<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 June 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 August 14, 1998: 198, 974, 994
<PAGE> 2
BORDEN, INC.
INTRODUCTION
The following filing with the Securities and Exchange Commission ("SEC") by
Borden, Inc. ("the Company") presents four separate financial statements:
Borden, Inc. 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
PART I - FINANCIAL INFORMATION
BORDEN, INC. ("BORDEN") CONDENSED CONSOLIDATED AND BORDEN, INC.
AND AFFILIATES CONDENSED COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Condensed Consolidated Statements of Operations and Comprehensive Income,
three months ended June 30, 1998 and 1997............................................................... 4
six months ended June 30, 1998 and 1997................................................................. 6
Condensed Consolidated Balance Sheets, June 30, 1998, and December 31, 1997................................. 8
Condensed Consolidated Statements of Cash Flows, six months ended June 30, 1998 and 1997....................10
Condensed Consolidated Statement of Shareholders' Equity, six months ended June 30, 1998....................12
Condensed Combined Statements of Operations and Comprehensive Income,
three months ended June 30, 1998 and 1997...............................................................13
six months ended June 30, 1998 and 1997.................................................................14
Condensed Combined Balance Sheets, June 30, 1998, and December 31, 1997.....................................15
Condensed Combined Statements of Cash Flows, six months ended June 30, 1998 and 1997........................17
Condensed Combined Statement of Shareholders' Equity, six months ended June 30, 1998........................19
Notes to Condensed Consolidated and Combined Financial Statements...........................................20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................................................33
Item 6. Exhibits, Guarantor Financial Statement Schedules and Reports on Form 8-K................................33
</TABLE>
3
<PAGE> 4
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED)
BORDEN, INC.
<TABLE>
<CAPTION>
Three Months Ended
June 30,
(In millions, except per share data) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 368.4 $ 387.0
Cost of goods sold 259.9 290.2
-------- --------
Gross margin 108.5 96.8
-------- --------
Distribution expense 14.3 14.0
Marketing expense 23.2 24.7
General & administrative expense 38.7 30.6
(Gain) on divestiture of business (8.3) -
-------- --------
Operating income 40.6 27.5
-------- --------
Interest expense 15.7 24.3
Interest income and other (6.0) (4.1)
Affiliated interest expense, net of affiliated interest
income of $0.5 and $7.4, respectively 4.1 (6.5)
-------- --------
Income from continuing operations
before income tax 26.8 13.8
Income tax expense 12.4 4.2
-------- --------
Income from continuing operations 14.4 9.6
-------- --------
Discontinued operations:
Income from operations, net of tax - 12.5
-------- --------
Net income 14.4 22.1
Preferred stock dividends (18.4) (18.4)
-------- --------
Net (loss) income applicable to common stock $ (4.0) $ 3.7
======== ========
Comprehensive income (See Note 6) $ 6.6 $ 21.0
======== ========
</TABLE>
4
<PAGE> 5
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED) (CONTINUED)
BORDEN, INC.
<TABLE>
<CAPTION>
Three Months Ended
June 30,
(In millions, except per share data) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Basic and Diluted Per Share Data
- --------------------------------
Income from continuing operations $ 0.07 $ 0.05
Discontinued operations:
Income from operations - 0.06
---------- ----------
Net income 0.07 0.11
Preferred stock dividends (0.09) (0.09)
---------- ----------
Net (loss) income applicable to common stock $ (0.02) $ 0.02
========== ==========
Dividends per common share $ 0.10 $ 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
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED)
BORDEN, INC.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(In millions, except per share data) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 735.5 $ 748.7
Cost of goods sold 534.7 565.4
-------- --------
Gross margin 200.8 183.3
-------- --------
Distribution expense 26.6 26.4
Marketing expense 42.6 43.6
General & administrative expense 74.1 61.4
(Gain) on divestiture of business (8.3) -
-------- --------
Operating income 65.8 51.9
-------- --------
Interest expense 32.1 47.9
Interest income and other (12.0) 0.1
Affiliated interest expense, net of affiliated interest
income of $1.6 and $13.5, respectively 8.9 (11.6)
-------- --------
Income from continuing operations
before income tax 36.8 15.5
Income tax expense 16.5 7.7
-------- --------
Income from continuing operations 20.3 7.8
-------- --------
Discontinued operations:
Income from operations, net of tax 2.3 19.6
Income from disposal, net of tax 26.0 -
-------- ------
Net income 48.6 27.4
Preferred stock dividends (36.9) (36.9)
-------- --------
Net income (loss) applicable to common stock $ 11.7 $ (9.5)
======== ========
Comprehensive income (See Note 6) $ 43.0 $ 18.4
======== ========
</TABLE>
6
<PAGE> 7
- ------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED) (CONTINUED)
BORDEN, INC.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(In millions, except per share data) 1998 1997
- -----------------------------------------------------------------------------
Basic and Diluted Per Share Data
- --------------------------------
<S> <C> <C>
Income from continuing operations $ 0.10 $ 0.04
Discontinued operations:
Income from operations 0.01 0.10
Income from disposal 0.13 -
---------- ----------
Net income 0.24 0.14
Preferred stock dividends (0.19) (0.19)
---------- ----------
Net income (loss) applicable to common stock $ 0.05 $ (0.05)
========== ==========
Dividends per common share $ 0.17 $ 0.13
Dividends per preferred share $ 1.50 $ 1.50
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
- ------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN, INC.
<TABLE>
<CAPTION>
(In millions)
June 30, December 31,
ASSETS 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 730.6 $ 183.6
Accounts receivable (less allowance for doubtful accounts of $9.5
and $9.4, respectively) 244.5 242.2
Amount due from unconsolidated affiliate 6.1 -
Inventories:
Finished and in-process goods 62.3 74.8
Raw materials and supplies 48.6 54.3
Deferred income taxes 104.0 106.1
Other current assets 20.2 34.9
Net assets of discontinued operations (See Note 5) - 165.2
---------- ----------
1,216.3 861.1
INVESTMENTS AND OTHER ASSETS
Investments 111.2 109.5
Deferred income taxes 83.6 170.4
Prepaid pension assets 126.2 140.2
Other assets 36.8 34.3
Assets sold under contractual arrangement (net of allowance
of $62.4 and $609.6, respectively) (See Note 2) 45.7 302.1
---------- ----------
403.5 756.5
PROPERTY AND EQUIPMENT
Land 23.0 23.5
Buildings 93.3 106.8
Machinery and equipment 677.3 738.4
---------- ----------
793.6 868.7
Less accumulated depreciation (317.4) (360.8)
---------- ----------
476.2 507.9
INTANGIBLES 68.4 80.4
---------- ----------
TOTAL ASSETS $ 2,164.4 $ 2,205.9
========== ==========
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Combined Financial Statements
8
<PAGE> 9
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN, INC.
(In millions, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
- --------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
<S> <C> <C>
Debt payable within one year $ 15.5 $ 6.9
Accounts and drafts payable 121.6 137.3
Income taxes payable 315.3 309.6
Loans payable with affiliates 437.6 4.0
Other current liabilities 307.7 328.8
---------- ----------
1,197.7 786.6
---------- ----------
OTHER LIABILITIES
Liabilities sold under contractual arrangement 41.6 230.1
Long-term debt 553.5 788.3
Non-pension post-employment benefit obligations 204.0 226.3
Other long-term liabilities 88.3 94.9
---------- ----------
887.4 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 348.1 384.0
Receivable from parent (434.7) (464.1)
Accumulated other comprehensive income (53.6) (48.0)
Accumulated deficit (396.9) (408.6)
---------- ----------
79.3 79.7
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,164.4 $ 2,205.9
========== ==========
</TABLE>
- ------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Combined Financial Statements
9
<PAGE> 10
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN, INC.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(In millions) 1998 1997
- -------------------------------------------------------------------------------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 48.6 $ 27.4
Adjustments to reconcile net income to net
cash from (used in) operating activities:
(Gain) on disposal of discontinued operations (90.7) -
(Gain) on divestiture of business (8.3) -
Deferred tax provision 88.1 51.4
Depreciation and amortization 25.8 17.6
Unrealized (gain) on interest rate swap (1.9) (2.7)
Loss on net assets sold under contractual arrangement 1.4 4.5
Restructuring - (1.7)
Net change in assets and liabilities:
Trade receivables (23.9) (27.7)
Inventories (2.5) (5.3)
Trade payables (3.0) 16.3
Due from affiliate (6.1) -
Income taxes 8.9 (46.3)
Other assets 33.0 9.1
Other liabilities (49.0) (43.3)
Discontinued operations, working capital, cash
and non cash charges 3.0 (13.5)
-------- --------
23.4 (14.2)
-------- --------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (29.8) (63.5)
Proceeds from the divestiture of businesses 335.9 53.9
Purchase of business (14.4) -
Return on investment in affiliate 66.5 (7.6)
-------- --------
358.2 (17.2)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net short-term debt borrowings 4.0 26.0
Borrowings of long-term debt - 362.4
Repayment of long-term debt (235.3) (347.0)
Affiliated borrowings 433.6 -
Interest received from parent 34.1 25.5
Common stock dividends paid (34.1) (25.5)
Preferred stock dividends paid (36.9) (36.9)
-------- --------
165.4 4.5
-------- --------
</TABLE>
- -------------------------------------------------------------------------------
10
<PAGE> 11
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)
BORDEN, INC.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(In millions) 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in cash and equivalents $ 547.0 $ (26.9)
Cash and equivalents at beginning
of period 183.6 118.3
-------- --------
Cash and equivalents at end
of period $ 730.6 $ 91.4
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest $ 23.5 $ 25.2
Taxes 8.9 11.7
Non-cash activity:
Distribution of note receivable from Company's parent
to cancel options 28.5 -
Investment retained in Decorative Products 10.5 -
Capital contribution by parent 12.1 12.2
- ------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
11
<PAGE> 12
- ------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
BORDEN, INC.
(In millions)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
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 48.6 48.6
Cash dividends-preferred stock (36.9) (36.9)
Cash dividends-common stock (34.1) (34.1)
Translation adjustments and other (5.6) (5.6)
Interest accrued on notes from parent 15.5 0.9 16.4
Capital contribution from parent 12.1 12.1
Cancel option on Decorative Products (29.4) 28.5 (0.9)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 $ 614.4 $ 2.0 $ 348.1 $(434.7) $(53.6) $ (396.9) $ 79.3
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
12
<PAGE> 13
- -------------------------------------------------------------------------------
CONDENSED COMBINED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED)
BORDEN, INC. AND AFFILIATES
<TABLE>
<CAPTION>
Three Months Ended
June 30,
(In millions) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 582.5 $ 884.8
Cost of goods sold 392.8 591.9
-------- --------
Gross margin 189.7 292.9
-------- --------
Distribution expense 30.7 44.9
Marketing expense 77.7 146.1
General & administrative expense 63.6 62.4
(Gain) on divestiture of businesses (9.4) -
-------- --------
Operating income 27.1 39.5
-------- --------
Interest expense 15.9 24.7
Interest income and other (6.4) (0.5)
-------- --------
Income from continuing operations
before income tax 17.6 15.3
Income tax expense 23.5 7.5
-------- --------
(Loss) income from continuing operations (5.9) 7.8
-------- --------
Discontinued operations:
Income from operations, net of tax - 12.5
-------- --------
Net (loss) income (5.9) 20.3
Affiliate's share of income (1.3) -
Preferred stock dividends (18.4) (18.4)
-------- --------
Net (loss) income applicable to common stock $ (25.6) $ 1.9
======== ========
Comprehensive income (See Note 6) $ (20.3) $ 14.3
======== ========
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Combined Financial Statements
13
<PAGE> 14
- -------------------------------------------------------------------------------
CONDENSED COMBINED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED)
BORDEN, INC. AND AFFILIATES
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(In millions) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 1,226.2 $ 1,721.7
Cost of goods sold 835.0 1,161.8
---------- ----------
Gross margin 391.2 559.9
---------- ----------
Distribution expense 64.5 85.8
Marketing expense 171.0 298.6
General & administrative expense 120.9 121.5
(Gain) on divestiture of businesses (310.8) -
---------- ----------
Operating income 345.6 54.0
---------- ----------
Interest expense 32.8 48.4
Interest income and other (14.4) (7.3)
---------- ----------
Income from continuing operations
before income tax 327.2 12.9
Income tax expense 90.4 6.3
---------- ----------
Income from continuing operations 236.8 6.6
---------- ----------
Discontinued operations:
Income from operations, net of tax 2.3 19.6
Income from disposal, net of tax 26.0 -
---------- ----------
Net income 265.1 26.2
Affiliate's share of income (130.0) -
Preferred stock dividends (36.9) (36.9)
---------- ----------
Net income (loss) applicable to common stock $ 98.2 $ (10.7)
========== ==========
Comprehensive income (See Note 6) $ 251.3 $ (1.8)
========== ==========
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Combined Financial Statements
14
<PAGE> 15
- --------------------------------------------------------------------------------
CONDENSED COMBINED BALANCE SHEETS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
(In millions)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
- -------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
<S> <C> <C>
Cash and equivalents $ 754.2 $ 198.6
Accounts receivable (less allowance for doubtful accounts of $13.6
and $16.7, respectively) 325.5 425.6
Inventories:
Finished and in-process goods 120.3 192.1
Raw materials and supplies 70.3 101.2
Deferred income taxes 153.8 149.3
Other current assets 34.9 67.1
Net assets of discontinued operation (See Note 5) - 165.2
--------- ---------
1,459.0 1,299.1
INVESTMENTS AND OTHER ASSETS
Investments 111.2 109.5
Deferred income taxes 83.8 223.6
Prepaid pension assets 137.3 151.2
Other assets 39.7 38.7
--------- ---------
372.0 523.0
PROPERTY AND EQUIPMENT
Land 38.5 42.2
Buildings 209.5 255.1
Machinery and equipment 1,055.0 1,227.9
--------- ---------
1,303.0 1,525.2
Less accumulated depreciation (607.7) (731.8)
--------- ---------
695.3 793.4
INTANGIBLES 400.9 434.2
--------- ---------
TOTAL ASSETS $ 2,927.2 $ 3,049.7
========= =========
- -------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
15
<PAGE> 16
- -------------------------------------------------------------------------------
CONDENSED COMBINED BALANCE SHEETS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
(In millions)
<TABLE>
<CAPTION>
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
- -------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
<S> <C> <C>
Debt payable within one year $ 22.6 $ 28.0
Accounts and drafts payable 190.7 248.6
Income taxes payable 342.2 353.0
Loans with affiliates 133.1 4.0
Other current liabilities 544.4 486.5
--------- ---------
1,233.0 1,120.1
--------- ---------
OTHER LIABILITIES
Long-term debt 558.2 794.9
Non-pension post-employment
benefit obligations 222.4 245.5
Other long-term liabilities 115.7 135.2
--------- ---------
896.3 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 641.5 666.5
Receivable from parent (434.7) (464.1)
Affiliate's interest in subsidiary 50.0 203.3
Accumulated other comprehensive income (86.6) (181.2)
Retained earnings (deficit) 11.3 (86.9)
--------- ---------
797.9 754.0
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,927.2 $ 3,049.7
========= =========
- -------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
16
<PAGE> 17
- -------------------------------------------------------------------------------
CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(In millions) 1998 1997
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 265.1 $ 26.2
Adjustments to reconcile net income to net
cash from (used in) operating activities:
(Gain) on disposal of discontinued operations (90.7) -
(Gain) on divestiture of businesses (310.8) -
Deferred tax provision 124.8 46.2
Depreciation and amortization 43.9 46.6
Unrealized (gain) on interest rate swap (1.9) (2.7)
Restructuring - (1.7)
Net change in assets and liabilities:
Trade receivables 33.1 (13.9)
Inventories 19.4 (8.1)
Trade payables (27.6) (3.9)
Income taxes (7.8) (64.1)
Other assets 44.2 21.5
Other liabilities (10.2) (61.3)
Discontinued operations, working capital, cash
and non cash charges 3.0 (13.5)
-------- ------
84.5 (28.7)
-------- ------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (46.4) (79.5)
Proceeds from the divestiture of businesses 1,059.1 53.9
Proceeds from the sale of fixed assets 11.2 -
Purchase of business (14.4) -
-------- ------
1,009.5 (25.6)
-------- ------
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES
Net short-term debt borrowings 6.7 30.8
Borrowings of long-term debt - 361.7
Repayment of long-term debt (236.0) (347.0)
Distribution to affiliates (272.2) -
Interest received from parent 34.1 25.5
Common stock dividends paid (34.1) (25.5)
Preferred stock dividends paid (36.9) (36.9)
-------- ------
(538.4) 8.6
-------- ------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
- -------------------------------------------------------------------------------
CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
BORDEN, INC. AND AFFILIATES
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(In millions) 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in cash and equivalents $ 555.6 $ (45.7)
Cash and equivalents at beginning
of period 198.6 153.5
------- -------
Cash and equivalents at end
of period $ 754.2 $ 107.8
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest $ 15.0 $ 35.1
Taxes 59.6 33.2
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 12.1 12.2
Affiliate's share of income 130.0
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Combined Financial Statements
18
<PAGE> 19
- -------------------------------------------------------------------------------
CONDENSED COMBINED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
BORDEN, INC. AND AFFILIATES
<TABLE>
<CAPTION>
(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 265.1 265.1
Cash dividends-preferred (36.9) (36.9)
Cash dividends-common stock (34.1) (34.1)
Translation adjustments and other 94.6 94.6
Interest accrued on notes from parent 15.3 0.9 16.2
Cancel option on Decorative Products (29.4) 28.5 (0.9)
Capital contribution from parent 12.1 12.1
Affiliate's interest in subsidiary 11.1 (153.3) (130.0) (272.2)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 $614.4 $2.0 $641.5 $(434.7) $ 50.0 $ (86.6) $ 11.3 $ 797.9
- -----------------------------------------------------------------------------------------------------------------------------------
</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 BWHLLC, an affiliate of the Company's parent, together with
subsidiaries of Wise Holdings, Inc. ("Wise Holdings") and subsidiaries of
Borden Foods Holdings Corporation ("Foods Holdings,") purchased Wise and
Foods on July 2, 1996 and October 1, 1996, respectively. As a result of
these sales, Wise and Foods, as of their respective sale dates, are no
longer legally part of Borden, Inc. (the "Registrant") on a consolidated
basis. However, management of the Registrant continues to exercise
significant operating and financial control over Wise and Foods. In
addition, Wise Holdings and Foods Holdings provide financial guarantees to
obligations under the Company's credit facility and all of the Company's
outstanding publicly held debt. Because of the aforementioned control and
guarantees, the Company has included, supplementally in this filing, the
Combined Companies financial condition and results of operations and cash
flows. The Combined Companies present financial information on a basis
consistent with that upon which credit was originally extended to the
Company.
The accompanying unaudited interim consolidated and combined financial
statements contain all adjustments, consisting only of normal adjustments,
which in the opinion of management are necessary for a fair statement of
the results for the interim periods. Results for the interim periods are
not necessarily indicative of results for the full years.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ASSETS AND LIABILITIES HELD UNDER CONTRACTUAL ARRANGEMENTS - Because
management of the Company exercises significant control over Wise and
Foods, the assets and liabilities of Wise and Foods, as of their respective
sale dates, 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 June 30, 1998, the
Company's net investment in Wise was $4.1. The December 31, 1997, net
investment totaled $6.5 for Wise and $65.5 for Foods. For the six months
ended June 30, 1998 and 1997, the Company recorded losses on the continuing
investment totaling $1.4 and $4.5, respectively. The losses are recorded as
other non-operating expense in the consolidated results of operations.
The Combined Companies continue to report Wise and Foods at the Company's
historical values since they remain members of the controlled group and
since in management's best estimate, future operating cash flows from Wise
and Foods are expected to exceed the historical carrying values of the
businesses.
RECLASSIFICATION - Certain prior year amounts have been reclassified to
conform with the 1998 presentation.
20
<PAGE> 21
3. BUSINESS REALIGNMENT
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 consisted of $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 June 30,
1998, is approximately $156 million of divestiture reserves related to the
sales of Unaligned Foods businesses. Of this amount, approximately $44
million relates to non-cash charges associated with assets to be sold.
4. AFFILIATE'S SHARE OF INCOME
In association with the divestiture of the Signature Flavor business, 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.
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.
Immediately prior to the transaction the Company canceled options on all of
the common stock of the Decorative Products business. The options were
issued in 1997 to BWHLLC for $31.0 in 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.
21
<PAGE> 22
Dairy
-----
On September 4, 1997, the Company completed the sale of its dairy
operations.
The results indicated below for Decorative Products and Dairy operations
have been reported separately as discontinued operations in the
consolidated and combined statements of operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ - $ 312.0
Income before income taxes - 19.9
Income tax expense - 7.4
Income from discontinued operations - 12.5
- -----------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
Net sales $ 73.2 $ 611.4
Income before income taxes 3.5 33.6
Income tax expense 1.2 14.0
Income from discontinued operations 2.3 19.6
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
6. COMPREHENSIVE INCOME
Comprehensive income was computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
--------------------------
CONSOLIDATED COMBINED
------------ --------
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ 14.4 $ 22.1 $ (5.9) $ 20.3
Foreign currency translation adjustments (7.8) (1.1) (14.4) (6.0)
------ ------- -------- -------
Comprehensive income $ 6.6 $ 21.0 $ (20.3) $ 14.3
- -----------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30
------------------------
CONSOLIDATED COMBINED
------------ --------
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 48.6 $ 27.4 $ 265.1 $ 26.2
Foreign currency translation adjustments (5.6) (9.0) 94.6 (28.0)
Less: Reclassification adjustments (108.4)
------ ------- -------- -------
Comprehensive income $ 43.0 $ 18.4 $ 251.3 $ (1.8)
- -----------------------------------------------------------------------------------------------------------------------------
</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. In addition Foods
reimburses the Company for the payment of certain taxes. The amount due
from Foods at June 30, 1998, was $6.1.
In addition, Foods and BWHLLC, an affiliate of the Company's parent,
invested cash not used in operations with the Company. At June 30, 1998,
Foods had $304.5, net of a $15.1 affiliated note payable, invested with the
Company and BWHLLC had $133.1 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.
8. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS - The Company, like others in similar businesses, is
subject to extensive federal, state and local environmental laws and
regulations. Although the Company's environmental policies and practices
are designed to ensure compliance with these laws and regulations, future
developments and increasingly stringent regulation could require the
Company to make additional unforeseen environmental expenditures.
Accruals for environmental matters are recorded when it is probable that a
liability has been incurred and the amount of the liability can be
reasonably estimated. Environmental accruals are routinely reviewed on an
interim basis as events and developments warrant and are subjected to a
comprehensive review annually during the fiscal fourth quarter. The Company
and the Combined Companies have each accrued approximately $20.0 and $23.0
at June 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 believes that it is reasonably
possible that costs associated with such liabilities may exceed current
reserves by amounts that may prove insignificant, or by amounts, in the
aggregate, of up to approximately $12.0.
LEGAL MATTERS - The Company has recorded $35.5 in liabilities on a combined
basis and $20.8 on a consolidated basis at June 30, 1998, for legal costs
that it believes are probable and reasonably estimable. These liabilities
at December 31, 1997, totaled $35.8 on a combined basis and $21.0 on a
consolidated basis. Actual costs are not expected to exceed these amounts.
In addition, the Company may be held responsible for certain environmental
liabilities incurred at Borden Chemicals and Plastics Limited Partnership
facilities, which were previously owned by the Company. The Company
believes, based upon the information it currently possesses, and taking
into account its established reserves for estimated liability and its
insurance coverage, that the ultimate outcome of the foregoing proceedings
and actions is unlikely to have a material adverse effect on the Company's
financial position or operating results.
OTHER COMMITMENTS - A wholly owned subsidiary serving as general partner of
Borden Chemicals and Plastics Limited Partnership ("BCP") has certain
fiduciary responsibilities to BCP's unitholders. The Company believes that
such responsibilities will not have a material adverse effect on its
financial statements.
23
<PAGE> 24
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.
<TABLE>
<CAPTION>
(Dollars in millions)
- -----------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- ------------------------
NET SALES 1998 1997 1998 1997
- --------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Chemical $ 323.7 $ 328.1 $ 643.4 $ 646.4
Consumer Products
and Services 36.0 31.1 55.3 48.9
Businesses Held for Sale 8.7 27.8 36.8 53.4
-------- ------ ---------- ----------
CONSOLIDATED NET SALES 368.4 387.0 735.5 748.7
Foods ongoing 126.9 179.5 276.5 379.5
Foods Unaligned 26.0 255.5 99.0 474.1
-------- ------ ---------- ----------
Total Foods 152.9 435.0 375.5 853.6
Wise 61.2 62.8 115.2 119.4
-------- ------ ---------- ----------
COMBINED NET SALES $ 582.5 $ 884.8 $ 1,226.2 $ 1,721.7
======== ======== ========== ==========
OPERATING INCOME
- ----------------
Chemical $ 41.1 $ 34.3 $ 75.2 $ 65.0
Consumer Products
and Services 4.3 2.6 4.0 3.7
Corporate (3.7) (9.9) (12.0) (18.9)
-------- ------ ---------- ----------
Subtotal 41.7 27.0 67.2 49.8
Businesses Held for Sale (1.1) 0.5 (1.4) 2.1
-------- ------ ---------- ----------
CONSOLIDATED OPERATING INCOME 40.6 27.5 65.8 51.9
Foods ongoing (12.6) (11.8) (19.6) (24.7)
Gain on sale 1.1 - 302.5 -
Foods Unaligned (2.1) 24.3 (0.3) 28.6
-------- ------ ---------- ----------
Total Foods (13.6) 12.5 282.6 3.9
Wise 0.1 (0.5) (2.0) (1.8)
Combining adjustments - - (0.8) -
-------- ------ ---------- ----------
COMBINED OPERATING INCOME $ 27.1 $ 39.5 $ 345.6 $ 54.0
======== ======== ========== ==========
- -----------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 25
CONSOLIDATED AND COMBINED THREE MONTHS ENDED JUNE 30, 1998 VERSUS THREE MONTHS
ENDED JUNE 30, 1997
Consolidated Summary
- --------------------
Consolidated net sales declined $18.6 million or 5% from 1997. The majority of
this decline was caused by the sale of the Company's commercial and industrial
wallcoverings business (formerly classified within "Businesses Held for Sale")
in April 1998.
Consolidated operating income improved $13.1 million or 48% from 1997, primarily
due to income from recently acquired Chemical businesses, improved margins in
the forest products business, and improved management and settlement of assets
and liabilities relating to businesses sold in prior years, offset by lower
contributions from Chemical businesses in Asia and Latin America when compared
to 1997.
Combined Summary
- ----------------
Combined sales declined $302.3 million or 34% from 1997, reflecting the sale of
Foods Unaligned businesses in early 1998 and late 1997 and the exit from
unprofitable private label sales in the Foods ongoing business, as well as the
net improvement described above for the Consolidated Company.
Operating income declined $12.4 million or 31%. Offsetting the positive factors
described for the Consolidated Company was a $26.4 million decline in the
operating results of Foods Unaligned businesses due to the sale of these
businesses.
Chemical
- --------
Chemical sales declined $4.4 million or 1% from 1997. This slight change from
1997 reflects incremental sales of approximately $19 million from the melamine
and derivatives product line, which includes two businesses acquired within the
past 12 months, offset by unfavorable currency exchange rates in Asia and Latin
America and by lower selling prices in the forest products business. Excluding
the approximately $10 million unfavorable impact of foreign currency translation
on Asian and Latin American sales, Chemical sales rose nearly $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 has experienced good results,
including record production in the month of June in response to strong demand.
Management expects strong demand and stable prices to continue throughout 1998.
Lower selling prices in the forest products business when compared to 1997
prices, reflecting the partial pass through of lower raw materials costs, have
decreased sales by over $20 million despite increased volume from strong housing
starts due to continued low interest rates.
Operating income increased $6.8 million or 20% from 1997. This improvement is
due primarily to the melamine and derivatives businesses purchased within the
past 12 months. Improved margins due to lower raw materials costs in the forest
products business also contributed to increased operating income. Partially
offsetting these factors were decreased operating income in Latin America and
Asia. In Latin America, poor economic conditions have resulted in late payments
by customers, debt write-offs, and increased inventory due to slow sales. These
difficulties were partially mitigated by lower raw material costs and aggressive
actions by management to reduce administrative costs. In Asia, unfavorable
currency exchange rates versus the dollar and higher general and administrative
costs have hurt operating income, but were partially offset by lower raw
material costs.
25
<PAGE> 26
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 improved $4.9 million or 16% from 1997.
This increase is the result of strong seasonal sales in the consumer adhesives
business. Operating income increased $1.7 million or 65% from 1997, due to
improved sales of higher margin products in the consumer adhesives business, as
well as higher sales.
Corporate
- ---------
Corporate results improved $6.2 million from 1997 to expenses of $3.7 million.
This improvement was primarily the result of improved management and 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 $52.6 million or 29% from 1997.
This decline was the expected result of a reduction in pasta volume due to
management's decision to exit the unprofitable private label business and
unprofitable markets, and elimination of low margin product lines and brands,
which occurred in the last four months of 1997.
Sales for Foods Unaligned businesses fell $229.5 million from 1997, reflecting
the sale of most of these businesses in early 1998 and late 1997.
Foods operating results from ongoing operations remained relatively flat,
declining $0.8 million to a loss of $12.6 million, despite the decrease in
ongoing sales. This decline was caused primarily by lower sales volume and
higher raw materials costs in 1998, largely offset by savings of $9.2 million on
plant overhead due to the closure of five pasta facilities in 1997 and
further production line reductions in early 1998.
Foods Unaligned businesses' results declined $26.4 million from 1997 due to the
sale of most Unaligned businesses in early 1998 and late 1997.
Wise
- ----
Wise sales remained relatively flat, declining $1.6 million or 3% from 1997.
This decline reflects loss of market share due to competitors' ongoing pricing
promotions, as well as the absence of sales from a business sold in 1998.
Management is currently evaluating promotional strategies to offset this
decline. Operating results improved from a loss in the prior year to operating
income of $0.1 million. This improvement was the result of reduced trade
spending in 1998, as well as ongoing improvements in manufacturing efficiency.
26
<PAGE> 27
CONSOLIDATED AND COMBINED SIX MONTHS ENDED JUNE 30, 1998 VERSUS SIX MONTHS ENDED
JUNE 30, 1997
Consolidated Summary
- --------------------
Consolidated net sales declined $13.2 million or 2% from 1997. The majority of
this decline from 1997 was caused by the sale of the Company's commercial and
industrial wallcoverings business (formerly classified as "Businesses Held for
Sale") in April 1998.
Consolidated operating income improved $13.9 million or 27% from 1997, primarily
due to income from recently acquired Chemical businesses, improved margins in
the forest products business, and improved management and settlement of assets
and liabilities relating to businesses sold in prior years, offset by lower
contributions from Chemical businesses in Asia and Latin America when compared
to 1997.
Combined Summary
- ----------------
Combined sales declined $495.5 million or 29%, reflecting the sale of Foods
Unaligned businesses in l998 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 $291.6, due to
the $302.5 million gain on the sale of certain Foods Unaligned businesses.
Absent this gain, operating results declined $10.9 million or 20%, reflecting
the absence of operating income from divested Unaligned Foods businesses.
Chemical
- --------
Chemical sales declined $3.0 million or less than 1% from 1997. This slight
change from 1997 reflects incremental sales of approximately $35 million from
the melamine and derivatives product line, which includes two businesses
acquired within the past 12 months, offset by unfavorable currency exchange
rates in Asia and Latin America and by lower selling prices in the forest
products business. Excluding the approximately $20 million unfavorable impact of
foreign currency translation on Asian and Latin American sales, Chemical sales
rose over $17 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 has experienced good results,
including record production in the month of June in response to strong demand.
Management expects strong demand and stable prices to continue throughout 1998.
Lower selling prices in the forest products business when compared to 1997
prices, reflecting the partial pass through of lower raw materials costs, have
decreased sales by over $34 million despite increased volume from strong housing
starts due to low interest rates.
Operating income increased $10.2 million or 16% from 1997. This improvement is
due primarily to the melamine and derivatives businesses purchased within the
past 12 months. Improved margins due to lower raw materials costs in the forest
products business also contributed to increased operating income. Partially
offsetting these factors were decreased operating income in Latin America and
Asia. In Latin America, poor economic conditions have resulted in late payments
by customers, debt write-offs, and increased inventory due to slow sales. These
difficulties were partially mitigated by lower raw material costs and aggressive
actions by management to reduce administrative costs. In Asia, unfavorable
currency exchange rates versus the dollar and higher general and administrative
costs have hurt operating income, but were partially offset by lower raw
material costs.
27
<PAGE> 28
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 $6.4 million or 13% from 1997.
This improvement is the result of stronger than usual seasonal sales in the
consumer adhesives business. Operating income rose $0.3 million or 8% from 1997.
The increase was due to improved sales of higher margin products in the consumer
adhesives business, as well as higher sales, partially offset by higher
administrative costs in the first quarter of 1998.
Corporate
- ---------
Corporate results improved $6.9 million to expenses of $12.0 million. This
improvement was primarily the result of improved management and 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 $103.0 million or 27% from 1997.
This decline was the expected result of a reduction in pasta volume due to
management's decision to exit from the unprofitable private label business and
unprofitable markets, and elimination of low margin product lines and brands,
which occurred in the last four months of 1997.
Sales for Foods Unaligned businesses declined $375.1 million, reflecting the
sale of most of these businesses in 1998 and late 1997.
Foods operating results from ongoing operations improved $5.1 million, despite
the decrease in ongoing sales, to a loss of $19.6 million. This improvement was
the result of reduced plant overhead and administrative costs, which more than
offset the reduced contribution from eliminated sales volume, partially offset
by higher raw material costs. Plant overhead savings amounted to approximately
$19.2 million for the first six months of 1998, attributed to the closure of
five pasta plants in 1997 and further production line reductions in early 1998.
Foods Unaligned businesses' operating income declined $28.9 million due to the
sale of most Unaligned businesses in 1998 and late 1997. Foods recorded gains of
$302.5 million in the first half of 1998 on the sale of Unaligned businesses.
Wise
- ----
Wise sales declined $4.2 million or 4% from 1997. This decline reflects loss of
market share due to competitors' ongoing deep feature pricing promotions.
Management is currently evaluating promotional strategies to offset this
decline. Operating results remained relatively flat from the prior year,
reflecting a $1.0 million loss accrued in the first quarter on the sale of a
business, offset by lower marketing expense and ongoing improvements in
manufacturing efficiency. Absent the loss on the sale of a business, operating
results improved $0.8 million to a loss of $1.0 million.
28
<PAGE> 29
NON-OPERATING EXPENSES AND INCOME TAXES
- ---------------------------------------
Following is a comparison of non-operating expenses for the three months ended
June 30, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
CONSOLIDATED COMBINED
------------ --------
(Dollars in millions) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest expense $ 15.7 $ 24.3 $ 15.9 $ 24.7
Affiliated interest expense (income), net 4.1 (6.5) - -
Other (6.0) (4.1) (6.4) (0.5)
------- ------- ------- -------
$ 13.8 $ 13.7 $ 9.5 $ 24.2
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Following is a comparison of non-operating expenses for the six months ended
June 30, 1998 and 1997.
<TABLE>
SIX MONTHS ENDED JUNE 30,
-------------------------
CONSOLIDATED COMBINED
------------ --------
(Dollars in millions) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest expense $ 32.1 $ 47.9 $ 32.8 $ 48.4
Affiliated interest expense (income), net 8.9 (11.6) - -
Other (12.0) 0.1 (14.4) (7.3)
------- ------- ------- -------
$ 29.0 $ 36.4 $ 18.4 $ 41.1
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The favorable fluctuations in interest expense for the Company and the Combined
Companies, for both the three months and six months ended June 30, 1998, are
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 June 30, 1998,
remained flat, increasing by $0.1 million. The decrease in interest expense was
offset by a $10.6 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 six months ended June 30, 1998,
decreased $7.4 million to $29.0 million. In addition to the decrease in
non-affiliated interest expense, the Company received $13.8 million more
interest income, primarily from the investment of proceeds from the sale of
certain Unaligned Foods businesses in short term investments. This improvement
was partially offset by a $20.5 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.
Combined non-operating expense for the three months ended June 30, 1998,
improved $14.7 million to $9.5 million. This change reflects the decrease in
interest expense, augmented by a $7.9 million increase in interest income from
the investment of proceeds from the sale of certain Unaligned Foods businesses
in short term investments.
Combined non-operating expense for the six months ended June 30, 1998, improved
$22.7 million to $18.4 million. This change reflects the decrease in interest
expense, augmented by a $12.1 million increase in interest income, primarily
from the investment of proceeds from the sale of certain Unaligned Foods
businesses in short term investments.
The change in the affiliated interest reflects interest expense associated with
the Foods investment of cash not used in operations within the Company.
29
<PAGE> 30
Following is a comparison of income tax provision related effective tax rates
for the three and six months ended June 30, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
CONSOLIDATED COMBINED
------------ --------
(Dollars in millions) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income tax expense 12.4 4.2 23.5 7.5
Effective tax rate 46% 30% N/M 49%
- -----------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
-------------------------
CONSOLIDATED COMBINED
------------ --------
(Dollars in millions) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
Income tax expense 16.5 7.7 90.4 6.3
Effective tax rate 45% 50% 28% 49%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The 1998 consolidated effective income tax rate reflects the effect of certain
non-deductible charges taken during the three months ended June 30, 1998. The
combined effective tax rate for the three months ended June 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
Unaligned Foods business divestitures led to a lower effective tax rate for the
Combined Companies for the six months ended June 30, 1998, as a portion of the
gain is not subject to corporate tax. The unusually high tax rate in 1997 for
the Company is attributable to non-deductible accounting charges associated with
the net investment in Foods and Wise.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Operating Activities
- --------------------
For the six months ended June 30, 1998, operating cash flows generated by the
Company and the Combined Companies were $23.4 million and $84.5 million compared
to cash used by the Company and the Combined Companies of $14.2 million and
$28.7 million during the first six months of 1997. The Company's $37.6 million
increase is primarily attributable to incremental cash inflows from Chemical
businesses purchased within the past 12 months in addition to normal working
capital cash inflows in the Chemical business. In addition, the Company realized
a net operating loss carryforward associated with the sale of its Decorative
Products business in the first quarter of 1998. These increases were partially
offset by an increase in the affiliated receivable and a decrease in accounts
payable, both as a result of the timing of payments.
The Combined Companies $113.2 million improvement in cash flows is attributable
to the factors noted above and the improvement in cash flow relating to Foods
accounts receivable and inventories. Improved receivable flows resulted from
collections outpacing new receivables as Foods was in the process of divesting
its remaining Unaligned Foods businesses. Cash from inventories also improved
significantly as a result of the planned reduction in inventory levels in
anticipation of the sale of the remaining Unaligned Foods businesses.
Investing Activities
- --------------------
Consolidated investing activities generated $358.2 million cash in 1998 compared
to a use of $17.2 million in 1997, due primarily to divestiture activity.
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. In addition, investing activity reflects $66.5 million
relating to net repayments of affiliated borrowings by Foods and Wise, partially
offset by the acquisition of a resins and compounds business acquired from Sun
Coast Industries, Inc. for $14.4 million.
30
<PAGE> 31
In addition to the above, the Combined Companies' divestiture activity reflects
$721.0 million of proceeds from the sale of Unaligned Foods businesses. During
the first quarter of 1998, the Combined Companies sold certain unaligned product
lines for $376.5 million, and 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. In the second quarter of 1998, Foods sold a
distribution business in Puerto Rico for proceeds of $8.8 million. The $66.5
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 $33.7
million and $33.1 million, respectively. This is mainly a result of the
divestitures of the Dairy business in the third quarter of 1997 and the
Decorative Products business in April 1998.
Financing Activities
- --------------------
Consolidated financing activities generated $165.4 million cash in 1998,
compared with $4.5 million in 1997. Cash generated from divestiture activity was
used to repay the $235.3 million revolving line of credit and to pay preferred
dividends in the first and second quarters. The Company's $433.6 million
affiliated borrowings represent proceeds from the sale of Unaligned Foods
businesses, which were in turn invested in cash equivalents.
Combined financing activities represent the above with the exception of the
affiliated borrowings with Foods a $272.2 million distribution 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 Unaligned Foods 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.
IMPACT OF THE YEAR 2000 ISSUE
- -----------------------------
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.
The Company and Combined Companies are utilizing both internal and external
resources to identify correct and test the systems for year 2000 compliance. The
Company and Combined Companies are each in the midst of conducting a complete
assessment of computer systems, developing a comprehensive implementation plan
to resolve the issue, and finalizing cost estimates to achieve year 2000
compliance. Each of the Company's businesses and Combined Companies is in the
process of implementing comprehensive new financial and business systems that
are year 2000 compliant. Implementation of these various new systems is expected
to be completed no later than June 1999. The status of the financial and
business system implementation plans is monitored and, when necessary,
contingency plans are developed and executed.
Plans are also being developed to address the risks related to plant systems,
suppliers and customers. The substantial portion of production facility Year
2000 remediation for the Company and the Combined Companies should be completed
in 1998, with all production facility remediation and final testing targeted to
be completed in the second quarter of 1999.
31
<PAGE> 32
While management has not finalized its estimate to repair, replace or retire all
systems in order to comply with year 2000 dating, significant investments in
information systems have been made since 1996 that will total in excess of $90.0
million by the year 2000. Remaining costs are not expected to have a material
impact on the financial position or results of operations of the Company or
Combined Companies in any year. Also, 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 the
Company and Combined Companies.
The Company intends its year 2000 date conversion project to be completed on a
timely basis so as to not significantly impact business operations. However, if
the necessary modifications and conversions are not completed timely, the year
2000 issue may have a material impact on the Company and Combined Companies.
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 results of operations
by business unit including anticipated customer demand, and raw material prices,
liquidity, legal, environmental liabilities, year 2000 compliance, and risk
management.
32
<PAGE> 33
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
(10) Agreement with R.L. de Ney
(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 second 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 August 14, 1998 By/ /S/ WILLIAM H. CARTER
--------------------------------
William H. Carter
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
33
<PAGE> 34
BORDEN FOODS HOLDINGS CORPORATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND YEAR TO DATE ENDED
JUNE 30, 1998 AND 1997
BFH1
<PAGE> 35
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
($ in thousands) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 152,902 $ 435,040 $ 375,520 $ 853,624
Cost of goods sold 92,822 260,901 224,875 517,188
--------- --------- --------- ---------
Gross margin 60,080 174,139 150,645 336,436
--------- --------- --------- ---------
Distribution expense 9,192 24,234 23,747 46,584
Marketing expense 45,112 109,962 109,807 233,240
General & administrative expense 18,650 25,912 32,159 49,854
Loss (gain) on divestiture 5,575 - (181,571) -
--------- --------- --------- ---------
Operating income (loss) (18,449) 14,031 166,503 6,758
--------- --------- --------- ---------
Interest expense 570 7,389 1,978 13,409
Interest income (4,726) (1,929) (10,828) (3,956)
Other expense (income), net (393) 15 (606) (670)
--------- --------- --------- ---------
Income (loss) before income tax (13,900) 8,556 175,959 (2,025)
Income tax expense (benefit) 10,640 1,470 47,950 (2,130)
--------- --------- --------- ---------
Net income (loss) (24,540) 7,086 128,009 105
Affiliate's share of income (1,324) - (130,069) -
--------- --------- --------- ---------
Net (loss) income applicable to common stock $ (25,864) $ 7,086 $ (2,060) $ 105
========= ========= ========= =========
Comprehensive income (Note 7) $ (26,799) $ 2,348 $ 123,598 $ (17,705)
========= ========= ========= =========
Basic and diluted income (loss) per common share $ (259) $ 71 $ (21) $ 1
Average number of common shares outstanding
during the period 100 100 100 100
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
BFH2
<PAGE> 36
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION
($ in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 341,130 $ 28,736
Accounts receivable (less allowance for doubtful
accounts of $1,865 and $4,821, respectively) 45,245 138,751
Other receivables 13,799 21,526
Inventories:
Finished and in-process goods 54,397 112,669
Raw materials and supplies 18,262 43,112
Deferred income taxes 46,934 41,290
Other current assets 23,174 50,050
--------- ---------
542,941 436,134
OTHER ASSETS 8,230 14,981
PROPERTY AND EQUIPMENT
Land 10,358 19,199
Buildings 42,758 64,908
Machinery and equipment 139,345 208,504
--------- ---------
192,461 292,611
Less accumulated depreciation (27,133) (50,878)
--------- ---------
165,328 241,733
INTANGIBLES
Goodwill 48,416 151,264
Trademarks and other intangibles 86,009 155,511
--------- ---------
134,425 306,775
--------- ---------
TOTAL ASSETS $ 850,924 $ 999,623
========= =========
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
BFH3
<PAGE> 37
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION
($ in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
LIABILITIES AND SHAREHOLDER'S EQUITY 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt payable within one year $ 7,108 $ 22,087
Loans due to affiliates 15,154 27,914
Accounts and drafts payable 52,548 98,718
Income taxes payable 38,002 30,158
Accrued customer allowances 26,223 32,106
Other amounts due affiliates 8,696 6,020
Other current liabilities 219,128 123,706
--------- ---------
366,859 340,709
--------- ---------
OTHER LIABILITIES
Long-term debt payable to Borden, Inc. - 47,616
Other long-term debt 4,704 5,438
Deferred income taxes 39,740 25,821
Non-pension postemployment benefit obligations 8,814 9,279
Other long-term liabilities 19,304 20,894
--------- ---------
72,562 109,048
--------- ---------
Commitments and Contingencies (Note 10)
SHAREHOLDER'S EQUITY
Common stock - $0.01 par value; 100 shares - -
Shareholder's investment in affiliate 50,013 203,297
Paid in capital 387,831 366,439
Accumulated other comprehensive income (13,432) (9,021)
Retained deficit (12,909) (10,849)
--------- ---------
411,503 549,866
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 850,924 $ 999,623
========= =========
- ------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
BFH4
<PAGE> 38
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
BORDEN FOODS HOLDINGS CORPORATION Six Months Ended
June 30,
($ in thousands) 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net income $ 128,009 $ 105
Adjustments to reconcile net income to net
cash used in operating activities:
Deferred tax provision 13,382 (2,338)
Depreciation and amortization 9,010 22,818
Gain on divestiture of businesses (181,571) -
Net change in assets and liabilities:
Trade receivables 55,188 16,146
Other receivables 4,890 (77)
Inventories 20,194 (3,474)
Trade payables (22,559) (18,599)
Accrued customer allowances (5,883) (9,172)
Income taxes (16,098) (13,109)
Other amounts due to/from affiliates (1,190) (5,493)
Other current assets and liabilities (57,984) 3,222
Long-term assets and liabilities 45 (93)
Other, net (4,612) (9,931)
--------- --------
(59,179) (19,995)
--------- --------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (12,456) (13,617)
Proceeds from the divestiture of businesses 721,079 -
Proceeds from the sale of fixed assets 11,244 -
--------- --------
719,867 (13,617)
--------- --------
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES
(Decrease) increase short-term debt (14,979) 3,794
(Decrease) increase in loans due to/from affiliates (12,760) 11,717
Unitholder distributions paid (272,205) -
Repayment of long-term debt to Borden, Inc. (47,616) -
(Decrease) increase in other long-term debt (734) 334
--------- --------
(348,294) 15,845
--------- --------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 312,394 (17,767)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 28,736 33,234
--------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $ 341,130 $ 15,467
========= ========
</TABLE>
- ------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
BFH5
<PAGE> 39
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
BORDEN FOODS HOLDINGS CORPORATION
Six Months Ended
($ in thousands) June 30,
1998 1997
- -------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest $ 3,286 $25,663
Taxes 50,666 5,471
NON-CASH ACTIVITY:
Minority interest (Note 6) (130,069)
Affiliate's share of income (Note 6) 130,069
- -------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
BFH6
<PAGE> 40
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> 41
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 4 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 six months ended June 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.
RECLASSIFICATION - Certain prior year amounts have been reclassified to conform
with the 1998 presentation.
5. BUSINESS REALIGNMENT
In March 1997, BFC announced its intention to sell certain businesses from its
current portfolio, which are not considered to be aligned with its grain-based
meal solution strategy. Among the unaligned businesses were
BFH8
<PAGE> 42
milk powder (KLIM), sweetened condensed milk and reconstituted lemon juice
(Signature Flavor), and processed cheese.
On January 24, 1998 BFC and Investment LP completed the sale of its Signature
Flavor businesses. The sale generated proceeds of $376,500 and an after tax gain
of $165,185, which includes a loss of $5,814 recorded in the second quarter
relating to additional taxes and asset write-offs.
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 $335,735 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 $28,542 was recorded in the six month period ended June 30, 1998, $6,230
of which was recorded in the second quarter relating to additional taxes.
On May 22, 1998 BFC sold its Puerto Rican distributor. The sale generated
proceeds of $8,844 and an after tax loss of $2,132.
Included in other current liabilities at June 30, 1998, is approximately
$167,000 of divestiture reserves. Of this amount, approximately $55,000 relates
to non-cash charges associated with assets to be sold.
6. AFFILIATE'S SHARE OF INCOME
The LLC was allocated an affiliate's share of income (see accompanying
consolidated statement of operations) of $130,069, 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 June 30, Six months ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
--------- ------- -------- ---------
<S> <C> <C> <C> <C>
Net (loss) income $(24,540) $ 7,086 $128,009 $ 105
Foreign currency translation adjustment (4,512) (4,738) (7,591) (17,810)
Less: Reclassification adjustments 2,253 -- 3,180 --
-------- ------- -------- --------
Comprehensive income $(26,799) $ 2,348 $123,598 $(17,705)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The reclassification adjustment represents the accumulated translation
adjustment recognized on the sale of the KLIM business offset by a
reclassification to paid in capital.
BFH9
<PAGE> 43
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 $8,696 and $4,746 as of June 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 $9,719 and
$7,164 as of June 30, 1998 and December 31, 1997, respectively.
BFC invested cash not used in operations with Borden. BFC's investment balance
was $319,636 and $15,043 with Borden as of June 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 $10,977 and $0 as of June 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 $990 and $1,611 for
such services for the three month periods ended June 30, 1998 and 1997,
respectively, and $1,604 and $3,492 for the six month periods ended June 30,
1998 and 1997, respectively. The receivable for services, merchandise sales, and
other transactions related to the purchase of Foods' assets was $1,657 and
$8,768 at June 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 businesses are included
in loans due from or to affiliates. Net short-term loans due to international
affiliates were $15,154 and $27,914 at June 30, 1998 and December 31, 1997,
respectively, at a weighted average variable rate of 5.9% and 6.7%,
respectively.
During 1996, BFC entered into a loan agreement (the "Loan Agreement") to borrow
funds from Borden under a revolving loan facility and term loans. The revolving
loan facility provided for borrowings up to $250,000 at a variable interest rate
equal to prime. Effective December 30, 1997, the revolving loan facility was
reduced to $50,000 with a maturity date of December 31, 1998. Borrowings with
three days notice and outstanding at
BFH10
<PAGE> 44
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 June 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 $4,274 for the
three months ended June 30, 1998 and 1997, respectively, and $575 and $8,556 for
the six months ended June 30, 1998 and 1997, respectively. Amounts payable for
such charges were $115 and $1,274 as of June 30, 1998 and December 31, 1997,
respectively.
10. COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS - There were no material developments during the second quarter
related to the Helm Tomatoes litigation. 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 a result of computer programs
written using two rather than four digits to define a year. Any of BFC's
computer programs that have date-sensitive software may recognize a "00" date as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, such as a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
BFC is working on finalizing its Year 2000 date conversion project so as to not
significantly impact business operations. If the necessary modifications and
conversions are not completed timely, the Year 2000 issue may have a material
impact on BFC. Although BFC's systems do not rely significantly on systems of
other companies, BFC cannot provide assurance that failure of third parties to
address the Year 2000 issue will not have an adverse impact on BFC.
BFH11
<PAGE> 45
[WISE LOGO] WISE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 1998 AND 1997
1
<PAGE> 46
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 61,271 $ 62,793
Cost of goods sold 38,702 39,720
-------- --------
Gross margin 22,569 23,073
Distribution expense 7,198 6,657
Marketing expense 9,422 11,462
General & administrative expense 5,639 5,135
-------- --------
Operating income (loss) 310 (181)
Interest expense 110 238
Other expense 27 60
-------- --------
Income (loss) before income taxes 173 (479)
Income tax expense (benefit) 148 (218)
-------- --------
Net income (loss) $ 25 $ (261)
======== ========
Per Share Data
- --------------
Basic and diluted income (loss) per common share $ 0.36 $ (3.73)
Average number of common shares outstanding
during the period 70 70
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
2
<PAGE> 47
- ------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
(Dollars in thousands) 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 115,152 $ 119,283
Cost of goods sold 72,432 76,996
--------- ---------
Gross margin 42,720 42,287
Distribution expense 14,139 12,873
Marketing expense 18,633 21,681
General & administrative expense 10,881 9,231
--------- ---------
Operating loss (933) (1,498)
Interest expense 232 503
Other expense (income) 17 (95)
--------- ---------
Loss before income taxes (1,182) (1,906)
Income tax benefit (460) (760)
--------- ---------
Net loss $ (722) $ (1,146)
========= =========
Per Share Data
- --------------
Basic and diluted loss per common share $ (10.31) $ (16.37)
Average number of common shares outstanding
during the period 70 70
- -----------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
2
<PAGE> 48
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1998 1997
- -------------------------------------------------------------------------------------------------
CURRENT ASSETS
<S> <C> <C>
Cash and equivalents $ 6,456 $ 3,604
Accounts receivable (less allowance for doubtful accounts
of $2,286 and $2,498, respectively) 21,962 23,131
Affiliated receivables 139 1,204
Inventories:
Finished goods 3,558 4,621
Raw materials and supplies 3,434 3,841
Deferred income taxes, net 2,446 2,825
Prepaid and other current assets 4,107 4,509
------- -------
42,102 43,735
------- -------
PROPERTY AND EQUIPMENT
Land 1,332 1,347
Buildings and improvements 5,064 5,585
Machinery and equipment 41,233 38,592
------- -------
47,629 45,524
Less accumulated depreciation 18,016 16,442
------- -------
29,613 29,082
------- -------
INTANGIBLES AND OTHER ASSETS
Trademarks (net of accumulated
amortization of $1,647 and $1,410, respectively) 17,164 17,401
Other assets 857 889
------- -------
18,021 18,290
------- -------
TOTAL ASSETS $89,736 $91,107
======= =======
- -------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE> 49
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
JUNE, 30 DECEMBER 31,
LIABILITIES AND SHAREHOLDER'S EQUITY 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt payable within one year $ 270
Accounts and drafts payable $16,536 12,570
Affiliated payables 1,038 1,467
Accrued liabilities 10,274 15,735
------- -------
27,848 30,042
------- -------
OTHER LIABILITIES
Long-term debt payable to Borden, Inc. 7,000 7,000
Deferred income taxes, net 3,500 2,522
Non-pension postemployment
benefit obligations 9,631 9,960
Affiliated employee benefit obligation 2,748 1,817
Other long-term liabilities 429 371
Minority interest 737 830
------- -------
24,045 22,500
------- -------
Commitments and Contingencies (Note 6)
SHAREHOLDER'S EQUITY
Common stock - $0.01 par value
70 shares authorized
70 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 2,863 3,585
------- -------
37,843 38,565
------- -------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $89,736 $91,107
======= =======
- -----------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE> 50
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
(Dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (722) $(1,146)
Adjustments to reconcile net loss to net cash
from operating activities
Minority interest's share in income (13) (21)
Depreciation 2,688 3,120
Amortization 237 235
Other non-cash (116) 206
Net change in assets and liabilities:
Accounts receivable (489) (3,505)
Affiliated receivables 1,065 (378)
Inventories 478 714
Prepaid and other current assets (246) 239
Other assets 32 204
Accounts and drafts payable 5,398 (320)
Affiliated payables (429) 4
Accrued liabilities (4,583) 4,297
Post-employment benefits other than pensions (157) 341
Affiliated employee benefit obligation 931 415
Other long-term liabilities 1,036 19
------- -------
5,110 4,424
------- -------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (4,139) (2,424)
Divestiture of business 2,107 -
Proceeds from sales of equipment 44 254
------- -------
(1,988) (2,170)
------- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Repayment of short-term borrowings (270)
Minority interest's equity contribution - 40
------- -------
(270) 40
------- -------
INCREASE IN CASH AND EQUIVALENTS 2,852 2,294
Cash and equivalents at beginning of period 3,604 3,027
------- -------
Cash and equivalents at end of period $ 6,456 $ 5,321
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest: $ 194 $ 630
- ------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE> 51
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.
6
<PAGE> 52
The condensed consolidated financial statements of Wise collectively include the
financial position of Wise Holdings, Inc. and subsidiaries as of June 30, 1998
and December 31, 1997. These financial statements also include the statements of
operations of Wise for the three and six months ended June 30, 1998 and 1997 and
cash flows of Wise for the six months ended June 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 June 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 June 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 June 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:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Compensation $ 1,274 $ 2,758
General insurance 5,516 5,627
Advertising and promotion 2,784 3,591
Other 700 3,759
------- -------
Total $10,274 $15,735
======= =======
- --------------------------------------------------------------------------------
</TABLE>
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.
7
<PAGE> 53
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
June 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 June 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
In addition to the affiliated debt and lease agreements, Wise is engaged in
various transactions with Borden and its affiliated companies in the ordinary
course of business. A subsidiary of Borden provides certain administrative
services to Wise at negotiated fees. These services include: processing of
payroll and active and retiree group insurance claims. Wise reimburses the
Borden subsidiary for payments for general disbursements, and general and group
insurance and retirement benefit claims. The amount owed by Wise for these
services is included in affiliated payables and was $615 and $1,467 at June 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.
8
<PAGE> 54
The following table summarizes the charges to Wise for these costs.
<TABLE>
<CAPTION>
Quarter ended Six months ended
June 30, June 30,
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Employee benefits $ 385 $ 562 $ 949 $1,033
Group and general insurance 1,023 1,543 1,784 2,783
Information services 37 52 102 100
Corporate staff departments and overhead 395 394 909 756
------ ------ ------ ------
$1,840 $2,551 $3,744 $4,672
====== ====== ====== ======
- -------------------------------------------------------------------------------------------
</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
$4,300 and $2,350 at June 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 approximately $250, subject to final settlement of
working capital adjustments.
9
<PAGE> 1
Exhibit 10
PAY AGREEMENT AND RELEASE
OF RICHARD DE NEY
This agreement effective on the last date executed below, contains all the
understandings between Richard de Ney and Borden, Inc. and its parents,
subsidiaries or affiliates, including without limitation, Borden, Inc., and
their officers, directors, employees and agents in their individual and
representative capacities, known collectively as the "Company" in connection
with your separation from employment. This agreement provides the specific
details of benefits to be received by you including those under the Company's
Employment and Benefits Upon Termination Plan and the conditions agreed to by
you for the receipt of those benefits.
1. The Company will pay you a gross total amount of $1,032,000, to be paid to
you in a lump sum no later that fifteen days following termination.
Deductions for cash advances, other money due the Company and as required
by statute or regulation, will be made from this allowance. Your official
termination date will be May 31, 1998. Between now and your termination
date you will work with the Partners and your staff to ensure a smooth
transition of responsibilities.
2. In accordance with the BW Holdings LLC Management Equity Plan, your units
will be repurchased at the Ordinary Repurchase Price which is the lesser
of: (a) The Original Purchase Price plus a portion (equal to the vested
percentage) of the amount, if any, by which the Unit Value exceeds the
Original Purchase Price; or (b) the greater of the Modified Book Value Per
Unit (MBV) or the Unit Value. Vesting will be determined as of the
Repurchase Calculation Date, March 1998, and, in accordance with the Plan,
they will be terminated if they are "underwater." Payment will be made by
May 31, 1998.
3. You agree to conduct yourself in a manner that does not disparage the
Company, or is damaging to or otherwise contrary to the Company's best
interests and you agree that this agreement is strictly confidential and
you will not reveal its terms except in connection with an official
investigation, legal process, or to immediate family, attorneys,
accountants, or other professional advisors to whom disclosure is necessary
provided that such persons agree to be subject to non-disclosure and
confidentiality. The Company agrees that its officers, directors and
employees agree that they will not disparage you and further agree that
this agreement is strictly confidential except for required public
disclosures, such as the Company's 10-K.
4. You also understand that your active participation in all active Company
sponsored employee benefit programs ceases on the date of your termination.
You have elected to continue your medical/dental benefits at normal active
associate contributions through May 31, 2000. You will pay Borden, Inc.
$3,612 by May 31, 1998 for this coverage. Any money due from Company
benefit plans, including, but not limited to, ESPP, Medical Accumulation,
and vested portion of 401(k) balances, will be paid to you in addition to
the amount paid under this Agreement pursuant to the terms of such plans.
You have 31 days from your termination date to convert group
1
<PAGE> 2
life coverage to an individual policy without the requirement of a physical
examination.
5. You will be provided, without charge, The Leader in Transition executive
outplacement service through Manchester International in their Fairfield
County, CT or New York, NY office. The Company does not warrant or
guarantee the results of the services provided and you agree to hold the
Company harmless from any claims in connection with the services provided.
6. You will be reimbursed for documented expenses associated with packing and
shipping your personal and household belongings to Connecticut. You will
also be reimbursed for documented expenses associated with terminating your
apartment lease.
7. You accept the money and benefits to be paid to you under this Agreement as
full settlement of all claims and causes of action arising out of your
employment by the Company and the termination of that employment, except
any vested pension rights and the provisions of this agreement.
8. You agree that you are entering into this agreement and release as your own
free decision in order to receive the payments and other benefits described
above. You understand that the Company would not make these payments or
extend these benefits to you without your voluntary consent to this
Agreement.
You understand that by signing this Agreement you are waiving all rights to
reinstatement or future employment with the Company and that you are giving
up your right to, and agreeing not to, file charges or lawsuits: (a) with
respect to any discrimination you believe you have suffered due to age,
disability, race, sex, religion, national origin or any other reason
related to your employment by the Company, or the termination of that
employment, including, but not limited to, any claims under Title VII of
the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the
Equal Pay Act, the Rehabilitation Act of 1973, Section 1981 of the Civil
Rights Act of 1866, the Civil Rights Act of 1991, the Americans with
Disabilities Act, the Family and Medical Leave Act of 1993, the Worker
Adjustment and Retraining Notification Act, the Older Workers Benefit
Protection Act, the Fair Labor Standards Act, and any other federal, state,
or local statute or regulation regarding employment, worker's compensation,
discrimination in employment or termination of employment; (b) with respect
to any theory of libel, slander, breach of contract, wrongful discharge,
detrimental reliance, infliction of emotional distress, tort, or any other
theory under the common law; and (c) with respect to any claims for
uncompensated expenses, severance pay, incentive or bonus pay, overtime pay
or any other form of compensation, except the executory provisions of this
Agreement.
You intend that this Agreement will bar each and every claim, demand and
cause of action above specified, whether known or unknown to you at the
time of execution of this Agreement. As a result, you acknowledge that you
might, in the future, discover claims or facts in addition to or different
from those which you now know or believe to exist with respect to the
subject matters of this Agreement and which, if known or suspected at the
time of
2
<PAGE> 3
executing this Agreement, may have materially affected this settlement.
Nevertheless, you hereby waive any right, claim, or cause of action that
might arise as a result of such different or additional claims or facts.
You also agree that should you breach this agreement by filing any charge
or beginning any suit as described in this paragraph you will immediately
repay to the Company the sums you have received under paragraph 1, above,
less $100.00 and further agree that in such event the Company will have no
further obligation to provide you with additional pay or benefits under
this agreement, but that all other provisions of this agreement will remain
in effect.
9. You agree that, following execution of the Agreement by all Parties, and
before May 31, 1998, you will return to the Company all Company credit
cards, keys, customer lists and records, policy and procedure manuals,
price lists, business contracts and other documents and information
belonging to the Company. You also agree to return all Company property,
including but not limited to cell phones, Palm Pilot and laptop/personal
computers.
10. You recognize that the Company possesses certain business and financial
information about its operations, information about new or envisioned
products or services, manufacturing methods, product research, product
specifications, records, plans, prices, costs, customer lists, concepts and
ideas, and is the owner of proprietary rights in certain systems, methods,
processes, procedures, technical and non-technical information, inventions,
machinery, research and other things which constitutes valuable trade
secrets of the Company. You acknowledge that you have been employed in
positions in which you have had access to such information and that the
Company has a legitimate interest in protecting such confidential and
proprietary information in order to maintain and enhance a competitive edge
within its industries. Accordingly, you agree that you will not use or
remove, duplicate or disclose, directly or indirectly, to any persons or
entities outside the Company any information, property, trade secrets or
other things of value which have not been publicly disclosed. In the event
that you are requested or required in a judicial, administrative or
governmental proceeding to disclose any information that is the subject
matter of this Paragraph, you will provide the Company with prompt written
notice of such request and all related proceedings so that the Company may
seek an appropriate protective order or remedy or, as soon as practicable,
waive your compliance with the provisions of this Paragraph.
11. You agree not to consult or provide services to any pasta business for a
period of two (2) years following your termination on May 31, 1998 without
the express written consent of Borden, Inc. which shall not be unreasonably
withheld. This agreement supersedes the non-compete clause included in the
BW Holdings LLC Management Equity Plan. You further agree that you will
not, directly or indirectly, solicit or recruit other employees of the
Company to leave their employment with the Company for a period of two (2)
years.
12. By entering into this Agreement, the Company does not admit to the breach
of any contractual or other promises to you, and does not admit to the
violation of any federal, state, local or other statute or law, including,
but not
3
<PAGE> 4
limited to, those laws referred to in Paragraph 8 of this Agreement, and
any claimed breaches or violations are hereby specifically denied.
13. In consideration of the terms hereof and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged,
the Company hereby agrees to release and waive all claims and never to
commence, prosecute or cause to permit, advise or assist to be commenced or
prosecuted any lawsuits, actions, charges or proceedings of any kind upon
any claims, demands, causes of action, obligations, damages or liabilities
against you and/or your agents, successors or assigns which were asserted
or could have been asserted by the Company through the day of execution of
the Agreement in any State, Federal or Agency action and any claims for
attorneys' fees that exist or may exist as of the date of the signing of
this Agreement.
14. This Agreement constitutes our entire agreement and supersedes all prior
agreements, with the exception of the BW Holdings LLC Management Equity
Plan, and cannot be changed or modified orally, but only by an instrument
in writing signed by the parties hereto.
15. This Agreement shall inure to the benefit of the parties hereto and their
respective successors, executors, trustees, administrators and assigns.
16. The waiver of any provisions hereof shall not be construed as a waiver of
any other provision of this Agreement. The failure of any party hereto to
enforce at any time any provision shall not be construed to be a waiver of
such provision nor affect the validity hereof or any part hereof or the
right of any party thereafter to enforce each such provision.
17. All parties agree to cooperate fully and execute any and all supporting
documents, and take all additional actions which may be necessary to give
full force and affect to the basic terms of this Agreement.
18. The Parties agree that this Agreement shall be construed in accordance with
Ohio law, and that any action brought by any party hereunder may be
instituted and maintained only in the appropriate court having jurisdiction
over Franklin County, Ohio.
19. In making your decision, you recognize that you have the right to seek
advice and counsel from an attorney, if you so choose. You also have
twenty-one (21) days from the date this agreement is presented to you to
decide whether to sign this agreement.
20. You have seven (7) calendar days from the date you sign this Agreement to
cancel it in writing. You also understand that this Agreement will not bind
either you or the Company until after the seven-day period you have to
cancel. No payments will be made under this Agreement until it becomes
4
<PAGE> 5
binding. You may cancel this Agreement by signing the cancellation box
below (or by any other written signed notice) and delivering it to the
Company within seven days of your signing this Agreement.
Very truly yours,
/s/ C. Robert Kidder
C. Robert Kidder
CEO, Borden, Inc.
April 29, 1998
ACCEPTED:
/s/ Richard de Nay
- ---------------------
Associate's Signature
Date: 4/29/98 WITNESS:
--------------
At Columbus, OH /s/ Nancy A. Reardon
----------------- -------------------------
[Location]
CANCELLATION NOTICE:
(To cancel this Agreement, sign below and deliver this copy of the Agreement to
the Company within 7 days of the date you signed the Agreement.)
I hereby cancel this Agreement.
- ------------------------ -----------------------------------
Date Signature
5
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 280,300
<SECURITIES> 450,300
<RECEIVABLES> 244,500
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<CURRENT-ASSETS> 1,216,300
<PP&E> 793,600
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0
614,400
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