<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 September 30, 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
- -------------------------------------------------------------------------------
(Address of principal executive offices)
(614) 225-4000
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant(1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Number of shares of common stock, $0.01 par value, outstanding as of the close
of business on November 12, 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. Condensed 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
<PAGE> 3
BORDEN, INC.
INDEX
<TABLE>
PART I - FINANCIAL INFORMATION
BORDEN, INC. ("BORDEN") CONDENSED CONSOLIDATED AND
BORDEN, INC. AND AFFILIATES CONDENSED COMBINED FINANCIAL STATEMENTS
<S> <C>
Condensed Consolidated Statements of Operations and Comprehensive Income,
three months ended September 30, 1998 and 1997.................................................. 4
nine months ended September 30, 1998 and 1997................................................... 6
Condensed Consolidated Balance Sheets, September 30, 1998, and December 31, 1997.................... 8
Condensed Consolidated Statements of Cash Flows,
nine months ended September 30, 1998 and 1997................................................... 10
Condensed Consolidated Statement of Shareholders' Equity,
nine months ended September 30, 1998............................................................ 12
Condensed Combined Statements of Operations and Comprehensive Income,
three months ended September 30, 1998 and 1997.................................................. 13
nine months ended September 30, 1998 and 1997................................................... 14
Condensed Combined Balance Sheets, September 30, 1998, and December 31, 1997........................ 15
Condensed Combined Statements of Cash Flows, nine months ended September 30, 1998 and 1997.......... 17
Condensed Combined Statement of Shareholders' Equity, nine months ended September 30, 1998.......... 19
Notes to Condensed Consolidated and Combined Financial Statements................................... 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ............................................................................... 35
Item 6. Exhibits, Guarantor Financial Statement Schedules and Reports on Form 8-K........................ 35
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED)
BORDEN, INC. Three Months Ended
September 30,
(In millions, except per share data) 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 335.6 $ 371.5
Cost of goods sold 237.2 279.6
--------------- ----------------
Gross margin 98.4 91.9
--------------- ----------------
Distribution expense 12.5 13.7
Marketing expense 20.6 24.3
General & administrative expense 30.0 24.2
--------------- ----------------
Operating income 35.3 29.7
--------------- ----------------
Interest expense 15.6 23.4
Affiliated interest expense (income), net of affiliated interest
income of $0.4 and $6.2, respectively 5.9 (5.4)
Interest income and other (7.2) (5.3)
--------------- ----------------
Income from continuing operations
before income tax 21.0 17.0
Income tax expense 9.3 5.4
--------------- ----------------
Income from continuing operations 11.7 11.6
--------------- ----------------
Discontinued operations:
Income from operations, net of tax - 6.9
Income from disposal, net of tax 5.3 154.4
--------------- ----------------
Net income 17.0 172.9
Preferred stock dividends (18.4) (18.4)
--------------- ----------------
Net (loss) income applicable to common stock $ (1.4) $ 154.5
=============== ================
Comprehensive income (See Note 6) $ 17.1 $ 167.8
=============== ================
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED) (continued)
BORDEN, INC.
Three Months Ended
September 30,
(In millions, except per share data) 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Basic and Diluted Per Share Data
- --------------------------------
Income from continuing operations $ 0.05 $ 0.06
Discontinued operations:
Income from operations - 0.03
Income from disposal 0.03 0.78
--------------- ----------------
Net income 0.08 0.87
Preferred stock dividends (0.09) (0.09)
--------------- ----------------
Net (loss) income applicable to common stock $(0.01) $ 0.78
=============== ================
Dividends per common share $ 0.06 $ 0.06
Dividends per preferred share $ 0.75 $ 0.75
Average number of common shares outstanding
during the period 199.0 199.0
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
5
<PAGE> 6
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED)
BORDEN, INC. Nine Months Ended
September 30,
(In millions, except per share data) 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 1,071.1 $ 1,120.3
Cost of goods sold 771.9 845.1
---------------- ----------------
Gross margin 299.2 275.2
---------------- ----------------
Distribution expense 39.0 40.0
Marketing expense 63.2 68.0
General & administrative expense 98.7 85.6
Business realignment 5.5 -
(Gain) on divestiture of business (8.3) -
---------------- ----------------
Operating income 101.1 81.6
---------------- ----------------
Interest expense 47.8 71.2
Affiliated interest expense (income), net of affiliated interest
income of $2.0 and $19.7, respectively 16.1 (17.0)
Interest income and other (20.6) (5.2)
---------------- ----------------
Income from continuing operations
before income tax 57.8 32.6
Income tax expense 25.8 13.2
---------------- ----------------
Income from continuing operations 32.0 19.4
---------------- ----------------
Discontinued operations:
Income from operations, net of tax 2.3 26.5
Income from disposal, net of tax 31.3 154.4
---------------- ----------------
Net income 65.6 200.3
Preferred stock dividends (55.3) (55.3)
---------------- ----------------
Net income applicable to common stock $ 10.3 $ 145.0
================ ================
Comprehensive income (See Note 6) $ 60.1 $ 186.2
================ ================
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED) (continued)
BORDEN, INC.
Nine Months Ended
September 30,
(In millions, except per share data) 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Basic and Diluted Per Share Data
- --------------------------------
Income from continuing operations $ 0.16 $ 0.10
Discontinued operations:
Income from operations 0.01 0.13
Income from disposal 0.16 0.78
--------------- ----------------
Net income 0.33 1.01
Preferred stock dividends (0.28) (0.28)
--------------- ----------------
Net income applicable to common stock $ 0.05 $ 0.73
=============== ================
Dividends per common share $ 0.24 $ 0.19
Dividends per preferred share $ 2.25 $ 2.25
Average number of common shares outstanding
during the period 199.0 199.0
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
7
<PAGE> 8
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN, INC.
(In millions)
September 30, December 31,
ASSETS 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 701.0 $ 183.6
Accounts receivable (less allowance for doubtful accounts of $10.1
and $9.4, respectively) 230.2 242.2
Amount due from unconsolidated affiliate 3.9 -
Inventories:
Finished and in-process goods 64.7 74.8
Raw materials and supplies 43.3 54.3
Deferred income taxes 92.6 106.1
Other current assets 20.7 34.9
Net assets of discontinued operations (See Note 5) - 165.2
-------------- -----------------
1,156.4 861.1
-------------- -----------------
INVESTMENTS AND OTHER ASSETS
Investments 111.3 109.5
Deferred income taxes 64.1 170.4
Prepaid pension assets 136.2 140.2
Other assets 29.6 34.3
Assets sold under contractual arrangement (net of allowance
of $62.1 and $609.6, respectively) (See Note 2) 47.2 302.1
-------------- -----------------
388.4 756.5
-------------- -----------------
PROPERTY AND EQUIPMENT
Land 23.2 23.5
Buildings 93.5 106.8
Machinery and equipment 679.0 738.4
-------------- -----------------
795.7 868.7
Less accumulated depreciation (322.3) (360.8)
-------------- -----------------
473.4 507.9
INTANGIBLES 67.9 80.4
-------------- -----------------
TOTAL ASSETS $2,086.1 $2,205.9
============== =================
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
8
<PAGE> 9
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN, INC.
(In millions, except share data)
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt payable within one year $ 20.3 $ 6.9
Accounts and drafts payable 114.0 137.3
Income taxes payable 279.0 309.6
Loans payable with affiliates 430.7 4.0
Other current liabilities 257.5 328.8
------------------ -----------------
1,101.5 786.6
------------------ -----------------
OTHER LIABILITIES
Liabilities sold under contractual arrangement 41.6 230.1
Long-term debt 553.6 788.3
Non-pension post-employment benefit obligations 201.6 226.3
Other long-term liabilities 84.6 94.9
------------------ -----------------
881.4 1,339.6
------------------ -----------------
Commitments and contingencies (See Note 8)
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 365.2 384.0
Receivable from parent (426.6) (464.1)
Accumulated other comprehensive income (53.5) (48.0)
Accumulated deficit (398.3) (408.6)
------------------ -----------------
103.2 79.7
------------------ -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,086.1 $2,205.9
================== =================
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
9
<PAGE> 10
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN, INC. Nine Months Ended
September 30,
(In millions) 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income $ 65.6 $ 200.3
Adjustments to reconcile net income to net
cash from (used in) operating activities:
(Gain) on disposal of discontinued operations (102.7) (248.2)
(Gain) on divestiture of business (8.3) -
Deferred tax provision 116.9 181.8
Depreciation and amortization 37.7 27.1
Unrealized (gain) on interest rate swap (1.1) (3.4)
Loss on net assets sold under contractual arrangement 1.1 -
Business realignment 5.5 -
Net change in assets and liabilities:
Trade receivables (23.9) (16.9)
Inventories (1.5) 3.2
Trade payables (11.4) 6.3
Due from affiliate (3.9) -
Income taxes (10.3) (42.0)
Other assets 43.8 (9.8)
Other liabilities (85.5) (145.6)
Discontinued operations working capital 3.0 (0.2)
---------------- ----------------
25.0 (47.4)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (39.2) (97.2)
Proceeds from the divestiture of businesses 335.9 419.1
Purchase of business (14.4) (4.2)
Proceeds from the sale of fixed assets 5.5
Return on investment in affiliate 65.3 9.2
---------------- ----------------
347.6 332.4
---------------- ----------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net short-term debt borrowings 8.7 16.4
Borrowings of long-term debt - 362.4
Repayment of long-term debt (235.3) (642.8)
Affiliated borrowings 426.7 -
Interest received from parent 47.4 38.1
Common stock dividends paid (47.4) (38.1)
Preferred stock dividends paid (55.3) (55.3)
---------------- ----------------
144.8 (319.3)
---------------- ----------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)
BORDEN, INC.
Nine Months Ended
September 30,
(In millions) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in cash and equivalents $ 517.4 $ (34.3)
Cash and equivalents at beginning
of period 183.6 125.0
---------------- ----------------
Cash and equivalents at end
of period $ 701.0 $ 90.7
================ ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest, net $ 31.0 $ 25.2
Taxes 13.5 21.0
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 34.5 18.1
Additional proceeds on Foods sale - 20.0
Reclassification of minimum pension liability adjustment to
prepaid pension cost - 97.7
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
11
<PAGE> 12
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT 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 65.6 65.6
Cash dividends-preferred stock (55.3) (55.3)
Cash dividends-common stock (47.0) (47.0)
Translation adjustments and other (5.5) (5.5)
Interest accrued on notes from parent 23.1 9.0 32.1
Capital contribution from parent 34.5 34.5
Cancel option on Decorative Products (29.4) 28.5 (0.9)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 $ 614.4 $ 2.0 $ 365.2 $ (426.6) $ (53.5) $ (398.3) $ 103.2
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
12
<PAGE> 13
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
CONDENSED COMBINED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED)
BORDEN, INC. AND AFFILIATES Three Months Ended
September 30,
(In millions) 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 536.2 $ 835.6
Cost of goods sold 351.9 555.9
--------------- ----------------
Gross margin 184.3 279.7
--------------- ----------------
Distribution expense 28.8 44.4
Marketing expense 75.2 117.8
General & administrative expense 51.5 66.3
Business realignment 17.0 -
(Gain) on divestiture of businesses (18.6) -
--------------- ----------------
Operating income 30.4 51.2
--------------- ----------------
Interest expense 15.9 20.1
Affiliated interest expense 2.1 0.1
Interest income and other (8.0) (1.5)
--------------- ----------------
Income from continuing operations
before income tax 20.4 32.5
Income tax expense 9.3 22.1
--------------- ----------------
Income from continuing operations 11.1 10.4
--------------- ----------------
Discontinued operations:
Income from operations, net of tax - 6.9
Income from disposal, net of tax 5.3 154.4
--------------- ----------------
Net income 16.4 171.7
Affiliate's share of income (1.0) -
Preferred stock dividends (18.4) (18.4)
--------------- ----------------
Net (loss) income applicable to common stock $ (3.0) $ 153.3
=============== ================
Comprehensive income (See Note 6) $ 14.2 $ 153.6
=============== ================
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
13
<PAGE> 14
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
CONDENSED COMBINED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED)
BORDEN, INC. AND AFFILIATES Nine Months Ended
September 30,
(In millions) 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 1,762.3 $ 2,557.3
Cost of goods sold 1,186.8 1,717.7
--------------- ----------------
Gross margin 575.5 839.6
--------------- ----------------
Distribution expense 93.2 130.2
Marketing expense 246.2 416.3
General & administrative expense 167.0 187.8
Business realignment 22.5 -
(Gain) on divestiture of businesses (329.4) -
--------------- ----------------
Operating income 376.0 105.3
--------------- ----------------
Interest expense 48.7 68.5
Affiliated interest expense 3.3 0.2
Interest income and other (23.7) (8.8)
--------------- ----------------
Income from continuing operations
before income tax 347.7 45.4
Income tax expense 99.7 28.4
--------------- ----------------
Income from continuing operations 248.0 17.0
--------------- ----------------
Discontinued operations:
Income from operations, net of tax 2.3 26.5
Income from disposal, net of tax 31.3 154.4
--------------- ----------------
Net income 281.6 197.9
Affiliate's share of income (131.0) -
Preferred stock dividends (55.3) (55.3)
--------------- ----------------
Net income applicable to common stock $ 95.3 $ 142.6
=============== ================
Comprehensive income (See Note 6) $ 265.6 $ 151.8
=============== ================
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
14
<PAGE> 15
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CONDENSED COMBINED BALANCE SHEETS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
(In millions)
September 30, December 31,
ASSETS 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 723.4 $ 198.6
Accounts receivable (less allowance for doubtful accounts of $13.7
and $16.7, respectively) 304.8 425.6
Inventories:
Finished and in-process goods 123.3 192.1
Raw materials and supplies 64.3 101.2
Deferred income taxes 142.3 149.3
Other current assets 35.2 67.1
Net assets of discontinued operation (See Note 5) - 165.2
----------------- -----------------
1,393.3 1,299.1
----------------- -----------------
INVESTMENTS AND OTHER ASSETS
Investments 111.3 109.5
Deferred income taxes 78.6 223.6
Prepaid pension assets 147.1 151.2
Other assets 32.8 38.7
----------------- -----------------
369.8 523.0
----------------- -----------------
PROPERTY AND EQUIPMENT
Land 37.2 42.2
Buildings 194.7 255.1
Machinery and equipment 1,008.8 1,227.9
----------------- -----------------
1,240.7 1,525.2
Less accumulated depreciation (567.9) (731.8)
----------------- -----------------
672.8 793.4
INTANGIBLES 394.9 434.2
----------------- -----------------
TOTAL ASSETS $ 2,830.8 $ 3,049.7
================= =================
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
15
<PAGE> 16
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
CONDENSED COMBINED BALANCE SHEETS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
(In millions)
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt payable within one year $ 26.3 $ 28.0
Accounts and drafts payable 183.2 248.6
Income taxes payable 301.6 353.0
Loans with affiliates 135.0 4.0
Other current liabilities 470.6 486.5
---------------- ----------------
1,116.7 1,120.1
---------------- ----------------
OTHER LIABILITIES
Long-term debt 558.2 794.9
Non-pension post-employment
benefit obligations 219.9 245.5
Other long-term liabilities 116.8 135.2
---------------- ----------------
894.9 1,175.6
---------------- ----------------
Commitments and contingencies (See Note 8)
SHAREHOLDERS' EQUITY
Preferred stock 614.4 614.4
Common stock 2.0 2.0
Paid in capital 658.8 666.5
Receivable from parent (426.6) (464.1)
Affiliate's interest in subsidiary 51.0 203.3
Accumulated other comprehensive income (88.8) (181.2)
Retained earnings (deficit) 8.4 (86.9)
---------------- ----------------
819.2 754.0
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,830.8 $ 3,049.7
================ ================
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
16
<PAGE> 17
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
Nine Months Ended
September 30,
(In millions) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income $ 281.6 $ 197.9
Adjustments to reconcile net income to net
cash from (used in) operating activities:
(Gain) on disposal of discontinued operations (102.7) (248.2)
(Gain) on divestiture of businesses (329.4) -
Deferred tax provision 144.9 189.9
Depreciation and amortization 64.4 70.7
Unrealized (gain) on interest rate swap (1.1) (3.4)
Business realignment 22.5 -
Net change in assets and liabilities:
Trade receivables 30.5 (5.3)
Inventories 20.1 (3.1)
Trade payables (35.1) (20.8)
Income taxes (30.2) (87.6)
Other assets 85.4 (7.5)
Other liabilities (74.3) (132.1)
Discontinued operations working capital 3.0 (0.2)
---------------- ----------------
79.6 (49.7)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (66.4) (125.1)
Proceeds from the divestiture of businesses 1,063.2 419.1
Proceeds from the sale of fixed assets 15.8 16.2
Purchase of business (14.4) (5.3)
----------------- ----------------
998.2 304.9
---------------- ----------------
CASH FLOWS (USED IN) FINANCING ACTIVITIES
Net short-term debt borrowings 10.5 22.5
Borrowings of long-term debt - 362.4
Repayment of long-term debt (236.0) (643.4)
Distribution to affiliates (272.2) -
Interest received from parent 47.4 38.1
Common stock dividends paid (47.4) (38.1)
Preferred stock dividends paid (55.3) (55.3)
---------------- ----------------
(553.0) (313.8)
---------------- ----------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
BORDEN, INC. AND AFFILIATES
Nine Months Ended
September 30,
(In millions) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in cash and equivalents $ 524.8 $ (58.6)
Cash and equivalents at beginning
of period 198.6 160.2
---------------- ---------------
Cash and equivalents at end
of period $ 723.4 $ 101.6
================ ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest, net $ 32.9 $ 65.6
Taxes 76.5 40.5
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 34.5 18.1
Affiliate's share of income 131.0
Additional proceeds on Foods sale - 20.0
Reclassification of minimum pension liability adjustment to
prepaid pension cost - 97.7
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
18
<PAGE> 19
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CONDENSED COMBINED STATEMENT 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 281.6 281.6
Cash dividends-preferred (55.3) (55.3)
Cash dividends-common stock (47.0) (47.0)
Translation adjustments and other 92.4 92.4
Interest accrued on notes from parent 23.1 9.0 32.1
Cancel option on Decorative Products (29.4) 28.5 (0.9)
Capital contribution from parent 34.5 34.5
Affiliate's interest in subsidiary 11.1 (152.3) (131.0) (272.2)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 $ 614.4 $ 2.0 $ 658.8 $ (426.6) $ 51.0 $ (88.8) $ 8.4 $ 819.2
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
19
<PAGE> 20
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 BW Holdings, LLC ("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 - Management of
the Company exercises significant control over and has provided financing
to Wise and Foods. Becuase of this continuing financial interest, the
assets and liabilities of Wise and Foods, as of their respective sale
dates, were classified as "sold under contractual arrangements" in the
consolidated financial statements. In addition, losses incurred by Wise and
Foods were 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 September 30, 1998,
the Company's net investment in Wise was $5.6. The December 31, 1997, net
investment totaled $6.5 for Wise and $65.5 for Foods. For the nine months
ended September 30, 1998, the Company recorded losses on the continuing
investment totaling $1.1. 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.
RECENTLY ISSUED ACCOUNTING STATEMENTS - Recently, the Financial Accounting
Standards Board has issued Financial Accounting Standard No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
Financial Accounting Standard No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," and Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The Company is currently considering the impact of these
pronouncements.
20
<PAGE> 21
RECLASSIFICATION - Certain prior year amounts have been reclassified to
conform with the 1998 presentation.
3. BUSINESS REALIGNMENT, ACQUISITIONS AND DIVESTITURES
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 the
Signature Flavor businesses. The sale generated proceeds of $376.5 and a
pre-tax gain of $296.9 ($237.2 after tax.)
On February 12, 1998, the Combined Companies sold the KLIM business,
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 $335.7 for the
sale of these operations and recognized an after tax loss of $19.1 ($1.5
gain before tax) in a prior year.
On April 29, 1998, the Company completed the divestiture of its commercial
and industrial wallcoverings business. Proceeds from the sale were
approximately $15.6, and the pre-tax loss of $55.0 on the sale ($26.8 after
tax) was recorded in a prior period. The business was previously classified
within Businesses Held for Sale.
On May 22, 1998, the Combined Companies sold a distributor in Puerto Rico.
Proceeds were $8.8 million, and a pre-tax gain of $1.1 was recorded on the
sale ($0.2 after tax.)
On June 30, 1998, the Company sold a plastic films business in Latin
America for cash proceeds of $15.5. The Company recorded a pre-tax gain of
$8.3 on the sale ($6.0 after tax.)
Included in the Combined Companies' other current liabilities at September
30, 1998, is approximately $124.3 of divestiture reserves related to the
sales of Foods Unaligned businesses. Of this amount, approximately $26.0
relates to non-cash charges associated with assets to be sold. In the third
quarter of 1998, the Combined Companies recorded gains of $18.6 ($11.2
after tax) related to a change in estimate to settle certain outstanding
liabilities related to the sales of Foods Unaligned businesses.
In the third quarter of 1998, the Combined Companies recorded a $23.1
charge related to consolidation of the pasta business, including a $6.1
charge recorded in cost of goods sold related to an adjustment of an
inventory purchase commitment to fair market value.
4. AFFILIATE'S SHARE OF INCOME
In association with the divestiture of the Signature Flavor businesses, an
affiliate of the Company's parent (the "Affiliate") was allocated income of
$130.0 (see accompanying combined statements of operations) in accordance
with the limited partnership agreement between Foods and the Affiliate. In
the second quarter of 1998, $272.2 was distributed to the Affiliate.
5. DISCONTINUED OPERATIONS
The following operations are separate segments of the Company's business as
defined by generally accepted accounting principles and have been
reclassified to discontinued operations in the 1998 and 1997 statements of
operations and cash flows. In addition, net assets relating to the
Decorative Products business of $165.2 at December 31, 1997, have been
reclassified to discontinued operations in the 1997 consolidated and
combined balance sheets.
21
<PAGE> 22
Decorative Products
-------------------
On March 13, 1998, the Company completed the sale of its Decorative
Products business. Proceeds consisted of $304.8 in cash plus a retained
equity interest of 11 percent. The Company recorded a pre-tax gain of $90.7
($26.0 after tax) in discontinued operations during the first quarter of
1998. In the third quarter of 1998, the Company recorded an additional gain
of $12.0 ($5.3 after tax) related to the final settlement of the sale
price.
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 1996 to BWHLLC for $31.0 in exchange for 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.
Dairy
-----
On September 4, 1997, the Company completed the sale of its dairy
operations.
The results included in the statement of operations for Decorative Products
and Dairy discontinued operations follow:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ - $ 215.6
Income before income taxes - 10.4
Income tax expense - 3.5
Income from discontinued operations - 6.9
- ---------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------
Net sales $ 73.2 $ 827.0
Income before income taxes 3.5 44.1
Income tax expense 1.2 17.6
Income from discontinued operations 2.3 26.5
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
6. COMPREHENSIVE INCOME
Comprehensive income was computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
CONSOLIDATED COMBINED
-------------- --------------
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 17.0 $ 172.9 $ 16.4 $ 171.7
Foreign currency translation adjustments 0.1 (5.1) (2.2) (18.1)
------ -------- ------- --------
Comprehensive income $ 17.1 $ 167.8 $ 14.2 $ 153.6
- ---------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
CONSOLIDATED COMBINED
-------------- --------------
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 65.6 $ 200.3 $ 281.6 $ 197.9
Foreign currency translation adjustments (5.5) (14.1) 92.4 (46.1)
Less: Reclassification adjustments - - (108.4) -
------- -------- -------- --------
Comprehensive income $ 60.1 $ 186.2 $ 265.6 $ 151.8
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The reclassification adjustment represents the accumulated translation
adjustment recognized on the sale of the Combined Companies' KLIM business.
22
<PAGE> 23
7. RELATED PARTY TRANSACTIONS
During the first quarter of 1998, the Company collected a note from Foods
Holdings that stemmed from the October 1, 1996, purchase of Foods by Foods
Holdings. The note repayment ends the Company's remaining financial
interest in Foods. As a result, the Company eliminated Foods 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. The amount due from
Foods at September 30, 1998, was $3.9.
In addition, Foods and BWHLLC, an affiliate of the Company's parent,
invested cash not used in operations with the Company. At September 30,
1998, Foods had $295.7 invested with the Company and BWHLLC had $135.0
invested with the Company. This is reflected as net loans payable to
unconsolidated affiliates in the consolidated balance sheet. The Foods
investment eliminates in the Combined Companies' financial statements.
The Company provides infrastructure management services to Foods and Wise.
Fees received for these services are offset against the Company's general
and administrative expenses. The fees from Foods and Wise offsetting the
Company's general and administrative expenses for the three months ended
September 30, 1998 and September 30, 1997 approximated $4.1 and $5.7,
respectively. The amount of revenue from Foods and Wise offsetting the
Company's general and administrative expenses for the nine months ended
September 30, 1998 and September 30, 1997 approximated $12.3 and $17.2,
respectively.
8. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS - The Company and Combined Companies, like others in
similar businesses, are subject to extensive federal, state and local
environmental laws and regulations. Although the Company's and Combined
Companies' environmental policies and practices are designed to ensure
compliance with these laws and regulations, future developments and
increasingly stringent regulation could require the Company and Combined
Companies 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 $19.0 and $23.0
at September 30, 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 and Combined Companies believe 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 $12.0.
LEGAL MATTERS - The Company and Combined Companies have recorded
liabilities of $20.2 and $34.8, respectively, at September 30, 1998, for
legal costs that management believes are probable and reasonably estimable.
These liabilities at December 31, 1997, totaled $21.0 on a consolidated
basis and $35.8 on a combined basis. Actual costs are not expected to
exceed these amounts. In addition, the Company and Combined Companies 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 and Combined Companies
believe, based upon the information management currently possesses, and
23
<PAGE> 24
taking into account established reserves for estimated liability and
insurance coverage, that the ultimate outcome of the foregoing proceedings
and actions is unlikely to have a material adverse effect on the Company's
or Combined Companies' 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.
24
<PAGE> 25
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)
<TABLE>
- -----------------------------------------------------------------------------------------------------
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
NET SALES 1998 1997 1998 1997
- --------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Chemical $ 306.3 $ 318.6 $ 949.7 $ 965.0
Consumer Products
and Services 29.3 27.0 84.6 75.9
Businesses Held for Sale -- 25.9 36.8 79.4
-------- -------- ---------- ----------
CONSOLIDATED NET SALES $ 335.6 $ 371.5 $ 1,071.1 $ 1,120.3
Foods ongoing 133.9 149.0 410.4 528.5
Foods Unaligned 11.1 253.8 110.1 727.9
-------- -------- ---------- ----------
Total Foods 145.0 402.8 520.5 1,256.4
Wise 55.6 61.3 170.7 180.6
-------- -------- ---------- ----------
COMBINED NET SALES $ 536.2 $ 835.6 $ 1,762.3 $ 2,557.3
======== ======== ========== ==========
OPERATING INCOME
Chemical $ 37.8 $ 30.2 $ 113.0 $ 95.2
Consumer Products
and Services 1.3 0.5 5.4 4.3
Corporate (3.8) (1.8) (15.9) (20.7)
-------- -------- ---------- ----------
Subtotal 35.3 28.9 102.5 78.8
Businesses Held for Sale -- 0.8 (1.4) 2.8
-------- -------- ---------- ----------
CONSOLIDATED OPERATING INCOME $ 35.3 $ 29.7 $ 101.1 $ 81.6
Foods ongoing (22.5) (9.3) (42.1) (34.0)
Gain on sale 18.6 -- 321.1 --
Foods Unaligned (1.6) 28.3 (1.8) 56.9
-------- -------- ---------- ----------
Total Foods (5.5) 19.0 277.2 22.9
Wise 0.6 2.5 (1.5) 0.8
Combining adjustments -- -- (0.8) --
-------- -------- ---------- ----------
COMBINED OPERATING INCOME $ 30.4 $ 51.2 $ 376.0 $ 105.3
======== ======== ========== ==========
- -----------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 26
CONSOLIDATED AND COMBINED THREE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS THREE
MONTHS ENDED SEPTEMBER 30, 1997
Consolidated Summary
- --------------------
Consolidated net sales declined $35.9 million or 10% from 1997 to $335.6
million. The majority of this decline was caused by the sale of the Company's
commercial and industrial wallcoverings business (formerly classified as
"Businesses Held for Sale") in April 1998. Lower Chemical sales, caused by the
negative impact of foreign exchange rates in Asia and Latin America, also
contributed to the decline.
Consolidated operating income increased $5.6 million or 19% from 1997 to $35.3
million. This improvement reflects income from recently acquired Chemical
businesses, as well as slightly higher margins in the forest products business,
partially offset by lower contributions from Chemical businesses in Latin
America and Asia.
Combined Summary
- ----------------
Combined sales declined $299.4 million or 36%, primarily reflecting the sale of
Foods Unaligned businesses in 1998 and late 1997 and the exit from unprofitable
private label sales in the Foods ongoing businesses, as well as the factors
described for the Consolidated Company. Operating income declined $20.8 million
or 41%, due mainly to the absence of $29.9 million of income from divested
businesses and charges of $23.1 million taken in the third quarter for capacity
reduction in the pasta businesses, partially offset by improvements in the
ongoing Foods businesses, a gain of $18.6 million related to a change in
estimate to settle certain outstanding liabilities related to the sales of Foods
Unaligned businesses and the $5.6 million improvement described for the
Consolidated Company.
Chemical
- --------
Chemical sales declined $12.3 million or 4% from 1997. This decrease reflects
the approximate $12.0 million negative impact of currency exchange rates in
Canada, Latin America and, most significantly, Asia Pacific, with lower pricing
and European and Latin America sales declines offset by incremental sales from
the new melamine and derivatives product line acquired within the last year.
The unfavorable impact of lower pricing compared to 1997 was approximately $15
million and reflects highly competitive market conditions and contractual
arrangements with customers that provide for the pass-through of significantly
lower raw material costs, primarily for methanol, phenol and urea.
A modest overall increase in volume, consisting primarily of improvement in
North America that was partially offset by a substantial decline in Latin
America, had a positive impact on sales of approximately $6 million.
The melamine and derivatives product line includes Melamine Chemicals and the
resins and compounds business of Sun Coast Industries, purchased in late 1997
and early 1998, respectively. This product line provided incremental sales of
approximately $17 million in third quarter 1998 in response to strong pricing
and market demand. Management expects these favorable conditions to continue
throughout the remainder of 1998.
The closure of a European operation and the sale of the Latin America plastic
films business accounted for most of the remaining sales decline from 1997.
Operating income increased $7.6 million or 25% from 1997. This improvement is
due primarily to the melamine and derivatives businesses purchased in late 1997.
Improved margins in North America, due to lower raw materials costs in the
forest products business, also contributed to increased operating income.
Operating income in Latin America declined significantly from the prior year due
to poor economic conditions in the region that have resulted in receivable
write-offs and increased inventory carrying costs due to slow sales.
26
<PAGE> 27
Consumer Products and Services
- ------------------------------
Consumer Products and Services sales increased $2.3 million or 9% from 1997 to
$29.3 million. The increase was the result of infrastructure management services
revenues from businesses outside the Combined Companies, as well as slightly
higher seasonal sales in the consumer adhesives business. Operating income
increased $0.8 million to $1.3 million. The increase was the result of improved
sales of higher margin products in the consumer adhesives business, partially
offset by administrative costs in the infrastructure management services
business.
Corporate
- ---------
Corporate general and administrative expenses increased by $2.0 million from
$1.8 million of expenses in 1997 to $3.8 million in 1998. This increase was due
mainly to timing differences in normal business expenses.
Foods
- -----
Foods sales from ongoing businesses decreased $15.1 million or 10% from 1997.
This decline was the expected result of a reduction in pasta volume due to
management's strategic decisions to exit the unprofitable private label business
and unprofitable markets, and to eliminate low margin product lines and brands.
The impact of these strategic decisions began to affect sales in the last four
months of 1997.
Sales for Foods Unaligned businesses fell $242.7 million from 1997, reflecting
the sale of most of these businesses in early 1998 and late 1997.
Foods operating results from ongoing operations declined $13.2 million to a loss
of $22.5 million. This loss was due primarily to charges of $23.1 million during
the third quarter related to consolidation of pasta production, including a $6.1
million charge recorded in cost of goods sold related to an adjustment of an
inventory purchase commitment to fair market value . Excluding these
nonrecurring expenses, ongoing operating results improved by $9.9 million to
income of $0.6 million, primarily driven by lower corporate general and
administrative expenses, the favorable net impact of exiting the unprofitable
businesses described above, and improved manufacturing and trade promotion costs
and efficiencies.
Foods Unaligned businesses' results declined $29.9 million from 1997 due to the
sale of most of these businesses in early 1998 and late 1997. In addition, Foods
recorded gains of $18.6 million during the third quarter of 1998 related to a
change in estimate to settle certain outstanding liabilities related to the
sales of Foods Unaligned businesses.
Wise
- ----
Wise sales decreased $5.7 million or 9% from 1997 to $55.6 million. This
decrease is due primarily to the absence of sales of $4.3 million from a
business divested in 1998, augmented by a loss in volume due to competitors'
ongoing pricing promotions and new product introductions. Operating income
declined $1.9 million from 1997 to $0.6 million. This was primarily the result
of reduced gross margins and sales volume declines.
27
<PAGE> 28
CONSOLIDATED AND COMBINED NINE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS NINE
MONTHS ENDED SEPTEMBER 30, 1997
Consolidated Summary
- --------------------
Consolidated net sales declined $49.2 million or 4% from 1997 to $1,071.1
million. The majority of this decline was caused by the sale of the Company's
commercial and industrial wallcoverings business (formerly classified as
"Businesses Held for Sale") in April 1998. Lower Chemical sales also contributed
to the decline, caused primarily by the negative impact of foreign exchange
rates in Asia and Latin America, and by unfavorable pricing, partially offset by
incremental sales from new businesses and other volume improvements.
Consolidated operating income increased $19.5 million or 24% from 1997 to $101.1
million. This improvement reflects income from recently acquired Chemical
businesses, as well as slightly higher margins in the forest products business.
Management and settlement of assets and liabilities relating to businesses sold
in prior years also improved. These improvements were partially offset by lower
contributions from Chemical businesses in Latin America and Asia than in 1997.
Combined Summary
- ----------------
Combined sales declined $795.0 million or 31%, reflecting the sale of Foods
Unaligned businesses in 1998 and late 1997 and the exit from unprofitable
private label sales in the Foods ongoing businesses, as well as the factors
described for the Consolidated Company. Operating income improved $270.7
million, due mainly to gains of $321.1 on the sale of certain Foods Unaligned
businesses. Excluding this gain, operating results declined $50.4 million,
reflecting the absence of $58.7 million of income from divested businesses,
charges of $23.1 million taken in the third quarter for capacity reduction in
the pasta business offset by improvements in the ongoing Foods business, and the
factors described for the Consolidated Company.
Chemical
- --------
Chemical sales declined $15.3 million or 2% from 1997. The impact on sales of
unfavorable Canada, Latin America and Asia Pacific currency exchange rates was
approximately $36 million, with half of the impact coming from Asia Pacific.
Excluding this impact, Chemical sales were up over $20 million.
The unfavorable impact of lower pricing compared to 1997 was approximately $30
million and reflects highly competitive market conditions and contractual
arrangements with customers that provide for the pass-through of significantly
lower raw material costs, primarily for methanol, phenol and urea.
A modest overall increase in volume, consisting primarily of improvement in
North America that was partially offset by substantial decline in Latin America,
had a positive impact on sales of approximately $9 million.
The melamine and derivatives product line includes Melamine Chemicals and the
resins and compounds business of Sun Coast Industries, purchased in late 1997
and early 1998, respectively. This product line provided incremental sales of
approximately $51 million in 1998 in response to strong pricing and market
demand. Management expects these favorable conditions to continue throughout the
remainder of 1998.
The closure of a European operation and the sale of the Latin America plastic
films business accounted for most of the remaining sales decline from 1997.
28
<PAGE> 29
Operating income increased $17.8 million or 19% from 1997. This improvement is
due primarily to the melamine and derivatives businesses purchased within the
past year. Improved margins in North America, due primarily to lower raw
materials costs in the forest products business, also contributed to increased
operating income. Operating income in Latin America declined significantly from
the prior year due to poor economic conditions in the region that have resulted
in receivable write-offs and increased inventory carrying costs due to slow
sales. Also, the second quarter sale of a Latin American plastic films business
produced a gain of $8.3 million, which was partially offset by a $5.5 million
severance charge related to the closure of a European operation.
Consumer Products and Services
- ------------------------------
Consumer Products and Services sales increased $8.7 million or 11% from 1997 to
$84.6 million. This increase is primarily from improved seasonal sales in the
consumer adhesives business and infrastructure management services revenues from
businesses outside the Company. Operating income increased $1.1 million or 26%
to $5.4 million, reflecting improved sales of higher margin products in the
consumer adhesives business, partially offset by higher administrative costs in
the infrastructure management services business.
Corporate
- ---------
Corporate general and administrative expenses improved $4.8 million or 23% from
1997 to a loss of $15.9 million. This improvement was primarily the result of
improved settlement of assets and liabilities relating to businesses sold in
prior years and other one-time administrative charges. The remainder of the
fluctuation is attributable to timing differences in normal business expenses.
Foods
- -----
Foods sales from ongoing businesses decreased $118.1 million or 22% from 1997.
This decline was the expected result of a reduction in pasta volume due to
management's strategic decisions to exit the unprofitable private label business
and unprofitable markets, and to eliminate low margin product lines and brands.
The impact of these strategic decisions began to affect sales in the last four
months of 1997.
Sales for Foods Unaligned businesses declined $617.8 million, reflecting the
sale of most of these businesses in 1998 and late 1997.
Foods operating results from ongoing operations declined $8.1 million to a loss
of $42.1 million. This decline was the result of charges of $23.1 million in
1998 related to consolidation of pasta production, including a $6.1 million
charge recorded in cost of goods sold related to an adjustment of an inventory
purchase commitment to fair market value. Higher raw material costs also
affected operating results, but were more than offset by lower general and
administrative expenses, the favorable net impact of exiting the unprofitable
businesses described above, and improved manufacturing and trade promotion costs
and efficiencies.
Foods Unaligned businesses' operating income declined $58.7 million due to the
sale of most of these businesses in early 1998 and late 1997. Foods recorded
gains of $321.1 million in the first nine months of 1998 on the sale of
Unaligned businesses.
29
<PAGE> 30
Wise
- ----
Wise sales decreased $9.9 million or 5% from 1997 to $170.7 million. This
decline is due primarily to the absence of sales of $7.3 million from a business
divested in 1998, augmented by a loss in volume due to competitors' ongoing
pricing promotions and new product introductions. Operating results declined
$2.3 million from 1997 to a loss of $1.5 million. This decline was due primarily
to the $1.3 million loss on the sale of a business, and lower sales volume.
NON-OPERATING EXPENSES AND INCOME TAXES
- ---------------------------------------
Following is a comparison of non-operating expenses for the three months ended
September 30, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
CONSOLIDATED COMBINED
------------ --------
(Dollars in millions) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest expense $ 15.6 $ 23.4 $ 15.9 $ 20.1
Affiliated interest expense (income), net 5.9 (5.4) 2.1 0.1
Interest income and other (7.2) (5.3) (8.0) (1.5)
------- ------- ------- -------
$ 14.3 $ 12.7 $ 10.0 $ 18.7
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Following is a comparison of non-operating expenses for the nine months ended
September 30, 1998 and 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
CONSOLIDATED COMBINED
------------ --------
(Dollars in millions) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest expense $ 47.8 $ 71.2 $ 48.7 $ 68.5
Affiliated interest expense (income), net 16.1 (17.0) 3.3 0.2
Interest income and other (20.6) (5.2) (23.7) (8.8)
------- ------- ------- -------
$ 43.3 $ 49.0 $ 28.3 $ 59.9
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The favorable fluctuations in non-affiliated interest expense for the Company
and the Combined Companies, for both the three months and nine months ended
September 30, 1998, are primarily attributable to cash proceeds from the sale of
the Decorative Products business unit used to pay down debt.
Consolidated non-operating expense for the three months ended September 30,
1998, increased by $1.6 million. The decrease in non-affiliated interest expense
was offset by a $11.3 million decrease in net affiliated interest income due to
Foods' repayment of debt to the Company using proceeds from the sale of its
Unaligned businesses.
Consolidated non-operating expense for the nine months ended September 30, 1998,
decreased $5.7 million to $43.3 million. In addition to the decrease in
non-affiliated interest expense, the Company received $15.4 million more
interest income, primarily from the investment of proceeds from the sale of
certain Foods Unaligned businesses in short term investments. This improvement
was partially offset by a $33.1 million decrease in net affiliated interest
income, due primarily to Foods' repayment of debt to the Company using proceeds
from the sale of its Unaligned businesses, and interest expense on amounts
loaned by Foods and BWHLLC, an affiliate of the Company's parent.
Combined non-operating expense for the three months ended September 30, 1998,
improved $8.7 million to $10.0 million. This change reflects the decrease in
non-affiliated interest expense, augmented by a $6.5 million increase in
interest income from the investment of proceeds from the sale of certain Foods
Unaligned businesses in short term investments. The increase in affiliated
interest expense is due to amounts loaned by BWHLLC, an affiliate of the
Company's parent.
30
<PAGE> 31
Combined non-operating expense for the nine months ended September 30, 1998,
improved $31.6 million to $28.3 million. This change reflects the decrease in
non-affiliated interest expense, augmented by an $14.9 million increase in
interest income, primarily from the investment of proceeds from the sale of
certain Foods Unaligned businesses in short term investments. The increase in
affiliate interest expense is due to amounts loaned by BWHLLC, an affiliate of
the Company's parent.
Following is a comparison of income tax provision related effective tax rates
for the three and nine months ended September 30, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
CONSOLIDATED COMBINED
------------ --------
(Dollars in millions) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income tax expense 9.3 5.4 9.3 22.1
Effective tax rate 44% 32% 46% 68%
- ----------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
CONSOLIDATED COMBINED
------------ --------
(Dollars in millions) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Income tax expense 25.8 13.2 99.7 28.4
Effective tax rate 45% 40% 29% 63%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The 1998 consolidated effective income tax rate reflects the effect of
non-deductible international charges for the closure of a European operation.
The combined effective tax rate for the three months ended September 30, 1998,
reflects changes in estimates on taxes related to businesses sold in the first
quarter of 1998, as well as a change in the estimated annual effective tax rate.
The Foods Unaligned business divestitures led to a lower effective tax rate for
the Combined Companies for the nine months ended September 30, 1998, as a
portion of the gain is not subject to corporate tax. The unusually high tax rate
in 1997 for the Combined Companies is attributable to the finalization of the
Foods purchase price leading to a $30.0 million adjustment in the tax basis of
certain intangible assets.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Operating Activities
- --------------------
For the nine months ended September 30, 1998, operating cash flows generated by
the Company and the Combined Companies were $25.0 million and $79.6 million
compared to cash used by the Company and the Combined Companies of $47.4 million
and $49.7 million during the first nine months of 1997. The Company's $72.4
million increase is attributable to incremental cash inflows of $19.5 million
from Chemical businesses purchased within the past 12 months. Also, the first
nine months of 1997 included an outflow of approximately $40.0 million for the
settlement of litigation.
The Combined Companies' $129.3 million improvement in cash flows is attributable
to the factors noted above and primarily an improvement in cash flow relating to
Foods accounts receivable and inventories. The improved Foods inventory and
receivable flows occurred prior to and in anticipation of the divestiture of
certain businesses.
Investing Activities
- --------------------
Consolidated investing activities generated $347.6 million cash in the first
nine months of 1998 compared to $332.4 million in the first nine months of 1997,
due primarily to divestiture activity. 1998 proceeds from divestitures include
$304.8 million from the sale of Decorative Products, $15.5 million from the sale
of a Latin American plastic films business, and $15.6 million from the sale of
the commercial and industrial wallcoverings business. 1997 proceeds from
divestitures included $405.2 million from the sale of the Company's Dairy
business. For 1998, investing activity also reflects $65.3 million relating to
net repayments of affiliated borrowings by Foods and Wise, partially offset by
the acquisition of a resins and compounds business from Sun Coast Industries for
$14.4 million.
31
<PAGE> 32
In addition to the above, the Combined Companies' divestiture activity reflects
$725.1 million of proceeds from the sale of Foods Unaligned businesses. The
Combined Companies sold certain unaligned product lines for $376.5 million; its
worldwide KLIM milk powder business, a non-dairy creamer business in South
Africa and an ice cream business in Puerto Rico for $335.7 million; and a
distribution business in Puerto Rico for proceeds of $8.8 million. In the third
quarter of 1998, Foods received proceeds of $4.1 million related to its sales of
Ireland and Puerto Rico businesses. The $65.3 million return on investment in
the consolidated investing flows is eliminated in the combined flows as the
Foods and Wise operations are included in the Combined Companies.
Capital expenditures for the Company and the Combined Companies decreased $58.0
million and $58.7 million, respectively. This is mainly a result of reduced
Chemical capital expenditures of $33.7 million due to reduced plant additions
and improvements and reduced capitalized system implementation costs, the
divested Dairy business in the third quarter of 1997, and the Decorative
Products business in March 1998.
Financing Activities
- --------------------
Consolidated financing activities generated $144.8 million cash in the first
nine months of 1998, compared with the use of $319.3 million in the first nine
months of 1997. In 1998, the Company borrowed $426.7 million from Foods related
to proceeds from the sale of Foods Unaligned businesses. The inflow was
partially offset by repayment of the $235.3 million outstanding balance on the
revolving line of credit, and payment of preferred dividends. The use of cash in
1997 related to the net repayment of long-term debt using proceeds from the sale
of businesses.
Combined financing activities represent the above with the exception of the
affiliated borrowings with Foods, which are eliminated. Also, the Combined
financing activities include a $272.2 million distribution from Foods 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 the second quarter of 1998, the Company's revolving credit facility was
reduced as a result of the sales of certain Foods Unaligned businesses in
accordance with the terms of the agreement. As a result of this reduction, the
$50.0 million 364-day revolving credit facility was canceled, and the $950.0
million five year revolving credit facility was reduced to $895.0 million.
YEAR 2000 UPDATE
- ----------------
Overview
- --------
The year 2000 issue is the result of computer programs written using two digits
rather than four to define the applicable year. Any of the Company's and
Combined 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. If
not addressed, the Year 2000 issue could have a material adverse impact on the
business operations and financial results of the Company and Combined Companies.
To address this issue, the Company's and Combined Companies' Year 2000 Program
is a risk-based plan divided into three phases that are being executed by both
internal and external resources. These phases are: Phase I - an inventory of all
systems, assigning a business priority for each system and performing a
preliminary assessment of Year 2000 susceptibility; Phase II - completion of a
detailed Year 2000 susceptibility analysis and development of remediation plans
and contingency plans; and Phase III - implementation of the remediation and, if
necessary, contingency plan(s) and completing final system testing.
32
<PAGE> 33
The Year 2000 efforts are divided into three areas that include, (1) systems
being replaced by new enterprise-wide system implementations; (2) systems that
will not be replaced by the new enterprise-wide system implementations,
including non-information technology systems such as plant process controls; and
(3) external suppliers and customers. A discussion of each area of activity
relative to the three phased approaches follows.
Enterprise-Wide Systems
- -----------------------
The comprehensive new enterprise-wide system implementations being implemented
by each of the Company's businesses and the Combined Companies will replace most
business and accounting systems. The enterprise-wide system versions are
warranted by the vendors to be Year 2000 compliant and include SAP, PeopleSoft
and J.D. Edwards. Due to the relative complexity and importance of the existing
business and accounting systems to ongoing operations, the new enterprise-wide
system implementations will address the significant majority of the Company's
and Combined Companies' internal Year 2000 risk. Implementations of these
various new systems are underway with Phase I and II complete except for the
development of certain contingency plans. Phase III has begun and is expected to
be completed by June 30, 1999.
Other Systems
- -------------
For the systems not to be replaced by enterprise-wide implementations, Phase I
is complete, Phase II is substantially complete, and Phase III remediation has
begun. The Company and Combined Companies plan to substantially complete in 1998
the remediation of systems not to be replaced by new enterprise-wide systems.
System remediation not completed in 1998 and all system testing activities are
planned to be completed by June 30, 1999.
Suppliers and Customers
- -----------------------
The Company and Combined Companies are in Phase I of the plan to assess and
address the risks related to third party suppliers and customers. As a result of
initial inquiries, supplier and customer responses have been received. These
responses will be evaluated and appropriate procedures will be performed to
determine the extent to which the Company and Combined Companies may be
vulnerable to the failure of third parties to resolve their own Year 2000
issues. Efforts related to suppliers and customers, including development of
contingency plans where appropriate, are targeted for completion by June 30,
1999. Although the Company's and Combined Companies' systems do not rely
significantly on systems of other companies, the Company and Combined Companies
cannot provide assurance that failure of third parties to address the Year 2000
issue will not have an adverse impact on business operations and results.
Costs
- -----
Significant investments in enterprise-wide information systems have been made
since 1996 that will total approximately $72 million for the Company and $112
million for the Combined Companies by the year 2000. The cost to make the
remaining systems Year 2000 compliant is estimated to be $8 million for the
Company and $20 million for the Combined Companies. As of September 30, 1998,
the Company and Combined Companies had incurred costs of approximately $60
million and $64 million, respectively, for enterprise-wide systems and
approximately $2 million and $4 million, respectively, for other systems and
efforts.
Risks
- -----
Due to the general uncertainty inherent in the Year 2000 problem, including the
uncertainty associated with suppliers and customers, the potential effect on the
financial results and condition of the Company and Combined Companies has not
been measured. The Company and Combined Companies intend the Year 2000 Program
to be completed on a timely basis so as to significantly reduce the level of
uncertainty and the impact on business operations and financial results.
Contingency plans have been and will continue to be developed and implemented to
mitigate Year 2000 risks and the effect of Year 2000 issues. To date, these
contingency plans generally include remediation of legacy systems in the event
the enterprise-wide implementations are delayed. To date, several of these plans
are now being implemented to reduce the risk of potential delays in
enterprise-wide system implementations.
33
<PAGE> 34
Readers are cautioned that Forward-looking statements contained in the Year 2000
Update should be read in conjunction with the disclosure under the heading:
"Forward-Looking and Cautionary Statements".
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.
34
<PAGE> 35
PART II
Item 1: LEGAL PROCEEDINGS
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 and the quarterly report on Form 10-Q for the period ended
March 31, 1998.
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
(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 third quarter of 1998.
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 November 12, 1998 By /s/ William H. Carter
--------------------------------------
William H. Carter
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
35
<PAGE> 36
BORDEN FOODS HOLDINGS CORPORATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND YEAR TO DATE ENDED
SEPTEMBER 30, 1998 AND 1997
BFH1
<PAGE> 37
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION
Three Months Ended Nine Months Ended
September 30, September 30,
($ in thousands) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 145,065 $ 402,832 $ 520,585 $ 1,256,456
Cost of goods sold 78,932 240,510 297,689 757,698
--------- --------- --------- -----------
Gross margin 66,133 162,322 222,896 498,758
--------- --------- --------- -----------
Distribution expense 9,255 23,428 33,002 70,012
Marketing expense 45,495 84,565 155,302 317,805
General & administrative expense 15,461 36,510 47,620 86,364
Gain on divestiture (18,600) -- (200,171) --
Business realignment 11,750 -- 17,868 --
--------- --------- --------- -----------
Operating income 2,772 17,819 169,275 24,577
--------- --------- --------- -----------
Interest expense 422 5,712 2,400 19,121
Interest income (4,513) (4,357) (15,341) (8,313)
Other (income) expense, net (650) 2,489 (1,256) 1,819
--------- --------- --------- -----------
Income before income tax 7,513 13,975 183,472 11,950
Income tax expense 4,851 7,982 52,801 5,852
--------- --------- --------- -----------
Net income 2,662 5,993 130,671 6,098
Affiliate's share of income (958) -- (131,027) --
--------- --------- --------- -----------
Net income (loss) applicable to common stock 1,704 5,993 $ (356) 6,098
========= ========= ========= ===========
Comprehensive income (loss) Note 7 $ 3,448 $ (8,183) $ 127,046 $ (25,888)
========= ========= ========= ===========
Basic and diluted income (loss) per common share $ 17 $ 60 $ (4) $ 61
Average number of common shares outstanding
during the period 100 100 100 100
- ----------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
</TABLE>
BFH2
<PAGE> 38
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION
($ in thousands)
September 30, December 31,
ASSETS 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 316,867 $ 28,736
Accounts receivable (less allowance for doubtful
accounts of $1,453 and $4,821, respectively) 50,710 138,751
Other receivables 3,821 21,526
Inventories:
Finished and in-process goods 55,519 112,669
Raw materials and supplies 17,285 43,112
Deferred income taxes 42,086 41,290
Other current assets 26,564 50,050
--------- ---------
512,852 436,134
OTHER ASSETS 14,220 14,981
PROPERTY AND EQUIPMENT
Land 10,189 19,199
Buildings 40,536 64,908
Machinery and equipment 124,147 208,504
--------- ---------
174,872 292,611
Less accumulated depreciation (28,597) (50,878)
--------- ---------
146,275 241,733
INTANGIBLES
Goodwill 48,115 151,264
Trademarks and other intangibles 85,389 155,511
--------- ---------
133,504 306,775
--------- ---------
TOTAL ASSETS $ 806,851 $ 999,623
========= =========
- ---------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
</TABLE>
BFH3
<PAGE> 39
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION
($ in thousands)
September 30, December 31,
LIABILITIES AND SHAREHOLDER'S EQUITY 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt payable within one year $ 5,788 $ 22,087
Loans due to affiliates -- 27,914
Accounts and drafts payable 55,810 98,718
Income taxes payable 34,113 30,158
Accrued customer allowances 28,454 32,106
Other amounts due affiliates 12,399 6,020
Other current liabilities 191,116 123,706
--------- ---------
327,680 340,709
--------- ---------
OTHER LIABILITIES
Long-term debt payable to Borden, Inc. -- 47,616
Other long-term debt 4,626 5,438
Deferred income taxes 37,474 25,821
Non-pension postemployment benefit obligations 8,681 9,279
Other long-term liabilities 16,402 20,894
--------- ---------
67,183 109,048
--------- ---------
Commitments and Contingencies Note 10
SHAREHOLDER'S EQUITY
Common stock - $0.01 par value; 100 shares -- --
Shareholder's investment in affiliate 50,971 203,297
Paid in capital 384,868 366,439
Accumulated other comprehensive income (12,646) (9,021)
Retained deficit (11,205) (10,849)
--------- ---------
411,988 549,866
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 806,851 $ 999,623
========= =========
- ---------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
</TABLE>
BFH4
<PAGE> 40
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION Nine Months Ended
September 30,
($ in thousands) 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net income $ 130,671 $ 6,098
Adjustments to reconcile net income to net
cash used in operating activities:
Deferred tax provision 10,045 15,903
Depreciation and amortization 13,061 36,970
Gain on divestiture of businesses (200,171) --
Net change in assets and liabilities:
Trade receivables 49,723 13,382
Other receivables 14,868 151
Inventories 20,049 (7,311)
Trade payables (19,297) (29,268)
Accrued customer allowances (3,652) (21,884)
Income taxes (19,987) (7,412)
Other amounts due to/from affiliates (894) (1,348)
Other current assets and liabilities (62,185) 3,877
Long-term assets and liabilities (3,061) (8,501)
Other, net 3,451 (35,685)
--------- --------
(67,379) (35,028)
--------- --------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (20,722) (24,356)
Proceeds from the divestiture of businesses 725,226 --
Proceeds from the sale of fixed assets 15,852 11,089
--------- --------
720,356 (13,267)
--------- --------
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES
(Decrease) increase short-term debt (16,299) 4,565
(Decrease) increase in loans due to/from affiliates (27,914) 19,713
Unitholder distributions paid (272,205) --
Repayment of long-term debt to Borden, Inc. (47,616) --
(Decrease) increase in other long-term debt (812) 399
--------- --------
(364,846) 24,677
--------- --------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 288,131 (23,618)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 28,736 33,234
--------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $ 316,867 $ 9,616
========= ========
- -----------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
</TABLE>
BFH5
<PAGE> 41
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
BORDEN FOODS HOLDINGS CORPORATION
Nine Months Ended
($ in thousands) September 30,
1998 1997
- ---------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<S> <C> <C>
Cash paid:
Interest $ 2,590 $ 26,296
Taxes 62,743 7,245
NON-CASH ACTIVITY:
Minority interest (Note 6) (131,027)
Affiliate's share of income (Note 6) 131,027
Capital contribution by Parent 20,000
Additional proceeds from Foods sale (20,000)
- ---------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
</TABLE>
BFH6
<PAGE> 42
BORDEN FOODS HOLDINGS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BACKGROUND
In September 1994, Borden, Inc. ("Borden") entered into a merger agreement
providing for the acquisition of all of Borden's outstanding common stock by
affiliates of Kohlberg Kravis Roberts & Co. ("KKR", the "Acquisition"). The
Acquisition was completed on March 14, 1995. Borden, a public registrant as a
result of public debt that was outstanding prior to the Acquisition, elected not
to apply push down accounting in its consolidated financial statements and as
such Borden's financial statements (including Borden Foods through October 1,
1996) are reported on Borden's historical cost basis. As discussed in the basis
of presentation, the accompanying financial statements have been prepared on a
purchase accounting basis from the date of KKR's acquisition of Borden.
In 1996, Borden Foods Corporation ("BFC") was formed for the purposes of
acquiring and operating certain of Borden's food businesses ("Foods"). Borden
Foods Holdings Corporation ("Foods Holdings"), a wholly owned subsidiary of
Borden Foods Holdings, LLC (the "LLC"), owns approximately 98% of BFC; the
remaining interest in BFC is owned directly by the LLC. The LLC is controlled by
BW Holdings, LLC. BFC Investments LP (the "Investment LP"), which is owned by
BFC and LLC, was formed for the purposes of acquiring, holding, and
sub-licensing certain trademarks associated with the operation of Foods. In
certain circumstances (see Note 6), 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 $241,300 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 9) along with the notes
contributed by BW Holdings, LLC to finance the purchase of Foods' net assets. In
a series of transactions in 1996 and 1997, BFC used $244,000 of consideration to
purchase a 70% interest in Investment LP and LLC used $104,600 of consideration
to acquire a 30% interest in Investment LP. Investment LP transferred $348,600
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 1998, including a transfer
of tax basis from BFC to Investment LP, shareholder's investment in affiliate
was increased $29,610.
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> 43
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 and bouillon. BFC's operations include 13 production
facilities, 7 of which are located in North America. The remaining facilities
are located primarily in Europe. Management expects to divest or close 5 of
these 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 and nine months ended September 30, 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.
RECENTLY ISSUED ACCOUNTING STATEMENTS - Recently, the Financial Accounting
Standards Board issued Financial Accounting Standard No. 131, "Disclosures about
Segments of an Enterprise and Related Information," Financial Accounting
Standard No. 132, "Employers' Disclosure about Pensions and Other Postretirement
Benefits," and Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities." BFC is currently considering the impact of
these pronouncements.
RECLASSIFICATION - Certain prior year amounts have been reclassified to conform
with the 1998 presentation.
BFH8
<PAGE> 44
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 grain-based
meal solution strategy. Among the unaligned businesses were 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 business. The sale generated proceeds of $376,500 and an after tax gain
of $166,565, of which $1,380 was recorded in the third quarter relating to a
change in estimate to settle certain outstanding liabilities.
BFC and Investment LP sold the KLIM business, 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 $339,882
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
$19,542 was recorded in the nine month period ended September 30, 1998, which
includes an after tax gain of $9,000 recorded in the third quarter relating to a
change in estimate to settle certain outstanding liabilities.
On May 22, 1998 BFC sold its Puerto Rican distributor. The sale generated
proceeds of $8,844 and an after tax loss of $1,532, which includes an after tax
gain of $600 recorded in the third quarter.
Included in other current liabilities at September 30, 1998 is approximately
$135,000 of divestiture reserves. Of this amount, approximately $40,000 relates
to non-cash charges associated with assets to be sold.
On September 17, 1998, BFC announced the closing of the Tolleson, Arizona pasta
plant due to the consolidation of pasta production into other BFC pasta
facilities. The plant is expected to cease production during the fourth quarter.
An after tax loss of $9,779 resulting from the plant closure was recorded during
the three month period ended September 30, 1998 (including a $6,118 charge,
related to an adjustment of an inventory purchase commitment to fair market
value, recorded in cost of goods sold). Reserves in the accompanying balance
sheet for severance and assets to be sold are $16,300 before tax at September
30, 1998, including non-cash charges of $12,513 for assets to be sold.
Additionally, two pasta lines were shut down during the third quarter resulting
in a pre tax, non-cash charge of $1,669.
6. AFFILIATE'S SHARE OF INCOME
The LLC was allocated an affiliate's share of income (see accompanying
consolidated statement of operations) of $131,027 primarily in association with
the divestiture of the Signature Flavor business. In accordance with Investment
LP's limited partnership agreement with BFC and the 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 the LLC. In
the second quarter of 1998, $272,205 was distributed to the LLC.
7. COMPREHENSIVE INCOME
Comprehensive income is computed as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
------------------- ------------------------
1998 1997 1998 1997
------ -------- --------- --------
<S> <C> <C> <C> <C>
Net income $2,662 $ 5,993 $ 130,671 $ 6,098
Foreign currency translation adjustments 786 (14,176) (3,921) (31,986)
Less: Reclassification adjustments -- -- 296 --
------ -------- --------- --------
Comprehensive income (loss) $3,448 $ (8,183) $ 127,046 $(25,888)
- ----------------------------------------------------------------------------------------------
</TABLE>
BFH9
<PAGE> 45
The reclassification adjustment represents the accumulated translation
adjustment recognized on the sale of the KLIM business offset by a
reclassification to paid in capital.
8. 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 $12,399 and $4,746 as of September 30, 1998 and
December 31, 1997, respectively.
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. Amounts
payable by BFC for its portion of the net pension liability were $7,433 and
$7,764 as of September 30, 1998 and December 31, 1997, respectively.
BFC invested cash not used in operations with Borden. BFC's investment balance
was $295,651 and $15,043 with Borden as of September 30, 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 $14,399 and $0 as of September 30, 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 $295 and $1,328 for
such services for the three month periods ended September 30, 1998 and 1997,
respectively, and $2,024 and $4,820 for the nine month periods ended September
30, 1998 and 1997, respectively. The receivable for services, merchandise sales,
and other transactions related to the purchase of Foods' assets was $1,642 and
$8,768 at September 30, 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.
9. 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
BFH10
<PAGE> 46
businesses are included in loans due from or to affiliates. Net short-term loans
due to international affiliates were $0 at September 30, 1998 and $27,914 at
December 31, 1997 at a weighted average variable rate of 6.7%.
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 September 30, 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 loan principal outstanding
on the long-term notes was $47,616 at December 31, 1997 and was paid off in
February 1998. Interest expense on the long term notes was $0 and $4,278 for the
three months ended September 30, 1998 and 1997, respectively, and $575 and
$12,834 for the nine months ended September 30, 1998 and 1997, respectively.
Amounts payable for such charges were $37 and $1,274 as of September 30, 1998
and December 31, 1997, respectively.
10. COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS - There were no material developments during the third quarter
related to the Helm Tomatoes litigation. A new trial is scheduled to begin
during February of 1999. Details of first quarter events are discussed in the
report filed for the three months ended March 31, 1998.
BFC is involved in certain other legal proceedings arising through the normal
course of business. 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 the result of computer programs
written using two rather than four digits to define the applicable year. Many of
BFC's computer programs that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities. If not addressed, the
Year 2000 issue could have a negative material impact on the business operations
and financial results of BFC.
BFC's Year 2000 Program is a risk-based plan divided into three phases that are
being executed by both internal and external resources. These phases are: (I) an
inventory of all systems, assigning a business priority for each system and
performing a preliminary assessment of Year 2000 susceptibility, (II) completion
of a detailed Year 2000 susceptibility analysis and development of remediation
plans and contingency plans, and (III) implementation of the remediation and, if
necessary, contingency plans and completing final system testing.
BFH11
<PAGE> 47
The Year 2000 efforts are divided into three categories: (1) systems being
replaced by new enterprise-wide system implementation, (2) systems that will not
be replaced by the new enterprise-wide system implementation, including
non-information technology systems such as plant process controls, and (3)
external suppliers and customers.
The comprehensive new enterprise-wide system being implemented by BFC will
replace most business and accounting systems. The enterprise-wide system
versions are warranted by the vendor to be Year 2000 compliant by utilizing a
four digit standard, including PeopleSoft, Vista and I2. Due to the relative
complexity and importance of the business and accounting systems to ongoing
operations, the new enterprise-wide system implementation will address the
significant majority of BFC's internal Year 2000 risk. Implementation of the new
system is underway and expected to be completed no later than June 30, 1999.
BFC plans to substantially complete the remediation of systems not to be
replaced by the enterprise-wide system in 1998. For these systems not to be
replaced by the enterprise-wide implementation, Phase I is complete, Phase II is
substantially complete, and Phase III has begun. BFC expects to complete system
remediation and all system testing activities by June 30, 1999.
The Year 2000 Program also includes procedures to assess the risks related to
suppliers and customers. As a result of initial inquiries, supplier and customer
responses have been received. These responses will be evaluated and appropriate
procedures will be performed to determine the extent to which BFC may be
vulnerable to such parties' failure to resolve their own Year 2000 issues.
Efforts related to suppliers and customers, including development of contingency
plans where appropriate, are targeted for completion by June 30, 1999. Although
BFC's systems do not rely significantly on systems of other companies, BFC
cannot provide assurance that failure of third parties to address the Year 2000
issue will not have an adverse impact on business operations and results.
Significant investments in an enterprise-wide information system and Year 2000
program expenses addressing non-compliance across all areas of the company will
total approximately $43,200 by the year 2000. This amount consists of $34,000
for the enterprise-wide information system and $9,200 of total Y2K costs and
write-offs. Y2K costs and write-offs are comprised of $4,900 for business
remediation, $2,600 for other related areas and program management, and $1,800
in write-offs of non-compliant hardware and systems. As of September 30, 1998,
BFC has incurred expense and capital of approximately $6,900 for the
enterprise-wide system and approximately $1,400 for Year 2000 compliance.
Due to the general uncertainty inherent in the Year 2000 problem, including the
uncertainty associated with suppliers and customers, the potential effect on the
financial results and condition of BFC has not been measured. BFC intends the
Year 2000 Program to be completed on a timely basis so as to significantly
reduce the level of uncertainty and the impact on business operations and
financial results. Contingency plans have been and will continue to be developed
and implemented to mitigate Year 2000 risks and the effect of Year 2000 issues.
To date, contingency plans are being implemented to reduce the risk of potential
delays in the enterprise-wide system implementation.
BFH12
<PAGE> 48
[LOGO] WISE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
WH-1
<PAGE> 49
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
THREE MONTHS ENDED
SEPTEMBER 30,
(Dollars in thousands) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Net sales $55,478 $ 61,296
Cost of goods sold 34,382 37,279
------- --------
Gross margin 21,096 24,017
Distribution expense 7,053 7,283
Marketing expense 9,111 8,929
General & administrative expense 4,128 5,250
------- --------
Operating income 804 2,555
Interest expense 129 222
Other expense(income) 55 (17)
------- --------
Income before income taxes 620 2,350
Income tax expense 247 910
------- --------
Net income $ 373 $ 1,440
======= ========
Per Share Data
Basic and diluted income (loss) per common share $ 5.33 $ 20.57
Average number of common shares outstanding
during the period 70 70
- ------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
</TABLE>
WH-2
<PAGE> 50
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
NINE MONTHS ENDED
SEPTEMBER 30,
(Dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 170,630 $ 180,579
Cost of goods sold 106,814 114,275
--------- ---------
Gross margin 63,816 66,304
Distribution expense 21,192 20,156
Marketing expense 27,744 30,610
General & administrative expense 15,009 14,481
--------- ---------
Operating income(loss) (129) 1,057
Interest expense 361 725
Other expense (income) 72 (112)
--------- ---------
Income(Loss) before income taxes (562) 444
Income tax expense(benefit) (213) 150
--------- ---------
Net Income(loss) $ (349) $ 294
========= =========
Per Share Data
Basic and diluted income(loss) per common share $ (4.99) $ 4.20
Average number of common shares outstanding
during the period 70 70
- ---------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
</TABLE>
WH-3
<PAGE> 51
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share amounts)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 4,947 $ 3,604
Accounts receivable (less allowance for doubtful accounts
of $2,123 and $2,498, respectively) 20,040 23,131
Affiliated receivables 219 1,204
Inventories:
Finished goods 3,088 4,621
Raw materials and supplies 3,739 3,841
Deferred income taxes, net 1,733 2,825
Prepaid and other current assets 4,711 4,509
------- -------
38,477 43,735
------- -------
PROPERTY AND EQUIPMENT
Land 1,407 1,347
Buildings and improvements 5,144 5,585
Machinery and equipment 43,266 38,592
------- -------
49,817 45,524
Less accumulated depreciation 19,429 16,442
------- -------
30,388 29,082
------- -------
INTANGIBLES AND OTHER ASSETS
Trademarks (net of accumulated
amortization of $1,764 and $1,410, respectively) 17,047 17,401
Other assets 823 889
------- -------
17,870 18,290
------- -------
TOTAL ASSETS $86,735 $91,107
======= =======
- --------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
</TABLE>
WH-4
<PAGE> 52
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share amounts)
SEPTEMBER, 30 DECEMBER 31,
LIABILITIES AND SHAREHOLDER'S EQUITY 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt payable within one year $ 267 $ 270
Accounts and drafts payable 13,377 12,570
Affiliated payables 1,571 1,467
Accrued liabilities 12,021 15,735
------- -------
27,236 30,042
------- -------
OTHER LIABILITIES
Long-term debt payable to Borden, Inc. 7,000 7,000
Deferred income taxes, net 1,639 2,522
Non-pension postemployment
benefit obligations 9,596 9,960
Affiliated employee benefit obligation 1,893 1,817
Other long-term liabilities 434 371
Minority interest 721 830
------- -------
21,283 22,500
------- -------
Commitments and Contingencies (Note 6)
SHAREHOLDER'S EQUITY
Common stock - $0.01 par value
70 shares authorized,
issued and outstanding -- --
Preferred stock - $0.01 par value
30 shares authorized,
none issued and outstanding -- --
Paid in capital 34,980 34,980
Retained earnings 3,236 3,585
------- -------
38,216 38,565
------- -------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $86,735 $91,107
======= =======
- --------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
</TABLE>
WH-5
<PAGE> 53
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
NINE MONTHS ENDED
SEPTEMBER 30,
(Dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From (Used In) Operating Activities
Net loss $ (349) $ 294
Adjustments to reconcile net loss to net cash
from operating activities
Minority interest's share in income (6) 9
Depreciation 4,162 4,771
Amortization 354 353
Other non-cash 82 400
Net change in assets and liabilities:
Accounts receivable 1,596 (1,040)
Affiliated receivables 985 413
Inventories 643 1,028
Prepaid and other current assets (850) 238
Other assets 1,158 285
Accounts and drafts payable 2,239 (216)
Affiliated payables 104 (295)
Accrued liabilities (3,638) 2,416
Post-employment benefits other than pensions (192) 62
Affiliated employee benefit obligation 76 320
Other long-term liabilities (820) 134
------- -------
5,544 9,172
------- -------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (6,388) (3,571)
Acquisition of business -- (1,037)
Divestiture of business 2,107 --
Proceeds from sales of equipment 83 332
------- -------
(4,198) (4,276)
------- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Short-term borrowings 267 742
Repayment of short-term borrowings (270) (175)
Minority interest's equity contribution 40
------- -------
(3) 607
------- -------
INCREASE IN CASH AND EQUIVALENTS 1,343 5,503
Cash and equivalents at beginning of period 3,604 3,027
------- -------
Cash and equivalents at end of period $ 4,947 $ 8,530
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Exchange of Accounts Receivable for Assets of Business $ -- $ 878
Cash paid for interest: 388 922
Cash paid for taxes: 152 --
- ---------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
</TABLE>
WH-6
<PAGE> 54
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 Holdings Inc.
("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 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 two principal
divisions: Wise and Moore's. The Wise and Moore's divisions manufacture and
distribute primarily in the eastern United States. Wise's products are
distributed through both independent and company-owned distribution networks.
On May 11, 1998 Wise sold its Caribbean Snacks, Inc. subsidiary, which had
served as a distribution center throughout Puerto Rico and the Caribbean. (see
note 8 - Business Divestiture)
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.
WH-7
<PAGE> 55
The condensed consolidated financial statements of Wise collectively include the
financial position of Wise Holdings, Inc. and subsidiaries as of September 30,
1998 and December 31, 1997. These financial statements also include the
statements of operations of Wise for the three and nine months ended September
30, 1998 and 1997 and cash flows of Wise for the nine months ended September 30,
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 September 30, 1998 and 1997 is
computed by dividing net income or loss by the weighted average number of common
shares outstanding during the period ended September 30, 1998 and 1997,
respectively. On April 24, 1998 the number of shares authorized and outstanding
were reduced for administrative and tax purposes. The Per Share information for
September 30, 1998 and 1997 is computed based on the adjusted shares
outstanding. 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:
September 30, December 31,
1998 1997
- -------------------------------------------------------------------------------
Compensation $ 875 $ 2,758
General insurance 5,164 5,627
Advertising and promotion 2,883 3,591
Other 2,589 3,759
------- --------
Total $11,511 $ 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.
WH-8
<PAGE> 56
Revolving Loan
- --------------
The Loan Agreement provides for a revolving loan facility of up to $5 million
maturing in December 1998, at a variable interest rate equal to Borden's cost of
funds for 30 day LIBOR borrowings plus 0.25%. A commitment fee based on a
variable rate tied to Borden's leverage is charged on the unused portion of the
revolving loan facility. Wise had no borrowings under the revolving agreement at
September 30, 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 September 30, 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
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 $1,571 and
$1,467 at September 30, 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.
WH-9
<PAGE> 57
The following table summarizes the charges to Wise for these costs.
<TABLE>
<CAPTION>
Quarter ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Employee benefits $ 447 $ 493 $1,396 $1,526
Group and general insurance 1,161 846 2,945 3,629
Information services 54 56 156 156
Corporate staff departments and overhead 221 646 1,130 1,402
------ ------ ------ ------
$1,883 $2,041 $5,627 $6,713
====== ====== ====== ======
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
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
$3,700 and $2,350 at September 30, 1998 and December 31, 1997, respectively
which is included as a component of cash.
8. BUSINESS DIVESTITURE
On May 11, 1998, Wise sold its subsidiary, Caribbean Snacks, Inc. for $2,107
resulting in a pretax loss of $438 (after tax loss $267).
WH-10
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