<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
- - EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1998
-------------------------------------------------
Commission file number I-71
---------------------------------------------------------
BORDEN, INC.
New Jersey 13-0511250
- ------------------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
180 East Broad Street, Columbus, OH 43215
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(Address of principal executive offices)
(614) 225-4000
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant(1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No__
Number of shares of common stock, $0.01 par value, outstanding as of the close
of business on May 14, 1998: 198,974,994
<PAGE> 2
BORDEN, INC.
INTRODUCTION
The following filing with the Securities and Exchange Commission ("SEC") by
Borden, Inc. ("the Company") presents four separate financial statements:
Borden, Inc. Consolidated Financial Statements, Borden, Inc. and Affiliates
Condensed Combined Financial Statements, the Condensed Financial Statements of
Wise Holdings, Inc. ("Wise Holdings") and Condensed Financial Statements of
Borden Foods Holdings Corporation ("Foods Holdings"). The consolidated
statements present the Company after the effect of the sales of (i) the
Company's former salty snacks business ("Wise") to Wise Holdings and its
subsidiaries and (ii) the Company's former domestic and international foods
business ("Foods") to Foods Holdings and its subsidiaries, as explained in Note
1 to the consolidated and combined financial statements. The Company, Wise
Holdings, and Foods Holdings are controlled by BW Holdings, LLC ("BWHLLC"). The
consolidated financial statements are those of the Company, which is the SEC
Registrant.
The Borden, Inc. and Affiliates ("the Combined Companies") condensed 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 condensed financial
statements are included because management of the Company continues to control
significant financial and managerial decisions with respect to Wise Holdings and
Foods Holdings. In accordance with rule 3-10 of Regulation S-X, the condensed
financial statements of Wise Holdings and Foods Holdings are included in Part II
of this Quarterly Report on Form 10-Q because Wise Holdings and Foods Holdings
are guarantors of the Company's credit facility and all of the Company's
outstanding publicly held debt. The Combined Companies condensed 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.
2
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BORDEN, INC.
INDEX
PART 1 - FINANCIAL INFORMATION
BORDEN, INC. ("BORDEN") CONDENSED CONSOLIDATED AND BORDEN, INC.
AND AFFILIATES CONDENSED COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Condensed Consolidated Statements of Operations and Comprehensive Income,
three months ended March 31, 1998 and 1997.................................................................. 4
Condensed Consolidated Balance Sheets, March 31, 1998 and December 31, 1997.................................... 6
Condensed Consolidated Statements of Cash Flows, three months ended March 31, 1998 and 1997.................... 8
Condensed Consolidated Statement of Shareholders' Equity, three months ended March 31, 1998.................... 10
Condensed Combined Statements of Operations and Comprehensive Income
three months ended March 31, 1998 and 1997.................................................................. 11
Condensed Combined Balance Sheets, March 31, 1998 and December 31, 1997........................................ 12
Condensed Combined Statements of Cash Flows,
three months ended March 31, 1998 and 1997.................................................................. 14
Condensed Combined Statement of Shareholders' Equity, three months ended
March 31, 1998.............................................................................................. 16
Notes to Condensed Consolidated and Condensed Combined Financial Statements.................................... 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................... 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................................................... 26
Item 6. Exhibits, Guarantor Financial Statement Schedules and Reports on Form 8-K................................... 26
</TABLE>
3
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED)
BORDEN, INC. Three Months Ended
March 31,
(In millions, except per share data) 1998 1997
- --------------------------------------------------------------------------------
Net sales $ 367.1 $ 361.7
Cost of goods sold 274.8 275.2
-------- --------
Gross margin 92.3 86.5
-------- --------
Distribution expense 12.3 12.4
Marketing expense 19.4 18.9
General & administrative expense 35.4 30.8
-------- --------
Operating income 25.2 24.4
-------- --------
Interest expense 16.4 23.5
Other non-operating (income) expense (5.9) 4.2
Affiliated interest expense, net of affiliated interest
income of $1.1 and $6.1, respectively 4.7 (5.0)
-------- --------
Income from continuing operations
before income tax 10.0 1.7
Income tax expense 4.2 3.5
-------- --------
Income (loss) from continuing operations 5.8 (1.8)
-------- --------
Discontinued operations:
Income from operations, net of tax 2.3 7.1
Income from disposal, net of tax 26.0 --
-------- --------
Net income 34.1 5.3
Preferred stock dividends (18.4) (18.4)
-------- --------
Net income (loss) applicable to common stock $ 15.7 $ (13.1)
======== ========
Comprehensive income (See Note 5) $ 36.3 $ (2.6)
======== ========
4
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED) (continued)
BORDEN, INC.
Three Months Ended
March 31,
(In millions, except per share data) 1998 1997
- --------------------------------------------------------------------------------
Basic and Diluted Per Share Data
Income (loss) from continuing operations $ 0.03 $ (0.01)
Discontinued operations:
Income from operations 0.01 0.04
Income from disposal 0.13 --
---------- ----------
Net income 0.17 0.03
Preferred stock dividends (0.09) (0.09)
---------- ----------
Net income (loss) applicable to common stock $ 0.08 $ (0.06)
========== ==========
Dividends per common share $ 0.07 $ 0.06
Dividends per preferred share $ 0.75 $ 0.75
Average number of common shares outstanding
during the period 199.0 199.0
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See Notes to Condensed Consolidated and Combined Financial Statements
5
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<TABLE>
<CAPTION>
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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN, INC.
(In millions)
March 31, December 31,
ASSETS 1998 1997
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<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 867.3 $ 183.6
Accounts receivable (less allowance for doubtful accounts of $10.0
and $9.4, respectively) 257.3 242.2
Amount due from unconsolidated affiliate 6.2
Inventories:
Finished and in-process goods 72.5 74.8
Raw materials and supplies 58.5 54.3
Deferred income taxes 110.5 106.1
Other current assets 27.7 34.9
Net assets of discontinued operations (See Note 4) -- 165.2
---------- ----------
1,400.0 861.1
INVESTMENTS AND OTHER ASSETS
Investments 117.6 109.5
Deferred income taxes 118.4 170.4
Prepaid pension assets 135.8 140.2
Other assets 33.1 34.3
Assets sold under contractual arrangement (net of allowance
of $62.4 and $609.6) (See Note 2) 45.3 302.1
---------- ----------
450.2 756.5
PROPERTY AND EQUIPMENT
Land 24.1 23.5
Buildings 109.8 106.8
Machinery and equipment 761.8 738.4
---------- ----------
895.7 868.7
Less accumulated depreciation (372.4) (360.8)
---------- ----------
523.3 507.9
INTANGIBLES 79.6 80.4
---------- ----------
TOTAL ASSETS $ 2,453.1 $ 2,205.9
========== ==========
- --------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
6
<PAGE> 7
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN, INC.
(In millions, except share data)
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt payable within one year $ 12.3 $ 6.9
Accounts and drafts payable 142.8 137.3
Income taxes payable 334.0 309.6
Loan payable to unconsolidated affiliate 599.7
Other current liabilities 344.8 332.8
---------- ----------
1,433.6 786.6
---------- ----------
OTHER LIABILITIES
Liabilities sold under contractual arrangement 41.6 230.1
Long-term debt 553.3 788.3
Non-pension post-employment benefit obligations 220.2 226.3
Other long-term liabilities 106.6 94.9
---------- ----------
921.7 1,339.6
---------- ----------
Commitments and Contingencies (Note 7)
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 355.7 384.0
Receivable from parent (435.6) (464.1)
Accumulated other comprehensive income (45.8) (48.0)
Accumulated deficit (392.9) (408.6)
---------- ----------
97.8 79.7
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,453.1 $ 2,205.9
========== ==========
- ---------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
7
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<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN, INC. Three Months Ended
March 31,
(In millions) 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS (USED IN) OPERATING ACTIVITIES
Net income $ 34.1 $ 5.3
Adjustments to reconcile net income to net
cash (used in) operating activities:
(Gain) on disposal of discontinued operations (90.7) --
Deferred tax provision 61.4 (17.5)
Depreciation and amortization 13.0 8.7
Unrealized (gain) on interest rate swap (1.7) (4.9)
Loss on net assets sold under contractual arrangement 1.4 9.3
Due from affiliate (6.3) --
Restructuring -- (2.2)
Net change in assets and liabilities:
Trade receivables (13.5) (21.3)
Inventories 1.4 2.9
Trade payables 7.0 (5.1)
Income taxes 26.2 20.3
Other assets 2.0 12.3
Other liabilities (46.3) (52.0)
Discontinued operations, working capital, cash
and non cash charges 3.0 (2.2)
-------- -------
(9.0) (46.4)
-------- -------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (16.3) (25.2)
Proceeds from the divestiture of businesses 304.8 13.7
Purchase of business (14.4) --
Return on investment in affiliate 66.9 2.1
-------- -------
341.0 (9.4)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net short-term debt payments 5.4 (1.3)
Borrowings of long-term debt -- 50.3
Repayment of long-term debt (235.0) --
Affiliated borrowings 599.7 --
Interest received from parent 13.3 12.7
Common stock dividends paid (13.3) (12.7)
Preferred stock dividends paid (18.4) (18.4)
-------- -------
351.7 30.6
-------- -------
- --------------------------------------------------------------------------------------
</TABLE>
8
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<TABLE>
<CAPTION>
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
BORDEN, INC.
Three Months Ended
March 31,
(In millions) 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in cash and equivalents $ 683.7 $ (25.2)
Cash and equivalents at beginning
of period 183.6 109.5
-------- --------
Cash and equivalents at end
of period $ 867.3 $ 84.3
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest $ 20.4 $ 17.7
Taxes 2.2 5.9
Non-cash activity:
Distribution of note receivable from Company's parent
to cancel options 28.5
Investment retained in Decorative Products 10.5
Capital contribution by parent 6.1
- --------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
9
<PAGE> 10
<TABLE>
<CAPTION>
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CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
BORDEN, INC.
(In millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Preferred Common Paid-in Receivable Other Accumulated
Stock Stock Capital from Comprehensive Deficit Total
Parent Income
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ 614.4 $ 2.0 $ 384.0 $ (464.1) $ (48.0) $ (408.6) $ 79.7
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 34.1 34.1
Cash dividends-preferred stock (18.4) (18.4)
Cash dividends-common stock (13.0) (13.0)
Translation adjustments and other 2.2 2.2
Interest accrued on notes from parent 8.0 8.0
Capital contribution from parent 6.1 6.1
Cancel option on Decorative Products (29.4) 28.5 (0.9)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 $ 614.4 $ 2.0 $ 355.7 $ (435.6) $ (45.8) $ (392.9) $ 97.8
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
10
<PAGE> 11
- --------------------------------------------------------------------------------
CONDENSED COMBINED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED)
BORDEN, INC. AND AFFILIATES Three Months Ended
March 31,
(In millions) 1998 1997
- --------------------------------------------------------------------------------
Net sales $ 643.6 $ 836.8
Cost of goods sold 442.1 569.9
-------- --------
Gross margin 201.5 266.9
-------- --------
Distribution expense 33.8 40.9
Marketing expense 93.3 152.4
General & administrative expense 57.3 59.0
Net (gain) on divestiture of business (301.4) --
-------- --------
Operating income 318.5 14.6
-------- --------
Interest expense 16.9 23.8
Other non-operating (income) (8.0) (6.8)
-------- --------
Income (loss) from continuing operations
before income tax 309.6 (2.4)
Income tax expense (benefit) 66.8 (1.2)
-------- --------
Income (loss) from continuing operations 242.8 (1.2)
-------- --------
Discontinued operations:
Income from operations, net of tax 2.3 7.1
Income from disposal, net of tax 26.0 --
-------- --------
Net income 271.1 5.9
Affiliate's share of income (128.7)
Preferred stock dividends (18.4) (18.4)
-------- --------
Net income (loss) applicable to common stock $ 124.0 $ (12.5)
======== ========
Comprehensive income (See Note 5) $ 271.7 $ (16.2)
======== ========
- --------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Combined Financial Statements
11
<PAGE> 12
- --------------------------------------------------------------------------------
CONDENSED COMBINED BALANCE SHEETS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
(In millions)
March 31, December 31,
ASSETS 1998 1997
- -------------------------------------------------------------------------------
CURRENT ASSETS
Cash and equivalents $ 877.9 $ 198.6
Accounts receivable (less allowance for doubtful
accounts of $15.1 and $16.7, respectively) 365.1 425.6
Inventories:
Finished and in-process goods 146.9 192.1
Raw materials and supplies 86.8 101.2
Deferred income taxes 160.4 149.3
Other current assets 47.7 67.1
Net assets of discontinued operations (See Note 4) -- 165.2
-------- --------
1,684.8 1,299.1
INVESTMENTS AND OTHER ASSETS
Investments 117.6 109.5
Deferred income taxes 119.5 223.6
Prepaid pension assets 146.9 151.2
Other assets 36.2 38.7
-------- --------
420.2 523.0
PROPERTY AND EQUIPMENT
Land 40.7 42.2
Buildings 238.9 255.1
Machinery and equipment 1,174.5 1,227.9
-------- --------
1,454.1 1,525.2
Less accumulated depreciation (699.0) (731.8)
-------- --------
755.1 793.4
INTANGIBLES 419.9 434.2
-------- --------
TOTAL ASSETS $3,280.0 $3,049.7
======== ========
- --------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Combined Financial Statements
12
<PAGE> 13
- --------------------------------------------------------------------------------
CONDENSED COMBINED BALANCE SHEETS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
(In millions)
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
- --------------------------------------------------------------------------------
CURRENT LIABILITIES
Debt payable within one year $ 30.4 $ 28.0
Accounts and drafts payable 227.2 248.6
Income taxes payable 373.9 353.0
Other current liabilities 600.2 490.5
-------- --------
1,231.7 1,120.1
-------- --------
OTHER LIABILITIES
Long-term debt 558.7 794.9
Non-pension post-employment
benefit obligations 239.1 245.5
Other long-term liabilities 134.6 135.2
-------- --------
932.4 1,175.6
-------- --------
Commitments and Contingencies (See Note 7)
SHAREHOLDERS' EQUITY
Preferred stock 614.4 614.4
Common stock 2.0 2.0
Paid in capital 636.9 666.5
Receivable from parent (435.6) (464.1)
Affiliate's interest in subsidiary 333.3 203.3
Accumulated other comprehensive income (72.2) (181.2)
Retained earnings (deficit) 37.1 (86.9)
-------- --------
1,115.9 754.0
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,280.0 $3,049.7
======== ========
- --------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Combined Financial Statements
13
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<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
Three Months Ended
March 31,
(In millions) 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS (USED IN) OPERATING ACTIVITIES
Net income $ 271.1 $ 5.9
Adjustments to reconcile net income to net
cash (used in) from operating activities:
(Gain) on disposal of discontinued operations (90.7) --
Deferred tax provision 97.2 18.9
Depreciation and amortization 23.6 23.2
Net (gain) on divestiture of business (301.4) --
Unrealized (gain) on interest rate swap (1.7) (4.9)
Restructuring -- (2.2)
Net change in assets and liabilities:
Trade receivables 22.0 7.6
Inventories 11.5 9.3
Trade payables (13.9) (36.1)
Income taxes 22.7 (33.6)
Other assets (29.9) 13.3
Other liabilities (48.1) (48.7)
Discontinued operations, working capital, cash
and non cash charges 3.0 (2.2)
-------- -------
(34.6) (49.5)
-------- -------
CASH FLOWS FROM (USED IN)INVESTING ACTIVITIES
Capital expenditures (22.5) (33.9)
Proceeds from the divestiture of businesses 994.3 13.7
Proceeds from the sale of fixed assets 8.8 --
Purchase of business (14.4) --
-------- -------
966.2 (20.2)
-------- -------
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES
Net short-term debt payments 1.4 0.8
Borrowings of long-term debt -- 49.5
Repayment of long-term debt (235.3) --
Interest received from parent 13.3 12.7
Common stock dividends paid (13.3) (12.7)
Preferred stock dividends paid (18.4) (18.4)
-------- -------
(252.3) 31.9
-------- -------
- ------------------------------------------------------------------------------------
</TABLE>
14
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<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)
BORDEN, INC. AND AFFILIATES
Three Months Ended
March 31,
(In millions) 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in cash and equivalents $ 679.3 $ (37.8)
Cash and equivalents at beginning
of period 198.6 144.7
-------- --------
Cash and equivalents at end
of period $ 877.9 $ 106.9
======== ========
Supplemental Disclosures of Cash Flow Information
Cash paid:
Interest $ 21.2 $ 21.7
Taxes 34.7 18.7
Non-cash activity:
Distribution of note receivable from Company's parent
to cancel options 28.5
Investment retained in Decorative Products 10.5
Capital contribution by parent 6.1
Affiliate's share of income 128.7
- ----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
15
<PAGE> 16
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CONDENSED COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
BORDEN, INC. AND AFFILIATES
(In millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Preferred Common Paid-in Receivable Affiliate's Other Retained
Stock Stock Capital from Interest in Comprehensive Earnings Total
Parent Subsidiary Income (Deficit)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $614.4 $2.0 $666.5 $(464.1) $203.3 $(181.2) $(86.9) $ 754.0
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 271.1 271.1
Cash dividends-preferred (18.4) (18.4)
Cash dividends-common stock (13.0) (13.0)
Translation adjustments and other 109.0 109.0
Interest accrued on notes from parent 8.0 8.0
Cancel option on Decorative Products (29.4) 28.5 (0.9)
Capital contribution from parent 6.1 6.1
Affiliate's interest in subsidiary (1.3) 130.0 (128.7)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 $614.4 $2.0 $636.9 $(435.6) $333.3 $ (72.2) $ 37.1 $1,115.9
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
16
<PAGE> 17
NOTES TO CONDENSED CONSOLIDATED
AND CONDENSED COMBINED FINANCIAL STATEMENTS
(Dollars in millions except per share amounts and as otherwise indicated)
1. BASIS OF PRESENTATION
Borden, Inc. (the "Company") conducts operations in the following
businesses: adhesives and resins ("chemical"), and consumer adhesives and
infrastructure management services ("consumer products and services").
Borden, Inc. and Affiliates (the "Combined Companies") includes the
financial condition and results of operations of the Company with the
financial condition and results of operations of the Company's former
international and domestic food operations ("Foods") and former salty
snacks business ("Wise").
The Company's principal lines of business formerly included Foods and
Wise. Subsidiaries of BWHLLC, an affiliate of the Company's parent,
together with subsidiaries of Wise Holdings, Inc. ("Wise Holdings") and
subsidiaries of Borden Foods Holdings Corporation ("Foods Holdings,")
purchased Wise and Foods on July 2, 1996 and October 1, 1996,
respectively. As a result of these sales, Wise and Foods, as of their
respective sale dates, are no longer legally part of Borden, Inc. (the
"Registrant") on a consolidated basis. However, management of the
Registrant continues to exercise significant operating and financial
control over Wise and Foods. In addition, Wise Holdings and Foods Holdings
provide financial guarantees to obligations under the Company's credit
facility and all of the Company's outstanding publicly held debt. Because
of the aforementioned control and guarantees, the Company has included,
supplementally in this filing, the Combined Companies financial condition
and results of operations and cash flows. The Combined Companies present
financial information on a basis consistent with that upon which credit
was originally extended to the Company.
The accompanying unaudited interim consolidated and combined financial
statements contain all adjustments, consisting only of normal adjustments,
which in the opinion of management are necessary for a fair statement of
the results for the interim periods. Results for the interim periods are
not necessarily indicative of results for the full years.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ASSETS AND LIABILITIES HELD UNDER CONTRACTUAL ARRANGEMENTS - Because
management of the Company exercises significant control over Wise and
Foods, the assets and liabilities of Wise and Foods, as of their
respective sale dates, are classified as "sold under contractual
arrangements" in the consolidated financial statements. In addition, any
future losses incurred by Wise and Foods will be recorded in the
consolidated financial statements to the extent of the Company's net
investment in Wise and Foods. During the first quarter of 1998 Foods
Holdings repaid its note to the Company relating to the October 1, 1996
purchase of Foods. This allowed the Company to treat the transaction as a
divestiture, and as such the investment in Foods is no longer carried on
the consolidated balance sheet. At March 31, 1998, the Company's net
investment in Wise was $3.7. The December 31, 1997 net investment totaled
$6.5 for Wise and $65.5 for Foods. During the first quarter of 1998 and
1997, the Company recorded losses totaling $1.4 and $9.3. The losses are
recorded as other non-operating expense in the consolidated results of
operations.
The Combined Companies continue to report Wise and Foods at the Company's
historical values since they remain members of the controlled group and
since in management's best estimate, future operating cash flows from Wise
and Foods are expected to exceed the historical carrying values of the
businesses.
RECLASSIFICATION - Certain prior year amounts have been reclassified to
conform with the 1998 presentation.
17
<PAGE> 18
3. ASSET WRITE-DOWNS AND BUSINESS REALIGNMENT
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, and to build its core business through strategic acquisitions and
investments in the existing business. The following describes business
redesign activities during 1998.
1998
On February 6, 1998, the Company completed the acquisition of the resins
and compounds division ("PMC") of Sun Coast Industries, Inc. for $14.4 in
cash. The acquisition was accounted for using the purchase method and
accordingly its results of operations have been included from the date of
acquisition.
On January 24, 1998, the Combined Companies completed the sale of its
Signature Flavor business. Signature Flavor was purchased by Eagle
Family Foods, Inc., a newly formed entity managed by GE Investments and
Warburg, Pincus & Co. LLC. The sale generated proceeds of $376.5 and an
after-tax gain of $235.1.
On February 12, 1998, the Combined Companies 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. The Combined Companies received $313.0 for
the sale of these operations. An accrued after-tax loss of $10.9
was recorded in the 1997 financial statements.
In the second quarter of 1998, the Company completed the divestiture of
its commercial and industrial wallcoverings business. Proceeds from the
sale were approximately $16.0, and the loss on the sale was recorded in a
prior period. The business was previously classified as a business held
for sale.
4. 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 1998 and 1997 statements of
operations and cash flows. In addition, net assets relating to these
businesses of $165.2 at December 31, 1997, have been reclassified to
discontinued operations in the 1997 consolidated and combined balance
sheets.
Decorative Products
-------------------
On March 13, 1998, the Company completed the sale of its Decorative
Products business to Blackstone Capital Partners III Merchant Banking
Fund, L.P. Proceeds consisted of about $304.8 in cash plus a retained
equity interest of 11 percent. The Company recorded an after tax gain of
$26.0 in discontinued operations during the first quarter of 1998.
Immediately prior to the transaction the Company canceled options on all
of the common stock of the Decorative Products business. The options were
issued in 1997 to BWHLLC for $31.0 in notes receivable from the Company's
parent. The cancellation payment of $28.5, also made in notes receivable
from the Company's parent, was based on an independent valuation. The
resulting $0.9 net gain on the transaction is recorded in paid in capital.
18
<PAGE> 19
Dairy
-----
On September 4, 1997, the Company completed the sale of its dairy
operations to Mid-America Dairymen, Inc. Net proceeds consisted of $405.2
in cash, which was used to pay down debt and to invest in existing
businesses.
The results indicated below for Decorative Products and Dairy operations
have been reported separately as discontinued operations in the
consolidated and combined statements of operations.
THREE MONTHS ENDED MARCH 31,
1998 1997
- --------------------------------------------------------------------------------
Net sales $ 73.2 $ 299.5
Income before income taxes 3.5 13.7
Income tax expense 1.2 6.6
Income from discontinued operations 2.3 7.1
- --------------------------------------------------------------------------------
5. COMPREHENSIVE INCOME
Comprehensive income was computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
---------------------------
CONSOLIDATED COMBINED
------------ --------
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 34.1 $ 5.3 $ 271.1 $ 5.9
Foreign currency translation adjustments 2.2 (7.9) 109.0 (22.1)
Less: Reclassification adjustment (108.4)
------- ------ --------- ------
Comprehensive Income $ 36.3 $ (2.6) $ 271.7 $(16.2)
- -------------------------------------------------------------------------------------------------------
</TABLE>
The reclassification adjustment represents the accumulated translation
adjustment recognized on the sale of the Combined Companies' KLIM
business.
6. RELATED PARTY TRANSACTIONS
During the first quarter of 1998, Foods Holdings repaid its note
receivable to the Company that stemmed from its October 1, 1996, purchase
of Foods. The note repayment ends the Company's remaining financial
interest in Foods. As a result, the Company eliminated assets and
liabilities held under contractual arrangements in the December 31, 1997,
consolidated balance sheet. In 1998 the Company accounts for transactions
with Foods as unconsolidated affiliated balances, not as an investment.
The Company is engaged in various transactions with Foods in the ordinary
course of business. These transactions include the processing of payroll
and active and retiree group claims. Foods reimburses the Company for
payments for general disbursements and group insurance. In addition Foods
reimburses the Company for the payment of certain taxes. The amount due
from Foods at March 31, 1998 was $6.2.
19
<PAGE> 20
In addition, Foods invested cash not used in operations with the Company.
At March 31, 1998, Foods had $599.7 invested with the Company, which is
reflected as a net loan payable to an unconsolidated affiliate in the
consolidated balance sheet.
Subsequent Event
In the second quarter of 1998, the Combined Companies distributed $270.0
to an affiliate that is not within the Combined Companies controlled
group. The distribution was consideration for an ownership interest in the
trademarks that were sold with the divested businesses. In addition $346.0
was loaned on a short-term basis at rates that approximate market
conditions, to Corning Consumer Products Company, which was purchased by
the Company's parent on April 1, 1998. The loan was repaid during the
second quarter of 1998.
7. 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 each accrued approximately $22.7
and $23.4 at March 31, 1998, and December 31, 1997, respectively, for
probable environmental remediation and restoration liabilities. 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.
LEGAL MATTERS - The Company has recorded $35.0 in liabilities on a
combined basis and $20.4 on a consolidated basis at March 31, 1998, for
legal costs in amounts that it believes are probable and reasonably
estimable. These liabilities at December 31, 1997, totaled $35.8 on a
combined basis and $21.0 on a consolidated basis. Actual costs are not
expected to exceed these amounts. 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 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.
20
<PAGE> 21
PART I FINANCIAL INFORMATION
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Following is a comparison of sales and operating income by business unit.
(Dollars in millions)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31
---------------------------
NET SALES 1998 1997
- --------- ---- ----
Chemical $ 319.7 $ 318.3
Consumer products
and services 19.3 17.8
Businesses held for sale 28.1 25.6
-------- --------
CONSOLIDATED NET SALES 367.1 361.7
Foods ongoing 149.6 205.3
Foods Unaligned 73.0 213.3
-------- --------
Total Foods 222.6 418.6
Wise 53.9 56.5
-------- --------
COMBINED NET SALES $ 643.6 $ 836.8
======== ========
OPERATING INCOME
- ----------------
Chemical $ 34.1 $ 30.8
Consumer products
and services (0.2) 1.1
Corporate (8.4) (8.9)
-------- --------
Subtotal 25.5 23.0
Businesses held for sale (0.3) 1.4
-------- --------
CONSOLIDATED OPERATING INCOME 25.2 24.4
Foods ongoing (6.6) (13.2)
Foods Unaligned 1.4 4.8
Gain on sale of Unaligned Foods business 301.4
-------- --------
Total Foods 296.2 (8.4)
Wise (2.1) (1.4)
Combining adjustment (0.8)
-------- --------
COMBINED OPERATING INCOME $ 318.5 $ 14.6
======== ========
- --------------------------------------------------------------------------------
21
<PAGE> 22
CONSOLIDATED AND COMBINED THREE MONTHS ENDED MARCH 31, 1998 VERSUS THREE MONTHS
ENDED MARCH 31, 1997
Consolidated
Consolidated net sales rose to $367.1 million in the first quarter of 1998 from
$361.7 million in 1997. The increase of $5.4 million or just over 1% is the
result of slight increases in all three of the Company's businesses. Operating
income also improved by $0.8 million or 3%, due to an 11% increase in Chemical
operating results due to improved margins, offset in part by less favorable
results in the Consumer products and services segment.
Combined
Combined sales decreased $193.2 million to $643.6 million in the first quarter
of 1998, from $836.8 million in 1997. The 23% decrease is due mainly to the
absence of sales from Foods businesses divested in late 1997 and early 1998,
compounded by a planned reduction in pasta volume, reflecting Foods management's
decision to exit from the unprofitable private label business and unprofitable
markets. Operating income for the Combined Companies improved $303.9 million to
$318.5 million, the result of a $301.4 million gain on the sale of Unaligned
Foods businesses in early 1998 and, to a lesser extent, by improved margins in
the pasta business.
Chemical
Chemical sales improved slightly for first quarter, up $1.4 million to $319.7
million from $318.3 million in 1997. The acquisition of Melamine Chemicals in
late 1997 and the acquisition of the resins and compounds business of Sun Coast
in early 1998 contributed $15.5 million to first quarter 1998 sales. The
favorable impact of these acquisitions was substantially offset by the effect of
unfavorable currency exchange rates and lower volume when compared to 1997,
especially in Asia Pacific and Latin America. In addition, increased volume in
forest products was substantially offset by lower prices resulting from
pass-through of lower raw material costs.
Chemical operating income improved $3.3 million or 11% from the first quarter of
1997 to $34.1 million. This improvement reflects the 1997 acquisition of
Melamine Chemicals and improved volume for forest products, partially offset by
the impact of lower volumes in all three international regions and higher
general and administrative expenses.
Consumer products and services
Consumer products and services sales improved $1.5 million or 8% to $19.3
million in the first quarter of 1998. This improvement is due partially to
increasing end-user consumption in the consumer adhesives business, which
management expects to result in improved sales in the next quarter as mass
merchant orders increase to match end-user consumption. The infrastructure
management services business also showed a $0.9 million increase in sales to
third parties due to transition services provided to businesses divested by the
Company.
Operating results showed a $1.3 million decrease to a loss of $0.2 million. This
decline was the result of higher administrative expenses in the infrastructure
management services business, including depreciation of information systems
added during 1997. Consumer adhesives results were flat compared to 1997.
Corporate
Corporate operating results were relatively flat, improving $0.5 million to
expense of $8.4 million in the first quarter, compared to $8.9 million in 1997.
Businesses held for sale
Sales improved 10% to $28.1 million in the first quarter of 1998 from $25.6
million in 1997. The sales increase did not translate into improved operating
income, which declined to a $0.3 million loss from $1.4 million income in 1997
due to higher manufacturing costs. The remaining business (a commercial and
industrial decorative surfacing products operation) was sold on April 29, 1998.
The loss on the sale of this business was accrued in a prior year.
22
<PAGE> 23
Foods
Sales for Foods' ongoing operations declined $55.7 million or 27% to $149.6
million in the first quarter of 1998 from $205.3 million in 1997. This decrease
was the expected result of a reduction in pasta volume throughout 1997 due to
management's decision to exit from the unprofitable private label pasta business
and unprofitable markets, and by the elimination of low margin product lines, as
well as lower volumes in core branded pasta. Sales for Unaligned Foods
businesses decreased $140.3 million from $213.3 million to $73.0 million. This
decrease is the result of the absence of sales from certain Foods product lines,
which were divested in the first quarter of 1998, and the cheese and candy
coated popcorn businesses which were divested in the fourth quarter of 1997.
Operating results for ongoing operations improved $6.6 million in 1998 to a loss
of $6.6 million from a loss of $13.2 million in 1997. The improvement is
primarily due to lower administrative costs, slightly higher gross margins due
to the exit from unprofitable private label pasta and unprofitable markets, and
improved manufacturing efficiencies from management's ongoing efforts to reduce
pasta conversion costs. These improvements were partially offset by lower
volumes and higher raw materials costs in branded pasta. Foods' Unaligned
businesses operating income was $302.8 million in 1998, up from $4.8 million in
1997. This increase was the result of a $301.4 million gain on the sale of the
Signature Flavors business.
Wise
Wise sales in the first quarter of 1998 decreased $2.6 million to $53.9 million
from $56.5 million in 1997. The slight decrease was mainly the result of
increased competitive activity, with many competitors using deep feature pricing
in attempts to gain market share. Operating results declined $0.7 million to a
$2.1 million loss from a $1.4 million loss in 1997, reflecting a $1.0 million
loss accrued on the sale of a business.
NON-OPERATING EXPENSES AND INCOME TAXES
Following is a comparison of non-operating expenses and income taxes for the
three months ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
CONSOLIDATED COMBINED
------------ --------
(Dollars in millions) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest expense $16.4 $23.5 $ 16.9 $ 23.8
Other non-operating(income) expense (5.9) 4.2 (8.0) (6.8)
Affiliated interest expense (income), net 4.7 (5.0) -- --
Income tax expense (benefit) 4.2 3.5 66.8 (1.2)
Effective tax rate 42% * 22% *
- --------------------------------------------------------------------------------------------
</TABLE>
*Not meaningful
The favorable fluctuations in interest expense for the Company and the Combined
Companies are attributable to cash proceeds from the sale of the Decorative
Products business used to pay down debt.
The $10.1 million improvement in the Company's other non-operating expenses in
1998 is attributable to a $4.9 million increase in interest income from the
investment of proceeds from the sale of certain Unaligned Foods businesses in
short term investments, and the absence of a $8.3 million accounting charge
associated with the Company's net investment in Foods when compared to 1997. The
improvements were partially offset by a $3.2 million decrease in income from
marking an interest rate swap to its market value when compared to the prior
year effect.
The $1.2 million increase in the Combined Companies other non-operating income
is a result of the increase in interest income partially offset by the $3.2
million decrease in income from the interest rate swap.
23
<PAGE> 24
The change in the affiliated interest reflects interest expense associated with
the Foods investment of cash not used in operations within the Company.
The 1998 consolidated effective income tax rate approximates the statutory rate
for the Company. The Unaligned Foods business divestitures led to a lower
effective tax rate for the Combined Companies in 1998 as a portion of the gain
is not subject to corporate tax.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Consolidated cash flows from operating activities improved $37.4 million to a
$9.0 million outflow in 1998. The Chemical operations contributed an additional
$3.3 million to operating income in the first quarter of 1998, as compared to
the first quarter of 1997, primarily from the November 1997 acquisition of
Melamine Chemicals. Improved working capital flows accounted for the remainder
of the improvement.
Combined operating cash flows reflect the items noted above and increased
working capital outflows in the Foods business.
Investing Activities
Consolidated investing activities generated cash of $341.0 million in 1998
compared to a use of $9.4 million in 1997. The first quarter 1998
acquisition/divestiture activity reflects the following: proceeds from the sale
of Decorative Products of $304.8 million, $66.9 million relating to the return
on investment in Foods and Wise, partially offset by the acquisition of a resins
and compounds operation acquired from Sun Coast Industries, Inc. for $14.4
million.
In addition to the above, the Combined Companies divestiture activity reflects
$689.5 million of proceeds resulting from the sale of Unaligned Foods
businesses. During the first quarter of 1998, the Combined Companies sold
certain unaligned product lines to Eagle Family Foods for $376.5 million, and
its worldwide KLIM milk powder and non-dairy creamer business in South Africa
and a Puerto Rican ice cream business to Nestle for $313.0. The $66.9 million
return on investment in the consolidated investing flows is eliminated in the
combined investing flows as the Foods operations are included in the Combined
Companies.
Capital expenditures decreased by $8.9 million and $11.4 million in the
consolidated and combined investing cash flows, respectively, primarily as a
result of the absence of the dairy operations, which were sold in the third
quarter of 1997.
In the second quarter of 1998, $270.0 million of the Combined Companies'
proceeds were distributed to an affiliate that is not within the Combined
Companies controlled group but has an ownership interest in the trademarks that
were sold with the divested businesses. In addition $346.0 million of the
proceeds were loaned on a short-term basis at rates that approximate market
conditions, to Corning Consumer Products Company, which was purchased by the
Company's parent on April 1, 1998. The loan was repaid during the second quarter
of 1998.
Financing Activities
Consolidated financing activities generated $351.7 million in cash during the
first quarter of 1998 compared to $30.6 million during the same period of 1997.
Cash generated from investing activities was used to repay the $235.0 million
revolving line of credit and to pay preferred dividends during the first quarter
of 1998. The Company's $599.7 million affiliated borrowings represent
proceeds from the sale of Unaligned Foods businesses which were in turn
invested in cash equivalents.
Combined financing activities reflect the above with the exception of the
affiliated borrowings with Foods. The Foods proceeds are included in investing
activities.
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 and
Companies' 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 and
Companies are utilizing both internal and external resources to identify,
correct and test the systems for year 2000 compliance. The Company and Companies
are each in the midst of conducting a complete assessment of 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
and Companies' 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. 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 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. In addition, plans are being developed to address the risks
related to plant systems, data and system infrastructure, suppliers and
customers. 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.
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.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
The Company and its officers may, from time to time, make written or oral
statements regarding the future performance of the Company, including statements
contained in the Company's filings with the Securities and Exchange Commission.
Investors should be aware that these statements are based on currently available
financial, economic, and competitive data and on current business plans. Such
statements are inherently uncertain and investors should recognize that events
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 risks and uncertainties are primarily in the areas of result of operations
by business unit, liquidity, legal, environmental liabilities, year 2000
compliance, and risk management.
25
<PAGE> 26
PART II
Item 1: LEGAL PROCEEDINGS
In July 1995, a Fresno, California jury returned a verdict in favor of Helms
Tomato, Inc., a Fresno agribusiness, 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, the Jury found that
while the Foods business had a legal right to terminate the agreement, it was
estopped from doing so because of an oral representation made by a former Foods
employee. On March 31, 1998, the court granted Foods' motion for a new trial,
citing, among other grounds, misconduct of plaintiff's counsel and insufficiency
of plaintiff's evidence of damages. No date has been set for the retrial.
Otherwise, there have been no material developments in the ongoing legal
proceedings that are discussed in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
The Company is involved in other litigation throughout the United States, which
is considered to be in the ordinary course of the Company's business.
The Company believes, based on the information it presently possesses, and
taking into account its established reserves for estimated liability and its
insurance coverages, that the ultimate outcome of the foregoing proceedings is
unlikely to have a materially adverse effect on the Company's financial position
or operating results.
Item 6: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. Exhibits
(10) Letter Amendment and Extension of Waiver dated January 30,
1998 among the Company, Borden Foods Holdings Corporation,
Wise Holdings, Inc., and certain lenders represented by
Citbank, N.A. as administrative agent.
(27) Financial Data Schedule
b. Financial Statement Schedules
Included 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.
c. Reports on Form 8-K
There were no reports on Form 8-K issued during the first quarter of 1998.
26
<PAGE> 27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BORDEN, INC.
Date May 14, 1998 By /s/ William H. Carter
--------------------------
William H. Carter
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
27
<PAGE> 28
BORDEN FOODS HOLDINGS CORPORATION
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997
BFH1
<PAGE> 29
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION
Three Months Ended
March 31,
($ in thousands) 1998 1997
- --------------------------------------------------------------------------------
Net sales $ 222,618 $ 418,584
Cost of goods sold 132,053 256,287
--------- ---------
Gross margin 90,565 162,297
--------- ---------
Distribution expense 14,555 22,350
Marketing expense 64,695 123,278
General & administrative expense 13,509 23,942
Gain on divestiture (187,146) --
--------- ---------
Operating income (loss) 184,952 (7,273)
--------- ---------
Interest expense 1,408 6,020
Interest income (6,102) (2,027)
Other expense (income), net (213) (685)
--------- ---------
Income (loss) before income tax 189,859 (10,581)
Income tax expense (benefit) 37,310 (3,600)
--------- ---------
Net income (loss) 152,549 (6,981)
Affiliate's share of income (128,745) --
--------- ---------
Net income (loss) applicable to common stock $ 23,804 $ (6,981)
========= =========
Comprehensive income (Note 6) $ 150,397 $ (20,053)
========= =========
Basic and diluted income (loss) per common share $ 238 $ (70)
Average number of common shares outstanding
during the period 100 100
- --------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
BFH2
<PAGE> 30
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION
(in thousands)
March 31, December 31,
ASSETS 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 622,915 $ 28,736
Accounts receivable (less allowance for doubtful
accounts of $2,337 and $4,821, respectively) 73,363 138,751
Other receivables 13,908 21,526
Inventories:
Finished and in-process goods 70,123 112,669
Raw materials and supplies 24,770 43,112
Deferred income taxes 48,238 41,290
Other current assets 22,595 50,050
----------- ---------
875,912 436,134
OTHER ASSETS 8,428 14,981
PROPERTY AND EQUIPMENT
Land 11,387 19,199
Buildings 48,315 64,908
Machinery and equipment 155,134 208,504
----------- ---------
214,836 292,611
Less accumulated depreciation (40,865) (50,878)
----------- ---------
173,971 241,733
INTANGIBLES
Goodwill 60,448 151,264
Trademarks and other intangibles 86,615 155,511
----------- ---------
147,063 306,775
----------- ---------
TOTAL ASSETS $ 1,205,374 $ 999,623
=========== =========
- ---------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
BFH3
<PAGE> 31
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION
($ in thousands)
March 31, December 31,
LIABILITIES AND SHAREHOLDER'S EQUITY 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt payable within one year $ 18,109 $ 22,087
Loans due to affiliates 14,952 27,914
Accounts and drafts payable 67,976 98,718
Income taxes payable 34,978 30,158
Accrued customer allowances 27,222 32,106
Other amounts due affiliates 4,392 6,020
Other current liabilities 239,107 123,706
----------- ---------
406,736 340,709
----------- ---------
OTHER LIABILITIES
Long-term debt payable to Borden, Inc. -- 47,616
Other long-term debt 5,443 5,438
Deferred income taxes 33,146 25,821
Non-pension postemployment benefit obligations 9,026 9,279
Other long-term liabilities 19,055 20,894
----------- ---------
66,670 109,048
----------- ---------
Commitments and Contingencies (Note 9)
SHAREHOLDER'S EQUITY
Common stock - $0.01 par value; 100 shares -- --
Shareholder's investment in affiliate 333,332 203,297
Paid in capital 397,781 366,439
Accumulated other comprehensive income (12,100) (9,021)
Retained earnings (deficit) 12,955 (10,849)
----------- ---------
731,968 549,866
----------- ---------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 1,205,374 $ 999,623
=========== =========
- ----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
BFH4
<PAGE> 32
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION Three Months Ended
March 31,
(in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net income (loss) $ 152,549 $ (6,981)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Deferred tax provision 3,301 (4,230)
Depreciation and amortization 6,201 11,304
Gain on divestiture of businesses (187,146) --
Net change in assets and liabilities:
Trade receivables 41,773 29,931
Other receivables 5,287 (3,062)
Inventories 9,280 4,687
Trade payables (17,271) (26,806)
Accrued customer allowances (4,884) (8,656)
Income taxes 4,820 (13,136)
Other amounts due to/from affiliates 666 (2,866)
Other current assets and liabilities (34,740) 1,452
Long-term assets and liabilities (157) 897
Other, net (11,268) (6,176)
--------- --------
(31,589) (23,642)
--------- --------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (4,711) (7,726)
Proceeds from the divestiture of businesses 686,224 --
Proceeds from the sale of fixed assets 8,806 --
--------- --------
690,319 (7,726)
--------- --------
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES
(Decrease) increase short-term debt (3,978) 1,127
(Decrease) increase in loans due to/from affiliates (12,962) 17,942
Repayment of long-term debt to Borden, Inc. (47,616) --
Increase in other long-term debt 5 257
--------- --------
(64,551) 19,326
--------- --------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 594,179 (12,042)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 28,736 33,233
--------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $ 622,915 $ 21,191
========= ========
- ---------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
BFH5
<PAGE> 33
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
BORDEN FOODS HOLDINGS CORPORATION
Three Months Ended
(in thousands) March 31,
1998 1997
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest $ 1,987 $ 20,583
Taxes 32,113 1,455
NON-CASH ACTIVITY:
Minority interest (Note 5) (128,745)
Affiliate's share of income (Note 5) 128,745
- --------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
BFH6
<PAGE> 34
BORDEN FOODS HOLDINGS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BACKGROUND AND NATURE OF OPERATIONS
In September 1994, Borden, Inc. ("Borden") entered into a merger agreement
providing for the acquisition of all of Borden's outstanding common stock by
affiliates of Kohlberg Kravis Roberts & Co. ("KKR", the "Acquisition"). 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 $550,000 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 73.6 million Class B units in exchange for $368,100 of notes from
BW Holdings, LLC. Prior to October 1, 1996, LLC issued approximately 1.1 million
Class A units to certain management employees of BFC in exchange for cash of
$5,323. In addition, LLC transferred $234,200 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 $5,323 of cash to BFC in exchange
for a 2% interest in BFC.
BFC issued $166,990 of long-term debt (see Note 8) 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 $273,000 of consideration to
purchase a 70% interest in Investment LP and LLC used $117,000 of consideration
to acquire a 30% interest in Investment LP. Investment LP transferred $390,000
of consideration to Borden in exchange for Foods' trademarks. Upon finalization
of the valuation in September 1997, an additional $20,000 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 $42,000.
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.
BFH7
<PAGE> 35
The accompanying unaudited condensed financial statements contain all
adjustments, consisting only of normal adjustments, which in the opinion of
management are necessary for the fair presentation of operating results for the
interim period. Results for the interim period are subject to seasonal
variations and are not necessarily indicative of results for the full year.
2. NATURE OF OPERATIONS
BFC is a manufacturer and distributor of food products worldwide, including
pasta, pasta sauce, soups, bouillon and truffles. BFC's operations include 16
production facilities, 5 of which are located in the United States. The
remaining facilities are located primarily in Europe and Asia. Management
expects to divest or close 7 facilities in 1998 as part of the business
realignment (Note 5).
3. BASIS OF PRESENTATION
As a result of the financial guarantee and in accordance with Regulation S-X
rule 3-10, Borden includes in its filings with the Securities and Exchange
Commission separate condensed financial statements for Foods Holdings as if it
were a registrant. The accompanying condensed financial statements for the three
months ended March 31, 1998 and 1997 were prepared on a purchase accounting
basis which allocated approximately $750,000, plus cash retained, less debt
assumed, of the December 1994 KKR purchase price to Foods Holdings. The purchase
price was allocated to tangible and intangible assets and liabilities of Foods
based on independent appraisals and management estimates.
The condensed 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. The portion of BFC
and the 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. The most significant estimates in the accompanying financial
statements are the accruals for trade promotions, reserves for expenses on
businesses sold, allocation of tax basis between Investment LP and BFC,
litigation and general insurance liabilities. Actual results could differ from
those estimates.
RECLASSIFICATION - Certain prior year amounts have been reclassified to conform
with the 1998 presentation.
5. BUSINESS REALIGNMENT
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
BFH8
<PAGE> 36
unaligned businesses are milk powder (KLIM), sweetened condensed milk and
reconstituted lemon juice (Signature Flavor), and processed cheese.
On January 24, 1998 BFC and Investment LP completed the sale of its Signature
Flavor businesses. Signature Flavor was purchased by Eagle Family Foods, Inc., a
newly formed entity managed by GE Investments and Warburg, Pincus & Co. LLC. The
sale generated proceeds of $376,500 and an after-tax gain of $170,999.
BFC and Investment LP 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 $313,000 for the sale of these operations. An accrued after-tax loss of
$9,254 was recorded in the 1997 financial statements. An additional after-tax
loss of $22,312 was recorded in the three month period ended March 31, 1998.
In association with the divestiture of the Signature Flavor business, LLC was
allocated an affiliate's share of income (see accompanying consolidated
statement of operations) of $128,745. 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. In the second quarter of
1998, $270,000 was distributed to LLC.
6. COMPREHENSIVE INCOME
Comprehensive income is computed as follows:
- --------------------------------------------------------------------------------
Three months ended March 31,
----------------------------
1998 1997
---- ----
Net income $152,549 $ (6,981)
Foreign currency translations adjustments (3,079) (13,072)
Less: Reclassification adjustments 927 --
-------- ---------
Comprehensive income $150,397 $ (20,053)
======== =========
- --------------------------------------------------------------------------------
The reclassification adjustment represents the accumulated translation
adjustment recognized on the sale of the KLIM business offset by a
reclassification to paid in capital.
7. RELATED PARTIES
BFC is engaged in various transactions with Borden and its affiliates in the
ordinary course of business. A subsidiary of Borden provides administrative
services to BFC at negotiated fees. These services include processing of payroll
and active and retiree group insurance claims. BFC reimburses the Borden
subsidiary for payments for general disbursements, and group insurance and
postemployment benefit claims. The amount owed by BFC for reimbursement of
payments and for services was $4,392 and $4,746 as of March 31, 1998 and
December 31, 1997, respectively.
BFH9
<PAGE> 37
BFC is generally self-insured for general insurance claims and postemployment
benefits other than pensions. The liabilities for these obligations are included
in Foods Holdings' financial statements. By agreement, Borden has retained the
obligation for active group insurance claims incurred prior to 1997.
Employee pension benefits are provided under the Borden domestic pension plans
to which BFC contributes. The U.S. employees participate in the Borden
retirement savings plan. Borden also provides certain health and life insurance
benefits for eligible employees. BFC has recognized expenses associated with
these benefits, certain of which are determined and allocated by Borden's
actuary. BFC has assumed an actuarially-determined portion of Borden's U.S. net
pension liability, however this amount is considered to be an amount due to
affiliate since Borden retains the legal obligation for these benefits.
BFC invested cash not used in operations with Borden. BFC's investment balance
was $614,629 and $15,043 with Borden as of March 31, 1998 and December 31, 1997,
respectively. The funds are invested overnight earning a rate set by Borden
which generally approximates money market rates. Amounts receivable for interest
were $5,421 and $0 as of March 31, 1998 and December 31, 1997, respectively.
BFC performs certain administrative services on behalf of other Borden
affiliates. These services include sales administration, promotion, purchasing,
and research and development. BFC charged these affiliates $614 and $1,881 for
such services for the three month period ended March 31, 1998 and 1997,
respectively. The receivable for services, merchandise sales, and other
transactions related to the purchase of Foods' assets was $1,053 and $8,768 at
March 31, 1998 and December 31, 1997, respectively.
Borden continues to provide executive, financial and strategic management to BFC
for which it charges a quarterly fee of $250.
8. AFFILIATED DEBT
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 are included
in loans due from or to affiliates. Net short-term loans due to international
affiliates were $14,952 and $27,914 at March 31, 1998 and December 31, 1997,
respectively, at a weighted average variable rate of 6.9% and 6.7%,
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 $250,000 at a variable interest rate
equal to prime. Effective December 30, 1997, the revolving loan facility was
reduced to $50,000 with a maturity date of December 31, 1998. 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
of prime.
As an affiliate 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 $548,480 and $783,480 at March 31, 1998 and December 31, 1997,
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. Effective January 1, 1997, the interest rate on the long-term
notes to Borden was changed from 12.0% to 10.3%. The
BFH10
<PAGE> 38
loan principal outstanding on the long-term notes was $0 and $47,616 at March
31, 1998 and December 31, 1997, respectively. Interest expense on the long term
notes was $575 and $4,278 for the three months ended March 31, 1998 and 1997,
respectively. Amounts payable for such charges were $14 and $1,274 as of March
31, 1998 and December 31, 1997, respectively.
9. COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS - In July 1995, a Fresno, California jury returned a verdict of
approximately $11,500 against BFC for wrongful termination of a tomato packing
agreement, for which $14,500 (including the verdict, interest and legal costs)
was previously provided. In granting the award for lost profits to Helm
Tomatoes, Inc., the jury found that while the business had a legal right to
terminate the agreement, it was estopped from doing this by an oral
representation made by a former employee. On March 31, 1998 the court granted
BFC's motion for a new trial concluding, among other things, that the misconduct
of plaintiff's counsel permeated the trial resulting in prejudice to BFC and the
evidence of damages was insufficient.
BFC is involved in certain other legal proceedings arising through the normal
course of business. Other than that mentioned above, management is of the
opinion that the final outcomes of such proceedings should not have a material
impact on BFC's results of operations or financial position.
OTHER CONTINGENCIES - 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, such as a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
BFC is working on finalizing its Year 2000 date conversion project 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. 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.
BFH11
<PAGE> 39
[LOGO] WISE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997
1
<PAGE> 40
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
THREE MONTHS ENDED
MARCH 31,
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
Net sales $ 53,881 $ 56,490
Cost of goods sold 33,730 37,276
-------- --------
Gross margin 20,151 19,214
Distribution expense 6,941 6,216
Marketing expense 9,211 10,219
General & administrative expense 5,242 4,096
-------- --------
Operating loss (1,243) (1,317)
Interest expense 122 265
Other income (10) (155)
-------- --------
Loss before income taxes (1,355) (1,427)
Income tax benefit (608) (542)
-------- --------
Net loss $ (747) $ (885)
======== ========
Per Share Data
Basic and diluted loss per common share $ (7.47) $ (8.85)
Average number of common shares outstanding
during the period 100 100
- --------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
2
<PAGE> 41
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share amounts)
March 31, December 31,
ASSETS 1998 1997
- --------------------------------------------------------------------------------
CURRENT ASSETS
Cash and equivalents $ 6,470 $ 3,604
Accounts receivable (less allowance for doubtful
accounts of $2,657 and $2,498, respectively) 20,532 23,131
Affiliated receivables 1,137 1,204
Inventories:
Finished goods 4,215 4,621
Raw materials and supplies 3,491 3,841
Deferred income taxes, net 2,582 2,825
Prepaid and other current assets 4,330 4,509
------- -------
42,757 43,735
------- -------
PROPERTY AND EQUIPMENT
Land 1,347 1,347
Buildings and improvements 5,615 5,585
Machinery and equipment 40,004 38,592
------- -------
46,966 45,524
Less accumulated depreciation 17,722 16,442
------- -------
29,244 29,082
------- -------
INTANGIBLES AND OTHER ASSETS
Trademarks (net of accumulated
amortization of $1,528 and $1,410, respectively) 17,283 17,401
Other assets 837 889
------- -------
18,120 18,290
------- -------
TOTAL ASSETS $90,121 $91,107
======= =======
- --------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
3
<PAGE> 42
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share amounts)
MARCH 31, DECEMBER 31,
LIABILITIES AND SHAREHOLDER'S EQUITY 1998 1997
- --------------------------------------------------------------------------------
CURRENT LIABILITIES
Debt payable within one year $ 270
Accounts and drafts payable $15,393 12,570
Affiliated payables 995 1,467
Accrued liabilities 13,451 15,735
------- -------
29,839 30,042
------- -------
OTHER LIABILITIES
Long-term debt payable to Borden, Inc. 7,000 7,000
Deferred income taxes, net 2,278 2,522
Non-pension postemployment
benefit obligations 9,907 9,960
Affiliated employee benefit obligation 2,139 1,817
Other long-term liabilities 407 371
Minority interest 733 830
------- -------
22,464 22,500
------- -------
Commitments and Contingencies (Note 6)
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 34,980
Retained earnings 2,838 3,585
------- -------
37,818 38,565
------- -------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $90,121 $91,107
======= =======
- --------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
4
<PAGE> 43
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
THREE MONTHS ENDED
MARCH 31,
(Dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net loss $ (747) $ (885)
Adjustments to reconcile net loss to net cash
from operating activities
Minority interest's share in income (97) (16)
Depreciation 1,308 1,551
Amortization 118 118
Other non-cash 164 (111)
Net change in assets and liabilities:
Accounts receivable 2,440 (1,346)
Affiliated receivables 67 337
Inventories 756 1,680
Prepaid and other current assets 179 (884)
Other assets 52 750
Accounts and drafts payable 2,823 (4,989)
Affiliated payables (472) (898)
Accrued liabilities (2,284) 1,318
Post-employment benefits other than pensions (53) 94
Affiliated employee benefit obligation 322 --
Other long-term liabilities 36 230
------- -------
4,612 (3,051)
------- -------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (1,484) (897)
Proceeds from sales of equipment 8 200
------- -------
(1,476) (697)
------- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Borrowings under affiliated revolving loan agreement -- 9,200
Repayments under affiliated revolving loan agreement -- (7,000)
Repayment of short-term borrowings (270) --
------- -------
(270) 2,200
------- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 2,866 (1,548)
Cash and equivalents at beginning of period 3,604 3,027
------- -------
Cash and equivalents at end of period $ 6,470 $ 1,479
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest: $ -- $ 333
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE> 44
WISE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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 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 have been 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.
6
<PAGE> 45
The condensed consolidated financial statements of Wise collectively include the
financial position of Wise Holdings, Inc. and subsidiaries as of March 31, 1998
and December 31, 1997. These financial statements also include the statements of
operations and cash flows of Wise for the three months ended March 31, 1998 and
1997. These unaudited interim condensed consolidated financial statements
reflect all normal and recurring adjustments that are, in the opinion of
management, necessary for the fair presentation of the results for the interim
periods presented.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 1998
presentation.
Per Share Information
Basic and diluted loss per common share at March 31, 1998 and 1997 is computed
by dividing net loss by the weighted average number of common shares outstanding
during the period ended March 31, 1998 and 1997, respectively. Options issued by
subsidiaries that enable the holder to obtain stock of the subsidiary were not
assumed exercised because they were antidilutive for both 1998 and 1997. Wise
has no other potentially dilutive securities.
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.
4. ACCRUED LIABILITIES
Accrued liabilities were as follows:
March 31, December 31,
1998 1997
- --------------------------------------------------------------------------------
Compensation $ 1,263 $ 2,758
General insurance 5,542 5,627
Advertising and promotion 2,979 3,591
Other 3,667 3,759
------- -------
Total $13,451 $15,735
======= =======
- --------------------------------------------------------------------------------
5. AFFILIATED LONG-TERM DEBT
In conjunction with the Incorporation, Wise entered into a long-term loan
agreement (the "Loan Agreement") to borrow funds from Borden.
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
7
<PAGE> 46
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 March 31, 1998 and December 31, 1997.
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. At March 31, 1998 and December 31, 1997, $7.0 million remains outstanding
under this loan agreement.
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.
6. COMMITMENTS AND CONTINGENCIES
Environmental Contingencies
Wise, like others in similar businesses, is subject to extensive Federal, state
and local environmental laws and regulations. Although Wise's environmental
policies and practices are designed to ensure compliance with these laws and
regulations, future developments and increasingly stringent regulations could
require Wise to make additional unforeseen environmental expenditures.
Environmental accruals are routinely reviewed on an interim basis as events and
developments warrant and are subject to an annual comprehensive review.
Litigation
Wise is subject to various investigations, claims and legal proceedings covering
a wide range of matters in the ordinary course of its business activities. Each
of these matters 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.
7. 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. A subsidiary of Borden provides certain administrative
services to Wise at negotiated fees. These services include: processing of
payroll and active and retiree group insurance claims. 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 $995 and $1,204 at March 31,
1998 and December 31, 1997, respectively.
Wise is generally self-insured for general insurance claims and post-employment
benefits other than pensions. The liabilities for these obligations are included
in Wise's financial statements.
8
<PAGE> 47
The following table summarizes the charges to Wise for these costs in the first
quarter of 1998 and 1997:
Quarter ended
March 31,
1998 1997
- --------------------------------------------------------------------------------
Employee benefits $ 564 $ 471
Group and general insurance 761 1,240
Information services 65 48
Corporate staff departments and overhead 514 362
------ ------
$1,904 $2,121
====== ======
- --------------------------------------------------------------------------------
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 also invests excess cash with Borden in one-day investments that totaled
$4,150 and $2,350 at March 31, 1998 and December 31, 1997, respectively.
8. BUSINESS DIVESTITURE
Wise has reached an agreement to sell the stock of its Puerto Rican division.
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.
9
<PAGE> 1
Exhibit 10
LETTER AMENDMENT AND
EXTENSION OF WAIVER
Dated as of January 30, 1998
To the banks, financial institutions
and other institutional lenders
(collectively, the "Lenders") parties
to the Credit Agreement referred to
below and to Citibank, N.A., as administrative
agent (the "Administrative Agent") for the Lenders
Ladies and Gentlemen:
We refer to the Credit Agreement dated as of December 15, 1994, amended and
restated as of July 14, 1997 (such Credit Agreement, as so amended, the "Credit
Agreement") among the undersigned and you. Capitalized terms not otherwise
defined in this Letter Amendment have the same meanings as specified in the
Credit Agreement.
Pursuant to a Letter Waiver dated as of December 30, 1997 (the "Letter
Waiver"), the Required Lenders agreed to extend the period during which Asset
Proceeds of certain dispositions would be applied pursuant to the terms of the
Credit Agreement. The undersigned hereby requests the Lenders to extend the
effectiveness of the waivers included in the Letter Waiver and to amend the
Credit Agreement to further clarify the application of the proceeds of such
dispositions.
You have indicated your willingness, on the terms and conditions stated
below, to so agree. Accordingly, it is hereby agreed by you and us as follows:
(a) The reference in the Letter Waiver to "February 15, 1998" is amended to
read "March 15, 1998" and
(b) The Credit Agreement is, effective as of the date of this Letter
Amendment, hereby amended as follows:
(i) The definition of "Asset Proceeds" in Section 1.01 is amended by
restating the parenthetical phrase in clause (b) thereof in full to read as
follows:
(including (i) such amounts paid or payable by direct or indirect partners,
members of other holders of direct or indirect equity or other ownership
interests in the assets or
<PAGE> 2
2
options subject to such sale and, in any case (but without duplication of
amounts included in clause (i)) (ii) the "Tax Amount" (as defined in the
Amended and Restated Agreement of Limited Partnership of BFC Investments,
L.P.) distributable in connection with such sale).
(ii) Section 2.06(a)(ii) is amended by adding to the end thereof a
new proviso to read as follows:
; provided that the Borrower may, with respect to any Asset Proceeds
attributable in whole or in part to Trademark Appreciation, defer for a
period of up to 90 days the application in accordance with this Section
2.06(a) of a portion of such Asset Proceeds equal to all, or at the
borrowers election a portion of, a good faith estimate by the Borrower of
the amount of such Asset Proceeds that is attributable to the sale of the
applicable trademarks (the "Trademark Estimate") so long as the aggregate
amount of the Unused Working Capital Commitments of the Lenders is not less
than the Trademark Estimate during such period.
(iii) Section 2.06(c) is amended by adding to the end thereof a new
proviso to read as follows:
; provided that the Borrower may, with respect to any Trademark
Appreciation, defer for a period of up to 90 days the application in
accordance with this Section 2.06(c) of a portion of such Trademark
Appreciation equal to all, or at the borrowers election a portion of, the
Trademark Estimate (as defined in Section 2.06(a) above) so long as the
aggregate amount of the Unused Working Capital Commitments of the Lenders
is not less than the Trademark Estimate during such period.
This Letter Amendment shall become effective as of the date first
above written when, and only when, the Administrative Agent shall have received
counterparts of this Letter Amendment executed by the undersigned and the
Required Lenders or, as to any of the Lenders, advice satisfactory to the
Administrative Agent that such Lender has executed this Letter Amendment. This
Letter Amendment is subject to the provisions of Section 8.01 of the Credit
Agreement.
On and after the effectiveness of this Letter Amendment, each
reference in the Credit Agreement of the Letter Waiver to "this Agreement",
"hereunder", "hereof" or words of like import referring to the Credit Agreement
or the Letter Waiver, respectively, and each reference in the Notes and each of
the other Loan Documents to "the Credit Agreement", "thereunder", "thereof" or
words of like import referring to the Credit Agreement, shall mean and be a
reference to the Credit Agreement, as amended by this Letter Amendment.
<PAGE> 3
3
The Credit Agreement, the Letter Waiver, the Notes and each of the
other Loan Documents, as specifically amended by this Letter Amendment, are and
shall continue to be in full force and effect and are hereby in all respects
ratified and confirmed. The execution, delivery and effectiveness of this Letter
Amendment shall not, except as expressly provided herein, operate as a waiver of
any right, power or remedy of any Lender or the Agent under the Credit
Agreement, nor constitute a waiver of any provision of the Credit Agreement.
If you agree to the terms and provisions hereof, please evidence such
agreement by executing and returning at least two counterparts of this Letter
Amendment to Veronica Lane at Shearman & Sterling, 599 Lexington Avenue, New
York, New York 10022.
This Letter Amendment may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement. Delivery of an executed counterpart of a
signature page to this Letter Amendment by telecopier shall be effective as
delivery of a manually executed counterpart of this Letter Amendment.
This Letter Amendment shall be governed by, and construed in
accordance with, the laws of the State of New York.
Very truly yours,
BORDEN, INC.
By /s/ Ronald P. Starkman
---------------------------------
Title: Senior VP & Treasurer
BORDEN, FOODS HOLDINGS
CORPORATION
By /s/ Ronald P. Starkman
---------------------------------
Title: Vice President & Treasurer
WISE HOLDINGS, INC.
By /s/ Ronald P. Starkman
---------------------------------
Title: Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 679,000
<SECURITIES> 188,300
<RECEIVABLES> 267,300
<ALLOWANCES> 10,000
<INVENTORY> 131,000
<CURRENT-ASSETS> 1,400,000
<PP&E> 895,700
<DEPRECIATION> 372,400
<TOTAL-ASSETS> 2,453,100
<CURRENT-LIABILITIES> 1,433,600
<BONDS> 553,300
0
614,400
<COMMON> 2,000
<OTHER-SE> (518,600)
<TOTAL-LIABILITY-AND-EQUITY> 2,453,100
<SALES> 367,100
<TOTAL-REVENUES> 367,100
<CGS> 274,800
<TOTAL-COSTS> 274,800
<OTHER-EXPENSES> 65,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,400
<INCOME-PRETAX> 10,000
<INCOME-TAX> 4,200
<INCOME-CONTINUING> 5,800
<DISCONTINUED> 28,300
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,100
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
