<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1999
-------------------------------------------------
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
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(Registrant's telephone number, including area code)
Not Applicable
--------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of shares of common stock, $0.01 par value, outstanding as of the close
of business on May 14, 1999: 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 the 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
ITEM 1. BORDEN, INC. ("BORDEN") CONDENSED CONSOLIDATED AND BORDEN, INC. AND
AFFILIATES CONDENSED COMBINED FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations and Comprehensive Income,
three months ended March 31, 1999 and 1998........................... 4
Condensed Consolidated Balance Sheets, March 31, 1999
and December 31, 1998................................................ 6
Condensed Consolidated Statements of Cash Flows, three months
ended March 31, 1999 and 1998....................................... 8
Condensed Consolidated Statement of Shareholders' Equity, three months
ended March 31, 1999................................................. 10
Condensed Combined Statements of Operations and Comprehensive Income
three months ended March 31, 1999 and 1998........................... 11
Condensed Combined Balance Sheets, March 31, 1999 and
December 31, 1998.................................................... 12
Condensed Combined Statements of Cash Flows, three months ended
March 31, 1999 and 1998.............................................. 14
Condensed Combined Statement of Shareholders' Equity,
three months ended March 31, 1999.................................... 16
Notes to Condensed Consolidated and Condensed Combined
Financial Statements................................................. 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................................ 20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................... 26
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...... 26
3
<PAGE> 4
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
BORDEN, INC.
<TABLE>
<CAPTION>
Three months ended March 31,
(In millions) 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 306.9 $ 367.1
Cost of goods sold 211.8 274.8
------- -------
Gross margin 95.1 92.3
------- -------
Distribution expense 12.0 12.3
Marketing expense 15.8 19.4
General & administrative expense 31.1 35.4
------- -------
Operating income 36.2 25.2
------- -------
Interest expense 15.3 16.4
Affiliated interest expense, net of affiliated
interest income of $1.1 in 1998 4.8 4.7
Interest income and other (8.7) (5.3)
Equity in net loss (income) of unconsolidated subsidiaries 5.3 (0.6)
------- -------
Income from continuing operations
before income tax 19.5 10.0
Income tax expense 6.2 4.2
------- -------
Income from continuing operations 13.3 5.8
------- -------
Discontinued operations:
Income from operations, net of tax -- 2.3
Gain on disposal, net of tax -- 26.0
------- -------
Net income 13.3 34.1
Preferred stock dividends (18.4) (18.4)
------- -------
Net (loss) income applicable to common stock $ (5.1) $ 15.7
======= =======
Comprehensive income (see Note 3) $ (4.4) $ 36.3
======= =======
- ----------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 5
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED) (continued)
BORDEN, INC.
<TABLE>
<CAPTION>
Three months ended March 31,
(In millions, except per share data) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Basic and Diluted Per Share Data
- --------------------------------
Income from continuing operations $ 0.07 $ 0.03
Discontinued operations:
Income from operations -- 0.01
Gain on disposal, net of tax -- 0.13
-------- --------
Net income 0.07 0.17
Preferred stock dividends (0.09) (0.09)
-------- --------
Net (loss) income applicable to common stock $ (0.02) $ 0.08
======== ========
Dividends per common share $ 0.06 $ 0.07
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 Condensed Combined Financial Statements
5
<PAGE> 6
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN, INC.
(In millions)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 617.1 $ 672.1
Accounts receivable (less allowance for doubtful
accounts of $10.4 in 1999 and 1998) 212.4 210.7
Inventories:
Finished and in-process goods 60.9 61.9
Raw materials and supplies 45.4 50.6
Deferred income taxes 55.3 73.3
Other current assets 19.1 18.4
-------- --------
1,010.2 1,087.0
-------- --------
INVESTMENTS AND OTHER ASSETS
Investments 75.8 81.3
Deferred income taxes 113.2 89.4
Prepaid pension assets 133.1 133.3
Other assets 38.2 38.0
Assets sold under contractual arrangement (net
of allowance of $63.3 in 1999 and $62.6 in 1998) 47.8 46.0
-------- --------
408.1 388.0
-------- --------
PROPERTY AND EQUIPMENT
Land 25.1 25.7
Buildings 90.7 93.2
Machinery and equipment 653.3 676.0
-------- --------
769.1 794.9
Less accumulated depreciation (307.8) (324.0)
-------- --------
461.3 470.9
INTANGIBLES 65.3 66.3
-------- --------
TOTAL ASSETS $1,944.9 $2,012.2
======== ========
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
6
<PAGE> 7
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN, INC.
(In millions, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt payable within one year $ 10.5 $ 16.1
Accounts and drafts payable 113.8 113.5
Income taxes payable 277.3 284.7
Loans payable to affiliates 418.6 415.8
Other current liabilities 180.7 208.2
-------- --------
1,000.9 1,038.3
-------- --------
OTHER LIABILITIES
Liabilities sold under contractual
arrangement 41.6 41.6
Long-term debt 551.9 552.0
Non-pension post-employment benefit
obligations 186.0 197.3
Other long-term liabilities 94.0 93.7
-------- --------
873.5 884.6
-------- --------
Commitments and contingencies (See Note 5)
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 362.5 358.9
Receivable from parent (414.9) (415.3)
Accumulated other comprehensive income (68.7) (51.0)
Accumulated deficit (424.8) (419.7)
-------- --------
70.5 89.3
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,944.9 $2,012.2
======== ========
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
7
<PAGE> 8
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN, INC.
<TABLE>
<CAPTION>
Three months ended March 31,
(In millions) 1999 1998
- ---------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income $ 13.3 $ 34.1
Adjustments to reconcile net income to net
cash from (used in) operating activities:
Gain on disposal of discontinued operations -- (90.7)
Deferred tax provision (benefit) (2.9) 61.4
Depreciation and amortization 12.0 13.0
Unrealized gain on interest rate swap (2.9) (1.7)
Equity in net loss (income) of unconsolidated
subsidiaries 5.3 (0.6)
Due from affiliate -- (6.3)
Net change in assets and liabilities:
Trade receivables (11.5) (13.5)
Inventories 2.5 1.4
Trade payables 1.3 7.0
Income taxes (6.1) 26.2
Other assets (2.3) 4.0
Other liabilities (29.6) (46.3)
Discontinued operations working capital -- 3.0
------- -------
(20.9) (9.0)
------- -------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (9.2) (16.3)
Proceeds from the divestiture of businesses -- 304.8
Purchase of businesses, net of cash acquired -- (14.4)
Return of investment in affiliate (1.8) 66.9
------- -------
(11.0) 341.0
------- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net short-term debt (repayments) borrowings (5.6) 5.4
Repayment of long-term debt (0.1) (235.0)
Affiliated borrowings 1.0 599.7
Interest received from parent 12.4 13.3
Common stock dividends paid (12.4) (13.3)
Preferred stock dividends paid (18.4) (18.4)
------- -------
(23.1) 351.7
------- -------
</TABLE>
- --------------------------------------------------------------------------------
8
<PAGE> 9
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)
BORDEN, INC.
<TABLE>
<CAPTION>
Three months ended March 31,
(In millions) 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
(Decrease) increase in cash and equivalents $ (55.0) $ 683.7
Cash and equivalents at beginning
of period 672.1 183.6
------- -------
Cash and equivalents at end
of period $ 617.1 $ 867.3
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest, net $ 20.4 $ 20.4
Taxes 15.3 2.2
Non-cash activity:
Distribution of note receivable from Company's parent
to cancel options -- 28.5
Investment retained in IHDG -- 10.5
Capital contribution by parent 8.4 6.1
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
9
<PAGE> 10
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
BORDEN, INC.
(In millions)
<TABLE>
<CAPTION>
Accumulated
Receivable Other
Preferred Common Paid-in from Comprehensive Accumulated
Stock Stock Capital Parent Income Deficit Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ 614.4 $ 2.0 $ 358.9 $ (415.3) $ (51.0) $ (419.7) $ 89.3
- -----------------------------------------------------------------------------------------------------------------------------
Net income 13.3 13.3
Translation adjustments (17.7) (17.7)
Preferred stock dividends (18.4) (18.4)
Common stock dividends (12.1) (12.1)
Interest accrued on notes from parent 7.3 0.4 7.7
Capital contribution from parent 8.4 8.4
- -----------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1999 $ 614.4 $ 2.0 $ 362.5 $ (414.9) $ (68.7) $ (424.8) $ 70.5
- -----------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
</TABLE>
10
<PAGE> 11
- --------------------------------------------------------------------------------
CONDENSED COMBINED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
BORDEN, INC. AND AFFILIATES
<TABLE>
<CAPTION>
Three months ended March 31,
(In millions) 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 496.5 $ 643.6
Cost of goods sold 313.2 442.1
------- -------
Gross margin 183.3 201.5
------- -------
Distribution expense 28.4 33.8
Marketing expense 81.0 93.3
General & administrative expense 44.5 57.3
Gain on divestiture of businesses, net (4.4) (301.4)
------- -------
Operating income 33.8 318.5
------- -------
Interest expense 15.5 16.9
Affiliated interest expense 1.7 --
Interest income and other (9.7) (7.4)
Equity in net loss (income) of unconsolidated subsidiaries 5.3 (0.6)
------- -------
Income from continuing operations
before income tax 21.0 309.6
Income tax expense 7.0 66.8
------- -------
Income from continuing operations 14.0 242.8
------- -------
Discontinued operations:
Income from operations, net of tax -- 2.3
Gain on disposal, net of tax -- 26.0
------- -------
Net income 14.0 271.1
Affiliate's share of income (0.9) (128.7)
Preferred stock dividends (18.4) (18.4)
------- -------
Net (loss) income applicable to common stock $ (5.3) $ 124.0
======= =======
Comprehensive income (see Note 3) $ (5.2) $ 380.1
======= =======
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
11
<PAGE> 12
- --------------------------------------------------------------------------------
CONDENSED COMBINED BALANCE SHEETS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
(In millions)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
- ---------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 635.3 $ 695.5
Accounts receivable (less allowance for doubtful
accounts of $13.6 in 1999 and $13.8 in 1998) 287.5 291.7
Inventories:
Finished and in-process goods 104.0 108.9
Raw materials and supplies 69.2 81.3
Deferred income taxes 79.9 99.2
Other current assets 33.0 33.3
-------- --------
1,208.9 1,309.9
-------- --------
INVESTMENTS AND OTHER ASSETS
Investments 75.8 81.3
Deferred income taxes 113.2 89.4
Prepaid pension assets 140.9 140.8
Other assets 34.7 34.8
-------- --------
364.6 346.3
-------- --------
PROPERTY AND EQUIPMENT
Land 38.4 39.4
Buildings 189.9 194.3
Machinery and equipment 983.3 1,000.4
-------- --------
1,211.6 1,234.1
Less accumulated depreciation (541.1) (554.6)
-------- --------
670.5 679.5
INTANGIBLES 383.6 386.2
-------- --------
TOTAL ASSETS $2,627.6 $2,721.9
======== ========
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
12
<PAGE> 13
- --------------------------------------------------------------------------------
CONDENSED COMBINED BALANCE SHEETS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
(In millions)
<TABLE>
<CAPTION>
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt payable within one year $ 17.4 $ 23.1
Accounts and drafts payable 170.9 185.4
Income taxes payable 286.4 279.8
Loans payable to affiliate 140.0 138.2
Other current liabilities 307.7 362.6
-------- --------
922.4 989.1
-------- --------
OTHER LIABILITIES
Long-term debt 554.5 554.6
Non-pension post-employment benefit obligations 202.9 214.6
Other long-term liabilities 119.3 129.7
-------- --------
876.7 898.9
-------- --------
Commitments and contingencies (See Note 5)
SHAREHOLDERS' EQUITY
Preferred stock 614.4 614.4
Common stock 2.0 2.0
Paid in capital 671.3 653.5
Receivable from parent (414.9) (415.3)
Affiliate's interest in subsidiary 61.7 60.8
Accumulated other comprehensive income (108.4) (89.2)
Retained earnings 2.4 7.7
-------- --------
828.5 833.9
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,627.6 $2,721.9
======== ========
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
13
<PAGE> 14
- --------------------------------------------------------------------------------
CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
<TABLE>
<CAPTION>
Three months ended March 31,
(In millions) 1999 1998
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income $ 14.0 $ 271.1
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 (4.4) (301.4)
Deferred tax provision (benefit) (1.1) 97.2
Depreciation and amortization 20.1 23.6
Unrealized gain on interest rate swap (2.9) (1.7)
Equity in net loss (income) of unconsolidated
subsidiaries 5.3 (0.6)
Net change in assets and liabilities:
Trade receivables (2.2) 22.0
Inventories 13.1 11.5
Trade payables (7.3) (13.9)
Income taxes (7.3) 22.7
Other assets 0.6 (29.3)
Other liabilities (57.4) (48.1)
Discontinued operations working capital -- 3.0
------- -------
(29.5) (34.6)
------- -------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (18.4) (22.5)
Proceeds from the divestiture of businesses 9.5 994.3
Proceeds from the sale of fixed assets 2.4 8.8
Purchase of business, net of cash acquired -- (14.4)
------- -------
(6.5) 966.2
------- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net short-term debt (repayments) borrowings (5.7) 1.4
Repayment of long-term debt (0.1) (235.3)
Interest received from parent 12.4 13.3
Common stock dividends paid (12.4) (13.3)
Preferred stock dividends paid (18.4) (18.4)
------- -------
(24.2) (252.3)
------- -------
</TABLE>
- --------------------------------------------------------------------------------
14
<PAGE> 15
- --------------------------------------------------------------------------------
CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
BORDEN, INC. AND AFFILIATES
<TABLE>
<CAPTION>
Three months ended March 31,
(In millions) 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
(Decrease) increase in cash and equivalents $ (60.2) $ 679.3
Cash and equivalents at beginning
of period 695.5 198.6
------- -------
Cash and equivalents at end
of period $ 635.3 $ 877.9
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest, net $ 17.0 $ 21.2
Taxes 15.4 34.7
Non-cash activity:
Distribution of note receivable from
Company's parent to cancel options -- 28.5
Investment retained in IHDG -- 10.5
Capital contribution by parent 8.4 6.1
Affiliate's share of income 0.9 128.7
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
15
<PAGE> 16
- --------------------------------------------------------------------------------
CONDENSED COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
BORDEN, INC. AND AFFILIATES
(In millions)
<TABLE>
<CAPTION>
Accumulated
Receivable Affiliate's Other
Preferred Common Paid-in from Interest in Comprehensive Retained
Stock Stock Capital Parent Subsidiary Income Earnings Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ 614.4 $ 2.0 $ 653.5 $ (415.3) $ 60.8 $ (89.2) $ 7.7 $ 833.9
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 14.0 14.0
Translation adjustments (19.2) (19.2)
Preferred stock dividends (18.4) (18.4)
Common stock dividends (12.1) (12.1)
Interest accrued on notes from parent 7.3 0.4 7.7
Capital contribution from parent 8.4 8.4
Transfer of tax basis among affiliates 14.2 14.2
Affiliate's interest in subsidiary 0.9 (0.9) 0.0
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1999 $ 614.4 $ 2.0 $ 671.3 $ (414.9) $ 61.7 $ (108.4) $ 2.4 $ 828.5
- ----------------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
</TABLE>
16
<PAGE> 17
NOTES TO CONDENSED CONSOLIDATED
AND CONDENSED COMBINED FINANCIAL STATEMENTS
(Dollars in millions except per share amounts and as otherwise indicated)
1. BASIS OF PRESENTATION
The Registrant, Borden, Inc. (the "Company"), is engaged primarily in
manufacturing, processing, purchasing and distributing a broad range of
products worldwide. The Company's principal line of business is chemicals
("Chemical"), including formaldehyde, melamine, resins, coatings and other
specialty and industrial chemicals. The Company also produces and sells
consumer adhesives and provides infrastructure management services.
The Company's principal lines of business formerly included its
international and domestic foods operations ("Foods") and salty snacks
business ("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 the Company on a consolidated basis.
However, management of the Company 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 financial
condition and results of operations and cash flows for Borden, Inc. and
Affiliates (the "Combined Companies"). 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 condensed consolidated and condensed
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 period. Results for the
interim period are not necessarily indicative of results for the full year.
2. DISCONTINUED OPERATION
The Decorative Products business was sold on March 13, 1998. Since the
business was a separate segment of the Company's business as defined by
generally accepted accounting principles, the business' results have been
reclassified to discontinued operations in the 1998 statements of
operations and cash flows. A summary of the results included in these
consolidated and combined financial statements follows.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
-------------------------------------------------------------------------
<S> <C> <C>
Net sales - $ 73.2
Income before income taxes - 3.5
Income tax expense - 1.2
Income from discontinued operations - 2.3
-------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
3. COMPREHENSIVE INCOME
Comprehensive income was computed as follows:
THREE MONTHS ENDED MARCH 31,
CONSOLIDATED COMBINED
---------------- ----------------
1999 1998 1999 1998
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 13.3 $34.1 $ 14.0 $271.1
Foreign currency translation
adjustments (17.7) 2.2 (19.2) 0.6
Reclassification adjustment -- -- -- 108.4
------ ----- ------ ------
$ (4.4) $36.3 $ (5.2) $380.1
-------------------------------------------------------------------------
</TABLE>
The foreign currency translation adjustment in 1999 relates primarily to
Latin American Chemical businesses. The reclassification adjustment in 1998
represents the accumulated translation adjustment recognized on the sale of
the Combined Companies' KLIM business.
4. RELATED PARTY TRANSACTIONS
Foods and BWHLLC, an affiliate of the Company's parent, invest cash not
used in operations with the Company. At March 31, 1999, Foods had $278.6
invested with the Company and BWHLLC had $140.0 invested with the Company.
These balances are reflected as a net loan payable to an unconsolidated
affiliate in the consolidated balance sheet.
The Company provides infrastructure management services to Foods and Wise.
Fees received for these services are offset against the Company's general
and administrative expenses, and approximated $2.4 and $3.2 for the three
months ended March 31, 1999 and 1998, respectively.
5. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS - The Company and Combined Companies, like others in
similar businesses, are subject to extensive federal, state and local
environmental laws and regulations. Although environmental policies and
practices are designed to ensure compliance with these laws and
regulations, future developments and increasingly stringent regulation
could require the Company and Combined Companies to make additional
unforeseen environmental expenditures.
Accruals for environmental matters are recorded when it is probable that a
liability has been incurred and the amount of the liability can be
reasonably estimated. Environmental accruals are routinely reviewed on an
interim basis as events and developments warrant. The Company and the
Combined Companies have each accrued approximately $19.0 and $19.6 at March
31, 1999, and December 31, 1998, respectively, for probable environmental
remediation and restoration liabilities. This is management's best estimate
of these liabilities, based on currently available information and
analysis. The Company and Combined Companies believe that it is reasonably
possible that costs associated with such liabilities may exceed current
reserves by amounts that may prove insignificant, or by amounts, in the
aggregate, of up to approximately $12.0.
LEGAL MATTERS - The Company and Combined Companies have recorded $16.8 and
$23.5, respectively, in liabilities at March 31, 1999, for legal costs that
they believe are probable and reasonably estimable. These liabilities at
December 31, 1998, totaled $17.6 for the Company and $32.1 for the Combined
Companies. Actual costs are not expected to exceed these amounts. In
addition, the Company and Combined Companies may be held responsible for
certain environmental liabilities incurred at Borden Chemicals and Plastics
Limited Partnership facilities, which were previously owned by the Company.
Management 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 or Combined Companies' financial position or operating
results.
18
<PAGE> 19
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 and Combined
Companies believe that such responsibilities will not have a material
adverse effect on their financial statements.
6. SEGMENT INFORMATION
<TABLE>
<CAPTION>
SALES TO UNAFFILIATED CUSTOMERS:
----------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
CONSOLIDATED COMBINED
----------------- -----------------
1999 1998 1999 1998
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foods ongoing $134.0 $149.6
Foods Unaligned 5.6 73.0
Wise 50.0 53.9
Chemical $285.6 $319.7 285.6 319.7
Corporate and other 21.3 19.3 21.3 19.3
Businesses held for sale - 28.1 - 28.1
------ ------ ------ ------
$306.9 $367.1 $496.5 $643.6
----------------------------------------------------------------------------
<CAPTION>
OPERATING EBITDA:
----------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
CONSOLIDATED COMBINED
----------------- -----------------
1999 1998 1999 1998
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foods ongoing $ (1.2) $ 0.1
Foods Unaligned 1.7 3.8
Wise 0.8 (0.6)
Chemical $ 49.6 $ 44.2 49.6 44.2
Corporate and other (1.4) (7.0) (1.4) (7.0)
Businesses held for sale - 1.0 - 1.0
Combining adjustments - - - (0.8)
------ ------ ------ ------
ADJUSTED OPERATING
EBITDA (1) 48.2 38.2 49.5 40.7
Significant unusual
items (2) - - 4.4 301.4
------ ------ ------ ------
OPERATING EBITDA 48.2 38.2 53.9 342.1
Depreciation and
amortization (12.0) (13.0) (20.1) (23.6)
------ ------ ------ ------
OPERATING INCOME $ 36.2 $ 25.2 $ 33.8 $318.5
----------------------------------------------------------------------------
<FN>
(1) Adjusted Operating EBITDA represents net income (loss), excluding
discontinued operations, non-operating income and expense, interest,
taxes, depreciation, amortization and significant unusual items.
(2) 1999 includes gains on the sale of Foods Unaligned businesses due to
additional proceeds and lower than expected exit costs related to the
1998 KLIM sale. 1998 includes gains on the sale of Foods Unaligned
businesses.
</TABLE>
19
<PAGE> 20
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 MARCH 31,
--------------------------------------
NET SALES 1999 1998
- --------- -------------- ---------------
<S> <C> <C>
Chemical $ 285.6 $ 319.7
Businesses held for sale - 28.1
Corporate and other 21.3 19.3
-------------- ---------------
CONSOLIDATED NET SALES 306.9 367.1
-------------- ---------------
Foods ongoing 134.0 149.6
Foods Unaligned 5.6 73.0
-------------- ---------------
Total Foods 139.6 222.6
Wise 50.0 53.9
-------------- ---------------
COMBINED NET SALES $ 496.5 $ 643.6
============== ===============
OPERATING INCOME
- ----------------
Chemical $ 39.7 $ 34.1
Businesses held for sale - (0.3)
Corporate and other (3.5) (8.6)
-------------- ---------------
CONSOLIDATED OPERATING INCOME 36.2 25.2
-------------- ---------------
Foods ongoing (7.5) (7.0)
Foods Unaligned 1.6 1.8
Gain on sale of Foods Unaligned businesses 4.4 301.4
-------------- ---------------
Total Foods (1.5) 296.2
Wise (0.9) (2.1)
Combining adjustment - (0.8)
-------------- ---------------
COMBINED OPERATING INCOME $ 33.8 $ 318.5
============== ===============
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
CONSOLIDATED AND COMBINED THREE MONTHS ENDED MARCH 31, 1999 VERSUS THREE MONTHS
ENDED MARCH 31, 1998
Consolidated Summary
- --------------------
Consolidated sales decreased $60.2 million or approximately 16% from $367.1
million in 1998 to $306.9 million in 1999. The sales decline was caused
primarily by the 1998 divestiture of the commercial and industrial wallcoverings
business, previously classified as "Businesses held for sale," and lower
Chemical sales due primarily to unfavorable currency exchange rates and lower
unit pricing, partially offset by improved volume in North America Chemical
businesses. Operating income improved $11.0 million from $25.2 million in 1998
to $36.2 million in 1999, due primarily to improved volume and margins in the
Chemical business and timing differences in corporate expenses.
Combined Summary
- ----------------
Combined sales decreased $147.1 million or approximately 23% from $643.6 million
in 1998 to $496.5 million in 1999. The decline in sales was caused primarily by
the divestiture of Foods Unaligned businesses in 1998, reduction in pasta
volumes, and the factors described above for consolidated sales. Combined
operating income declined $284.7 million primarily due to $301.4 million of
gains on divestitures of Foods Unaligned businesses in 1998, compared to $4.4
million in 1999. Absent these gains, operating income improved $12.3 million or
approximately 72%, and primarily reflects the consolidated operating income
results, as well as a decline in Foods operating results offset by a $7.5
million gain on the favorable settlement of litigation in 1999.
Chemical
- --------
Chemical sales were down $34.1 million or approximately 11% from 1998. The
decline reflects unfavorable currency exchange rates in Canada and Latin
America, substantially lower North America pricing, the 1998 shutdown of a
European operation, and the 1998 sales of non-core businesses in North America
and Latin America, all partially offset by improved volumes, primarily in the
North America forest products resins business.
The impact of unfavorable currency exchange rates on sales was approximately $15
million, with most of the impact coming from Latin America, reflecting the
recent currency devaluation in Brazil.
The effect of significantly lower pricing in North America was approximately $20
million and reflects competitive market conditions as well as contractual
arrangements that require pass-through of significantly lower raw material
costs, primarily for methanol, phenol and urea.
The 1998 closure of a European operation and the 1998 sales of the North America
paper resins business and the Latin America plastic films business resulted in a
sales decline of approximately $12 million versus the prior year.
Overall volume improvement of 4% had a positive impact on sales of approximately
$12 million, with most of the improvement coming from the North America forest
products resins business. The improved volume in North America was driven by
continued low interest rates and strong housing and construction activity,
especially in Canada.
Operating income increased $5.6 million or approximately 16% from 1998. The
improvement is due primarily to improved gross margins, which reflect
significantly higher volumes, lower raw material costs, and lower manufacturing
costs resulting from specific cost reduction and control programs. These
improvements were partially offset by higher selling, general and administrative
expenses, and unfavorable currency exchange rates in Canada and Latin America.
The favorable impact of significantly lower raw materials costs was
substantially offset by lower selling prices necessitated by contractual
arrangements, under which resin selling prices are tied directly to raw material
costs. Operating income in Latin America was down just 10% despite the recent
significant currency devaluation in Brazil, as management was able to increase
prices to mitigate the effect of higher imported raw material costs.
21
<PAGE> 22
Corporate and other
- -------------------
Corporate and other sales increased $2.0 million or 10% from $19.3 million in
1998 to $21.3 million in 1999 due to improved volumes and sales mix in the
consumer adhesives business. Operating income improved $5.1 million from a loss
of $8.6 million to a loss of $3.5 million, due primarily to timing differences
in normal business expenses.
Foods
- -----
Foods sales for the three months ended March 31, 1999, were $139.6 million, down
$83.0 million or approximately 37% compared to $222.6 million for the three
months ended March 31, 1998. The decrease is due primarily to the absence of
sales from Foods Unaligned businesses sold during 1998. Sales from ongoing
businesses declined $15.6 million primarily due to lower pasta volumes caused
primarily by the timing of promotional programs and customer inventory
adjustments.
Foods operating results declined $297.7 million from income of $296.2 million to
a loss of $1.5 million in 1999. This decline is primarily due to gains on the
sale of Foods Unaligned businesses in 1998. Results from Foods ongoing
businesses declined $0.5 million or 7% from a loss of $7.0 million in 1998 to a
loss of $7.5 million in 1999. Excluding a $7.5 million gain on the favorable
settlement of litigation in 1999, results of ongoing operations decreased $8.0
million. The positive effects of improving gross margins through lower raw
materials prices and manufacturing efficiencies were more than offset by the
volume decline, increased investment in brands, and $3.8 million additional
general and administrative expense related to implementing enterprise-wide
information technology systems.
Wise
- ----
Wise sales declined $3.9 million or approximately 7% from the first quarter of
1998. This sales decline is the result of the sale of the company's Caribbean
based distributorship. Operating results improved $1.2 million from a loss of
$2.1 million in 1998 to a loss of $0.9 million in 1999. The improvement was
primarily due to the absence of a $1.0 million loss recorded on the sale of the
company's Caribbean based distributorship in the first quarter of 1998.
NON-OPERATING EXPENSES AND INCOME TAXES
- ---------------------------------------
Following is a comparison of non-operating expenses for the three months ended
March 31, 1999 and 1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
--------------------------------------------
CONSOLIDATED COMBINED
------------------- -------------------
(Dollars in millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest expense $ 15.3 $ 16.4 $ 15.5 $ 16.9
Affiliated interest expense, net 4.8 4.7 1.7 -
Interest income and other (8.7) (5.3) (9.7) (7.4)
Equity in net loss (income) of
unconsolidated subsidiaries 5.3 (0.6) 5.3 (0.6)
------- ------- ------- -------
$ 16.7 $ 15.2 $ 12.8 $ 8.9
- --------------------------------------------------------------------------------
</TABLE>
Consolidated non-operating expense increased $1.5 million from $15.2 million in
1998 to $16.7 million in 1999. This increase was primarily due to equity in net
losses of unconsolidated subsidiaries in 1999 compared to income in 1998,
partially offset by greater interest income on a higher average cash balance in
1999 than 1998. Average cash balances were higher in the first quarter of 1999
due to the sale of certain businesses in 1998. The Company's affiliated net
interest expense remained flat.
Combined non-operating expense increased $3.9 million from $8.9 million in 1998
to $12.8 million in 1999. The increase resulted primarily from the factors
described above for consolidated reporting, adjusted for the elimination of
Foods and Wise activity.
22
<PAGE> 23
Following is comparison of income taxes for the three months ended March 31,
1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------
CONSOLIDATED COMBINED
------------------------ ------------------------
(Dollars in millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income tax expense $ 6.2 $ 4.2 $ 7.0 $ 66.8
Effective tax rate 32% 42% 33% 22%
- -------------------------------------------------------------------------------
</TABLE>
The 1999 consolidated and combined effective tax rates reflect a higher portion
of net income derived from foreign operations and the effect of lower tax rates
in foreign jurisdictions.
The 1998 consolidated effective income tax rate approximates the statutory rate
for the Company. The Foods Unaligned divestitures in 1998 led to a lower
effective tax rate for the Combined Companies as a portion of the gains are not
subject to corporate tax.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Operating Activities
- --------------------
Consolidated cash used in operating activities totaled $20.9 million for the
first quarter of 1999 and $9.0 million for the first quarter of 1998. Although
there was improvement in 1999 working capital and net income before gain on
divestiture, the increase in cash used between years is due primarily to an
increase in tax payments of $13.1 million and the payment of approximately $13.0
million to settle certain long term disability claims.
The Combined Companies reduced cash outflows from operating activities by $5.1
million for the first quarter of 1999. Combined operating cash flows reflect the
items noted above, a reduction of cash taxes paid by Foods and a reduction of
cash generated by Wise operating activities. Higher cash taxes paid by Foods in
the first quarter of 1998 related to gains recognized on the sale of certain
Foods Unaligned businesses. The reduction in cash generated from Wise's first
quarter operating activities is primarily due to the timing of payments.
Investing Activities
- --------------------
First quarter consolidated investing activities used cash of $11.0 million in
1999 compared to generating cash of $341.0 million in 1998. The decline of
$352.0 million between years is due primarily to the absence of proceeds from
business sales in 1998 and reduced affiliated debt repayments from Foods, which
repaid its outstanding affiliated debt balance in 1998.
Combined investing cash flows reflect primarily the items noted above excluding
the affiliated debt repayments which are eliminated.
Financing Activities
- --------------------
Consolidated financing activities used $23.1 million in cash during the first
quarter of 1999 compared to $351.7 million generated during the same period in
1998. In the first quarter of 1998, cash generated from investing activities was
used to repay the $235.0 million outstanding revolving line of credit balance.
The Company's $599.7 million affiliated borrowings in the first quarter of 1998
represent proceeds from the sale of Foods Unaligned businesses, which were in
turn invested in cash equivalents.
Combined financing activities primarily reflect the above with the exception of
the Foods affiliated borrowing activity which is eliminated.
23
<PAGE> 24
IMPACT OF THE YEAR 2000 ISSUE
- -----------------------------
Overview
- --------
The Year 2000 issue is the result of computer programs written using two digits
rather than four to define the applicable year. Any of the Company's and
Combined Companies' computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities. If
not addressed, the Year 2000 issue could have a material adverse impact on the
business operations and financial results of the Company and Combined Companies.
To address this issue, the Company's and Combined Companies' Year 2000 Program
is a risk-based plan divided into three phases that are being executed by both
internal and external resources. These phases are: Phase I - an inventory of all
systems, assigning a business priority for each system and performing a
preliminary assessment of Year 2000 susceptibility; Phase II - completion of a
detailed Year 2000 susceptibility analysis and development of remediation plans
and contingency plans; and Phase III - implementation of the remediation plans
and, if necessary, contingency plan(s) and completing final system testing.
The Year 2000 efforts are divided into three areas that include (1) systems
being replaced by new enterprise-wide system implementations; (2) systems that
will not be replaced by the new enterprise-wide system implementations,
including non-information technology systems such as plant process controls; and
(3) external suppliers and customers. A discussion of each area of activity
relative to the three phased approach follows.
Enterprise-Wide Systems
- -----------------------
The comprehensive new enterprise-wide system being implemented by each of the
Company's and the Combined Companies' businesses will replace most business and
accounting systems. The enterprise-wide system versions are said to be Year 2000
compliant by the vendors and include SAP, PeopleSoft and J.D. Edwards. Due to
the relative complexity and importance of the existing business and accounting
systems to ongoing operations, the new enterprise-wide system implementations
will address the significant majority of the Company's and Combined Companies'
internal Year 2000 risk. Three out of five of these new system implementations
were substantially completed by April 30, 1999. All of the new enterprise-wide
system implementations are planned to be completed by July 1, 1999.
Other Systems
- -------------
For the systems not to be replaced by enterprise-wide implementations, Phase I
and Phase II are complete, and Phase III remediation and testing are in process.
As of March 31, 1999, the Company and Combined Companies have completed
approximately 80% of the needed remediation work for these other systems. The
remaining remediation work and all system testing activities are planned to be
completed by June 30, 1999.
Suppliers and Customers
- -----------------------
The Company and Combined Companies have completed Phase I of the plan to assess
and address the risks related to third party suppliers and customers. Supplier
and customer responses are being evaluated and appropriate procedures are being
performed to determine the extent to which the Company and Combined Companies
may be vulnerable to the failure of third parties to resolve their own Year 2000
issues. Efforts related to suppliers and customers, including development of
contingency plans where appropriate, are targeted for completion by June 30,
1999. Although the Company's and Combined Companies' systems do not rely
significantly on systems of other companies, the Company and Combined Companies
cannot provide assurance that failure of third parties to address the Year 2000
issue will not have an adverse impact on business operations and results.
24
<PAGE> 25
Costs
- -----
Significant investments in enterprise-wide information systems have been made
since 1996 that will total approximately $74 million for the Company and $118
million for the Combined Companies by the Year 2000. The cost to make the
remaining systems Year 2000 compliant is estimated to be $7 million for the
Company and $15 million for the Combined Companies. As of March 31, 1999, the
Company and Combined Companies had incurred costs of approximately $69 million
and $105 million, respectively, for enterprise-wide systems and approximately $4
million and $11 million, respectively, for other systems and efforts.
Risks
- -----
Due to the general uncertainty inherent in the Year 2000 problem, including
primarily the uncertainty associated with suppliers and customers, the potential
effect of the Year 2000 issue on the financial results and condition of the
Company and Combined Companies has not been measured. The Company and Combined
Companies intend the Year 2000 Program, as described above, to be completed on a
timely basis so as to significantly reduce the level of uncertainty and the
impact on business operations and financial results. Contingency plans have been
and will continue to be developed and implemented to mitigate Year 2000 risks
and the effect of Year 2000 issues. Previously, these contingency plans
primarily related to remediation of existing business systems in the event the
enterprise-wide implementations are delayed beyond the targeted completion
dates. Contingency plans will also be developed to address potential Year 2000
incidents and issues, primarily related to third parties, that may occur in
2000.
Readers are cautioned that forward-looking statements contained in the Year 2000
Update should be read in conjunction with the disclosure under the heading
"Forward-Looking and Cautionary Statements."
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
- -----------------------------------------
The Company and its officers may, from time to time, make written or oral
statements regarding the future performance of the Company, including statements
contained in the Company's filings with the Securities and Exchange Commission.
Investors should be aware that these statements are based on currently available
financial, economic, and competitive data and on current business plans. Such
statements are inherently uncertain and investors should recognize that events
could cause the Company's actual results to differ materially from those
projected in forward-looking statements made by or on behalf of the Company.
Such risks and uncertainties are primarily in the areas of results of operations
by business unit, liquidity, legal, environmental liabilities, and Year 2000
compliance.
25
<PAGE> 26
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, 1998.
The Company is involved in various litigation throughout the United States,
which is considered to be in the ordinary course of the Company's business.
The Company believes, based on the information it presently possesses, and
taking into account its established reserves for estimated liability and its
insurance coverages, that the ultimate outcome of the foregoing proceedings is
unlikely to have a materially adverse effect on the Company's financial position
or operating results.
Item 6: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. Exhibits
(27) Financial Data Schedule
b. Financial Statement Schedules
Included are the separate financial statements of Foods Holdings and Wise
Holdings filed in accordance with rule 3-10 of Regulation S-X. Foods Holdings
and Wise Holdings are guarantors of the Company's credit facility and all of the
Company's outstanding publicly held debt.
c. Reports on Form 8-K
There were no reports on Form 8-K issued during the first quarter of 1999.
26
<PAGE> 27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BORDEN, INC.
Date May 14, 1999 By /s/ William H. Carter
--------------------------------
William H. Carter
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
27
<PAGE> 28
BORDEN FOODS HOLDINGS CORPORATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998
BFH 1
<PAGE> 29
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION
<TABLE>
<CAPTION>
Three Months Ended
(In thousands except per share and share amounts) March 31,
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 139,621 $ 222,618
Cost of goods sold 68,995 132,053
--------- ---------
Gross margin 70,626 90,565
--------- ---------
Distribution expense 9,584 14,555
Marketing expense 57,065 64,695
General & administrative expense 8,739 13,509
Gain on divestiture of businesses (3,088) (187,146)
--------- ---------
Operating (loss) income (1,674) 184,952
--------- ---------
Interest expense 210 1,408
Interest income (3,448) (6,102)
Other income, net (195) (213)
--------- ---------
Income before income tax 1,759 189,859
Income tax expense 359 37,310
--------- ---------
Net income 1,400 152,549
Affiliate's share of income (866) (128,745)
--------- ---------
Net income applicable to common stock $ 534 $ 23,804
========= =========
Comprehensive income (Note 5) $ (1,387) $ 184,384
========= =========
Basic and diluted earnings per common share $ 5,340 $ 238,040
Average number of common shares outstanding
during the period 100 100
</TABLE>
- --------------------------------------------------------------------------------
See accompanying Notes to the Condensed Consolidated Financial Statements.
BFH 2
<PAGE> 30
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 295,480 $ 300,104
Accounts receivable (less allowance for doubtful
accounts of $1,386 and $1,391, respectively) 39,153 47,339
Other receivables 16,949 12,513
Inventories:
Finished and in-process goods 38,923 42,933
Raw materials and supplies 20,678 26,853
Deferred income taxes 22,165 24,181
Amounts due from affiliates 2,063 2,130
Other current assets 10,137 11,076
--------- ---------
445,548 467,129
OTHER ASSETS 9,615 9,138
PROPERTY AND EQUIPMENT
Land 10,262 10,879
Buildings 42,367 44,094
Machinery and equipment 151,557 147,720
--------- ---------
204,186 202,693
Less accumulated depreciation (60,640) (59,535)
--------- ---------
143,546 143,158
INTANGIBLES
Goodwill 14,177 15,658
Trademarks and other intangibles 110,210 110,987
--------- ---------
124,387 126,645
--------- ---------
TOTAL ASSETS $ 723,096 $ 746,070
========= =========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying Notes to the Condensed Consolidated Financial Statements.
BFH 3
<PAGE> 31
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION
(In thousands except per share and share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
LIABILITIES AND SHAREHOLDER'S EQUITY 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt payable within one year $ 6,774 $ 6,824
Accounts and drafts payable 43,321 55,847
Accrued customer allowances 17,738 19,600
Amounts due to affiliates 3,147 2,948
Income tax payable 17,869 5,418
Other current liabilities 94,434 116,349
--------- ---------
183,283 206,986
OTHER LIABILITIES
Long-term debt 2,643 2,602
Deferred income taxes 22,827 38,823
Other long-term liabilities 26,141 22,899
--------- ---------
51,611 64,324
Commitments and Contingencies (Note 8)
SHAREHOLDER'S EQUITY
Common stock - $0.01 par value; 100 shares
authorized, issued, and outstanding -- --
Shareholder's investment in affiliates 61,690 60,824
Paid in capital 405,817 390,988
Accumulated translation adjustment (10,893) (8,106)
Retained earnings 31,588 31,054
--------- ---------
488,202 474,760
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 723,096 $ 746,070
========= =========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying Notes to the Condensed Consolidated Financial Statements.
BFH 4
<PAGE> 32
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION
<TABLE>
<CAPTION>
Three Months Ended
(In thousands) March 31,
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net income $ 1,400 $ 152,549
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 3,969 6,201
Deferred tax provision 849 3,301
Gain on divestiture of businesses (3,088) (187,146)
Net change in assets and liabilities:
Accounts receivable 8,186 41,773
Other receivables 2,164 5,287
Inventories 5,995 9,280
Accounts and drafts payable (12,526) (17,271)
Accrued customer allowances (1,862) (4,884)
Income taxes (488) 4,820
Other amounts due to/from affiliates 266 666
Other current assets and liabilities (10,867) (34,740)
Other assets and liabilities (3,367) (11,425)
--------- ---------
(9,369) (31,589)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (7,105) (4,711)
Proceeds from the sale of fixed assets 2,424 8,806
Proceeds from the sale of businesses 9,476 686,224
--------- ---------
4,795 690,319
--------- ---------
CASH FLOWS USED IN FINANCING ACTIVITIES
Net short-term debt payments (50) (3,973)
Repayment of loans with affiliates -- (12,962)
Repayment of long-term debt payable to
affiliates -- (47,616)
--------- ---------
(50) (64,551)
--------- ---------
(DECREASE) INCREASE IN CASH AND EQUIVALENTS (4,624) 594,179
CASH AND EQUIVALENTS AT BEGINNING
OF PERIOD 300,104 28,736
--------- ---------
CASH AND EQUIVALENTS AT END
OF PERIOD $ 295,480 $ 622,915
========= =========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying Notes to the Condensed Consolidated Financial Statements.
BFH 5
<PAGE> 33
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
BORDEN FOODS HOLDINGS CORPORATION
<TABLE>
<CAPTION>
Three Months Ended
(In thousands) March 31,
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest $ 253 $ 1,987
Taxes 112 32,113
Non-cash activity:
Shareholder's investment in affiliates (Note 4) $ (866) $(128,745)
Affiliate's share of income (Note 4) 866 128,745
</TABLE>
- --------------------------------------------------------------------------------
See accompanying Notes to the Condensed Consolidated Financial Statements.
BFH 6
<PAGE> 34
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION
(In thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Shareholder's Accumulated
Paid in Investment Retained Translation
Capital in Affiliate Earnings Adjustments Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 390,988 $ 60,824 $ 31,054 $ (8,106) $ 474,760
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 1,400 1,400
Foreign currency translation adjustments (2,787) (2,787)
Affiliate's share of income 866 (866) -
Transfer of tax basis among affiliates 14,829 14,829
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1999 $ 405,817 $ 61,690 $ 31,588 $ (10,893) $ 488,202
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to the Condensed Consolidated Financial Statements.
BFH 7
<PAGE> 35
BORDEN FOODS HOLDINGS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
1. NATURE OF OPERATIONS
Borden Foods Holdings Corporation ("Foods Holdings"), a wholly owned subsidiary
of Borden Foods Holdings, LLC ("LLC"), owns approximately 98% of Borden Foods
Corporation ("BFC"). The remaining interest in BFC is owned directly by LLC. BFC
is a manufacturer and distributor of a variety of food products worldwide,
including pasta, pasta sauce, soups and bouillon. At March 31, 1999, BFC's
operations included 11 production facilities, 4 of which are located in the
United States. The remaining facilities are located primarily in Canada and
Europe.
2. BASIS OF PRESENTATION
Foods Holdings has fully and unconditionally guaranteed obligations under
Borden, Inc.'s ("Borden") Credit Facility and all of Borden's publicly held debt
on a pari passu basis. As a result of the financial guarantee and in accordance
with Regulation S-X rule 3-10, Borden is required to include in its filings with
the Securities and Exchange Commission separate financial statements for Foods
Holdings as if it were a registrant. Foods Holdings' financial statements are
prepared on a purchase accounting basis. Borden elected not to apply push down
accounting in its consolidated or combined financial statements and, as such,
Borden's financial statements are reported on a historical cost basis.
The accompanying unaudited condensed consolidated financial statements include
all adjustments (consisting only of normal recurring adjustments) which
management believes to be necessary for the fair presentation of operating
results for the interim periods. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The results for
the interim period are subject to seasonal variations and are not necessarily
indicative of results for the full year. The interim financial statements should
be read in conjunction with Foods Holdings' audited financial statements for the
year ended December 31, 1998.
Certain prior year amounts have been reclassified to conform to the 1999
presentation.
3. BUSINESS REALIGNMENT
Restructuring of Aligned Businesses
- -----------------------------------
In 1996, management approved the closure of five domestic pasta plants in order
to reduce its SKU complexity and manufacturing capacity. On January 5, 1999, a
remaining facility was sold for proceeds of $2,424.
As of March 31, 1999 and December 31, 1998, reserves related to the
restructuring of aligned businesses of $1,669 and $7,570, respectively, remained
in other current liabilities. It is anticipated that the remaining balance will
be disbursed by the end of fiscal 1999.
BFH 8
<PAGE> 36
Divested Businesses
- -------------------
During the first quarter of 1999, BFC received proceeds of $9,476 for working
capital settlements on the sale of KLIM, of which $8,400 was included in other
receivables as of December 31, 1998, and reduced current liabilities by $2,012,
as costs were lower than previously estimated.
During the first quarter of 1998, BFC and Investment LP sold the Signature
Flavor business to Eagle Family Foods, Inc. for $376,500 and the KLIM business
to Nestle, S.A for $330,000. As a result of these divestitures, BFC recorded a
pre-tax gain of $187,146, net of charges for work-force reductions, closure of
facilities, selling and legal fees, contract terminations, transition services
and other miscellaneous costs.
Activities related to the divestiture reserves during the three months ended
March 31, 1999, which were recorded in other current liabilities, were as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Business & Selling,
Work-Force Contractual Legal &
Reductions(1) Obligations(2) Other(3) TOTAL
--------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 $ 7,110 $ 35,071 $ 19,711 $ 61,892
Utilized (536) (3,815) (275) (4,626)
Other(4) (2,012) (2,012)
-------- -------- -------- --------
Balance at March 31, 1999 $ 6,574 $ 31,256 $ 17,424 $ 55,254
======== ======== ======== ========
- ----------------------------------------------------------------------------------------
(1) Includes severance and other employee related benefits.
(2) Includes charges related to the termination of leases, distributor
arrangements, and other contractual agreements.
(3) Includes selling and legal fees, facility closings, and other miscellaneous
costs.
(4) Changes in estimates.
- ----------------------------------------------------------------------------------------
</TABLE>
Subsequent Divestiture
- ----------------------
On April 30, 1999, BFC sold the milk powder business located in China to Royal
Numico for approximately $7.1 million, which resulted in a pre-tax gain of
approximately $10.8 million.
BFH 9
<PAGE> 37
4. AFFILIATE'S SHARE OF INCOME
In accordance with BFC Investment LP's limited partnership agreement with BFC
and LLC, LLC was allocated an affiliate's share of income (see accompanying
condensed consolidated statements of operations) of $866 and $128,745 during
the first quarter of 1999 and 1998, respectively. The 1998 allocation was
primarily due to a gain on divestiture of the Signature Flavor business.
5. COMPREHENSIVE INCOME
Comprehensive income (loss) was computed as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Three months ended March 31,
1999 1998
---- ----
<S> <C> <C>
Net income $ 1,400 $ 152,549
Foreign currency translation adjustments (2,787) (3,079)
Reclassification adjustment - 34,914
------- ---------
$(1,387) $ 184,384
======= =========
------------------------------------------------------------------------------------------
</TABLE>
The reclassification adjustment in 1998 represents the accumulated translation
adjustment recognized on the sale of the KLIM business.
6. RELATED PARTIES
Borden and a subsidiary of Borden provide certain administrative services to BFC
at negotiated fees. These services include processing of payroll, active and
retiree group insurance claims, securing insurance coverage for catastrophic
claims, and information systems support. BFC also reimburses the Borden
subsidiary for payments for general disbursements and post-employment benefit
claims. The amount owed by BFC for reimbursement of payments, services, and
other liabilities was $3,135 at March 31, 1999 and $2,935 at of December 31,
1998.
Eligible U.S. employees are provided employee pension benefits under the Borden
domestic pension plan to which BFC contributes, and can participate in the
Borden retirement savings plan. BFC has recognized expenses associated with
these benefits, certain of which are determined by Borden's actuary. The
liabilities for these obligations are included in BFC's financial statements.
The following summarizes the affiliate charges for the three months ended
March 31, 1999 and 1998:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Three months ended March 31,
1999 1998
<S> <C> <C>
Employee benefits $ 685 $ 1,351
Group and general insurance 1,250 1,399
Administrative services 3,329 4,102
-------- --------
$ 5,264 $ 6,852
======== ========
- ------------------------------------------------------------------------------------------------------
</TABLE>
BFH 10
<PAGE> 38
BFC performs certain administrative services on behalf of other Borden
affiliates. These services include sales administration, promotion, purchasing
and research and development. BFC charged affiliates $237 and $285 for such
services for the three months ended March 31, 1999 and 1998, respectively. The
receivable for these services was $769 at March 31, 1999 and $505 at December
31, 1998.
BFC invests cash not used in operations with Borden. BFC's investment balance
was $278,550 at March 31, 1999 and $277,591 at December 31, 1998. The funds are
invested overnight earning a rate set by Borden that generally approximates
money market rates. BFC earned interest income of $3,257 and $5,815 on these
funds for the three months ended March 31, 1999 and 1998, respectively. Amounts
receivable for interest were $1,294 and $1,625 as of March 31, 1999 and December
31, 1998, respectively.
Borden continues to provide executive, financial and strategic management to BFC
for which it charges a quarterly fee of $250.
7. UNIT INCENTIVE PLAN
During the first quarter of 1999, LLC sold 389,125 Class C units to certain BFC
management employees. The Class C units are generally restricted as to transfer
and allow for LLC, at its discretion, to repurchase the units, upon certain
conditions including termination of the unitholders' employment, prior to full
vesting after five years.
Under the Unit Incentive Plan, BFC issued four UAR's with an exercise price of
$8 per unit for each Class C unit purchased. The UAR entitles the unitholder to
receive an amount in cash equal to the excess of the market price (as defined in
the UAR agreement) of the unit over the exercise price of the UAR. The UAR's
vest ratably over five years and expire upon certain events, including
termination of the unitholders' employment, but in no case to exceed ten years.
8. COMMITMENTS AND CONTINGENCIES
Legal Matters
- -------------
In early 1999, BFC and Helm Tomatoes, Inc. reached agreement to settle a claim
of wrongful termination of a tomato packing agreement with payments from BFC of
$3,300 in May 1999 and $3,400 in May 2000. A gain of $7,500, derived from the
difference between an initial reserve of $14,500 less the settlement and legal
fees, was recorded in general and administrative expense during the first
quarter of 1999.
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.
Year 2000
- ---------
The Year 2000 issue is the result of computer programs written using two rather
than four digits to define the applicable year. Many of BFC's computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations including, among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities. If not addressed, the Year 2000 issue could
have a negative material impact on the business operations and financial results
of BFC.
BFH 11
<PAGE> 39
BFC's Year 2000 Program is a risk-based plan divided into three phases that are
being executed by both internal and external resources. These phases are: (I) an
inventory of all systems, assigning a business priority for each system and
performing a preliminary assessment of Year 2000 susceptibility, (II) completion
of a detailed Year 2000 susceptibility analysis and development of remediation
plans and contingency plans, and (III) implementation of the remediation and, if
necessary, contingency plans and completing final system testing.
The Year 2000 efforts are divided into three categories: (1) ERP - business
systems being replaced by new enterprise-wide system implementation, (2) Non-ERP
- - business systems that will not be replaced by the new enterprise-wide system
implementation, including non-information technology systems such as plant
process controls, and (3) Third Parties - external suppliers and customers.
ERP - The comprehensive new enterprise-wide system being implemented by BFC will
replace most business and accounting systems. The enterprise-wide system
versions are warranted by the vendor to be Year 2000 compliant by utilizing a
four digit standard, including PeopleSoft, Vista and I2. Due to the relative
complexity and importance of the business and accounting systems to ongoing
operations, the new enterprise-wide system implementation will address the
significant majority of BFC's internal Year 2000 risk. Implementation of the new
system is underway and expected to be completed no later than June 30, 1999.
Non-ERP - BFC plans to remediate systems not to be replaced by the
enterprise-wide system. For these systems, Phase I is complete, Phase II is
complete, and Phase III is approximately 75% complete. BFC expects to complete
system remediation and all system testing activities by June 30, 1999.
Third Parties - The Year 2000 Program also includes procedures to assess the
risks related to suppliers and customers. As a result of initial inquiries,
supplier and customer responses have been received. These responses will be
evaluated and appropriate procedures will be performed to determine the extent
to which BFC may be vulnerable to such parties' failure to resolve their own
Year 2000 issues. Efforts related to suppliers and customers, including
development of contingency plans where appropriate, are targeted for substantial
completion by June 30, 1999. Although BFC's systems do not rely significantly on
systems of other companies, BFC cannot provide assurance that failure of third
parties to address the Year 2000 issue will not have an adverse impact on
business operations and results.
Significant investments in an enterprise-wide information system and Year 2000
program expenses addressing non-compliance across all areas of the company will
total approximately $42,700 by the year 2000. This amount consists of $35,500
for the enterprise-wide information system and $7,200 of total Year 2000 costs
and write-offs. Year 2000 costs and write-offs are comprised of $4,400 for
business remediation, $1,900 for other related areas and program management, and
$900 in write-offs of non-compliant hardware and systems. As of March 31, 1999,
BFC has incurred expense and capital of $27,110 for the enterprise-wide system
and $4,502 for Year 2000 compliance.
Due to the general uncertainty inherent in the Year 2000 problem, including the
uncertainty associated with suppliers and customers, the potential effect on the
financial results and condition of BFC has not been measured. BFC intends the
Year 2000 Program to be completed on a timely basis so as to significantly
reduce the level of uncertainty and the impact on business operations and
financial results. Contingency plans have been and will continue to be developed
and implemented to mitigate Year 2000 risks and the effect of Year 2000 issues.
To date, contingency plans are being implemented to reduce the risk of potential
delays in the enterprise-wide system implementation.
BFH 12
<PAGE> 40
[LOGO] WISE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998
WH 1
<PAGE> 41
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 49,956 $ 53,881
Cost of goods sold 31,415 33,730
-------- --------
Gross margin 18,541 20,151
Distribution expense 6,765 6,941
Marketing expense 8,136 9,211
General & administrative expense 4,375 5,242
-------- --------
Operating loss (735) (1,243)
Interest expense 119 122
Other expense(income) 42 (10)
-------- --------
Loss before income taxes (896) (1,355)
Income tax benefit (335) (608)
-------- --------
Net loss $ (561) $ (747)
======== ========
Per Share Data
Basic and diluted loss per common share $ (8.01) $ (10.67)
Average number of common shares outstanding
during the period 70 70
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
WH 2
<PAGE> 42
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
(Dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 3,271 $ 2,610
Accounts receivable (less allowance for doubtful accounts
of $1,789 and $1,971, respectively) 20,181 22,181
Affiliated receivables 57 15
Inventories:
Finished goods 4,151 4,045
Raw materials and supplies 3,177 3,886
Deferred income taxes, net 2,452 2,651
Prepaid and other current assets 3,685 3,660
------- -------
36,974 39,048
------- -------
PROPERTY AND EQUIPMENT
Land 1,412 1,412
Buildings and improvements 5,527 5,352
Machinery and equipment 45,850 45,120
------- -------
52,789 51,884
Less accumulated depreciation 20,880 19,769
------- -------
31,909 32,115
------- -------
INTANGIBLES AND OTHER ASSETS
Trademarks (net of accumulated
amortization of $1,999 and $1,880, respectively) 16,812 16,931
Other assets 657 808
------- -------
17,469 17,739
------- -------
TOTAL ASSETS $86,352 $88,902
======= =======
- --------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
WH 3
<PAGE> 43
- ----------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
(Dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
LIABILITIES AND SHAREHOLDER'S EQUITY 1999 1998
- ----------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt payable within one year $ 170 $ 168
Accounts and drafts payable 13,811 16,060
Affiliated payables 500 463
Accrued liabilities 13,090 14,954
------- -------
27,571 31,645
------- -------
OTHER LIABILITIES
Long-term debt payable to Borden, Inc. 7,450 5,000
Deferred income taxes, net 1,882 2,198
Non-pension postemployment
benefit obligations 9,475 9,513
Affiliated employee benefit obligation 2,362 2,165
Other long-term liabilities 250 455
Minority interest 215 218
------- -------
21,634 19,549
------- -------
Commitments and Contingencies (Note 6)
SHAREHOLDER'S EQUITY
Common stock - $0.01 par value
70 shares authorized,
issued and outstanding -- --
Preferred stock - $0.01 par value
30 shares authorized,
none issued and outstanding -- --
Paid in capital 34,980 34,980
Retained earnings 2,167 2,728
------- -------
37,147 37,708
------- -------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $86,352 $88,902
======= =======
- ----------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
WH 4
<PAGE> 44
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
THREE MONTHS ENDED
MARCH 31,
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net loss $ (561) $ (747)
Adjustments to reconcile net loss to net cash
from operating activities
Minority interest's share in loss (3) (97)
Depreciation 1,429 1,308
Amortization 119 118
Other non-cash 123 164
Net change in assets and liabilities:
Accounts receivable 2,182 2,440
Affiliated receivables (42) 67
Inventories 603 756
Prepaid and other current assets (25) 179
Other assets 151 52
Accounts and drafts payable (2,249) 2,823
Affiliated payables 37 (472)
Accrued liabilities (1,447) (2,284)
Post-employment benefits other than pensions (38) (53)
Affiliated employee benefit obligation 197 322
Other long-term liabilities (205) 36
------- -------
271 4,612
------- -------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (2,065) (1,484)
Proceeds from sales of equipment 3 8
------- -------
(2,062) (1,476)
------- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Short-term borrowings 2 --
Long-term borrowings 2,450
Repayment of short-term borrowings -- (270)
------- -------
2,452 (270)
------- -------
INCREASE IN CASH AND EQUIVALENTS 661 2,866
Cash and equivalents at beginning of period 2,610 3,604
------- -------
Cash and equivalents at end of period $ 3,271 $ 6,470
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest: $ 175 $ --
Cash paid for taxes: 92 --
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
WH 5
<PAGE> 45
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.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
As a result of the financial guarantee and in accordance with Regulation S-X
rule 3-10, Borden is required to include in its filings with the Securities and
Exchange Commission separate financial statements for Wise as if it were a
registrant. The accompanying financial statements subsequent to the purchase by
KKR have been prepared on a purchase accounting basis that allocates
approximately $51 million of the original KKR purchase price of Borden to the
Wise operations. The purchase price has been allocated to tangible and
intangible assets and liabilities of Wise based on independent appraisals and
management estimates.
WH 6
<PAGE> 46
The condensed consolidated financial statements of Wise collectively include the
financial position of Wise Holdings, Inc. and subsidiaries as of March 31, 1999
and December 31, 1998. These financial statements also include the statements of
operations of Wise for the three months ended March 31, 1999 and 1998 and cash
flows of Wise for the three months ended March 31, 1999 and 1998. 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 1999
presentation.
Per Share Information
- ---------------------
Basic and diluted loss per common share at March 31, 1999 and 1998 is computed
by dividing net income or loss by the weighted average number of common shares
outstanding during the period ended March 31, 1999 and 1998, respectively. On
April 24, 1998 the number of shares authorized and outstanding were reduced for
administrative and tax purposes. The Per Share information for March 31, 1999
and 1998 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 1999 and 1998. 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.
Recently Issued Accounting Statements
- -------------------------------------
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. Wise implemented this pronouncement as
of January 1, 1999. Wise estimates that internal costs approximating $600 will
be eligible for capitalization in 1999 which would have been expensed as
incurred.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This standard is effective for fiscal years
beginning after June 15, 1999 and requires all derivatives be measured at fair
value and recorded on a company's balance sheet as a asset or liability,
depending upon the company's underlying rights or obligations associated with
the derivative instrument. Wise is investigating the impact of this
pronouncement, but does not expect it to have a material impact on the company's
results of operations, financial position or cash flows.
WH 7
<PAGE> 47
4. ACCRUED LIABILITIES
Accrued liabilities were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Compensation $ 1,661 $ 2,557
General insurance 5,282 5,292
Advertising and promotion 3,560 3,772
Other 2,587 3,333
------- -------
Total $13,090 $14,954
======= =======
- ---------------------------------------------------------------------------------------------
</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.
Revolving Loan
- --------------
The Loan Agreement provides for a revolving loan facility of up to $5 million
maturing in December 1999, 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
March 31, 1999 and December 31, 1998.
Long-Term Loan
- --------------
The Loan Agreement also provides for a $10 million term loan with a fixed
interest rate of 11% maturing in November 2000, payable in full at the maturity
date. At March 31, 1999 and December 31, 1998, $7.5 million and $5.0 million
respectively remained 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.
WH 8
<PAGE> 48
Litigation
- ----------
Wise is subject to various investigations, claims and legal proceedings covering
a wide range of matters in the ordinary course of its business activities. Each
of these matters is subject to various uncertainties and some of these matters
may be resolved unfavorably to Wise. Wise has established accruals for matters
that are probable and reasonably estimable. Management believes that any
liability that may ultimately result from the resolution of these matters in
excess of amounts provided will not have a material adverse effect on the
financial statements of Wise.
7. RELATED PARTIES
Wise is engaged in various transactions with Borden and its affiliated companies
in the ordinary course of business. A subsidiary of Borden provides certain
administrative services to Wise at negotiated fees. These services include:
processing of payroll and active and retiree group insurance claims. Wise
reimburses the Borden subsidiary for payments for general disbursements, and
general and group insurance and retirement benefit claims. The amount owed by
Wise for these services is included in affiliated payables and was $500 and $463
at March 31, 1999 and December 31, 1998, 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. The following table summarizes the charges to
Wise for these costs.
<TABLE>
<CAPTION>
Quarter ended
March 31,
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Employee benefits $ 431 $ 564
Group and general insurance 1,164 761
Information services 109 65
Corporate staff departments and overhead 360 514
------ ------
$2,064 $1,904
====== ======
- --------------------------------------------------------------------------------
</TABLE>
Wise also invests excess cash with Borden in one-day investments that totaled
$1,950 and $1,700 at March 31, 1999 and December 31, 1998, respectively which is
included as a component of cash.
WH 9
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 231,100
<SECURITIES> 386,000
<RECEIVABLES> 212,400
<ALLOWANCES> 10,400
<INVENTORY> 106,300
<CURRENT-ASSETS> 1,010,200
<PP&E> 769,100
<DEPRECIATION> 307,800
<TOTAL-ASSETS> 1,944,900
<CURRENT-LIABILITIES> 1,000,900
<BONDS> 551,900
0
614,400
<COMMON> 2,000
<OTHER-SE> (545,900)
<TOTAL-LIABILITY-AND-EQUITY> 1,944,900
<SALES> 306,900
<TOTAL-REVENUES> 306,900
<CGS> 211,800
<TOTAL-COSTS> 211,800
<OTHER-EXPENSES> 58,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,300
<INCOME-PRETAX> 19,500
<INCOME-TAX> 6,200
<INCOME-CONTINUING> 13,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,300
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
