIBOR plus 125 basis points to LIBOR plus 60 basis points. The commitment
fee on the unused portion of the facility, previously 37.5 points, was reduced
to 20 basis points for the five-year revolver and 10 basis points for the
364-day revolver. In addition, certain covenants were changed to provide the
Company with greater flexibility to complete divestitures and acquisitions.
In accordance with the terms in the amended credit agreement, management expects
that the credit line will be reduced by approximately $100.0 million during the
first half of 1998, as a portion of the proceeds from the divestitures described
earlier will not be re-invested in the Combined Companies, but rather
distributed to an affiliate of the Combined Companies. The Company and the
Combined Companies expect to have enough liquidity to fund working capital
requirements, support capital expenditures, repay debt and pay preferred
dividends during 1998 and in future years due to cash from operations, and
amounts available under the Credit Agreement.
As of December 31, 1997, the Company and the Combined Companies had $154.8
million and $160.0 million, respectively in deferred tax assets that related to
the net operating loss and alternative minimum tax carryforwards. These
carryforwards are expected to reduce future tax liabilities.
23
<PAGE> 24
RISK MANAGEMENT
- ---------------
Foreign Exchange
- ----------------
In 1997, international operations accounted 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, 1997, forward exchange contracts outstanding totaled $33.5
million for the Company and $129.5 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, 1997, $224.3 million notional amount of
interest rate swaps was outstanding. On average during 1997, the Company paid
10.4% and received 5.7% 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 September 1, 2000, 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 financial institutions 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 does not enter into these contracts for speculative purposes. These
contracts generally mature in less than one year. As of December 31, 1997, the
notional value of commodity futures contracts outstanding totaled $0.9 million.
24
<PAGE> 25
IMPACT OF THE YEAR 2000 ISSUE
- -----------------------------
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Corrective action to address the year 2000 issue has begun. The Company is
utilizing both internal and external resources to identify, correct and test the
systems for year 2000 compliance. The Company is in the midst of conducting a
complete assessment of its computer systems, developing a comprehensive
implementation plan to resolve the issue, and preparing cost estimates to
achieve year 2000 compliance. Each of the Company's businesses is, or soon will
be, in the process of implementing comprehensive new financial and business
systems that are year 2000 compliant. Implementation of these new systems is
expected to be completed in 1999. In addition, plans are being developed to
address the risks related to plant systems, data and system infrastructure,
suppliers and customers. While management cannot reasonably estimate the cost of
implementation of all systems necessary to comply with year 2000 dating,
significant investments in information systems have been made since 1996 that
will total, for the Company and the Combined Companies, in excess of $90.0
million by the year 2000. Any remaining costs are not expected to have a
material impact on the financial position or results of operations of the
Company in any year.
The Company intends its year 2000 date conversion project to be completed on a
timely basis so as to not significantly impact business operations. If the
necessary modifications and conversions are not completed timely, the year 2000
issue may have a material impact on the Company. Also, although the Company's
systems do not rely significantly on systems of other companies, the Company
cannot provide assurance that failure of third parties to address the year 2000
issue will not have an adverse impact on the Company.
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 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 results of operations by
business unit, liquidity, legal, environmental and risk management.
25
<PAGE> 26
Item 8. Financial Statements and Supplementary Data
------ -------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
BORDEN, INC.
<TABLE>
<CAPTION>
Year ended December 31,
(In millions, except per share data) 1997 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 1,487.7 $ 2,388.0 $ 2,902.1
Cost of goods sold 1,124.5 1,728.1 2,151.1
---------- ---------- ----------
Gross margin 363.2 659.9 751.0
---------- ---------- ----------
Distribution expense 52.8 111.9 145.4
Marketing expense 87.2 272.0 336.7
General & administrative expense 123.7 141.6 291.9
(Gain) loss on divestiture -- (62.0) 213.0
---------- ---------- ----------
Operating income (loss) 99.5 196.4 (236.0)
---------- ---------- ----------
Interest expense 93.0 112.8 133.7
Affiliated interest income, net (26.5) (4.0) --
Other (income) expense, net (6.4) (7.7) 29.7
---------- ---------- ----------
Income (loss) from continuing operations
before income tax 39.4 95.3 (399.4)
Income tax expense 22.2 50.6 28.8
---------- ---------- ----------
Income (loss) from continuing operations 17.2 44.7 (428.2)
---------- ---------- ----------
Discontinued operations:
Income (loss) from operations, net of tax 30.7 29.7 (5.5)
Income (loss) from disposal, net of tax 173.4 (330.7) 67.6
---------- ---------- ----------
Net income (loss) 221.3 (256.3) (366.1)
Preferred stock dividends (73.7) (76.8) (58.8)
---------- ---------- ----------
Net income (loss) applicable to common stock $ 147.6 $ (333.1) $ (424.9)
========== ========== ==========
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
BORDEN, INC.
Year ended December 31,
(In millions, except per share data) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic and Diluted Per Share Data
- --------------------------------
Income (loss) from continuing operations $ 0.09 $ 0.23 $ (2.22)
Discontinued operations:
Income (loss) from operations 0.15 0.15 (0.03)
Income (loss) from disposal 0.87 (1.66) 0.35
------------ ---------- ----------
Net income (loss) 1.11 (1.28) (1.90)
Preferred stock dividends (0.37) (0.39) (0.31)
------------ ---------- ----------
Net income (loss) applicable to common stock $ 0.74 $ (1.67) $ (2.21)
============ ========== ==========
Dividends per common share $ 0.26 $ 0.08
Dividends per preferred share $ 2.98 $ 3.13 $ 2.39
Average number of common shares outstanding
during the period 199.0 199.0 192.3
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated and Combined Financial Statements
27
<PAGE> 28
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
BORDEN, INC.
(In millions)
December 31,
ASSETS 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 183.6 $ 109.5
Accounts receivable (less allowance for doubtful
accounts of $9.4 and $11.7, respectively) 242.2 224.9
Inventories:
Finished and in-process goods 74.8 74.0
Raw materials and supplies 54.3 55.3
Deferred income taxes 106.1 162.6
Other current assets 34.9 26.6
Net assets of discontinued operations (Note 5) 165.2 321.6
-------- --------
861.1 974.5
INVESTMENTS AND OTHER ASSETS
Investments 109.5 106.8
Deferred income taxes 170.4 204.9
Prepaid pension assets 140.2 4.8
Other assets 34.3 61.5
Assets sold under contractual arrangement (net of allowance
of $609.6 and $866.0) 302.1 701.0
-------- --------
756.5 1,079.0
PROPERTY AND EQUIPMENT
Land 23.5 29.6
Buildings 106.8 131.4
Machinery and equipment 738.4 613.1
-------- --------
868.7 774.1
Less accumulated depreciation (360.8) (386.4)
-------- --------
507.9 387.7
INTANGIBLES
Net of accumulated amortization of $16.9 and $14.2 80.4 48.8
-------- --------
TOTAL ASSETS $2,205.9 $2,490.0
======== ========
- ------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated and Combined Financial Statements
28
<PAGE> 29
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
BORDEN, INC.
(In millions, except share data)
December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt payable within one year $ 6.9 $ 414.0
Accounts and drafts payable 137.3 147.1
Income taxes payable 309.6 272.5
Other current liabilities 332.8 427.1
-------- --------
786.6 1,260.7
-------- --------
OTHER LIABILITIES
Liabilities sold under contractual arrangement 230.1 442.9
Long-term debt 788.3 567.2
Non-pension post-employment benefit obligations 226.3 257.8
Other long-term liabilities 94.9 101.3
-------- --------
1,339.6 1,369.2
-------- --------
Commitments and Contingencies (Note 18)
SHAREHOLDERS' EQUITY
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 384.0 379.9
Receivable from parent (464.1) (443.6)
Accumulated translation adjustment (48.0) (27.2)
Minimum pension liability -- (109.2)
Accumulated deficit (408.6) (556.2)
-------- --------
79.7 (139.9)
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,205.9 $2,490.0
======== ========
- -----------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated and Combined Financial Statements
29
<PAGE> 30
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
BORDEN, INC.
Year ended December 31,
(In millions) 1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS (USED IN) FROM OPERATING ACTIVITIES
Net income (loss) $221.3 $(256.3) $(366.1)
Adjustments to reconcile net income (loss) to net
cash (used in) from operating activities:
(Gain) loss on disposal of discontinued operations (308.2) 263.5 (98.3)
Deferred tax provision 70.8 3.1 72.6
Depreciation and amortization 38.9 81.3 87.7
Net (gain) loss on divestiture of businesses -- (62.0) 213.0
Unrealized (gain) loss on interest rate swap (4.1) (12.1) 35.9
Loss on sale of investment/impairment 16.0 -- 30.2
Restructuring -- (9.6) (52.5)
Net change in assets and liabilities:
Trade receivables (9.4) (25.0) (51.2)
Inventories 1.8 (7.0) 10.4
Trade payables (14.2) 18.0 (31.6)
Income taxes (50.8) 22.4 (94.8)
Other assets 12.0 (1.9) 110.9
Other liabilities (132.4) (59.7) (96.0)
Discontinued operations, working capital, cash
and non cash charges 61.3 138.2 344.0
------ ------ ------
(97.0) 92.9 114.2
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (129.7) (242.5) (202.5)
Proceeds from the divestiture of businesses 458.6 478.6 7.4
Proceeds from the sale of fixed assets 6.7 -- --
Purchase of business, net of cash acquired (90.9) -- (7.0)
Proceeds from sale of RJR investment -- -- 282.1
Return on investment in affiliate 186.1 76.5 --
------ ------ ------
430.8 312.6 80.0
------ ------ ------
CASH FLOWS USED IN FINANCING ACTIVITIES
Net short-term debt payments 2.8 (11.6) (191.5)
Borrowings of long-term debt 235.0 -- 3.1
Repayment of long-term debt (423.8) (274.7) (436.1)
Increase in minority interest -- 9.0 --
Purchase of TMI interest -- (19.2) (471.5)
Equity contribution -- -- 994.7
Issuance of stock options -- -- 3.3
Interest received from parent 50.8 3.8 --
Common stock dividends paid (50.8) (3.8) --
Preferred stock dividends paid (73.7) (73.7) (43.4)
------ ------ ------
(259.7) (370.2) (141.4)
------ ------ ------
- ------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
BORDEN, INC.
Year ended December 31,
(In millions) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase in cash and equivalents $ 74.1 $ 35.3 $ 52.8
Cash and equivalents at beginning
of period 109.5 74.2 21.4
------------ ------------ ------------
Cash and equivalents at end
of period $ 183.6 $ 109.5 $ 74.2
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest $ 84.5 $ 82.3 $ 100.8
Taxes 111.6 25.8 51.7
Non-cash activity:
Reclassification of note from long-term
to short-term 305.3
Non-cash proceeds relating to the
Wise sale 44.3
Non-cash proceeds relating to the
Foods sale 20.0 521.8
Non-cash proceeds from the sale
of options recorded in equity 44.0
Investment in AEPI common stock 80.0
Capital contribution by parent 24.5 31.0
Proceeds from the sale of European bakery 30.1
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated and Combined Financial Statements
31
<PAGE> 32
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
BORDEN, INC.
- ---------------------------------------------------------------------------------------------------------------------------------
(In millions)
- ---------------------------------------------------------------------------------------------------------------------------------
Preferred Common Treasury Paid-in Receivable
Stock Stock Stock Capital from
Parent
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $ - $ 121.9 $ (249.5) $ 120.0 $ -
- ---------------------------------------------------------------------------------------------------------------------------------
Net loss
Cash dividends-preferred stock
Translation adjustments and other
Issuance of series A cumulative
preferred shares 614.4 (614.4)
Cancellation of common shares (121.9) 121.9
Issuance of new common shares 2.0
Cancellation of treasury shares 245.4 (245.4)
Stock issued for preferred series B
converted, exercised options and
benefits and award plans 4.1 2.2
KKR additional capital contribution 928.4
Valuation allowance - securities
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $ 614.4 $ 2.0 $ - $ 312.7 $ -
- ---------------------------------------------------------------------------------------------------------------------------------
Net loss
Cash dividends-preferred stock
Cash dividends-common stock (16.5)
Translation adjustments and other
Note receivable from Wise for stock
issuance (34.2)
Options sold to parent 44.0 (44.0)
Notes receivable from Foods
transaction (345.9)
Interest accrued on notes from parent 8.7 (19.5)
Capital contribution from parent 31.0
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 614.4 $ 2.0 $ - $ 379.9 $ (443.6)
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(In millions)
- ----------------------------------------------------------------------------------------------------------------
Minimum
Accumulated Pension Retained
Translation Liability Earnings Total
Adjustment and Other (Deficit)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $ (140.4) $ (145.4) $ 201.8 $ (91.6)
- ----------------------------------------------------------------------------------------------------------------
Net loss (366.1) (366.1)
Cash dividends-preferred stock (58.8) (58.8)
Translation adjustments and other 10.8 (0.6) 10.2
Issuance of series A cumulative
preferred shares -
Cancellation of common shares -
Issuance of new common shares 2.0
Cancellation of treasury shares -
Stock issued for preferred series B
converted, exercised options and
benefits and award plans 6.3
KKR additional capital contribution 928.4
Valuation allowance - securities 38.1 38.1
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $ (129.6) $ (107.9) $(223.1) $ 468.5
- ----------------------------------------------------------------------------------------------------------------
Net loss (256.3) (256.3)
Cash dividends-preferred stock (76.8) (76.8)
Cash dividends-common stock (16.5)
Translation adjustments and other 102.4 (1.3) 101.1
Note receivable from Wise for stock
issuance (34.2)
Options sold to parent -
Notes receivable from Foods
transaction (345.9)
Interest accrued on notes from parent (10.8)
Capital contribution from parent 31.0
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ (27.2) $ (109.2) $(556.2) $ (139.9)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 33
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
BORDEN, INC.
(In millions)
- ------------------------------------------------------------------------------------------------------------------------------
Preferred Common Paid-in Receivable Accumulated
Stock Stock Capital from Translation
Parent Adjustment
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 614.4 $ 2.0 $ 379.9 $ (443.6) $ (27.2)
- ------------------------------------------------------------------------------------------------------------------------------
Net income
Cash dividends-preferred stock
Cash dividends-common stock (51.4)
Translation adjustments and other (20.8)
Interest accrued on notes from parent 31.0 (0.5)
Capital contribution from parent 24.5
Additional note from Foods
transaction (20.0)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 614.4 $ 2.0 $ 384.0 $ (464.1) $ (48.0)
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(In millions)
- ------------------------------------------------------------------------------------------------------------------------------
Minimum
Pension Accumulated
Liability Deficit Total
and Other
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------
Balance, December 31, 1996 $(109.2) $(556.2) $ (139.9)
- ------------------------------------------------------------------------------------
Net income 221.3 221.3
Cash dividends-preferred stock (73.7) (73.7)
Cash dividends-common stock (51.4)
Translation adjustments and other 109.2 88.4
Interest accrued on notes from parent 30.5
Capital contribution from parent 24.5
Additional note from Foods
transaction (20.0)
- ------------------------------------------------------------------------------------
Balance, December 31, 1997 $ - $(408.6) $ 79.7
- ------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated and Combined Financial Statements
33
<PAGE> 34
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
COMBINED STATEMENTS OF OPERATIONS
BORDEN, INC. AND AFFILIATES
Year ended December 31,
(In millions) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $3,481.6 $4,456.8 $4,741.0
Cost of goods sold 2,302.1 3,001.6 3,257.2
-------- -------- --------
Gross margin 1,179.5 1,455.2 1,483.8
-------- -------- --------
Distribution expense 175.7 231.4 245.4
Marketing expense 557.6 837.0 890.4
General & administrative expense 267.5 246.6 401.5
(Gain) loss on divestiture (122.6) (55.9) 245.1
-------- -------- --------
Operating income (loss) 301.3 196.1 (298.6)
-------- -------- --------
Interest expense 93.3 116.4 138.8
Other (income) expense, net (9.1) (16.7) 26.9
-------- -------- --------
Income (loss) from continuing operations
before income tax 217.1 96.4 (464.3)
Income tax expense 124.0 51.4 4.9
-------- -------- --------
Income (loss) from continuing operations 93.1 45.0 (469.2)
-------- -------- --------
Discontinued operations:
Income from operations, net of tax 30.7 36.9 35.5
Income from disposal, net of tax 154.4 -- 67.6
-------- -------- --------
Net income (loss) 278.2 81.9 (366.1)
Affiliate's share of income (73.4) -- --
Preferred stock dividends (73.7) (76.8) (58.8)
-------- -------- --------
Net income (loss) applicable to common stock $ 131.1 $ 5.1 $ (424.9)
======== ======== ========
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated and Combined Financial Statements
34
<PAGE> 35
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
COMBINED BALANCE SHEETS
BORDEN, INC. AND AFFILIATES
(In millions)
December 31,
ASSETS 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 198.6 $ 144.7
Accounts receivable (less allowance for doubtful
accounts of $16.7 and $19.0, respectively) 425.6 419.6
Inventories:
Finished and in-process goods 192.1 218.2
Raw materials and supplies 101.2 120.2
Deferred income taxes 149.3 185.4
Other current assets 67.1 63.1
Net assets of discontinued operations (Note 5) 165.2 321.6
-------- --------
1,299.1 1,472.8
INVESTMENTS AND OTHER ASSETS
Investments 109.5 106.8
Deferred income taxes 223.6 260.2
Prepaid pension assets 151.2 22.4
Other assets 38.7 61.9
-------- --------
523.0 451.3
PROPERTY AND EQUIPMENT
Land 42.2 51.1
Buildings 255.1 301.2
Machinery and equipment 1,227.9 1,186.8
-------- --------
1,525.2 1,539.1
Less accumulated depreciation (731.8) (808.7)
-------- --------
793.4 730.4
INTANGIBLES
Net of accumulated amortization of $120.6 and $111.4 434.2 430.2
-------- --------
TOTAL ASSETS $3,049.7 $3,084.7
======== ========
- ------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated and Combined Financial Statements
35
<PAGE> 36
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
COMBINED BALANCE SHEETS
BORDEN, INC. AND AFFILIATES
(In millions)
December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
- -----------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt payable within one year $ 28.0 $ 421.8
Accounts and drafts payable 248.6 304.7
Income taxes payable 353.0 293.8
Other current liabilities 490.5 595.8
-------- --------
1,120.1 1,616.1
-------- --------
OTHER LIABILITIES
Long-term debt 794.9 581.8
Non-pension post-employment
benefit obligations 245.5 280.2
Other long-term liabilities 135.2 111.2
-------- --------
1,175.6 973.2
-------- --------
Commitments and Contingencies (Note 18)
SHAREHOLDERS' EQUITY
Preferred stock 614.4 614.4
Common stock 2.0 2.0
Paid in capital 666.5 683.1
Receivable from parent (464.1) (443.6)
Affiliate's interest in subsidiary 203.3 87.9
Accumulated translation adjustment (181.2) (121.2)
Minimum pension liability -- (109.2)
Accumulated deficit (86.9) (218.0)
-------- --------
754.0 495.4
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,049.7 $3,084.7
======== ========
- -----------------------------------------------------------------
</TABLE>
See Notes to Consolidated and Combined Financial Statements
36
<PAGE> 37
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
COMBINED STATEMENTS OF CASH FLOWS
BORDEN, INC. AND AFFILIATES
Year ended December 31
(In millions) 1997 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS (USED IN) FROM OPERATING ACTIVITIES
Net income (loss) $278.2 $ 81.9 $(366.1)
Adjustments to reconcile net income to net
cash (used in) from operating activities:
(Gain) on disposal of discontinued operations (248.2) -- (98.3)
Deferred tax provision (benefit) 30.3 (75.9) 68.7
Depreciation and amortization 96.3 134.0 136.4
Net (gain) loss on divestiture of businesses (122.6) (55.9) 245.1
Unrealized (gain) loss on interest rate swap (4.1) (12.1) 35.9
Loss on sale of investment/impairment 16.0 -- 30.2
Restructuring 1.0 (9.6) (52.5)
Net change in assets and liabilities:
Trade receivables 4.9 (12.9) 4.4
Inventories 24.1 (25.7) 5.4
Trade payables (61.7) 8.4 (7.4)
Income taxes 48.4 110.8 (60.2)
Other assets (35.6) 36.8 117.3
Other liabilities (115.9) (76.4) (26.1)
Discontinued operations, working capital, cash
and non cash charges 36.3 62.2 38.4
------ ------ ------
(52.6) 165.6 71.2
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (170.2) (265.2) (202.5)
Proceeds from the divestiture of businesses 603.6 500.2 7.4
Proceeds from the sale of fixed assets 19.4 -- --
Purchase of business, net of cash acquired (91.9) -- (7.0)
Proceeds from sale of RJR investment -- -- 282.1
------ ------ ------
360.9 235.0 80.0
------ ------ ------
CASH FLOWS (USED IN) FINANCING ACTIVITIES
Net short-term debt payments 15.9 (19.7) (191.5)
Borrowings of long-term debt 235.0 -- 3.1
Repayment of long-term debt (431.6) (281.1) (436.1)
Increase in minority interest -- 15.0 --
Purchase of TMI interest -- (19.2) (471.5)
Equity contribution -- -- 994.7
Issuance of stock options -- -- 3.3
Interest received from parent 50.8 3.8 --
Common stock dividends paid (50.8) (3.8) --
Preferred stock dividends paid (73.7) (73.7) (43.4)
------ ------ ------
(254.4) (378.7) (141.4)
------ ------ ------
- ---------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 38
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
COMBINED STATEMENTS OF CASH FLOWS (continued)
BORDEN, INC. AND AFFILIATES
Year ended December 31,
(In millions) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase in cash and equivalents $ 53.9 $ 21.9 $ 9.8
Cash and equivalents at beginning
of period 144.7 122.8 113.0
------ ------ ------
Cash and equivalents at end
of period $198.6 $144.7 $122.8
====== ====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest $ 80.3 $ 83.1 $100.8
Taxes 132.7 37.2 51.7
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 20.0 264.9
Proceeds from the sale of interest in subsidiary to affiliate 81.0
Non-cash proceeds from the sale
of options recorded in equity 44.0
Investment in AEPI common stock 80.0
Capital contribution by parent 44.5 31.0
Proceeds from the sale of European bakery 30.1
Affiliate's share of income 73.4
- -------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated and Combined Financial Statements
38
<PAGE> 39
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
BORDEN, INC. AND AFFILIATES
(In millions)
- ---------------------------------------------------------------------------------------------------------------------------------
Preferred Common Treasury Paid-in Receivable
Stock Stock Stock Capital from
Parent
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $ - $ 121.9 $ (249.5) $ 120.0 $ -
- ---------------------------------------------------------------------------------------------------------------------------------
Net loss
Cash dividends-preferred
Translation adjustments and other
Issuance of series A cumulative
preferred shares 614.4 (614.4)
Cancellation of common shares (121.9) 121.9
Issuance of new common shares 2.0
Cancellation of treasury shares 245.4 (245.4)
Stock issued for preferred series B
converted, exercised options and
benefits and award plans 4.1 2.2
KKR additional capital contribution 928.4
Valuation allowance - securities
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $ 614.4 $ 2.0 $ - $ 312.7 $ -
- ---------------------------------------------------------------------------------------------------------------------------------
Net income
Cash dividends-preferred stock
Cash dividends-common stock (16.5)
Translation adjustments and other
Note receivable from Wise for stock
issuance 34.2 (34.2)
Options sold to parent 44.0 (44.0)
Notes receivable from Foods
transaction (345.9)
Issuance of Foods common stock 264.9
Interest accrued on notes from parent 12.8 (19.5)
Capital contribution from parent 31.0
Affiliate's interest in subsidiary
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 614.4 $ 2.0 $ - $ 683.1 $(443.6)
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(In millions)
- --------------------------------------------------------------------------------------------------------------------------------
Minimum
Affiliate's Accumulated Pension Retained
Interest in Translation Liability Earnings Total
Subsidiary Adjustment and Other (Deficit)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $ - $ (140.4) $ (145.4) $ 201.8 $ (91.6)
- ------------------------------------------------------------------------------------------------------------------------------
Net loss (366.1) (366.1)
Cash dividends-preferred (58.8) (58.8)
Translation adjustments and other 10.8 (0.6) 10.2
Issuance of series A cumulative
preferred shares -
Cancellation of common shares -
Issuance of new common shares 2.0
Cancellation of treasury shares -
Stock issued for preferred series B
converted, exercised options and
benefits and award plans 6.3
KKR additional capital contribution 928.4
Valuation allowance - securities 38.1 38.1
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $ - $ (129.6) $ (107.9) $ (223.1) $ 468.5
- ------------------------------------------------------------------------------------------------------------------------------
Net income 81.9 81.9
Cash dividends-preferred stock (76.8) (76.8)
Cash dividends-common stock (16.5)
Translation adjustments and other 8.4 (1.3) 7.1
Note receivable from Wise for stock
issuance -
Options sold to parent -
Notes receivable from Foods
transaction (345.9)
Issuance of Foods common stock 264.9
Interest accrued on notes from parent (6.7)
Capital contribution from parent 31.0
Affiliate's interest in subsidiary 87.9 87.9
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 87.9 $ (121.2) $ (109.2) $ (218.0) $ 495.4
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 40
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
BORDEN, INC. AND AFFILIATES
(In millions)
- -----------------------------------------------------------------------------------------------------------------------------------
Preferred Common Paid-in Receivable Affiliate's
Stock Stock Capital from Interest in
Parent Subsidiary
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 614.4 $ 2.0 $ 683.1 $ (443.6) $ 87.9
- -----------------------------------------------------------------------------------------------------------------------------------
Net income
Cash dividends-preferred
Cash dividends-common stock (51.4)
Translation adjustments and other
Interest accrued on notes from parent 31.0 (0.5)
Additional note from Foods
transaction (20.0)
Capital contribution from parent 44.5
Affiliate's interest in subsidiary (40.7) 115.4
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 614.4 $ 2.0 $ 666.5 $ (464.1) $ 203.3
- -----------------------------------------------------------------------------------------------------------------------------------
(In millions)
- -------------------------------------------------------------------------------------------------------------------------
Minimum
Accumulated Pension Retained
Translation Liability Earnings Total
Adjustment and Other (Deficit)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ (121.2) $ (109.2) $ (218.0) $ 495.4
- -------------------------------------------------------------------------------------------------------------------------
Net income 278.2 278.2
Cash dividends-preferred (73.7) (73.7)
Cash dividends-common stock (51.4)
Translation adjustments and other (60.0) 109.2 49.2
Interest accrued on notes from parent 30.5
Additional note from Foods
transaction (20.0)
Capital contribution from parent 44.5
Affiliate's interest in subsidiary (73.4) 1.3
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ (181.2) $ - $ (86.9) $ 754.0
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated and Combined Financial Statements
40
<PAGE> 41
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, ("the Acquisition") of all of
the Company's outstanding common stock by an affiliate of Kohlberg Kravis
Roberts & Co. ("KKR"). 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 sales 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,
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.
2. NATURE OF OPERATIONS
The Company is engaged primarily in manufacturing, processing, purchasing and
distributing a broad range of products worldwide. The Company sold its
Decorative Products business on March 13, 1998, its Dairy business on September
4, 1997, and its Foods business on October 1, 1996. Each of these business units
is included in the Company's discontinued operations for all periods presented,
consistent with the Company's ownership. The Company's principal remaining line
of business is chemicals, including formaldehyde, resins, coatings and other
specialty and industrial chemicals.
The Combined Companies includes the Foods and Wise businesses, which are engaged
primarily in manufacturing, processing and distributing food products.
Domestic products for the chemical, and consumer products and services 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, Latin 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 foreign countries. The majority of the identifiable assets of the
Company and the Combined Companies are located in the United States.
Information about the Company's industry and geographic segments is provided on
pages 6 to 8 and is an integral part of the Consolidated and Combined Financial
Statements.
41
<PAGE> 42
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 intercompany accounts and transactions. The combined financial
statements include the accounts of Borden, Inc., Foods and Wise, after the
elimination of intercompany accounts and transactions. The Company's 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.
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 expenses used
to determine gains and 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. Included in the Company's cash equivalents are time deposits of
$138.7 in 1997 and $43.0 in 1996. The Combined Companies' cash equivalents
included time deposits of $142.3 in 1997 and $56.1 in 1996. The effect of
exchange rate changes on cash flows is not material.
INVENTORIES - Inventories are stated at 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 $0.8 ($1.1 for the Combined Companies), $1.7 and $1.5 for
the years ended December 31, 1997, 1996 and 1995, 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
and combined 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 40 years. Also,
included in intangibles are certain trademarks, patents and other intangible
assets used in the operations of the businesses which amounted to $11.4 and
$13.8 ($29.6 and $33.2 for the Combined Companies) at December 31, 1997 and
1996, 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.
REVENUE RECOGNITION - Revenues are recognized when products are shipped.
42
<PAGE> 43
ADVERTISING AND PROMOTION EXPENSE - Production costs of future media advertising
are deferred until the advertising first 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
rate adjustments are included in net income.
The Company and the Combined Companies incurred realized and unrealized net
foreign exchange losses aggregating $1.0 and $3.4, respectively, in 1997, $1.4
and $2.0 in 1996, and $1.3 and $2.9 in 1995.
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 values 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 - Basic and diluted net income attributable to common stock
is computed by dividing net income by the weighted average number of common
shares outstanding during the period. Options issued by subsidiaries that enable
the holder to obtain stock of the subsidiary were assumed to be exercised if
they were dilutive.
43
<PAGE> 44
The net income available to common shareholders figure used in the basic
earnings per share "EPS" calculation includes income from continuing and
discontinued operations less preferred stock dividends. Diluted income available
to common shareholders also includes a $0.6 and $0.1 reduction in 1997 and 1996
relating to options exercised for subsidiary stock. Common shares outstanding of
199.0 million in 1997 and 1996 used in both the basic and diluted EPS
calculation is identical, as the dilutive securities are for subsidiary stock,
not the common stock of the Company. There were no dilutive securities in 1995.
At December 31, 1997, there were 6.5 million options to purchase subsidiary
stock outstanding, of which 1.3 million were considered dilutive to EPS. At
December 31, 1996, there were 7.1 million options to purchase subsidiary common
stock outstanding, of which 2.3 million were considered dilutive to EPS. There
were no subsidiary stock options outstanding at December 31, 1995.
CONCENTRATIONS OF CREDIT RISK - Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally of temporary
cash investments and accounts receivable. The Company 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 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 STATEMENTS - In March 1998, the American Institute of
Certified Public Accountants issued Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." The
Company is currently considering the impact of this pronouncement.
RECLASSIFICATION - Certain prior year amounts have been reclassified to conform
with the 1997 presentation.
4. BUSINESS REDESIGN
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 and the Combined Companies' long-term
strategic plan. In addition, management intends to build its core business
through strategic acquisitions and investments in the existing business.
1996
- ----
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 to the extent of the Company's net investment in Wise. The
Company's net investment in Wise was $6.5 as of December 31, 1997, and $10.2 as
of December 31, 1996. 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.
44
<PAGE> 45
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, the Combined Companies approved the closure of five domestic
pasta plants in order to reduce its product line complexity and manufacturing
capacity. During 1997 three of these plants ceased operations, and the other two
facilities were sold for aggregate proceeds of approximately $10.0. During 1996
the Combined Companies took a $26.0 impairment charge related to the closure of
these plants.
1997
- ----
On November 14, 1997, the Company and the Combined Companies completed the
acquisition of Melamine Chemicals, Inc. in a cash tender offer for $20.50 per
share, totaling approximately $120.0 including cash acquired of $30.0. Melamine
Chemicals produces and markets melamine crystal, which is used to make resins
for various adhesive, laminate, and coatings applications, and is a
complementary material to the existing range of products. The acquisition was
accounted for using the purchase method and accordingly its results of
operations have been included from the date of acquisition. Sales and operating
income for Melamine Chemicals were $54.2 and $4.3 for the full year ended
December 31, 1997, excluding a $17.4 one-time gain on the sale of technology.
In December 1997 the Company decided to exit certain international operations.
Based on preliminary market value indications, the Company recorded an
impairment charge of $16.0. The charge is included in general and administrative
expense.
On December 31, 1997, the Combined Companies sold two of its Unaligned Foods
businesses, Cracker Jack and the domestic cheese business. Proceeds from both
sales totaled $185.1, and the Combined Companies recorded a pre tax gain on
sales of $121.1 (an after tax gain of $98.6). In addition, in 1997 the Combined
Companies accrued for an anticipated after tax loss of $10.9 (a pre tax gain of
$1.5) on the sale of its milk powder operations in Asia, South Africa and Latin
America, which were sold early in 1998, for proceeds of $313.0.
Subsequent to December 31, 1997, the Combined Companies sold its Signature
Flavors and milk powder businesses. The Signature Flavors product lines
(including the Eagle Brand, Cremora, ReaLemon, Kava and None Such grocery lines)
were sold to Eagle Family Foods, Inc., a newly formed entity managed by GE
Investments and Warburg, Pincus & Co. LLC. The transaction is valued at
approximately $377.0. The transaction closed early in 1998 and resulted in a pre
tax gain of $294.9 (an after tax gain of $235.1), which will be reported in the
first quarter 1998 statement of operations.
5. DISCONTINUED OPERATIONS
The following operations are separate segments of the Company's business as
defined by generally accepted accounting principles and have been reclassified
to discontinued operations in the 1997, 1996 and 1995 statements of operations
and cash flows. In addition, net assets relating to these businesses of $165.2
in 1997 and $321.6 in 1996 have been reclassified to discontinued operations in
the 1997 and 1996 balance sheets. Net assets of discontinued operations include
$77.6 and $88.3 of current net assets in 1997 and 1996.
Decorative Products
- -------------------
On November 6, 1997, the Company announced a definitive agreement for the sale
of its Decorative Products business to Blackstone Capital Partners III Merchant
Banking Fund, L.P., hence its operating results are classified as discontinued
operations in the financial statements. The transaction value is approximately
$320.0, consisting of about $310.0 in cash plus a retained equity interest of 11
percent. On March 13, 1998, the Company completed the sale. The after tax gain
on the transaction is expected to be in excess of $20.0.
45
<PAGE> 46
In accordance with Section 210.11 of Regulation S-X, the Company has provided
below the adjustments necessary to reflect the impact of this sale on the
Company's and Combined Companies financial statements. The unaudited adjustments
are those that are necessary to represent the results of operations and
financial position of the Company and the Combined Companies, had the sale of
Decorative Products taken place at January 1, 1997, and December 31, 1997, for
the statements of operations and balance sheets, respectively.
<TABLE>
<CAPTION>
Increase
(Dollars in millions, except per share data) (Decrease)
- -------------------------------------------------------------------------------------------
PRO FORMA ADJUSTMENTS TO BALANCE SHEETS (UNAUDITED)
<S> <C>
ASSETS
Cash and equivalents $ 308.2 (1)
Net assets of discontinued operations (165.2) (2)
Net deferred tax assets (102.3) (3)
Investments 10.4 (4)
LIABILITIES
Other current liabilities 26.6 (5)
Retained earnings 24.5 (6)
PRO FORMA ADJUSTMENTS TO STATEMENT OF OPERATIONS (UNAUDITED)
Interest expense $ (23.7) (7)
Income tax expense 9.5 (7)
Consolidated basic and diluted income from continuing operations per share $ 0.07
- -------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Net proceeds on the transaction.
(2) Net book value of the Decorative Products business at December 31, 1997.
(3) Write-off of net deferred taxes, primarily reflecting the use of a net
operating loss carryforward to reduce tax liabilities associated with the
sale.
(4) Carrying cost of investment retained upon completion of the transaction.
(5) Closing and other transaction costs.
(6) Estimated after tax gain on the transaction.
(7) Interest savings (and related tax effect), assuming a weighted average
borrowing rate of 7.7%.
- --------------------------------------------------------------------------------
Dairy
- -----
On September 4, 1997, the Company sold its Dairy business to Mid-America
Dairymen, Inc. for $430.0 Net proceeds of $405.2 in cash were used to pay down
debt and to invest in existing businesses. The after tax gain on the transaction
of $154.4 ($248.2 pre tax) is recorded in discontinued operations in the
Company's statement of operations.
Foods
- -----
On October 1, 1996, the Company sold Foods to Foods Holdings and its
subsidiaries for $550.0 less assets transferred plus liabilities assumed. The
purchase price of the business was determined by an independent valuation,
subject to adjustment based on a valuation associated with Foods management's
intent to realign its then current portfolio of businesses. A loss on disposal
of $330.7 ($263.5 pre tax) was recorded as a loss on discontinued operations in
the consolidated financial statements in the third quarter of 1996. Upon
finalization of this valuation in September 1997, additional proceeds of $20.0
consisting of receivables from the Company's parent previously held by Foods
Holdings were transferred to the Company and recorded as additional income from
disposals. Tax expense of $25.0 was provided to adjust for the additional
proceeds and the estimated impact on the tax provision related to the sales of
the Unaligned Foods businesses.
46
<PAGE> 47
On December 31, 1997, the Company sold a trademark right that it had previously
licensed to Foods Holdings for five years to a third party ad infinitum. This
was done in connection with the Combined Companies sale of its domestic cheese
business discussed in Note 4. As a result, the Company recorded a pre tax gain
of $40.0 ($24.0 after tax), in discontinued operations.
Because management of the Company exercises significant control over Foods, the
assets and liabilities, at the date of sale, are classified as "sold under
contractual arrangements" 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, 1997, was $65.5. 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, the Combined Companies continue to report Foods at historical values
and no loss was incurred in the Combined Companies' financial statements.
Other
- -----
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.
The results indicated below for Decorative Products, Dairy and Foods have been
reported separately as discontinued operations in the consolidated statements of
operations. Decorative Products and Dairy are included in the 1997, 1996 and
1995 results while Foods is included in the 1996 and 1995 results only.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CONSOLIDATED 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 910.0 $2,652.5 $3,009.2
Income (loss) before income taxes 51.9 40.9 (4.5)
Income tax expense 21.2 11.2 1.0
Income (loss) from discontinued operation 30.7 29.7 (5.5)
- --------------------------------------------------------------------------------
</TABLE>
The results indicated below for Dairy and Decorative Products have been reported
separately as discontinued operations in the combined statements of operations.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
COMBINED 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 910.0 $1,275.9 $1,173.0
Income before income taxes 51.9 60.4 60.5
Income tax expense 21.2 23.5 25.0
Income from discontinued operation 30.7 36.9 35.5
- --------------------------------------------------------------------------------
</TABLE>
6. CHANGE IN ACCOUNTING ESTIMATE
In 1997 Foods reduced accruals and marketing expense for trade promotions in the
Combined financial statements by $18.3. These accruals had been provided in
earlier years for anticipated customer redemptions in the ordinary course of
business. Due to a concerted effort to better manage trade spending, these
redemptions have been significantly lower than management had previously
estimated. This change in estimate has no effect on the consolidated statements
of operations.
47
<PAGE> 48
7. INVESTMENTS
As discussed in Note 4, on October 11, 1996, the Company 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 $ 81.7 and $81.5 at December 31, 1997
and 1996, respectively. This represents 2.4 million shares of AEPI common stock
or a 34% ownership.
At December 31, 1997 and 1996, the unamortized excess of the Company's
investments over its equity in the underlying net assets of AEPI was $44.9 and
$46.3, respectively. 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 contributed 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.
48
<PAGE> 49
8. DEBT, LEASE OBLIGATIONS AND RELATED COMMITMENTS
Debt outstanding at December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------- ----------------------------
Due within Due within
(In millions) Long-Term One Year Long-Term One Year
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Borrowings under credit line (at
an average rate of 6.5%) $ 235.0
9 7/8% Notes due 1997 $ 78.1
Medium Term Notes, Series A
(at an average rate of
8.0%) 26.5
Zero-Coupon Convertible Bonds 305.3
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) 53.9 $ 0.3 54.2 0.3
Other (at an average rate of
10% and 8.5%, respectively) 5.1 18.7 0.1
- -----------------------------------------------------------------------------------------------------------------------------
Total current maturities
of long-term debt 0.3 410.3
Short-term debt (primarily foreign bank loans
at an average rate of 8.3% and 6.7%,
respectively) 6.6 3.7
- -----------------------------------------------------------------------------------------------------------------------------
Total debt - Consolidated $ 788.3 $ 6.9 $ 567.2 $ 414.0
- -----------------------------------------------------------------------------------------------------------------------------
Other Foods debt (at an average rate of 8.2%) 6.6 0.1 14.6 0.1
Foods and Wise short-term debt (primarily foreign bank
loans at an average rate of 6.1%
and 9.5%, respectively) 21.0 7.7
- -----------------------------------------------------------------------------------------------------------------------------
Total debt - Combined $ 794.9 $ 28.0 $ 581.8 $ 421.8
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE> 50
In July 1997, the Company's Credit Agreement was restructured into a $950.0
five-year revolver (maturing July 13, 2002) and a $50.0 364-day convertible
revolver. Pricing under the LIBOR based borrowing option was reduced from LIBOR
plus 125 basis points to LIBOR plus 60 basis points. The commitment fee on the
unused portion of the facility, previously 37.5 basis points, was reduced to 20
basis points for the five-year revolver and 10 basis points for the 364-day
revolver. Pricing varies based on a grid tied to the Combined Companies'
leverage at the end of each fiscal quarter. The current borrowing rate is LIBOR
plus 50 basis points. In addition, certain covenants were changed to provide the
Company with greater flexibility to complete divestitures and acquisitions.
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,
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 use proceeds from asset sales and certain debt and equity
issuances. In addition, the Credit Agreement requires that the Combined
Companies 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 EBITDA.
At December 31, 1997, there was $235.0 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.
Aggregate maturities of total debt and minimum annual rentals under operating
leases at December 31, 1997, 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
- --------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
1998 $ 6.9 $ 20.5 $ 28.0 $ 30.0
1999 0.7 16.0 3.3 22.2
2000 10.8 14.6 11.4 19.2
2001 0.5 12.0 1.0 15.3
2002 239.9 11.3 240.4 13.6
2003 and thereafter 536.4 12.5 538.8 15.1
------ -------
$795.2 $ 822.9
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company had $619.9 (net of $145.1 in letters of credit) available for
borrowing under its Credit Agreement at December 31, 1997, and incurred $2.4 of
commitment fees during 1997. Consolidated rental expense amounted to $16.8,
$37.1 and $33.1 in 1997, 1996 and 1995. Combined rental expense amounted to
$27.0, $44.7 and $38.5 in 1997, 1996 and 1995.
9. INCOME TAXES
Comparative analysis of the Company's provision (benefit) for income taxes from
continuing operations follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED
-----------------------------------------------------------------
1997 1996 1995 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal $ (58.2) $ (6.3) $(66.7) $ 62.6 $ 26.7 $ 67.9
State and Local (7.6) 1.5 2.3 11.3 4.7
Foreign 17.2 52.3 20.6 (3.1) (28.3) 4.7
------- ------- ------ ------ ------- -------
$ (48.6) $ 47.5 $(43.8) $ 70.8 $ 3.1 $ 72.6
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE> 51
The income tax expense from discontinued operations' operating results was
$21.2, $11.2 and $1.0 in 1997, 1996 and 1995, respectively. The income tax
expense from discontinued operations' disposals was $134.8, $68.2 and $30.8 in
1997, 1996 and 1995, respectively.
The Combined Companies' provision (benefit) for income taxes from continuing
operations is as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED
--------------------------------------------------------------------------
1996 1995 1997 1996 1995 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal $ 57.7 $ 66.5 $ (96.8) $ 25.1 $ (50.3) $ 62.5
State and Local 8.5 0.5 2.3 4.3 4.7
Foreign 27.5 60.3 30.7 0.9 (30.3) 6.2
------ ------- ------- ------ ------- ------
$ 93.7 $127.3 $ (63.8) $ 30.3 $ (75.9) $ 68.7
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The income tax expense from discontinued operations' operating results was
$21.2, $23.5 and $25.0 in 1997, 1996 and 1995, respectively. The income tax
expense from discontinued operations' disposals was $93.8 in 1997 and $30.8 in
1995.
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) 1997 1996 1995 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income taxes computed at
Federal statutory tax rate $ 13.8 $ 33.3 $ (139.8) $ 76.0 $ 33.8 $ (162.5)
State tax provision, net of
Federal benefits 2.4 4.8 0.7 8.3 3.5 0.6
Foreign tax differentials 6.6 4.5 9.5 6.9 3.8 11.4
Foreign source income subject
to U.S. taxation 3.7 3.8
Write-offs of assets with lower
tax bases and differences
in tax rates 0.8 14.3 63.1 30.7 10.2 68.5
Losses and merger and other
expenses not deductible for tax 0.5 0.6 7.1 0.9 0.9 7.3
Adjustment of prior estimates (1.9) (6.9) (3.5) 1.2 (0.8) (12.2)
Unrepatriated foreign earnings 88.0 88.0
-------- -------- -------- --------- -------- --------
Provision for income taxes $ 22.2 $ 50.6 $ 28.8 $124.0 $ 51.4 $ 4.9
- --------------------------------------------------------------------------------------------------------------------
</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) 1997 1996 1995 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic $ 10.6 $ 38.3 $(460.0) $149.5 $ 15.9 $(543.7)
Foreign 28.8 57.0 60.6 67.6 80.5 79.4
------- ------- ------- ------ ------- -------
$ 39.4 $ 95.3 $(399.4) $217.1 $ 96.4 $(464.3)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE> 52
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, 1997 and 1996, follow:
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
--------------------------------------------------------------
(Dollars in millions) 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net current asset $ 103.4 $ 159.6 $ 146.6 $ 182.4
Net non-current asset 163.3 201.4 188.6 260.2
--------- --------- --------- ---------
Net asset $ 266.7 $ 361.0 $ 335.2 $ 442.6
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1997 and 1996, follow:
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Non-pension post-employment benefit
obligations $ 88.6 $ 97.2 $ 97.0 $ 113.7
Divestiture reserve 33.8 46.2 39.7 46.2
Accrued expenses and other expenses 123.5 180.5 160.8 201.4
Foreign property, plant and equipment 6.3 7.0 6.5 5.1
Minimum pension liability 9.1 9.1
Loss and credit carryforwards 154.8 140.7 160.0 147.3
Impairment 41.7 41.7
Other prepaids 48.2 54.4 49.1 141.4
-------- -------- -------- ---------
Gross deferred tax assets 455.2 576.8 513.1 705.9
Valuation allowance (4.2) (25.8) (9.4) (32.4)
--------- --------- --------- ---------
451.0 551.0 503.7 673.5
LIABILITIES
Property, plant, equipment, and intangibles 39.1 72.6 8.9 64.3
Foreign property, plant, equipment/other 18.2 21.9 33.7 18.2
Certain foreign intangibles 8.2 9.1 8.5 6.7
Pension liability 50.1 48.6
Deferred gain on sale of partnership interest 17.6 17.6 17.6 17.6
Pension and health plan contributions 51.1 64.1 51.2 64.1
Other 4.7 60.0
-------- -------- -------- --------
184.3 190.0 168.5 230.9
- ---------------------------------------------------------------------------------------------------------------------
Net asset $ 266.7 $ 361.0 $ 335.2 $ 442.6
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's net change of $21.6 in valuation allowance in 1997 is primarily
related to loss carryforwards of foreign operations which expired. The Company's
net change of $46.5 in valuation allowances 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 Combined Companies' net change in valuation allowance of $23.0 in 1997
related to loss carryforwards of foreign operations which expired. The Combined
Companies' net change of $39.9 in 1996 primarily related to loss carryforwards
that were fully reserved for foreign operations of the packaging business that
was sold in 1996.
The Company's net deferred tax asset at December 31, 1997, was $266.7. Of this
amount, $276.5 represents net domestic deferred tax assets related to future tax
benefits. Included in the domestic deferred tax asset is $46.1 of net operating
loss carryforward for U.S. federal tax purposes, which begins expiring in 2011.
Realization of the domestic net operating loss depends upon generation of
approximately $131.7 of future income before the expiration date in 2011.
Realization of the entire net domestic deferred asset depends upon generation of
approximately $790.0 of future domestic taxable income.
52
<PAGE> 53
The Combined Companies' net deferred tax asset at December 31, 1997, was $335.2.
Of this amount, $360.7 represents net domestic deferred tax assets related to
future tax benefits. Included in the domestic deferred tax asset is $46.1 of net
operating loss carryforward for U.S. federal tax purposes, which begins expiring
in 2011. Realization of the domestic net operating loss depends upon generation
of approximately $131.7 of future income before the expiration date in 2011.
Realization of the entire net deferred asset depends upon generation of
approximately $1,030.6 of future taxable income.
Management believes that is more likely than not that sufficient additional
income will be earned to fully realize this benefit. This belief is based on the
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 $143.7 at December 31,
1997. The determination of the tax effect relating to such earnings is not
practicable.
10. 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 Company match for
the savings plans ranges from 50% to 75%. The Company has the option to
contribute up to an additional 25%, based on financial performance.
Following are the components of the net pension expense recognized by the
Company:
<TABLE>
<CAPTION>
DOMESTIC FOREIGN
-----------------------------------------------------------------------
1997 1996 1995 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service-cost benefits
earned during the period $ 7.0 $ 7.9 $ 7.5 $ 4.3 $ 4.0 $ 4.6
Interest cost on the projected
benefit obligation 27.7 27.6 31.6 12.2 11.9 12.6
Actual return on plan assets (100.7) (26.9) (87.1) (31.6) (13.8) (15.4)
Net amortization and deferral 76.9 (1.2) 56.2 19.1 3.3 4.8
-------- -------- ------- ------- ------ ------
$ 10.9 $ 7.4 $ 8.2 $ 4.0 $ 5.4 $ 6.6
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
In addition to the net pension expense, the Company recognized a net curtailment
and settlement loss of $22.1 in 1997 and $2.2 gain in 1996 reflecting the sale
of the dairy, packaging and plastic films, and European bakery businesses.
In 1997 pension expense of $3.2 and $0.5 for the domestic and foreign plans,
respectively, related to Foods and Wise. Foods and Wise reimbursed the Company
for these expenses. There were no material differences in the domestic and
foreign net pension expense between the Company and the Combined Companies in
1996 and 1995.
53
<PAGE> 54
The weighted average rates used to determine net pension expense for both the
Company and the Combined Companies were as follows:
<TABLE>
<CAPTION>
DOMESTIC FOREIGN
-------------------------------------------------------------------
1997 1996 1995 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 7.5% 6.8% 8.8% 8.3% 8.4% 8.9%
Rate of increase in future
compensation levels 4.5% 4.3% 5.3% 4.7% 4.9% 5.3%
Expected long-term rate of
return on plan assets 8.5% 7.8% 9.8% 9.3% 9.6% 10.0%
- ------------------------------------------------------------------------------------------------------------------
</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 $1.2, $7.0 and $4.1 in 1997, 1996 and 1995, respectively,
for payments to pension trusts on behalf of employees not covered by the
Company's plans. The combined financial statements included charges of $2.7,
$7.3 and $4.1 in 1997, 1996 and 1995, respectively.
The Company's and the Combined Companies' funding of their 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>
1997 1996
--------------------------------------------------- ----------------------
Plan Assets Accumulated Benefits Accumulated Benefits
Exceed Accumulated Exceed Plan Exceed Plan
DOMESTIC PLANS Benefits Assets Assets
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Plan assets at fair value $ 385.2 $ 393.6
Actuarial present value of:
Vested benefit obligations (333.9) $ (6.6) (391.1)
Accumulated benefit obligations (342.5) (7.2) (408.6)
Projected benefit obligations (345.0) (7.2) (408.8)
Plan assets greater (less) than
projected benefit obligation 40.2 (7.2) (15.2)
Unrecognized prior service cost 4.3 0.1 3.1
Unrecognized loss (gain) 91.2 (0.2) 182.1
Unrecognized net transition (asset) obligation (3.1) 0.1 (6.6)
Minimum liability adjustment (178.3)
- ---------------------------------------------------------------------------------------------------------------------------
Net pension asset (liability) $ 132.6 $ (7.2) $ (14.9)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
54
<PAGE> 55
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>
1997 1997
CONSOLIDATED COMBINED
---------------------------- -----------------------------
Plan Assets Accumulated Plan Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
FOREIGN PLANS Benefits Plan Assets Benefits Plan Assets
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Plan assets at fair value $ 129.7 $ 21.1 $ 159.6 $ 21.5
Actuarial present value of:
Vested benefit obligations (102.7) (23.6) (124.7) (25.7)
Accumulated benefit obligations (102.7) (24.7) (125.7) (26.9)
Projected benefit obligations (118.9) (26.1) (142.9) (28.8)
Plan assets greater (less) than
projected benefit obligation 10.8 (5.0) 16.7 (7.3)
Unrecognized prior service
(benefit) cost (0.2) 0.8 (0.2) 0.8
Unrecognized loss 15.2 1.3 19.7 0.4
Unrecognized net transition
obligation 0.1 0.2 0.1
- ---------------------------------------------------------------------------------------------------------
Net pension asset (liability) $ 25.8 $ (2.8) $ 36.4 $ (6.0)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1996 1996
CONSOLIDATED COMBINED
------------------------------------ --------------------------------------
Plan Assets Accumulated Plan Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
FOREIGN PLANS Benefits Plan Assets Benefits Plan Assets
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Plan assets at fair value $ 117.4 $ 11.1 $ 146.9 $ 13.5
Actuarial present value of:
Vested benefit obligations (99.4) (14.6) (118.7) (18.2)
Accumulated benefit obligations (99.0) (14.7) (119.9) (18.7)
Projected benefit obligations (112.0) (15.0) (133.0) (20.2)
Plan assets greater (less) than
projected benefit obligation 5.4 (3.9) 13.9 (6.7)
Unrecognized prior service
cost 0.3 0.3 0.3
Unrecognized loss 14.9 3.9 24.3 4.7
Unrecognized net transition
(asset) obligation (0.1) 0.1 (0.1) 0.2
Minimum liability adjustment (4.6) (4.6)
- -------------------------------------------------------------------------------------------------------------------------
Net pension asset (liability) $ 20.5 $ (4.2) $ 38.1 $ (6.1)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
55
<PAGE> 56
The weighted average discount rates and rates of increase in future compensation
levels used in determining the projected benefit obligation for consolidated and
combined domestic plans were 7.3% and 4.4%, respectively, as of December 31,
1997, and 7.5% and 4.5%, respectively, as of December 31, 1996. The foreign
plans' weighted average discount rates and rates of increase in future
compensation levels were 7.7% and 4.1%, respectively as of December 31, 1997,
and 8.3% and 4.7% respectively, as of December 31, 1996. These rates were the
same for both consolidated and combined reporting.
Plan assets consist primarily of equity securities and corporate obligations.
Charges to operations for matching contributions under the Company's retirement
savings plans in 1997, 1996 and 1995 amounted to $7.3, $7.6 and $16.1,
respectively. Charges for matching contributions under the Combined Companies
retirement savings plans in 1997, 1996 and 1995 amounted to $10.3, $10.5 and
$16.1, respectively.
11. NON-PENSION POST-EMPLOYMENT 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.
Benefits are funded on a pay-as-you-go basis.
The components of net postretirement benefit expense for 1997, 1996 and 1995 are
as follows:
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
--------------------------------------------------------------------------
(Dollars in millions) 1997 1996 1995 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 0.1 $ 0.2 $ 1.1 $ 0.2 $ 0.2 $ 1.1
Interest cost 11.1 11.3 13.3 12.5 11.8 13.3
Net amortization/deferral (13.2) (13.7) (16.7) (13.5) (13.8) (16.7)
- -------------------------------------------------------------------------------------------------------------------
Net postretirement (benefit) $ (2.0) $ (2.2) $ (2.3) $ (0.8) $ (1.8) $ (2.3)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
In addition, termination benefits of $2.4 and $11.7 were incurred in 1997 by the
Company and the Combined Companies, respectively.
The status of the Company's and Combined Companies' unfunded postretirement
benefit obligation at December 31, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
--------------------------------------------------------------------------
(Dollars in millions) 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees $(133.8) $(157.1) $(149.4) $(175.1)
Fully eligible active plan participants (0.1) (1.3) (0.2) (1.7)
Other active plan participants (0.8) (2.2) (1.0) (3.2)
- -------------------------------------------------------------------------------------------------------------------
(134.7) (160.6) (150.6) (180.0)
Unrecognized prior service benefit (42.1) (61.7) (42.1) (61.7)
Unrecognized (gain) (37.9) (46.8) (37.9) (46.5)
- -------------------------------------------------------------------------------------------------------------------
Accrued postretirement (liability) $(214.7) $(269.1) $(230.6) $(288.2)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The discount rate used in determining the accumulated postretirement benefit
obligation at December 31, 1997 and 1996, was 7.3% and 7.5%, respectively.
56
<PAGE> 57
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation at December 31, 1997, was 8.8% for 1998,
gradually declining to 5.3% by the year 2004. The comparable assumptions for the
prior year were 9.5% and 5.5%. 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, 1997, by
$10.4 and the sum of service and interest costs in 1997 by $0.8.
In addition to the postretirement benefit the Company and the Combined Companies
recognized a $15.2 curtailment and settlement gain in 1997, primarily relating
to the sale of the Dairy business.
12. 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,
1997. 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. At this time, the Company has no plans to
redeem these shares.
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.
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, 1997 and 1996,
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 1995 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. Upon finalization of the Foods
purchase price, $20.0 of the Company's parent's notes receivable were
contributed to Foods (the Combined Companies,) and were in turn paid to the
Company as additional proceeds. The finalization of the purchase price was based
on a September 1997 valuation associated with Foods management's intent to
realign its then current portfolio of businesses. At December 31, 1997, the
principal amounts of the notes are $34.2 and $365.9, with accrued interest
amounting to $20.0. 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. The Combined Companies reflected the $20.0 as a
capital contribution from an affiliate of the Combined Companies' parent.
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,
57
<PAGE> 58
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 Borden
Decorative Products options were cancelled prior to the March 13, 1998, sale of
the business. In settlement of this early cancellation, the Company transferred
$28.4 of notes receivable from the Company's parent to BWHLLC.
In 1996 the Combined Companies, in conjunction with the Foods transaction,
recorded an $87.9 credit to affiliate's interest in a subsidiary. The credit
primarily represents an affiliate's minority interest in a 70% owned
consolidated subsidiary of Foods. The affiliate's interest in subsidiary account
increased in 1997 due to a $42.0 adjustment to reflect the final purchase price
allocation, which occurred simultaneously with the finalization of the purchase
price as previously discussed in Note 5. In addition, the Combined Companies'
affiliate's interest in subsidiary account was adjusted by a $73.4 net gain on
the sale of trademarks of Unaligned Foods businesses. The gains relating to the
sale of the trademarks may be distributed to an affiliate that is not part of
the controlled group in accordance with the allocation of gains per the
partnership agreement.
The Company declared common stock dividends of $51.4 and $16.5 during 1997 and
1996. The dividends were recorded as a charge to paid-in capital to reflect a
return of capital to the Company's parent.
In addition, $24.5 and $31.0 was recorded as a credit to paid-in capital
representing tax benefits contributed to the Company by its parent in 1997 and
1996, respectively. 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 Company was not required to recognize a minimum pension liability adjustment
in 1997 as the fair market value of the pension plan assets exceed its
accumulated benefit obligation.
13. STOCK OPTION PLANS AND OTHER STOCK-BASED COMPENSATION
Unit Appreciation Rights
- ------------------------
Effective January 1, 1996, key employees of Foods and Borden, Inc. were offered
units and unit appreciation rights in their respective holding companies. During
1997, as part of the 1997 Unit Appreciation Rights Plan, additional employees of
Borden, Inc. were offered unit appreciation rights ("UAR's") in BWHLLC. They
vest over 5 years, and any compensation expense incurred in conjunction with the
UAR's will be charged to the Company or the Combined Companies. During 1997 and
1996, there was no compensation expense attributable to the UAR's. There were
23,692,720 UAR's outstanding in the aggregate at December 31, 1997, and
1,037,240 UAR's available for future grants.
Stock Options
- -------------
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 Dairy, Wise, Elmer's, Decorative Products and Chemical business
units was sold to key management personnel. Fixed stock options were granted to
purchase additional shares at exercise prices of $5 and $10. The options were
issued at or above fair value, vest over five years and expire ten years from
the date of the grant. There are 6,912,405 options currently outstanding among
the companies and 803,595 options available for future grants.
The Company has adopted the disclosure-only provisions of SFAS 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 consistent with the provisions of SFAS No. 123, the Company's net
income (loss) and basic and diluted net income (loss) per share would have been
the amounts presented below:
58
<PAGE> 59
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) applicable to common stock- as reported 147.6 (333.1)
Net income (loss) - applicable to common stock-pro forma 156.2 (332.0)
Basic and diluted net income (loss) per share - as reported 0.74 (1.67)
Basic and diluted net income (loss) per share - pro forma 0.78 (1.67)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Pro forma net income applicable to common stock for the Combined Companies is
$139.7 in 1997 and $4.0 in 1996.
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 5.3% and
expected lives ranging from five to ten years.
Information regarding the management stock option plans is as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------- -------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year 7,082,034 $ 5.18
Options exercised (1,047,284) 5.00
Options granted 1,242,655 5.15 7,177,034 $ 5.18
Options forfeited (365,000) 5.00 (95,000) 5.00
------------ ---------
Options outstanding, end of year 6,912,405 5.18 7,082,034 5.18
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Most of the options exercised were in conjunction with the September 4, 1997,
sale of the dairy business.
The following table summarizes information about fixed-price stock options at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------- ------------------------------
Fair Value Number Weighted Average Weighted Average Number Weighted Average
Exercise Price at Grant Outstanding Remaining Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 5.00 $ 1.16 6,612,405 4 years $ 5.00 1,081,550 $ 5.00
$10.00 $0.01 300,000 4 years $10.00 52,400 $10.00
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14. 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 at December 31, 1997 and
1996. These swaps have maturities ranging from 2000 to 2002. The net impact of
interest rate swaps was an increase for the Company's and the Combined
Companies' interest expense of $10.5 in 1997, $10.7 in 1996 and $11.2 in 1995.
<PAGE> 60
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. A 1% increase in market interest rates
would result in a $2.2 increase in the fair value of the interest rate swap
agreements. A 1% decline in the interest rates would result in a $2.2 decrease
in the fair value of the interest rate swap agreements.
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Receive fixed swaps
Average rate received N/A 8.0% 8.0%
Average rate paid N/A 5.7% 6.6%
Pay fixed swaps
Average rate paid 10.4% 10.4% 10.2%
Average rate received 5.7% 5.5% 6.1%
- ------------------------------------------------------------------------------
</TABLE>
An interest rate swap, having a notional amount of $200.0, no longer met the
criteria for hedge accounting and was marked to market during the first quarter
of 1995. The unrealized gains on this instrument of $4.1 and $12.1 in 1997 and
1996 and the 1995 unrealized loss of $35.9 were included in the consolidated and
combined statements of operations and other long-term liabilities. The remaining
swap is not marked to market, as it meets the requirements of hedge accounting.
The average fair value of the interest rate swaps was $(33.7) in 1997 and
$(40.4) in 1996. 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 that 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, 1997 and 1996, the Company had $33.5 and $93.7 of notional
value, respectively, of forward foreign currency exchange contracts outstanding.
The Combined Companies had $129.5 and $247.0 of notional value of forward
foreign exchange contracts outstanding at December 31, 1997 and 1996,
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.
60
<PAGE> 61
Commodity Futures
- -----------------
The Combined Companies are exposed to risk from fluctuating prices for
commodities used primarily to produce salty snacks. Some risk is hedged through
commodity futures executed over the counter with various brokers. The Combined
Companies utilize commodity futures to effectively fix the prices over the life
of the contract. Cost of products sold reflects the commodity cost including the
effects of the commodity futures. As of December 31, 1997 and 1996, $0.9 and
$4.6 of commodity futures were outstanding, generally maturing in less than one
year. The maturity of the contracts highly correlates to the actual purchases of
the commodity. Under such contracts the Combined Companies pays the counterparty
at a fixed rate, and receives a floating rate from the counterparty; 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, 1997 and 1996, was unfavorable $0.1 and $0.7 based on
dealer quotes. This fair value will be reflected in the cost of the commodity as
it is actually purchased. The Combined Companies defer the impact of changes in
the market value of those contracts until the hedge transaction is completed.
15. 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, 1997 and 1996. 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>
1997 1996
- -------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
NONDERIVATIVES Amount Value Amount Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Assets
Investment securities $ 81.7 $ 74.5 $ 81.5 $132.7
Liabilities
Debt 795.2 808.7 981.2 940.3
Notional Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
DERIVATIVES RELATING TO:
Foreign currency contracts - gain $ 20.8 $ 0.5 $ 46.4 $ 0.8
Foreign currency contracts - loss 12.7 (0.1) 47.3 (0.6)
Interest rate swap - loss 224.3 (33.3) 224.3 (38.2)
- -------------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE> 62
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>
1997 1996
- -------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
NONDERIVATIVES Amount Value Amount Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Assets
Investment securities $ 81.7 $ 74.5 $ 81.5 $132.7
Liabilities
Debt 822.9 836.5 1,003.6 962.7
Notional Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
DERIVATIVES RELATING TO:
Foreign currency contracts - gain $ 62.3 $ 2.6 $ 151.7 $ 3.3
Foreign currency contracts - loss 67.2 (3.2) 95.3 (1.0)
Interest rate swap - loss 224.3 (33.3) 224.3 (38.2)
Commodity futures - loss 0.9 (0.1) 4.6 (0.7)
- -------------------------------------------------------------------------------------------------------
</TABLE>
16. SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
-------------------------------------------------------------------------
(Dollars in millions) 1997 1996 1995 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Depreciation $35.8 $79.3 $81.1 $ 81.9 $116.5 $119.1
Amortization 3.1 2.0 6.6 14.4 17.5 17.3
Advertising 4.4 10.3 12.7 48.9 67.3 61.5
Promotions 20.7 59.2 74.4 318.3 422.5 478.6
Research and development 24.9 26.5 33.1 44.4 49.2 40.0
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Other current liabilities include the following amounts:
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
--------------------------------------------------------------
(Dollars in millions) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
General insurance accruals $ 52.4 $ 54.2 $ 71.1 $ 74.7
Reserves for sale of businesses 83.6 113.9 98.8 94.5
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
17. RELATED PARTY TRANSACTIONS
Subsequent Event
- ----------------
On March 2, 1998, an affiliate of Borden, Inc.'s parent announced the signing of
a definitive agreement under which the affiliate will acquire a controlling
interest in Corning Consumer Products Company ("CCPC") from Corning Incorporated
in a recapitalization transaction valued at approximately $603.0 on April 1,
1998. In connection with this transaction, the Company or the Combined Companies
intends to loan approximately $350.0 to CCPC on a short-term basis at rates
which approximate current market conditions. A portion of the loan will be
repaid shortly after the closing using proceeds from a bank credit facility
currently being arranged by CCPC. CCPC will repay the remaining amount using
proceeds from a public debt offering, which is expected to be completed within
30 days of the closing.
Other 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 Wise, Foods and the other business units of the
Combined Companies have been eliminated in the financial statements.
62
<PAGE> 63
The Company and the Combined Companies' financial statements include an
additional note receivable of $20.0, representing an increase in the amount of
proceeds associated with the sale of Foods to Foods Holdings (see Note 12).
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, 1997, was
$6.5 and $65.5, respectively. 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 decreased as a result of the sale of certain Unaligned Foods
businesses to third parties.
The net investment in Wise included a $7.0 and $10.1 term loan receivable with
the Company at December 31, 1997 and 1996, respectively. The Foods investment
included a $47.6 and $167.0 term loan receivable with the Company at December
31, 1997 and 1996. A 1997 interest rate of 10.25% and 11%, payable quarterly,
was charged to Foods and Wise, respectively (12% in 1996.) The Wise and Foods
notes are due November 30, 1999. Affiliated interest income of $25.5 for Foods
and $1.0 for Wise, net of amounts paid for overnight investments, was accrued
during 1997. The Company recorded affiliated interest income of $3.4 for Foods
and $0.6 for Wise during 1996. Foods also had a net loan outstanding from other
international affiliates of the Company of $27.9 and $22.7 at December 31, 1997
and 1996.
The Loan Agreement with Foods and Wise provides a revolving loan feature. During
1996 the Foods revolving loan agreement provided for borrowing up to $250.0 at a
variable interest rate equal to prime. Effective April 24, 1997, the revolving
loan facility was reduced to $100.0. Effective December 30, 1997, the revolving
loan facility was reduced to $50.0 with a maturity date of December 31, 1998.
The Wise revolving loan facility provides for borrowings up to $5.0 maturing in
December 1998 at a variable interest rate equal to the cost of funds for 30 day
LIBOR borrowings plus 0.50%.
Foods and Wise invest cash overnight at an interest rate set by the Company,
which generally approximates money market rates. Foods had $15.0 invested at
December 31, 1997. Wise had $2.3 and $1.8 invested at December 31, 1997 and
1996, respectively.
KKR renders management, consulting and financial services to the Company and its
businesses for an annual fee of $10.0, payable quarterly in arrears.
During 1997 and 1996 the Company purchased $108.9 and $109.9 of raw materials
from Borden Chemicals and Plastics Limited Partnership, of which the Company is
the general partner.
18. 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.
Accruals for environmental matters are recorded when it is probable that a
liability has been incurred and the amount of the liability can be reasonably
estimated. 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. The Company and the Combined
Companies have accrued $23.3 and $23.4, respectively, at December 31, 1997, for
probable environmental remediation and restoration liabilities. These
liabilities in 1996 totaled $32.6 on a consolidated basis and $33.0 on a
combined basis. This is management's best estimate of these liabilities. Based
on currently available information and analysis, the Company believes that it is
reasonably possible that costs associated with such liabilities may exceed
current reserves by amounts that may prove insignificant, or by amounts, in the
aggregate, of up to approximately $20.0.
63
<PAGE> 64
LEGAL MATTERS - The Company has recorded $35.8 in liabilities on a combined
basis and $21.0 on a consolidated basis in 1997 for legal costs in amounts that
it believes are probable and reasonably estimable. These liabilities in 1996
totaled $84.2 on a combined basis and $69.1 on a consolidated basis. Actual
costs are not expected to exceed these amounts. During the third quarter of
1997, the Company settled a lawsuit with Quaker Oats Company ("Quaker') in
connection with the 1994 sale to Quaker of the Company's Brazilian pasta
business. The settlement amount was fully accrued in a prior year. In addition,
the Company may be held responsible for certain environmental liabilities
incurred at Borden Chemicals and Plastics Limited Partnership facilities, which
were previously owned by the Company. The Company has resolved 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 has agreed to the payment of certain taxes and interest of
approximately $100 resulting from the reduction of capital losses on such tax
returns. During 1997 $75.0 was paid; the remainder will be settled in 1998. The
settlement was fully accrued by the Company in a prior year. 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 material adverse effect on the Company's financial position
or operating results.
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.
64
<PAGE> 65
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents Quarterly Financial Data for the Company:
<TABLE>
<CAPTION>
1997 QUARTERS FIRST SECOND THIRD FOURTH (1)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 361.8 $ 387.0 $ 371.5 $ 367.4
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Profit 74.2 82.8 78.2 75.2
- ----------------------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations (1.8) 9.6 11.6 (2.2)
- ----------------------------------------------------------------------------------------------------------------------------------
Discontinued operations:
Income from operations 7.1 12.5 6.9 4.2
Gain on disposal 154.4 19.0
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 5.3 22.1 172.9 21.0
- ----------------------------------------------------------------------------------------------------------------------------------
Preferred stock dividends 18.4 18.4 18.4 18.5
- ----------------------------------------------------------------------------------------------------------------------------------
Net (loss) income applicable to common stock (13.1) 3.7 154.5 2.5
- ----------------------------------------------------------------------------------------------------------------------------------
Basic and diluted, per share of common stock:
(Loss) income from continuing operations (0.01) 0.05 0.06 (0.01)
Discontinued operations:
Income from operations 0.04 0.06 0.03 0.02
Gain on disposal 0.78 0.09
Net (loss) income (0.07) 0.02 0.78 0.01
Dividends 0.06 0.06 0.06 0.08
Dividends per preferred share 0.75 0.75 0.75 0.75
Average number of common shares outstanding 199.0 199.0 199.0 199.0
- ----------------------------------------------------------------------------------------------------------------------------------
1996 QUARTERS FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales $ 639.6 $ 674.3 $ 594.9 $ 479.2
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit 139.5 161.5 134.8 112.2
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 43.7 (9.1) (0.1) 10.2
- ----------------------------------------------------------------------------------------------------------------------------------
Discontinued operations:
Income from operations 0.6 3.6 7.7 17.8
(Loss) on disposal (330.7)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 44.3 (5.5) (323.1) 28.0
- ----------------------------------------------------------------------------------------------------------------------------------
Preferred stock dividends 18.4 18.4 18.4 21.6
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock 25.9 (23.9) (341.5) 6.4
- ----------------------------------------------------------------------------------------------------------------------------------
Basic and diluted, per share of common stock:
Income (loss) from continuing operations 0.22 (0.05) 0.05
Discontinued operations:
Income from operations 0.02 0.04 0.09
(Loss) on disposal (1.66)
Net income (loss) 0.13 (0.12) (1.72) 0.03
Dividends per preferred share 0.75 0.75 0.75 0.88
Average number of common shares outstanding 199.0 199.0 199.0 199.0
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) - As discussed in Notes 4 and 5, the Company's fourth quarter results
reflect a $40.0 pre tax gain on the sale of a trademark, $20.0 of income from
disposals relating to the finalization of the Foods valuation, $25.0 of
additional expense for the estimated impact on the tax provision relating to
the sales of certain Foods businesses and the finalization of the Foods
valuation, and a $16.0 impairment charge on certain international operations.
65
<PAGE> 66
The following represents Quarterly Financial Data for the Combined Companies:
<TABLE>
<CAPTION>
1997 QUARTERS FIRST SECOND THIRD FOURTH(1)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 836.8 $ 884.8 $ 835.6 $ 924.4
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Profit 226.0 248.0 235.4 294.4
- ----------------------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations (1.2) 7.8 10.4 76.1
- ----------------------------------------------------------------------------------------------------------------------------------
Discontinued operations:
Income from operations 7.1 12.5 6.9 4.2
Gain on disposal 154.4
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 5.9 20.3 171.7 80.3
Affiliate's share of income 73.4
- ----------------------------------------------------------------------------------------------------------------------------------
Preferred stock dividends 18.4 18.4 18.4 18.5
- ----------------------------------------------------------------------------------------------------------------------------------
Net (loss) income applicable to common stock $ (12.5) $ 1.9 $ 153.3 $ (11.6)
- ----------------------------------------------------------------------------------------------------------------------------------
1996 QUARTERS FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales $ 1,101.6 $ 1,125.5 $ 1,116.6 $ 1,113.1
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit 288.4 302.3 299.8 333.3
- ----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 36.4 1.2 1.7 5.7
- ----------------------------------------------------------------------------------------------------------------------------------
Discontinued operations:
Income from operations 7.9 10.1 6.8 12.1
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 44.3 11.3 8.5 17.8
- ----------------------------------------------------------------------------------------------------------------------------------
Preferred stock dividends 18.4 18.4 18.4 21.6
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 25.9 $ (7.1) $ (9.9) $ (3.8)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) - As discussed in Notes 4 and 5, the Combined Companies' fourth quarter
results reflect a $122.6 pre tax gain on the sale of certain Foods businesses,
$25.0 of additional expense for the estimated impact on the tax provision
relating to the sales of certain Foods businesses, and a $16.0 impairment charge
on certain international operations.
66
<PAGE> 67
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, 1997 and 1996, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. 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 consolidated financial statements present fairly, in all
material respects, the financial position of Borden, Inc. and subsidiaries at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Columbus, Ohio
March 13, 1998
67
<PAGE> 68
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, 1997 and 1996,
and the related combined statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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,
1997 and 1996, and the combined results of their operations and their combined
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Columbus, Ohio
March 13, 1998
68
<PAGE> 69
PART III
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosures
---------------------
None
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 13, 1998, 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 1997 Since
- -------------- ------------------------------------ -------- ----------
<S> <C> <C> <C>
C.R. Kidder Chairman of the Board, Director,
Chief Executive Officer and President 53 1995
H.R. Kravis Director 53 1995
A. Navab Director 32 1995
C.S. Robbins Director 39 1995
G.R. Roberts Director 54 1995
S.M. Stuart Director 38 1995
W.H. Carter Executive Vice President and
Chief Financial Officer 44 1995
R.L. de Ney Executive Vice President-Corporate
Strategy and Development 48 1995
J.M. Saggese Executive Vice President; Chairman and
Chief Executive Officer-Borden Chemical 66 1990
N.A. Reardon Senior Vice President-Human Resources
and Corporate Affairs 45 1997
R.P. Starkman Senior Vice President and Treasurer 43 1995
W.F. Stoll, Jr. Senior Vice President and General Counsel 49 1996
</TABLE>
69
<PAGE> 70
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 1995 and served as Chairman of the Board and Chief Executive
Officer of both companies from April 1992 through September 30, 1995, 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 Morgan Stanley, Dean Witter &
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 member of KKR & Co., LLC since 1996,
was a General Partner of Kohlberg Kravis Roberts & Co. from its establishment
through 1995 and has been a General Partner of KKR Associates, L.P. since its
establishment. He is also a Director of Accuride Corporation, Bruno's, Inc., KSL
Recreation Corporation, Randall's Food Markets, Inc., Gillette Company, IDEX
Corporation, Merit Behavioral Care Corporation, Newsquest Capital, PLC,
Owens-Illinois, Inc., Owens-Illinois Group, Inc., Primedia, Inc., Safeway Inc.,
Sotheby's, Union Texas Petroleum Holdings, Inc., RELTEC Corporation 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., KSL Recreation Corporation, RELTEC Corporation and
World Color Press, Inc. He is a member of the Audit Committee of the Borden
Board.
Clifton S. Robbins has been a member of KKR & Co., LLC since 1996, was a General
Partner of Kohlberg Kravis Roberts & Co. and has been a General Partner of KKR
Associates, L.P. since January 1995. He began as an Executive with Kohlberg
Kravis Roberts & Co. in 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 member of KKR & Co., LLC since 1996, was a General
Partner of Kohlberg Kravis Roberts & Co. from its establishment through 1995,
and has been a General Partner of 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, Primedia, Inc., KSL Recreation
Corporation, Merit Behavioral Care Corporation, Newsquest Capital, PLC.,
Owens-Illinois, Inc., Owens-Illinois Group, Inc., Safeway Inc., Union Texas
Petroleum Holdings, Inc., RELTEC Corporation and World Color Press, Inc. Messrs.
Kravis and Roberts are first cousins.
Scott M. Stuart has been a member of KKR & Co., LLC since 1996, was a General
Partner of Kohlberg Kravis Roberts & Co. and has been a General Partner of KKR
Associates, L.P. since January 1995. He began as an Executive with Kohlberg
Kravis Roberts & Co. in 1986. He is also a Director of AEP Industries Inc., KSL
Recreation Corporation, Newsquest Capital, PLC and World Color Press, Inc. He is
Chairman of the Audit Committee and 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.
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.
70
<PAGE> 71
Joseph M. Saggese is an Executive Vice President of the Company and Chairman and
Chief Executive Officer of Borden Chemical, 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.
Nancy A. Reardon was elected Senior Vice President, Human Resources and
Corporate Affairs effective March 3, 1997. Previously she 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 at that time, he was a Vice
President of Westinghouse Electric Corporation since 1993, and served as its
Deputy General Counsel from 1988 to 1996.
71
<PAGE> 72
<TABLE>
Item 11. Executive Compensation
- -------- ----------------------
The following table provides certain summary information concerning compensation
of the Company's Chief Executive Officer, the four other most highly compensated
Executive Officers as of December 31, 1997, and one former Executive Officer
(the "Named Executive Officers") for the periods indicated.
<CAPTION>
====================================================================================================================================
SUMMARY COMPENSATION TABLE
====================================================================================================================================
ANNUAL COMPENSATION LONG TERM COMPENSATION
================================================================================
AWARDS PAYOUTS
=======================================
OTHER RESTRICTED SECURITIES LONG TERM (3)ALL
NAME AND ANNUAL STOCK UNDERLYING INCENTIVE OTHER
PRINCIPAL COMPENSATION AWARD(S) OPTIONS/LSARS PLAN (LTIP) COMPENSA-
POSITION YEAR SALARY ($) BONUS ($) ($) ($) (#) PAYOUTS ($) TION ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <S>
C.R. Kidder 1997 1,000,000 742,500 (1)121,900 NONE (4) NONE 87,255
Chairman, President & 1996 950,000 912,000 (2)160,655 NONE (4) NONE 199,576
Chief Executive Officer 1995 873,750 360,000 14,721 NONE NONE NONE 59,487
- ------------------------------------------------------------------------------------------------------------------------------------
W.H. Carter 1997 395,667 180,000 0 NONE (4) NONE 28,589
Executive Vice President & 1996 370,000 250,137 (5)5,753 NONE (4) NONE 16,319
Chief Financial Officer 1995 262,500 96,250 0 NONE NONE NONE 14,962
- ------------------------------------------------------------------------------------------------------------------------------------
R.L. de Ney 1997 386,250 192,700 0 NONE (4) NONE 27,436
Executive Vice President, 1996 372,500 237,597 0 NONE (4) NONE 42,204
Corporate Strategy & 1995 339,792 NONE 5,253 NONE NONE NONE 28,122
Development
- ------------------------------------------------------------------------------------------------------------------------------------
J.M. Saggese 1997 476,667 0 0 NONE (4) NONE 18,958
Executive Vice President, 1996 450,000 25,000 (6)59,006 NONE (4) NONE 29,640
Chairman & Chief Executive 1995 390,833 340,393 0 NONE NONE NONE 60,757
Officer, Borden Chemical,
Chairman, Borden
Decorative Products
- ------------------------------------------------------------------------------------------------------------------------------------
W.F. Stoll, Jr 1997 310,500 142,000 (5)1,200 NONE (4) NONE 45,623
Senior Vice President and 1996 150,000 (7)168,863 (5)82,624 NONE (4) NONE 9,422
General Counsel
==================================================================================================================================
D.A. Smith 1997 426,667 268,909 (5)192,000 NONE (4) NONE (9)142,542
Former Executive Vice 1996 500,000 (8)500,000 (5)256,205 NONE (4) NONE 123,506
President, Chairman &
Chief Executive Officer,
Borden Foods Corporation
==================================================================================================================================
(1) Includes $60,000 pursuant to the Executive Perquisite Benefit Plan and $61,900 not paid to Mr. Kidder but allocable to his
personal use of company aircraft.
(2) Includes $60,000 pursuant to the Executive Perquisite Benefit Plan, $36,800 not paid to Mr. Kidder but allocable to his
personal use of Company aircraft, and $59,355 in tax gross-ups.
</TABLE>
72
<PAGE> 73
<TABLE>
<CAPTION>
(3) All other compensation consists of the following:
EXECUTIVE
FAMILY
SURVIVOR MATCHING CAPITAL
PROTECTION CONTRIBUTIONS ACCUMULATION RELOCATION
YEAR PLAN(a) (RSP AND ESP)(b) ACCOUNT(c) EXPENSE
---- ---------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
C.R. Kidder 1997 0 87,255 0 0
1996 0 45,850 0 153,726
1995 17,475 30,581 4,200 7,231
W.H. Carter 1997 0 28,589 0 0
1996 0 16.319 0 0
1995 5,250 6,562 3,150 0
R.L. de Ney 1997 0 27,436 0 0
1996 0 13,037 0 29,167
1995 6,824 11,943 4,200 5,155
J.M. Saggese 1997 0 18,958 0 0
1996 0 29,640 0 0
1995 31,776 24,781 4,200 0
W.F. Stoll, Jr. 1997 0 11,873 0 33,750
1996 0 750 0 8,672
- -------------------------------------------------------------------------------------------
D.A. Smith 1997 0 17,094 0 0
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) RSP and ESP refer to the Company's Retirement Savings Plan and the
executive supplemental benefit plans.
(c) The Capital Accumulation 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) Tax gross-up payments
(6) Includes $40,000 pursuant to the Executive Perquisite Benefit Plan, $17,000
as compensation for discontinued perquisites, and $1,006 in tax gross-ups
(7) Includes $82,500 paid pursuant to terms of employment.
(8) Includes $200,000 paid pursuant to terms of employment
(9) Includes $125,448 paid pursuant to termination arrangement.
73
<PAGE> 74
The Aggregated Option/SAR Exercises and Fiscal Year End Option/SAR Value table
has been eliminated since there were no option/SAR's exercised during 1997 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 has no long-term incentive plan.
The Option/SAR Grants In Last Fiscal Year table has been omitted since there
were no grants of options to acquire Borden, Inc. stock or grants of SAR's by
the Registrant during 1997 to the Named Executive Officers.
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
1997, the interest rate was 5.43%. Benefits vest after completion of five years
of employment for employees hired on or after July 1, 1990.
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, provides 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 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.
74
<PAGE> 75
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 1997: W. H. Carter - $103,734, R. L. de Ney -
$79,252, C. R. Kidder - $140,830, J. M. Saggese - $280,596, D.A. Smith - $21,529
(resigned 11/2/97,deferred to 65), and W.F. Stoll - $47,563.
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
Pursuant to a separation agreement with Douglas A. Smith, former Chairman and
CEO of Borden Foods Corporation and Executive Vice President of the Company, Mr.
Smith will receive two years base salary, an incentive payment based upon the
performance of Borden Foods Corporation but not to exceed $309,000, outplacement
services, a relocation payment, and the continuation of executive and other
employee benefits and perquisites.
The Company has a special retirement arrangement with William F. Stoll, Senior
VP and General Counsel. Under this arrangement the Company will calculate the
benefit Mr. Stoll would have received from his former employer, using
predetermined assumptions, and deduct from this amount the retirement benefits
accrued under the Borden Retirement Programs. Any shortfall in benefits will be
paid by Borden, Inc. as a non-qualified benefit. Special provisions also apply
in the event of death or disability.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Robbins and Stuart are members of the Company's Compensation Committee.
Both are general partners of KKR Associates, L.P. See "Certain Relationships and
Related Transactions." Mr. Kidder, Chairman and Chief Executive Officer of the
Company, is also a member of the Compensation Committee.
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 13, 1998, 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 1997
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.
75
<PAGE> 76
<TABLE>
<CAPTION>
Name of Beneficial Ownership
Beneficial Owner of Equity Securities
---------------- --------------------
Shares/Units Percent
------------ -------
<S> <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 *
Joseph M. Saggese (3) 240,000 *
Douglas A. Smith (4) 120,000 *
William F. Stoll, Jr. (2) 60,240 *
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. beneficially
owned by the executive including 160,000 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: 705,627 units of BW Holdings, LLC; 120,000
units of Borden Foods Holdings, LLC; and 240,000 shares of Borden Chemical
Holdings, Inc. including 160,000 shares subject to currently exercisable
options. No director or executive officer owns directly any stock of the
Registrant or options to acquire such stock.
Pursuant to Rule 13d-3, stock options that are presently exercisable or
exercisable within 60 days after March 13, 1998, 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 13, 1998, and (ii)
the number of Stock Options exercisable within 60 days of March 13, 1998, 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.
76
<PAGE> 77
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
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, a director of the Company, 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.
77
<PAGE> 78
2. Exhibits
--------
Management contracts, compensatory plans and arrangements are
listed herein at Exhibits (10)(x) through (10) (xxiii).
(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, 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.
(iii) 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.
(iv) 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.
78
<PAGE> 79
(10)(i) Recapitalization Agreement, dated as of October
14, 1997, among BORDEN, INC., a New Jersey
corporation, BORDEN DECORATIVE PRODUCTS
HOLDINGS, INC., a Delaware corporation and an
indirect wholly owned subsidiary of Borden, and
BDPI HOLDINGS CORPORATION, a Delaware
corporation.
(ii) 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.
(iii) Credit Agreement dated as of December 15, 1994
amended and restated as of July 14, 1997,
incorporated herein by reference to Exhibit
10(ii) to the June 30, 1997, Form 10-Q.
(iv) 364-Day Credit Agreement dated as of July 14,
1997, incorporated herein by reference to
Exhibit 10(iii) to the June 30, 1997, Form 10-Q.
(v) Stock Purchase and Merger Agreement dated as of
May 22, 1997, among Mid-America Dairymen, Inc.,
BDH Two, Inc. and Borden, Inc. incorporated
herein by reference to Exhibit 10(i) to the June
30, 1997, Form 10-Q.
(vi) 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.
(vii) 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.
(viii) 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.
(ix) 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.
(x) Purchase Agreement, dated as of June 20, 1996,
between Borden, Inc. and AEP Industries Inc.,
incorporated herein by reference to Exhibit 4 to
Schedule 13D, dated July 1, 1996, File No.
005-37385.
(xi) 1996 Unit Incentive Plan for Key Employees of
Borden, Inc. incorporated herein by reference to
Exhibit 10 (vii) to the 1996 Form 10-K.
79
<PAGE> 80
(xii) First Amendment to 1996 Unit Incentive Plan for
Key Employees of Borden, Inc. and Associated
Persons.
(xiii) Descriptions of 1996 Management Incentive Plans
for (a) Borden, Inc.; (b) Borden Services
Company; (c) Borden Foods; and (d) Borden
Chemical. Incorporated herein by reference to
Exhibit 10 (viii) to the 1996 Form 10-K.
(xiv) Descriptions of 1997 Management Incentive Plans
for (a) BCMP; (b) Borden Foods; and (c) Borden
Chemical.
(xv) 1994 Management Incentive Plan incorporated by
reference to Exhibit 10(iv) to the 1993 Form
10-K Annual Report.
(xvi) Amendment to 1994 Management Incentive Plan,
incorporated by reference to Exhibit 10(xii) to
the Company's 1995 Form 10-K Annual Report.
(xvii) 1994 Stock Option Plan incorporated by reference
to Exhibit 10(v) to the 1993 Form 10-K Annual
Report.
(xviii) 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.
(xix) 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.
(xx) 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.
(xxi) Advisory Directors Plan, incorporated herein by
reference from Exhibit 10(viii) to the 1989 Form
10-K Annual Report.
(xxii) Advisory Directors Plan Trust Agreement,
incorporated herein by reference from Exhibit
10(ix) to the 1988 Form 10-K Annual Report.
Management Agreements
---------------------
(xxiii) (a) Agreement with Mr. A. S. D'Amato, Chairman
and Chief Executive Officer, incorporated
herein by reference from Exhibit 10(i) to
the June 30, 1993, Form 10-Q.
(b) Amendment to Agreement with 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 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.
80
<PAGE> 81
(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 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 1994 Form
10-K Annual Report.
(g) Letter agreement with R.D. Kautto dated
January 19, 1994 incorporated herein by
reference to Exhibit 10(m) to the 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) Employment Agreement with W. F. Stoll, Jr.,
dated June 6, 1996, incorporated by
reference to Exhibit 10(vi) to the June 30,
1996, Form 10-Q.
(j) Summary of Terms of Employment for D.A.
Smith, incorporated by reference to Exhibit
10(xx)(i) to the 1996 Form 10-K Annual
Report.
(k) Agreement with D.A. Smith dated November 6,
1997.
(l) Termination Agreement with A.L. Miller
dated May 1, 1995, incorporated herein by
reference to Exhibit 10 to the June 30, 1995
Form 10-Q.
(m) 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.
(xxiv) Executive Perquisite Benefits Plan dated January
1, 1996, incorporated by reference to Exhibit
10(xxiv) to the 1995 Form 10-K Annual Report.
(xxv) Consulting Agreement dated August 21, 1995,
incorporated herein by reference to Exhibit 10
to the September 30, 1995, Form 10-Q.
(21) Subsidiaries of Registrant.
(23) (i) Accountants' Consent.
(27) Financial Data Schedule
81
<PAGE> 82
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.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Company during the fourth quarter of
1997.
82
<PAGE> 83
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, 1998
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)
Director
- -----------------------------
(Scott M. Stuart)
Director
- -----------------------------
(Alexander Navab)
83
<PAGE> 84
BORDEN FOODS HOLDINGS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS FOR EACH
OF THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1997
<PAGE> 85
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
And Shareholder of Borden Foods Holdings Corporation
We have audited the accompanying consolidated balance sheets of Borden Foods
Holdings Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholder's equity and cash
flows for each of the three years in the period ended December 31, 1997. 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 consolidated financial statements present fairly, in all
material respects, the financial position of Borden Foods Holdings Corporation
and subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Columbus, Ohio
March 13, 1998
<PAGE> 86
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
BORDEN FOODS HOLDINGS CORPORATION
($ in thousands) Year ended December 31,
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 1,751,683 $ 1,949,841 $ 1,838,889
Cost of goods sold 1,026,214 1,195,672 1,112,211
---------------- ------------------ ------------------
Gross margin 725,469 754,169 726,678
---------------- ------------------ ------------------
Distribution expense 96,760 106,612 97,065
Marketing expense 430,938 546,360 568,894
General & administrative expense 116,208 93,157 93,868
Gain on divestitures (68,067) - -
Business realignment 3,794 27,817 -
---------------- ------------------ ------------------
Operating income (loss) 145,836 (19,777) (33,149)
---------------- ------------------ ------------------
Interest expense 26,065 34,359 10,853
Interest income (3,409) (23,407) (18,788)
Other expense (income), net 3,458 851 (707)
---------------- ------------------ ------------------
Income (loss) before income tax 119,722 (31,580) (24,507)
Income tax expense (benefit) 59,453 (16,347) (16,249)
---------------- ------------------ ------------------
Net income (loss) 60,269 (15,233) (8,258)
Affiliate's share of income (73,446) - -
---------------- ------------------ ------------------
Net loss applicable to common stock $ (13,177) $ (15,233) $ (8,258)
================ ================== ==================
Basic and diluted loss per common share $ (132) $ (152) $ (83)
Average number of common shares outstanding
during the period 100 100 100
- -------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements
</TABLE>
<PAGE> 87
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
BORDEN FOODS HOLDINGS CORPORATION
($ in thousands)
December 31,
ASSETS 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 28,736 $ 33,234
Accounts receivable (less allowance
for doubtful accounts of $4,821 and
$5,944, respectively) 138,751 152,423
Other receivables 21,526 18,563
Inventories:
Finished and in-process goods 112,669 140,452
Raw materials and supplies 43,112 59,523
Deferred income taxes 41,290 17,559
Loans due from affiliates - 9,349
Other amounts due from affiliates 8,768 24,972
Other current assets 41,282 32,435
--------------- -----------------
436,134 488,510
OTHER ASSETS
Deferred income taxes 5,504 -
Other assets 9,477 10,329
--------------- -----------------
14,981 10,329
PROPERTY AND EQUIPMENT
Land 19,199 23,147
Buildings 64,908 82,568
Machinery and equipment 208,504 243,212
--------------- -----------------
292,611 348,927
Less accumulated depreciation (50,878) (66,606)
--------------- -----------------
241,733 282,321
INTANGIBLES
Goodwill 151,264 161,296
Trademarks and other intangibles 155,511 203,987
--------------- -----------------
306,775 365,283
--------------- -----------------
TOTAL ASSETS $ 999,623 $ 1,146,443
=============== =================
- --------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements
</TABLE>
<PAGE> 88
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
BORDEN FOODS HOLDINGS CORPORATION
($ in thousands)
December 31,
LIABILITIES AND SHAREHOLDER'S EQUITY 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt payable within one year $ 22,087 $ 15,707
Loans due to affiliates 27,914 56,396
Accounts and drafts payable 98,718 145,363
Income tax payable 30,158 13,136
Other amounts due to affiliates 6,020 32,527
Accrued customer allowances 32,106 72,447
Other current liabilities 123,706 103,432
--------------- ---------------
340,709 439,008
OTHER LIABILITIES
Long-term debt payable to Borden, Inc. 47,616 166,990
Other long-term debt 5,438 6,701
Deferred income taxes 25,821 41,527
Non-pension postemployment
benefit obligations 9,279 12,906
Other long-term liabilities 20,894 14,593
--------------- ---------------
109,048 242,717
Commitments and Contingencies (Note 18)
SHAREHOLDER'S EQUITY
Common stock - $0.01 par value; 100 shares
authorized, issued, and outstanding - -
Shareholder's investment in affiliate 203,297 87,859
Paid in capital 366,439 349,475
Accumulated translation adjustment (9,021) 25,056
Retained (deficit) earnings (10,849) 2,328
--------------- ---------------
549,866 464,718
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 999,623 $ 1,146,443
=============== ===============
- --------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements
</TABLE>
<PAGE> 89
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
BORDEN FOODS HOLDINGS CORPORATION
(In thousands) Year ended December 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 60,269 $ (15,233) $ (8,258)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and amortization 46,986 46,075 44,780
Deferred tax provision 22,442 - -
Gain on divestitures (68,067) - -
Business realignment (1,000) 27,817 -
Net change in assets and liabilities:
Trade receivables 13,672 6,607 5,175
Other receivables (2,963) 3,021 2,300
Inventories 44,194 (15,738) (5,464)
Trade payables (46,645) (6,139) 24,169
Accrued customer allowances (40,341) 903 40,664
Current tax payable 17,022 12,383 (4,254)
Other current assets and liabilities (21,954) 4,274 27,441
Other long-term assets and liabilities (2,774) 5,614 (199)
Other, net (13,778) (15,944) (6,814)
---------------- ---------------- ----------------
7,063 53,640 119,540
---------------- ---------------- ----------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (35,153) (49,901) (31,311)
Proceeds from the sale of fixed assets 11,915 - -
Proceeds from the sale of businesses 145,067 13,480 -
Acquisition of assets from Borden - (5,323) -
---------------- ---------------- ----------------
121,829 (41,744) (31,311)
---------------- ---------------- ----------------
CASH FLOWS USED IN FINANCING ACTIVITIES
Decrease in loans with affiliates (19,133) - -
Increase (decrease) in other short-term debt 6,380 (7,818) 1,362
Repayment of long-term debt with Borden, Inc. (119,374) - -
(Decrease) increase in other long-term debt (1,263) (3,929) 867
Management contribution - 5,323 -
Other changes in Shareholder's Equity /
Owner's Investment - (21,776) (132,459)
---------------- ---------------- ----------------
(133,390) (28,200) (130,230)
---------------- ---------------- ----------------
DECREASE IN CASH AND EQUIVALENTS (4,498) (16,304) (42,001)
CASH AND EQUIVALENTS AT BEGINNING
OF PERIOD 33,234 49,538 91,539
---------------- ---------------- ----------------
CASH AND EQUIVALENTS AT END
OF PERIOD $ 28,736 $ 33,234 $ 49,538
================ ================ ================
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 90
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
BORDEN FOODS HOLDINGS CORPORATION
(In thousands) For the year ended December 31,
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURES
<S> <C> <C> <C>
Cash paid:
Interest $ 45,640 $ 13,510 $ 10,853
Income taxes, foreign 9,835 6,525 11,029
Income taxes, domestic 10,154 - -
NON-CASH ACTIVITY
Issuance of Class A units in exchange for notes of
principal unitholder (Note 1) $ 20,000 $ 345,900
Interest on notes of principal unitholder (Note 7) 8,878
Issuance of notes payable to finance purchase of
Foods' assets (Note 1) 166,990
Management contribution (Note 1) 5,323
Acquisition of Foods' net assets (Note 1) (20,000) (345,900)
Minority interest (Note 5) (73,446)
Affiliate's share of income (Note 5) 73,446
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements
</TABLE>
<PAGE> 91
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
BORDEN FOODS HOLDINGS CORPORATION
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
|----- Owner's Investment -------| Paid in Accumulated Shareholder's
Intercompany Intercompany Capital Translation Investment
Balances Loans Adjustment in Affiliate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ 959,302 $ (71,901) $ - $ - $ -
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses allocated by Borden 35,640
Translation adjustments and other 921
Net collections made by Borden on
Foods behalf (84,132)
Loans made to Borden and affiliates (59,049)
Other intercompany changes (25,839)
Net loss (8,258)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 876,713 (130,950) - 921 -
- ------------------------------------------------------------------------------------------------------------------------------------
Net collections made by Borden on
Foods behalf 8,604
Net transfer of balances to Foods from
Borden and affiliates (105,689)
Translation adjustments and other 24,135
Short-term borrowings from Borden 307,500
Repayments of short-term borrowings (224,600)
Other intercompany changes (33,000)
Intercompany dividend to affiliate (89,016) 89,016
Net loss prior to September 30, 1996 (17,561)
Recapitalization:
Management contribution (5,323) 5,323
Issuance of Class A units in exchange
for notes of principal unitholder (345,900) 264,900 81,000
Excess of owner's investment over
recapitalization (84,575) 84,575
Equity income in affiliate (1,536) 1,536
Issuance of notes payable to finance
purchase of Foods' net assets (166,990)
Amounts due to/from affiliate (81,930) 41,934
Deferred taxes (36,697)
Net income subsequent to October 1, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 - - 349,475 25,056 87,859
- ------------------------------------------------------------------------------------------------------------------------------------
Reallocation of consideration from BFC to
Investment LP (40,710) 40,710
Affiliate's share of income 74,728
Increase in tax basis related to finalization
of purchase price allocation 67,383
Translation adjustments and other (9,709) (34,077)
Net income
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ - $ - $ 366,439 $ (9,021) $ 203,297
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------
Retained
Earnings
(Deficit) Total
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance at January 1, 1995 $ - $ 887,401
- --------------------------------------------------------------------------------
Expenses allocated by Borden 35,640
Translation adjustments and other 921
Net collections made by Borden on
Foods behalf (84,132)
Loans made to Borden and affiliates (59,049)
Other intercompany changes (25,839)
Net loss (8,258)
- ------------------------------------------------------------------------------
Balance at December 31, 1995 - 746,684
- ------------------------------------------------------------------------------
Net collections made by Borden on
Foods behalf 8,604
Net transfer of balances to Foods from
Borden and affiliates (105,689)
Translation adjustments and other 24,135
Short-term borrowings from Borden 307,500
Repayments of short-term borrowings (224,600)
Other intercompany changes (33,000)
Intercompany dividend to affiliate -
Net loss prior to September 30, 1996 (17,561)
Recapitalization:
Management contribution -
Issuance of Class A units in exchange
for notes of principal unitholder -
Excess of owner's investment over -
recapitalization -
Equity income in affiliate -
Issuance of notes payable to finance
purchase of Foods' net assets (166,990)
Amounts due to/from affiliate (39,996)
Deferred taxes (36,697)
Net income subsequent to October 1, 1996 2,328 2,328
- ------------------------------------------------------------------------------
Balance at December 31, 1996 2,328 464,718
- ------------------------------------------------------------------------------
Reallocation of consideration from BFC to
Investment LP -
Affiliate's share of income (73,446) 1,282
Increase in tax basis related to finalization
of purchase price allocation 67,383
Translation adjustments and other (43,786)
Net income 60,269 60,269
- ------------------------------------------------------------------------------
Balance at December 31, 1997 $ (10,849) $ 549,866
- ------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements
</TABLE>
<PAGE> 92
BORDEN FOODS HOLDINGS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
1. BACKGROUND
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"). 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 ("Foods"). Borden
Foods Holdings Corporation ("Foods 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. The LLC is controlled by
BW Holdings, LLC. BFC Investments LP (the "Investment LP"), which is owned by
BFC and LLC, was formed for the purposes of acquiring, holding, and
sub-licensing certain trademarks associated with the operation of Foods. In
certain circumstances (see Note 5), allocation of income and gains may differ
from the ownership percentages indicated.
Effective October 1, 1996, Borden, in a taxable transaction, sold Foods and
certain trademarks to BFC and Investment LP, respectively, for $550.0 million
less assets transferred plus liabilities assumed. The purchase price was based
on an independent valuation of Foods. In connection with this sale, LLC issued
approximately 74 million Class B units in exchange for $368.1 million of notes
from BW Holdings, LLC. Prior to October 1, 1996, LLC issued approximately one
million Class A units to certain management employees of BFC in exchange for
cash of $5.3 million. In addition, LLC transferred $228.2 million of notes to
Foods Holdings in exchange for 100 shares of common stock. Foods Holdings used
the notes to acquire a 98% interest in BFC. LLC contributed $5.3 million of cash
to BFC in exchange for a 2% interest in BFC.
BFC issued $167.0 million of long-term debt (see Note 9) along with the notes
contributed by BW Holdings, LLC to finance the purchase of Foods' net assets. In
a series of transactions in 1996 and 1997 BFC used $273.0 million of
consideration to purchase a 70% interest in Investment LP and LLC used $117.0
million of consideration to acquire a 30% interest in Investment LP. Investment
LP transferred $390.0 million of consideration to Borden in exchange for Foods'
trademarks. Upon finalization of the valuation in September 1997, an additional
$20.0 million of consideration held by Investment LP was transferred to Borden
to complete the purchase of Foods' trademarks. As a result of transactions
concluded in 1997, including a transfer of basis from BFC to Investment LP,
shareholder's investment in affiliate was increased $42.0 million.
BFC used the remaining consideration to purchase the net assets (excluding
trademarks) of Foods. There was no change in the book basis of Foods' assets
and liabilities as of October 1, 1996 because the sale was between related
parties and Borden's principal stockholders will continue to control BFC. 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.
2. NATURE OF OPERATIONS
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. Foods' operations include 29 production
facilities, 10 of which are located in the United States. The remaining
1
<PAGE> 93
facilities are located primarily in Europe and Latin America. In 1998,
management expects to divest or close 20 facilities as part of business
realignment (Note 5). See Note 20 for further geographic segment information.
3. 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 Foods Holdings as if it
were a registrant. The accompanying financial statements for 1997 and 1996 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 Foods. The purchase price has been allocated to tangible and
intangible assets and liabilities of Foods based on independent appraisals and
management estimates.
Prior to October 1, 1996, Foods was managed as a division of Borden. Under this
structure, Borden incurred various costs related to Foods, which included
corporate and administrative expenses (see Note 7). The allocation of these
costs, as well as intercompany purchases and sales, cash infusions and
withdrawals, and other transactions are reflected in Owner's Investment through
September 30, 1996. In connection with the formation of Foods Holdings and the
October 1, 1996 sale, the net assets of Foods Holdings have been recapitalized
to reflect the resulting capital structure.
The financial statements include the accounts of Foods 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. Minority interest
is included in other long-term liabilities in the accompanying balance sheet.
The portion of BFC and Investment LP directly owned by the LLC is recorded in
Shareholder's Investment in Affiliate.
4. 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. Significant estimates in the accompanying financial statements
are the accruals for trade promotions, reserves for expenses on business sold,
allocation of tax basis between Investment LP and BFC, litigation, general
insurance liabilities, 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 and Promotion Costs - Production costs of future media advertising
are expensed on the first air-date or print release date of the advertising. All
other advertising is expensed as incurred. Promotional expenses are generally
expensed ratably over the year in relation to revenues or other performance
measures.
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 overnight investments with Borden of $15,043
and time deposits of $13,002 at December 31, 1997 and 1996, 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.
2
<PAGE> 94
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.
Intangibles - The excess of purchase price over the value of net tangible assets
of 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 $29,092 and $19,448 at December 31, 1997 and
1996, respectively.
Impairment - BFC 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.
General Insurance - BFC 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 BFC's experience.
Income Taxes - Income taxes are accounted for using the liability method in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109
"Accounting for Income Taxes". Subsequent to October 1, 1996 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 Foods were included in Borden's consolidated tax return. Taxes
related to foreign operations have been provided for in accordance with SFAS No.
109.
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 shareholder's 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 translation assets and liabilities. Related exchange
rate adjustments are included in net income. BFC incurred realized net foreign
exchange losses aggregating $2,442, $622, and $1,597 for the years ended
December 31, 1997, 1996, and 1995 respectively.
Derivative Financial Instruments - BFC uses forward exchange contracts which
reduce BFC's cash flow exposure to changes in foreign exchange rates. The fair
values 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 hedged transactions.
Concentration of Credit Risk - Financial instruments which potentially subject
BFC to concentrations of credit risk consist principally of temporary cash
investments, marketable securities, and accounts receivable. BFC places its
temporary cash investments with Borden and its affiliates. Concentrations of
credit risk with respect to accounts receivable are limited, due to the large
number of customers comprising BFC's customer base and their dispersion across
many different industries and geographies. BFC generally does not require
collateral or other security to support customer receivables.
Stock Options - The Financial Accounting Standards Board ("FASB") issued SFAS
No. 123, Accounting for Stock-Based Compensation, which was adopted for
disclosure only by Foods Holdings, effective January 1, 1996. As permitted by
SFAS No. 123, Foods Holdings will continue to apply its current accounting
policy of the intrinsic
3
<PAGE> 95
value method under Accounting Principles Board Opinion No. 25 and will include
the additional disclosures required by SFAS No. 123.
Per Share Information - Basic and diluted net loss per common share is computed
by dividing net loss by the weighted average number of common shares outstanding
during 1997 and the period from October 1, 1996 to December 31, 1996, and
assuming these shares were outstanding for the full year of 1995 as well as the
nine month period ended September 30, 1996. Unit Appreciation Rights (UAR's)
that enable the holder to obtain additional units were assumed to be exercised
if they were dilutive.
Recently Issued Accounting Statements - In March 1998, the American Institute of
Certified Public Accountants issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The company is currently considering the impact of this
pronouncement.
Reclassification - Certain prior year amounts have been reclassified to conform
with the 1997 presentation.
5. BUSINESS REALIGNMENT
In December 1996, management approved the closure of five domestic pasta plants
in 1997 in order to reduce its SKU complexity and manufacturing capacity.
Accordingly, $27,817 had been provided in 1996 to write down the facilities to
their net realizable value. During 1997, three of the facilities ceased
operations and the other two facilities were sold for aggregate proceeds of
$10,000. Additional cost of $3,794 was incurred in 1997, primarily for severance
related to these plant closures.
In March 1997, BFC announced its intention to sell certain businesses from its
current portfolio, which are not considered to be aligned with its great
tasting, wholesome, grain-based meal solution strategy. Among the unaligned
businesses are its milk powder, processed cheese, sweetened condensed milk and
reconstituted lemon juice businesses.
On December 31, 1997, BFC and Investment LP completed the sale of the domestic
Cracker Jack candy popcorn business to Recot, Inc., a subsidiary of Frito-Lay
which is a Texas based unit of PepsiCo, Inc., and the domestic cheese business
to Mid-America Dairymen, Inc., a dairy marketing co-op headquartered in
Missouri. BFC received $145.1 million for these businesses and recorded an after
tax gain of $42.5 million. The candy popcorn and cheese businesses generated net
trade sales of $281.0, $328.3 and $283.4 million in 1997, 1996 and 1995,
respectively.
Subsequent to December 31, 1997, BFC and Investment LP completed the sale of its
Signature Flavor and KLIM businesses. Signature Flavor was purchased by Eagle
Family Foods, Inc., a newly formed entity managed by GE Investments and Warburg,
Pincus & Co. LLC. Signature Flavor grocery brands include Eagle Brand, Cremora,
ReaLemon, Kava, and None Such and contributed net trade sales of $228.6, $230.4
and $225.3 million in 1997, 1996 and 1995, respectively. The sale generated
proceeds of $376.5 million. BFC sold the KLIM business to Nestle, S.A.,
including the KLIM milk powder business in Latin America and Asia, the non-dairy
coffee creamer operations in South Africa, and the ice cream business in Puerto
Rico. BFC received $313.0 million for the sale of these operations. An accrued
after-tax loss of $9.3 million (including $11.1 million of accumulated
translation that contributed to the loss) was recorded in the 1997 financial
statements.
In association with the divestiture of the candy coated popcorn, cheese and KLIM
businesses, LLC was allocated an affiliate's share of income (see accompanying
consolidated statement of operations) of $73.4 million. In accordance with
Investment LP's limited partnership agreement with BFC and LLC, the first
allocation of the trademark gain is to BFC's priority return which is generally
based on a 10% return to BFC based on BFC's net capital contributions. The
allocation of the remaining gain, computed on a tax basis, is 10% to BFC and 90%
to LLC.
4
<PAGE> 96
6. CHANGE IN ACCOUNTING ESTIMATE
In 1997, BFC reduced $18.3 million of accruals corresponding to domestic trade
spending. These accruals had been provided in earlier years for anticipated
customer redemptions in the ordinary course of business. Due to a concerted
effort to improve the management of trade spending, the redemptions have been
significantly lower than management had previously estimated.
Of the $18.3 adjustment, $15.2 relates to BFC's divested businesses which were
sold at the end of 1997 and during the first quarter of 1998. The remaining $3.1
relates to ongoing operations. The income recognized for this estimate revision
is included in marketing expense.
7. RELATED PARTIES
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,
information services, and corporate administrative departments, were allocated
to Foods. A description of the allocation methods for these costs follows.
Pension and group insurance benefits were charged to 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 have been allocated to 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 Foods at negotiated fees. These services include:
processing of payroll, processing active and retiree group insurance claims,
administration of workers' compensation claims (through June, 1997), and
securing insurance coverage for catastrophic claims. BFC reimburses the Borden
subsidiary for payments for general disbursements, group insurance (through
June, 1997), and postemployment benefit claims. Effective July 1, 1997, BFC
secured its own general insurance coverage. The amount owed by BFC for
reimbursement of payments, services, and other liabilities was $4,746 and
$11,678 as of December 31, 1997 and 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 BFC's financial statements. By agreement, Borden has retained the obligation
for active group insurance claims incurred in 1996 and paid in 1997. Subsequent
to January 1, 1997, BFC is funding all group insurance claims incurred.
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. Foods has recognized expenses associated with
these benefits, certain of which are determined and allocated by Borden's
actuary. Prior to January 1, 1997, Foods assumed an actuarially-determined
portion of Borden's U.S. net pension liability which is included in amounts due
to affiliates since Borden retains the legal obligation for these benefits (see
Note 12). Subsequent to January 1, 1997, BFC assumed the funding of the net
pension liability.
5
<PAGE> 97
The following summarizes the allocation of costs to Foods in 1995 and the
charges in 1997 and 1996:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Employee benefits $ 8,385 $ 4,931 $ 3,776
Group and general
insurance 3,875 12,947 16,799
Corporate staff departments
and overhead 16,363 16,728 15,065
------- ------- -------
$28,623 $34,606 $35,640
======= ======= =======
</TABLE>
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 $5,819 and $7,438 for
such services in 1997 and 1996, respectively. BFC also sold certain merchandise
to Borden affiliates totaling $4,506 and $7,625 in 1997 and 1996, respectively.
The receivable for services, merchandise sales, and other transactions related
to the purchase of Foods' assets was $8,768 and $14,245 at December 31, 1997 and
1996, respectively.
In 1997, BFC invested cash not used in operations with Borden. The funds are
invested overnight earning a rate set by Borden which generally approximates
money market rates. BFC's investment balance was $15,043 with Borden as of
December 31, 1997. Gross interest income of $8,878 is recorded in the 1996
statement of operations relating to notes due from a BW Holdings, LLC affiliate
which were contributed to Foods Holdings on July 2, 1996, and which were
contributed to Borden in connection with the purchase of Foods on October 1,
1996.
Foods generated net losses in the first nine months of 1996. By agreement,
Borden reimbursed Foods for the tax effect of these losses as Foods incurs tax
liability on future net income. The amount due from Borden under this
arrangement of $0 and $10,727 is included in amounts due from affiliates at
December 31, 1997 and 1996, respectively.
Borden continues to provide executive, financial and strategic management to BFC
for which it charges an annual fee of $1.0 million.
8. DEBT AND COMMITMENTS
Debt outstanding at December 31, 1997 and 1996 is as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
-------------------- -------------------
Due Due
within within
Long-term one year Long-term one year
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Borrowings under loan agreement
with Borden (see Note 9) $ 47,616 $ $166,990 $ 24,360
Loans due to affiliates (see Note 9) 27,914 32,036
Domestic bank loans 537
Foreign bank loans 2,639 21,550 3,773 15,707
Industrial Revenue Bonds 2,799 2,928
-------- -------- -------- --------
Total debt $ 53,054 $ 50,001 $173,691 $ 72,103
======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
6
<PAGE> 98
The foreign bank loans bear interest at rates ranging from 3% to 12%. Fixed
assets with a net book value of $5,496 and $4,422 at December 31, 1997 and 1996,
respectively, have been pledged as collateral on these loans. The Industrial
Revenue Bonds do not bear interest.
The non-affiliated and affiliated bank loans at December 31, 1997 mature as
follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Non-
Affiliated Affiliated
---------- ----------
<S> <C> <C>
1998 $ 27,914 $ 22,087
1999 47,616 1,407
2000 589
2001 490
2002 491
2003 and beyond 2,461
-------- ----------
$ 75,530 $ 27,525
======== ========
</TABLE>
- --------------------------------------------------------------------------------
9. AFFILIATED DEBT
Prior to January 1, 1996, receipts, disbursements and the net cash position of
Foods were managed by Borden. Accordingly, both cash generated and required by
Foods' domestic operations are recorded in Shareholder's Equity for such
periods. There was no interest expense allocated to Foods with respect to such
domestic "lendings" or "borrowings". An allocation of interest was not practical
given the longevity of the Foods' operations and because Borden had not
historically identified a capital structure comprised of separate elements of
debt and equity applicable to 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, 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 for generally a 90 day period. Net lendings or borrowings by international
businesses subsequent to October 1, 1996, are included in loans due from or to
affiliates. Net short-term loans due to international affiliates were $27,914
and $22,687 at December 31, 1997 and 1996, respectively, at a weighted average
variable rate of 6.7% and 6.3%, 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 provided for borrowings up to $250 million at a variable interest
rate equal to prime. Effective April 24, 1997, the revolving loan facility was
reduced to $100 million.
The outstanding balance under the revolving loan facility was $0 and $24,360 at
December 31, 1997 and 1996, respectively. A commitment fee based on a variable
rate tied to Borden's leverage is charged on the unused portion of the revolving
loan facility. Commitment fees charged on the unused portion of the revolving
facility were $416 and $816 for 1997 and 1996, respectively. Effective December
30, 1997, the revolving loan facility was reduced to $50 million with a maturity
date of December 31, 1998.
During 1997, the interest rate on the revolving loan facility was revised.
Borrowings with three days notice and outstanding at least 30 days incurred
interest at Borden's cost of funds for 30 day LIBOR plus 0.25%. Same day
borrowings incurred interest ranging from prime to prime plus 0.50%.
7
<PAGE> 99
The Credit Agreement, as amended, contains covenants that significantly limit or
prohibit, among other things, BFC's and its subsidiaries' ability to incur
indebtedness, make prepayments of certain indebtedness, pay dividends, engage in
transactions with affiliates, create liens, make changes in its business or
control of BFC, sell assets, engage in mergers and consolidations, and use
proceeds from asset sales and certain debt and equity issuances. In addition,
the Credit Agreement requires that BFC 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 an affiliated guarantor, Foods Holdings' 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 $783.5 million and $910.0 million at December 31, 1997 and 1996,
respectively. In connection with this guarantee, Foods Holdings charges Borden
an annual fee of $1,050.
As a result of 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. The loan
principal outstanding on the long-term notes was $47,616 and $166,990 at
December 31, 1997 and 1996, respectively. Effective January 1, 1997, the
interest rate on the long-term notes to Borden was changed to 10.25%. Interest
expense on the long term notes was $19,558 and $19,621 for 1997 and 1996,
respectively. By agreement with Borden, 1996 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 $1,274 and $20,849 as of December 31, 1997 and 1996, respectively.
10. LEASES
BFC 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, 1997 are as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Non-
Affiliated Affiliated
---------- ----------
<S> <C> <C>
1998 $ 2,966 $ 5,498
1999 1,394 3,717
2000 1,502 2,521
2001 1,609 977
2002 1,609 539
2003 and beyond 1,356
------- -------
$ 9,080 $14,608
======= =======
</TABLE>
- --------------------------------------------------------------------------------
Total rental expenses for operating leases in 1997, 1996 and 1995 were $8,272,
$8,402 and $7,011, respectively.
11. INCOME TAXES
Effective October 1, 1996, Foods Holdings is recognized as a separate legal
entity for U.S. Federal income tax purposes. Prior to such time, Foods was
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 Foods Holdings 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.
8
<PAGE> 100
As stated in Note 3, the accompanying financial statements reflect the assets of
Foods on a purchase accounting basis from December 31, 1994. The tax basis of
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 ongoing tax basis
of Foods' net assets.
As a result of the October 1, 1996 purchase, the tax basis of Foods Holdings'
net assets was increased to reflect the purchase price of $550.0 million less
assets transferred plus liabilities assumed. The book basis of 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 stockholders continued to control
Foods Holdings. 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
94-10 "Accounting by a Company for the Income Tax Effects of Transactions among
or with Its Shareholders under FASB Statement No. 109".
Upon finalization of the valuation and purchase price allocation in September
1997, an additional $20,000 of notes held by Investment LP were transferred to
Borden. The initial capitalization and tax basis was reallocated from BFC to
Investment LP resulting in additional domestic tax basis. These changes had no
impact on the 1997 or 1996 tax provision. However, the additional domestic tax
basis resulted in an increase in deferred tax assets and Shareholder's Equity of
$67,383.
Income tax provision (benefit) for the periods ended December 31, 1997, 1996 and
1995, consist of the following:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 23,050 $ 14,020 $
State and local 4,314 2,543
Foreign 9,647 6,942 3,786
-------- -------- --------
37,011 23,505 3,786
Deferred:
Federal 14,829 (15,156)
State and local 2,778 (2,840)
Foreign 4,835 524 (1,265)
-------- -------- --------
22,442 (17,472) (1,265)
-------- -------- --------
Total non-affiliated provision 59,453 6,033 2,521
Domestic benefit included in Shareholder's Equity /
Owner's Investment (22,380) (18,770)
-------- -------- --------
$ 59,453 $(16,347) $(16,249)
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
The domestic and foreign components of income before income taxes are as
follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Domestic $ 78,825 $ (64,051) $ (49,950)
Foreign 40,897 32,471 25,443
---------- --------- ----------
Total $ 119,722 $ (31,580) $ (24,507)
========== ========= ==========
</TABLE>
- --------------------------------------------------------------------------------
9
<PAGE> 101
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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
U.S. Federal income tax at statutory rate $ 41,903 $(11,053) $ (8,577)
State income tax expense, net of Federal 4,610 (2,488) (1,925)
Divestiture tax differential 13,195
Foreign rate differentials (555) (3,899) (6,384)
Other 300 1,093 637
Income tax provision (benefit) -------- -------- --------
$ 59,453 $(16,347) $(16,249)
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
The net current and noncurrent components of deferred income taxes recognized in
the balance sheet at December 31, 1997 and 1996 are as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net current assets $ 41,290 $ 17,559
Net noncurrent liability (20,317) (41,527)
-------- --------
Net asset (liability) $ 20,973 $(23,968)
======== ========
</TABLE>
- --------------------------------------------------------------------------------
Temporary differences are associated with the financial statements' assets and
liabilities shown in the table below. Deferred income tax assets and liabilities
have been recorded at December 31, 1997 and 1996 as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS:
Non-pension postemployment $ 3,619 $ 4,838
Litigation reserve 5,655
Coupon accrual 284 4,736
General insurance 5,320
Incentive compensation 4,882 2,185
Divestiture reserves 34,402
Trademarks and other intangibles 6,188
Other 1,493 4,015
Loss and credit carryforwards 5,173 6,613
-------- --------
Gross deferred tax assets 56,041 33,362
Valuation allowance (5,173) (6,613)
-------- --------
50,868 26,749
LIABILITIES:
Property and equipment 25,242 42,849
Trademarks and other intangibles 2,142
Other 4,653 5,726
-------- --------
29,895 50,717
-------- --------
NET ASSET (LIABILITY) $ 20,973 $(23,968)
======== ========
</TABLE>
- --------------------------------------------------------------------------------
10
<PAGE> 102
Foods Holdings has recorded a valuation allowance of $5,173 and $6,613 at
December 31, 1997 and 1996, respectively, for the foreign net operating losses
due to uncertainty as to whether the deferred tax asset is realizable. The
decrease from 1996 is due to the expiration of operating loss carryforwards
related to operations in Italy.
12. PENSION AND RETIREMENT SAVINGS PLANS
Most employees of BFC 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 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 BFC
employees of $7,764 and $2,732 is included in other noncurrent liabilities at
December 31, 1997 and 1996, respectively.
Following are the components of net pension expense recognized by Borden for the
domestic pension plan (in millions).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Borden Borden Borden
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 7.1 $ 7.2 $ 6.4
Interest cost on projected benefit obligation 27.3 27.4 31.2
Return on plan assets (100.7) (26.9) (87.1)
Net amortization or deferral 70.1 (5.5) 51.4
-------- ------- -------
$ 3.8 $ 2.2 $ 1.9
======== ======= =======
</TABLE>
- --------------------------------------------------------------------------------
Amounts charged to Foods for participation in this plan were $5,660 (including a
curtailment loss and settlement of $862 and $2,474, respectively, due to the
divestiture of the domestic candy popcorn and cheese businesses), $1,764, and
$838 for the years ended December 31, 1997, 1996 and 1995, respectively.
The weighted average rates used to determine net periodic pension expense for
Borden's domestic pension plan were as follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.5% 6.8% 8.8%
Rate of increase in future compensation levels 4.5% 4.3% 5.3%
Expected long-term rate of return on plan assets 8.5% 7.8% 9.8%
</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 was as follows (in millions):
11
<PAGE> 103
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Borden Borden
1997 1996
---- ----
<S> <C> <C>
Plan assets at fair value $ 385.2 $ 393.6
Actuarial present value of:
Vested benefit obligation (333.9) (383.1)
Accumulated benefit obligation (342.5) (400.4)
Projected benefit obligation (345.0) (400.4)
-------- --------
Plan assets greater (less) than accumulated benefits 40.2 (6.8)
Unrecognized prior service cost 2.6 2.9
Unrecognized (benefit) loss (35.7) 2.2
Minimum liability adjustment (5.1)
-------- --------
Net pension asset (liability) $ 7.1 $ (6.8)
======== ========
</TABLE>
- --------------------------------------------------------------------------------
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 7.3% and 4.4%, respectively, as of December 31, 1997 and 7.5%
and 4.5%, respectively, as of December 31, 1996.
Certain employees of BFC participate in a Canadian pension plan. Following are
the components of the net pension expense for the Foods' Canadian pension plan
(in millions):
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BFC BFC BFC
1997 1996 1995
------- ------- ------
<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 1.2
Return on plan assets (1.8) (3.2) (3.0)
Net amortization or deferral 1.4 1.1
------ ------ ------
$ (0.4) $ (0.4) $ (0.5)
====== ====== ======
</TABLE>
- --------------------------------------------------------------------------------
The weighted average rates used to determine net periodic pension expense for
the Canadian pension plan were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.8% 8.3% 10.0%
Rate of increase in future compensation levels 4.8% 5.3% 7.0%
Expected long-term rate of return on plan assets 8.8% 9.3% 11.0%
</TABLE>
- --------------------------------------------------------------------------------
12
<PAGE> 104
Plan assets consist primarily of equity and fixed income securities. The funded
status of the Canadian pension plan was as follows (in millions):
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BFC BFC
1997 1996
-------- --------
<S> <C> <C>
Plan assets at fair value $ 22.4 $ 21.1
Actuarial present value of:
Vested benefit obligation (16.9) (15.5)
Accumulated benefit obligation (17.2) (15.8)
Projected benefit obligation (17.4) (16.0)
------- -------
Plan assets greater than projected benefit
obligation 5.0 5.1
Unrecognized loss (benefit) 0.1 (0.4)
------- -------
Net pension asset $ 5.1 $ 4.7
======= =======
</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 6.8% and 3.8%, respectively, as of December 31, 1997 and 7.8%
and 4.8%, respectively, as of December 31, 1996.
Certain employees of BFC participate in other international pension plans.
Following are the components of the net pension for Foods' international pension
plans (in millions):
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BFC BFC BFC
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 0.3 $ 0.3 $ 0.3
Interest cost on projected benefit obligation 0.7 0.4 0.4
Return on plan assets (0.4) (0.6) (0.6)
Net amortization or deferral (0.1)
------ ------ ------
$ 0.5 $ 0.1 $ 0.1
====== ====== ======
</TABLE>
- --------------------------------------------------------------------------------
The weighted average rates used to determine net periodic pension expense for
the other international pension plans were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.9% 10.4% 10.3%
Rate of increase in future compensation levels 6.0% 7.0% 6.7%
Expected long-term rate of return on plan assets 7.5% 12.4% 13.1%
</TABLE>
- --------------------------------------------------------------------------------
13
<PAGE> 105
Plan assets consist primarily of equity and fixed income securities, guaranteed
insurance contracts and cash. The funded status of the other international
pension plans was as follows (in millions):
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BFC BFC
1997 1996
-------------------------------------------- --------------------------------------------
Plan Assets Exceed Accumulated Benefits Plan Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Plan Assets Accumulated Benefits Exceed Plan Assets
--------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Plan assets at fair value $ 7.4 $ 0.4 $ 5.5 $ 0.3
Actuarial present value of:
Vested benefit obligation (5.2) (2.1) (3.9) (0.7)
Accumulated benefit obligation (5.8) (2.2) (4.5) (0.8)
Projected benefit obligation (6.6) (2.7) (5.2) (1.2)
-------------- ------------ ----------- ---------------
Plan assets greater (less) than
projected benefit obligation 0.8 (2.3) 0.3 (0.9)
Unrecognized (benefit) loss (1.9) (0.1) 1.1 (0.1)
-------------- ------------ ----------- ---------------
Net pension asset (liability) $ (1.1) $ (2.4) $ 1.4 $ (1.0)
============== ============ =========== ===============
</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 7.1% and 3.3%, respectively, as of December 31,
1997, and 8.1% and 5.3%, respectively, for December 31, 1996.
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 trusts, and under certain
other specified conditions. Charges to Foods for payments to pension trusts on
behalf of employees not covered by Borden plans were not considered significant.
Amounts incurred for matching contributions under the Borden sponsored
retirement savings plans were $2,084, $2,319, and $1,827 for the years ended
December 31, 1997, 1996 and 1995, respectively. Eligible salaried and hourly
non-bargaining employees may contribute up to 5% of their pay (7% for certain
longer service salaried employees), which have been matched 50% by Borden since
the first quarter of 1994.
13. NON-PENSION POSTEMPLOYMENT BENEFITS
BFC provides certain health and life insurance benefits for eligible domestic
retirees and their dependents. The cost of these benefits are accrued as a form
of deferred compensation earned during the period that employees render service.
Benefits are funded on a pay-as-you-go basis.
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 Foods based upon the actuarially determined obligation
relating to the Foods domestic employees. Effective January 1, 1996, the
components of postretirement benefit expense and unfunded postretirement
obligation were accounted for separately for BFC.
14
<PAGE> 106
The information provided as of December 31, 1997 and 1996, represents the status
of BFC's segregated plan (in millions):
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BFC BFC
1997 1996
-------- ---------
<S> <C> <C>
Actuarial present value of accumulated postretirement
benefit obligation:
Retirees $ (7.9) $ (10.4)
Fully eligible active plan participants (0.2)
Other active plan participants (0.1) (0.7)
------- -------
(8.0) (11.3)
Unrecognized prior service cost
Unrecognized net (benefit) loss (0.7) 0.1
------- -------
Accrued postretirement liability $ (8.7) $ (11.2)
======= =======
</TABLE>
- --------------------------------------------------------------------------------
A portion of Borden's expense for postemployment and postretirement benefits was
allocated annually to Foods in 1995 (See Note 7). The following are the
components of annual expense for postretirement benefits. Information provided
for 1995 represents annual expense for the total Borden plan. Amounts (in
millions) provided for 1997 and 1996 represent the segregated BFC's plan:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BFC BFC Borden, Inc.
1997 1996 1995
------ -------- -------
<S> <C> <C> <C>
Service cost $ $ 0.1 $ 1.1
Interest cost 0.8 0.7 13.3
Net amortization and deferral 0.1
------ ------- -------
$ 0.9 $ 0.8 $ 14.4
====== ======= =======
</TABLE>
- --------------------------------------------------------------------------------
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.3% and 7.5% for December 31, 1997 and 1996, respectively. In
addition, termination benefits of $9.3 million were incurred in 1997.
The assumed health care cost trend rate used in measuring BFC's accumulated
postretirement benefit obligation at December 31, 1997 was 8.8% for 1998,
gradually declining to 5.3% in 2004 and thereafter. The comparable assumptions
for the prior year were 9.5% and 5.5%, respectively. A one percentage point
increase in the health care cost trend rate would increase BFC's accumulated
postretirement benefit obligation as of December 31, 1997 and 1996 by $0.6 and
$1.1, respectively, and the sum of the service and interest costs by $0.1 in
1997 and 1996.
BFC 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, are accrued when it is
probable that a benefit will be provided. The amounts of such charges are not
considered significant.
14. DERIVATIVE FINANCIAL INSTRUMENTS
International operations account for a significant portion of the BFC's revenue
and operating income. BFC is exposed to foreign exchange risk on transactions,
which are denominated in a currency other than the operating
15
<PAGE> 107
unit's functional currency. It is BFC'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 BFC policy).
BFC 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, 1997 and 1996 BFC had $95,941 and $153,295 of notional value,
respectively, of forward foreign currency exchange contracts outstanding. 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. BFC is exposed to credit loss
in the event of non-performance by the other parties to the contracts. BFC
evaluates the creditworthiness of the counterparties' financial condition and
does not expect default by the counterparties.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying or notional amount and fair value,
based on dealer quotes, of BFC's financial instruments at December 31, 1997 and
1996. 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.
As discussed in Note 9, Foods Holdings guarantees obligations under Borden's
credit facility and all of Borden's outstanding publicly held debt on a pari
passu basis. Management does not expect these guarantees to have a material
adverse effect on the financial position of Foods Holdings. Fair value was not
assigned to these guarantees due to the complexity of the arrangements and the
absence of the expected funding and market for these financial instruments.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---------------------- -------------------
Notional Fair Notional Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
DERIVATIVES RELATING TO:
Foreign currency contracts $ 41,478 $ 2,187 $ 105,322 $ 2,505
- gains
Foreign currency contracts 54,463 (3,014) 47,973 (393)
- losses --------- --------- --------- -------
$ 95,941 $ (827) $ 153,295 $ 2,112
========= ========= ========= =======
</TABLE>
- --------------------------------------------------------------------------------
16
<PAGE> 108
16. UNITS AND UNIT APPRECIATION RIGHTS
During 1996, a Unit Incentive Plan was formed which provides for the granting of
options, UAR's, units and other unit-based equity interests in LLC to key
employees of BFC and associated persons at the discretion of the Board of
Directors of BFC.
During 1996, the LLC sold 1,080,000 Class A units to certain management
employees of BFC 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 unitholders'
employment, prior to full vesting after five years. In 1997, LLC sold an
additional 20,000 Class A units and repurchased 81,000 Class A units from
management. Class A units outstanding at December 31, 1997 and 1996 were
1,019,000 and 1,080,000, respectively.
Under the Incentive Plan, BFC issued UAR's 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 UAR's vest ratably over five years and expire upon certain events,
including termination of the unitholders' employment, but in no case to exceed
ten years. Four UAR's were issued for each unit purchased: one UAR with an
exercise price of $10 per unit and three UAR's with an exercise price of $20 per
unit. At December 31, 1997, there were 1,019,000 UAR's outstanding with an
exercise price of $10 and 3,057,000 UAR's outstanding with an exercise price of
$20. For 1997 and 1996, there was no compensation expense recorded in relation
to the issuance of UAR's since the exercise price exceeds the underlying value
of the UAR's.
The pro forma disclosure of net income and earnings per share that would have
been recognized in the 1997 consolidated statement of operations, if the fair
value-based had been used, was not material.
17. LITIGATION
In July 1995, a Fresno, California jury returned a verdict against Foods for
wrongful termination of a tomato packing agreement, for which $14.5 million
(including interest and legal costs) 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. Foods is contesting the
verdict.
18. RISKS AND UNCERTAINTIES
Foods has unconditional purchase obligations for raw materials and packaging of
$89,271 and $30,724 at December 31, 1997 and 1996, respectively.
Raw materials, such as semolina, tomatoes, milk and cheese, account for a high
percentage of BFC's total production costs. BFC purchases a major portion of
these materials under market sensitive supply contracts, and therefore BFC's
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 BFC operates, BFC's ability to pass these raw material
price increases through to the customer is limited and often depends upon BFC's
competitors raising their prices as well.
17
<PAGE> 109
The Year 2000 issue is a result of computer programs written using two rather
than four digits to define a year. Any of BFC's computer programs that have
date-sensitive software may recognize a "00" date as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations causing
disruptions of operations including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
BFC intends its Year 2000 date conversion project to be completed on a timely
basis so as to not significantly impact business operations. If the necessary
modifications and conversions are not completed timely, the Year 2000 issue may
have a material impact on BFC. Also, although BFC's systems do not rely
significantly on systems of other companies, BFC can not provide assurance that
failure of third parties to address the Year 2000 issue will not have an adverse
impact on BFC.
19. SUPPLEMENTAL FINANCIAL DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Research and development $ 17,704 $ 21,867 $ 16,530
Depreciation and amortization 46,986 46,075 44,780
Advertising 42,648 56,411 40,786
Consumer and trade promotion 277,032 354,060 435,393
</TABLE>
- --------------------------------------------------------------------------------
18
<PAGE> 110
20. GEOGRAPHIC SEGMENT INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NET TRADE SALES:
United States $ 1,048,135 $ 1,204,437 $ 1,143,565
Canada 149,473 170,666 167,404
Europe 71,915 81,679 91,788
Asia 151,353 125,158 125,364
Africa 60,576 85,939 67,216
Latin America 270,231 281,962 243,552
----------- ----------- -----------
$ 1,751,683 $ 1,949,841 $ 1,838,889
=========== =========== ===========
OPERATING INCOME (LOSS):
United States $ 86,117 $ (49,197) $ (55,100)
Canada 2,291 5,747 2,699
Europe 6,967 10,779 3,601
Asia 7,198 (8,141) 9,265
Africa 9,461 3,336 1,301
Latin America 33,802 17,699 5,085
----------- ----------- -----------
$ 145,836 $ (19,777) $ (33,149)
=========== =========== ===========
IDENTIFIABLE ASSETS:
United States $ 549,739 $ 659,495
Canada 68,256 75,795
Europe 43,759 138,280
Asia 131,505 59,295
Africa 24,200 25,346
Latin America 182,164 188,232
----------- -----------
$ 999,623 $ 1,146,443
=========== ===========
</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.
19
<PAGE> 111
[WISE HOLDINGS, INC. LOGO] WISE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997
1
<PAGE> 112
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, 1997 and 1996, and the related
consolidated statements of operations, shareholder's equity and cash flows for
each of the three years in the period ended December 31, 1997. 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 consolidated financial statements present fairly, in all
material respects, the financial position of Wise Holdings, Inc. and
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Columbus, Ohio
March 13, 1998
2
<PAGE> 113
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
WISE HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year ended December 31,
(Dollars in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 242,176 $ 245,619 $ 250,679
Cost of goods sold 150,316 161,124 161,288
--------- --------- ---------
Gross margin 91,860 84,495 89,391
Distribution expense 27,501 25,864 30,514
Marketing expense 39,459 45,715 47,397
General and administrative expense 21,247 15,462 13,014
--------- --------- ---------
Operating income (loss) 3,653 (2,546) (1,534)
Interest expense, net 856 1,218
Other (income) expense (331) 307 (57)
--------- --------- ---------
Income (loss) before income taxes 3,128 (4,071) (1,477)
Income tax expense (benefit) 1,292 (490) (349)
--------- --------- ---------
Net income (loss) $ 1,836 $ (3,581) $ (1,128)
========= ========= =========
SHARE INFORMATION
Basic and diluted earnings (loss) per common share $ 18.36 $ (35.81) $ (11.28)
Average number of common shares outstanding
during the period 100 100 100
- --------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
</TABLE>
3
<PAGE> 114
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
WISE HOLDINGS, INC. AND SUBSIDIARIES
(Dollars in thousands) December 31,
ASSETS 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 3,604 $ 3,027
Accounts receivable (less allowance for doubtful accounts
of $2,498 and $1,345, respectively) 23,131 23,771
Affiliated receivables 1,204 2,202
Inventories:
Finished goods 4,621 3,744
Raw materials and supplies 3,841 5,339
Deferred income taxes, net 2,825 2,289
Prepaid and other current assets 4,509 4,806
---------------- -----------------
43,735 45,178
PROPERTY AND EQUIPMENT
Land 1,347 1,331
Buildings and improvements 5,585 4,583
Machinery and equipment 36,906 35,178
---------------- -----------------
Less accumulated depreciation 43,838 41,092
14,756 11,524
---------------- -----------------
29,082 29,568
---------------- -----------------
INTANGIBLES AND OTHER ASSETS
Trademarks, (net of accumulated
amortization of $1,410 and $940) 17,401 17,865
Other assets 889 1,308
---------------- -----------------
18,290 19,173
---------------- -----------------
TOTAL ASSETS $ $ 91,107 $ 93,919
================ =================
- -------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
</TABLE>
4
<PAGE> 115
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
WISE HOLDINGS, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share amounts) December 31,
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDER'S EQUITY 1997 1996
<S> <C>
Current Liabilities
Debt payable within one year $ 270
Accounts and drafts payable 12,570 $ 15,924
Affiliated payables 1,467 2,163
Accrued liabilities 15,735 14,438
-------- --------
30,042 32,525
Other Liabilities
Long-term debt payable to Borden, Inc. 7,000 10,145
Deferred income taxes, net 2,522 3,442
Non-pension postemployment
benefit obligations 9,960 9,928
Affiliated employee benefit obligation 1,817 1,247
Other long-term liabilities 371
Minority interest 830 683
-------- --------
22,500 25,445
Commitments and Contingencies (Note 11)
Shareholder's Equity
Common stock - $0.01 par value
10,000,000 shares authorized 100
issued and outstanding - -
Preferred stock - $0.01 par value
4,000,000 shares authorized; none
issued and outstanding - -
Paid in capital 34,980 34,200
Retained earnings (from July 2, 1996) 3,585 1,749
-------- --------
38,565 35,949
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 91,107 $ 93,919
======== ========
- ------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
</TABLE>
5
<PAGE> 116
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
WISE HOLDINGS, INC. AND SUBSIDIARIES
(Dollars in thousands) Year Ended December 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income (loss) $ 1,836 $ (3,581) $ (1,128)
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation and amortization 6,555 6,225 6,299
Provision (benefit) for deferred income tax (1,455) 1,153
Other non cash 960 783 (568)
Net change in assets and liabilities:
Accounts receivable (569) (2,076) 1,129
Affiliated receivables 1,778 (2,202)
Inventories 959 1,526 123
Prepaid and other current assets 297 565 (867)
Other assets 413 851 (194)
Accounts and drafts payable (3,354) 1,982 1,697
Affiliated payables (696) 2,163
Accrued liabilities 1,297 (586) 1,932
Non-pension postemployment benefits 32 (125) 1,078
Affiliated employee benefit obligations 570 108
Other long-term liabilities 371 (1,187)
------- -------- -------
8,994 6,786 8,314
------- -------- -------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (5,359) (5,847) (2,956)
Proceeds on sales of equipment 759 474 606
Purchase of business (1,037)
Purchase of subsidiary investment (655)
------- -------- -------
(5,637) (6,028) (2,350)
------- -------- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Management contributions 95 655
Short-term borrowings 742
Repayment of short-term borrowings (472)
Payment of affiliated long-term debt (3,145)
Other increases (decreases) in owners investment 1,013 (6,234)
------- -------- -------
(2,780) 1,668 (6,234)
------- -------- -------
Increase (decrease) in cash and equivalents 577 2,426 (270)
Cash and equivalents at beginning of period 3,027 601 871
------- -------- -------
Cash and equivalents at end of period $ 3,604 $ 3,027 $ 601
======= ======== =======
- -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
</TABLE>
6
<PAGE> 117
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
WISE HOLDINGS, INC. AND SUBSIDIARIES
(Dollars in thousands) Year Ended December 31,
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest $ 1,474 $ 999
Change in affiliate tax sharing arrangement 780
Exchange of accounts receivable
for assets of business 878
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)
- ----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
</TABLE>
7
<PAGE> 118
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
WISE HOLDINGS, INC. AND SUBSIDIARIES
COMMON INTERCOMPANY PAID IN RETAINED
(Dollars in thousands) SHARES ACCOUNT CAPITAL EARNINGS TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
(Predecessor Basis)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 71,591 $ 71,591
Change in accounting basis
as a result of KKR's
acquisition of Borden (14,912) (14,912)
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, 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 debt to Borden, Inc. (10,145) (10,145)
Management contribution (655) (655)
Net income from July 2, 1996 $ 1,749 1,749
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 100 - 34,200 1,749 35,949
- -------------------------------------------------------------------------------------------------------------------------------
Change in affiliate tax sharing
arrangement 780 780
Net income 1,836 1,836
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 100 $ 34,980 $ 3,585 $ 38,565
- -------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
</TABLE>
8
<PAGE> 119
WISE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except for per share information)
1. BACKGROUND
In September 1994, Borden, Inc. ("Borden") entered into a merger agreement 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 Wise, 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 fully and unconditionally
guarantees 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 receives an annual fee of $210.
2. NATURE OF OPERATIONS
Wise Holdings, Inc. ("Wise") is a 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.
3. 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 accompanying financial statements subsequent to the purchase by
KKR were prepared on a purchase accounting basis that allocates approximately
$51 million of the original KKR purchase price of Borden to the Wise operations.
The purchase price has been allocated to tangible and intangible assets and
liabilities of Wise based on independent appraisals and management estimates.
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, 1997, and
the salty snack business of Borden, Inc. for the period of January 1, 1995,
through July 1, 1996.
9
<PAGE> 120
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.
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 the year ended December 31, 1995, 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 EQUIVALENTS
Cash and 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.
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.
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.
10
<PAGE> 121
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
equity in the accompanying financial statements.
EARNINGS PER SHARE
Basic and diluted earnings (loss) per common share at December 31, 1997 are
computed by dividing net income by the weighted average number of common shares
outstanding during the period ended December 31, 1997. Basic and diluted
earnings (loss) per common share at December 31, 1996 and 1995 is computed
assuming that the shares outstanding from July 2, 1996 to December 31, 1996 were
outstanding for the entire period ended December 31, 1996 and for the full
period of 1995. Options issued by subsidiaries that enable the holder to obtain
stock of the subsidiary were not assumed exercised because they were
antidilutive for both 1997 and 1996. Wise has no other potentially dilutive
securities.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject Wise to concentrations of credit
risk consist principally of temporary cash investments, marketable securities,
and accounts receivable. Wise invests its excess cash with Borden who in turn
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, however under some
circumstances Wise will obtain collateral to mitigate risk. Wise monitors its
exposure to credit losses and maintains allowances for anticipated losses.
IMPAIRMENT
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, 1997 and 1996.
STOCK OPTIONS
The Financial Accounting Standards Board has issued SFAS No. 123, Accounting for
Stock-Based Compensation. 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.
11
<PAGE> 122
RECLASSIFICATIONS
Wise reclassified its promotional price adjustments ("PPA") relating to products
sold at specially agreed upon prices. These costs were reclassified from
marketing expense to a direct adjustment to net sales. The reclassification
effectively reduced net sales and marketing expense, with no impact to net
income. Total reclassifications were $33,189, $32,435 and $32,118 for 1997, 1996
and 1995, respectively.
As a result of the finalization of the 1996 federal corporation income tax
return and the associated tax basis allocation of the Incorporation, certain
1996 deferred income tax amounts have been reclassified to conform to the 1997
presentation. These changes had no impact on the 1997 or 1996 tax provision.
Certain other prior year amounts have been reclassified to conform with the 1997
presentation.
4. ACCRUED LIABILITIES
<TABLE>
<CAPTION>
Accrued liabilities were as follows: DECEMBER 31,
1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Compensation $ 2,758 $ 2,073
General insurance 5,627 6,374
Advertising and promotion 3,591 2,576
Other 3,759 3,415
--------- ---------
Total $15,735 $ 14,438
- -------------------------------------------------------------------------------------------
</TABLE>
5. AFFILIATED LONG-TERM DEBT
In conjunction with the Incorporation, Wise entered into a loan agreement (the
"Loan Agreement") to borrow funds from Borden.
REVOLVING LOAN
The Loan Agreement provides for a revolving loan facility of up to $5 million
maturing in December 1998, at a variable interest rate equal to Borden's cost of
funds for 30 day LIBOR borrowings plus 0.25%. A commitment fee based on a
variable rate tied to Borden's leverage is charged on the unused portion of the
revolving loan facility. Wise had no borrowings under the revolving agreement at
December 31, 1997 and 1996.
LONG-TERM LOAN
The Loan Agreement also provides for a $10.145 million term loan with a fixed
interest rate of 11% maturing in November 1999, payable in full at the maturity
date.
By agreement with Borden, interest charges and commitment fees for fiscal 1996
under the Loan Agreement were calculated as if the borrowings were outstanding
from January 1, 1996. Interest charges under the Loan Agreement amounted to
$1,152 and $1,218 in 1997 and 1996, respectively.
The Loan Agreement contains certain restrictions on the activities of Wise and
its subsidiaries, including restrictions on liens, the incidence of
indebtedness, mergers and consolidations, sales of assets, investments, payment
of dividends (requires prior approval from Borden), 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.
12
<PAGE> 123
6. 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 years of 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 that 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 $511, $477 and $312 during 1997, 1996 and 1995,
respectively.
Most Wise employees who 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 $234, $236 and
$233 in 1997, 1996 and 1995, 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>
1997 1996
BORDEN BORDEN
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligations $ 333,938 $ 383,065
========= =========
Accumulated benefit obligations $ 342,535 $ 400,371
========= ==========
Projected benefit obligations $ 345,035 $ 400,458
Plan assets at fair value 385,151 393,625
--------- ----------
Plan assets greater (less) than projected
benefit obligation 40,116 (6,833)
Unrecognized prior service cost 2,618 2,938
Unrecognized loss (gain) (35,742) 2,213
Minimum liability adjustment (5,064)
--------- -----------
Net pension asset (liability) $ 6,992 $ (6,746)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 124
The following are the components of the net pension expense recognized under the
Borden Plan:
<TABLE>
<CAPTION>
1997 1996 1995
BORDEN BORDEN BORDEN
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Components of pension cost:
Service cost $ 7,146 $ 7,233 $ 6,430
Interest cost 27,275 27,371 31,165
Actual return on assets (100,698) (26,843) (87,071)
Net amortization and deferral 70,058 (5,551) 51,430
---------- ---------- --------
Net expense $ 3,781 $ 2,210 $ 1,954
- ------------------------------------------------------------------------------------------------------------------------------------
</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 7.25% and 4.4%, respectively for 1997, and 7.5% and 4.5%,
respectively for 1996. The expected long-term rate of return on plan assets for
1997, 1996 and 1995 was 8.5%, 7.8%, and 9.8%, respectively. 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 are generally
matched 50% by Borden. Charges to operations for matching contributions for Wise
employees under Borden's retirement savings plans for 1997, 1996 and 1995
amounted to $726, $466 and $778, respectively.
7. NON-PENSION POSTEMPLOYMENT BENEFITS
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 postemployment 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 postretirement medical benefits are
contributory; the postretirement life insurance is noncontributory. Benefits are
funded on a pay-as-you-go basis.
Prior to January 1, 1996 amounts attributable to postretirement benefits were
commingled in one Borden sponsored plan. Effective January 1, 1996, the
components of postretirement benefit expense and unfunded postretirement
obligation were accounted for separately for the Wise business. The gross
postretirement obligation at December 31, 1995 was allocated to Wise based upon
the actuarially determined obligation relating to Wise's employees.
The postretirement benefit expense allocated to Wise from the Borden plan was
$548 during 1995, however other information as to service cost, interest cost,
net amortization and deferral is not available for Wise prior to January 1,
1996. The components of Wise's net postretirement benefit expense for the years
ended December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
WISE WISE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Service cost $ 19 $ 8
Interest cost 582 543
Net amortization and deferral 37 18
------ ------
Net post-retirement expense $ 638 $ 569
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The status of Wise's unfunded postretirement benefit obligation as of December
31, 1997 and 1996 is as follows:
14
<PAGE> 125
<TABLE>
<CAPTION>
1997 1996
WISE WISE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of accumulated
post-retirement benefit obligation:
Retirees $ (7,826) $(7,534)
Fully eligible active plan participants (22) (212)
Other active plan participants (66) (337)
---------- ----------
$ (7,914) $(8,083)
Unrecognized net (loss) gain (453) 108
---------- ---------
Accrued post-retirement $ (8,367) $(7,975)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The discount rate used in determining the accumulated postretirement benefit
obligation at December 31, 1997 and 1996 was 7.25% and 7.50%, respectively.
The assumed health care cost trend used in measuring the accumulated
postretirement benefit obligation at December 31, 1997 was 8.75%, gradually
declining to 5.25% by the year 2004. The comparable assumptions for the prior
year were 9.50%, declining to 5.50%. A one percentage point increase in health
care cost trend rate would increase the accumulated postretirement benefit
obligation as of December 31, 1997 and 1996 by $550 and $800 and the sum of the
service and interest costs in 1997 and 1996 by $40 and $64.
8. 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 commodities, which are principal
components 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, 1997, and 1996, $900 and $3,400 of commodity futures
was outstanding, maturing through December 1998 and March 1997, respectively.
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; 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 (based on dealer quotes) of commodity futures as of December 31,
1997 and 1996 was unfavorable $61 and $491, respectively. This amount has been
deferred by Wise as of December 31, 1997 and will be reflected in the cost of
the commodity as it is actually purchased. Total deferred losses at December 31,
1997 and 1996 relating to contracts closed but not yet amortized were not
material.
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 GUARANTEES
As discussed in Note 11, Wise has guaranteed obligations under Borden's credit
facility and all of Borden's outstanding publicly held debt on a pari passu
basis. Wise also guarantees outstanding debt for an independent distributor.
Management does not expect these guarantees to have a material adverse effect on
the consolidated results of operations or financial position of Wise. Fair value
was not assigned to these guarantees due to the complexity of the arrangements
and both the absence of expected funding and market for these financial
instruments.
15
<PAGE> 126
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 debts of like maturities and approximates its
carrying value.
9. 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, Borden included Wise operations
in determining taxable income and Borden made all U.S. tax payments. 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.
The provision (benefit) for income taxes consisted of:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal
Current $ 2,466 $ (469)
Deferred (1,307) 1,503
------- -------
Subtotal 1,159 1,034
State and local
Current 282 (53)
Deferred (149) 171
------- -------
Subtotal 133 118
------- -------
Total non-affiliated provision 1,292 1,152
Affiliated provision included in equity (1,642) $ (349)
------- ------- -------
$ 1,292 $ (490) $ (349)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
As discussed in Note 2, deferred tax amounts were recorded in equity prior to
July 2, 1996. Accordingly, the tax provision for the first six months of 1996
and all of 1995 is also included as a component of shareholder's equity.
A reconciliation of the statutory U.S. Federal income tax rate to the Wise
effective tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax at statutory rate $ 1,094 $(1,425) $ (517)
State and local income taxes,
less federal income tax benefit 94 (149) (42)
Rate differential on tax benefit 963
Tax credits and other 104 121 210
--------- --------- -------
Total $ 1,292 $ (490) $ (349)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The net current and non-current components of Wise's deferred income taxes
recognized in the balance sheets at December 31, 1997 and 1996 follow:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net current asset $ 2,825 $ 2,289
Net non-current liability (2,522) (3,442)
---------- ---------
Net asset (liability) $ 303 $(1,153)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 127
The tax effects of Wise's significant temporary differences and loss carry
forwards which comprise the deferred tax assets and liabilities at December 31,
1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Reserve for doubtful accounts $ 974 $ 525
Employee benefits and related items 4,541 4,174
General insurance 2,195 2,486
Other-net 528 540
Other long-term liabilities 879 511
NOL carryforward 541
-------- -------
Total deferred tax assets $ 9,117 $ 8,777
======== =======
DEFERRED TAX LIABILITIES:
Parts and racks inventory $ (1,027) $ (751)
Prepaid and other assets (501) (814)
Property and equipment (6,855) (8,221)
Trademarks (431) (144)
--------- --------
Total deferred tax liabilities $ (8,814) $(9,930)
========= ========
Total deferred tax asset (liability) $ 303 $(1,153)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's net deferred tax asset at December 31, 1997 was $303. Realization
of the entire deferred tax asset is dependent on generation of approximately
$720 of future taxable income. Management believes that it is more likely than
not that sufficient additional income will be earned to fully realize this
benefit. Accordingly, no valuation allowance is necessary at December 31, 1997.
In a limited tax sharing arrangement with Borden, Wise will be reimbursed for
taxes paid subsequent to July 2, 1996 up to an aggregate sum of $2,562. At
Incorporation, Borden agreed to reimburse Wise $1,782 under this arrangement.
Upon finalization of Borden's 1996 corporate tax return in 1997, Borden agreed
to increase reimbursements by $780. This change in the affiliated tax sharing
arrangement has been accounted for as a permanent increase to paid-in-capital.
During 1997 Borden paid $1,461 in taxes on the behalf of Wise under this tax
sharing arrangement. The residual amount of $1,101 at December 31, 1997 is
included as a component of affiliated receivables.
10. 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%. At that time, options
were also issued which vest over five years and allow management to purchase
additional shares resulting in an ownership of up to 6% of the subsidiary. In
1997 Wise issued additional equity interests to management in consideration of
$95, increasing the ownership percentage to 2.15% under similar circumstances as
described above. 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 full vesting, 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.
17
<PAGE> 128
11. 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 eight
years.
Future minimum annual rentals under operating leases at December 31, 1997, are
as follows:
<TABLE>
<CAPTION>
MINIMUM RENTALS ON
OPERATING LEASES
-----------------------------------------
NON-
AFFILIATED AFFILIATED
---------- ----------
<C> <C> <C>
1998 $ 924 $ 3,534
1999 404 2,964
2000 165 2,727
2001 120 2,217
2002 193 1,585
2003 and beyond 183 1,088
------- --------
Total $1,989 $14,115
- --------------------------------------------------------------------------------
</TABLE>
The affiliated leases are part of a lease agreement that Borden has with a third
party lender. As such, management believes 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 1997, 1996 and 1995 were $4,855,
$4,252, and $4,810, respectively.
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 could require Wise to make additional
unforeseen environmental expenditures.
Environmental accruals are routinely reviewed 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 is 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.
DEBT GUARANTEES
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
$783,480 at December 31, 1997. Wise also guarantees $602 of outstanding debt for
an independent distributor of Wise products.
18
<PAGE> 129
Management does not expect these guarantees will have a material adverse effect
on the consolidated financial statements of Wise.
12. 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 as well as active and retiree group insurance 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 $1,204 and $1,849 at
December 31, 1997 and 1996, respectively. Effective July 1, 1997, Wise secured
the services of a third party for its general insurance needs related to losses
that occur after the effective date, and makes payments directly to a third
party vendor.
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.
During 1997, the majority of hourly employees at two plants converted their
group insurance coverage from a Borden sponsored plan to a third party
non-affiliated plan.
The following table summarizes the allocation of costs to Wise in 1996 and 1995
and the charges for these costs in 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Employee benefits $ 2,103 $ 1,861 $ 2,045
Group and general insurance 4,193 4,563 7,441
Information services 240 40 15
Corporate staff departments
and overhead 1,832 2,235 2,888
-------- -------- --------
$ 8,368 $ 8,699 $ 12,389
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Wise also invests excess cash with Borden in one-day investments that totaled
$2,350 and $1,800 at December 31, 1997 and 1996, respectively. Interest income
from Borden for these one day investments totaled $148 and $30 for the years
ended December 31, 1997 and 1996, respectively.
On July 14, 1997 and September 26, 1997, Wise entered into two unsecured
agreements with a third party to finance insurance premiums of $532 and $210.
Both agreements bear interest at a fixed annual rate of 5.4% and require monthly
payments of principal and interest through the maturity date of April 1, 1998.
Borden negotiated the interest rates under these agreements on behalf of the
affiliated companies.
19
<PAGE> 130
13. 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.
In 1996, Wise Foods, a subsidiary of Wise, issued a total of 6,971,000 shares of
common stock with a par value of $.01 per share. Out of the total shares issued,
131,000 shares were issued to key members of management at $5 per share, along
with the grant of options to purchase an additional 262,000 shares of common
stock at an exercise price of $10 per share (the "1996 Option Plan"). In 1997,
Wise Foods issued an additional 19,000 shares which provided for 38,000 options
under similar arrangements. 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. In both
years, the remainder of Wise Foods' issued and outstanding shares, amounting to
6,821,000 and 6,840,000 shares in 1997 and 1996, respectively, were held by
Wise, its parent.
Information regarding Wise Foods' 1996 Option Plan is summarized below:
<TABLE>
<CAPTION>
Stock Weighted
Options Average Price
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at 12/31/95
Granted 262,000 $10
Exercised
Canceled ---------- --------
Outstanding at 12/31/96 262,000 $10
Granted 38,000 $10
Exercised
Canceled ---------- --------
Outstanding at 12/31/97 300,000 $10
========== ========
Exercisable at 12/31/97 52,400
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The pro forma disclosure of net income and earnings per share, that would have
been recognized in the 1997 consolidated statement of operations if the fair
value-based method had been used, was not material.
14. SUPPLEMENTAL INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Advertising and promotion expenses $22,468 $29,747 $30,892
Research and development expenses 1,787 957 695
Depreciation 6,085 5,755 5,829
Amortization 470 470 470
</TABLE>
15. BUSINESS ACQUISITION AND DIVESTITURE
On July 31, 1997, for a purchase price of $1.9 million, Wise acquired certain
assets (accounted for under the purchase method) of Quality Foods of North
Carolina, an independent distributor of Wise products and other snack food
products throughout North and South Carolina. Wise will continue to use the
acquired assets for the purpose of distribution of snack foods.
20
<PAGE> 131
Wise has reached a tentative agreement to sell the stock of its Puerto Rican
subsidiary. The selling price of the business is expected to approximate book
value. In the opinion of management, the sale of the subsidiary will have no
material adverse effect on Wise.
21
<PAGE> 1
Exhibit (10)(i)
RECAPITALIZATION AGREEMENT
Recapitalization Agreement, dated as of October 14, 1997 (hereinafter
"Agreement"), among BORDEN, INC., a New Jersey corporation ("Borden"), BORDEN
DECORATIVE PRODUCTS HOLDINGS, INC., a Delaware corporation and an indirect
wholly owned subsidiary of Borden ("BDPH"), and BDPI HOLDINGS CORPORATION, a
Delaware corporation ("MergerCo").
W I T N E S S E T H:
WHEREAS, BDH One, Inc. ("BDH One"), a Delaware corporation, and certain
members of management of BDPH ("BDPH Management") (collectively, the
"Stockholders"), own all of the issued and outstanding shares of capital stock
of BDPH;
WHEREAS, Borden and certain of its direct and indirect subsidiaries are
presently engaged in the business of the development, production, marketing,
distribution and sale of certain paper and vinyl decorative surface products and
coordinating fabrics and accessories for residential, commercial and industrial
applications (the "Products") primarily in North America, the United Kingdom and
the Far East (which business, which does not include the commercial
wallcoverings and industrial decorative products businesses of Borden's Columbus
Coated Fabrics division or Borden's Orchard division (including The Orchard
Company), is hereinafter referred to as the "Business");
WHEREAS, the parties desire Borden to cause a newly formed unlimited
liability company organized under the laws of Nova Scotia, Canada (the "BDPH
Canadian
<PAGE> 2
2
Subsidiary"), that is a wholly owned subsidiary of Borden Company Limited, a
company organized under the laws of Canada ("BCL" or the "Asset Seller"),
subject to the terms and conditions of this Agreement, to own certain of the
assets and assume certain of the liabilities of BCL as provided in Article 2
hereof (such transfer, the "Asset Transfer");
WHEREAS, immediately following the Asset Transfer, Borden will cause
BCL to transfer all of the capital stock of the BDPH Canadian Subsidiary to BDPH
(the "Stock Transfer");
WHEREAS, immediately after the Stock Transfer, MergerCo and BDPH intend
to effect the merger of MergerCo with and into BDPH (the "Merger") in accordance
with the Delaware General Corporation Law (the "DGCL") and the provisions of
this Agreement, pursuant to which each share of common stock, par value $0.01
per share, of BDPH (the "BDPH Common Stock"), and each share of preferred stock,
par value $0.01 per share, of BDPH (the "BDPH Preferred Stock" and, together
with the BDPH Common Stock, the "BDPH Capital Stock"), issued and outstanding
immediately prior to the Effective Time of the Merger (as defined in Section
3.2) will be converted, retained or cancelled as set forth in Article 4 hereof;
and
WHEREAS, it is intended that the Merger be accounted for as a
recapitalization for financial reporting purposes.
NOW, THEREFORE, in consideration of the premises, representations and
warranties and the mutual covenants and agreements contained herein and other
good, valuable and sufficient consideration, the receipt of which is hereby
acknowledged, each of the parties, intending to be legally bound, hereby agrees
as follows:
<PAGE> 3
3
1. [Intentionally Omitted]
2. OWNERSHIP OF ASSETS AND ASSUMPTION OF LIABILITIES
2.1 Transfer of Assets
Subject to the satisfaction or waiver of the conditions set forth in
this Agreement, at the Closing and as of the Closing Date and immediately prior
to the Merger, Borden shall cause BCL to assign, transfer, convey and deliver to
the BDPH Canadian Subsidiary and the BDPH Canadian Subsidiary shall acquire all
of the assets, rights, properties, claims, contracts and business of BCL which
are principally utilized or held for use in the Business, of every kind, nature,
character and description, tangible and intangible, real, personal or mixed,
wherever located other than (i) the stock or assets of BDPH and the direct and
indirect subsidiaries of BDPH (such companies, which for purposes of Article 6
only shall be deemed to exclude the BDPH Canadian Subsidiary, the "Decorative
Products Companies") and (ii) the Excluded Assets described in Section 2.3
hereof (such assets, the "Acquired Assets"; and together with the assets of the
Decorative Products Companies, the "Assets"). As of the Closing, risk of loss as
to the Acquired Assets shall pass from the Asset Seller to the BDPH Canadian
Subsidiary.
2.2 Acquired Assets
Without limiting the generality or effect of the first sentence of
Section 2.1, the Acquired Assets include the following assets of BCL subject in
each case to the limitations set forth in clauses (i) and (ii) of Section 2.1(a)
hereof:
(a) Real Property. All Real Property (as defined in Section
6.7(b)) described or required by the terms hereof to be described on Part I of
Schedule 6.7(b) hereto, including all Facilities (as defined in Section 6.7(b))
thereon, and all buildings, improvements,
<PAGE> 4
4
fixtures, easements, privileges, rights-of-way, riparian and other water rights,
lands underlying any adjacent streets or roads and appurtenances pertaining to
or accruing to the benefit of such property, in each case subject to the
exceptions described on Schedule 6.7(a) hereto.
(b) Machinery and Equipment. All machinery, equipment and
other items of personal property which are located at the Facilities on the
Closing Date or otherwise principally related to the Business (the "Machinery")
and all warranties and guarantees, if any, express or implied, existing for the
benefit of the Machinery.
(c) Intangible Property.
(i) Patent Rights. All right, title and interest
including, without limitation, any causes of action in respect thereof in the
Patent Rights (as defined in Section 6.10(a)) described or required by the terms
hereof to be described on Part I of Schedule 6.10(a) hereto;
(ii) Trademark Rights. All right, title and interest
including, without limitation, any causes of action in respect thereof in the
Trademark Rights (as defined in Section 6.10(b)) described or required by the
terms hereof to be described on Part I of Schedule 6.10(b) hereto;
(iii) Copyrights. All right, title and interest including,
without limitation, any causes of action in respect thereof in the Copyright
Rights (as defined in Section 6.10(c)) described or required by the terms hereof
to be described on Part I of Schedule 6.10(c) hereto;
(iv) Technology. All right, title and interest including,
without limitation, any causes of action in respect thereof in the Technology
(as defined in Section 6.10(a)); and
<PAGE> 5
5
(v) Business Information. All written or electronic
business information, management systems and books, records and other
information relating principally to the operation of the Business, including,
but not limited to, any of the foregoing contained in the information systems
listed on Schedule 2.3(e) and advertising, marketing and sales programs,
business and strategic plans, supplier and employee information and customer
lists.
(d) Contracts. All Contracts (as defined in Section 6.8(a)) to
which BCL is a party or by which BCL is bound.
(e) Permits. All Permits (as defined in Section 6.14) which
relate principally to the Business.
(f) Inventories. The finished products (other than finished
products that have been billed and are being held for customers' accounts)
principally related to the Business and owned by BCL on the Closing Date and all
work-in-process, raw materials and packaging materials used in connection
therewith, principally related to the Business and owned by BCL on the Closing
Date.
(g) Receivables. All accounts receivable and other receivables
of BCL in existence on the Closing Date (whether or not billed) to the extent
related to the operations of the Business (the "Receivables").
(h) Related Assets. Rights arising in respect of or other
assets constituting prepaid expenses as of the Closing to the extent relating to
the Acquired Assets or the Business.
(i) Other Assets. All other assets of the Business (i)
included or reflected in (A) the Financial Statements (as defined in Section
6.5), to the extent still in existence on the Closing Date or (B) the Closing
Balance Sheet (as defined in Section 5.2(b)) including, in
<PAGE> 6
6
each case, the notes thereto, excluding the Excluded Assets (as defined in
Section 2.3) or (ii) owned or held by Borden or any of its affiliates and used
principally in the Business.
2.3 Excluded Assets
It is expressly agreed that BCL will retain and the BDPH Canadian
Subsidiary will not acquire the following assets (the "Excluded Assets"):
(a) Non-Acquired Assets. Any assets utilized by BCL
principally in connection with businesses other than the Business or used by BCL
at plants or distribution facilities which are not owned or used by BCL
principally in the operation of the Business as generically described on
Schedule 2.3(a).
(b) Cash and Cash Equivalents. Cash and cash equivalents,
including, without limitation, bank deposits, investments in so-called "money
market" funds, commercial paper funds, certificates of deposit, Treasury Bills
and accrued interest thereon ("Cash"), except to the extent arising out of any
Receivable or other asset reflected in the Closing Net Working Capital and
except for petty cash on hand at any of the Facilities and cash and cash
equivalents arising out of or under any Asset following the Closing.
(c) Tax Refunds. Any refunds or credits for (including
interest thereon or claims therefor) Taxes (as defined in Section 6.12) relating
to the ownership of the Acquired Assets and the conduct of the Business prior to
the Closing, other than any Taxes assumed by MergerCo pursuant to Section 15.3
or for which any Decorative Products Company is directly liable.
(d) Insurance Contracts. Except as expressly provided in
Section 8.19, any contracts of insurance in respect of the Business; and any
reimbursement for, or other benefit associated with prepaid insurance, and any
rights associated with any prepaid expense for
<PAGE> 7
7
which BDPH will not receive the benefit after the Closing Date, including
without limitation any insurance proceeds with respect to events occurring prior
to the Closing Date to the extent BCL assumes or retains the cost of any such
event or indemnifies BDPH with respect to such event, provided, however, that
nothing herein will affect the rights of BDPH (as an additional insured or
otherwise) or any Decorative Products Company under any such insurance after the
Closing.
(e) Excluded Information Systems. Subject to Section
2.2(c)(v), the information systems of the Business identified in Schedule
2.3(e).
(f) Employee Benefit Assets. Assets relating to the Benefit
Plans (as defined in Section 6.13(b)) to the extent provided in Section 8.7.
(g) Transferred or Disposed Assets. Any assets transferred or
otherwise disposed of by BCL in the ordinary course of the Business prior to the
Closing and in accordance with this Agreement.
(h) Borden Name and Borden Trademarks. (i) All corporate
trademarks, servicemarks, trade names and logos owned by the Asset Seller
incorporating the word "Borden" or trade dress and logos used in connection
therewith; (ii) any translations, adaptations, derivations or combinations of
any of the items indicated in (i); and (iii) all goodwill associated with any of
the items indicated in (i) and (ii), except as otherwise provided in Section 8.6
or the License Agreement.
<PAGE> 8
8
2.4 Assumed Liabilities
On the terms and subject to the conditions hereof, as of the Closing
Date, Borden shall cause the BDPH Canadian Subsidiary to assume and agree to
pay, perform and discharge when due, all liabilities and obligations whatsoever,
other than Excluded Liabilities (as defined below), of BCL arising principally
out of or pertaining principally to the Business or the Acquired Assets whether
arising before or after the Closing, and whether known or unknown, fixed or
contingent, to the extent the same are unpaid, undelivered or unperformed on the
Closing Date, including, but not limited to, any such liability or obligation of
a type listed below (the "Assumed Liabilities"):
(a) all liabilities of BCL principally related to the Business
and included in (i) the Financial Statements, to the extent they are
still in existence on the Closing Date, and (ii) the Closing Balance
Sheet;
(b) all liabilities with respect to all actions, suits,
proceedings, disputes, claims or investigations but only to the extent
principally arising out of or principally related to the Business or
the Acquired Assets;
(c) all liabilities for claims, but only to the extent
principally relating to the Business under BCL's self-insurance
arrangements;
(d) all obligations and liabilities of BCL under the
Contracts, Leased Real Property (as defined in Section 6.7(b)) and
Permits relating principally to the Business;
(e) all obligations and liabilities of BCL for Product
returns, replacements or allowances or warranty given in the ordinary
course of business to the customers of the Business;
<PAGE> 9
9
(f) any obligations and liabilities of BCL for trade promotion
programs (including, without limitation, trade allowance programs),
rebates, coupons, non-coupon consumer promotions (including, without
limitation, sweepstakes) and other marketing programs and commitments
principally relating to the Business;
(g) all workers' compensation, product liability, automobile
liability and general liability claims of BCL relating principally to
the Business which occurred prior to the Closing Date, or any incident
arising prior to the Closing Date which results in any such claims
after the Closing Date;
(h) all obligations and liabilities of BCL arising as a result
of at any time being the owner or occupant of, or the operator of the
activities conducted at, any of the Facilities, including all such
obligations and liabilities relating to personal injury, property
damage and Environmental Liability (as defined in Section 6.16); and
(i) all obligations and liabilities for which MergerCo or BDPH
is expressly responsible under Sections 8.7, 12 and 15.3 hereof.
2.5 Excluded Liabilities
It is expressly agreed that BCL shall retain and the BDPH Canadian
Subsidiary shall not assume any of the following liabilities or obligations (the
"Excluded Liabilities"):
(a) all obligations and liabilities principally arising out of
or relating to (i) the Excluded Assets, (ii) any business other than the
Business, (iii) any property other than the Facilities, and (iv) any product
other than the Products;
(b) all liabilities or obligations of BCL that do not arise
out of or are not principally related to the Business or the Acquired Assets;
<PAGE> 10
10
(c) all obligations and liabilities of BCL retained pursuant
to Sections 8.7, 12 and 15.3 hereof and all obligations and liabilities under
the Benefit Plans expressly assumed or retained by the Asset Seller or any other
affiliate of Borden pursuant to Section 8.7 hereof or in respect of Taxes for
which Borden is or remains responsible hereunder;
(d) all obligations and liabilities for Taxes owed by BCL in
respect of the Business for which BCL is responsible pursuant to Section 12
hereof;
(e) all obligations and liabilities arising out of those
liabilities specifically set forth on Schedule 2.5(e);
(f) all obligations and liabilities under or relating to
Acquired Assets that cannot be assigned to BDPH;
(g) all obligations and liabilities incurred by BCL after the
Closing Date; and
(h) any other obligations and liabilities which BCL or Borden
has expressly assumed or retained pursuant to this Agreement.
2.6 Certain Definitions. For purposes of this Agreement, the term or
phrase "principally" or "principally related to" and similar phrases refers to
an asset or liability, as the case may be, that primarily is used in or
primarily arises out of the Business and is not primarily used in or does not
primarily arise out of any other business of BCL or Borden other than the
Business or the businesses of BCL or Borden generally.
<PAGE> 11
11
3. THE MERGER
3.1 The Merger
Subject to the satisfaction or waiver of the conditions set forth in
this Agreement, at the Closing and as of the Closing Date and immediately after
the consummation of the Asset Transfer, MergerCo shall be merged with and into
BDPH in accordance with the DGCL. Upon the Effective Time of the Merger (as
defined below), the separate existence of MergerCo shall cease, and BDPH shall
continue as the surviving corporation (the "Surviving Corporation") and shall
continue under the name "Royal Wall Fashions, Inc." or such other name as
MergerCo may designate prior to the Closing and may be reflected in the
Certificate of Merger (as defined below). After the Closing, all references in
this Agreement to "MergerCo" shall mean "BDPH", as successor by merger.
3.2 Effective Time of the Merger
On the Closing Date, immediately after the consummation of the Asset
Transfer, the parties shall file with the Secretary of State of the State of
Delaware a certificate of merger (the "Certificate of Merger") executed in
accordance with the relevant provisions of the DGCL and shall make all other
filings or recordings required under the DGCL. The Merger shall become effective
at such time as the Certificate of Merger is duly filed with the Secretary of
State of the State of Delaware, or at such other time as is permissible in
accordance with the DGCL and as MergerCo and BDPH shall agree should be
specified in the Certificate of Merger (the time the Merger becomes effective
being the "Effective Time of the Merger").
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3.3 Effects of the Merger
The Merger shall have the effects set forth in the applicable
provisions of the DGCL, including without limitation, that BDPH will succeed to
all rights and obligations of MergerCo under the Transaction Documents (as
defined in Section 6.2).
3.4 Certificate of Incorporation; By-Laws; Purposes
(a) At the Effective Time of the Merger, and without any
further action on the part of BDPH or MergerCo, the Certificate of Incorporation
of BDPH, as in effect immediately prior to the Effective Time of the Merger,
shall be the certificate of incorporation of the Surviving Corporation following
the Merger until thereafter further amended as provided therein and under the
DGCL except that Article First thereof will be amended to read as follows: "The
name of the Corporation is Royal Wall Fashions, Inc." (or such other name as may
be designated by MergerCo pursuant to Section 3.1.) and except that, upon action
of the Board of Directors of the Surviving Corporation, the certificate of
incorporation of MergerCo may be substituted therefor, with such name change.
(b) At the Effective Time of the Merger, and without any
further action on the part of BDPH or MergerCo, the By-laws of MergerCo as in
effect at the Effective Time of the Merger shall be the By-laws of the Surviving
Corporation following the Merger until thereafter changed or amended as provided
therein and under the DGCL.
3.5 Directors
The directors of MergerCo at the Effective Time of the Merger and/or
such other persons as may be designated by MergerCo shall be the directors of
the Surviving Corporation following the Merger, until the earlier of their
resignation or removal or until their respective successors are duly elected and
qualified, as the case may be.
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3.6 Officers
The officers of MergerCo at the Effective Time of the Merger shall be
the officers of the Surviving Corporation following the Merger, until the
earlier of their resignation or removal or until their respective successors are
duly elected or appointed and qualified, as the case may be.
4. EFFECT OF THE MERGER ON THE CAPITAL
STOCK OF BDPH AND MERGERCO
4.1 Effect on Capital Stock
As of the Effective Time of the Merger, by virtue of the Merger and
without any action on the part of BDPH, MergerCo or any holder of any shares of
BDPH Capital Stock or any shares of capital stock of MergerCo:
(a) Common Stock of MergerCo. All of the shares of common
stock of MergerCo issued and outstanding immediately prior to the Effective Time
of the Merger shall be converted in the Merger into 5,284,375 shares of BDPH
Common Stock; provided that such number shall be reduced on a share for share
basis for each share of BDPH Common Stock, if any, held by Collins & Aikman
Products Co. ("C&A") as of the close of business on the Closing Date.
(b) Conversion (or Retention) of BDPH Common Stock. Except as
otherwise provided herein and subject to Section 4.2(e), all shares of BDPH
Common Stock issued and outstanding immediately prior to the Effective Time of
the Merger (other than shares cancelled pursuant to Section 4.1(e) and
Dissenting Shares) shall be converted into the right to receive the following
(the "Common Stock Merger Consideration") as follows:
(i)(A) 653,125 shares in aggregate of BDPH Common Stock shall
each be converted into the right to retain one fully paid and
non-assessable share of BDPH
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Common Stock following the Merger (such retained shares, in the
aggregate, the "Retained Shares"); and (B) all remaining shares of BDPH
Common Stock shall be converted into cash from BDPH following the
Merger in an amount equal to the Per Share Consideration (as calculated
by Borden in accordance with Exhibit I) (such cash consideration in the
aggregate, the "Cash Merger Consideration").
(ii) the right to retain Retained Shares and to receive Cash
Merger Consideration in the Merger shall each be allocated among the
holders of BDPH Common Stock on a consistent basis pro rata to the
number of shares of BDPH Common Stock which the holders of shares of
BDPH Common Stock held immediately prior to the Merger.
(c) Conversion of Preferred Stock of BDPH. Shares of BDPH
Preferred Stock issued and outstanding immediately prior to the Effective Time
of the Merger shall each be converted into the right to receive the Liquidation
Preference (as defined in the Borden Decorative Products MergerCo, Inc.
Certificate of Designations, as adopted on May 30, 1996) equal to the original
per share liquidation preference of $25.00, plus, if and to the extent
applicable, all accrued and unpaid dividends, whether or not declared. The
aggregate amount of merger consideration payable in connection with the
conversion of the Preferred Stock may be referred to as the "Preferred Stock
Merger Consideration" and together with the aggregate Common Stock Merger
Consideration may be referred to as the "Merger Consideration".
(d) [Intentionally omitted]
(e) Cancellation of Treasury Stock and MergerCo Owned BDPH
Capital Stock. Each share of BDPH Capital Stock that is owned by BDPH or by any
subsidiary of
<PAGE> 15
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BDPH or each share of BDPH Capital Stock that is owned by MergerCo shall
automatically be cancelled and retired and shall cease to exist, and no cash,
share of BDPH Capital Stock or other consideration shall be delivered or
deliverable in exchange therefor.
(f) Dissenting Shares. Notwithstanding anything in this
Agreement to the contrary, shares of BDPH Common Stock issued and outstanding
immediately prior to the Effective Time of the Merger held by each holder (if
any) who has the right to demand payment for and an appraisal of such shares in
accordance with Section 262 of the DGCL (or any successor provision)
("Dissenting Shares") shall not be converted into a right to receive Merger
Consideration or any cash in lieu of fractional shares of BDPH Common Stock
following the Merger (but shall have the rights set forth in Section 262 of the
DGCL (or any successor provision)) unless such holder fails to perfect or
otherwise loses such holder's right to such payment or appraisal, if any. If,
after the Effective Time of the Merger, such holder fails to perfect or loses
any such right to appraisal, each such share held by such holder shall be
treated as a share that had been converted as of the Effective Time of the
Merger into the right to receive Merger Consideration in accordance with this
Section 4.1.
(g) Cancellation and Retirement of BDPH Capital Stock. As of
the Effective Time of the Merger, all shares of BDPH Capital Stock (other than
shares referred to in Sections 4.1(b)(i)(A) and 4.1(f)) issued and outstanding
immediately prior to the Effective Time of the Merger, shall no longer be
outstanding and shall automatically be cancelled and retired and shall cease to
exist, and each holder of a certificate representing any such shares of BDPH
Capital Stock shall, to the extent such certificate represents such shares,
cease to have any rights with respect thereto, except the right to receive the
Merger Consideration, including cash in lieu of fractional shares of BDPH Common
Stock following the Merger, to
<PAGE> 16
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be issued or paid in consideration upon surrender of such certificate in
accordance with Section 4.2.
4.2 Exchange of Certificates
(a) At or prior to the Effective Time, Borden, in its own
right to the extent entitled to payment and as exchange and disbursing agent for
its subsidiaries and BDPH Management, shall establish a separate bank account in
which the aggregate amount of the Merger Consideration, as well as the other
elements of the Aggregate Consideration, will be deposited (the "Disbursing
Account"). As soon as practicable after the Effective Time of the Merger, each
holder of an outstanding certificate or certificates which prior thereto
represented shares of BDPH Capital Stock shall, upon surrender to Borden of such
certificate or certificates and acceptance thereof by Borden, be entitled to a
certificate or certificates representing the number of full shares of BDPH
Common Stock, if any, to be retained by the holder thereof pursuant to this
Agreement and the amount of cash, if any, into which the number of shares of
BDPH Capital Stock previously represented by such certificate or certificates
surrendered shall have been converted pursuant to this Agreement. Borden shall
accept such certificates upon compliance with such reasonable terms and
conditions as Borden may impose to effect an orderly exchange thereof in
accordance with normal exchange practices. If any certificate for such retained
BDPH Common Stock is to be issued in, or if cash is to be remitted to, a name
other than that in which the certificate for BDPH Common Stock surrendered for
exchange is registered, it shall be a condition of such exchange that the
certificate so surrendered shall be properly endorsed, with signature
guaranteed, or otherwise in proper form for transfer and that the person
requesting such exchange shall pay to the BDPH or its transfer agent any
transfer or other taxes required by reason of the issuance of
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certificates for such retained BDPH Common Stock in a name other than that of
the registered holder of the certificate surrendered, or establish to the
satisfaction of BDPH or its transfer agent that such tax has been paid or is not
applicable. Until surrendered as contemplated by this Section 4.2, each
certificate for shares of BDPH Capital Stock shall be deemed at any time after
the Effective Time of the Merger to represent only the right to receive upon
such surrender the Merger Consideration as contemplated by Section 4.1. No
interest will be paid or will accrue on any cash payable as Merger Consideration
or in lieu of any fractional shares of retained BDPH Common Stock, and Borden
shall retain any amounts earned or funds in the Disbursing Account and any
amounts or securities to which a holder of Dissenting Shares ceases to be
entitled. Notwithstanding the foregoing, none of BDPH, Borden or any other party
hereto shall be liable to a holder of shares of BDPH Capital Stock for any
Merger Consideration delivered pursuant hereto to a public official pursuant to
applicable abandoned property laws.
(b) The right of any holder of a certificate representing BDPH
Common Stock to receive the Merger Consideration shall be subject to and reduced
by the amount of any required Tax withholding obligation.
(c) Promptly after the Effective Time, Borden shall make
available to BDPH shareholders entitled to receive the Merger Consideration a
form of letter of transmittal and instructions for use in surrendering such
certificates and receiving the applicable Merger Consideration in exchange
therefor.
(d) After the Effective Time, there shall be no transfers on
the stock transfer books of BDPH of any shares of BDPH Capital Stock other than
Retained Shares and shares issued pursuant to Section 4.1(a). If, after the
Effective Time, certificates previously
<PAGE> 18
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representing shares of BDPH Capital Stock are presented to BDPH, they shall be
cancelled and exchanged for the applicable Merger Consideration as provided in
this Article IV, subject to applicable law in the case of Dissenting Shares.
(e) (i) No certificates or scrip representing fractional
shares of BDPH Capital Stock shall be retained in connection with the Merger,
and such fractional share interests will not entitle the owner thereof to vote
or to any rights of a stockholder of BDPH after the Merger; and (ii)
notwithstanding any other provision of this Agreement, each holder of shares of
BDPH Common Stock converted pursuant to the Merger who would otherwise have been
entitled to receive a fraction of a share of BDPH Common Stock following the
Merger (after taking into account all shares of BDPH Common Stock delivered by
such holder) shall receive, in lieu thereof, a cash payment (without interest)
from Borden equal to the product of (x) such fraction, multiplied by (y) the Per
Share Consideration. Borden shall retain for its own account (or at its option,
the account of one or more Subsidiaries of Borden) all shares of BDPH Common
Stock constituted from fractional shares with respect to which Borden has made a
cash payment pursuant to this Section.
(f) Borden will indemnify BDPH against all liabilities,
obligations, claims and losses to the extent arising out of the failure of
Borden to fulfill its obligations to exchange shares of BDPH Common Stock
surrendered by BDPH Management into the Merger Consideration in accordance with
the terms and provisions of Section 4.2 of this Agreement.
5. AGGREGATE CONSIDERATION AND ADJUSTMENTS
5.1 (a) Payment of the Aggregate Consideration. The aggregate
consideration payable to Borden, Borden's subsidiaries and BDPH Management at
Closing in connection with the transactions contemplated by this Agreement shall
equal $320,000,000 (the
<PAGE> 19
19
"Aggregate Consideration"). The Aggregate Consideration of $320,000,000 is
comprised of the Cash Amount (as defined below) in cash (subject to Section
8.13(b)) and the Retained Shares. The Aggregate Consideration shall be paid to
Borden, for its own account and as disbursing and exchange agent, at Closing.
The term "Cash Amount" shall mean (i) $320,000,000 less (ii) the product of (X)
0.123596 multiplied by (Y) the sum of (I) the cash amount of equity capital
provided to MergerCo prior to the Closing by Blackstone Capital Partners III
Merchant Banking Fund L.P. ("Blackstone") and made available as common equity to
the Surviving Corporation as a result of the Merger and (II) subject to the
proviso to Section 4.1(a) hereof, the amount of BDPH Common Stock, if any, held
as of the close of business on the Closing Date by C&A as a result of the C&A
Transaction (valued on a per share basis in the same manner as the shares of
BDPH Common Stock held by Blackstone on the Closing Date immediately following
the Merger); provided that in no event shall the Cash Amount be less than
$309,550,000; and provided, further, that as of the close of business on the
Closing Date, in no event shall the number of shares of BDPH Common Stock
outstanding after giving effect to both the Merger and the C&A Transaction (as
defined in Section 8.3(d)) be greater than 5,937,500.
The cash amount of the Aggregate Consideration shall be paid in
immediately available funds in U.S. dollars to the account or accounts
designated by Borden to MergerCo and BDPH no less than two business days prior
to the Closing Date. Subject to its receipt of the Aggregate Consideration,
Borden shall be solely responsible for allocating the Aggregate Consideration
among the Merger Consideration (and the various components thereof), the Borden
Transaction Fees (as defined in Exhibit I hereto) and any amounts paid prior to
or on
<PAGE> 20
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the Closing Date in respect of the redemption, purchase or cancellation of any
BDPH Options (as defined in Section 9.3(l)) or any shares of capital stock of
BDPH.
(b) Management Options. Borden shall cause BDPH, acting
through its Board of Directors or a duly authorized committee thereof, to take
all required action under the 1996 Stock Purchase and Option Plan of BDPH (the
"Option Plan") and the outstanding options thereunder so that, at the Closing,
all such options shall be cancelled (unless otherwise agreed prior to Closing
with respect to a specific holder or specific holders among MergerCo, Borden and
each such holder). At or prior to the Closing, the Option Plan will be
terminated and no further stock awards, stock options or stock appreciation
rights will be granted thereunder subsequent to the Closing Date.
5.2 Working Capital Adjustment
(a) Calculation of the Working Capital Adjustment. In
accordance with the provisions of this Section 5.2, (x) BDPH shall pay Borden
the amount, if any, by which the Closing Working Capital (as defined in and
calculated in accordance with Schedule 5.2(a)) of the Business is finally
determined, accepted, deemed accepted or agreed pursuant to Section 5.2(c)
below, to be greater than the Target Working Capital (as defined below) and (y)
Borden shall pay BDPH the amount, if any, of any Balance Sheet Indebtedness and
the amount, if any by which the Closing Working Capital of the Business is
finally determined, accepted, deemed accepted or agreed pursuant to Section
5.2(c) below, to be less than the Target Working Capital. The term "Target
Working Capital" shall mean $82,000,000. "Balance Sheet Indebtedness" means the
amount of Indebtedness set forth on the Closing Balance Sheet in accordance with
GAAP (including (i) indebtedness for borrowed money, (ii) capitalized leases
required to be reflected as indebtedness in accordance with GAAP, (iii) so
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long as not duplicative of other items of Indebtedness, guarantees or similar
obligations with respect to items of the type covered by clauses (i) and (ii) of
this parenthetical and (iv) accrued and unpaid interest and all other amounts
due in connection therewith); provided that guarantees and similar obligations
addressed by clause (iii) of the preceding parenthetical shall be included in
Balance Sheet Indebtedness even if such guarantees and similar obligations would
not themselves be Indebtedness in accordance with GAAP so long as the items
covered by clauses (i) and (ii) of the preceding parenthetical to which such
guarantees and similar obligations relate are themselves Indebtedness in
accordance with GAAP; and provided, further, that to the extent borne by Borden,
the BLC Buy-Out Amount (as defined in Section 8.14) shall not be included as
Balance Sheet Indebtedness.
(b) Closing Balance Sheet. For purposes hereof, Closing
Working Capital will include only the items specified in Schedule 5.2(a) and
will be derived from a balance sheet for the Business as of the close of
business on the last business day immediately preceding the Closing Date (the
"Working Capital Measurement Date") and excluding any effects of the
transactions contemplated by this Agreement (the "Closing Balance Sheet")
prepared in accordance with U.S. generally accepted accounting principles,
consistently applied ("GAAP"), and using the same accounting policies and
practices used in the preparation of the balance sheet as of December 31, 1996
included in the Annual Financial Statements; provided, however, that the Closing
Balance Sheet and Closing Working Capital will exclude all Excluded Assets,
Excluded Liabilities and any Assets converted into Cash on, but neither prior to
nor after, the Closing Date; and provided, further, that the Closing Balance
Sheet will present fairly the financial position of the Business. Within 60 days
after the Closing, MergerCo, with the assistance of its independent accounting
firm ("MergerCo's
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Accountants"), shall prepare, or cause to be prepared, the Closing Balance
Sheet. Borden shall cooperate fully and shall provide MergerCo and MergerCo's
Accountants with all assistance and access to books and records necessary for
MergerCo to prepare the Closing Balance Sheet. Without limiting the generality
or effect of any other provision hereof, Borden shall (i) provide MergerCo and
its representatives access, during normal business hours, to the facilities,
personnel and accounting and other records of Borden and its affiliates to the
extent reasonably determined by MergerCo to be necessary to permit MergerCo to
prepare or have prepared the Closing Balance Sheet and to compute the Closing
Working Capital as herein provided; provided, however, that MergerCo will
conduct any such review in a manner that does not unreasonably interfere with
the conduct of the Business by Borden or any of its affiliates, and (ii) take
such actions as may be reasonably requested by MergerCo to close, or to assist
in closing, as of the close of business on the day immediately preceding the
Closing Date, the books and accounting records of the Business and otherwise
reasonably to cooperate with MergerCo and its representatives in the preparation
of the Closing Balance Sheet.
(c) Closing Calculation. (i) Borden shall be entitled to full
access to the relevant records and working papers prepared by or for MergerCo
and MergerCo's Accountants to aid in its review of the calculation of the
Closing Balance Sheet, provided, however, that any such review will be conducted
in a manner which does not interfere with the ongoing conduct of the Business.
If Borden believes that the Closing Working Capital calculation (hereinafter the
"Closing Calculation") has not been properly calculated in accordance with the
calculation methodologies set forth in this Section 5.2, it shall, within 30
days after receipt of the Closing Calculation, give written notice (the "Borden
Objection") to
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MergerCo, setting forth the basis of the Borden Objection in reasonable detail
and to the extent practicable the adjustments to the Closing Calculation which
Borden believes should be made. Failure so to notify MergerCo shall constitute
acceptance and approval of the Closing Calculation. If MergerCo agrees that any
change proposed by Borden is appropriate, the change shall be made to the
Closing Calculation. If the proposed change is disputed by MergerCo, then Borden
and MergerCo shall negotiate in good faith to resolve such dispute as
expeditiously as possible. If, after a period of 30 days following the date on
which Borden gives MergerCo notice of any such proposed change, any such
proposed change still remains disputed, then;
(ii) KPMG Peat Marwick LLP or, if KPMG Peat Marwick LLP is
unwilling so to serve, another accounting firm mutually acceptable to MergerCo
and Borden (the "Neutral Accounting Firm"), shall be engaged to resolve any
remaining disputes. The Neutral Accounting Firm shall act as an arbitrator to
determine, based solely on presentations by Borden and MergerCo, and not by
independent review, only those issues still in dispute. The Neutral Accounting
Firm's determination, based upon the calculation methodologies set forth in this
Section 5.2, shall be made within 30 days following the date on which the
dispute is submitted or as promptly as practicable thereafter, shall be set
forth in a written statement delivered to Borden and MergerCo, and shall be
final, binding and conclusive. The fees and any expenses of the Neutral
Accounting Firm shall be shared equally by Borden and MergerCo.
(d) Payment of Aggregate Consideration Adjustment. Payment of
any adjustment in the Aggregate Consideration pursuant to this Section 5.2 shall
be made, if applicable, by wire transfer to an account designated by Borden or
MergerCo, as the case
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may be, in United States Dollars, in immediately available federal funds within
three business days after (i) the Closing Calculation has been determined,
accepted or deemed accepted by Borden pursuant to Section 5.2(c) or (ii) any
proposed change made by Borden has been agreed upon by the parties or finally
determined by the Neutral Accounting Firm as described in Section 5.2(c)
together with interest from the Closing Date to the date of payment at the "base
rate" of LIBOR on the Closing Date plus 155 basis points, based on a 360-day
year.
5.3 Currency Exchange Values
In calculating any adjustments to the Aggregate Consideration under
this Section 5, non-U.S. currency values shall be converted to U.S. Dollar
values at the rate of exchange for foreign currencies per U.S. dollar on the day
immediately prior to the Closing Date, as reported in the Wall Street Journal
(Eastern Edition).
6. REPRESENTATIONS AND WARRANTIES OF BORDEN
Borden represents and warrants to MergerCo and BDPH that:
6.1 Corporate Existence
Borden and the Subsidiaries (as defined below) are corporations duly
organized and validly existing and, where the concept exists, in good standing
under the laws of the jurisdiction of its incorporation and each of said
corporations has the requisite power and authority to own the Decorative
Products Company Stock, as applicable, and to own, lease and operate the Assets
and to carry on the Business as the same is now being conducted. Borden and the
Subsidiaries are each duly authorized, qualified or licensed to do business as a
foreign corporation and, where the concept exists, in good standing in every
jurisdiction wherein, by reason of the nature of the Business or the character
of the Assets, the failure to be so qualified or in good standing could be
reasonably expected to result in a material
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adverse effect on the results of operations, financial condition or business of
the Business taken as a whole or on the ability of Borden and the Subsidiaries
to consummate the transactions contemplated hereby (a "Material Adverse
Effect"). For purposes of this Agreement the term "Subsidiaries" shall mean,
collectively, the Decorative Products Companies and BCL. None of the Decorative
Products Companies or BCL is, or is required to be, a registered or reporting
company under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Complete and correct copies of the certificate of incorporation and
by-laws or other constituent documents, each as amended to date, of each
Decorative Products Company and BCL have heretofore been made available to
MergerCo.
6.2 Corporate Authority; Shareholder Authorization
This Agreement and the consummation of all of the transactions provided
for herein and each of the agreements and instruments contemplated to be
executed and delivered by Borden or any of the Subsidiaries hereunder
(collectively with this Agreement, the "Transaction Documents") have been duly
authorized by the Board of Directors of Borden and, where appropriate or
required, will be duly authorized by such Subsidiaries, by all requisite
corporate, shareholder (including without limitation shareholder approval of the
Merger) or other action prior to Closing, and Borden and every Subsidiary party
thereto have full power and authority to execute and deliver the Transaction
Documents and to perform their respective obligations thereunder. This Agreement
has been, and the other Transaction Documents will be, duly executed and
delivered by Borden and every Subsidiary party thereto, and constitutes, and in
the case of each other Transaction Document will constitute, a valid and legally
binding obligation of each such entity, enforceable in accordance with its terms
except as enforceability may be (i) limited by bankruptcy, insolvency or other
similar
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laws affecting the enforcement of creditor's rights, or (ii) subject to general
principles of equity. The execution and delivery of the Transaction Documents by
Borden and every Subsidiary party thereto and the consummation by Borden and
every Subsidiary party thereto of the transactions contemplated thereby, and the
fulfillment of the terms and compliance with the provisions thereof, will not
(a) conflict with or result in a breach of or a default (or in an occurrence
which with the lapse of time or action by a third party, or both, could result
in a default) with respect to any of the terms, conditions or provisions of, (b)
result in the termination of, accelerate the performance required by, (c) result
in the creation of any Lien (as defined in Section 6.3) upon the assets of the
Business in connection with, (d) impair Borden or any Subsidiary's ability to
consummate the transactions contemplated thereby, or (e) give rise to any right
of termination or renegotiation, or purchase or offer right, under: (x) any
statute, rule, regulation, code, order, writ or decree of any governmental
authority applicable to Borden or any Subsidiary or the Business, (y) the
certificate of incorporation or by-laws or other constituent documents of Borden
or any Subsidiary, or (z) any contract, lease, permit or other instrument to
which the Business or Borden or any Subsidiary is a party or subject or by which
any of Borden's, any of the Subsidiary's or the Business' properties or assets
are bound, except in the cases of clauses (x) and (z) for those conflicts,
breaches, defaults, terminations, or accelerations which, individually or in the
aggregate, could not be reasonably expected to have a Material Adverse Effect
and except that no representation is made herein as to the effect of this
Agreement and the transactions contemplated hereby under antitrust laws.
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6.3 Decorative Products Company Stock
Except as set forth on Schedule 6.3 hereto and except for the
directors' qualifying shares and other nominal share interests issued to third
parties to comply with requirements of law described thereon, all of the shares
of capital stock of the Decorative Products Companies ("Decorative Products
Company Stock") shown as outstanding on Schedule 6.3 have been validly issued
and are fully paid and nonassessable and are owned by BDPH, BDH One or a wholly
owned subsidiary of BDPH free and clear of all liens, pledges, restrictions,
rights of reversion, defects, claims, charges, security interests, options or
other legal or equitable encumbrances ("Liens"). Schedule 6.3 sets forth for
each of the Decorative Products Companies the authorized capital stock, the
number of shares of outstanding capital stock, the number of shares of such
outstanding capital stock owned by each owner thereof and the name of each such
owner. Except as indicated on Schedule 6.3 hereto, there are no outstanding
options, warrants or other rights of any kind relating to the sale, issuance or
voting of any Decorative Products Company Stock which have been issued, granted
or entered into by Borden or any of the Subsidiaries or any securities
convertible into or evidencing the right to purchase any Decorative Products
Company Stock.
6.4 Governmental Approvals; Consents
None of Borden or the Subsidiaries are subject to any order,
judgement or decree which would prevent the consummation of the transactions
contemplated in any of the Transaction Documents. No claim, legal action, suit,
arbitration, governmental investigation, action or other legal or administrative
proceeding is pending or, to the knowledge of Borden, threatened against Borden
or any Subsidiary which would enjoin or delay the transactions contemplated by
any of the Transaction Documents. Except as set forth in Schedule 6.4
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hereto, no consent, approval, order or authorization of, license or permit from,
notice to or registration, declaration or filing with, any governmental
authority or entity, domestic or foreign, or of any third party, is or has been
required on the part of Borden or the Subsidiaries in connection with the
execution and delivery of the Transaction Documents or the consummation of the
transactions contemplated thereby except for such consents, approvals, orders or
authorizations of, licenses or permits, filings or notices the failure of which
to obtain or make would not have a Material Adverse Effect or which have been
obtained and which will remain in full force and effect after the Closing
assuming the compliance therewith by MergerCo.
6.5 Financial Statements
(a) Schedule 6.5 contains a copy of the unaudited consolidated balance
sheet of the Business as of December 31, 1996 and the related consolidated
statement of income and of cash flows for the fiscal year ended on such date,
including the notes related thereto (the "Annual Financial Statements"). The
Annual Financial Statements have been derived from the books and records of
Borden and the Subsidiaries and present fairly the consolidated financial
position and the consolidated results of operations and cash flows of the
Business (including the Acquired Assets and the Assumed Liabilities) as of the
dates and for the periods indicated. The Annual Financial Statements have been
prepared in accordance with the internal accounting practices of the Business,
which practices, individually and in the aggregate, are in accordance with GAAP.
Schedule 6.5 also contains the unaudited consolidated balance sheet of the
Business (including the Acquired Assets and the Assumed Liabilities) as of June
30, 1997 (the "Interim Balance Sheet") and the related unaudited consolidated
statement of income and of cash flows for the six-month period ended on such
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date (the "Interim Financial Statements" and together with the Annual Financial
Statements, the "Financial Statements"). The Interim Financial Statements
present fairly the consolidated financial position of the Business (including
the Acquired Assets and the Assumed Liabilities) as of such date and the
consolidated results of operations and consolidated cash flows for the six-month
period then ended subject to normal year-end audit adjustments, none of which is
material, individually or in the aggregate. The Interim Financial Statements
have been prepared in accordance with the internal accounting practices of the
Business, which practices, individually and in the aggregate, are in accordance
with GAAP and consistent with those used in the Annual Financial Statements
except as permitted by GAAP for interim financial reporting or as specified in
Schedule 6.5 or Schedule 6.5(a). The Interim Financial Statements include all
adjustments, consisting solely of normal recurring accruals, necessary for a
fair presentation of the Business' consolidated financial position and results
of operations. The reserves set forth in the Annual Financial Statements under
FAS 106 and 112, respectively, as of December 31, 1996 were adequate and were
recorded in accordance with GAAP. The reserves and accruals for current and
deferred taxes reflected in the Financial Statements were adequate and were
recorded in accordance with GAAP.
(b) From and after the Imperial Termination Date (as defined in Section
13.1(c) of this Agreement), the first three sentences of Section 6.5(a) of this
Agreement shall be deemed to have read in their entirety as of the date hereof
and as of any date hereafter as follows: "Schedule 6.5 contains a copy of the
audited consolidated/combined balance sheets of BDPH and its predecessors with
respect to the Business (the "Predecessors") as of December 31, 1995 and 1996
and the related consolidated/combined statements of income and of cash flows for
the fiscal year ended on such dates, accompanied by the reports thereon of
Deloitte &
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Touche L.L.P. (the "Annual Financial Statements"). The Annual Financial
Statements present fairly the consolidated/combined financial position and
consolidated/combined results of the operations and cash flows of BDPH and its
Predecessors (including the Acquired Assets and the Assumed Liabilities) as of
the dates and for the periods indicated. The Annual Financial Statements,
including the related notes thereto, have been prepared in accordance with GAAP,
consistently applied. Borden shall deliver the audited financial statements
referred to in this Section 6.5(b) (the "Audited Financial Statements") as
promptly as practicable and in any event within five days prior to the Imperial
Termination Date.
(c) All Financial Statements are qualified by the fact that the
Business was not, prior to January 1, 1996, operated as a separate "stand-alone"
entity within Borden. As a result, the Business received certain allocated
charges and credits as specified in Note (1) accompanying the Financial
Statements. Such charges and credits, while believed by Borden to be reasonable,
do not necessarily reflect the amounts which would have resulted from
arms-length transactions. In addition, in order to present stand-alone Financial
Statements for the Business, a number of significant assumptions have been made,
all of which are believed by Borden to be reasonable and are specified in Note
(1) to the Financial Statements. BORDEN MAKES NO REPRESENTATION WITH RESPECT TO
ANY FINANCIAL INFORMATION FOR THE BUSINESS DELIVERED TO MERGERCO OTHER THAN AS
CONTAINED IN OR PURSUANT TO THIS AGREEMENT.
6.6 Absence of Changes
Except as specified in Schedule 6.6 hereto or as expressly contemplated
by this Agreement, since December 31, 1996, (i) the Business has been conducted
in the ordinary course consistent with past practice and (ii) there has not been
any material adverse change or
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development that, individually or in the aggregate, could reasonably be expected
to have a material adverse effect on the Business or its financial condition or
results of operations, other than normal seasonal changes, changes relating to
the economy in general or changes relating to the industry in which the Business
operates in general.
6.7 Real and Personal Properties
(a) Borden and/or one or more of the Subsidiaries have good and
marketable title in fee simple (as to real property) to, or a valid and binding
leasehold interest in, the real or personal property included in the Assets or
otherwise pertaining to the Business, free and clear of all Liens, except (i) as
set forth on Schedule 6.7(a); (ii) as disclosed in the Financial Statements;
(iii) Liens for taxes, assessments and other governmental charges not yet due
and payable or, if due, (A) not delinquent or (B) being contested in good faith
by appropriate proceedings during which collection or enforcement against the
property is stayed, and, for those existing on the dates of the Interim
Financial Statements or the Annual Financial Statements, for which adequate
reserves in accordance with GAAP are reflected on the Interim Financial
Statements or the Annual Financial Statements, as the case may be; (iv)
mechanics', workmen's, repairmen's, warehousemen's, carriers' or other like
liens arising or incurred in the ordinary course of business if the underlying
obligations are not past due, and, for those existing on the dates of the
Interim Financial Statements or the Annual Financial Statements, for which
adequate reserves in accordance with GAAP are reflected on the Interim Financial
Statements or the Annual Financial Statements, as the case may be; (v) original
purchase price conditional sales contracts and equipment leases with third
parties entered into in the ordinary course of business; and (vi) with respect
to real property, (A) easements, licenses, covenants, rights-of-way and other
similar restrictions, including, without
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limitation, any other agreements or restrictions which would be shown by a
current title report or other similar report or listing, (B) any conditions that
may be shown by a current survey, title report or physical inspection and (C)
zoning, building and other similar restrictions, so long as none of (A), (B) or
(C), individually or in the aggregate, renders the title of such real property
unmarketable, materially detracts from its value or prevents the use of such
real property substantially as currently used (such liens, charges and
encumbrances described in clauses (i)-(vi) hereof are referred to herein as
"Permitted Liens").
(b) Schedule 6.7(b) contains a list of all of Borden and the
Subsidiaries' right, title and interest in real property owned, used or held for
use by Borden and the Subsidiaries in the Business ("Owned Real Property") and
all leases of real property owned, used or held for use by Borden and the
Subsidiaries in the Business ("Leased Real Property" and together with Owned
Real Property, the "Real Property"), including all buildings, structures and
other improvements situated thereon (individually, a "Facility" and
collectively, the "Facilities"). Part I of Schedule 6.7(b) lists all of the Real
Property owned by BCL or used or held for use by BCL in the Business. The
covenants, easements or rights-of-way affecting the Real Property do not with
respect to each parcel of Real Property impair the Business' ability to use any
such Real Property in the operation of the Business as presently conducted
except for those covenants, easements and rights of way that, individually or in
the aggregate, could not be reasonably expected to have a Material Adverse
Effect. Each lease listed on Schedule 6.7(b) is in full force and effect, and
Borden and the Subsidiaries have performed all material obligations required to
be performed by them to date under each of the leases and none of Borden or the
Subsidiaries, nor to the knowledge of Borden, any other party thereto, is in
default under any of such leases except for those defaults under leases that,
individually or in
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33
the aggregate, could not be reasonably expected to have a Material Adverse
Effect. Borden and the Subsidiaries have delivered to MergerCo a true and
correct copy of each such lease, and all amendments thereto, listed on Schedule
6.7(b). Except as set forth in Schedule 6.7(b), (i) there are no parties in
possession of any portion of the Owned or Leased Real Properties as lessees,
tenants at sufferance or trespassers other than Borden and the Subsidiaries and
(ii) there is no pending or, to the knowledge of Borden, threatened special
assessment affecting the Owned Real Properties or any part thereof. Except as
provided in Schedule 6.7(b), none of Borden or the Subsidiaries have received
any actual notice that the location, construction, occupancy, operation or use
of the buildings located on the Owned or Leased Real Properties violates any
restrictive covenant or deed restriction or any other governmental laws, orders,
rules or regulations. There are no pending or, to the knowledge of Borden,
threatened condemnation or similar proceedings affecting the Real Property
except those condemnations or similar proceedings that could not, individually
or in the aggregate, be reasonably expected to have a Material Adverse Effect.
The Business has access to public roads, streets or the like or valid easements
over private streets, roads or other private property for such ingress to and
egress from the Real Property.
6.8 Contracts
(a) Except as otherwise disclosed in Schedule 6.8, there are
no outstanding commitments, contracts, indentures and agreements, written or
oral, to which Borden or any of its Subsidiaries are party to or by which Borden
or any of the Subsidiaries are bound that relate principally to the Business,
including, without limitation, personal property leases, purchase orders for
inventory, service or maintenance agreements, broker agreements, sales
representative agreements and license agreements (all of the foregoing,
hereinafter
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34
"Contracts") that (i) involve commitments by Borden or any of its Subsidiaries
for terms of 12 months or longer, (ii) involve payment of more than US$100,000
in the aggregate, (iii) are entered into with salesmen, commissioned agents, or
other sales representatives, or with distributors, dealers or customers, (iv)
involve agreements or arrangements for the sale or lease of any of the assets of
the Business other than the usual, regular and ordinary course of Business, (v)
involve employment (other than contracts representing the standard terms and
conditions prevailing between Borden, the Subsidiaries and the Business
Employees), severance or consulting by any Business Employee, (vi) grant to any
person or entity a first-refusal, first-offer or other right to purchase or
acquire any of the capital stock or other securities of the Decorative Products
Companies, (vii) impose noncompetition or exclusive dealing obligations relating
to the Business or (viii) evidence or create any Indebtedness, and in the case
of (i) - (iii), are not terminable by their terms, without penalty, on 30 days
or less notice. Contracts disclosed or required by the terms hereof to be
disclosed in Schedule 6.8 are hereafter referred to as the "Disclosed
Contracts";
(b) Borden has furnished or made available to MergerCo a true
and correct copy of each Disclosed Contract. Each Contract is valid and in full
force and effect according to its terms and, to Borden's knowledge, the parties
thereto are not in default or breach under any such Contract and there are no
claims affecting the same of any kind pending except where such failure to be
valid or in full force or effect or such breach or claim, individually or in the
aggregate, could not be reasonably expected to have a Material Adverse Effect;
and
(c) Except as listed in Schedule 6.8, all Disclosed Contracts
are assignable (to the extent they are being assigned in the Asset Transfer)
without the requirement of
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35
consent from any other party thereto and, except as could not be reasonably
expected to have a Material Adverse Effect, the consummation of the transactions
contemplated by the Transaction Documents does not otherwise conflict with or
give rise to any right or obligation thereunder.
6.9 Litigation, Agencies
Except as set forth in Schedule 6.9, there are no actions, suits,
proceedings (whether adjudicatory, rulemaking, licensing or otherwise) or
investigations pending or, to the knowledge of Borden, threatened in law or in
equity, or before any governmental agency, which, if determined or resolved
adversely or in accordance with the plaintiff's demands, individually or in the
aggregate, could be reasonably expected to have a Material Adverse Effect.
Except as set forth on Schedule 6.9, Borden and its Subsidiaries are not subject
to or in default under any judgment, order, injunction or decree of any court or
government agency relating to the Business except for such defaults, judgments,
orders, injunctions or decrees which, individually or in the aggregate, could
not be reasonably expected to have a Material Adverse Effect.
6.10 Intangible Property Rights
(a) Schedule 6.10(a) lists all material unexpired domestic and
foreign patents and patent applications, as well as all material utility models,
reexamination certificates, reissues, divisionals, continuations and
continuation-in-part applications and any patents issuing thereon, and all
license agreements and other agreements which relate to inventions or
discoveries and any patent applications and patents thereon, as well as
improvements therein owned, used or held for use principally in connection with
the Business (the "Patent Rights"). Part I of Schedule 6.10(a) lists all Patent
Rights owned, used or held
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36
for use by BCL (whether or not material), Borden and its Subsidiaries in the
Business. Except as set forth in Schedule 6.10(a) (i) Borden and its
Subsidiaries own, are licensed or have the full right to use the Patent Rights
and the Technology (as defined below) described or required to be described in
Schedule 6.10(a) free and clear of all Liens and without payment of material
royalties or other fees; (ii) there are no pending, or to the knowledge of
Borden, threatened claims challenging the validity, enforceability or ownership
of such Patent Rights or Technology or Borden or its Subsidiaries' right to use
such Patent Rights or Technology except as, individually or in the aggregate,
could not be reasonably expected to have a Material Adverse Effect; (iii) the
Patent Rights described in Schedule 6.10(a) constitute all of the same owned,
used or held for use by Borden and the Subsidiaries in connection with the
operation of the Business and are sufficient for MergerCo to operate the
Business as presently operated by Borden and the Subsidiaries; (iv) the issued
patents under such Patent Rights are valid and subsisting and all maintenance
and other fees and taxes for said patents have been paid, and, to the knowledge
of Borden, none of the claims of said patents is now being infringed by others
except as, individually or in the aggregate, could not be reasonably expected to
have a Material Adverse Effect; (v) there are no licenses or sublicense
agreements now in effect regarding Borden and its Subsidiaries' use of such
Patent Rights or Technology; and (vi) none of Borden and the Subsidiaries are,
to the knowledge of Borden, infringing any U.S. or foreign patent owned by third
parties in the current operation of the Business and no claim is now pending or,
to the knowledge of Borden, is threatened to such effect, except for such
infringements and claims as, individually or in the aggregate, could not be
reasonably expected to have a Material Adverse Effect. For purposes of this
Agreement, the term "Technology" shall mean the patterns, plans, designs,
research data, trade
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secrets and other proprietary know-how, inventions, discoveries, formulae and
manufacturing processes, computer software or firmware (except as set forth in
Schedule 2.3(a)) operating manuals, drawings, technology, manuals, data,
records, procedures, research and development records, as well as improvements
therein and all licenses or other rights to use any of the same owned or
licensed by others, owned, used or held for use principally in connection with
the Business.
(b) Schedule 6.10(b) lists (i) all material trademarks,
service marks, trademark registrations, service mark registrations, trademark
and service mark applications (including all documents or files pertaining
thereto), trade names, Internet addresses and names, and similar rights; (ii)
any and all material licenses or other rights to use any of the foregoing owned
by others and (iii) any material trade dress associated therewith, used in
connection with the Business (the "Trademark Rights"). Part I of Schedule
6.10(b) lists the Trademark Rights owned, used or held for use by BCL (whether
or not material). Except as set forth in Schedule 6.10(b), (i) Borden and/or the
Subsidiaries own, are licensed or have the full right to use the Trademark
Rights described or required to be described in Schedule 6.10(b) free and clear
of all Liens and without payment of material royalties or other fees; (ii) all
such Trademark Rights are valid and subsisting, free and clear of any
encumbrances or rights of third parties which would restrict, impair or dilute
MergerCo's exclusive right to use such Trademark Rights except as, individually
or in the aggregate, could not be reasonably expected to have a Material Adverse
Effect, and (iii) no claim by third parties with regard to the use of any of
such Trademark Rights is pending, has been made or, to the knowledge of Borden,
threatened and none of such Trademark Rights is being infringed by others,
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38
individually or in the aggregate, except as could not be reasonably expected to
have a Material Adverse Effect.
(c) Schedule 6.10(c) lists all material copyrights, copyright
registrations, copyright applications (pertaining thereto) and all material
licenses or other rights to use the copyrights of others, in each case used
principally in connection with the Business (the "Copyright Rights"). Part I of
Schedule 6.10(c) lists the Copyright Rights owned, used or held for use by BCL
(whether or not material). Except as disclosed in Schedule 6.10(c), (i) Borden
and the Subsidiaries own, are licensed or have the full right to use the
Copyright Rights described or required to be described in Schedule 6.10(c) free
and clear of all Liens and without payment of material royalties or other fees
and (ii) there are no pending or, to the best of Borden's knowledge, threatened
claims by or against Borden or any of the Subsidiaries with respect to any
Copyright Rights or the use thereof and no valid basis exists for any such
claim.
6.11 Insurance
Schedule 6.11 sets forth a list of all material insurance policies
providing coverage for the properties or operations or liabilities of the
Business ("Insurance"), the type and amount of coverage and the expiration dates
of the policies. Such policies are valid and enforceable in accordance with
their terms, are in full force and effect and insure against risk and
liabilities to the extent and in the manner reasonably deemed appropriate and
sufficient by Borden. Borden and its Subsidiaries will continue in force to the
Closing Date policies of insurance of substantially the same character and
coverage so long as such Insurance continues to be available at commercially
reasonable rates.
6.12 Tax Matters
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39
(a) Except as set forth in Schedule 6.12(a) hereto, there has
been filed by or on behalf of the Decorative Products Companies or BCL, or a
filing extension from the appropriate federal, state, local or foreign
governments or governmental agencies has been obtained with respect to, all
material returns relating to any United States federal, state, provincial,
local, territorial and foreign income, profits, franchise, gross receipts,
payroll, sales, employment, use, property, real estate, excise, value added,
estimated, stamp, alternative or add-on minimum, environmental, withholding and
any other taxes, duties or assessments, together with all interest, penalties
and additions imposed with respect to such amounts (collectively, "Taxes")
required to be filed on or prior to the date of this Agreement (the "Tax
Returns"), and all Taxes shown to be due on such Tax Returns have been paid or
adequate provision in current taxes payable (rather than deferred) in accordance
with GAAP for the payment of all Taxes shown to be due on such Tax Returns has
been made.
(b) Except as set forth in Schedule 6.12(b), no audit or other
proceeding by any court, governmental or regulatory authority, or similar person
is pending or, to the knowledge of Borden, threatened with respect to any Taxes
due from or with respect to any Decorative Products Company or BCL. No
assessment of tax has been proposed in writing against any Decorative Products
Company or BCL.
(c) Except as set forth in Schedule 6.12(c), all Tax Returns
filed with respect to Taxes of the Decorative Products Companies and BCL through
the tax year ended December 31, 1993, have been examined and closed or the
applicable period for assessment of Taxes with respect to such tax years under
applicable law, after giving effect to extensions or waivers, has expired.
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(d) There are no liens for Taxes (other than for Taxes not yet
due and payable) on any Asset except for Permitted Liens.
(e) Except as set forth in Schedule 6.12(e) hereto, none of
the Decorative Products Companies or BCL is a party to or bound by (nor will any
of them become a party to or bound by prior to the Closing Date) any tax
indemnity, tax sharing or tax allocation agreement.
6.13 Employment and Benefits
(a) Labor Controversies. Except as described on Schedule
6.13(a) and except, with respect to clauses (i) and (ii) below, for such
matters, individually or in the aggregate, as could not reasonably be expected
to have a Material Adverse Effect, in respect of the Business, (i) Borden and
the Subsidiaries are in compliance with all applicable laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours, (ii) there is no unfair labor practice complaint against Borden
or any of the Subsidiaries pending or, to the knowledge of Borden, threatened,
before the National Labor Relations Board, or any other U.S. or foreign
governmental or regulatory authority or court, (iii) there is no labor strike,
dispute, slowdown or stoppage actually pending or threatened against or
affecting Borden or any of the Subsidiaries, (iv) Borden and the Subsidiaries
have not experienced any strike, work stoppage or other labor difficulty, and
(v) none of Borden or the Subsidiaries are a party to, or subject to, a
collective bargaining agreement, and no collective bargaining agreement relating
to Business Employees is being negotiated. None of the collective bargaining
agreements listed on Schedule 6.13(a) and assumed by MergerCo pursuant to
Section 8.7(c) cover any employees other than Business Employees.
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(b) Employee Benefit Plans. (i) For purposes of this
Agreement, "Benefit Plans" shall mean all "employee benefit plans" (within the
meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), including, without limitation, "multiemployer plans"
within the meaning of Sections 3(37) and 4001(a)(3) of ERISA), "multiple
employer plans" within the meaning of Section 413(c) of the Code, retirement
savings, stock purchase, stock option, severance, vacation, employment,
change-in-control, fringe benefit, collective bargaining, bonus, incentive,
deferred compensation and all other employee benefit plans, agreements,
programs, policies or other arrangements (whether or not subject to ERISA or
United States laws) (A) under which any employee or former employee of the
Business (collectively, the "Business Employees") has any present or future
right to benefits and (B) under which Borden or any of its affiliates has any
present or future liability. For purposes of this Agreement, "U.S. Benefit
Plans," "Canada Benefit Plans" and "U.K. Benefit Plans" shall mean all Benefit
Plans under which any Business Employee who is or was primarily employed in the
United States, Canada or the United Kingdom, respectively (collectively, the
"U.S Business Employees,""Canada Business Employees" or "U.K. Business
Employees," respectively), has any present or future right to benefits. Schedule
6.13(b)(i) sets forth a list of each material Benefit Plan.
(ii) Except as described on Schedule
6.13(b)(ii)-1, each Material Benefit Plan has been established and administered
in accordance with its terms and in compliance with the applicable provisions of
ERISA, the Code and other applicable laws (foreign or domestic), except where a
failure to do so, individually or in the aggregate, could not reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect.
Except for liabilities generically described on Schedule 6.13(b)(ii)-2, neither
Borden
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42
nor any Subsidiary nor any other ERISA Affiliate has any liability to provide
medical benefits, life insurance benefits or supplemental pension benefits in
respect of any current of former Business Employee beyond their retirement.
(iii) Except as described on Schedule
6.13(b)(iii), the Internal Revenue Service has issued, with respect to each
Benefit Plan intended to be tax qualified under Sections 401(a) and 501(a) of
the Code, a letter determining that such Benefit Plan is so qualified and its
related trust is exempt from United States federal income tax under Sections
401(a) and 501(a) of the Code (including without limitation the requirements of
the Tax Reform Act of 1986), respectively, and there has been no occurrence
affecting the form or operation of any such Benefit Plan since the date of any
such determination letter which is likely to materially adversely affect such
qualification.
(iv) To Borden's or any Subsidiary's knowledge,
there are no actions or claims existing or pending (other than routine claims
for benefits) or threatened with respect to any Benefit Plan, and neither Borden
nor any Subsidiary nor any other ERISA Affiliate has been notified of any audit
or investigation of a Benefit Plan by any governmental entity that would have a
Material Adverse Effect. "ERISA Affiliate" means any entity, trade or business
that would be treated as under common control with Borden or as a member of a
controlled group including Borden within the meaning of Section 414 of the Code
or Section 4001 of ERISA.
(v) Except as described on Schedule 6.13(b)(v),
assuming that all Business Employees remain in the employment of the Business
immediately after the Closing (regardless of whether such employment is
thereafter continued), the Asset Transfer, the Stock Transfer and the Merger in
themselves will not: (A) entitle any such individual to severance
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pay, unemployment compensation or other similar payment; (B) accelerate the time
of payment or vesting of any amount; (C) increase the amount of compensation due
to any such individual; (D) constitute a "prohibited transaction" (as defined in
Section 406 of ERISA or Section 4975 of the Code) or (E) entitle any such
individual to an "excess parachute payment" within the meaning of Section 280G
of the Code.
(vi) Schedule 6.13(b)(vi) sets forth the
calculations of the funding status of the ERIP, the Sunworthy Plan and the
Borden Scheme as calculated by William M. Mercer Limited and Towers Perrin,
actuaries in Canada and the U.K., respectively, in accordance with the
assumptions set forth in Schedules 8.7(h)-1 through 8.7(h)-3. These calculations
are the last performed before the date of this Agreement. Notwithstanding the
foregoing, Borden makes no representation about the validity of the calculations
or assumptions in Schedules 6.13, 8.7(h)-1, 8.7(h)-2, 8.7(h)-3 or 8.7(h) or that
any other actuary or individual would arrive at the same calculations or
conclusions.
(c) Employment Contracts. Except as described on Schedule
6.13(c), there are no employment or severance contracts between Borden or the
Subsidiaries, on the one hand, and any Business Employee, on the other hand,
other than contracts representing the standard terms and conditions prevailing
between Borden or the Subsidiaries and any Business Employees in existence
pursuant to the standard practices of the countries in which Borden or the
Subsidiaries conduct their business.
6.14 Compliance with Laws
Except as disclosed on Schedule 6.14 and except for those failures to
have, to be in full force in effect, to file, retain and maintain and to comply
in each case that individually or in the aggregate, could not be reasonably
expected to have a Material Adverse Effect, (i) with
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44
respect to the Business, Borden and the Subsidiaries have all licenses, permits
or franchises issued by any United States or foreign, federal, state,
provincial, municipal or local authority or regulatory body and other
governmental certificates, authorizations and approvals (collectively "Permits")
required by every United States or foreign, federal, state, provincial,
municipal or local governmental or regulatory body for the operation of the
Business and the use of its assets and properties as presently operated or used;
(ii) with respect to the Business, all such Permits are in full force and effect
and no action, claim or proceeding is pending, nor to the knowledge of Borden
threatened, to suspend, revoke, revise, limit, restrict or terminate any of such
Permits or declare any such Permit invalid; (iii) Borden and its Subsidiaries
have filed all necessary reports and maintained and retained all necessary
records pertaining to such Permits; and (iv) with respect to the Business,
Borden and the Subsidiaries have otherwise complied with all of the laws,
ordinances, regulations and orders applicable to its existence, financial
condition, operations, assets, properties or Business, and Borden has not
received any notice to the contrary.
6.15 Finders; Brokers
With the exception of fees and expenses payable to Morgan Stanley & Co.
Incorporated, which shall be Borden's sole responsibility, none of Borden or any
of the Subsidiaries is a party to any agreement with any finder or broker, or in
any way obligated to any finder or broker for any commissions, fees or expenses
in connection with the origin, negotiation, execution or performance of any
Transaction Document.
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6.16 Environmental Matters
Except as disclosed on Schedule 6.16:
(a) In respect of the Business, Borden and its Subsidiaries
are in compliance with all Environmental Laws (as defined below)
applicable to the nature, scope and extent of the Business as presently
conducted by Borden and its Subsidiaries, except for violations of
Environmental Laws that could not, individually or in the aggregate,
have a Material Adverse Effect;
(b) In respect of the Business, Borden and its Subsidiaries
hold, and are in compliance with, all Licenses and Permits, required
under Environmental Laws applicable to the nature, scope and extent of
the Business as presently conducted by Borden and its Subsidiaries,
except for the absence of, or noncompliance with, such Licenses and
Permits that could not, individually or in the aggregate, have a
Material Adverse Effect; and
(c) In respect of the Business, Borden and its Subsidiaries
have not received any written request for information, notice of
violation or noncompliance or notice of the institution or pendency of
any lawsuit, action, proceeding, investigation or claim by any person
alleging any Environmental Liability arising from or relating to the
conduct of the Business, except for all such cases that could not,
individually or in the aggregate, have a Material Adverse Effect.
(d) The business is not subject to any cleanup, remediation,
monitoring or corrective action, liability or requirement under any
Environmental Law applicable to the nature, scope and extent of the
Business as presently conducted by Borden and its Subsidiaries except
for cleanup, remediation, monitoring or corrective action, liability
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or requirements as would not individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
(e) As used herein:
"Environmental Laws" means any domestic, foreign, federal,
state, interstate or local statute, law or regulation in effect prior to the
Closing Date (insofar as they result in a liability or obligation on or after
the Closing Date) or as of the Closing Date or any order, injunction, judgment,
decree, common law or other enforceable requirement of any governmental entity,
and relating to the protection of the environment, including any of the
foregoing related to: (i) Remedial Actions; (ii) the reporting, licensing,
permitting or investigating of the emission, discharge, release or threatened
release of Hazardous Substances into the air, surface water, groundwater or
land; or (iii) the manufacture, release, distribution, use, generation,
treatment, storage, disposal, transport or handling of Hazardous Substances;
"Environmental Liability" means any liability or obligation
arising under Environmental Laws to the extent arising from any condition
existing or any act or omission at or prior to the Closing Date.
"Hazardous Substance" means (i) any substance or material
regulated under applicable Environmental Laws or (ii) gasoline, diesel fuel or
other petroleum hydrocarbons or polychlorinated biphenyls, asbestos or
radioactive matter.
"Remedial Action" means any response action, removal action,
remedial action, corrective action, monitoring program, sampling program,
investigation or other cleanup activity pertaining to any Hazardous Substance.
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6.17 Entire Business
Except for the Excluded Assets and except as set forth in Schedule
6.17, the Assets and the Decorative Products Companies Stock constitute,
together with the rights and services made available in the Services Agreement
and the Borden Home License Agreement (each as hereinafter defined), all the
assets, properties and rights (i) necessary to conduct the Business in all
material respects as currently conducted, (ii) reflected in the Financial
Statements (except for assets disposed of in the ordinary course of the Business
since the dates thereof) or the Closing Balance Sheet, or (iii) which relate to
the Business.
6.18 Millennium Compliance
(a) Schedule 6.18 describes the measures that have been
implemented to determine the extent to which the computer systems used in the
Business (other than the information systems listed on Schedule 2.3(e)) (the
"Computer Systems") are not in Millennium Compliance, and the material details
of any program undertaken with a view toward causing the Computer Systems to
achieve Millennium Compliance.
(b) As used herein, "Millennium Compliance" means that the
Computer Systems are capable of the following before, during and/or after
January 2000:
(i) handling date information involving all and any dates
before, during and/or after January 1, 2000, including accepting input,
providing output and performing date calculations in whole or in part;
(ii) operating, accurately without interruption on and in
respect of any and all dates before, during and/or after January 1,
2000 and without any change in performance;
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(iii) responding to and processing two digit year input
without creating any ambiguity as to the century; and
(iv) storing and providing date input information without
creating any ambiguity as to the century.
6.19 Affiliate Agreements and Liabilities
Except as set forth on Schedule 6.19 or as expressly contemplated by
this Agreement or the Schedules and Exhibits hereto, there are no written or
oral Contracts, liabilities or obligations pertaining to the Business between
any Decorative Products Company or BCL, on the one hand, and any of Borden or
its subsidiaries or any affiliate thereof (other than the Decorative Products
Companies), on the other hand, which will continue to exist or under or a result
of which there will be any liability on or after the Closing, including, without
limitation, any such Contracts relating to the provision of any services by the
Business to any of Borden or its subsidiaries or affiliates, or by any of Borden
or its subsidiaries or affiliates to the Business.
6.20 Labor Relations
Except as set forth on Schedule 6.20, the Business is not a party to
any collective bargaining agreement covering employees, there are no
controversies or unfair labor practice proceedings pending or, to the best of
Borden's knowledge, threatened between the Business and any Business Employee or
any labor or other collective bargaining unit representing any Business Employee
that, individually or in the aggregate, could reasonably be expected to result
in a labor strike, dispute, slow-down or work stoppage or otherwise have a
Material Adverse Effect. Except as set forth on Schedule 6.20, no organizational
effort is presently being made or, to the knowledge of Borden, threatened by or
on behalf of any labor union.
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6.21 Product Liability
Except as disclosed on Schedule 6.21 and except as could not,
individually or in the aggregate, be reasonably expected to have a Material
Adverse Effect, (i) there is no notice, demand, claim, action, suit, inquiry,
hearing, proceeding, notice of violation or investigation of a civil, criminal
or administrative nature by or before any court or other governmental or
regulatory authority against or involving any product, substance or material
(collectively, a "Material"), or class of claims or lawsuits involving a
Material manufactured, produced, distributed or sold by or on behalf of the
Business which is pending or, to Borden's knowledge, threatened, on behalf of
the purchaser of any Material, resulting from an alleged defect in design,
manufacture, materials or workmanship of any Material manufactured, produced,
distributed or sold by or on behalf of the Business, or any alleged failure to
warn, or from any breach of express or implied specifications or warranties or
representations (each such defect, failure or breach, a "Product Claim"), and
(ii) there has not been, nor is there under consideration or investigation by
the Business, any Materials recall, rework, retrofit or post-sale warning
(collectively, recalls, reworks, retrofits and post-sale warnings are referred
to in this Agreement as "Recalls") conducted by or on behalf of the Business
concerning any Materials manufactured, produced, distributed or sold by or on
behalf of the Business or, to the knowledge of Borden and its Subsidiaries, any
Recall conducted by or on behalf of any entity as a result of any alleged defect
in any Material supplied by the Business. Except as disclosed in Schedule 6.21,
there is no Product Claim pending or, to the knowledge of Borden, threatened, on
behalf of a customer of the Business or any governmental or regulatory authority
which, individually or in the aggregate, has had or could reasonably be expected
to have a Material Adverse Effect. Since December 31, 1996, and except as
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individually or in the aggregate, could not be reasonably expected to have a
Material Adverse Effect, no events, conditions, circumstances, activities,
practices, incidents, actions, omissions or plans have existed or occurred that
could give rise to any liability or otherwise form the basis of any material
claim based on or related to any Product or Material that was or allegedly was
designed, formulated, manufactured, produced, distributed or sold by or on
behalf of the Business.
6.22 No Undisclosed Liabilities
There were no material liabilities of or relating to the Business as of
December 31, 1996 that are of a type required to be disclosed in a balance sheet
prepared in accordance with GAAP, except (a) as set forth in Schedule 6.22 or
(b) as reflected in the Annual Financial Statements. Since December 31, 1996,
the Decorative Products Companies have not incurred any material liabilities,
except (i) as set forth in Schedule 6.22, (ii) those reflected on the Interim
Financial Statements or (iii) liabilities incurred in the ordinary course of
business and not in violation of this Agreement.
6.23 BDPH Preferred Stock
After giving effect to the Merger, the BDPH Preferred Stock will no
longer be outstanding, and BDPH will have no liabilities or obligation in
respect thereof (except the liability to pay the Aggregate Consideration in
accordance with Section 4.1(c) hereof).
6.24 No Other Representations or Warranties
Except for the representations and warranties contained in this Section
6, any Transaction Document, the Schedules or Exhibits thereto or any
certificate delivered in connection with the Closing, neither Borden, the
Subsidiaries nor any other person makes any other express or implied
representation or warranty on behalf of Borden and the Subsidiaries
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including, without limitation, as to the probable success or profitability of
the ownership, use or operation of the Business, the Decorative Products
Companies and the Assets by MergerCo after the Closing.
6.25 Expiration of Representations and Warranties
Subject to Sections 11 and 12 hereof, the respective representations
and warranties of Borden contained herein shall survive the Closing but shall
expire and be terminated and extinguished on April 1, 1999, and thereafter
Borden shall have no liability whatsoever with respect to any such
representation or warranty, provided, however, that (i) the representations and
warranties in Sections 6.1, 6.2, 6.3, 6.4, 6.7(a), 6.12 and 6.15 (collectively,
the "Five-Year Reps") will survive the Closing until the fifth anniversary
thereof and (ii) nothing herein will affect the parties' relative rights and
obligations in respect of a claim for breach of any representation or warranty
made within the applicable survival period provided herein.
7. REPRESENTATIONS OF MERGERCO
MergerCo represents and warrants to Borden that:
7.1 Corporate Existence
MergerCo is a corporation duly organized and validly existing and in
good standing under the laws of the jurisdiction of its incorporation. MergerCo
is duly authorized, qualified or licensed to do business as a foreign
corporation and in good standing in every jurisdiction wherein, by reason of the
nature of the Business or the character of the Assets, the failure to be so
qualified or in good standing would reasonably be likely to result in the
material adverse effect on the ability of MergerCo to consummate the
transactions contemplated hereby (a "MergerCo Material Adverse Effect").
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7.2 Corporate Authority; Shareholder Authorization
This Agreement and the consummation of all of the transactions provided
for herein and each of the Transaction Documents have been duly authorized by
the Board of Directors of MergerCo and by all requisite corporate, shareholder
(including approval of the Merger by MergerCo's shareholders), or other action
prior to Closing, and MergerCo has full power and authority to execute and
deliver the Transaction Documents and to perform its obligations thereunder.
This Agreement has been, and the other Transaction Documents will be, duly,
executed and delivered by MergerCo and each Transaction Document constitutes a
valid and legally binding obligation of MergerCo, enforceable in accordance with
its terms (i) except as enforceability may be limited by bankruptcy, insolvency
or other similar laws affecting the enforcement of creditor's rights or (ii)
subject to general principles of equity. The execution and delivery of the
Transaction Documents by MergerCo or the consummation by MergerCo of the
transactions contemplated thereby and the fulfillment of the terms and
compliance with the provisions hereof, will not (a) conflict with or result in a
breach of or a default (or in an occurrence which with the lapse of time or
action by a third party, or both, could result in a default) with respect to any
of the terms, conditions or provisions of, (b) result in the termination of,
accelerate the performance required by, (c) impair MergerCo's ability to
consummate the transactions contemplated hereby, (d) give rise to any right of
termination or renegotiation, or purchase or offer right, under: (x) any
statute, rule, regulation, code, order, writ or decree of any governmental
authority applicable to MergerCo, (y) the certificate of incorporation or
by-laws or other constituent documents of MergerCo, or (z) any contract, lease,
permit or other instrument to which MergerCo is a party or subject or by which
any of MergerCo's properties or assets are bound, except in the cases of clauses
(x) and (z) for those
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conflicts, breaches, defaults, terminations, or accelerations which,
individually or in the aggregate, could not reasonably be expected to have a
MergerCo Material Adverse Effect and except that no representation is made
herein as to the effect of this Agreement and the transactions contemplated
hereby under antitrust laws.
7.3 Governmental Approvals; Consents
MergerCo is not subject to any order, judgement or decree which would
prevent the consummation of the transactions contemplated hereby. No claim,
legal action, suit, arbitration, governmental investigation, action or other
legal or administrative proceeding is pending or, to the knowledge of MergerCo,
threatened against MergerCo which would enjoin or delay the transactions
contemplated hereby. Except as set forth in Schedule 7.3 hereto, no consent,
approval, order or authorization of, license or permit from, notice to or
registration, declaration or filing with, any governmental authority or entity,
domestic or foreign, or of any third party, is or has been required on the part
of MergerCo in connection with the execution and delivery of this Agreement, or
the consummation of the transactions contemplated hereby except for such
consents, approvals, orders or authorizations of, licenses or permits, filings
or notices the failure of which to obtain or make would not have a MergerCo
Material Adverse Effect or which have been obtained and which will remain in
full force and effect after the Closing.
7.4 Finders; Brokers
MergerCo is not a party to any agreement with any finder or broker, or
in any way obligated to any finder or broker for any commissions, fees or
expenses, in connection with the origin, negotiation, execution or performance
of this Agreement for which Borden or any
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54
of its Affiliates (other than, if the Closing occurs, the Decorative Product
Companies), have any liability.
7.5 Purchase for Investment
MergerCo is aware that no shares of capital stock or other securities
being acquired pursuant to the transactions contemplated hereby are registered
under the Securities Act of 1933, as amended (the "Securities Act"), or under
any state or foreign securities laws. MergerCo is not an underwriter, as such
term is defined under the Securities Act.
7.6 Financial Capacity
MergerCo has in hand a binding commitment letter (the "Commitment
Letter"), which is currently in effect and true and a correct copy of which is
attached hereto as Schedule 7.6, from the financial institutions indicated
therein, as well as the equity Commitment Letter (the "Blackstone Commitment
Letter") of Blackstone, to provide secured debt and equity financing
contemplated by MergerCo and BDPH for the transactions described in this
Agreement and has obtained a highly confident letter with respect to the
subordinated debt financing so contemplated (collectively, the "Financing").
Blackstone has undertaken to provide the equity capital contemplated by the
Commitment Letter.
7.7 [Intentionally omitted]
7.8 No Other Representations or Warranties
Except for the representations and warranties contained in this Section
7, neither MergerCo nor any other person makes any other express or implied
representation or warranty on behalf of MergerCo.
7.9 Expiration of Representations and Warranties
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Subject to Sections 11 and 12 hereof, the respective representations
and warranties of MergerCo contained herein shall survive the Closing but shall
expire and be terminated and extinguished on April 1, 1999 and thereafter
MergerCo shall have no liability whatsoever with respect to any such
representation or warranty, provided, however, that (i) the representations and
warranties in Sections 7.1, 7.2, 7.3 and 7.4 (collectively, "Long-Term Reps")
will survive the Closing until the fifth anniversary thereof and (ii) nothing
herein will affect the parties' relative rights and obligations in respect of a
claim for breach of any representation or warranty made within the applicable
survival period provided herein.
8. AGREEMENTS OF MERGERCO AND BORDEN
8.1 Operation of the Business
Except as otherwise contemplated by this Agreement or as disclosed in
Schedule 8.1, Borden covenants that until the Closing it will, and it will cause
the Subsidiaries (including BDPH) to, use all reasonable efforts to continue, in
a manner consistent with the past practices of the Business, to maintain and
preserve intact the Business and to maintain the ordinary and customary
relationships of the Business with its employees, suppliers, customers and
others having business relationships with it with a view toward preserving for
BDPH to and after the Closing Date the Business, the Assets and the goodwill
associated therewith. Until the Closing Date, Borden shall, and Borden shall
cause the Subsidiaries (including BDPH) to, continue to operate and conduct the
Business in the ordinary course consistent with past practice (including,
without limitation, in respect of the creation and distribution of sample books
and other marketing efforts, and customer returns and allowances policies) and
maintain its books and records in accordance with GAAP and will not, and shall
cause the
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56
Subsidiaries (including BDPH) not to, without the prior written approval of
MergerCo or as otherwise contemplated by this Agreement or Schedule 8.1, take
any of the following actions:
(a) with respect to any Decorative Products Company, amend its
charter or by-laws (or analogous organizational documents), issue, deliver,
sell, pledge or otherwise encumber any shares of capital stock of any class or
series, or any securities convertible into or exchangeable for shares of capital
stock, or issue any options, warrants or other rights to acquire any shares of
capital stock;
(b) sell, transfer or otherwise dispose of or encumber any of
their properties or assets pertaining to the Business, other than (A) in the
ordinary course of business and (B) transfers by a Decorative Product Company to
another Decorative Products Company or by Borden or another Subsidiary to a
Decorative Product Company;
(c) cancel any debts or waive any claims or rights pertaining
to the Business, except in the ordinary course of business;
(d) grant any increase in the compensation of directors,
officers or employees who are Business Employees except for increases to
employees (but not officers or directors) (i) in the ordinary course of business
and consistent with past practice or (ii) as required by any Benefit Plan (as
defined in Section 6.13(b));
(e) fail to make capital expenditures as contemplated by
Schedule 8.1(e);
(f) except with respect to endorsement of negotiable
instruments in the ordinary course of its Business, incur, assume, guarantee or
otherwise become liable in respect of any Indebtedness. For purposes of this
Agreement, "Indebtedness" means any liability or obligation (whether primary or
secondary as a guarantor or other surety other than arising out of the
endorsement of checks for collection in the ordinary course of business), for
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borrowed money (other than purchase money borrowing and other borrowings which
are repaid in full prior to the Closing), for the deferred purchase price of any
asset (other than inventory in the ordinary course of business), under a
capitalized lease or any other liability or obligation which should be shown as
indebtedness on a balance sheet for the Business prepared in accordance with
GAAP, whether or not evidenced by a note, bond or similar instrument;
(g) fail to observe, in all material respects, their duties
and obligations under the Disclosed Contracts or any other material Contract;
(h) amend, modify or cancel any Disclosed Contract or any
other material Contract, except in the ordinary course of business consistent
with past practice or adopt or amend any Benefit Plan;
(i) fail to continue existing practices relating to
maintenance of Assets owned, leased or otherwise held in connection with the
Business or by any Decorative Products Company;
(j) dispose of, permit to lapse, or otherwise fail to preserve
any of the Patent Rights, Trademark Rights, Copyright Rights and Technology or
other similar rights, or amend any Contract relating thereto, dispose of or
permit to lapse any material Permit, or dispose of or disclose to any person or
entity other than an authorized representative of MergerCo, any trade secret
(except for such of the foregoing as may occur by operation of law or the terms
of any of the foregoing);
(k) with respect to any Decorative Products Company, make any
investments in, or acquisitions of, or enter into any joint venture, partnership
or similar arrangement with, any person or entity;
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(l) settle or compromise or agree to settle any claim related
to the Business that is in excess of $50,000 against any person or entity;
(m) take or omit to take any action that would cause any
representation of Borden or BDPH (i) that is qualified as to materiality to
become untrue or (ii) that is not qualified as to materiality to become untrue
in all material respects;
(n) make any change in the accounting methods, principles or
practices of the Business, except as required by GAAP;
(o) (i) split, combine or reclassify any Decorative Products
Company Stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of Decorative Products
Company Stock or (ii) purchase, redeem or otherwise acquire any shares of
Decorative Products Company Stock or any other securities thereof or any rights,
warrants or options to acquire any such shares or other securities; or
(p) agree, whether in writing or otherwise, to do any of the
foregoing.
8.2 Investigation of Business
MergerCo may, prior to the Closing Date, make or cause to be made such
investigation of the business, assets and properties of the Business and of its
financial and legal condition as MergerCo deems necessary or advisable. Borden
will, or it will cause the Subsidiaries to, permit MergerCo and its authorized
agents or representatives, including its independent accountants, to have full
access to the assets, properties, employees, officers, books and records of the
Business at reasonable hours to review information and documentation relative to
the properties, books, contracts, commitments and other records of the Business,
provided, however, that MergerCo shall not have access to customer lists to the
extent disclosure thereof to MergerCo is prohibited by applicable law prior to
Closing.
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MergerCo and its representatives will hold in confidence all confidential
information obtained from Borden and the Subsidiaries and their officers,
agents, representatives or employees in accordance with the provisions of the
letter dated April 25, 1997 between MergerCo and Borden ("Confidentiality
Letter").
8.3 Mutual Cooperation; No Inconsistent Action
(a) Subject to the terms and conditions hereof, Borden and
MergerCo agree to use their reasonable best efforts to take, or cause to be
taken, all commercially reasonable actions and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement, including all of the following (i)
obtain prior to Closing all licenses, certificates, permits, approvals,
authorizations, qualifications and orders of governmental authorities as are
necessary for the consummation of the transactions contemplated hereby,
including without limitation such consents and approvals as may be required
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"Hart-Scott Act"), and any similar foreign legislation; (ii) effect all
necessary registrations and filings and (iii) satisfy the conditions to Closing.
Borden and MergerCo shall cooperate fully with each other to the extent
reasonable in connection with the foregoing.
(b) MergerCo and Borden shall timely and promptly make all
filings which may be required by each of them in connection with the
consummation of the transactions contemplated hereby under the Hart-Scott Act
and any similar foreign legislation. Each party shall furnish to each other such
necessary information and assistance as the other party may reasonably request
in connection with the preparation of any necessary filings or submissions by it
to any U.S. or foreign governmental agency, including, without limitation, any
filings
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necessary under the provisions of the Hart-Scott Act. Each party shall provide
the other party the opportunity to make copies of all correspondence, filings or
communications (or memoranda setting forth the substance thereof) between such
party or its representatives, on the one hand, and the Federal Trade Commission
(the "FTC"), the Antitrust Division of the United States Department of Justice
(the "Antitrust Division") or any similar foreign governmental agency or members
of their respective staffs, on the other hand, with respect to this Agreement or
the transactions contemplated hereby.
(c) Other than to the extent applicable law expressly requires
Borden and its Subsidiaries to do so, BDPH shall be responsible for making all
filings and giving all notices relating to, and otherwise pursuing all licenses,
permits, consents, approvals, authorizations and orders of foreign governmental
authorities and making all registrations and filings with foreign governmental
authorities (collectively, the "Foreign Governmental Consents"), to be made or
given subsequent to the Closing Date, which, to the best knowledge of BDPH or
MergerCo, are required in connection with the transactions contemplated hereby
and shall provide a copy of any such filings or notices to Borden. In connection
with and as a condition to BDPH's obligations under the preceding sentence,
Borden shall fully cooperate with and assist BDPH in identifying and obtaining
all such licenses, permits, consents, approvals, authorizations or orders and in
making all such registrations and filings.
(d) Each of Borden and MergerCo shall notify and keep the
other advised in reasonable detail as to (i) any litigation or administrative
proceeding pending and known to such party, or to its knowledge threatened,
which challenges the transactions contemplated hereby or the acquisition (the
"C&A Transaction") of Collins & Aikman Products Co.'s
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Imperial Wallcoverings business ("Imperial") and (ii) any event or circumstance
which would constitute a breach of their respective representations and
warranties in this Agreement, provided that the failure of Borden or MergerCo to
comply with clause (ii) shall not subject Borden or MergerCo to any liability
hereunder except as and to the extent Borden or MergerCo would be responsible
for a breach of such representations and warranties pursuant to Section 11
(including, without limitation, the limitations on recovery and the time periods
for bringing claims thereunder). Subject to the provisions of Section 13 hereof,
Borden and MergerCo shall not and shall cause their respective affiliates not to
take any action inconsistent with their obligations under this Agreement or
which would materially hinder or delay the consummation of the transactions
contemplated by this Agreement.
8.4 Public Disclosures
Prior to the Imperial Termination Date, neither MergerCo nor Borden
will issue any press release or make any other public disclosures concerning the
existence or contents of this Agreement or the transactions contemplated hereby.
On or after the Imperial Termination Date, neither MergerCo nor Borden will
issue any press release or make any other public disclosures concerning this
transaction or the existence or contents of this Agreement or the transactions
contemplated hereby without the prior written consent of the other party, which
shall not be unreasonably withheld or delayed. Until the first anniversary of
the Closing Date the parties agree that prior to filing any report or document
with the Securities and Exchange Commission containing language describing the
Agreement and the transactions contemplated by or directly related to the
Transaction Documents, each shall allow the other party reasonable time to
comment on such language. Notwithstanding the above, nothing in this Section
will preclude any party from making any disclosures it determines in good faith
to be
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required by law or regulation or necessary and proper in conjunction with the
filing of any tax return or other document required to be filed with any
federal, state or local governmental body, authority or agency; provided, that
the party required to make the release or statement shall, if practicable in the
circumstances, allow the other party reasonable time to comment on such release
or statement in advance of such issuance.
8.5 Access to Records and Personnel
(a) The parties shall retain the books, records, documents,
instruments, accounts, correspondence, writings, evidences of title and other
papers, including independent accountants' workpapers, relating to the Business
or the Assets in their possession (the "Books and Records") for the longer of
(i) the period of time set forth in their respective records retention policies
on the Closing Date or (ii) for such longer period as may be required by law or
any applicable court order.
(b) The parties will allow each other reasonable access to
such Books and Records, and to personnel having knowledge of the whereabouts
and/or contents of such Books and Records (and will instruct such personnel to
fully cooperate with the other party) for legitimate business reasons, such as
the preparation of tax returns, the defense of litigation, the preparation of
audited financial statements and in connection with the financing of the
transactions contemplated hereby, provided, however, such access shall not
interfere with the normal operation of the providing party's business. Borden
will use its reasonable best efforts to cause the independent accountants that
issued the reports relating to the 1995, 1996 and 1997 audited Financial
Statements of the Business to consent to BDPH's use of such audited Financial
Statements as may be required by applicable law in the disclosure documents
relating to the financing contemplated by this Agreement or any subsequent
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financing involving a public offering. Each party shall be entitled to recover
its out-of-pocket costs (including, without limitation, copying costs and
accountants' fees and expenses) incurred in providing such records and/or
personnel to the other party. The requesting party will hold in confidence all
confidential information identified as such by, and obtained from, the
disclosing party, any of its officers, agents, representatives or employees,
provided, however, that information which was (i) in the public domain; (ii) was
in fact known to the requesting party prior to disclosure by the disclosing
party, its officers, agents, representatives or employees; or (iii) becomes
known to the requesting party from or through a third party not under an
obligation of non-disclosure to the disclosing party, shall not be deemed to be
confidential information.
8.6 Use of Materials Bearing the "Borden" Trademark
(a) Except as otherwise provided in the Borden Home License
Agreement (defined below), for a period of 6 months after the Closing Date,
Borden hereby grants to BDPH a non-exclusive non-assignable, royalty-free
license to use the Borden(R) trademark (hereinafter in this Section 8.6 the
"Trademark") on any and all packaging materials for Products on which the
Trademark appears as of the Closing Date ("Packaging Materials"); provided that
any such products manufactured by BDPH are manufactured, in all material
respects, at the quality standards of Borden and consistent, in all material
respects, with the quality standard used prior to Closing. Any such Packaging
Materials bearing the Trademark not used within 6 months after the Closing Date
may not be thereafter used by BDPH and shall be destroyed at MergerCo's sole
expense unless otherwise agreed to by Borden in writing. Within the later of (i)
one month after any extension granted by Borden pursuant to the previous
sentence and (ii) 7 months following the Closing Date, BDPH shall provide to
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Borden evidence reasonably satisfactory to Borden that all such Packaging
Materials have been used or destroyed. BDPH shall defend, indemnify and hold
Borden harmless from any product liability or similar claims arising from
Products manufactured and sold by BDPH using such Packaging Materials. On and
after the Closing, BDPH shall not be authorized to execute any purchase order
bearing the Trademark and BDPH agrees immediately after Closing to destroy any
and all such purchase order forms.
(b) On or prior to the Closing, Borden shall have delivered to
MergerCo evidence that the inter-company trademark licensing agreements between
Borden and its affiliates (other than Decorative Products Companies), on the one
hand, and the Decorative Product Companies, on the other hand, listed on
Schedule 8.6(b) hereto shall have been terminated.
(c) On the Closing Date, BDPH and Borden shall execute and
deliver a transition license agreement, substantially in the form of Exhibit A
hereto (the "Borden Home License Agreement"), pursuant to which Borden shall
grant to BDPH a non-assignable license to use, for a period of one year
following the Closing Date, certain Borden Home-related trademarks.
8.7 Employee Relations and Benefits
(a) Conduct Prior to Closing Date. Borden and its Subsidiaries
shall be under no obligation to terminate any Business Employee; provided,
however, that the Decorative Products Companies shall be under no obligation to
maintain employment of any Business Employee following the Closing Date by
virtue of any provision of this Agreement.
(b) Continuity of Employment. The parties agree that all
Business Employees employed immediately prior to the Closing will be employed in
the Business
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immediately after the Closing; provided, however, that the Decorative Products
Companies shall be under no obligation to employ any Business Employee following
the Closing Date.
(c) Collective Bargaining Agreements. The BDPH Canadian
Subsidiary shall assume and be bound by the terms of the collective bargaining
agreements listed on Schedule 8.7(c) which pertain to the Acquired Assets and
Assumed Liabilities to be acquired or assumed by the BDPH Canadian Subsidiary
(the "Collective Bargaining Agreements") as of the Closing Date.
(d) Comparable Benefits. Subject to Section 8.7(m), for one
year following the Closing Date, BDPH shall offer such compensation and benefits
(including, but not limited to, health, welfare, pension, vacation, savings and
severance benefits), effective as of the Closing Date, to the Business Employees
who are not in a unit represented by a collective bargaining agent that are
comparable in the aggregate to the compensation and benefits that are in effect
for Imperial employees immediately prior to Closing.
(e) Benefit Plan Participation. Except as expressly provided
in this Section 8.7 or except as otherwise required by applicable law, all
Business Employees shall cease active participation in (and accrual of
additional benefits under) all Benefit Plans as of the Closing Date.
(f) Employment Liabilities. Except as otherwise specifically
provided in this Section 8.7, BDPH shall be responsible and liable for (i) all
liabilities and obligations relating to the participation of the Business
Employees under the Benefit Plans before, on or after the Closing Date
(including, but not limited to, medical, dental and life insurance benefits for
the benefit of Business Employees who are receiving disability income payments
under any Benefit Plan, but excluding all liabilities and obligations relating
to the Borden,
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Inc. Employees Retirement Income Plan (the "Borden U.S. Pension Plan"), any
withdrawal liability incurred by or asserted with respect to any Benefit Plan
that is a multiple employer plan or multiemployer plan, and long-term disability
income benefits payable to U.S. Business Employees and Canada Business Employees
for long-term disability claims reported to Borden by the making of application
for disability benefits prior to Closing, which excluded liabilities shall be
assumed and/or retained by Borden) and (ii) all liabilities and obligations in
connection with the employment (or termination of employment) of the Business
Employees before, on or after Closing including the assumption of the employment
agreements with respect to the Business Employees.
(g) U.S. Defined Contribution Plans. (i) As of Closing, Borden
shall cause the active participation by the U.S. Business Employees in the
Borden, Inc. Retirement Savings Plan, the Borden, Inc. Union Savings Plan and
the Borden, Inc. Associate Savings Plan (collectively, the "U.S. Savings Plans")
to cease. Borden shall (A) as of Closing cause the trustees of the Savings Plans
to identify, in accordance with the applicable spinoff provisions set forth
under Section 414(l) of the Code, the assets of the U.S. Savings Plans
representing the full account balances of the U.S. Business Employees for all
periods of participation through Closing (including, as applicable, all employee
contributions, employer contributions and all earnings attributable thereto);
and (B) as soon as practicable (but in no event later than nine months) after
Closing, make all required filings and submissions to appropriate governmental
authorities and all required amendments to the U.S. Savings Plans and related
trust agreements necessary to provide for the transfer of assets described in
this Section 8.7(g). The U.S. Savings Plans shall be amended to provide that (A)
there shall be
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no contributions thereto with respect to the U.S. Business Employees for periods
after Closing and (B) all transferred employer contributions shall be fully
vested.
(ii) BDPH shall (A) give Borden written notice of the name
of the trustee of the defined contribution plan designated by BDPH to which the
assets and liabilities for benefits of the U.S. Savings Plans are to be
transferred (the "BDPH U.S. Savings Plan"), accompanied by a copy of the most
recent favorable IRS determination letter for such plan received by BDPH, as
promptly as possible after Closing, but in any event prior to the date on which
such transfer is to occur; and (B) as soon as practicable (but in no event later
than nine months) after Closing, make all required filings and submissions to
appropriate governmental authorities. As soon as practicable after Closing, and
pursuant to the procedures set forth below, Borden shall cause the trustees of
the U.S. Savings Plans to transfer to the trustee of the BDPH Savings Plan the
following amount (the "U.S. Savings Total Transfer Amount"): (A) the full
account balances (in kind or in cash as determined by Borden, and notes for any
loans to the U.S. Business Employees) of all U.S. Business Employees, whose
account balances shall have been credited with appropriate earnings and
contributions, if any, attributable to the period ending at the close of
business on the Closing Date, plus (B) earnings on such account balances
attributable to the period from the Closing Date to U.S. Savings Transfer Date,
as defined below, reduced by (C) any benefit or withdrawal payments in respect
of the U.S. Business Employees prior to the U.S. Savings Transfer Date. The
"U.S. Savings Transfer Date" shall be the first day of the month following a
15th day of a month by which BDPH has requested the transfer and Borden has
received copies of the applicable favorable IRS determination letter; provided,
however, that in no instance shall such date occur more than nine months after
Closing. On the U.S.
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Savings Transfer Date, Borden shall transfer 90% of its good faith estimate of
the U.S. Savings Total Transfer Amount. Upon the completion of a calculation of
the U.S. Savings Total Transfer Amount by the record keeper for the U.S. Saving
Plans (such calculation to occur no later than 120 days after the U.S. Savings
Transfer Date and such calculation to be binding on BDPH), the U.S. Savings
Plans shall transfer to the BDPH U.S. Savings Plan an amount equal to the
difference between the U.S. Savings Total Transfer Amount and any amounts
previously transferred to the BDPH U.S. Savings Plan or, if applicable, the BDPH
U.S. Savings Plan shall transfer to the U.S. Savings Plans an amount equal to
the difference between any amounts previously transferred to the BDPH U.S.
Savings Plan and the U.S. Savings Total Transfer Amount. In consideration of the
transfer of assets hereunder, BDPH shall, as of the U.S. Savings Transfer Date,
cause the BDPH U.S. Savings Plan to assume the liabilities for benefits payable
to plan participants and beneficiaries in respect of participants for whom
assets (including notes) are transferred.
(iii) BDPH shall (A) permit repayment to the BDPH U.S.
Savings Plan of the outstanding loans of the U.S. Business Employees (under the
U.S. Savings Plans) by way of regular paycheck deductions and (B) take all steps
required to effectuate such repayment (including, but not limited to, the
amendment of its plans).
(iv) Any transfer of plan assets shall consist of cash,
participants notes and fixed investment contracts (valued at their book value as
of the date or dates of transfer) as determined by Borden.
(h) International Benefit Plans. Schedule 8.7 (h) describes
additional obligations of BDPH and Borden with respect to Benefit Plans that are
not U.S. Benefit Plans (collectively, the "International Benefit Plans"). To the
extent that an International Benefit
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Plan is not specifically addressed in Schedule 8.7(h), such International
Benefit Plan shall be governed by the general provisions of this Section 8.7 and
by applicable local laws.
(i) Pre-Closing Claims. In respect of pre-Closing benefits
claims (including, without limitation, workers compensation claims, claims under
Borden's self-insured retention programs and welfare benefit claims) assumed or
retained by BDPH pursuant to Section 8.7, following the Closing until such time
as BDPH provides Borden with reasonably satisfactory evidence that it has made
arrangements to promptly process such claims, Borden shall have the option, but
not the obligation, to process and pay such claims and BDPH hereby agrees to
promptly reimburse Borden the amount paid in respect of such claims, as well as
Borden's incremental costs of processing such claims.
(j) Post-Retirement Benefits. As of Closing, no Business
Employee shall be eligible to receive "Post-Retirement Benefits" from Borden
(including, but not limited to, retiree medical and retiree life benefits). To
the extent that Business Employees receive (or are eligible to receive) any of
the Post-Retirement Benefits generically described on Schedule 8.7(j) from
Borden immediately prior to Closing, such Business Employees shall receive the
same Post-Retirement Benefits from BDPH following Closing.
(k) Welfare Plans. Except with respect to the disability
benefits retained by Borden pursuant to Section 8.7(f)(i) above, with respect to
any BDPH Benefit Plan that is a "welfare benefit plan" (as defined in Section
3(1) of ERISA, or would be a "welfare benefit plan" if such plan was subject to
ERISA) for the benefit of Business Employees on and after Closing, BDPH shall
(a) cause there to be waived any pre-existing condition limitations and (b) give
effect, in determining any deductible and maximum out-of-pocket limitations, to
claims incurred and amounts paid by, and amounts reimbursed to, such employees
with
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respect to similar plans maintained by Borden immediately prior to Closing.
Notwithstanding any other Section in this Agreement, BDPH shall assume all
liabilities (whether incurred before, during or after the Closing) with respect
to the FAS 106 and FAS 112 liabilities (including, but not limited to,
Post-Retirement and Post-Employment Benefits) of the Business Employees.
(l) Accrued Vacation. With respect to any accrued but unused
vacation time to which any Business Employee is entitled pursuant to the
vacation policies, which, in the case of non-union vacation policies, are
described on Schedule 8.7(l)-1, applicable to such employee (the "Vacation
Policy") as of the Closing Date, BDPH shall allow such Business Employee to use
such accrued vacation; provided, however, that if BDPH deems it necessary to
disallow such employee from taking such accrued vacation, BDPH shall be liable
for and pay in cash an amount that is consistent with vacation time accrued
under the Vacation Policy to such employee.
(m) Severance. With respect to Business Employees covered by
the Collective Bargaining Agreements, such Business Employees shall be covered
by such severance benefits, if any, as provided by such Collective Bargaining
Agreements. With respect to U.K. Business Employees, MergerCo shall provide such
Business Employees terminated within 12 months of Closing, who otherwise qualify
therefor, with severance benefits in accordance with the severance practices set
forth in Schedule 8.7(m)-1. With respect to all other Business Employees,
MergerCo shall provide severance benefits in accordance with the severance
practices of Imperial set forth in Schedule 8.7(m)-2 to such Business Employees
(who are either salaried or non-union hourly employees) terminated within 12
months of Closing who otherwise qualify therefor.
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(n) Service Credit. With respect to the Business Employees,
BDPH shall recognize all service with Borden and its Subsidiaries for purposes
of eligibility and vesting under the BDPH Benefit Plans.
(o) WARN Act. BDPH agrees to provide any required notice under
the Worker Adjustment and Retraining Notification Act ("WARN") and any other
similar applicable law and to otherwise comply with any such statute with
respect to any "plant closing" or "mass layoff" (as defined in WARN) or similar
event affecting U.S. Business Employees and occurring on or after Closing or
arising as a result of the transactions contemplated hereby.
(p) COBRA. BDPH agrees to provide any required notice under
the Consolidated Omnibus Budget Reconciliation Act of 1986, as amended, and any
other applicable law on or after Closing.
(q) No Rights Conferred on Employees. Nothing herein,
expressed or implied, shall confer upon any employee or former employee of
Borden, BDPH or any Decorative Products Company or any of their affiliates
(including, without limitation, the Business Employees) any rights or remedies
including, without limitation, any right to employment or continued employment
for any specified period) of any nature or kind whatsoever, under or by reason
of this Agreement.
(r) Retention of Certain Severance Liabilities. Borden agrees
to retain all liabilities and obligations for any severance liabilities arising
solely from the Asset Transfer, the Stock Transfer and the Merger, provided that
any severance liabilities or obligations arising from the acts or omissions of
MergerCo, or, following the Closing, BDPH and its Subsidiaries, shall be the
responsibility of BDPH.
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8.8 Intentionally Omitted
8.9 "As Is" Condition
Except as otherwise specifically provided by Borden in the
representations and warranties of Borden set forth herein, and subject to the
limitations with respect to such representations and warranties contained in
this agreement, MergerCo agrees that it shall accept all Assets in an "As Is"
"Where Is" condition at the Closing Date. EXCEPT AS OTHERWISE SPECIFICALLY
PROVIDED BY BORDEN IN THE REPRESENTATIONS AND WARRANTIES OF BORDEN SET FORTH IN
THE TRANSACTION DOCUMENTS, AND SUBJECT TO THE LIMITATIONS WITH RESPECT TO SUCH
REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS AGREEMENT, BORDEN MAKES NO
WARRANTY WITH RESPECT TO THE VALUE, CONDITION OR USE OF THE ASSETS, WHETHER
EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
8.10 Intercompany Transactions
Effective as of the Closing Date, all intercompany receivables or
payables and loans (including intercompany obligations with respect to foreign
currency contracts or other derivative financial contracts) then existing
between Borden and any affiliates of Borden which are not Decorative Products
Companies (collectively the "Borden Affiliates") on the one hand, and any of the
Decorative Products Companies, on the other hand, shall be netted and the
remaining balance will be deemed to be treated as an intercompany dividend or
capital contribution, as the case may be, and all Contracts between such parties
will terminate except as specified in Schedule 8.10.
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8.11 Non-Solicitation
Until the Closing shall actually have occurred, MergerCo acknowledges
that it remains subject to paragraph 12 of the Confidentiality Letter.
8.12 Guarantees
BDPH shall use its commercially reasonable efforts (which shall not
include agreeing to any modifications of the terms of the underlying obligations
or the payment of any amounts) to cause itself or one or more of its affiliates
to be substituted in all respects for the Borden Affiliates, effective as of the
Closing, in respect of all obligations of the Borden Affiliates under each of
the guarantees, indemnities, surety bonds, letters of credit and letters of
comfort obtained by the Borden Affiliates for the benefit of the Business listed
on Schedule 8.12 (the "Guarantees").
8.13 Financing
(a) If MergerCo is unable to arrange and/or cause BDPH to
obtain any portion of the financing described in the Commitment Letters due to
facts or circumstances relating to Imperial or the C&A Transaction, then
MergerCo shall use its reasonable best efforts to arrange and/or cause BDPH to
obtain alternative financing for the consummation of the transactions (excluding
the C&A Transaction) contemplated hereby from other sources or in any other
commercially reasonable manner, provided, however, that reasonable best efforts
shall not be deemed to include acceptance of financial or other terms that
MergerCo determines are not, taken as a whole, at least as favorable in all
material respects to MergerCo as the terms contained in the Commitment Letters.
MergerCo will inform Borden within 24 hours of any determination that it is
unable to arrange any financing.
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(b) At Closing, MergerCo will be capitalized as contemplated
by the Blackstone Commitment Letter. In the event that Blackstone contributes
additional equity capital (the amount of such additional contribution, together
with any shares of BDPH Common Stock received by C&A from Blackstone following
the Closing Date in the C&A Transaction (provided such common stock is expressed
in the definitive documentation of the C&A Transaction on or prior to the
Imperial Termination Date as a fixed number of shares and is not amended with
respect to such number of shares without the prior written consent of Borden),
valued on the same basis as the shares of BDPH Common Stock held by Blackstone
on the Closing Date immediately following the Merger, the "C&A Capital Amount")
to BDPH in connection with a closing of the C&A Transaction which is subsequent
to the Closing Date and subject to the condition that no additional shares of
BDPH Common Stock or common stock of any subsidiary of BDPH and no options,
warrants, appreciation rights or other rights of any kind relating to the BDPH
Common Stock or the common stock of any subsidiary of BDPH are issued in
connection with the C&A Transaction, then the Cash Refund Amount (as defined
below), if any, shall be paid by Borden to BDPH by wire transfer within 2
business days of notice thereof in writing to Borden following the closing of
the C&A Transaction. The term "Cash Refund Amount" shall mean the excess, if
any, of (i) the Cash Amount as actually calculated at the Closing over (ii) the
Cash Amount as it would have been calculated at the Closing had the C&A Capital
Amount been provided to MergerCo prior to the Closing; provided, that in no
event shall the Cash Amount calculated pursuant to either clause (i) or clause
(ii) of this definition ever be less than $309,550,000.
(c) From and after the opening of business on the Closing
Date, BDPH shall be responsible for funding all disbursements of the Business;
Borden will be responsible
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therefor prior thereto. Any cash, cash equivalents, similar investments,
certificates of deposit, Treasury bills and other marketable securities at the
Closing shall be treated by the parties consistent with Section 2.3(c).
8.14 Buy-Out of BLC Assets
The "BLC Master Lease" shall mean the master lease dated June 1, 1990
between Citicorp Bankers Leasing Corporation ("Citicorp") and Borden pursuant to
which the machinery and equipment described in Schedule 8.14 (the "BLC Assets")
are leased to Borden by Citicorp. Prior to the Closing Date, Borden and MergerCo
shall each use commercially reasonable efforts to assign the BLC Master Lease,
relating to the BLC Assets, to BDPH, provided, however, that nothing herein will
require BDPH, MergerCo or any affiliate of MergerCo (or any subsidiary of BDPH
or any post-merger affiliate of BDPH) to expend money or incur any liability or
obligation to obtain such assignment. If, prior to the Closing Date, Citicorp
has not agreed to such assignment effective prior to the Closing, then Borden
shall pay to Citicorp immediately prior to the Closing, by wire transfer of
immediately available funds, the BLC Buy-Out Amount (as defined below). If such
assignment is procured prior to the Closing Date on or prior to the Closing
Date, MergerCo shall arrange to have all BLC Assets which by law are required to
carry liability or other insurance insured in accordance with applicable law.
The "BLC Buy-Out Amount" shall mean approximately $639,240 (the equity balance
payable by Borden as of September 30, 1997 under the BLC Master Lease to acquire
title to the BLC Assets) less any lease payments on such BLC Assets made by
Borden from the date on which the foregoing equity balance was calculated
through the Closing Date.
8.15 Services Agreement
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On the Closing Date, BDPH and Borden shall execute and deliver
agreements, substantially in the form attached hereto as Exhibit B (the
"Services Agreements"), pursuant to which Borden shall agree to provide certain
services on the terms and subject to the conditions set forth therein.
8.16 Nondisclosure; Noncompetition
(a) From and after the Closing Date, Borden shall not, and
shall cause its subsidiaries not to use, divulge, furnish or make accessible to
anyone (except to the extent otherwise required in the opinion of Borden's
counsel, by applicable law, regulation or legal process) any proprietary,
material non-public, confidential or secret information to the extent relating
to the Business (including, without limitation, customer lists, supplier lists
and pricing and marketing arrangements with customers or suppliers), and Borden
and its subsidiaries shall cooperate reasonably with MergerCo in preserving such
proprietary, confidential or secret aspects of the Business. After the Closing
Date and to the extent provided in the applicable confidentiality letter, Borden
shall use its reasonable best efforts to retrieve (or obtain an agreement to
destroy) any written evaluation and due diligence materials distributed to
parties (other than MergerCo and affiliates of MergerCo and other than parties
who are involved in the sales process for Borden's Columbus Coated Fabrics
division and/or Orchard division), and any materials incorporating or based on
such materials, in connection with the sales process undertaken by Borden in
connection with the proposed sale of the Business and take such other actions as
BDPH may request to enforce Borden's rights under any agreements similar to the
confidentiality letter for the benefit of BDPH; provided that BDPH shall
reimburse Borden for its out-of-pocket costs in connection with its obligations
in this sentence.
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(b) For a period of two years after the Closing Date, other
than as a result of the BDPH Common Stock owned pursuant to this Agreement,
Borden shall not, and shall cause its subsidiaries not to, directly or
indirectly, manufacture or sell any Products manufactured or sold by the
Residential Wallcoverings and Vernon Plastics businesses as of the Closing, or
own stock or otherwise have an equity interest in any person or entity engaged
in such business (other than holding less than 5% of the stock of a publicly
held corporation engaged in such business). Notwithstanding the foregoing,
Borden may engage in a transaction whereby, directly or indirectly, it acquires
(whether by merger, stock purchase, purchase of assets or otherwise), any person
or business, or any interest in any person or business, engaged at the time of
such acquisition in the manufacture or sale of any products manufactured or sold
by the Business as of the Closing provided that, at the time of such
transaction, no more than 25% of such person's or business's revenues result
from products of a type manufactured by the Business as of the Closing. None of
Borden and its subsidiaries will, for a period of two years from the Closing
Date, solicit for hire any employees of the Business without the prior written
consent of MergerCo; provided, however, that the foregoing provision will not
prevent Borden from hiring any such person (i) who contacts Borden on his or her
own initiative without any direct or indirect solicitation by or encouragement
from Borden, (ii) who responds to a public advertisement placed by Borden, (iii)
who has not been employed by BDPH during the preceding six months or (iv) who
has been terminated by BDPH. Borden and its subsidiaries agree that a violation
of this Section 8.16 will case irreparable injury to MergerCo, and MergerCo will
be entitled, in addition to any other rights and remedies it may have at law or
in equity, to an injunction enjoining and
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restraining Borden and its subsidiaries from doing or continuing to do any such
violation and any other violations or threatened violations of Section 8.16.
(c) Borden and its subsidiaries acknowledge and agree that the
covenants set forth in this Section 8.16 are reasonable and valid in scope and
in all other respects. If any of such covenants is found to be invalid or
unenforceable by a final determination of a court of competent jurisdiction (i)
the remaining terms and provisions hereof shall be unimpaired and (ii) the
invalid or unenforceable term or provision shall be deemed replaced by a term or
provision that is valid and enforceable and that comes closest to expressing the
intention of the invalid or unenforceable term or provision. In the event that,
notwithstanding the first sentence of this Section 8.16(c), any of the
provisions of this Section 8.16 relating to scope of the covenants contained
therein or the nature of the business restricted thereby shall be declared by a
court of competent jurisdiction to exceed the maximum restrictiveness such court
deems enforceable, such provision shall be deemed to be replaced by the maximum
restriction deemed enforceable by such court.
8.17 PVC Contract. Following the Closing, in connection with any sale
by BDPH of the Vernon plastics division of the Business in a single transaction,
Borden will cause its Subsidiary which acts as general partner of BCP (as
defined in Section 9.3(o)) to cooperate, subject to such Subsidiary's duties as
general partner, if any, in any required assignment of the contract referred to
in Section 9.3(o).
8.18 Stockholders Agreement
On the Closing Date, Blackstone, BDPH and Borden shall execute and
deliver an agreement ("Stockholders Agreement"), incorporating the terms of the
term sheet attached hereto as Annex B, pursuant to which Borden, BDPH and
Blackstone will agree to certain
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rights and obligations with respect to the BDPH Common Stock owned by such
parties. Borden and MergerCo will endeavor to agree upon the definitive form of
the Stockholders' Agreement prior to the Imperial Termination Date.
8.19 Insurance Covenant
With respect to any loss, liability or damage suffered after the
Closing Date resulting from or arising out of the conduct of the Business on or
prior to the Closing Date or for which the Asset Seller or any of its affiliates
(other than BDPH) (a "Borden Insured Party") would be entitled to assert, or
cause any other person to assert, a claim for recovery under any policy of
Insurance underwritten by third parties not affiliated with Borden, at the
reasonable request of BDPH and to the extent permitted under such applicable
policies of Insurance without the payment of additional premiums in connection
therewith, such Borden Insured Party will assert one or more claims under the
policies of Insurance covering such loss, liability or damage if BDPH is not
itself entitled to assert such claim, but such Borden Insured Party is so
entitled; provided, however, that all of the Borden Insured Parties' reasonable
out-of-pocket costs and expenses incurred in connection with the foregoing,
including without limitation any liability, obligation or expense referred to in
the last sentence hereof, are, at the option and in the sole discretion of the
entity incurring such costs and expenses, paid in advance of the entity
incurring such costs and expenses, or promptly reimbursed by MergerCo and/or
BDPH. To the extent required under the terms of the policies of Insurance to
give effect to the foregoing, Borden will be deemed, solely for the purpose of
asserting claims for recovery under such Insurance to have assumed or retained
liability for such loss, liability or damage but only to the extent of the
policy limits of the applicable policy of Borden Insurance; provided, however,
that (i) BDPH and/or Holding's
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obligations under Section 11.2 will not be affected by the provisions hereof and
(ii) with respect to any claim made by any Borden Insured Party under any
Insurance pursuant to this section, BDPH and/or MergerCo will indemnify, defend
and hold harmless Borden and each of its affiliates (other than BDPH) and their
respective directors, officers, partners, employees, agents and representatives
(including without limitation any predecessor or successor of any of the
foregoing) from and against any Borden Losses relating to, resulting from or
arising out of any deductible, policy limit, obligation, indemnity, reinsurance
due to the liquidation or insolvency of the reinsurer, self-insurance retention
or retroactive or retrospective premium resulting from claims made hereunder or
other like arrangement by which any such entity, including without limitation
any captive insurance company, retains any liability or obligation under any
such policy of Insurance or otherwise.
8.20 Certain Purchasers. Promptly after the Imperial Termination Date,
Borden shall offer to purchase, subject to the occurrence of the Closing, any
and all shares of BDPH Common Stock to be owned beneficially or of record
following the Merger by persons other than Borden or any subsidiary of Borden
who were holders of shares of BDPH Common Stock prior to the Merger for cash at
a price per share equal to the Per Share Consideration and, following the
occurrence of the Closing, shall purchase promptly all such shares from holders
accepting such offer. If any such shares are not so purchased, the parties will
endeavor to cause all shareholders to become parties to the Stockholders'
Agreement.
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9. CONDITIONS
9.1 Conditions Precedent to Obligations of MergerCo and Borden
The respective obligations of MergerCo and Borden to consummate the transactions
contemplated by this Agreement shall be subject to the satisfaction at or prior
to the Closing Date of each of the following conditions:
(a) No Injunction, etc. At the Closing Date, there shall be no
injunction, restraining order or decree of any nature of any court or
governmental agency or body of competent jurisdiction that is in effect that
restrains or prohibits this Agreement or any material transaction contemplated
hereby, including without limitation, the consummation of the Asset Transfer,
the Stock Transfer or the Merger, and no governmental authority (an "Enforcement
Authority") shall have initiated any action to restrain, enjoin or otherwise
prohibit the consummation of the transactions contemplated by this Agreement
which action remains outstanding at the time in question.
(b) Regulatory Authorizations. All (i) consents, approvals,
authorizations and orders of federal, state and foreign governmental and
regulatory authorities as are necessary in connection with the Asset Transfer,
the Stock Transfer or the Merger or which if not obtained could be reasonably
likely to subject BDPH, MergerCo, Borden or any Subsidiary, or any officer,
director or agent of any such person to civil or criminal liability or could
render such transfer void or voidable (the "Required Consents") shall have been
obtained, except for Required Consents the failure to obtain which, individually
or in the aggregate, are not material to the operations of the Business taken as
a whole and the failure of which to obtain would not subject MergerCo, BDPH or
Borden or Borden's affiliates, or any officers, directors or agent of any such
person to civil or criminal liability; provided that
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for purposes of this clause (b) applicable waiting periods specified under the
Hart-Scott Act with respect to the transactions contemplated by this Agreement
shall have lapsed or been terminated.
9.2 Conditions Precedent to Obligation of Borden
The obligation of the Borden to consummate the transactions provided
for in this Agreement is subject to fulfillment of each of the following
conditions:
(a) Accuracy of MergerCo's Representations and Warranties;
Covenants of MergerCo. The representations and warranties of MergerCo contained
in this Agreement that are qualified as to materiality shall be true and correct
and the representations and warranties of MergerCo set forth in this Agreement
and that are not so qualified shall be true and correct in all material
respects, in each case on the date of this Agreement (except to the extent cured
prior to the Closing Date) and on the Closing Date as though made on the Closing
Date, except to the extent such representations and warranties speak as of an
earlier date; provided that for purposes only of the condition set forth in this
Section 9.2(a) any breach of a representation or warranty will be considered
both individually and together with any other such breaches; MergerCo shall have
complied in all material respects with all covenants contained in this Agreement
to be performed by it prior to Closing; and Borden shall have received a
certificate signed by an officer of MergerCo to such effect.
(b) Stockholders Agreement. Blackstone and BDPH shall have
executed and delivered to Borden the Stockholders Agreement.
(c) Borden Home License Agreement. MergerCo shall have
executed and delivered to Borden the Borden Home License Agreement.
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(d) Services Agreement. MergerCo shall have executed and
delivered to Borden the Services Agreement.
(e) Exemption Certificates. MergerCo shall have executed and
delivered to Borden all certificates required by all relevant taxing authorities
that are necessary to support any applicable exemption from the imposition of
any sales or similar tax on the transfer of the Acquired Assets or the
Decorative Products Company Stock.
(f) Stock Certificates. Subject to compliance with the
provisions of Section 4.2(f), Borden shall have received stock certificates
representing the Retained Shares.
(g) Corporate Documents. Borden shall have received from
MergerCo certified copies of the resolutions duly adopted by the Board of
Directors of MergerCo approving the execution and delivery of the Transaction
Documents by MergerCo and the consummation of the transactions contemplated
thereby, and such resolutions shall be in full force and effect as of the
Closing Date.
(h) Opinion of Counsel. Borden shall have received an opinion
of Jones, Day, Reavis & Pogue, counsel to MergerCo, substantially to the effect
set forth in Exhibit C.
9.3 Conditions Precedent to Obligation of MergerCo
The obligation of MergerCo to consummate the transactions provided for
in this Agreement is subject to fulfillment of each of the following conditions:
(a) Accuracy of Representations and Warranties of Borden;
Covenants of Borden. The representations and warranties of Borden and BDPH
contained in this Agreement that are qualified as to materiality shall be true
and correct and the representations and warranties of Borden set forth in this
Agreement and that are not so qualified shall be true and correct in all
material respects, in each case on the date of this Agreement (except to
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the extent cured prior to the Closing Date) and on the Closing Date as though
made on the Closing Date, except to the extent such representations and
warranties speak as of an earlier date; provided that for purposes only of the
condition set forth in this Section 9.3(a) any breach of a representation or
warranty will be considered both individually and together with any other such
breaches; Borden shall have complied in all material respects with all covenants
contained in this Agreement to be performed by it prior to Closing; and MergerCo
shall have received a certificate signed by an officer of Borden to such effect;
(b) Financing. All conditions precedent to BDPH's being
entitled to receive the proceeds of the Financing shall have been satisfied or
waived.
(c) Stockholders Agreement. Borden shall have executed and
delivered to MergerCo the Stockholders Agreement.
(d) Borden Home License Agreement. Borden shall have executed
and delivered to MergerCo the Borden Home License Agreement;
(e) Services Agreement. Borden shall have executed and
delivered to MergerCo the Services Agreements;
(f) Termination Agreement. Borden and its affiliates shall
have executed and delivered to MergerCo a termination agreement ("Termination
Agreement"), terminating the inter-company trademark licensing agreements listed
on Schedule 8.6(b);
(g) Certain Payments. If applicable, Borden shall have made
the payments contemplated by Section 8.14;
(h) Corporate Documents. MergerCo shall have received from
Borden and the Subsidiaries certified copies of the resolutions duly adopted by
the Boards of Directors of Borden and the Subsidiaries, and certified copies of
the resolutions duly adopted by the
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shareholders of Borden and the Subsidiaries where required, approving the
execution and delivery of the Transaction Documents by Borden and the
consummation of the transactions contemplated thereby, and such resolutions
shall be in force and effect as of the Closing Date;
(i) Consents. Consent, if and to the extent required, to the
assignment to the BDPH Canadian Subsidiary of the lease of the property at 195
Walker Drive, Brampton, Ontario shall have been obtained or, in Borden's sole
discretion, in lieu of any such consent, a new lease putting the Business in
substantially the same position as such consent shall have been entered into.
(j) Material Adverse Effect. Since the date of the Interim
Balance Sheet, there shall not have occurred (i) a Material Adverse Effect or
(ii) any event which could reasonably be expected to have a Material Adverse
Effect;
(k) Opinion of Counsel. MergerCo shall have received an
opinion of the General Counsel of Borden substantially to the effect set forth
in Exhibit D;
(l) No Outstanding BDPH Warrants or Options. After giving
effect to the transactions contemplated to occur at the Closing, there will not
be outstanding any options, warrants, convertible securities or other rights of
any kind exercisable, convertible or exchangeable into or evidencing the right
to purchase any capital stock of BDPH ("BDPH Options").
(m) No C&A Injunctions, Etc. (i) At the Closing Date, there
shall be no injunction, restraining order or decree of any nature of any court
or governmental agency or body of competent jurisdiction that is in effect that
restrains or prohibits the C&A Transaction (or the operative acquisition
agreements in connection therewith) and no Enforcement Authority shall have
initiated any action to restrain, enjoin or otherwise prohibit the
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consummation of the C&A Transaction (or the operative acquisition agreements in
connection therewith) on antitrust or competition grounds.
(ii) The applicable waiting periods specified under
the Hart-Scott Act with respect to the transactions contemplated by the C&A
Transaction shall have lapsed or been terminated and all consents, approvals,
authorizations and orders of federal, state and foreign governmental and
regulatory authorities which if not obtained could be reasonably expected to
subject MergerCo or any officer, director or agent of MergerCo to criminal
liability shall have been obtained.
(n) Release of Liens. Borden shall have delivered to MergerCo
evidence reasonably satisfactory to MergerCo of the release and termination of
all Liens (other than Permitted Liens) in respect of Balance Sheet Indebtedness.
(o) New PVC Contract. BDPH and Borden Chemical and Plastics
Operating Limited Partnership, a Delaware Partnership ("BCP"), shall have
entered into a new contract (the "New PVC Contract") for the purchase by BDPH
or, if in existence, a wholly owned subsidiary of BDPH designated by MergerCo,
and BCP's sale of polyvinyl chloride on terms at least as favorable as those
terms contained in the PVC Purchase Agreement made as of November 30, 1987,
between Borden and BCP, having a term expiring on November 30, 2002.
(p) Asset Transfer. The Asset Transfer and the Stock Transfer
shall have been consummated, BCL and the BDPH Canadian Subsidiary shall have
executed and delivered a Bill of Sale and an Assumption Agreement substantially
in the form of Exhibits E and F, respectively, a copy of which Bill of Sale and
Assumption Agreement shall have been
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provided to MergerCo and Borden shall have delivered to MergerCo evidence
satisfactory to MergerCo that the Stock Transfer has been consummated.
10. CLOSING
10.1 Generally
(a) Unless this Agreement shall have been terminated and the
transactions herein shall have been abandoned pursuant to Section 13 hereof, the
closing of the transactions contemplated by this Agreement (the "Closing") shall
take place at a location in New York City to be agreed upon by the parties, at
10:00 a.m., New York City time, on December 31, 1997 (or as soon as practicable
thereafter as all of the conditions to the Closing set forth in Section 9 hereof
are satisfied or waived), or such other date, time and place as shall be agreed
upon by Borden and MergerCo (the actual date and time being herein called the
"Closing Date").
(b) Subject to the terms and conditions of this Agreement, the
respective deliveries to be performed by MergerCo and Borden and the
Subsidiaries will take place in the sequence specified in Section 5.1(a).
(c) Notwithstanding the foregoing, the parties hereto agree
that, unless otherwise agreed to in writing, the Closing shall not be deemed to
have occurred until such time as all of the transfers, transactions and
deliveries contemplated by Section 5.1(a) hereof been completed in accordance
with the requirements of such Section and no transfer, transaction or delivery
contemplated by Section 5.1(a) shall be deemed to be valid or in full force and
effect until such time as all of the transfers, transactions and deliveries
contemplated by Section 5.1(a) have been consummated.
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10.2 MergerCo Deliveries
At the Closing, MergerCo shall deliver or cause BDPH to deliver, (i)
the Aggregate Consideration in accordance with the sequence set forth in Section
5.1(a) hereof, (ii) the documents described in Section 9.2 hereof and (iii) such
other documents and instruments as counsel for MergerCo and Borden mutually
agree to be reasonably necessary to consummate the transactions described
herein.
10.3 Borden Deliveries
At the Closing, Borden shall deliver, or cause one or more of the
Subsidiaries or affiliates to deliver, to BDPH, the following executed
instruments in such form and substance as indicated in any applicable Schedule
hereto, or as is reasonably acceptable to MergerCo:
(a) a copy of the certificate of incorporation of each of the
Decorative Products Companies, as amended, certified as of a date not earlier
than 10 days prior to the Closing Date, by the corporate Secretary for each of
said corporations;
(b) the documents described in Section 9.3 hereof;
(c) stock certificates representing shares of BDPH duly
endorsed or accompanied by stock powers duly executed;
(d) warranty deeds to any Owned Real Properties of BCL; and
(e) such other documents and instruments as counsel for
MergerCo and Borden mutually agree to be reasonably necessary to consummate the
transactions described herein.
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11. INDEMNIFICATION
11.1 Indemnification by Borden
(a) Borden shall defend, indemnify and hold BDPH, MergerCo and their
respective affiliates harmless from and against and in respect of any and all
losses, claims, demands, actions, suits or proceedings (by any person or entity,
including without limitation any governmental authority in connection therewith
or in enforcing BDPH's, MergerCo's and their respective affiliates' rights
hereunder), liabilities, damages, judgements, settlements and expenses,
including reasonable attorneys' fees in connection therewith or in enforcing
BDPH's, MergerCo's and their respective affiliates' rights hereunder incurred
directly by any such person or entity (hereinafter "MergerCo Losses") which
arise out of (i) any breach of any of the representations or warranties
contained in Section 6 hereof, in any other Transaction Document or in any
certificate delivered in connection with the Closing, (ii) any breach of any of
the covenants of Borden (other than the covenant set forth in clause (ii) of the
first sentence of Section 8.3(d)) in this Agreement), (iii) the ownership,
operation or use of any of the Excluded Assets, (iv) any direct or derivative
claim or action by a holder of BDPH Common Stock or any rights to purchase BDPH
Capital Stock, including, without limitation, any action by such a holder who
has demanded payment for and an appraisal of such shares in accordance with
Section 262 of the DGCL, (v) liabilities and obligations of the Decorative
Products Companies that do not arise principally out of or pertain principally
to the Business or the Assets and (vi) any of the Excluded Liabilities and any
liabilities retained by Borden pursuant to Section 8.7. MergerCo or BDPH shall
give Borden prompt written notice of any third party claim which may give rise
to any indemnity obligation under this Section, together if reasonably possible
with the estimated amount of such claim, and Borden
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shall have the right to assume the defense of any such claim through counsel of
its own choosing, by so notifying MergerCo within 30 days of receipt of
MergerCo's or BDPH's written notice; provided, however, that Borden's counsel
shall be reasonably satisfactory to MergerCo. Failure to give prompt notice
shall not affect the indemnification obligations hereunder in the absence of
actual prejudice and then only to the extent proximately resulting therefrom. If
MergerCo or BDPH desires to participate in any such defense assumed by Borden,
it may do so at its sole cost and expense (except that Borden shall be
responsible for the fees and expenses of counsel to MergerCo or BDPH to the
extent MergerCo or BDPH is advised, in writing by its counsel, that either (x)
Borden's counsel has a conflict of interest, or (y) there are legal defenses
available to MergerCo that are different from or additional to those available
to Borden (but only to the extent of such additional defenses)). If Borden
declines to assume any such defense, it shall be liable for all reasonable costs
and expenses of defending such claim incurred by MergerCo or BDPH, including
reasonable fees and disbursements of counsel. Neither party shall, without the
prior written consent of the other party, which shall not be unreasonably
withheld or delayed, settle, compromise or offer to settle or compromise any
such claim or demand on a basis which would result in the imposition of a
consent order, injunction or decree which would restrict the future activity or
conduct of the other party or any subsidiary or affiliate thereof or if such
settlement or compromise does not include an unconditional release of the other
party for any liability arising out of such claim or demand or any related claim
or demand.
(b) The foregoing obligation to indemnify MergerCo, BDPH and
their respective affiliates set forth in Section 11.1(a) shall be subject to
each of the following limitations:
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(i) Borden's indemnification obligation for any breach of the
representations and warranties described in Section 6 of this Agreement
shall survive until April 1, 1999 (other than the Five-Year Reps which
shall survive until the fifth anniversary of the Closing), and
thereafter all such representations and warranties of Borden under this
Agreement shall be extinguished. No claim for the recovery of such
MergerCo Losses may be asserted by MergerCo after April 1, 1999 (other
than claims asserted for breaches of the Five-Year Reps which shall
survive and may be asserted until the fifth anniversary of the
Closing); provided, however, that claims first asserted in writing with
reasonable specificity within the applicable period shall not
thereafter be barred;
(ii) No reimbursement for MergerCo Losses asserted against
Borden under Section 11.1(a)(i), above shall be required unless and
until the cumulative aggregate amount of such MergerCo Losses equals or
exceeds US $2,500,000 (the "Threshold") and then only to the extent
that the cumulative aggregate amount of MergerCo Losses exceeds the
Threshold; provided that in calculating such Threshold any MergerCo
Losses which individually and when considered together with any related
MergerCo Losses total less than US $25,000 each ("De Minimis MergerCo
Losses") shall be excluded in their entirety and Borden in any event
shall have no liability hereunder to BDPH, MergerCo and their
respective affiliates under Section 11.1(a)(i) for any such De Minimis
MergerCo Losses.
(iii) Borden's liability to MergerCo and its affiliates under
Section 11.1(a)(i) for MergerCo Losses in excess of the Threshold shall
not exceed $80,000,000.
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(c) The indemnities provided in this Section 11.1 shall survive the
Closing. The indemnity provided in this Section 11.1 shall be the sole and
exclusive remedy of the indemnified party against the indemnifying party at law
or equity for any matter covered by paragraphs (a) and (b).
(d) In no event shall Borden be liable to MergerCo or its affiliates
for special, indirect, incidental, consequential or punitive damages, except for
such instances, if any, where the MergerCo Losses result from a third-party
claim to which Borden is required to indemnify MergerCo or its affiliates
pursuant to Subsection 11.1 (a)(iii)-(v) of this Agreement.
(e) The indemnities provided in this Section 11.1 shall survive any
investigation prior to Closing by or on behalf of MergerCo or any knowledge or
information MergerCo may have, subject to the limitations on indemnification set
forth in Section 11.1(b)(i) of this Agreement.
11.2 Indemnification by BDPH
(a) BDPH shall defend, indemnify and hold Borden and its affiliates
harmless from and against and in respect of any and all actual losses, claims,
demands, actions, suits or proceedings (by any person or entity, including
without limitation any governmental authority in connection therewith or in
enforcing Borden's and its Affiliates' rights hereunder), liabilities, damages,
judgements, settlements and expenses, including reasonable attorney fees, in
connection therewith or in enforcing Borden's and its Affiliates' rights
hereunder incurred directly by Borden and its affiliates (hereinafter the
"Borden Losses"; together with MergerCo Losses, "Losses") arising out of (i) any
breach of any of the representations or warranties contained in Section 7
hereof, (ii) any breach of any of the covenants of MergerCo (other
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than the covenant set forth in clause (ii) of the first sentence of Section
8.3(d)) in this Agreement, (iii) the ownership, operation or use of the Assets
after the Closing and (iv) any Assumed Liabilities and any liabilities retained
by BDPH pursuant to Section 8.7. Borden shall give BDPH prompt written notice of
any third party claim which may give rise to any indemnity obligation under this
Section, together if reasonably possible with the estimated amount of such
claim, and BDPH shall have the right to assume the defense of any such claim
through counsel of its own choosing, by so notifying Borden within 30 days of
receipt of Borden's written notice; provided, however, that BDPH's counsel shall
be reasonably satisfactory to Borden. Failure to give prompt notice shall not
affect the indemnification obligations hereunder in the absence of actual
prejudice. If Borden desires to participate in any such defense assumed by BDPH
it may do so at its sole cost and expense (except that BDPH shall be responsible
for the fees and expenses of counsel to Borden to the extent the Borden is
advised, in writing by its counsel, that either (x) BDPH's counsel has a
conflict of interest, or (y) there are legal defenses available to Borden that
are different from or additional to those available to BDPH (but only to the
extent of such additional defenses)). If BDPH declines to assume any such
defense, it shall be liable for all costs and expenses of defending such claim
incurred by Borden and its affiliates, including reasonable fees and
disbursements of counsel. Neither party shall, without the prior written consent
of the other party, which shall not be unreasonably withheld or delayed, settle,
compromise or offer to settle or compromise any such claim or demand on a basis
which would result in the imposition of a consent order, injunction or decree
which would restrict the future activity or conduct of the other party or any
subsidiary or affiliate thereof or if such settlement or
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compromise does not include an unconditional release of the other party for any
liability arising out of such claim or demand.
(b) The foregoing obligation to indemnify Borden and its affiliates set
forth in Section 11.2(a) shall be subject to each of the following limitations:
(i) BDPH's indemnification obligation for any breach of the
representations and warranties described in Section 7 of this Agreement
shall survive until April 1, 1999 other than the Long-Term Reps which
shall survive until the fifth anniversary of the Closing, and
thereafter all such representations and warranties of MergerCo under
this Agreement shall be extinguished. No claim for the recovery of such
Borden Losses may be asserted by Borden after April 1, 1999 (other than
claims asserted for breaches of the Long-Term Reps which shall survive
and may be made until the fifth anniversary of the Closing); provided,
however, that claims first asserted in writing with specificity within
such period shall not thereafter be barred;
(ii) No reimbursement for the Borden Losses asserted against
MergerCo under Section 11.2(a)(i), above shall be required unless and
until the cumulative aggregate amount of such Borden Losses equals or
exceeds US $2,500,000.00 (the "MergerCo Threshold") and then only to
the extent that the cumulative aggregate amount of the Borden Losses,
as finally determined, exceeds the MergerCo Threshold; provided that in
calculating such Threshold any Losses which individually and when
considered together with any related Borden Losses total less than
US$25,000 each ("De Minimis Losses") shall be excluded in their
entirety and in any event shall have no liability hereunder to Borden
and its affiliates for any such De Minimis Losses.
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(iii) BDPH's liability to Borden and its affiliates under
Section 11.2(a)(i) for the Borden Losses in excess of the MergerCo
Threshold shall not exceed $80,000,000.
(c) The indemnities provided in this Section 11.2 shall survive the
Closing. The indemnity provided in this Section 11.2 shall be the sole and
exclusive remedy of the indemnified party against the indemnifying party at law
or equity for any matter covered by paragraphs (a) and (b).
(d) In no event shall MergerCo or BDPH be liable to Borden or its
affiliates for special, indirect, incidental, consequential or punitive damages
except for such instances, if any, where the Borden Losses result from a third
party claim to which BDPH is required to indemnify Borden of its affiliates
pursuant to Subsections 11.2(a)(iii)-(iv) of this Agreement.
(e) The indemnities provided in this Section 11.2 shall survive any
investigation prior to Closing by or on behalf of Borden or any knowledge or
information that Borden may have, subject to the limitations or indemnification
set forth in Section 11.2(b)(i) of this Agreement.
11.3 Indemnification Calculations
(a) The amount of any Borden Losses or MergerCo Losses for which
indemnification is provided under this Section 11 shall be computed net of any
net insurance proceeds received by the indemnified party in connection with such
Losses, reduced by all costs and expenses related thereto and any retrospective
or other premium increase or expense resulting therefrom. If the amount with
respect to which any claim is made under this Section 11 (an "Indemnity Claim")
gives rise to a currently realizable Tax Benefit (as defined below) to the party
making the claim, the indemnity payment shall be reduced by the amount of the
Tax Benefit available to the party making the claim if and to the extent
actually
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realized by such party. To the extent such Indemnity Claim does not give rise to
a currently realizable Tax Benefit, if the amount with respect to which any
Indemnity Claim is made gives rise to a subsequently realized Tax Benefit to the
party that made the claim, such party shall refund to the indemnifying party the
amount of such Tax Benefit when, as and if realized. For the purposes of this
Agreement, any subsequently realized Tax Benefit shall be treated as though it
were a reduction in the amount of the initial Indemnity Claim, and the
liabilities of the parties shall be redetermined as though both occurred at or
prior to the time of the indemnity payment. For purposes of this Section 11.3, a
"Tax Benefit" means an amount by which the tax liability of the party (or group
of corporations including the party) is actually reduced (including, without
limitation, by deduction, reduction of income by virtue of increased tax basis
or otherwise, entitlement to refund, credit or otherwise), after first taking
into account all other losses, deductions, credits and other tax items available
to the parties, plus any related interest received from the relevant taxing
authority. Where a party has other losses, deductions, credits or items
available to it, the Tax Benefit from any losses, deductions, credits or items
relating to the Indemnity Claim shall be deemed to be realized only after any
other losses, deductions, credits or items. For the purposes of this Section 11,
a Tax Benefit is "currently realizable" to the extent such Tax Benefit is
realized in the current taxable period or year or in any tax return with respect
thereto (including through a carryback to a prior taxable period) or in any
taxable period or year prior to the date of the Indemnity Claim. In the event
that there should be a determination disallowing the Tax Benefit, the
indemnifying party shall be liable to refund to the indemnified party the amount
of any related reduction previously allowed or payments previously made to the
indemnifying party pursuant to this Section 11.3. The amount of the refunded
reduction or payment shall be
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deemed a payment under this Section 11.3 and thus shall be paid subject to any
applicable reductions under this Section 11.3.
(b) If the amount of any Borden Losses or MergerCo Losses, at any time
subsequent to the making of an indemnity payment, is reduced by recovery,
settlement or otherwise under or pursuant to any insurance coverage, or pursuant
to any claim, recovery, settlement, rebate or other payment by or against any
other person, the amount of such reduction, together with interest thereon from
the date of payment thereof at the rate of interest described in Section 5.2(d),
will promptly be repaid by the indemnitee to the indemnifying party. Upon making
any indemnity payment the indemnifying party will, to the extent of such
indemnity payment, be subrogated to all rights of the indemnitee or an insurer
of the indemnitee in respect of the Loss to which the indemnity payment relates;
provided, however, that (i) the indemnifying party shall then be in compliance
with its obligations under this Agreement in respect of such loss and (ii) until
the indemnitee recovers full payment of its loss, any and all claims of the
indemnifying party against any such third person on account of said indemnity
payment will be subrogated and subordinated in right of payment to the
indemnitee's rights against such third person. Without limiting the generality
or effect of any other provision hereof, each such indemnitee and indemnifying
party will duly execute upon request all instruments reasonably necessary to
evidence and perfect the above-described subrogation and subordination rights.
(c) The parties agree that any indemnification payments made pursuant
to this Agreement shall be treated for tax purposes as an adjustment to the
Aggregate Consideration, unless otherwise required by applicable law.
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12. TAX MATTERS
12.1 Tax Indemnification
(a) Following the Closing, Borden shall indemnify MergerCo and
its affiliates (including the Decorative Products Companies) and each of their
respective officers, directors, employees, agents and other representatives and
hold them harmless from (i) all liability for income Taxes (other than any
liability for UK national income taxes for 1997 and any portion of 1998 prior to
the Closing) of the Decorative Products Companies, for a Pre-Closing Tax Period
(as defined below), (ii) all liability as a result of Treasury Regulation
Section 1.1502-6(a) for U.S. federal income Taxes of Borden or any of its
affiliates or any other entity which is or has been affiliated with the
Decorative Products Companies and BCL relating to a Pre-Closing Tax Period,
(iii) all liability for Taxes attributable to actions taken after the Closing by
Borden or any of its affiliates (other than the Decorative Products Companies)
or attributable to a breach by Borden of any covenant contained in Section 12.2
and (iv) all liability for U.K. national income taxes of the Decorative Products
Companies for 1997 and any portion of 1998 prior to the Closing in excess of
$7,957,000. Notwithstanding the foregoing, Borden shall not indemnify and hold
harmless any of MergerCo, its affiliates or their respective officers,
directors, employees and agents from any liability for Taxes attributable to (i)
Taxes of the Decorative Products Companies for the Pre-Closing Tax Period to the
extent of the accrual, if any, established therefor and reflected as Balance
Sheet Indebtedness or as a current liability in the calculation of Closing
Working Capital or (ii) any action taken after the Closing by MergerCo, any of
its affiliates (including the Decorative Products Companies), or any transferee
of MergerCo or any of its affiliates (other than any such action expressly
required by applicable law or by this Agreement) (a "MergerCo Tax
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Act") or attributable to a breach by MergerCo of any covenant contained in
Section 12.2 of this Agreement. "Pre-Closing Tax Period" shall mean all or any
portion of a taxable period ending on or before the Closing Date.
(b) Following the Closing, MergerCo shall, and shall cause the
Decorative Products Companies to, indemnify Borden and its affiliates and each
of their respective officers, directors, employees, and agents and hold them
harmless from (i) all liability for Taxes of the Decorative Products Companies
for any Post-Closing Tax Period, (ii) all liability for Taxes attributable to a
MergerCo Tax Act or to a breach by MergerCo of any covenant contained in Section
12.2 of this Agreement, (iii) all liability for up to $7,957,000 of U.K.
national income taxes of the Decorative Products Companies for 1997 and any
portion of 1998 prior to the Closing and (iv) all liability for Taxes of the
Decorative Products Companies for the Pre-Closing Tax Period to the extent of
the accrual, if any, established therefor as Balance Sheet Indebtedness or as a
current liability in the calculation of Closing Working Capital.
"Post-Closing Tax Period" shall mean all or any portion of a
taxable period beginning after the Closing Date.
(c) Procedures Relating to Indemnification of Tax Claims. If a
claim shall be made by any taxing authority, which, if successful, might result
in an indemnity payment to a party (the "First Party"), one of its affiliates or
any of their respective officers, directors, employees, agents or
representatives pursuant to this Section 12.1, the First Party shall promptly
and in any event no more than 30 days following the First Party's receipt of
written notice of such claim, give notice to the other party (the "Second
Party") in writing of such claim (a "Tax Claim"); provided, however, the failure
of the First Party to give such notice
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shall not affect the indemnification provided hereunder except to the extent the
Second Party has been actually prejudiced as a result of such failure (except
the Second Party shall not be liable for any expenses incurred during the period
in which the First Party failed to give such notice).
With respect to any Tax Claim relating to a Pre-Closing Tax
Period for which Borden has indemnified MergerCo, Borden shall control all
proceedings and may make all decisions taken in connection with such Tax Claim
(including selection of counsel) and, without limiting the foregoing, may in its
sole discretion pursue or forego any and all administrative appeals,
proceedings, hearings and conferences with any taxing authority with respect
thereto, and may, in its sole discretion, either pay the Tax claimed and sue for
a refund where applicable law permits such refund suits or contest the Tax Claim
in any permissible manner. With respect to any Tax Claim related to a
Post-Closing Tax Period or with respect to which MergerCo has otherwise
indemnified Borden, MergerCo shall control proceedings and may make all
decisions taken in connection with such Tax Claim (including selection of
counsel) and, without limiting the foregoing, may in its sole discretion pursue
or forego any and all administrative appeals, proceedings, hearings and
conferences with any taxing authority with respect thereto, and may, in its sole
discretion, either pay the Tax claimed or sue for a refund where applicable law
permits such refund suits or contest the Tax Claim in any permissible manner. To
the extent that any Tax Claim relates to both a Pre-Closing Tax Period and a
Post-Closing Tax Period, or to a Tax Claim for which both parties may be
obligated, Borden and MergerCo shall jointly participate in the resolution of
such Tax Claim and shall each proceed in good faith to achieve a mutually
agreeable result.
<PAGE> 101
106
Borden and MergerCo and each of their respective affiliates
shall reasonably cooperate with each other in contesting any Tax Claim, which
cooperation shall include the retention and, upon the request of the party or
parties controlling proceedings relating to such Tax Claim, the provision to
such party or parties of records and information which are reasonably relevant
to such Tax Claim, and making employees available on a mutually convenient basis
to provide additional information or explanation of any material provided
hereunder or to testify at proceedings relating to such Tax Claim.
In no case shall any of MergerCo or the Decorative Products
Companies settle or otherwise compromise any Tax Claim relating to a Pre-Closing
Tax Period for which Borden has indemnified MergerCo without Borden's prior
written consent. In no case shall Borden or any of its affiliates settle or
otherwise compromise any Tax Claim relating to a Post-Closing Tax Period or for
which MergerCo has otherwise indemnified Borden without MergerCo's prior written
consent. In the event that any party violates the provisions of this paragraph
(relating to the settlement or compromise of Tax Claims), such party shall not
be entitled to any indemnity payments with respect to any indemnifiable claim
(relating to such Tax Claims) pursuant to this Section 12.1.
(d) Indemnification Calculations. The amount payable with
respect to any Tax Claim and the treatment and adjustment thereof shall be
governed by the provisions of Section 11.3 of this Agreement.
<PAGE> 102
107
12.2 Other Tax Matters
(a) Borden and its subsidiaries and MergerCo shall reasonably
cooperate, and shall cause their respective affiliates, officers, employees,
agents, auditors and other representatives reasonably to cooperate, in preparing
and filing all Tax Returns for Pre-Closing Tax Periods. Neither MergerCo nor any
Decorative Products Company shall file or cause to be filed any amended return
of Borden or any of its affiliates for any Pre-Closing Tax Period without the
prior written consent of Borden, which consent may not be unreasonably withheld
or delayed.
(b) The amount or economic benefit of any refunds, credits or
offsets of Taxes of any Decorative Products Company shall be for the account of
Borden or its affiliates to the extent such refund, credit or offset relates to
any Taxes for which Borden has indemnified MergerCo. The amount or economic
benefit of any refunds, credits or offsets of Taxes of any Decorative Products
Company shall be for the account of MergerCo to the extent such refund, credit
or offset relates to Taxes for which MergerCo has otherwise indemnified Borden.
Each party shall forward, and shall cause its affiliates to forward, to the
party entitled pursuant to this Section 12.2(b) to receive the amount or
economic benefit of a refund, credit or offset to Tax, the amount of such
refund, or the economic benefit of such credit or offset to Tax, within ten days
after such refund is received or after such credit or offset is allowed or
applied against other Tax liability, as the case may be. In the event such
refund, credit or offset is later disallowed by the IRS, the account of such
party shall be debited, such party shall repay the amount of the refund, credit
or offset previously received plus interest computed at the rate of the
prevailing federal rate for tax refunds.
<PAGE> 103
108
(c) There shall be no withholding pursuant to Section 1445 of
the Code, provided that Borden delivers to MergerCo at the Closing a certificate
complying with the Code and Treasury Regulations, in form and substance
reasonably satisfactory to MergerCo, duly executed and acknowledged, certifying
that the transactions contemplated hereby are exempt from withholding under
Section 1445 of the Code.
(d) Except as provided in Schedule 12.2, Borden shall cause
all tax allocation agreements or tax sharing agreements with respect to each of
the Decorative Products Companies to be terminated as of the Closing Date, and
shall ensure that such agreements are of no further force or effect as to any of
the Decorative Products Companies on and after the Closing Date and that there
shall be no further liabilities or obligations imposed on any of the Decorative
Products Companies under any such agreements.
13. TERMINATION
13.1 Termination Events
Without prejudice to other remedies which may be available to the
parties by law or this Agreement, this Agreement may be terminated and the
transactions contemplated herein may be abandoned:
(a) by mutual consent of Borden and MergerCo;
(b) by Borden, in its sole discretion, after February 9, 1998,
if either (i) the applicable waiting periods specified under the Hart-Scott Act
with respect to the transactions contemplated by this Agreement and the C&A
Transaction have not lapsed or been terminated or (ii) any Enforcement Authority
is seeking to prohibit on antitrust or competition grounds the consummation of
the transactions contemplated herein;
<PAGE> 104
109
(c) by MergerCo, in its sole discretion, on November 4, 1997
(the "Imperial Termination Date"), but neither before or after such date, if (i)
MergerCo has not entered into a definitive acquisition agreement to acquire
Imperial or (ii) the audited Annual Financial Statements, at and for the year
ended December 31, 1996, referred to in Section 6.5(b) reflect an adverse
difference from the unaudited Annual Financial Statements at and for the year
ended December 31, 1996 referred to in Section 6.5(a) in any material respect,
as determined by MergerCo, which determination shall be conclusive for all
purposes;
(d) by Borden or MergerCo by notice to the other party if the
Closing shall not have been consummated on or before March 15, 1998, unless
extended by written agreement of the parties hereto, so long as the party
terminating this Agreement shall not be in default or breach hereunder; and
(e) by MergerCo after February 1, 1998, if Borden shall have
materially breached any portion of this Agreement and not cured such breach by
the later of (i) February 1, 1998 and (ii) 30 days after written notice thereof.
13.2 Effect of Termination
In the event of any termination of the Agreement as provided
in Section 13.1 above, this Agreement shall forthwith become wholly void and of
no further force and effect and there shall be no liability on the part of
MergerCo or Borden and the Subsidiaries, except (i) that the obligations of
MergerCo and Borden and the Subsidiaries under Sections 8.2, 8.11 and 15.6 of
this Agreement shall remain in full force and effect and (ii) as a result of any
prior breach hereof.
<PAGE> 105
110
14. ALTERNATIVE DISPUTE RESOLUTION
The parties shall attempt in good faith to resolve any dispute
arising out of or relating to this Agreement promptly by negotiations between
executives who have authority to settle the controversy. Any party may give the
other party(ies) written notice of any dispute not resolved in the normal course
of business. Within 20 days after delivery of said notice, executives of both
parties shall meet at a mutually acceptable time and place, and thereafter as
often as they reasonably deem necessary, to exchange relevant information and to
attempt to resolve the dispute. If the matter has not been resolved within 60
days of the disputing party's original notice, or if the parties fail to meet
within 20 days, either party may initiate legal proceedings to resolve the
controversy or claim. If a party's negotiator intends to be accompanied at a
meeting by an attorney, the other party's negotiator shall be given at least
three working days' notice of such intention and may also be accompanied by an
attorney. All negotiations pursuant to this clause are confidential and shall be
treated as compromise and settlement negotiations for purposes of the Federal
Rules of Evidence and state rules of evidence.
15. MISCELLANEOUS AGREEMENTS OF THE PARTIES
15.1 Notices
All communications provided for hereunder shall be in writing
and shall be deemed to be given when delivered in person or by private courier
with receipt, when telefaxed and received (receipt electronically confirmed by
Sender's telecopy machine), or five days after being deposited in the United
States mail, first-class, registered or certified, return receipt requested,
with postage paid and,
<PAGE> 106
111
If to MergerCo: c/o The Blackstone Group
345 Park Avenue
New York, New York 10054
Attention: Mr. David A. Stockman
Senior Managing Director
Telephone: (212) 836-9818
Fax: (212) 754-8720
With a Copy to: Jones, Day, Reavis & Pogue
599 Lexington Avenue
32nd Floor
New York, New York 10022
Attention: Robert A. Profusek, Esq.
Telephone: (212) 326-3800
Fax: (212) 755-7306
If to Borden: Itzhak Reichman
Vice President,
Strategic Planning
Borden, Inc.
180 East Broad Street
Columbus, Ohio 43215-3799
Fax: 614-225-4108
With a Copy to: William F. Stoll
Senior Vice President and
General Counsel
Borden, Inc.
180 East Broad Street
Columbus, Ohio 43215-3799
Fax: 614-627-8374
or to such other address as any such party shall designate by written notice to
the other parties hereto.
15.2 Bulk Transfers
MergerCo and BDPH waive compliance with the provisions of all
applicable laws relating to bulk transfers in connection with the Assets
Transfer.
<PAGE> 107
112
15.3 Transaction Taxes
MergerCo and Borden shall each pay one-half of all sales and
transfer taxes, if any, which may be payable with respect to the consummation of
the transactions contemplated by this Agreement and to the extent any exemptions
from such taxes are available MergerCo and Borden shall cooperate to prepare any
certificates or other documents necessary to claim such exemptions.
15.4 Further Assurances; Asset Returns
Upon request from time to time, Borden shall execute or cause
its subsidiaries, including without limitation, BDH Two, Inc. to the extent any
intangible property or other assets constituting Assets hereunder are held of
record by BDH Two, Inc., to execute and deliver all documents, take all rightful
oaths, and do all other acts that may be reasonably necessary or desirable, in
the reasonable opinion of counsel for MergerCo, to perfect or record the title
of MergerCo, or any successor of MergerCo, to the Assets transferred or to be
transferred under this Agreement, or to aid in the prosecution, defense or other
litigation of any rights arising from said transfer (provided that MergerCo
shall reimburse the Borden for all incremental out of pocket costs and expenses
resulting from any such request). In the event that MergerCo receives any assets
of the Asset Seller that are not intended to be transferred pursuant to the
terms of this Agreement, whether or not related to the Business, MergerCo agrees
to promptly return such assets to the Asset Seller at Borden's expense.
15.5 Other Covenants
Without limiting the generality or effect of Articles 9 or 11,
to the extent that any consents needed to assign to MergerCo any of the Acquired
Assets have not been obtained on or prior to the Closing Date this Agreement
shall not constitute an assignment or
<PAGE> 108
113
attempted assignment thereof if such assignment or attempted assignment would
constitute a breach thereof. If any such consent or any other consent of a third
party required by the terms of any contract, lease or license included in the
Assets shall not be obtained on or prior to the Closing Date, then (i) Borden
and MergerCo, if required under applicable law, shall use their reasonable
efforts in good faith to obtain such consent as promptly as practicable
thereafter and (ii) if in the reasonable judgment of MergerCo such consent may
not be obtained, the parties shall use reasonable efforts in good faith to
cooperate, and to cause each of their respective affiliates to cooperate, in any
lawful arrangement designed to provide for MergerCo the benefits under any such
Acquired Assets.
15.6 Expenses
Subject to Section 5.1(a) and Section 15.3, Borden and
MergerCo shall each pay their respective expenses (such as legal, investment
banker and accounting fees) incurred in connection with the origination,
negotiation, execution and performance of this Agreement. The Decorative
Products Companies shall not be obligated to incur any fees or expenses in
connection with the Financing, except for fees, expenses or indemnification
obligations which are conditioned upon the occurrence of the Closing.
15.7 Non-Assignability
This Agreement shall inure to the benefit of and be binding on
the parties hereto and their respective successors and permitted assigns. This
Agreement shall not be assigned by any party hereto without the express prior
written consent of the other parties, and any attempted assignment, without such
consents, shall be null and void; provided, however, that (i) at or following
the Closing, MergerCo may assign its rights or delegate its duties to any
affiliate of MergerCo or BDPH, provided that no such delegation will relieve
<PAGE> 109
114
MergerCo of its obligations hereunder, (ii) MergerCo or BDPH (or any such
assignee) may assign its rights hereunder (or any portion thereof) to any lender
or other person or entity in connection with any financing, provided that no
such delegation will relieve MergerCo of its obligations hereunder and (iii) in
connection with any sale of the Vernon plastics division of the Business in a
single transaction, MergerCo, upon notice to Borden, may assign its rights to
indemnity under this Agreement in respect of any Excluded Liability (but not
with respect to any other aspect of the indemnity obligations of Borden
hereunder) to any other party to any such transaction, whereupon Borden will be
directly liable in respect thereof to such other party as well as to MergerCo
and its other permitted assigns hereunder.
15.8 Amendment; Waiver
This Agreement may be amended, supplemented or otherwise
modified only by a written instrument executed by the parties hereto. No waiver
by any party of any of the provisions hereof shall be effective unless
explicitly set forth in writing and executed by the party so waiving; provided
that MergerCo shall not waive the condition in Section 9.3(b) without the prior
written consent of Borden. Except as provided in the preceding sentence, no
action taken pursuant to this Agreement, including without limitation, any
investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any representations,
warranties, covenants, or agreements contained herein, and in any other
Transaction Document or document to be delivered in connection with the Closing
hereunder. The waiver by any party hereto of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any subsequent
breach.
<PAGE> 110
115
15.9 Schedules and Exhibits
All exhibits and schedules hereto are hereby incorporated by
reference and made a part of this Agreement. All statements contained in
schedules, exhibits, certificates and other instruments attached hereto or
delivered or furnished on behalf of the Borden or the Subsidiaries pursuant
hereto or in connection with the transactions contemplated hereby, shall be
deemed representations and warranties by Borden. Any fact or item which is
clearly disclosed on any Schedule or Exhibit to this Agreement or in the
Financial Statements in such a way as to make its relevance to a representation
or representations made elsewhere in this Agreement or to the information called
for by another Schedule or other Schedules (or Exhibit or other Exhibits) to
this Agreement readily apparent shall be deemed to be an exception to such
representation or representations or to be disclosed on such other Schedule or
Schedules (or Exhibit or Exhibits), as the case may be. Any fact or item
disclosed on any Schedule or Exhibit hereto shall not by reason only of such
inclusion be deemed to be material and shall not be employed as a point of
reference in determining any standard of materiality under this Agreement.
15.10 Third Parties
Except as provided in Section 15.7 or Article 11 (to the
extent contemplated thereby) hereof and except for BDPH's successorship rights
by virtue of the Merger or as otherwise contemplated herein, this Agreement does
not create any rights, claims or benefits inuring to any person that is not a
party hereto nor create or establish any third party beneficiary hereto.
<PAGE> 111
116
15.11 Governing Law
This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York, except for matters relating
to the Real Property, which shall be governed by the laws of the jurisdictions
where such properties are located.
15.12 Consent to Jurisdiction
Each of the parties hereto irrevocably submits to the
exclusive jurisdiction of the United States District Court for the Southern
District of New York located in the borough of Manhattan in the City of New
York, or if such court does not have jurisdiction, the Supreme Court of the
State of New York, New York County, for the purposes of any suit, action or
other proceeding arising out of this Agreement or any transaction contemplated
hereby. Each of the parties hereto further agrees that service of any process,
summons, notice or document by U.S. registered mail to such party's respective
address set forth in Section 15.1 shall be effective service of process for any
action, suit or proceeding in New York with respect to any matters to which it
has submitted to jurisdiction as set forth above in the immediately preceding
sentence. Each of the parties hereto, irrevocably and unconditionally waives any
objection to the laying of venue of any action, suit or proceeding arising out
of this Agreement or the transactions contemplated hereby in (a) the United
States District Court for the Southern District of New York or (b) the Supreme
Court of the State of New York, New York County, and hereby further irrevocably
and unconditionally waives and agrees not to plead or claim in any such court
that any such action, suit or proceeding brought in any such court has been
brought in an inconvenient forum.
15.13 Certain Definitions
For purposes of this Agreement, the term:
<PAGE> 112
117
(i) "affiliate" of a person means a person that
directly or indirectly, through one or more intermediaries, controls,
is controlled by, or is under common control with, the first mentioned
person;
(ii) "person" means an individual, corporation,
partnership, association, trust, incorporated organization, other
entity or group (as defined in Section 13(d)(3) of the Exchange Act);
(iii) "subsidiary" or "subsidiaries" of MergerCo, Borden
or any other person means any corporation, partnership, joint venture
or other legal entity of which MergerCo, Borden or such other person,
as the case may be (either alone or through or together with any other
subsidiary), owns, directly or indirectly, 50% or more of the stock or
other equity interests the holder of which is generally entitled to
vote for the election of the board of directors or other governing body
of such corporation or other legal entity; and
(iv) "the knowledge of" or "the best knowledge of" a
party hereto when modifying any representation and warranty shall mean
(v) that such party has no knowledge that such representation and
warranty is not true and correct to the same extent as provided in the
applicable representation and warranty, and that:
(A) such party has made appropriate investigations
and inquiries of its officers and responsible employees; and
(B) nothing has come to its attention in the course
of such investigation and inquiries or otherwise which would
cause such party, in the exercise of due diligence, to believe
that such representation and warranty is not true and correct.
<PAGE> 113
118
Borden shall be deemed to have satisfied the requirements of Subsection
15.13 above by making appropriate investigations and inquiries of the officers
and employees of Borden and the Subsidiaries listed on Schedule 15.13, and no
knowledge of any other officer or employee of Borden or the Subsidiaries shall
be imputed to the persons listed on Schedule 15.13 or to Borden.
15.14 Construction
The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent, and no rule of
strict construction will be applied against any party. Any references to any
federal, state, local or foreign statute or law will also refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise.
Unless the context otherwise requires: (a) a term has the meaning assigned to it
by this Agreement; (b) an accounting term not otherwise defined has the meaning
assigned to it by GAAP; (c) "or" is disjunctive but not exclusive; (d) words in
the singular include the plural, and in the plural include the singular; (e)
provisions apply to successive events and transactions; and (f) "$" means the
currency of the United States of America.
15.15 Specific Performance
Without limiting or waiving in any respect any rights or
remedies of MergerCo under this Agreement now or hereinafter existing at law or
in equity or by statute, each of the parties hereto shall be entitled to seek
specific performance of the obligations to be performed by the other in
accordance with the provisions of this Agreement.
15.16 Conveyance and Transfer Agreement
MergerCo agrees that the terms and provisions of this
Agreement, including the Exhibits and Schedules attached hereto, supersede any
inconsistent terms and provisions
<PAGE> 114
119
contained in the Conveyance and Transfer Agreement by and between Borden, Inc.,
and Decorative Products MergerCo, Inc., dated April 3, 1996, and MergerCo hereby
waives any rights against Borden under any indemnification or other provisions
of such Conveyance and Transfer Agreement as to which MergerCo would not be
entitled under the terms and provisions of this Agreement.
15.17 Entire Agreement
This Agreement, and the Schedules and Exhibits hereto set
forth the entire understanding of the parties hereto and no modifications or
amendments to this Agreement shall be binding on the parties unless in writing
and signed by the party or parties to be bound by such modification or
amendment.
15.18 Section Headings; Table of Contents
The section headings contained in this Agreement and the Table
of Contents to this Agreement are for reference purposes only and shall not
affect the meaning or interpretation of this Agreement.
15.19 Severability
If any provision of this Agreement shall be declared by any
court of competent jurisdiction to be illegal, void or unenforceable, all other
provisions of this Agreement shall not be affected and shall remain in full
force and effect.
15.20 Counterparts
This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original and all of which together shall
be deemed to be one and the same instrument.
<PAGE> 115
120
IN WITNESS WHEREOF, the parties have caused this
Recapitalization Agreement to be duly executed as of the date first above
written.
BORDEN, INC.
By: ______________________________
Name:
Title:
BDPI HOLDINGS CORPORATION
By: _______________________________
Name:
Title:
BORDEN DECORATIVE PRODUCTS
HOLDINGS, INC.
By: _______________________________
Name:
Title:
<PAGE> 116
EXHIBIT 1
The "Per Share Consideration" to be received for each share of BDPH Common Stock
("BDPH Shares") to be converted in the Merger will be calculated in accordance
with the formula set forth below. The Per Share Consideration shall be
calculated as if the Aggregate Consideration was paid exclusively in cash,
notwithstanding the fact that a portion of the Aggregate Consideration will be
represented by Retained Shares. Capitalized terms used herein and not otherwise
defined herein are used herein as defined in the Agreement.
The "Per Share Consideration" for the Business shall be determined in
accordance with the following formula (the "Per Share Consideration
Formula"):
PSC = PP - (LP x PS) - [(PSC x OPT) - (EXOP x OPT)]
---------------------------------------------
DS
where DS = Number of shares of BDPH Common Stock
outstanding immediately prior to the Merger
(excluding shares to be cancelled pursuant to
Section 4.1(d))
PP = Aggregate Consideration less Borden's
estimate of transaction fees incurred or to
be incurred by Borden and its affiliates
(other than any of the Decorative Products
Companies in connection with the
transactions contemplated by this Agreement)
(the "Borden Transaction Fees")
EXOP = Exercise price for each outstanding option
("Option") to purchase BDPH Shares
OPT = Number of shares of BDPH Common Stock
subject to Options outstanding on the
Closing Date less the number of shares of
BDPH Common Stock subject to Options, if
any, that are exchanged for options or
similar rights of MergerCo or an affiliated
entity
LP = Per share liquidation preference of each
outstanding share of Preferred Stock
PSC = Per Share Consideration
PS = Number of shares of Preferred Stock
outstanding on the Closing Date
<PAGE> 117
Annex C
TERMS OF STOCKHOLDERS AGREEMENT
Parties: Borden Decorative Products MergerCo, Inc.
(the "Company"), MergerCo's sole stockholder
immediately prior to the Merger and any
permitted transferees ("Blackstone") and
Borden, Inc., its affiliates and any
permitted transferees (the "Stockholders").
Dated: The Closing Date. The Stockholders' Agreement
shall terminate (other than with respect to
Piggyback Rights, Demand Rights and Board
Representation) at such time as the Company
consummates an initial public offering.
Restrictions on Transfer: Except for transfers pursuant to the
Drag-Along Rights or Tag-Along Rights or for
transfers following the ROFO Period (as
defined herein) Stockholders may transfer
BDPH Common Stock only to affiliates, and
then only if the permitted transferee agrees
to be bound by the terms of the Stockholders'
Agreement. Transferees will be bound by the
terms of the Drag-Along Rights but will
receive the benefits of the Tag-Along Rights,
the Piggyback and Demand Rights and the
Indemnity Rights. As a condition to any
transfer by Blackstone to an Affiliate of
Blackstone, the Blackstone Affiliate must
agree to be bound by the Stockholders
Agreement.
Tag-Along Rights: For any proposed transfer by Blackstone or
any of its affiliates of the BDPH Common
Stock other than to an affiliate or in a
public offering, Blackstone shall have the
obligation to require the proposed transferee
to purchase from the Stockholders, should any
of the Stockholders exercise its right, a
proportionate number of shares of BDPH Common
Stock at the same price per share and upon
the same terms and conditions (including
payment of proportionate costs).
Right of First Offer: Prior to the earlier of (i) an initial public
offering of the Company and (ii) the five
year anniversary of the Closing (the "ROFO
Period"), the Stockholders will be required
to comply with a 30/90 day right of first
offer provision ("ROFO") and prohibitions on
sales to competitors.
<PAGE> 118
2
Drag-Along Rights: If Blackstone or any of its affiliates
receives an offer from a person other than
from an affiliate to purchase at least a
majority of the outstanding shares of BDPH
Common Stock and such offer is accepted by
Blackstone, then the Stockholders will
transfer shares of BDPH Common Stock owned by
them proportionately, if applicable, to such
third party on the terms of the offer so
accepted by Blackstone (including payment of
proportionate costs).
Piggyback Rights: Each time the Company files a registration
statement in connection with the sale of
shares of BDPH Common Stock by the Company
(other than in connection with an initial
public offering comprised solely of the offer
and sale by the Company of primary shares and
with customary exceptions for S-8, S-4 and
any successor registration statements),
Blackstone or any Blackstone affiliates, the
Company, at the request of a majority in
interest of the Stockholders, will use its
reasonable best efforts to effect the
registration of all shares of BDPH Common
Stock owned by the Stockholders which the
Company has been so requested to register by
the Stockholders; provided, that in the event
that the managing underwriter determines that
a proposed offering including shares of the
Stockholders and the Company and/or
Blackstone exceeds the number of shares of
BDPH Common Stock that can be sold without
having an adverse effect on such offering or
that inclusion of selling Stockholders would
adversely affect the offering, the Company
will have priority and the number of shares,
if any, to be registered held by Blackstone,
the Stockholders and any other holder of
registration rights, shall be in proportion
to the relative sizes of their holdings of
BDPH Common Stock.
<PAGE> 119
3
Demand Rights: Market
Stand-off The Stockholders shall have the right, on one
occasion (including following such time as
the Stockholders are permitted to Sell their
shares of BDPH Common Stock without regard to
the volume limitations of Rule 144 under the
Securities Act) following 180 days after the
initial public offering of BDPH Common Stock,
to cause the Company to file a registration
statement in connection with the proposed
sale of all shares of BDPH Common Stock by
the Stockholders, provided, that Blackstone
and any other holder of registration rights
shall have the right to participate in such
offering in proportion to the relative sizes
of their holdings of BDPH Common Stock and
the Board may delay such registration for no
longer than 180 days pursuant to a customary
black-out provision, provided, further, that
if the Stockholders are unable to sell all of
the shares requested to be included in such
offering because of Blackstone's and other
holders of registration rights participation
in the offering, then the Stockholders shall
be granted a like additional demand. The
Company shall pay all expenses of such
offerings (other than underwriting discounts,
selling commissions and fees of counsel to
the Stockholders or other experts hired
directly by Stockholders). The Company and
the Stockholders shall reasonably mutually
agree upon the managing underwriters of such
offerings. The Stockholders shall, upon
request, execute 180 day market stand-offs in
connection with the initial public offering
of the Company and 90-day standoffs on any
subsequent offering.
Indemnity Rights: The Company shall indemnify Blackstone and
the Stockholders against any liability or
damage relating to the operations of the
Company or the ownership of the shares of
BDPH Common Stock on terms consistent with
other Blackstone-sponsored transactions.
Board Representation: The Stockholders and Blackstone shall vote
their shares so as to elect 1 designee of the
Stockholders and the designees of Blackstone
to the board of directors of the Company so
long as the Stockholders own at least 75% of
the BDPH Common Stock issued to Borden in the
Merger. Such person must meet criteria as to
level of seniority if an executive of Borden,
to be specified in the definitive
Stockholders Agreement or otherwise be
acceptable to the board. The Stockholders'
Board representation rights will terminate
after an IPO if Borden owns less than 5% of
the post-IPO BDPH Common Stock.
<PAGE> 120
4
Assignment: Blackstone may assign its drag-along rights
hereunder to a single transferee of a
majority of Blackstone's shares of BDPH
Common Stock. Such transferee would then be
the only holder of drag-along rights.
Following any assignment actions by either
Blackstone or Stockholders will be by
majority in interest of the affected group.
<PAGE> 121
SCHEDULE 8.7(h)-1
SCHEDULE OF CANADIAN ASSUMPTIONS - GOING CONCERN
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
Interest: 7.5% per annum, net of all investment and
administrative expenses.
- -----------------------------------------------------------------------------------------------------------------------
Mortality: GAM 1983 for pre and post-retirement
mortality
- -----------------------------------------------------------------------------------------------------------------------
Termination Rates: During First Five years of employment:
Years Salaried Hourly
----- -------- ------
0 18.1% 28.3%
1 15.3% 20.7%
2 13.4% 15.7%
3 11.4% 11.1%
4 9.4% 7.0%
- -----------------------------------------------------------------------------------------------------------------------
After 5 Years of Employment (sample
rates:)
- -----------------------------------------------------------------------------------------------------------------------
Age Salaried Hourly
--- -------- ------
25 15.6% 9.3%
30 10.6% 7.4%
35 7.6% 6.1%
40 5.9% 5.3%
45 4.6% 4.8%
50 3.7% 4.5%
55 0.0% 0.0%
- -----------------------------------------------------------------------------------------------------------------------
Retirement Rates: Age Salaried Hourly
--- -------- ------
55 8.0% 1.0%
56 8.0% 1.3%
57 8.0% 1.8%
58 8.0% 2.5%
59 8.0% 3.6%
60 8.0% 5.2%
61 10.3% 13.5%
62 16.1% 35.5%
63 21.5% 21.5%
64 37.2% 60.2%
65 100.0% 100.0%
- -----------------------------------------------------------------------------------------------------------------------
Family Composition: 85% of the members would have a spouse,
and males would be three years older than
their wives.
- -----------------------------------------------------------------------------------------------------------------------
Method: Accrued benefit actuarial cost method.
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 122
SCHEDULE 8.7(h)-2
SCHEDULE OF CANADIAN ASSUMPTIONS - SOLVENCY
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
Interest: x% per annum for the first 15 years and 6% per annum
thereafter, where x% is determined by applying the Canadian
Institute of Actuaries Recommendations for the Computation
of Transfer Values (effective August 1993) for non-indexed
pensions. X% is determined at Closing Date. The
corresponding rate at January 1, 1995 was 10.0%
- -----------------------------------------------------------------------------------------------------------------------
Mortality: GAM 1983 for pre and post-retirement mortality.
- -----------------------------------------------------------------------------------------------------------------------
Termination Rates: No allowance for a termination prior to retirement.
- -----------------------------------------------------------------------------------------------------------------------
Retirement Rates: Ontario members are assumed to retire at the age between
55 and 65 that maximizes the commuted value of the pension.
- -----------------------------------------------------------------------------------------------------------------------
Vesting: All members are assumed to be 100% vested.
- -----------------------------------------------------------------------------------------------------------------------
Growing in: For Ontario members whose age plus service exceed
fifty-five (55) points, the provisions of Section 74 of the
PBA of Ontario are applied.
- -----------------------------------------------------------------------------------------------------------------------
Method: The accrued benefit actuarial cost method is applied.
Members are assumed to terminate employment on the Closing
Date based on benefits earned to this date.
- -----------------------------------------------------------------------------------------------------------------------
Expense: $400 per member expense charge associated with plan
wind-up.
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 123
SCHEDULE 8.7(h)-3
U.K. DEFINED BENEFIT PROJECTED BENEFIT
OBLIGATIONS DETERMINATION METHODS AND ASSUMPTIONS
<TABLE>
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Valuation Approach Ongoing Concern
- -------------------------------------------------------------------------------------------------------------------------
Valuation methods:
* Liabilities FAS 87 Projected Unit Credit Method
* Assets Fair Market Value
- -------------------------------------------------------------------------------------------------------------------------
Economic Assumptions:
* Price Inflation (RPI) Discount Rate less 4.25%
* Discount Rate Gross Redemption Yield on British
Government Bonds as measured by the
Financial Times index for Fixed Interest, 20
year, medium coupon bonds as of the last day
of the month preceding Closing, plus 0.75%
rounded to nearest 0.25%.
* SALARY INCREASES RPI + 0.5%
* REVALUATION OF NON-GMP BENEFITS IN
DEFERMENT RPI - 0.25%, Maximum 4.5%
* POST-RETIREMENT PENSION INCREASES:
-- PRE-88GMP Nil
-- POST-88 GMP RPI - 0.75%, Maximum 2.75%
-- CORE PRE-97 NON-GMP 3.00%
-- CORE POST-97 NON-GMP RPI - 0.5%, Maximum 4.25%
-- MONEY MATCH RPI - 0.5%, Maximum 4.25%
* RETURN ON ASSETS 9.50%
* RETURN ON GUARANTEED INTEREST FUND RPI + 3.0%
* BUILDING SOCIETY RETURN RPI + 2.0%
* LOWER EARNINGS LIMIT INCREASES RPI
- -------------------------------------------------------------------------------------------------------------------------
Demographic Assumptions: A67/70 rated down 3 years for women
* Mortality PA90 rated down one year
-- Pre-retirement 10% of active male members retire at each
-- Post-retirement age from 60 to 64. All other active male
* Retirement members retire at age 65 except for certain
male members who have a normal retirement
age of 62 and who are assumed to retire at
that age. All active female members retire at
age 60.
All deferred members are assumed to retire at
their Normal Retirement Age except that
allowance has been made for retirement at age
60 in respect of:
</TABLE>
<PAGE> 124
2
<TABLE>
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Valuation Approach Ongoing Concern
- -------------------------------------------------------------------------------------------------------------------------
* Service of male members between May
17, 1990, and December 31, 1991; and
* Service of female members prior to
January 1, 1992.
Sample rates are set out below:
* Withdrawal Age Rate per 1,000 lives
--- --------------------
25 150
30 150
35 120
40 90
45 50
50 Nil
None
* Disability 90% of members are assumed to be married at
* Family Statistics retirement and on death before retirement.
Husbands are assumed to be three years older
than their wives.
- -------------------------------------------------------------------------------------------------------------------------
* Expenses None
- -------------------------------------------------------------------------------------------------------------------------
* Market Adjustments: None
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 125
2
LIST OF SCHEDULES, EXHIBITS AND ANNEXES TO AGREEMENT
SCHEDULES
---------
<TABLE>
<S> <C>
Schedule 2.3(a) Non-Acquired Assets
Schedule 2.3(e) Excluded Information Systems
Schedule 2.5(e) Other Excluded Liabilities
Schedule 5.2(a) Working Capital Calculation
Schedule 6.3 Decorative Products Company Stock
Schedule 6.4 Governmental Approvals; Consents
Schedule 6.5 Financial Statements
Schedule 6.5(a) Exceptions to GAAP (Interim Financial Statements)
Schedule 6.6 Changes Since December 31, 1996
Schedule 6.7(a) Real and Personal Property Liens
Schedule 6.7(b) Owned and Leased Real Property
Schedule 6.8 Contracts
Schedule 6.9 Legal Proceedings
Schedule 6.10(a) Patent Rights
Schedule 6.10(b) Trademark Rights
Schedule 6.10(c) Copyright Rights
Schedule 6.11 Insurance
Schedule 6.12(a) Tax Returns
Schedule 6.12(b) Tax Audits
Schedule 6.12(c) Tax Years Closed
Schedule 6.12(e) Tax Sharing Agreements
Schedule 6.13(a) Employment Matters
Schedule 6.13(b)(i) Material Benefit Plans
Schedule 6.13(b)(ii)-1 Material Benefit in Violation of ERISA
Schedule 6.13(b)(ii)-2 Post Retirement Benefits
Schedule 6.13(b)(iii) Tax Qualification Letters
Schedule 6.13(b)(v) Change in Control Arrangements
Schedule 6.13(b)(vi) International Pension Plan Calculations
Schedule 6.13(c) Employment Contracts
Schedule 6.14 Compliance with Laws
Schedule 6.16 Environmental Matters
Schedule 6.17 Entire Business
Schedule 6.18 Millennium Compliance
Schedule 6.19 Affiliate Agreements and Liabilities
Schedule 6.20 Labor Relations
Schedule 6.21 Product Liability
Schedule 6.22 Undisclosed Liabilities
Schedule 7.3 Buyer Governmental Approvals; Consents
Schedule 7.6 Commitment Letters
Schedule 8.1 Operation of Business
Schedule 8.1(e) Capital Expenditures
</TABLE>
<PAGE> 126
2
<TABLE>
<S> <C>
Schedule 8.6(b) Intercompany Trademark Licensing Agreements
Schedule 8.7(c) Collective Bargaining Agreements
Schedule 8.7(h) International Benefit Plans
Schedule 8.7(j) Post-Retirement Benefits
Schedule 8.7(l) Vacation Policies
Schedule 8.7(m) Severance Benefits
Schedule 8.10 Intercompany Transactions
Schedule 8.12 Guarantees
Schedule 8.14 BLC Assets
Schedule 12.2 Exceptions to Termination of Tax Agreements
Schedule 15.13 Officers and Employees with Knowledge
ANNEXES
-------
ANNEX A -Terms of Stockholders' Agreement
EXHIBITS
--------
EXHIBIT 1 - Purchase Price
EXHIBIT A - Form of Trademark License Agreement
EXHIBIT B - Form of Services Agreement
EXHIBIT C - Opinion of Jones, Day, Reavis & Pogue -Matters
to be Addressed
EXHIBIT D - Opinion of General Counsel of Borden - Matters
to be Addressed
EXHIBIT E - Form of Bill of Sale
EXHIBIT F - Form of Assumption Agreement
</TABLE>
<PAGE> 127
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Acquired Assets ............................................................................3
Affiliate ................................................................................112
Aggregate Consideration ...................................................................19
Agreement ..................................................................................1
Annual Financial Statements ...........................................................28, 30
Antitrust Division ........................................................................60
Asset Transfer .............................................................................2
Assets .....................................................................................3
BDH One ....................................................................................1
BDPH .......................................................................................1
BDPH Capital Stock .........................................................................2
BDPH Common Stock ..........................................................................2
BDPH Management ............................................................................1
BDPH Preferred Stock .......................................................................2
BDPH U.S. Savings Plan ....................................................................67
Benefit Plans .............................................................................41
BLC Assets ................................................................................75
BLC Buy-Out Amount ........................................................................75
BLC Master Lease ..........................................................................75
Books and Records .........................................................................62
Borden .....................................................................................1
Borden Affiliates .........................................................................72
Borden Home License Agreement .............................................................64
Borden Losses .............................................................................92
Borden Objection ..........................................................................22
Borden Transaction Fees ....................................................................1
Borden U.S. Pension Plan ..................................................................66
Business ...................................................................................1
Business Employees ........................................................................41
Canada Benefit Plans ......................................................................41
Canada Business Employees .................................................................41
Cash Merger Consideration .................................................................14
Certificate of Merger .....................................................................11
Citicorp ..................................................................................75
Closing ...................................................................................87
Closing Balance Sheet .....................................................................21
Closing Calculation .......................................................................22
Closing Date ..............................................................................87
Commitment Letter .........................................................................54
Common Stock Merger Consideration .........................................................13
Computer Systems ..........................................................................47
Confidentiality Letter ....................................................................59
Contracts .................................................................................34
Copyright Rights ..........................................................................38
De Minimis Holdings Losses ................................................................91
DGCL .......................................................................................2
</TABLE>
<PAGE> 128
<TABLE>
<CAPTION>
Page
----
<S> <C>
Disbursing Account ........................................................................16
Disclosed Contracts .......................................................................34
Dissenting Shares .........................................................................15
Effective Time of the Merger ..............................................................11
ERISA .....................................................................................41
Exchange Act ..............................................................................25
Excluded Assets ............................................................................6
Excluded Liabilities .......................................................................9
Facilities ................................................................................32
Facility ..................................................................................32
Financial Statements ......................................................................29
Financing .................................................................................54
First Party ...............................................................................99
Five-Year Reps ............................................................................51
Foreign Governmental Consents .............................................................60
FTC .......................................................................................60
GAAP ......................................................................................21
Guarantees ................................................................................73
Hart-Scott Act ............................................................................59
Holdings ...................................................................................1
Holdings Losses ...........................................................................89
Holdings Material Adverse Effect...........................................................51
Holdings Tax Act ..........................................................................98
Holdings Threshold ........................................................................94
Holdings' Accountants .....................................................................21
Indemnity Claim ...........................................................................95
Insurance .................................................................................38
Interim Balance Sheet .....................................................................28
Interim Financial Statements ..............................................................29
International Benefit Plans ...............................................................68
Leased Real Property ......................................................................32
Liens .....................................................................................27
Long-Term Reps ............................................................................55
Losses ....................................................................................92
Machinery ..................................................................................4
Material ..................................................................................49
Material Adverse Effect ...................................................................25
Merger .....................................................................................2
Merger Consideration ......................................................................14
Neutral Accounting Firm ...................................................................23
Option .....................................................................................1
Owned Real Property .......................................................................32
Packaging Materials .......................................................................63
Patent Rights .............................................................................35
Per Share Consideration ....................................................................1
Per Share Consideration Formula ............................................................1
</TABLE>
<PAGE> 129
<TABLE>
<CAPTION>
Page
----
<S> <C>
Permits ...................................................................................44
Permitted Liens ...........................................................................32
Person ...................................................................................112
Pre-Closing Tax Period ....................................................................99
Preferred Stock Merger Consideration.......................................................14
Product Claim .............................................................................49
Products ...................................................................................1
Real Property .............................................................................32
Recalls ...................................................................................49
Receivables ................................................................................5
Required Consents .........................................................................81
Retained Shares ...........................................................................14
Second Party ..............................................................................99
Securities Act ............................................................................54
Services Agreement ........................................................................76
Stockholders ...............................................................................1
Stockholders Agreement ....................................................................78
Subsidiaries .............................................................................112
Subsidiary ...............................................................................112
Tax Claim .................................................................................99
Tax Returns ...............................................................................39
Taxes .....................................................................................39
Termination Agreement .....................................................................84
The best knowledge of ....................................................................112
The knowledge of .........................................................................112
Threshold .................................................................................91
Trademark .................................................................................63
Trademark Rights ..........................................................................37
Transaction Documents .....................................................................25
U.K. Benefit Plans ........................................................................41
U.K. Business Employees ...................................................................41
U.S Business Employees ....................................................................41
U.S. Benefit Plans ........................................................................41
U.S. Savings Plans ........................................................................66
U.S. Savings Total Transfer Amount ........................................................67
U.S. Savings Transfer Date ................................................................67
Vacation Policy ...........................................................................70
WARN ......................................................................................71
</TABLE>
<PAGE> 130
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. [Intentionally Omitted]................................................................................ 3
2. OWNERSHIP OF ASSETS AND ASSUMPTION OF LIABILITIES...................................................... 3
2.1 Transfer of Assets........................................................................... 3
2.2 Acquired Assets.............................................................................. 3
2.3 Excluded Assets.............................................................................. 6
2.4 Assumed Liabilities.......................................................................... 8
2.5 Excluded Liabilities......................................................................... 9
2.6 Certain Definitions.......................................................................... 10
3. THE MERGER............................................................................................. 11
3.1 The Merger................................................................................... 11
3.2 Effective Time of the Merger................................................................. 11
3.3 Effects of the Merger........................................................................ 12
3.4 Certificate of Incorporation; By-Laws; Purposes.............................................. 12
3.5 Directors.................................................................................... 12
3.6 Officers..................................................................................... 13
4. EFFECT OF THE MERGER ON THE CAPITAL
STOCK OF BDPH AND MERGERCO............................................................................. 13
4.1 Effect on Capital Stock...................................................................... 13
4.2 Exchange of Certificates..................................................................... 16
5. AGGREGATE CONSIDERATION AND ADJUSTMENTS................................................................ 18
5.1 (a) Payment of the Aggregate Consideration.................................................. 18
5.2 Working Capital Adjustment................................................................... 20
5.3 Currency Exchange Values..................................................................... 24
6. REPRESENTATIONS AND WARRANTIES OF BORDEN............................................................... 24
6.1 Corporate Existence.......................................................................... 24
6.2 Corporate Authority; Shareholder Authorization............................................... 25
6.3 Decorative Products Company Stock............................................................ 27
6.4 Governmental Approvals; Consents............................................................. 27
6.5 Financial Statements......................................................................... 28
6.6 Absence of Changes........................................................................... 30
6.7 Real and Personal Properties................................................................. 31
6.8 Contracts.................................................................................... 33
6.9 Litigation, Agencies......................................................................... 35
6.10 Intangible Property Rights................................................................... 35
6.11 Insurance.................................................................................... 38
6.12 Tax Matters.................................................................................. 38
6.13 Employment and Benefits...................................................................... 40
6.14 Compliance with Laws......................................................................... 43
6.15 Finders; Brokers............................................................................. 44
</TABLE>
i
<PAGE> 131
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
6.16 Environmental Matters........................................................................ 45
6.17 Entire Business.............................................................................. 47
6.18 Millennium Compliance........................................................................ 47
6.19 Affiliate Agreements and Liabilities......................................................... 48
6.20 Labor Relations.............................................................................. 48
6.21 Product Liability............................................................................ 49
6.22 No Undisclosed Liabilities................................................................... 50
6.23 BDPH Preferred Stock......................................................................... 50
6.24 No Other Representations or Warranties....................................................... 50
6.25 Expiration of Representations and Warranties................................................. 51
7. REPRESENTATIONS OF MERGERCO............................................................................ 51
7.1 Corporate Existence.......................................................................... 51
7.2 Corporate Authority; Shareholder Authorization............................................... 52
7.3 Governmental Approvals; Consents............................................................. 53
7.4 Finders; Brokers............................................................................. 53
7.5 Purchase for Investment...................................................................... 54
7.6 Financial Capacity........................................................................... 54
7.7 [Intentionally omitted]...................................................................... 54
7.8 No Other Representations or Warranties....................................................... 54
7.9 Expiration of Representations and Warranties................................................. 54
8. AGREEMENTS OF MERGERCO AND BORDEN...................................................................... 55
8.1 Operation of the Business.................................................................... 55
8.2 Investigation of Business.................................................................... 58
8.3 Mutual Cooperation; No Inconsistent Action................................................... 59
8.4 Public Disclosures........................................................................... 61
8.5 Access to Records and Personnel.............................................................. 62
8.6 Use of Materials Bearing the "Borden" Trademark.............................................. 63
8.7 Employee Relations and Benefits ............................................................. 64
8.8 Intentionally Omitted........................................................................ 72
8.9 "As Is" Condition............................................................................ 72
8.10 Intercompany Transactions.................................................................... 72
8.11 Non-Solicitation............................................................................. 73
8.12 Guarantees................................................................................... 73
8.13 Financing.................................................................................... 73
8.14 Buy-Out of BLC Assets........................................................................ 75
8.15 Services Agreement........................................................................... 75
8.16 Nondisclosure; Noncompetition................................................................ 76
8.17 PVC Contract................................................................................. 78
8.18 Stockholders Agreement....................................................................... 78
8.19 Insurance Covenant........................................................................... 79
8.20 Certain Purchasers........................................................................... 80
9. CONDITIONS............................................................................................. 81
9.1 Conditions Precedent to Obligations of MergerCo and Borden................................... 81
</TABLE>
ii
<PAGE> 132
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
9.2 Conditions Precedent to Obligation of Borden................................................. 82
9.3 Conditions Precedent to Obligation of MergerCo............................................... 83
10. CLOSING................................................................................................ 87
10.1 Generally.................................................................................... 87
10.2 MergerCo Deliveries.......................................................................... 88
10.3 Borden Deliveries............................................................................ 88
11. INDEMNIFICATION........................................................................................ 89
11.1 Indemnification by Borden.................................................................... 89
11.2 Indemnification by BDPH...................................................................... 92
11.3 Indemnification Calculations................................................................. 95
12. TAX MATTERS............................................................................................ 98
12.1 Tax Indemnification.......................................................................... 98
12.2 Other Tax Matters............................................................................102
13. TERMINATION............................................................................................103
13.1 Termination Events...........................................................................103
13.2 Effect of Termination........................................................................104
14. ALTERNATIVE DISPUTE RESOLUTION.........................................................................105
15. MISCELLANEOUS AGREEMENTS OF THE PARTIES................................................................105
15.1 Notices......................................................................................105
15.2 Bulk Transfers...............................................................................106
15.3 Transaction Taxes............................................................................107
15.4 Further Assurances; Asset Returns............................................................107
15.5 Other Covenants..............................................................................107
15.6 Expenses.....................................................................................108
15.7 Non-Assignability............................................................................108
15.8 Amendment; Waiver............................................................................109
15.9 Schedules and Exhibits.......................................................................110
15.10 Third Parties................................................................................110
15.11 Governing Law................................................................................111
15.12 Consent to Jurisdiction......................................................................111
15.13 Certain Definitions..........................................................................111
15.14 Construction.................................................................................113
15.15 Specific Performance.........................................................................113
15.16 Conveyance and Transfer Agreement............................................................113
15.17 Entire Agreement.............................................................................114
15.18 Section Headings; Table of Contents..........................................................114
15.19 Severability.................................................................................114
15.20 Counterparts.................................................................................114
</TABLE>
iii
<PAGE> 133
================================================================================
RECAPITALIZATION AGREEMENT
among
BORDEN DECORATIVE PRODUCTS HOLDINGS, INC.,
BDPI HOLDINGS CORPORATION
and
BORDEN, INC.
Dated as of October 14, 1997
================================================================================
<PAGE> 134
SCHEDULE 8.7(h)
INTERNATIONAL BENEFIT PLANS
CANADA
I. Canadian Defined Benefit Plans. (i) The Borden Company, Limited
Employees Retirement Income Plan ("ERIP").
(A) As of the Closing Date, but in any event, within
ninety (90) days thereof, MergerCo shall establish and register with the
applicable regulatory authorities, or shall otherwise cause to be provided, a
pension plan (the "MergerCo' Canadian DB Plan") for all those Business Employees
who are accruing benefits under ERIP prior to the Closing Date. Each such
Business Employee shall be enrolled as a member of Buyer's Canadian DB Plan
effective on the Closing Date and shall cease to actively participate in and
accrue benefits under ERIP (all such Business Employees are herein called the
"Canadian ERIP Transferred Participants"). MergerCo shall also cause to be
provided a trust fund or other funding arrangement for Buyer's Canadian DB Plan.
Buyer's Canadian DB Plan shall provide that for the purposes of vesting and all
other purposes required by applicable laws, service by Canadian Transferred
Participants recognized under ERIP shall be recognized as continuous unbroken
service for purposes of Buyer's Canadian DB Plan. MergerCo agrees to provide the
Borden Companies with such documentation and information as it may reasonably
require to satisfy itself that Buyer's Canadian DB Plan and the trust fund or
other funding arrangement therefore has been properly established, amended or
otherwise provided, as applicable, and registered in accordance with this
provision.
(B) Buyer's Canadian DB Plan shall assume the labilities
under ERIP relating to the Canadian ERIP Transferred Participants together with
the liabilities under ERIP relating to all persons who were employees of the
Business (and their spouses, dependents and estates) and who, immediately prior
to the Closing Date, have an immediate or future entitlement to benefits under
ERIP as retired or deferred vested members thereof (all assumed liabilities
under this clause (B) being referred to as the "Canadian ERIP Transferred
Liabilities").
(C) Immediately following the Closing Date, but in any
event within ninety (90) days thereof, Borden shall cause the actuary for ERIP
to calculate, as of the Closing Date, the Canadian ERIP Transferred Liabilities
determined on the higher of a going concern or solvency basis using the
actuarial assumptions and methods set out in Schedules 8.7(h)-1 and 8.7(h)-2. At
the same time, Borden shall cause the actuary for ERIP to calculate, as of the
Closing Date, on the same basis but using employee data from the immediately
prior fiscal year end if Borden's actuary determines there has been no
significant change therein, the actuarial present value of all the ERIP
liabilities which are not being assumed by MergerCo determined on the higher of
a going concern or solvency basis (the "Canadian ERIP Retained Liabilities")
(the sum of the Canadian ERIP Transferred Liabilities and the Canadian ERIP
Retained Liabilities so calculated being referred to as the "Canadian ERIP Total
Liabilities"). Borden shall also cause to be determined as at the Closing Date,
<PAGE> 135
2
the market value of the investments held in the trust fund for ERIP together
with all other assets including, without limitation, any cash balances and
accrued or receivable amounts in respect of ERIP (collectively the ("ERIP Fund
Value").
(D) Forthwith upon determination of the Canadian ERIP
Transferred Liabilities, Canadian ERIP Retained Liabilities, Canadian ERIP Total
Liabilities and ERIP Fund Value, Borden shall report or cause its actuary to
report such determinations to MergerCo and its actuary and furnish to each of
them such other information and data as may be reasonably requested by them and
afford them a period of thirty (30) days (or such longer period as is mutually
agreed) to review and indicate their approval of same. If Borden and MergerCo
cannot agree on such determinations such determinations shall be referred to and
finally determined by such independent actuary as the parties may agree, using
the actuarial assumptions and methods set out in Schedule 8.7(h)-1 and the costs
and expenses of such independent actuary shall be borne equally by Borden and
MergerCo.
(E) Forthwith after such determinations have been made,
Borden shall cause the actuary for ERIP to determine the portion of the ERIP
Fund Value that the Canadian ERIP Transferred Liabilities is of the Canadian
ERIP Total Liabilities (such portion is herein called the "Canadian ERIP
Transfer Amount"). Upon determination of the Canadian ERIP Transfer Amount,
Borden shall forthwith file with the regulatory authorities all documents and
information required to effect the transfer of the Canadian ERIP Transfer Amount
as herein provided. Notwithstanding the foregoing, if the amount approved by the
regulatory authorities for transfer from ERIP to Buyer's Canadian DB Plan
pursuant to this Agreement is different from the Canadian ERIP Transfer Amount,
the Canadian ERIP Transfer Amount shall be deemed for all purposes of this
Agreement to be the amount so approved by the regulatory authorities. Written
confirmation of any and all required regulatory approvals shall be forwarded by
each party to the other forthwith upon receipt.
(F) Upon receipt by Borden and MergerCo of such regulatory
approvals as may be required, Borden shall cause the funding agent of ERIP to
transfer to the funding agent of Buyer's Canadian DB Plan cash or other assets
as selected by Borden equal to the Canadian Transfer Amount, adjusted by the
fund rate of return earned by ERIP from the Closing Date to the date of such
transfer (the "Canadian ERIP Transfer Date").
(G) From the Closing Date to the Canadian ERIP Transfer
Date, Borden on behalf of MergerCo, shall cause the funding agent of ERIP to pay
and record as required, all benefit payments for service accrued prior to the
Closing Date relating to the Canadian ERIP Transferred Participants and others
entitled to payments from ERIP. The amount of the aforesaid payments and any
applicable administrative expenses shall be deducted from the amount required to
be transferred hereunder. During this period, Borden will calculate, on behalf
of MergerCo, all benefits and other disbursements payable under ERIP in respect
of the Canadian ERIP Transferred Liabilities and shall be entitled to deduct
from the Canadian ERIP Transfer Amount its reasonable administrative costs for
so doing.
<PAGE> 136
3
(H) MergerCo shall not take any steps which would result
in a wind-up of ERIP in whole or in part.
(ii) The Borden Company, Limited Pension Plan for Salaried
Employees (the "Quebec Plan").
(A) As of the Closing Date, but in any event, within
ninety (90) days thereof, MergerCo shall establish and register with the
applicable regulatory authorities, or shall otherwise cause to be provided, a
pension plan (the "Buyer's Quebec DB Plan") for all those Business Employees who
are accruing benefits under the Quebec Plan prior to the Closing Date. If the
MergerCo determines that a separate Quebec-registered plan is not required to
meet necessary regulatory requirements, it is understood that the Buyer's Quebec
DB Plan might be one and the same as the Buyer's Canadian DB Plan, referred to
above, and need not be registered in Quebec. Each of such Business Employees
shall be enrolled as a member of Buyer's Quebec DB Plan effective on the Closing
Date and shall cease to actively participate in and accrue benefits under the
Quebec Plan (all such Business Employees are herein called the "Quebec
Transferred Participants"). MergerCo shall also cause to be provided a trust
fund or other funding arrangement for Buyer's Quebec DB Plan. Buyer's Quebec DB
Plan shall provide that for the purposes of vesting and all other purposes
required by applicable laws, service by Quebec Transferred Participants
recognized under the Quebec Plan shall be recognized as continuous unbroken
service for purposes of Buyer's Quebec DB Plan. MergerCo agrees to provide
Borden with such documentation and information as it may reasonably require to
satisfy itself that Buyer's Quebec DB Plan and the trust fund or other funding
arrangement therefore has been properly established, amended or otherwise
provided, as applicable, and registered in accordance with this provision.
(B) Buyer's Quebec DB Plan shall assume the liabilities
under the Quebec Plan relating to the Quebec Transferred Participants together
with the liabilities under the Quebec Plan relating to all persons who were
employees of the Business (and their spouses, dependents and estates) and who,
immediately prior to the Closing Date, have an immediate or future entitlement
to benefits under the Quebec Plan as retired or deferred vested members thereof
(all assumed liabilities under this clause (B) being referred to as the "Quebec
Transferred Going Concern Liabilities" if determined using the going concern
assumptions and the "Quebec Transferred Solvency Liabilities" if determined
using the solvency assumptions using in either case the actuarial assumptions
and methods set out in Schedules 8.7(h)-1 and 8.7(h)-2.
(C) Immediately following the Closing Date, but in any
event within ninety (90) days thereof, Borden shall cause the actuary for the
Quebec Plan to calculate, as of the Closing Date, the Quebec Transferred Going
Concern Liabilities and the Quebec Transferred Solvency Liabilities. At the same
time, Borden shall cause the actuary for the Quebec Plan to calculate, as of the
Closing Date, on the same basis but using employee data from the immediately
prior fiscal year end if Borden's actuary determines there has been no
significant change therein, the actuarial present value of all the Quebec Plan
liabilities which are not being assumed by MergerCo determined on a going
concern basis (the "Quebec
<PAGE> 137
4
Retained Liabilities") the sum of the Quebec Going Concern Transferred
Liabilities and the Quebec Retained Liabilities so calculated being referred to
as the "Quebec Total Liabilities"). Borden shall also cause to be determined as
at the Closing Date, the market value of the investments held in the trust fund
for the Quebec Plan together with all other assets including, without
limitation, any cash balances and accrued or receivable amounts in respect of
the Quebec Plan (collectively the ("Quebec Fund Value").
(D) Forthwith upon determination of the Quebec Transferred
Liabilities, Quebec Transferred Solvency Liabilities, Quebec Retained
Liabilities, Quebec Total Liabilities and Quebec Fund Value, Borden shall report
or cause its actuary to report such determinations to MergerCo and its actuary
and furnish to each of them such other information and data as may be reasonably
requested by them and afford them a period of thirty (30) days (or such longer
period as is mutually agreed) to review and indicate their approval of same. If
Borden and MergerCo cannot agree on such determinations such determinations
shall be referred to and finally determined by such independent actuary as the
parties may agree, using the actuarial assumptions and methods set out in
Schedule 8.7(h)-1 and the costs and expenses of such independent actuary shall
be borne equally by Borden and MergerCo.
(E) Forthwith after such determinations have been made,
Borden shall cause the actuary for the Quebec Plan to determine which amount is
greater (1) the portion of the Quebec Fund Value that the Quebec Transferred
Liabilities is of the Quebec Total Liabilities or (2) the Quebec Transferred
Solvency Liabilities. Such greater amount is herein called the "Quebec Transfer
Amount". Upon determination of the Quebec Transfer Amount, Borden shall
forthwith file with the regulatory authorities all documents and information
required to effect the transfer of the Quebec Transfer Amount as herein
provided. Notwithstanding the foregoing, if the amount approved by the
regulatory authorities for transfer from the Quebec Plan to Buyer's Quebec DB
Plan pursuant to this Agreement is different from the Quebec Transfer Amount,
the Quebec Transfer Amount shall be deemed for all purposes of this Agreement to
be the amount so approved by the regulatory authorities. Written confirmation of
any and all required regulatory approvals shall be forwarded by each party to
the other forthwith upon receipt.
(F) Upon receipt by Borden and MergerCo of such regulatory
approvals as may be required, Borden shall cause the funding agent of the Quebec
Plan to transfer to the funding agent of Buyer's Quebec DB Plan cash or other
assets as selected by Borden equal to the Quebec Transfer Amount, adjusted by
the fund rate of return earned by the Quebec Plan from the Closing Date to the
date of such transfer (the "Quebec Transfer Date").
(G) From the Closing Date to the Quebec Transfer Date,
seller on behalf of MergerCo, shall cause the funding agent of the Quebec Plan
to pay and record as required, all benefit payments for service accrued prior to
the Closing Date relating to the Quebec Transferred Participants and others
entitled to payments from the Quebec Plan. The amount of the aforesaid payments
and any applicable administrative expenses shall be deducted from the amount
required to be transferred hereunder. During this period, Borden will calculate,
on
<PAGE> 138
5
behalf of MergerCo, all benefits and other disbursements payable under the
Quebec Plan in respect of the Quebec Transferred Liabilities and shall be
entitled to deduct from the Quebec Transfer Amount its reasonable administrative
costs for so doing.
(H) MergerCo shall not take any steps which would result
in a wind-up of the Quebec Plan in whole or in part.
(iii) The Retirement Plan for Hourly Employees of
Sunworthy Wallcovering (the "Sunworthy Plan"):
(A) On and after the Closing Date and effective as of the
Closing Date, the Borden hereby assigns to MergerCo, and MergerCo hereby assumes
from the Borden, all liability and responsibility under and pursuant to the
Sunworthy Plan so that the MergerCo at all times after the Closing Date shall be
the successor Company thereunder; provided, however, that the Buyer's
administrative responsibility to make the actual benefit payments to
participants shall become effective only upon the assignment of sponsorship of
the Sunworthy Pension Trust (as herein defined) to the MergerCo. The Borden and
MergerCo will execute any additional documents which may be necessary, in the
reasonable opinion of Borden and MergerCo, to effect this assignment as soon as
practicable on or after the Closing Date.
(B) On the Closing Date, the Borden hereby assigns to
MergerCo, and MergerCo hereby assumes from Borden, all rights, duties and
obligations of Borden pursuant to The Borden Company, Limited Sunworthy
Participating Trust Agreement dated August 15, 1988, (the "Sunworthy Pension
Trust"). Borden and MergerCo shall execute any additional documents which may be
necessary, in the reasonable opinion of Borden and MergerCo, to effect the
transfer of the sponsorship of the Sunworthy Pension Trust as soon as
practicable on or after the Closing Date.
(C) Prior to the Closing Date Borden shall direct the
Trustee of the Sunworthy Pension Trust to redeem all of the units in the Borden
Company, Limited Master Trust Agreement dated August 15, 1988, owned by
Sunworthy Pension Trust in cash or securities as determined by Borden.
(D) Within sixty (60) consecutive calendar days next
following the Closing Date and effective as of the Closing Date, Borden shall
cause:
(1) The Sunworthy Plan to be amended as may be
necessary to permit such plan to be assumed and adopted by MergerCo and to
permit MergerCo to be substituted in place of Borden on and after the Closing
Date as the "Company" thereunder, and shall thereafter provide MergerCo with a
copy of the Sunworthy Plan as so amended; and
(2) Sponsorship of the Sunworthy Pension Trust shall
be assigned to MergerCo as a successor employer to Borden which shall permit
MergerCo to assume and adopt the rights, duties, and obligations of the Borden.
Within a period of forty-five (45) days following receipt by MergerCo of the
amended Sunworthy Plan, MergerCo shall duly
<PAGE> 139
6
execute and adopt the Sunworthy Plan amendment referred to above, and shall
adopt such sponsorship of trust agreement. Borden shall pay into the Sunworthy
Pension Trust any contributions in respect of current service accrued but not
yet paid in respect of all periods of operation of the Sunworthy Plan prior to
the Closing Date, as determined by Borden in accordance with Borden's current
actuarial and accounting practices and the applicable provisions of the Pension
Benefits Act of Ontario. In addition, Borden shall pay any contributions
relating to any unfunded liability or solvency deficiency of the Sunworthy Plan,
which were due and payable prior to the Closing Date but which were not paid,
but Borden shall not be obligated to make any additional contributions to the
Sunworthy Pension Trust by reason of any unfunded actuarial liability or
solvency deficiency under the Sunworthy Plan.
(E) As soon as practicable after the Closing Date, and in
any event within sixty (60) days, Borden shall deliver to MergerCo such copies
of Borden's applicable records concerning the participants and such copies of
any other applicable records of Borden regarding the Sunworthy Plan and the
Sunworthy Pension Trust, as MergerCo may reasonably require and request, to the
extent that such information is not then already in the possession of MergerCo
or any of its representatives.
(F) Borden shall be responsible for satisfying any and all
governmental reporting and/or disclosure requirements applicable to the
Sunworthy Plan and or the Sunworthy Pension Trust with respect to plan years
ending prior to the Closing Date, and MergerCo shall be responsible for
satisfying any and all such governmental reporting and/or disclosure
requirements applicable to the Sunworthy Plan and/or the Sunworthy Pension Trust
with respect to plan years ending on or after the Closing Date.
(G) As and from the Closing Date, MergerCo shall defend,
indemnify, and hold Borden harmless from and against any and all third party
suits, demands, and/or claims which may arise under, or on account of, or in
connection with, the Sunworthy Plan and the Sunworthy Pension Trust, except to
the extent that the same shall arise form any breach of any representation or
warranty on the part of the Borden.
II. Canadian Defined Contribution Plans. (i) Borden sponsors
the following Savings Plans in which Canadian Business Employees participate:
The Borden Company, Limited Retirement Savings Plan for Salaried
Employees, which is a consolidation of The Borden Company, Limited Group
Retirement Savings Plan for Salaried Employees; The Borden Company, Limited
Deferred Profit Sharing Plan for Salaried Employees; and The Borden Company,
Limited Employees Personal Savings Plan for Salaried Employees.
The Borden Company, Limited Retirement Savings Plan for Hourly
Employees, which is a consolidation of The Borden Company, Limited Group
Retirement Savings Plan for Hourly Employees; The Borden Company, Limited
Deferred Profit Sharing Plan for Hourly Employees; and The Borden Company,
Limited Employees Personal Savings Plan for Hourly Employees.
<PAGE> 140
7
The Borden Company, Limited Retirement Savings Plan for Union
Employees, which is a consolidation of The Borden Company, Limited Group
Retirement Savings Plan for Union Employees; The Borden Company, Limited
Deferred Profit Sharing Plan for Union Employees; and The Borden Company,
Limited Employees Personal Savings Plan for Union Employees.
(All of the above savings plans being hereinafter collectively referred
to as the "Canadian Savings Plans").
(ii) As of the Closing Date, each Canadian Business Employee
who is accruing benefits under any of the Canadian Savings Plans immediately
prior to the Closing Date will cease to participate in and accrue benefits
thereunder. Borden will cause the funding agents of the Canadian Savings Plans
to transfer out of the Canadian Savings Plans cash and/or assets in kind as
determined by Borden equal to the value of each account maintained for the
Canadian Business Employees and the plans shall be amended to provide that all
transferred employer contributions shall be fully vested.
(iii) Subject to the requirement of MergerCo to comply with
the terms of any collective agreements, from the Closing Date, for service
accrued from and after the Closing Date, MergerCo will provide to the Canadian
Business Employees employed by MergerCo comparable benefits to those benefits
the Canadian Business Employees were receiving under the Canadian Savings Plans
immediately prior to the Closing Date, recognizing service under the Canadian
Savings Plans as continuous unbroken service for vesting and all other purposes
required by applicable laws.
UNITED KINGDOM
I. United Kingdom Pension Plan. (a) Definitions. In this
Schedule 8.7(h) the following words and expressions shall unless the context
otherwise requires have the meanings set opposite them:
"Actuarial Assumptions" - the actuarial methods and assumptions set out
in Schedule 8.7(h)-3.
"Borden's Actuary" - David Carse of Towers Perrin or such other actuary
as Borden may for the time being appoint for the purposes of this Schedule
8.7(h).
"Buyer's Actuary" - [ ] or such other actuary as MergerCo
may for the time being appoint for the purposes of this Schedule 8.7(h).
"Borden Chemical" - Borden Chemical UK Limited (3104655).
"Borden Scheme" - the retirement benefits scheme known as The Borden UK
Pension Plan which is governed by a Deed dated 3 October 1995.
<PAGE> 141
8
"Interim Period" - the period commencing on Closing and ending on the
UK Transfer Date.
"New Scheme" - the retirement benefits scheme or personal pension
scheme nominated, established or to be established by or at the instance of
Borden Chemical or to which Borden Chemical has adhered in accordance with
paragraph (ii) of this Schedule 8.7(h).
"Relevant Members" - those employees of Borden Chemical and Borden
Foods who are (A) active members of the Borden Scheme immediately before Closing
(whether or not they cease to be active members before the U.K. Transfer Date)
or (B) those persons who were formerly employed by Borden Chemical and Borden
Foods (and in both cases their dependents) and who are now either (X) entitled
to a deferred pension payable from the Borden Scheme or (Y) are in receipt of a
pension from the Borden Scheme;
"U.K. Payment Date"- the date which is seven days after the date on
which the U.K. Transfer Amount is either agreed in accordance with paragraph
(ii) of this Schedule 8.7(h) or determined by the Independent Actuary in
accordance with paragraph (vii) of this Schedule 8.7(h) or, if later, the date
which is seven days after receipt by the trustees of the Borden Scheme of the
approval (if required) of the Revenue Authorities to the payment by the trustees
of the Borden Scheme of the U.K. Transfer Amount to the trustees of the New
Scheme (which approval MergerCo shall use its best endeavors to obtain or be
obtained as soon as practicable after the date of this Agreement).
"U.K. Transfer Amount" - such amount as shall be calculated by: (A)
determining at the U.K. Transfer Date the ratio of the total assets of the
Borden Scheme (less the value of the assets of the Borden Scheme which relate to
money purchase benefits) to the total liabilities of the Borden Scheme (less the
value of the liabilities of the Borden Scheme which relate to money purchase
benefits), such liabilities being calculated in accordance with the Actuarial
Assumptions; (B) applying the ratio calculated in (A) to the value of that part
of the Unadjusted U.K. Transfer Amount which is not money purchase in nature;
(C) adjusting the result by the investment return between the U.K. Transfer Date
and the U.K. Payment Date on the assets of the Borden Scheme which relate to
defined benefits under the Borden Scheme; (D) adding to (C) the value of that
part of the Unadjusted U.K. Transfer Amount which is money purchase in nature
adjusted to reflect the investment return (positive or negative) on the relevant
money purchase accounts in the period from the U.K. Transfer Date up to the last
dealing date before the U.K. Payment Date;
"U.K. Transfer Date" - such date as shall be agreed by Borden and
MergerCo.
"U.K. Transferring Members" - those of the Relevant Members who
(whether active members, pensioners or deferred pensioners of the Borden Scheme)
become members of the New Scheme with effect on and from the U.K. Transfer Date
pursuant to the offer of membership referred to in paragraph (b)(B) below.
<PAGE> 142
9
"U.K. Unadjusted Transfer Amount" - such amount as shall be calculated
by Buyer's Actuary in accordance with the Actuarial Assumptions and agreed by
Borden's Actuary (or in the absence of agreement determined in accordance with
paragraph (b)(C)(iv) below as is equal to the aggregate of: (A) in the case of
benefits under the Final pay section of the Borden Scheme, the value as at the
U.K. Transfer Date as is equal to the aggregate of: (1) the value of the accrued
benefits prospectively and contingently payable to and in respect of the U.K.
Transferring Members under the Borden Scheme by reference to pensionable service
up to the U.K. Transfer Date and final pensionable earnings at that time (making
allowance in accordance with the Actuarial Assumptions for projected increases
in final pensionable earnings of the U.K. Transferring Members from the U.K.
Transfer Date to the assumed date of retirement or earlier death or withdrawal
from service); and (2) the value of such guarantees as apply to the U.K.
Transferring Members under the Final Pay section of the Borden Scheme; and (3)
the value of those benefits under the Final Pay section of the Borden Scheme
which are money purchase in nature; and (B) in the case of benefits under the
Money Match section of the Borden Scheme, the value as at the U.K. Transfer Date
as is equal to the aggregate of:
(1) the value of the Member's Interest (as defined
in the Borden Scheme) applicable to the U.K. Transferring Members; and
(2) the value of such guarantees as apply to U.K.
Transferring Members under the Money Match section of the Borden Scheme;
(b) The New Scheme
(A) Borden hereby undertakes that with effect from a date
not later than the U.K. Transfer Date Borden Chemical will have nominated or
established or adhered to one or more retirement benefits schemes or one or more
nominated personal pension scheme shall have been nominated:
(1) each of which is approved or capable of
approval under Chapter I or Chapter IV of Part XIV of the Taxes Act; and
(2) each of which is a contracted-out scheme or an
appropriate personal pension scheme (as defined in the Pension Schemes Act
1993);
(3) to each of which the trustees of the Borden
Scheme can make a transfer or cash and/or assets without prejudicing the
approval of the Borden Scheme as an exempt approved scheme.
Membership of the New Scheme will during the Interim Period be offered
to the Relevant Members;
(B) Borden undertakes that the offer of membership
referred to in paragraph A shall include a request or an invitation to consent
to the transfer of benefits from
<PAGE> 143
10
the Borden Scheme to the New Scheme. Such request or invitation to consent shall
be in such form and shall include such discharges as the trustees of the Borden
Scheme may reasonably require. Borden shall procure (subject to receipt by the
trustees of the New Scheme of the U.K. Transfer Amount) that the New Scheme
shall provide benefits for and in respect of the U.K. Transferring Members in
respect of their pensionable service under the Borden Scheme which are either
(1) in the opinion of the trustees of New Scheme
no less favorable overall in value terms than the benefits under the Borden
Scheme in respect of the U.K. Transferring Members' pensionable service
thereunder up to the U.K. Transfer Date on the terms of the Borden Scheme in
force immediately prior thereto; or
(2) money purchase benefits such that each U.K.
Transferring Member shall be entitled to an opening credit equal to the part of
the U.K. Transfer Amount paid in respect of him.
(C) The MergerCo will give its consent to and will procure
that Borden Chemical may remain a participating employer under the Borden Scheme
in respect of the Relevant Members during the Interim Period on the same terms,
including rates of contributions payable, as are in force immediately prior to
Closing. MergerCo shall procure that all other participating employers in the
Borden Scheme shall participate in the Borden Scheme on the terms (including
rates of contributions) as are in force immediately prior to Closing. During the
Interim Period Borden will procure that Borden Chemical complies with the
obligations on it as a participating employer under the Borden Scheme, such
obligations (otherwise than where required by law)( being those which applied to
it immediately prior to the commencement of the Interim Period). MergerCo will
not appoint or remove any trustee (or any director thereof) of the Borden Scheme
during the Interim Period.
Borden Chemical shall continue to be able to exercise such powers and
discretions under the Borden Scheme during the Interim Period as were available
to it immediately prior to Closing provided that Borden Chemical shall procure
that no action is taken in relation to the Borden Scheme during the Interim
Period which results or would result in any additional or increased costs or
liabilities to MergerCo or BDPH.
MergerCo shall procure that no action is taken in relation to the
Borden Scheme during the period between Closing and the U.K. Payment Date which
results or would result in any additional or increased contributions being
required from Borden Chemical or Borden Foods in relation either to the Borden
Scheme or the New Scheme or any additional or increased liability in either the
Borden Scheme or the New Scheme without Borden's prior written agreement (not to
be unreasonably withheld). Where such action is taken, MergerCo will pay to
Borden Chemical an amount agreed between Buyer's Actuary and Borden's Actuary as
being required to fund the additional contributions or liability.
(i) Determination of Transfer Amount. On or immediately
after the U.K. Transfer Date, MergerCo shall instruct Buyer's Actuary to
calculate the U.K. Transfer Amount
<PAGE> 144
11
and within thirty (30) days after the U.K. Transfer Date to submit his findings
to Borden's Actuary for verification and agreement by him. If Borden's Actuary
is unable (within thirty (30) days (or such longer period as the parties may
agree) of the submission to him of the findings of Buyer's Actuary) to agree the
U.K. Transfer Amount as aforesaid the matter shall be referred to an independent
actuary pursuant to this Schedule.
(ii) Payment of Transfer Amount. (A) The MergerCo shall use
its best endeavors to procure that on the U.K. Payment Date the Trustees of the
Borden Scheme make a payment to the trustees of the New Scheme of an amount
equal to the U.K. Transfer Amount.
(B) MergerCo shall procure that all payments to be made
(whether to be made by the trustees of the Borden Scheme or otherwise under this
paragraph) shall be made in cash unless (in the case of any payment to them) the
trustees of the New Scheme shall agree otherwise.
(iii) Additional Voluntary Contributions. Any additional
voluntary contributions made by the U.K. Transferring Members to Borden's Scheme
together with the accrued investment return thereon shall be disregarded for the
purposes of determining the U.K.
Transfer Amount.
MergerCo shall use its reasonable endeavors to procure that
if before the U.K. Payment Date the trustees of the Borden Scheme have not done
so that they shall pay or transfer to the trustees of the New Scheme in addition
to the U.K. Transfer Amount any sums or policies as at the U.K. Payment Date
which under the Borden Scheme relate to the additional voluntary contributions
paid by the U.K. Transferring Members.
(iv) Disputes. Any disputes between Borden's Actuary and
Buyer's Actuary concerning the calculation of the U.K. Transfer Amount in
accordance with this Schedule 8.7(h) and/or the Actuarial Assumptions or any
other matter of an actuarial nature shall, in the absence of agreement between
them, be referred to an independent actuary agreed by Borden and MergerCo or,
failing such agreement within 14 days of one party calling upon the other in
writing so to agree, appointed by the President for the time being of the
institute of Actuaries. Any such independent actuary shall reach his decision on
the basis of the provisions of this Schedule 8.7(h) and the Actuarial
Assumptions and shall act as an expert and not as an arbitrator and his decision
shall (in the absence of manifest error) be final and binding upon Borden and
MergerCo. The charges and expenses of the independent actuary in respect of any
such reference shall be borne equally by Borden and MergerCo.
<PAGE> 145
EXHIBIT C
The opinion of Jones, Day, Reavis & Pogue referred to in
Section 9.2(i) of the accompanying Agreement will be substantially to the effect
set forth in the first and second sentences of Section 7.1, the first and second
sentences of Section 7.2 and the third sentence of Section 7.2 (but only as to
MergerCo's certificate of incorporation or by-laws or other constituent
documents of MergerCo) and will be subject to such limitations and
qualifications as are customary for such opinions.
<PAGE> 146
EXHIBIT D
The opinion of the General Counsel or Assistant General
Counsel of Borden referred to in Section 9.3(k) of the accompanying Agreement
will be substantially to the effect set forth in the first and second sentences
of Section 6.1, the first and second sentences of Section 6.2, the third
sentence of Section 6.2 (but only as to the certificate of incorporation or
by-laws or other constituent documents of Borden or any subsidiary) and the
first sentence of Section 6.3 and will be subject to such limitations and
qualifications as are customary for such opinions.
<PAGE> 1
Exhibit(10)(xii)
FIRST AMENDMENT TO
1996 UNIT INCENTIVE PLAN FOR
KEY EMPLOYEES OF BORDEN, INC.
AND ASSOCIATED PERSONS
This Amendment dated December 5, 1997, is made to allow for the
transferability, in certain circumstances, of certain Grants made under the Plan
as approved by the Compensation Committee of the Board of Directors of Borden,
Inc. on November 21, 1997.
AMENDMENTS
----------
Section 6(f) is amended as follows:
6. Limitations and Conditions
--------------------------
(f) The first sentence of Section 6(f) is amended to
delete the words "transfer" and "assignment."
The following language is added to the end of paragraph (f):
"Notwithstanding the foregoing, the Committee may,
in its discretion, authorize all or a portion of the options
or UARs to be granted to an optionee to be on terms which
permit transfer by such optionee to (1) the spouse, children
or grandchildren of the optionee ("Immediate Family
Members"), (ii) a trust or trusts for the exclusive benefit of
such Immediate Family Members, or (iii) a partnership or
other entity in which such Immediate Family Members are the
only partners, members or beneficiaries, provided that, (x)
the stock option agreement pursuant to which such options are
granted must be approved by the Committee, and must expressly
provide for transferability in a manner consistent with this
Section, (y) subsequent transfers of transferred options shall
be prohibited except transfers by will or by the applicable
laws of descent and distribution, and (z) the transferees
shall agree to be bound by the provisions of this Plan.
Following transfer, any such options shall continue to be
subject to the same terms and conditions as were applicable
immediately prior to transfer."
* * * * *
<PAGE> 1
Exhibit (10)(xiv)(a)
BORDEN CAPITAL MANAGEMENT PARTNERS
1997 INCENTIVE PLAN
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Participation All Associates
- ---------------------------------------------------------------------------------------------------------------------------------
Financial Measurement EVA
- ---------------------------------------------------------------------------------------------------------------------------------
Target Award For key Associates, Target Award is based on market average, where market data indicates an
incentive award as part of total compensation
For all other Associates, Target Award is:
15% of salary for managers
10% of salary for supervisors and function experts
5% of salary for support professionals
- ---------------------------------------------------------------------------------------------------------------------------------
Target Weight 100% Financial, modified by Performance vs. Individual Performance Objectives (IPOs)
- ---------------------------------------------------------------------------------------------------------------------------------
Award Amount Infinite +
- ---------------------------------------------------------------------------------------------------------------------------------
Award Allocation Determined by matrix
- ---------------------------------------------------------------------------------------------------------------------------------
Banking Award Amount in excess of 100% Target Award is banked
- ---------------------------------------------------------------------------------------------------------------------------------
Award Payment Up to Target Award plus 1/3 of bank;
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
Exhibit (10)(xiv)(b)
BORDEN FOODS
1997 INCENTIVE PLAN
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Participation All Associates
- ---------------------------------------------------------------------------------------------------------------------------------
Financial Measurement EBIT and EVA
- ---------------------------------------------------------------------------------------------------------------------------------
Target Award 60% of salary for CEO
40% of salary for Senior Team
30% of salary for exempt associates in salary grades 23 to 26
25% of salary for exempt associates in salary grades 20 to 22
20% of salary for exempt associates in salary grades 17 to 19
15% of salary for exempt associates in salary grades 14 to 16
10% of salary for exempt associates in salary grades 9 to 13
5% of salary for all other associates
- ---------------------------------------------------------------------------------------------------------------------------------
Target Weight 100% Financial
- ---------------------------------------------------------------------------------------------------------------------------------
Award Amount Once EBIT goal is achieved, the incentive pool will be funded up to the target award amount.
Any earnings in excess of this amount will be shares with 2/3 allocated to the company and 1/3
allocated to the incentive pool
- ---------------------------------------------------------------------------------------------------------------------------------
Award Allocation Individual awards are determined based on evaluation of 27 defined behaviors. The score translates
to a performance percentage based on a matrix.
- ---------------------------------------------------------------------------------------------------------------------------------
Banking None
- ---------------------------------------------------------------------------------------------------------------------------------
Award Payment The incentive pool is divided by the sum of the performance percentages times the incentive targets
to establish an adjustment factor to manage incentive payments within the allocated pool.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
Exhibit (10)(xiv)(c)
BORDEN CHEMICAL, INC.
1997 INCENTIVE PLAN
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Participation Management staff with ability to impact company performance
- ---------------------------------------------------------------------------------------------------------------------------------
Financial Measurement EVA
- ---------------------------------------------------------------------------------------------------------------------------------
Target Award Percentage of salary. Based on market data.
- ---------------------------------------------------------------------------------------------------------------------------------
Target Weight 100% Financial, modified + or -20% by Performance vs. Individual Performance Objectives (IPOs)
- ---------------------------------------------------------------------------------------------------------------------------------
Award Amount Infinite, both + and -
- ---------------------------------------------------------------------------------------------------------------------------------
Banking Award Amount in excess of 100% Target Award or below 0 Target Award is banked
- ---------------------------------------------------------------------------------------------------------------------------------
Award Payment Target Award plus 1/3 of bank;
Negative amount is paid off as follows:
50% in each of the next two years an award is generated
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
Exhibit (10)(xxiii)(k)
PAY AGREEMENT AND RELEASE
This agreement effective on the last date executed below, contains all the
understandings between Doug Smith and Borden Foods Corporation and its parents,
subsidiaries or affiliates, including without limitation, Borden, Inc., and
their officers, employees and agents in their individual and representative
capacities, known collectively as the "Company") in connection with your
separation from employment. This agreement provides the specific details of
benefits to be received by you including those under the Company's Employment
and Benefits Upon Termination Plan and the conditions agreed to by you for the
receipt of those benefits.
1. The Company will pay you a gross total amount of $1,030,000, to be paid to
you in 48 semi-monthly installments in amounts of $21,458.33 each for the
period beginning on your termination date and ending on November 1, 1999
(your "Severance Period"). Deductions for cash advances, other money due
the Company and as required by statute or regulation, will be made from
this allowance. Your official termination date will be November 1, 1997.
Between now and your termination date you are relieved of your duties and
need not report for duty.
2. Any bonus to which you might be entitled for calendar year 1997 will be
based upon 1997 financial performance of Borden Foods Corporation. Any
bonus will be paid following the February, 1998, meeting of the Borden, Inc
Board of Directors. A calculation will be made against your personal target
of 60% of your annual base salary, with the incentive payment capped at
$309,000.00.
3. In accordance with the Borden Foods Management Equity Plan, your units will
be repurchased at the Ordinary Purchase Price which is the lesser of: (a)
The Original Purchase Price plus a portion (equal to the vested percentage)
1
<PAGE> 2
of any increase in the Modified Book Value Per Unit; or (b) the Modified
Book Value Per Unit. Because the unaligned businesses are being sold in a
series of transactions over the next few months, you may elect a Modified
Book Value calculation date of: (a) November 30, 1997, the last day of the
month in which your employment terminated; or (b) a date, determined by the
Board of Directors, which closely follows completion of the planned sales.
This date is currently estimated to be January 31, 1998. Vesting will be
determined on the date Modified Book Value is calculated. The election of
your Modified Book Value calculation date is irrevocable. All Unit
Appreciation Rights will be valued on the same date and, in accordance with
the Plan, they will be terminated if they are "underwater."
4. You agree to conduct yourself in a manner that does not disparage the
Company, or is damaging to or otherwise contrary to the Company's best
interests and you agree that this agreement is strictly confidential and
you will not reveal its terms except in connection with an official
investigation or legal process.
5. You also understand that your active participation in all active Company
sponsored employee benefit programs cease on the date of your termination
except that you may elect to continue your medical/dental benefits at
normal active associate contributions through your Severance Period. Any
money due from Company benefit plans, such as vested 401(k) balances will
be paid to you in addition to the amount paid under this Agreement pursuant
to the terms of such plans. You will also receive payment for 4 weeks of
accrued but unused 1997 vacation. You have 31 days from your termination
date to convert group life coverage to an individual policy without the
requirement of a physical examination.
I elect the above described medical/dental continuation during my Severance
Period at normal active associate contribution rates.
2
<PAGE> 3
6. You will be provided with executive outplacement services through Drake
Beam Moren or Right Associates in Columbus or another city where the firm
you select has an office. Selection of the firm must be completed within 21
days of your termination date. The services must be initiated within six
(6) months of your termination date and will continue to the earlier of
your employment or 24 months of outplacement services. The Company does not
warrant or guarantee the results of the services provided and you agree to
hold the Company harmless from any claims in connection with the services
provided. The Company will also reimburse you for documented job search
expenses of up to $2,400.00.
7. In lieu of relocation, you will receive a payment of $192,000, within 30
days of execution of this agreement.
8. You have the opportunity to purchase the cell phone you have been using for
$600 within 30 days of execution of this agreement. It is your
responsibility to establish service through a carrier.
9. You accept the money and benefits to be paid to you under this Agreement as
full settlement of all claims and causes of action arising out of your
employment by the Company and the termination of that employment, except
any vested pension rights.
10. You agree that you are entering into this agreement and release as your own
free decision in order to receive the payments and other benefits described
above. You understand that the Company would not make these payments or
extend these benefits to you without your voluntary consent to this
Agreement.
You understand that by signing this Agreement you are waiving all rights to
reinstatement or future employment with the Company and that you are giving
up your right to, and agreeing not to, file charges or lawsuits; (a) with
respect
3
<PAGE> 4
to any discrimination you believe you have suffered due to age, disability,
race, sex, religion, national origin or any other reason related to your
employment by the Company, or the termination of that employment,
including, but not limited to, any claims under Title VII of the Civil
Rights Act of 1964, the Age Discrimination in Employment Act, the Equal Pay
Act, the Rehabilitation Act of 1973, Section 1981 of the Civil Rights Act
of 1866, the Civil Rights Act of 1991, the Americans with Disabilities Act,
the Family and Medical Leave Act of 1993, the Worker Adjustment and
Retraining Notification Act, the Older Workers Benefit Protection Act, the
Fair Labor Standards Act, and any other federal, state, or local statute or
regulation regarding employment, worker's compensation, discrimination in
employment or termination of employment; (b) with respect to any theory of
libel, slander, breach of contract, wrongful discharge, detrimental
reliance, infliction of emotional distress, tort, or any other theory under
the common law; and (c) with respect to any claims for uncompensated
expenses, severance pay, incentive or bonus pay, overtime pay or any other
form of compensation.
You intend that this Agreement will bar each and every claim, demand and
cause of action above specified, whether known or unknown to you at the
time of execution of this Agreement. As a result, you acknowledge that you
might, in the future, discover claims or facts in addition to or different
from those which you now know or believe to exist with respect to the
subject matters of this Agreement and which, if known or suspected at the
time of executing this Agreement, may have materially affected this
settlement. Nevertheless, you hereby waive any right, claim, or cause of
action that might arise as a result of such different or additional claims
or facts.
You also agree that should you breach this agreement by filing any charge
or beginning any suit as described in this paragraph you will immediately
repay to the Company the sums you have received under paragraph 1, above,
less $100.00 and further agree that in such event the Company will have no
4
<PAGE> 5
further obligation to provide you with additional pay or benefits under
this agreement, but that all other provisions of this agreement will remain
in effect.
11. You agree that, immediately upon execution of the Agreement by all Parties,
you will return to the Company all Company credit cards, keys, customer
lists and records, policy and procedure manuals, price lists, business
contracts and other documents and information belonging to the Company. You
also agree to return all Company property, including but not limited to
cell phones and laptop/personal computers.
12. You recognize that the Company possesses certain business and financial
information about its operations, information about new or envisioned
products or services, manufacturing methods, product research, product
specifications, records, plans, prices, costs, customer lists, concepts and
ideas, and is the owner of proprietary rights in certain systems, methods,
processes, procedures, technical and non-technical information, inventions,
machinery, research and other things which constitutes valuable trade
secrets of the Company. You acknowledge that you have been employed in
positions in which you have had access to such information and that the
Company has a legitimate interest in protecting such confidential and
proprietary information in order to maintain and enhance a competitive edge
within its industry. Accordingly, you agree that you will not use or
remove, duplicate or disclose, directly or indirectly, to any persons or
entities outside the Company any information, property, trade secrets or
other things of value which have not been publicly disclosed. In the event
that you are requested or required in a judicial, administrative or
governmental proceeding to disclose any information that is the subject
matter of this Paragraph, you will provide the Company with prompt written
notice of such request and all related proceedings so that the Company may
seek an appropriate protective order or remedy or, as soon as practicable,
waive your compliance with the provisions of this Paragraph.
5
<PAGE> 6
13. You agree that you will not, directly or indirectly, for a period of two
(2) years following the effective date of this Agreement, engage in work or
other activity the same or similar to work which you performed for the
Company, for any competitors of the pasta or pasta sauce wherever such
competitors are located.
14. You agree that you will not, directly or indirectly, for a period of two
(2) years following the effective date of this Agreement solicit business
from any customer of the company, or from any person responsible for
referring business to the Company, for any competitor of the Company or for
your own interests if you should become a competitor of the Company. You
further agree that you will not, directly or indirectly, solicit or recruit
other employees of the Company to leave their employment with the Company.
15. By entering into this Agreement, the Company does not admit to the breach
of any contractual or other promises to you, and does not admit to the
violation of any federal, state, local or other statute or law, including,
but not limited to, those laws referred to in Paragraph 10 of this
Agreement, and any claimed breaches or violations are hereby specifically
denied.
16. The Parties agree that this Agreement shall be construed in accordance with
Ohio law, and that any action brought by any party hereunder may be
instituted and maintained only in the appropriate court having jurisdiction
over Franklin County, Ohio.
17. In making your decision, you recognize that you have the right to seek
advice and counsel from an attorney, if you so choose. You also have
twenty-one (21) days from the date this agreement is presented to you to
decide whether to sign this agreement.
6
<PAGE> 7
18. You have seven (7) calendar days from the date you sign this Agreement to
cancel it in writing. You also understand that this Agreement will not bind
either you or the Company until after the seven-day period you have to
cancel. No payments will be made under this Agreement until it becomes
binding. You may cancel this Agreement by signing the cancellation box
below (or by any other written signed notice) and delivering it to the
Company within seven days of your signing this Agreement.
Very truly yours,
/s/ C. Robert Kidder
C. Robert Kidder
Chairman, Borden Foods Corporation
November 6, 1997
ACCEPTED:
/s/ XXXXXXXXXXXXX
- -------------------------
Associate's Signature
Date: 11/7/97 WITNESS:
---------
At Upper Arlington, OH /s/ XXXXXXXXXXXXXXXXXXX
----------------------- ------------------------------
[Location]
CANCELLATION NOTICE:
(To cancel this Agreement, sign below and deliver this copy of the Agreement to
the Company within 7 days of the date you signed the Agreement.)
I hereby cancel this Agreement.
- -------------------------- ------------------------------
Date Signature
7
<PAGE> 1
EXHIBIT 21
Page 1 of 4
BORDEN, INC.
SUBSIDIARIES OF REGISTRANT AS OF DECEMBER 31, 1997
--------------------------------------------------
<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 UnitedKingdom
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
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
Borden Chemical, Inc. 100 Delaware
Borden Chemical International, Inc. 100 Delaware
Compania Quimica Borden, S.A. 100 Panama
Melamine Chemicals, Inc. 100 Delaware
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
Quimica Borden Espana, S.A. 8.35 Spain
Italcolor, S.A. 39.38 Uruguay
Alba Quimica Industria e Comercio Ltda. 100 Brazil
</TABLE>
<PAGE> 2
EXHIBIT 21
Page 2 of 4
BORDEN, INC.
SUBSIDIARIES OF REGISTRANT AS OF DECEMBER 31, 1997
--------------------------------------------------
<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>
Alba Amazonia S.A. Industrias Quimicas 99.9 Brazil
Alba Nordeste Industrias Quimica Ltda. 100 Brazil
The Wenham Corp., S.A. 100 Uruguay
Bexley Finance, S.A. 100 Panama
Borden Chimie, S.A. 100 France
Borden International Philippines, Inc. 98 Philippines
Compania Casco S.A. Industrial y Comercial 94.2 Argentina
Compania Quimica Borden Ecuatoriana, S.A. 83.3 Ecuador
Gun Ei Borden International Resin Co. Ltd. 50 Japan
Italcolor S.A. 60.62 Uruguay
Quimica Borden Espana S.A. 87.39 Spain
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 Japan, Inc. 100 Japan
Elmer's Holdings, Inc. 98.5 Delaware
Elmer's Products, Inc. 100 Delaware
Elmer's Products Canada, Inc. 100 Canada
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. 77.28 Delaware
Zeelandia Investerings Partnership 100 New York
T. K. Partner, Inc. 100 Delaware
Zip Corporation 100 Delaware
Zcan Investments Ltd. 100 Canada
<FN>
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.
</TABLE>
<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
- -------------------------- ------ ------------
OTHERS
- ------
<S> <C> <C>
Borden Foods Holdings Corporation 100 Delaware
Borden Foods Corporation 100 Delaware
Albadoro S.p.A. 100 Italy
Monder Aliment S.p.A. 100 Italy
BDH One de Venezuela C. A. 100 Venezuela
BF Foods International Corp. 100 Delaware
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
Compania Internacional de Ventas, S.A. 100 Panama
Borden De Costa Rica S.A. 100 Costa Rica
Borden De Guatemala, S.A. 100 Guatemala
Borden Foods de ElSalvadore S.A. 99.8 El Salvadore
Compania Chiricana de Leche, S.A. 96.8 Panama
Inthesa, S.A. (D) 100 Panama
Borden (Proprietary) Limited 100 South Africa
Borden Marketing (Pty) Ltd. 100 South Africa
Borden Foods (Pty.) Ltd. 100 South Africa
Etiniser (Pty.) Ltd. 100 South Africa
Codoveca C por A. 100 Dominican Republic
Fabrica de Productos Borden, S.A. 100 Panama
<FN>
NOTES:
(A) Inactive companies.
(D) A nominee company; an inactive company originally created to hold stock in
another company.
</TABLE>
<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>
Helados Borden, S.A. 100 Panama
Alimentos Nutritivos S.A. 100 Panama
Pastas Alimenticias La Imperial, S.A. 100 Panama
Naxos S.A. 100 Panama
BF (Colombia) LLC 100 Delaware
BFC (Alisa) SDAD LtdA. 100 Panama
BFC (Cicolac) Ltda. 100 Panama
BFC (Colombia) S.A. 100 Panama
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
BFC Seven Corporation 100 Delaware
Borden Foods International Corp. 100 Delaware
Borden Foods Canada Corporation 100 Canada
Borden International, Inc. 100 Delaware
Borden International Foods (Asia-Pacific) Ltd. 100 Hong Kong
Borden, S.A. 100 Panama
Chef's of the World Ltd. 100 United Kingdom
Productos Especiales, S.A. (D) 100 Panama
Cicolac, Ltda. 100 Colombia
Ecumilk S.A. 100 Ecuador
Borden Redevelopment Corp. 100 Missouri
International Gourmet Specialties Company 100 New Jersey
Prince Company, Inc., The (A) 100 Massachusetts
Qihe Dairy Corp. Ltd. 50 Republic of China
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. 100 Delaware
Moore's Quality Snack Foods, Inc. (A) 100 Virginia
<FN>
NOTES:
(A) Inactive companies.
(D) A nominee company; an inactive company originally created to hold stock in
another company.
</TABLE>
<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., Borden,
Inc. and Affiliates, Borden Foods Holdings Corporation and Wise Holdings, Inc.
dated March 13, 1998 appearing in this Annual Report on Form 10-K of Borden,
Inc. for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Columbus, Ohio
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 184
<SECURITIES> 0
<RECEIVABLES> 242
<ALLOWANCES> 9
<INVENTORY> 129
<CURRENT-ASSETS> 861
<PP&E> 508
<DEPRECIATION> 361
<TOTAL-ASSETS> 2,206
<CURRENT-LIABILITIES> 787
<BONDS> 788
0
614
<COMMON> 2
<OTHER-SE> (537)
<TOTAL-LIABILITY-AND-EQUITY> 2,206
<SALES> 1,488
<TOTAL-REVENUES> 1,488
<CGS> 1,125
<TOTAL-COSTS> 1,125
<OTHER-EXPENSES> 264
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 93
<INCOME-PRETAX> 39
<INCOME-TAX> 22
<INCOME-CONTINUING> 17
<DISCONTINUED> 204
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 221
<EPS-PRIMARY> .74
<EPS-DILUTED> .74
</TABLE>
