UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 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
-------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant(1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of shares of common stock, $0.01 par value, outstanding as of the close
of business on November 15, 1999: 198, 974, 994
<PAGE>
BORDEN, INC.
INTRODUCTION
The following filing with the Securities and Exchange Commission ("SEC") by
Borden, Inc. ("the Company") presents four separate financial statements:
Borden, Inc. Condensed Consolidated Financial Statements, Borden, Inc. and
Affiliates Condensed Combined Financial Statements, the Condensed Financial
Statements of Wise Holdings, Inc. ("Wise Holdings") and Condensed Financial
Statements of Borden Foods Holdings Corporation ("Foods Holdings"). The
consolidated statements present the Company after the effect of the sales of (i)
the Company's former salty snacks business ("Wise") to Wise Holdings and its
subsidiaries and (ii) the Company's former domestic and international foods
business ("Foods") to Foods Holdings and its subsidiaries, as explained in Note
1 to the consolidated and combined financial statements. The Company, Wise
Holdings, and Foods Holdings are controlled by BW Holdings, LLC ("BWHLLC"). The
consolidated financial statements are those of the Company, which is the SEC
Registrant.
The Borden, Inc. and Affiliates ("the Combined Companies") condensed combined
financial statements are included herein to present the Company on a combined
historical basis, including the financial position, results of operations and
cash flows of Wise and Foods. Although not required, the combined financial
statements have been included with the Registrants' SEC filings after the 1996
sales of Wise and Foods as supplemental information to the holders of the
Company's publicly held debt issued prior to the sale of Wise and Foods and
because management of the Company controls significant financial and managerial
decisions with respect to Wise and Foods. 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. 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.
2
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<CAPTION>
BORDEN, INC.
INDEX
<S> <C>
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 September 30, 1999 and 1998. . . . . . . . . . . . . . . . . . . . . . . . . . 4
nine months ended September 30, 1999 and 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Condensed Consolidated Balance Sheets, September 30, 1999, and December 31, 1998.. . . . . . . . . . 8
Condensed Consolidated Statements of Cash Flows, nine months ended September 30, 1999 and 1998 . . 10
Condensed Consolidated Statement of Shareholders' Equity, nine months ended September 30, 1999. . . 12
Condensed Combined Statements of Operations and Comprehensive Income,
three months ended September 30, 1999 and 1998. . . . . . . . . . . . . . . . . . . . . . . . . . 13
nine months ended September 30, 1999 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Condensed Combined Balance Sheets, September 30, 1999, and December 31, 1998. . . . . . . . . . . . 15
Condensed Combined Statements of Cash Flows, nine months ended September 30, 1999 and 1998 . . . . . 17
Condensed Combined Statement of Shareholders' Equity, nine months ended September 30, 1999. . . . . 19
Notes to Condensed Consolidated and Combined Financial Statements . . . . . . . . . . . . . . . . . 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . 26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . . . . . . . . . . . . 35
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
ITEM 6. EXHIBITS, GUARANTOR FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K . . . . . . . . . . 36
</TABLE>
3
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<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
BORDEN, INC.
Three months ended September 30,
(In millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $350.7 $335.6
Cost of goods sold 241.3 237.2
------- -------
Gross margin 109.4 98.4
------- -------
Distribution expense 14.4 12.5
Marketing expense 20.6 20.6
General & administrative expense 31.1 30.0
Business realignment and asset write-offs 21.6 -
------- -------
Operating income 21.7 35.3
------- -------
Interest expense 15.6 15.6
Affiliated interest expense, net of affiliated
interest income of $0.3 in 1999 and $0.4 in 1998 4.5 5.9
Interest income and other (6.5) (6.9)
Equity in net income of unconsolidated subsidiaries (1.3) (0.3)
------- -------
Income from continuing operations
before income tax 9.4 21.0
Income tax expense 5.6 9.3
------- -------
Income from continuing operations 3.8 11.7
------- -------
Discontinued operations:
Gain on disposal, net of tax - 5.3
------- -------
Net income 3.8 17.0
Preferred stock dividends (18.4) (18.4)
------- -------
Net loss applicable to common stock $(14.6) $ (1.4)
======= =======
Comprehensive income (see Note 4) $ 4.9 $ 17.1
======= =======
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
4
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED) (CONTINUED)
BORDEN, INC.
Three months ended September 30,
(In millions, except per share data) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Basic and Diluted Per Share Data
--------------------------------
Income from continuing operations $ 0.02 $ 0.05
Discontinued operations:
Income from disposal - 0.03
------- -------
Net income $ 0.02 $ 0.08
Preferred stock dividends (0.10) (0.09)
------- -------
Net loss applicable to common stock $(0.08) $(0.01)
======= =======
Dividends per common share $ 0.14 $ 0.06
Dividends per preferred share $ 0.75 $ 0.75
Average number of common shares outstanding
during the period 199.0 199.0
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
5
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<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
BORDEN, INC.
Nine months ended September 30,
(In millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $1,001.5 $1,071.1
Cost of goods sold 683.0 771.9
--------- ---------
Gross margin 318.5 299.2
--------- ---------
Distribution expense 40.5 39.0
Marketing expense 56.3 63.2
General & administrative expense 86.1 98.7
Gain on divestiture of business - (8.3)
Business realignment and asset write-offs 31.6 5.5
--------- ---------
Operating income 104.0 101.1
--------- ---------
Interest expense 46.6 47.8
Affiliated interest expense, net of affiliated
interest income of $0.7 in 1999 and $2.0 in 1998 14.5 16.1
Interest income and other (24.1) (22.2)
Equity in net loss of unconsolidated subsidiaries 2.6 1.6
--------- ---------
Income from continuing operations
before income tax 64.4 57.8
Income tax expense 24.7 25.8
--------- ---------
Income from continuing operations 39.7 32.0
--------- ---------
Discontinued operations:
Income from operations, net of tax - 2.3
Gain on disposal, net of tax 0.6 31.3
--------- ---------
Net income 40.3 65.6
Preferred stock dividends (55.3) (55.3)
--------- ---------
Net (loss) income applicable to common stock $ (15.0) $ 10.3
========= =========
Comprehensive income (see Note 4) $ 34.0 $ 60.1
========= =========
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
6
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<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED) (CONTINUED)
BORDEN, INC.
Nine months ended September 30,
(In millions, except per share data) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Basic and Diluted Per Share Data
---------------------------------
Income from continuing operations $ 0.20 $ 0.16
Discontinued operations:
Income from operations - 0.01
Income from disposal - 0.16
------- -------
Net income $ 0.20 $ 0.33
Preferred stock dividends (0.28) (0.28)
------- -------
Net (loss) income applicable to common stock $(0.08) $ 0.05
======= =======
Dividends per common share $ 0.26 $ 0.24
Dividends per preferred share $ 2.25 $ 2.25
Average number of common shares outstanding
during the period 199.0 199.0
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
7
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN, INC.
(In millions)
September 30, December 31,
ASSETS 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 194.6 $ 672.1
Accounts receivable (less allowance for doubtful
accounts of $11.7 in 1999 and $10.4 in 1998) 230.6 210.7
Loan receivable from affiliate 132.6 -
Inventories:
Finished and in-process goods 58.4 61.9
Raw materials and supplies 45.3 50.6
Deferred income taxes 45.7 73.3
Other current assets 20.4 18.4
--------------- --------------
727.6 1,087.0
--------------- --------------
INVESTMENTS AND OTHER ASSETS
Investments 77.2 81.3
Deferred income taxes 107.6 89.4
Prepaid pension assets 131.3 133.3
Other assets 45.7 38.0
Assets sold under contractual arrangement (net
of allowance of $62.6 in 1999 and 1998) 51.1 46.0
--------------- --------------
412.9 388.0
--------------- --------------
PROPERTY AND EQUIPMENT
Land 24.6 25.7
Buildings 98.5 93.2
Machinery and equipment 777.9 676.0
--------------- --------------
901.0 794.9
Less accumulated depreciation (356.0) (324.0)
--------------- --------------
545.0 470.9
INTANGIBLES 93.3 66.3
--------------- --------------
TOTAL ASSETS $ 1,778.8 $ 2,012.2
=============== ==============
- ----------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
8
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN, INC.
(In millions, except share data)
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts and drafts payable $ 130.3 $ 113.5
Debt payable within one year 25.3 16.1
Income taxes payable 262.1 284.7
Loans payable to affiliates 243.4 415.8
Other current liabilities 208.1 208.2
--------------- --------------
869.2 1,038.3
--------------- --------------
OTHER LIABILITIES
Liabilities sold under contractual arrangement 41.6 41.6
Long-term debt 541.3 552.0
Non-pension post-employment benefit obligations 179.3 197.3
Other long-term liabilities 85.3 93.7
--------------- --------------
847.5 884.6
--------------- --------------
Commitments and contingencies (see Note 6)
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 352.6 358.9
Receivable from parent (414.9) (415.3)
Accumulated other comprehensive income (57.3) (51.0)
Accumulated deficit (434.7) (419.7)
--------------- --------------
62.1 89.3
--------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,778.8 $ 2,012.2
=============== ==============
- -----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
9
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN, INC.
Nine months ended September 30,
(In millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income $ 40.3 $ 65.6
Adjustments to reconcile net income to net
cash from operating activities:
Gain on disposal of discontinued operations (0.9) (102.7)
Gain on divestiture of business - (8.3)
Business realignment and asset write-offs 31.6 5.5
Deferred tax provision 2.8 116.9
Depreciation and amortization 38.6 37.7
Unrealized gain on interest rate swap (8.1) (1.1)
Equity in net loss of unconsolidated subsidiaries 2.6 1.6
Net change in assets and liabilities:
Trade receivables (21.6) (23.9)
Inventories 9.9 (1.5)
Accounts and drafts payable 5.2 (17.3)
Income taxes (12.0) (10.3)
Other assets 0.1 39.4
Other liabilities (53.3) (79.6)
Discontinued operations working capital - 3.0
-------- --------
35.2 25.0
-------- --------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES
Capital expenditures (40.4) (39.2)
Proceeds from the divestiture of businesses - 335.9
Proceeds from the sale of fixed assets 5.5 -
Purchase of businesses, net of cash acquired (110.5) (14.4)
Net investment (in) from affiliate (5.1) 65.3
-------- --------
(150.5) 347.6
-------- --------
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES
Net short-term debt (repayments) borrowings (1.0) 8.7
Repayment of long-term debt (0.4) (235.3)
Affiliated borrowings (repayments/loans) (305.5) 426.7
Interest received from parent 36.7 47.4
Common stock dividends paid (36.7) (47.4)
Preferred stock dividends paid (55.3) (55.3)
-------- --------
(362.2) 144.8
-------- --------
- --------------------------------------------------------------------------------
</TABLE>
10
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
BORDEN, INC.
Nine months ended September 30,
(In millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
(Decrease) increase in cash and equivalents $(477.5) $517.4
Cash and equivalents at beginning
of period 672.1 183.6
-------- ------
Cash and equivalents at end
of period $ 194.6 $701.0
======== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest, net $ 48.2 $ 31.0
Taxes 33.9 13.5
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 19.0 34.5
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
11
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
BORDEN, INC.
(In millions)
- ----------------------------------------------------------------------------------------------------------------------------
Accumulated
Receivable Other
Preferred Common Paid-in from Comprehensive Accumulated
Stock Stock Capital Parent Income Deficit Total
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $614.4 $2.0 $358.9 $(415.3) $(51.0) $(419.7) $89.3
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income 40.3 40.3
Translation adjustments (6.3) (6.3)
Preferred stock dividends (55.3) (55.3)
Common stock dividends (51.9) (51.9)
Interest accrued on notes from parent 26.6 0.4 27.0
Capital contribution from parent 19.0 19.0
- ----------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 $614.4 $2.0 $352.6 $(414.9) $(57.3) $(434.7) $62.1
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
12
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<TABLE>
<CAPTION>
CONDENSED COMBINED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
BORDEN, INC. AND AFFILIATES
Three months ended September 30,
(In millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $531.6 $536.2
Cost of goods sold 334.2 351.9
------- -------
Gross margin 197.4 184.3
------- -------
Distribution expense 31.5 28.8
Marketing expense 73.5 75.2
General & administrative expense 51.2 51.5
Gain on divestiture of businesses (32.7) (18.6)
Business realignment and asset write-offs 21.6 17.0
------- -------
Operating income 52.3 30.4
------- -------
Interest expense 15.3 15.9
Affiliated interest expense 1.6 2.1
Interest income and other (5.9) (7.9)
Equity in net income of unconsolidated subsidiaries (1.3) (0.1)
------- -------
Income from continuing operations
before income tax 42.6 20.4
Income tax expense 20.4 9.3
------- -------
Income from continuing operations 22.2 11.1
------- -------
Discontinued operations:
Gain on disposal, net of tax - 5.3
------- -------
Net income 22.2 16.4
Affiliate's share of income (0.5) (1.0)
Preferred stock dividends (18.4) (18.4)
------- -------
Net income (loss) applicable to common stock $ 3.3 $ (3.0)
======= =======
Comprehensive income (see Note 4) $ 23.5 $ 14.2
======= =======
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
13
<PAGE>
<TABLE>
<CAPTION>
CONDENSED COMBINED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
BORDEN, INC. AND AFFILIATES
Nine months ended September 30,
(In millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $1,547.2 $1,762.3
Cost of goods sold 973.4 1,186.8
--------- ---------
Gross margin 573.8 575.5
--------- ---------
Distribution expense 90.5 93.2
Marketing expense 218.5 246.2
General & administrative expense 145.8 167.0
Gain on divestiture of businesses (47.5) (329.4)
Business realignment and asset write-offs 31.6 22.5
--------- ---------
Operating income 134.9 376.0
--------- ---------
Interest expense 46.7 48.7
Affiliated interest expense 5.1 3.3
Interest income and other (23.6) (24.1)
Equity in net loss of unconsolidated subsidiaries 2.6 0.4
--------- ---------
Income from continuing operations
before income tax 104.1 347.7
Income tax expense 53.1 99.7
--------- ---------
Income from continuing operations 51.0 248.0
--------- ---------
Discontinued operations:
Income from operations, net of tax - 2.3
Gain on disposal, net of tax 0.6 31.3
--------- ---------
Net income 51.6 281.6
Affiliate's share of income (0.8) (131.0)
Preferred stock dividends (55.3) (55.3)
--------- ---------
Net (loss) income applicable to common stock $ (4.5) $ 95.3
========= =========
Comprehensive income (see Note 4) $ 48.0 $ 374.0
========= =========
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
14
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<TABLE>
<CAPTION>
CONDENSED COMBINED BALANCE SHEETS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
(In millions)
September 30, December 31,
ASSETS 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 225.3 $ 695.5
Accounts receivable (less allowance for doubtful
accounts of $15.7 in 1999 and $13.8 in 1998) 305.4 291.7
Loan receivable from affiliate 132.6 -
Inventories:
Finished and in-process goods 108.3 108.9
Raw materials and supplies 68.2 81.3
Deferred income taxes 55.8 99.2
Other current assets 35.6 33.3
--------------- --------------
931.2 1,309.9
--------------- --------------
INVESTMENTS AND OTHER ASSETS
Investments 77.2 81.3
Deferred income taxes 107.6 89.4
Prepaid pension assets 139.5 140.8
Other assets 42.8 34.8
--------------- --------------
367.1 346.3
--------------- --------------
PROPERTY AND EQUIPMENT
Land 37.7 39.4
Buildings 192.0 194.3
Machinery and equipment 1,111.3 1,000.4
--------------- --------------
1,341.0 1,234.1
Less accumulated depreciation (580.9) (554.6)
--------------- --------------
760.1 679.5
INTANGIBLES 405.0 386.2
--------------- --------------
TOTAL ASSETS $ 2,463.4 $ 2,721.9
=============== ==============
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
15
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<TABLE>
<CAPTION>
CONDENSED COMBINED BALANCE SHEETS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
(In millions)
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts and drafts payable $ 184.8 $ 185.4
Debt payable within one year 26.3 23.1
Income taxes payable 278.4 279.8
Loan payable to affiliate 2.9 138.2
Other current liabilities 284.5 362.6
--------------- --------------
776.9 989.1
--------------- --------------
OTHER LIABILITIES
Long-term debt 543.9 554.6
Non-pension post-employment benefit obligations 195.7 214.6
Other long-term liabilities 112.0 129.7
--------------- --------------
851.6 898.9
--------------- --------------
Commitments and contingencies (See Note 6)
SHAREHOLDERS' EQUITY
Preferred stock 614.4 614.4
Common stock 2.0 2.0
Paid in capital 661.4 653.5
Receivable from parent (414.9) (415.3)
Affiliate's interest in subsidiary 61.6 60.8
Accumulated other comprehensive income (92.8) (89.2)
Retained earnings 3.2 7.7
--------------- --------------
834.9 833.9
--------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,463.4 $ 2,721.9
=============== ==============
- --------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
16
<PAGE>
<TABLE>
<CAPTION>
CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
Nine months ended September 30,
(In millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income $ 51.6 $ 281.6
Adjustments to reconcile net income to net
cash from operating activities:
Gain on disposal of discontinued operations (0.9) (102.7)
Gain on divestiture of businesses (47.5) (329.4)
Business realignment and asset write-offs 31.6 22.5
Deferred tax provision 23.6 144.9
Depreciation and amortization 65.6 64.4
Unrealized gain on interest rate swap (8.1) (1.1)
Equity in net loss of unconsolidated subsidiaries 2.6 0.4
Net change in assets and liabilities:
Trade receivables (25.3) 30.5
Inventories 11.3 20.1
Accounts and drafts payable (12.2) (34.8)
Income taxes 9.0 (30.2)
Other assets 15.3 85.0
Other liabilities (97.0) (74.6)
Discontinued operations working capital - 3.0
-------- ---------
19.6 79.6
-------- ---------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES
Capital expenditures (82.6) (66.4)
Proceeds from the divestiture of businesses 23.6 1,063.2
Proceeds from the sale of fixed assets 10.5 15.8
Purchase of business, net of cash acquired (110.5) (14.4)
-------- ---------
(159.0) 998.2
-------- ---------
CASH FLOWS USED IN (FROM) FINANCING ACTIVITIES
Net short-term debt (repayments) borrowings (7.2) 10.5
Repayment of long-term debt (0.3) (236.0)
Affiliated borrowings (repayments/ loans) (268.0) -
Distribution to affiliates - (272.2)
Interest received from parent 36.7 47.4
Common stock dividends paid (36.7) (47.4)
Preferred stock dividends paid (55.3) (55.3)
-------- ---------
(330.8) (553.0)
-------- ---------
- --------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
BORDEN, INC. AND AFFILIATES
Nine months ended September 30,
(In millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
(Decrease) increase in cash and equivalents $(470.2) $524.8
Cash and equivalents at beginning
of period 695.5 198.6
-------- ------
Cash and equivalents at end
of period $ 225.3 $723.4
======== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest, net $ 38.1 $ 32.9
Taxes 19.2 76.5
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 19.0 34.5
Affiliate's share of income 0.8 131.0
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
18
<PAGE>
<TABLE>
<CAPTION>
CONDENSED COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
BORDEN, INC. AND AFFILIATES
(In millions)
- ----------------------------------------------------------------------------------------------------------------------
Accumulated
Receivable Affiliate's Other
Preferred Common Paid in from Interest in Comprehensive Retained
Stock Stock Capital Parent Subsidiary Income Earnings Total
- -----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $614.4 $2.0 $653.5 $(415.3) $60.8 $(89.2) $7.7 $833.9
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income 51.6 51.6
Translation adjustments (3.6) (3.6)
Preferred stock dividends (55.3) (55.3)
Common stock dividends (51.9) (51.9)
Interest accrued on notes from parent 26.6 0.4 27.0
Capital contribution from parent 19.0 19.0
Transfer of tax basis among affiliates 14.2 14.2
Affiliate's interest in subsidiary 0.8 (0.8) -
- -----------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 $614.4 $2.0 $661.4 $(414.9) $61.6 $(92.8) $3.2 $834.9
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
19
<PAGE>
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, although 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. Additionally,
management of the Company continues to exercise significant operating and
financial control over Wise and Foods. 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") 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 periods. Results for the interim
periods are not necessarily indicative of results for the full years.
2. BUSINESS ACQUISITIONS, DIVESTITURES, AND OTHER CHANGES
Consolidated
- ------------
In May, the Company completed the acquisition of Spurlock Industries, Inc.
("Spurlock"), for $40.2 in cash as reported in the Company's Form 10-Q for the
quarter ended June 30, 1999. Based on a preliminary allocation, the approximate
$13 of excess purchase price over net tangible assets ("goodwill") associated
with the transaction has been classified as goodwill and will be amortized over
a period of 40 years.
In June, the Company finalized a plan for the closure of the Chemical resins
operations in the Philippines by the end of 1999. As part of this plan,
long-lived assets will be disposed of and were written down to net realizable
value as of June 30, 1999 based upon estimated proceeds of $5.0. This resulted
in a second quarter 1999 charge of $10.0 which is classified as business
realignment on the Condensed Consolidated and Condensed Combined Statements of
Operations, and as a reduction of accumulated translation adjustments previously
recorded on the balance sheet for the Philippines. In the third quarter 1999,
severance and other costs totaling $3.0 related to the closure of the
Philippines operations were recorded in accordance with EITF 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity".
Early in the third quarter, the Company completed the acquisition of Blagden
Chemicals, Ltd. ("Bladgen") for $71.5 in cash. Blagden produces formaldehyde and
resins for the forest products, foundry, and industrial applications at three
manufacturing facilities in the United Kingdom and a fourth in the Netherlands.
The acquisition was accounted for using the purchase method of accounting and,
accordingly, its results of operations have been included from the date of
acquisition. Goodwill, based on a preliminary allocation at the end of
September,approximates $16 and will be amortized over 40 years.
20
<PAGE>
Also in the third quarter 1999, management approved a plan to close a Brazil
Chemical operation and Uruguay Chemical business. As a result, a charge of $3.6
was recorded and is classified as business realignment on the Condensed
Consolidated and Condensed Combined Statements of Operations. The charge relates
primarily to fixed assets.
In the third quarter, management of the Company discontinued a plant expansion
project. The Company has written off approximately $15.0 of engineering,
equipment and other costs which have been classified in business realignment
and asset write-offs on the Condensed Consolidated and Condensed Combined
Statements of Operations. Management is in the process of reviewing the recovery
of additional commitments related to the plant expansion project.
Combined
- --------
In April, the Combined Companies sold the milk powder business located in China
for approximately $7.1, which resulted in a pre-tax gain of approximately $10.8
($3.5 after tax).
In July 1999, the Combined Companies sold the chocolate milk business located in
Denmark. The sale generated proceeds of $6.7 and an after tax gain of $1.2 ($1.9
gain before tax). These amounts have been classified as gain on divestiture of
businesses in the Condensed Combined Statements of Operations.
In a prior year, the Combined Companies sold the KLIM business, recognizing an
after tax loss of $19.1 ($1.5 gain before tax). In the third quarter of 1999,
$30.8 of additional pre-tax gain was recorded due to additional proceeds and
lower than expected exit costs related to the KLIM sale. This amount has been
classified as gain on divestiture of businesses in the Condensed Combined
Statements of Operations.
3. DISCONTINUED OPERATIONS
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 Condensed Consolidated and Condensed
Combined financial statements is shown below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- --------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales $ - $ - $ - $73.2
Income before income taxes - - - 3.5
Income tax expense - - - 1.2
Income from discontinued operations - - - 2.3
- ---------------------------------------------------------------------------
</TABLE>
In addition to the amount shown above, gains (net of tax) recognized on the sale
of the Decorative Products business are included in the discontinued operations
of the consolidated and combined financial statements for 1998. The recorded
1999 net of tax gain from discontinued operations of $0.6 represents a favorable
claim settlement related to the 1997 divestiture of the Dairy business.
21
<PAGE>
4. COMPREHENSIVE INCOME
Comprehensive income was computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
CONSOLIDATED COMBINED
------------ --------------
1999 1998 1999 1998
----- ----- ------ ------
<S> <C> <C> <C> <C>
Net income $ 3.8 $17.0 $22.2 $16.4
Foreign currency translation adjustments 1.1 0.1 2.5 (2.2)
Reclassification adjustments - - (1.2) -
----- ----- ------ ------
$ 4.9 $17.1 $23.5 $14.2
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
CONSOLIDATED COMBINED
--------------- ---------------
1999 1998 1999 1998
------- ------ ------- -------
<S> <C> <C> <C> <C>
Net income $ 40.3 $65.6 $ 51.6 $281.6
Foreign currency translation adjustments (16.3) (5.5) (12.4) (16.0)
Reclassification adjustments 10.0 - 8.8 108.4
------- ------ ------- -------
$ 34.0 $60.1 $ 48.0 $374.0
- --------------------------------------------------------------------------------
</TABLE>
The foreign currency translation adjustments in 1999 relate primarily to amounts
recorded in the first quarter for the Latin America Chemical businesses. The
reclassification adjustment in 1999 represents the accumulated translation
adjustment included as part of the charge to close the Chemical operations in
the Philippines, Brazil and Uruguay. The reclassification adjustment in 1998
represents the accumulated translation adjustment recognized on the sale of the
Combined Companies' KLIM business.
5. RELATED PARTY TRANSACTIONS
Foods and BWHLLC, an affiliate of the Company's parent, invest cash not used in
operations with the Company. At September 30, 1999, Foods had $243.4 invested
with the Company. This balance is reflected as a loan payable to unconsolidated
affiliates in the consolidated balance sheet. Loans payable to unconsolidated
affiliates for the Combined Companies includes $2.9 from an affiliate of the
Combined Companies. In September 1999, the Company repaid its $138.2 loan plus
accrued interest to BWHLLC.
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 $1.6 and $4.3 for the three months
ended September 30, 1999 and 1998, respectively, and $6.5 and $12.3 for the nine
months ended September 30, 1999 and 1998, respectively.
At September 30, 1999 the Company had loaned $132.6 in the form of demand notes
to CCPC Acquisition Corp., ("CCPC"), an affiliate, to provide temporary
financing to complete the acquisitions of EKCO Group, Inc. and General
Housewares Corporation. The loan bears variable interest at the monthly prime
rate as quoted by The Wall Street Journal. Early in the fourth quarter, the
Company loaned an additional $46.4 at the monthly prime rate and loaned an
additional $71.5 to CCPC Holding Company, Inc., a subsidiary of CCPC at LIBOR
plus 4%, to provide further temporary financing for the acquisitions. The two
loans mature on December 31, 1999. To date, $87.4 of the total loaned amounts
have been repaid. The Company anticipates repayment of the remaining amounts
when permanent financing arrangements are completed by its affiliates and upon
the sale of two business units acquired with EKCO Group, Inc. that are held by
CCPC for sale. Additionally, early in the fourth quarter, the Company made a
$50.0 equity investment in CCPC Holding Company, Inc., in the form of 16%
cumulative junior preferred stock.
22
<PAGE>
6. 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 Combined Companies have
accrued approximately $17.5 and $17.6, respectively, at September 30, 1999, for
probable environmental remediation and restoration liabilities. The Company and
Combined Companies had each accrued approximately $19.6 at December 31, 1998,
for these liabilities. This is management's best estimate of these liabilities,
based on currently available information and analysis. The Company and Combined
Companies believe that it is reasonably possible that costs associated with such
liabilities may exceed current reserves by amounts that may prove insignificant,
or by amounts, in the aggregate, of up to approximately $12.0.
LEGAL MATTERS - The Company and Combined Companies have recorded liabilities of
$5.3 and $8.7, respectively, at September 30, 1999, for legal costs that they
believe are probable and reasonably estimable. These liabilities at December
31, 1998, totaled $17.6 and $32.1 for the Company and Combined Companies,
respectively. The decrease in liabilities is primarily related to favorable
settlements of legal matters pending at December 31, 1998. Actual costs are not
expected to exceed the amounts accrued at September 30, 1999. In addition, the
Company and Combined Companies may be held responsible for certain environmental
liabilities incurred at Borden Chemical and Plastics Limited Partnership
facilities, which were previously owned by the Company. Management believes,
based upon the information management currently possesses, and taking into
account established reserves for estimated liability and insurance coverage,
that the ultimate outcome of the foregoing proceedings and actions is unlikely
to have a material adverse effect on the Company's or Combined Companies'
financial position or operating results.
OTHER COMMITMENTS - A wholly owned subsidiary serving as general partner of
Borden Chemical 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.
23
<PAGE>
7. SEGMENT INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------
CONSOLIDATED COMBINED
---------------- ----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET SALES TO UNAFFILIATED CUSTOMERS:
Foods ongoing - - $121.9 $133.9
Foods Unaligned - - 1.0 11.2
Wise - - 58.0 55.5
Chemical $317.8 $306.3 317.8 306.3
Corporate and other 32.9 29.3 32.9 29.3
------- ------- ------- -------
NET SALES TO UNAFFILIATED CUSTOMERS $350.7 $335.6 $531.6 $536.2
======= ======= ======= =======
OPERATING EBITDA:
Foods ongoing - - $ 3.4 $ (9.6)
Foods Unaligned - - 0.7 15.7
Wise - - 3.4 2.1
Chemical $ 57.2 $ 47.6 57.2 47.6
Corporate and other 0.5 (0.4) 0.5 (0.4)
------- ------- ------- -------
ADJUSTED OPERATING EBITDA (1) 57.7 47.2 65.2 55.4
Significant unusual items (2) (21.6) - 11.1 (4.5)
------- ------- ------- -------
OPERATING EBITDA 36.1 47.2 76.3 50.9
Depreciation and amortization (14.4) (11.9) (24.0) (20.5)
------- ------- ------- -------
OPERATING INCOME $ 21.7 $ 35.3 $ 52.3 $ 30.4
======= ======= ======= =======
- -------------------------------------------------------------------------------------
<FN>
(1) Adjusted Operating EBITDA represents net income excluding discontinued
operations, non-operating income and expenses, interest, taxes, depreciation,
amortization and significant unusual items.
(2) 1999 Consolidated represents costs associated with realignment of a Chemical
business of $6.6 and Chemical plant asset write-offs of $15.0. 1999 Combined includes
the Chemical charges and gains on the sale of Foods Unaligned businesses due to
additional proceeds and lower than expected exit costs related to the 1998 KLIM sale
of $32.7. 1998 Combined includes gains on the sale of Foods Unaligned businesses of
$18.6 less business realignment charges related to the consolidation of the pasta
business of $23.1 (which includes a $6.1 inventory adjustment recorded in cost of
goods sold).
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------
CONSOLIDATED COMBINED
------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES TO UNAFFILIATED CUSTOMERS:
Foods ongoing - - $ 367.6 $ 410.4
Foods Unaligned - - 11.1 110.1
Wise - - 167.0 170.7
Chemical $ 910.6 $ 949.7 910.6 949.7
Corporate and other 90.9 84.6 90.9 84.6
Businesses held for sale - 36.8 - 36.8
--------- --------- --------- ---------
SALES TO UNAFFILIATED CUSTOMERS $1,001.5 $1,071.1 $1,547.2 $1,762.3
========= ========= ========= =========
OPERATING EBITDA:
Foods ongoing - - $ 1.0 $ (14.8)
Foods Unaligned - - 2.8 15.9
Wise - - 6.6 4.3
Chemical $ 162.9 $ 140.7 162.9 140.7
Corporate and other 11.3 (5.1) 11.3 (5.1)
Businesses held for sale - 0.4 - 0.4
Combining Adjustments - - - (0.8)
--------- --------- --------- ---------
ADJUSTED OPERATING EBITDA (1) 174.2 136.0 184.6 140.6
Significant unusual items (2) (31.6) 2.8 15.9 299.8
--------- --------- --------- ---------
OPERATING EBITDA 142.6 138.8 200.5 440.4
Depreciation and amortization (38.6) (37.7) (65.6) (64.4)
--------- --------- --------- ---------
OPERATING INCOME $ 104.0 $ 101.1 $ 134.9 $ 376.0
========= ========= ========= =========
- -----------------------------------------------------------------------------------------
(1) Adjusted Operating EBITDA represents net income excluding discontinued
operations, non-operating income and expenses, interest, taxes, depreciation,
amortization and significant unusual items.
(2) 1999 Consolidated represents costs associated with realignment of Chemical
businesses of $16.6 and Chemical plant asset write-offs of $15.0. 1999 Combined includes
the Chemical charges and gains on the sale of Foods Unaligned businesses due to
additional proceeds and lower than expected exit costs related to the 1998 KLIM sale of
$47.5. 1998 Combined includes primarily gains on the sale of Foods Unaligned businesses.
</TABLE>
25
<PAGE>
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>
(In millions)
- ------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- ------------------------------------------------------------------------------------------------
1999 1998 1999 1998
------- ------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES
Chemical $317.8 $306.3 $ 910.6 $ 949.7
Corporate and other 32.9 29.3 90.9 84.6
Business held for sale (1) - - - 36.8
------- ------- --------- ---------
CONSOLIDATED NET SALES $350.7 $335.6 $1,001.5 $1,071.1
Foods ongoing 121.9 133.9 367.6 410.4
Foods Unaligned 1.0 11.2 11.1 110.1
------- ------- --------- ---------
Total Foods 122.9 145.1 378.7 520.5
Wise 58.0 55.5 167.0 170.7
------- ------- --------- ---------
COMBINED NET SALES $531.6 $536.2 $1,547.2 $1,762.3
======= ======= ========= =========
OPERATING INCOME
Chemical $ 23.4 $ 37.8 $ 98.7 $ 113.0
Corporate and other (1.7) (2.5) 5.3 (10.5)
Business held for sale (1) - - - (1.4)
------- ------- --------- ---------
CONSOLIDATED OPERATING INCOME $ 21.7 $ 35.3 $ 104.0 $ 101.1
Foods ongoing (4.3) (22.5) (20.4) (42.1)
Foods Unaligned 0.8 (1.6) 2.6 (1.8)
Gain on sale of Foods Unaligned businesses 32.7 18.6 47.5 321.1
------- ------- --------- ---------
Total Foods 29.2 (5.5) 29.7 277.2
Wise 1.4 0.6 1.2 (1.5)
Combining adjustments - - - (0.8)
------- ------- --------- ---------
COMBINED OPERATING INCOME $ 52.3 $ 30.4 $ 134.9 $ 376.0
======= ======= ========= =========
- ------------------------------------------------------------------------------------------------
<FN>
(1) Includes the operating results of the commercial and industrial wallcovering business prior
to its sale in April, 1998.
</TABLE>
26
<PAGE>
CONSOLIDATED AND COMBINED THREE MONTHS ENDED SEPTEMBER 30, 1999 VERSUS THREE
MONTHS ENDED SEPTEMBER 30, 1998
Consolidated Summary
- --------------------
Consolidated net sales increased $15.1 million or approximately 4% in 1999 to
$350.7 million from $335.6 million in 1998. The net sales increase was
primarily attributable to higher Chemical net sales resulting from improved
sales volume and sales contributed by two businesses acquired in 1999.
Increased Chemical unit volumes were partly offset by lower pricing, unfavorable
currency exchange rates in Latin America and the exit from certain non-core
businesses. Operating income decreased $13.6 million or approximately 39% to
$21.7 million from $35.3 million in 1998. The decrease was primarily
attributable to $6.6 million charged for the closure of Chemical operations in
the Philippines, Brazil and Uruguay and $15.0 million charged for plant asset
write-offs, partially offset by increased Chemical operating income from ongoing
operations due primarily to higher sales volume.
Combined Summary
- ----------------
Combined net sales decreased $4.6 million or approximately 1% to $531.6 million
from $536.2 million in 1998. The decrease was caused primarily by the
divestiture of the Foods Unaligned businesses in 1998 and a reduction in volumes
for pasta and sauce offset, in part, by the factors described above for
consolidated net sales. Combined operating income improved $21.9 million or
approximately 72% to $52.3 million from $30.4 million in 1998. The increase is
primarily due to gains on the sale of Foods Unaligned businesses, a 1998
non-recurring charge, declines in Foods ongoing operations due primarily to
lower volumes offset by lower raw material costs and manufacturing improvements,
and the factors described above in the consolidated summary.
Chemical
- --------
Chemical sales increased $11.5 million or approximately 4% to $317.8 million
from $306.3 million. The most significant components of the increase were
improved volumes, primarily in the North America forest products resins and UV
coatings businesses, and two acquisitions in the U.S. and Europe, partially
offset by generally lower pricing, unfavorable currency exchange rates in Latin
America, and the prior year exit from certain non-core businesses in North
America and Europe.
Overall volume improvement of approximately 11%, excluding the effect of
acquisitions and divestitures, had a positive impact on sales of approximately
$28.2 million, with most of the improvement coming from the North America forest
products resins and UV coatings businesses. The improved volume in North
America forest products resins is driven by continued low interest rates and
strong housing and construction activity. The improved volume in UV coatings
reflects significant demand for optical fiber.
The second quarter acquisition of Spurlock Industries, Inc. and the third
quarter acquisition of Blagden Chemicals, Ltd. contributed sales of
approximately $7.4 million and $14.9 million, respectively. The 1998 sales of
the North America paper resins business and the closure of a European operation
resulted in a sales decline of approximately $4.2 million compared with the
prior year.
Significantly lower pricing, which negatively impacted quarterly sales by
approximately $21.8 million, reflects competitive market conditions as well as
contractual arrangements, primarily in North America, that require pass-through
of significantly lower raw material costs, primarily for methanol, phenol and
urea.
The unfavorable currency exchange rates in Latin America reflect the significant
currency devaluation in Brazil in early 1999 that had an unfavorable impact on
quarterly sales of approximately $12.8 million compared with the prior year.
27
<PAGE>
Excluding business realignment charges of $6.6 million and plant asset
write-offs of $15.0 million, as described in Note 2 to the Condensed financial
statements, operating income increased $7.2 million, or approximately 19%, from
1998. The improvement is primarily due to significantly higher sales volume.
The impact of significantly lower raw material costs was offset by lower selling
prices. Negatively impacting operating income are higher selling, general and
administrative expenses and the effect of unfavorable currency exchange rates in
Latin America.
Foods
- -----
Foods' sales for the three months ended September 30, 1999 decreased $22.2
million or approximately 15% to $122.9 million from $145.1 million in 1998.
Sales of Foods Unaligned businesses during 1999 and 1998 accounted for $10.2
million or approximately 46% of the decline. Net sales from ongoing businesses
declined $12.0 million resulting primarily from lower pasta volumes due
primarily to overall product category declines, market share declines due to
exiting certain non-core brands and reductions in customer inventory levels.
Lower pasta unit pricing, in conjunction with reduced promotional spending, also
contributed to pasta sales decreases.
Foods' operating results improved $34.7 million from a loss of $5.5 million to
income of $29.2 million in 1999. Gains on the sale of Foods Unaligned
businesses in 1999 improved $14.1 million due to lower than expected exit costs
and additional proceeds related to the 1998 KLIM sale. Results of Foods
Unaligned business operations improved $2.4 million. Results from Foods'
ongoing operations improved $18.2 million or approximately 81% to a loss of $4.3
million in 1999 from a loss of $22.5 million in 1998. Excluding a nonrecurring
charge of $23.1 million in 1998 related to the consolidation of the pasta
business (which includes a $6.1 million inventory adjustment recorded in cost of
goods sold), and a $1.8 million gain on the favorable settlement of litigation
in 1999, results of ongoing operations declined $6.7 million. Gross margin
declined primarily due to volume declines and lower unit pricing, substantially
offset by lower pasta raw material costs and improved manufacturing operations.
Additionally, reduced trade spending was more than offset by higher general and
administrative expense related to product development, enterprise-wide
information technology systems and start-up costs.
Wise
- ----
Wise net sales increased by $2.5 million or approximately 5% to $58.0 million
from $55.5 million in 1998. The increase was primarily attributable to improved
sales volume resulting from increased promotional spending in key market areas.
Operating income improved $0.8 million to $1.4 million from $0.6 million in
1998. The improvement resulted primarily from higher sales volume and lower raw
material costs.
Corporate and other
- -------------------
Corporate and other net sales increased $3.6 million or approximately 12% to
$32.9 million from $29.3 million in 1998. The increase is primarily due to
higher volumes and improved mix in the consumer adhesives business.
Operating income improved by $0.8 million to a loss of $1.7 million from a loss
of $2.5 million in 1998. The improvement is primarily due to improved
performance in the consumer adhesives business.
28
<PAGE>
CONSOLIDATED AND COMBINED NINE MONTHS ENDED SEPTEMBER 30, 1999 VERSUS NINE
MONTHS ENDED SEPTEMBER 30, 1998
Consolidated Summary
- --------------------
Consolidated net sales decreased $69.6 million or approximately 6% to $1,001.5
million from $1,071.1 million in 1998. The decrease was primarily due to lower
Chemical net sales related to lower pricing, unfavorable currency exchange rates
and the exit of non-core businesses in 1998, partially offset by improved
volumes in the North America Chemical businesses and from two acquisitions in
1999. In addition, the 1998 divestiture of the commercial and industrial
wallcoverings business, previously classified as "Business held for sale",
contributed to the overall decrease in net sales. Operating income increased
$2.9 million or approximately 3% to $104.0 million from $101.1 million in 1998.
The improvement is primarily due to improved Chemical volumes and gross margins
and timing differences in corporate expenses partly offset by $16.6 million
charged related to the closure of Chemical operations in the Philippines, Brazil
and Uruguay and $15.0 million charged related to Chemical plant asset
write-offs.
Combined Summary
- ----------------
Combined net sales decreased $215.1 million or approximately 12% to $1,547.2
million from $1,762.3 million in 1998. The decrease in net sales was caused
primarily by the divestiture of Foods Unaligned businesses in 1998, reduction in
pasta and sauce volumes, and the factors described above for consolidated net
sales. Combined operating income decreased $241.1 million to $134.9 million
from $376.0 million in 1998. The decrease was primarily due to gains on the
sale of Foods Unaligned businesses in 1998 of $321.1 million versus $47.5
million in 1998, a decline in ongoing Foods results due primarily to reduced
volumes partly offset by certain non-recurring Foods amounts, and the
consolidated operating income results described above.
Chemical
- --------
Chemical sales decreased $39.1 million, or approximately 4% to $910.6 million
from $949.7 million. The most significant components of the decline are
generally lower pricing, unfavorable currency exchange rates in Latin America,
and the prior year exit from certain non-core businesses in North America,
Europe and Latin America, all partially offset by improved volumes, primarily in
the North America forest products resins and UV coatings businesses, and
acquisitions in the U.S. and Europe.
Significantly lower pricing, which negatively impacted sales by $61.4 million,
reflects competitive market conditions as well as contractual arrangements,
primarily in North America, that require pass-through of significantly lower raw
material costs, primarily for methanol, phenol and urea.
The unfavorable currency exchange rates in Latin America reflect a significant
currency devaluation in Brazil in early 1999 that had an unfavorable impact on
1999 sales of $40.1 million compared to the prior year.
The 1998 sales of a North America paper resins business and a Latin America
plastic films business and the closure of a European operation resulted in a
sales decline of $28.2 million versus the prior year. The second quarter 1999
acquisition of Spurlock Industries, Inc. and the third quarter 1999 acquisition
of Blagden Chemicals, Ltd. contributed 1999 sales of $11.4 million and $14.9
million, respectively.
Overall volume improvement of approximately 9%, excluding the effect of
acquisitions and divestitures, had a positive impact on sales of $67.0 million,
with most of the improvement coming from the North America forest products
resins and UV coatings businesses. The improved volume in North America forest
products resins is driven by continued low interest rates and strong housing and
construction activity. The improved volume in UV coatings reflects significant
demand for optical fiber.
29
<PAGE>
Excluding business realignment charges of $16.6 million, and plant asset
write-offs of $15.0 million, as described in Note 2 to the Condensed financial
statements, operating income increased $17.3 million, or approximately 15%, from
1998. The improvement is due primarily to the significantly higher volume but
also reflects overall gross margin improvement. Negatively impacting operating
income are higher selling, general and administrative expenses, and the effect
of unfavorable currency exchange rates in Latin America and Canada. The gross
margin improvement reflects both significantly lower raw material costs and
manufacturing cost improvements. The impact of lower raw material costs,
however, is substantially offset by lower selling prices that reflect both
contractual arrangements, under which pricing is tied directly to raw material
costs, as well as continuing competitive pressures in the market. Manufacturing
cost improvements reflect the impact of specific programs to improve
manufacturing processes and other manufacturing cost reduction and control
programs.
Foods
- -----
Foods' sales for the nine months ended September 30, 1999 decreased $141.8
million or approximately 27% to $378.7 million from $520.5 million in 1998. The
sale of Foods Unaligned businesses during 1999 and 1998 accounted for $99.0
million or approximately 70% of the decrease. Net sales from ongoing businesses
declined $42.8 million. The decline is primarily due to lower pasta volumes due
to overall product category declines, market share declines due primarily to
exiting certain non-core brands, competitive pressures in the foodservice
business and reductions in customer inventory levels. Lower pasta unit pricing,
in conjunction with reduced promotional spending, also contributed to pasta
sales decreases. Lower sauce volumes were due primarily to customer inventory
reductions, slightly offset by product category increases. To a lesser extent,
Soups and Bouillon sales were down due primarily to reduced market share caused
by competitive market pressures.
Foods' operating results declined $247.5 million to $29.7 million in 1999 from
$277.2 million in 1998. Of this decline, $273.6 million was due to higher gains
on the sale of Foods Unaligned businesses in 1998. Results of Foods Unaligned
business operations improved $4.4 million. Results from Foods' ongoing
operations improved $21.7 million to a loss of $20.4 million in 1999 from a loss
of $42.1 million in 1998. Excluding a nonrecurring charge of $23.1 million in
1998 related to the consolidation of the pasta business (which includes a $6.1
million inventory adjustment recorded in cost of goods sold), and a $9.3 million
gain on the favorable settlements of litigation in 1999, results of ongoing
operations declined $10.7 million. Gross margin declined primarily due to
volume declines and lower unit pricing, substantially offset by lower raw
material costs and improved pasta manufacturing operations. Additionally,
reduced trade spending was more than offset by higher general and administrative
expense related to product development, enterprise-wide information technology
systems and start-up costs.
Wise
- ----
Wise net sales decreased $3.7 million or approximately 2% to $167.0 million from
$170.7 million in 1998. The net sales decrease is primarily the result of the
sale of the Caribbean based distributorship in May of 1998. Operating income
improved $2.7 million to $1.2 million from a loss of $1.5 million last year.
The improvement was primarily due to the absence of a $1.0 million loss recorded
on the sale of the Caribbean based distributorship in 1998 and reduced
manufacturing, marketing and administrative expenses compared to the same period
last year.
Corporate and other
- -------------------
Corporate and other net sales increased $6.3 million or approximately 7% to
$90.9 million from $84.6 million in 1998. The improvement was primarily due to
higher volumes and improved mix in the consumer adhesives business.
Operating income improved by $15.8 million to $5.3 million from a loss of $10.5
million in 1998, principally due to reduced general and administrative expenses.
Lower net expense in 1999 is primarily due to gains on disposal of property in
1999 compared with losses in 1998 ($2.1 million) and improved cost management
resulting in lower salary costs ($1.9 million). Other items that contributed to
the improvement that are generally non-recurring and related to businesses
30
<PAGE>
previously sold include favorable settlements of corporate liabilities ($3.6
million) and lower pension and related costs due to growth in their supporting
assets ($3.8 million). Lower expenses were also attributable, in part, to a net
$1.9 million reduction in 1999 due to the timing of various corporate and
administrative expenses. Performance in the consumer adhesives business also
improved.
NON-OPERATING EXPENSES AND INCOME TAXES
- ---------------------------------------
Following is a comparison of non-operating expenses for the three months ended
September 30, 1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
CONSOLIDATED COMBINED
-------------- -------------
(In millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest expense $15.6 $15.6 $15.3 $15.9
Affiliated interest expense, net 4.5 5.9 1.6 2.1
Interest income and other (6.5) (6.9) (5.9) (7.9)
Equity in net income of unconsolidated subsidiaries (1.3) (0.3) (1.3) (0.1)
------ ------ ------ ------
$12.3 $14.3 $ 9.7 $10.0
- ---------------------------------------------------------------------------------------
</TABLE>
Consolidated non-operating expense decreased $2.0 million for the three months
ended September 30, 1999 compared with the three months ended September 30,
1998. The decrease was partly attributable to increased equity in net income of
unconsolidated subsidiaries in 1999. The decrease was also caused, in part, by
lower affiliated interest expense resulting from lower average affiliated loan
balances in 1999.
Combined non-operating expense decreased by $0.3 million for the three months
ended September 30, 1999, compared with the three months ended September 30,
1998. The decrease reflects increased equity in net income of unconsolidated
subsidiaries and lower interest expense in 1999 offset, in large part, by lower
interest income in 1999. Lower interest expense and interest income resulted
from lower average balances for loans outstanding and assets invested in 1999
compared with 1998.
Following is a comparison of non-operating expenses for the nine months ended
September 30, 1999 and 1998.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
CONSOLIDATED COMBINED
---------------- --------------
(In millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest expense $ 46.6 $ 47.8 $ 46.7 $ 48.7
Affiliated interest expense, net 14.5 16.1 5.1 3.3
Interest income and other (24.1) (22.2) (23.6) (24.1)
Equity in net loss of unconsolidated subsidiaries 2.6 1.6 2.6 0.4
------- ------- ------- -------
$ 39.6 $ 43.3 $ 30.8 $ 28.3
- ----------------------------------------------------------------------------------------
</TABLE>
For the nine months ended September 30, 1999, consolidated non-operating
expenses decreased $3.7 million compared with the nine months ended September
30, 1998. The decrease was partly attributable to lower interest expense related
to lower average loan balances outstanding this year and, in part, to increased
interest and other income related to an increase in the unrealized gain on an
interest rate swap which is marked to market. The decrease was partly offset by
increased equity in net losses of unconsolidated subsidiaries.
For the nine months ended September 30, 1999, combined non-operating expenses
increased $2.5 million compared with the nine months ended September 30, 1998.
The increase was primarily attributable to increased equity in net losses of
unconsolidated subsidiaries.
31
<PAGE>
Following is a comparison of income tax provision related effective tax rates
for the three and nine months ended September 30, 1999 and September 30, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
CONSOLIDATED COMBINED
--------------- --------------
(In millions) 1999 1998 1999 1998
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income tax expense $ 5.6 $ 9.3 $20.4 $ 9.3
Effective tax rate 60% 44% 48% 46%
- -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
CONSOLIDATED COMBINED
--------------- --------------
(In millions) 1999 1998 1999 1998
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income tax expense $24.7 $25.8 $53.1 $99.7
Effective tax rate 38% 45% 51% 29%
- ------------------------------------------------------------------------
</TABLE>
The 1999 consolidated effective income tax rate for the three months ended
September 30, 1999 reflects minor changes in estimates for foreign jurisdictions
as well as amounts identified in the filing of the Company's 1998 tax returns.
The 1999 consolidated effective income tax rate for the nine months ended
September 30, 1999 reflects the effect of a higher portion of net income derived
from foreign operations and the effect of lower tax rates in foreign
jurisdictions. The 1999 combined effective tax rate for the nine months ended
September 30, 1999, includes the tax effect of the disposal of Borden Foods
Corporation Chinese subsidiary, which has substantial differences in its net
book value and tax basis. In addition, in 1998, the Unaligned Foods business
divestitures led to a lower effective tax rate for the Combined Companies for
the nine months ended September 30, 1998 as a portion of the gain was not
subject to corporate tax.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
Operating Activities
- --------------------
Consolidated cash provided by operating activities totaled $35.2 million for the
first nine months of 1999, and $25.0 million for the comparable period in 1998.
The most significant components of the $10.2 million improvement include an
overall improvement in operating EBITDA, after adjusting for divestitures, of
$38.2 million, an increase of $11.4 million due to lower inventories primarily
in the Chemical business caused by reduced raw material costs and intentional
inventory reduction programs, and improvements due to the timing of trade
payments, all partially offset by higher net interest and tax payments of $37.6
million.
The Combined Companies cash provided by operating activities was $19.6 million
for the first nine months of 1999, a decrease of $60.0 million compared to the
same period in 1998. The change in cash flows is primarily attributable to
reduced Foods net trading capital inflows and normal business activities,
partially offset by reduced taxes paid in 1999 of approximately $57 million.
Higher receivable Foods inflows in 1998 resulted from collections outpacing new
receivables as Foods was in the process of divesting its Unaligned businesses.
Cash flow from inventories was also higher in 1998 as a result of planned
reductions in anticipation of the sale of Foods Unaligned businesses. Reduced
1999 tax payments resulted from higher 1998 income due to gains on business
divestitures.
Investing Activities
- --------------------
Consolidated investing activities used $150.5 million cash for the nine months
ended September 30, 1999 compared to cash generated of $347.6 million in 1998.
Investing activities in 1999 include the purchases of Spurlock and Blagden by
Chemical using $110.5 million while 1998 divestiture proceeds include $304.8
million from the sale of Decorative Products, $15.5 million from the sale of a
Latin American plastic films business, and $15.6 million from the sale of the
commercial and industrial wallcoverings business. Investing activity in 1998
also includes $65.3 million relating to net repayments of affiliated borrowings
32
<PAGE>
by Foods and Wise, partially offset by the acquisition of a resins and compounds
business acquired from Sun Coast Industries, Inc. for $14.4 million.
The Combined Companies investing activity used $159.0 million in 1999 compared
to generating cash of $998.2 million in 1998. In addition to the above, the
Combined Companies' 1999 divestiture activity reflects $23.6 million of proceeds
from the sale of Foods Unaligned businesses compared to $725.1 million in 1998.
The 1998 return on investment of $65.3 million in the consolidated investing
flows is eliminated in the combined flows as the Foods and Wise operations are
included in the Combined Companies.
Financing Activities
- --------------------
Consolidated financing activities used $362.2 million cash in 1999 compared to
cash generated of $144.8 million in 1998. Cash used in 1999 primarily includes
preferred stock dividend payments, the repayment of affiliated borrowings from
BWHLLC, an affiliate of the Company's parent, and Foods totaling $172.9 million
and a loan of $132.6 million to CCPC Acquisition Corp. to provide temporary
financing for two acquisitions as described in Note 5. The 1998 cash inflow
primarily represented $426.7 million of affiliated borrowings from Foods in 1998
representing proceeds from the sale of Foods Unaligned businesses, partially
offset by the repayment of the $235.3 million revolving line of credit and the
payment of preferred dividends.
Combined financing activities used $330.8 million in 1999 compared to $553.0
million used in 1998. The increased use of cash in 1998 was primarily due to
repayment of bank debt from proceeds of Foods divestitures and a $272.2 million
distribution to an affiliate that is not within the Combined Companies
controlled group, but has an ownership interest in the trademarks that were sold
with the Foods Unaligned businesses. The 1999 use of cash reflects repayment of
the $138.2 million loan from BWHLLC and a temporary loan of $132.6 million
provided to CCPC Acquisition Corp.
Subsequent Events
- -----------------
Early in the fourth quarter of 1999, the Company loaned an additional $46.4
million to CCPC Acquisition Corp. and made an additional loan to CCPC Holding
Company, Inc., a subsidiary of CCPC Acquisition Corp., of $71.5 million to
provide additional temporary financing to complete the acquisitions of EKCO
Group, Inc. and General Housewares Corporation. To date, $87.4 million of the
total loaned amounts have been repaid. The Company anticipates repayment of the
remaining amounts when permanent financing arrangements are completed by CCPC
Holding Company, Inc. and upon the sale of two business units acquired with EKCO
Group, Inc. that are held by CCPC Acquisition Corp. Additionally, early in the
fourth quarter the Company made a $50 million equity investment in the form of
16% cumulative junior preferred stock in CCPC Holding Company, Inc.
YEAR 2000 UPDATE
- ----------------
Overview
- --------
The Year 2000 issue is the result of computer programs written using two digits
rather than four to define the applicable year. Any of the Company's and
Combined Companies' computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities. If
not addressed, the Year 2000 issue could have a material adverse impact on the
business operations and financial results of the Company and Combined Companies.
To address this issue, the Company's and Combined Companies' Year 2000 Program
is a risk-based plan divided into three phases that are being executed by both
internal and external resources. These phases are: Phase I - an inventory of all
systems, assigning a business priority for each system and performing a
preliminary assessment of Year 2000 susceptibility; Phase II - completion of
detailed Year 2000 susceptibility analyses and development of remediation plans
and contingency plans; and Phase III - completion of the remediation plans,
system testing, and contingency planning.
33
<PAGE>
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 new enterprise-wide system implementations, including
non-information technology systems such as plant process controls; and (3)
external suppliers and customers. Implementations of the new enterprise-wide
systems and remediation and testing of other systems are complete. Third party
and contingency planning efforts are substantially complete. A discussion of
each area of activity relative to the three phased approach follows.
Enterprise-Wide Systems
- -----------------------
Phases I & II are completed for enterprise-wide systems and Phase III is
substantially complete. Comprehensive new enterprise-wide systems have been
implemented by each of the Company's and the Combined Companies' businesses to
replace the business and accounting systems that were planned to be replaced by
enterprise-wide systems. The enterprise-wide system versions are said to be Year
2000 compliant by the vendors and include SAP, PeopleSoft and J.D. Edwards.
Testing of these new systems is complete. Due to the relative complexity and
importance of the business and accounting systems to ongoing operations of the
Company and Combined Companies, the new enterprise-wide system implementations
address the significant majority of the Company's and Combined Companies'
internal Year 2000 risk.
Other Systems
- -------------
For the systems not to be replaced by enterprise-wide implementations, all three
phases of the Year 2000 Program are complete.
Suppliers and Customers
- -----------------------
The Company and Combined Companies have completed Phase I and Phase II to assess
and address the risks related to third party suppliers and customers. Supplier
and customer responses continue to be 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. Initial contingency planning is substantially complete and
will continue to be re-evaluated throughout 1999. Although the Company's and
Combined Companies' systems do not rely significantly on systems of other
companies, the Company and Combined Companies cannot provide assurance that
failure of third parties to address the Year 2000 issue will not have an adverse
impact on business operations and results.
Costs
- -----
Significant investments in enterprise-wide information systems have been made
since 1996 that will total approximately $75 million for the Company and $120
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 September 30, 1999,
The Company and Combined Companies had incurred costs of approximately $70
Million and $115 million, respectively, for enterprise-wide systems. The
costs for other systems and efforts was substantially spent.
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. Work performed to date on
the internal systems has reduced the risk to the Company and Combined Companies,
although complete assurances cannot be provided. Contingency plans have been
and will continue to be developed and implemented to mitigate Year 2000 risks
and the effect of Year 2000 issues. Because of the difficulty of assessing the
Year 2000 readiness of third parties, the Company and Combined Companies
consider the potential disruptions caused by such parties to be the most
reasonably likely worst case scenarios.
34
<PAGE>
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".
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 1999, the FASB issued SFAS No. 137,
which deferred the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000. SFAS No. 133 requires all derivatives be measured at fair
value and recorded on a company's balance sheet as an asset or liability,
depending on the company's underlying rights or obligations associated with the
derivative instrument. The Company 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.
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 and environmental liabilities, Year 2000
update, and market risk.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company and Combined Companies continue to enter into various financial
instruments, primarily to hedge interest rate risk and foreign currency exchange
risk. In the first nine months of 1999, the nature and amounts of these
instruments have not significantly changed from the 1998 Borden, Inc. Form 10-K,
except for an increase in options and forward currency contracts.
The notional amount of options and forward currency contracts for the Company
and Combined Companies increased approximately $194 million from $39.7 million
and $55.8 million, respectively, at December 31, 1998. The increase primarily
represents the anticipated repayment by and related interim transactions with,
an affiliate of Chemical for the acquisition of Blagden Chemicals, Ltd. (see
Note 2 to the Condensed Consolidated and Condensed Combined Financial
Statements). The net fair value of the losses related to the contracts
outstanding at the period ended September 30, 1999, as determined from quoted
market prices at September 30, 1999, was approximately $1.9 million for the
Company and the Combined Companies.
35
<PAGE>
PART II
Item 1: LEGAL PROCEEDINGS
There have been no material developments during the third quarter of 1999 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 other litigation throughout the United States, which
is considered to be in the ordinary course of the Company's business.
The Company believes, based on the information it presently possesses, and
taking into account its established reserves for estimated liability and its
insurance coverages, that the ultimate outcome of the foregoing proceedings is
unlikely to have a materially adverse effect on the Company's financial position
or operating results.
Item 6: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. Exhibits
(27) Financial Data Schedule
b. Financial Statement Schedules
Included are the separate financial statements of Foods Holdings and Wise
Holdings filed in accordance with rule 3-10 of Regulation S-X. Foods Holdings
and Wise Holdings are guarantors of the Company's credit facility and all of the
Company's outstanding publicly held debt.
c. Reports on Form 8-K
There were no reports on Form 8-K issued during the third quarter of 1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BORDEN, INC.
Date November 15, 1999 By/s/William H. Carter
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
36
<PAGE>
BORDEN FOODS HOLDINGS CORPORATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998
BFH 1
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION
Three Months Ended Nine Months Ended
(In thousands except per share and share amounts) September 30, September 30,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $122,850 $145,065 $378,673 $ 520,585
Cost of goods sold 57,431 78,419 185,193 303,173
--------- --------- --------- ----------
Gross margin 65,419 66,646 193,480 217,412
--------- --------- --------- ----------
Distribution expense 9,666 9,768 28,520 33,636
Marketing expense 43,682 45,495 136,118 155,302
General & administrative expense 14,323 15,461 42,558 47,620
Gain on divestiture of businesses (30,609) (18,600) (44,080) (200,171)
Business realignment - 11,750 - 11,750
--------- --------- --------- ----------
Operating income 28,357 2,772 30,364 169,275
--------- --------- --------- ----------
Interest expense 73 422 401 2,400
Interest income (3,791) (4,513) (10,793) (15,341)
Other income, net (9) (650) (332) (1,256)
--------- --------- --------- ----------
Income before income tax 32,084 7,513 41,088 183,472
Income tax expense 12,825 4,851 26,545 52,801
--------- --------- --------- ----------
Net income 19,259 2,662 14,543 130,671
Affiliate's share of income (562) (958) (827) (131,027)
--------- --------- --------- ----------
Net income (loss) applicable to common stock $ 18,697 $ 1,704 $ 13,716 $ (356)
========= ========= ========= ==========
Comprehensive income (Note 5) $ 19,370 $ 3,448 $ 12,939 $ 158,780
========= ========= ========= ==========
Basic and diluted income (loss) per common share $186,970 $ 17,040 $137,160 $ (3,560)
Average number of common shares
outstanding during the period 100 100 100 100
- ---------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to the Condensed Consolidated Financial Statements.
BFH 2
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION
(In thousands)
September 30, December 31,
ASSETS 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 272,606 $ 300,104
Accounts receivable (less allowance for doubtful
accounts of $1,820 and $1,391, respectively) 49,336 47,339
Other receivables 2,766 12,513
Inventories:
Finished and in-process goods 45,889 42,933
Raw materials and supplies 19,251 26,853
Deferred income taxes 13,944 24,181
Amounts due from affiliates 4,229 2,130
Other current assets 11,406 11,076
--------------- --------------
419,427 467,129
OTHER ASSETS 11,125 9,138
PROPERTY AND EQUIPMENT
Land 9,436 10,879
Buildings 39,638 44,094
Machinery and equipment 169,972 147,720
--------------- --------------
219,046 202,693
Less accumulated depreciation (60,912) (59,535)
--------------- --------------
158,134 143,158
INTANGIBLES
Goodwill 11,085 15,658
Trademarks and other intangibles 108,656 110,987
--------------- --------------
119,741 126,645
--------------- --------------
TOTAL ASSETS $ 708,427 $ 746,070
=============== ==============
- ----------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to the Condensed Consolidated Financial Statements.
BFH 3
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION
(In thousands except per share and share amounts)
September 30, December 31,
LIABILITIES AND SHAREHOLDER'S EQUITY 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts and drafts payable $ 41,545 $ 55,847
Accrued customer allowances 15,634 19,600
Amounts due to affiliates 1,580 2,948
Debt payable within one year 767 6,824
Loans payable to affiliate 2,884 -
Income tax payable 27,892 5,418
Other current liabilities 60,683 116,349
--------------- --------------
150,985 206,986
OTHER LIABILITIES
Long-term debt 2,714 2,602
Deferred income taxes 29,644 38,823
Other long-term liabilities 22,274 22,899
--------------- --------------
54,632 64,324
Commitments and Contingencies (Note 8)
SHAREHOLDER'S EQUITY
Common stock - $0.01 par value; 100 shares
authorized, issued, and outstanding - -
Paid in capital 405,817 390,988
Shareholder's investment in affiliates 61,651 60,824
Accumulated translation adjustment (9,428) (8,106)
Retained earnings 44,770 31,054
--------------- --------------
502,810 474,760
--------------- --------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 708,427 $ 746,070
=============== ==============
- --------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to the Condensed Consolidated Financial Statements.
BFH 4
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION
Nine Months Ended
(In thousands) September 30,
1999 1998
- ---------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net income $ 14,543 $ 130,671
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 14,913 13,061
Deferred tax provision 15,886 10,045
Gain on divestiture of businesses (44,080) (200,171)
Net change in assets and liabilities:
Accounts receivable (1,997) 49,723
Other receivables (202) 14,868
Inventories (1,096) 20,049
Accounts and drafts payable (14,302) (19,297)
Accrued customer allowances (3,966) (3,652)
Income taxes 24,535 (19,987)
Other amounts due to/from affiliates (3,467) (894)
Other current assets and liabilities (11,444) (62,185)
Other assets and liabilities (6,744) 390
--------- ----------
(17,421) (67,379)
--------- ----------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES
Capital expenditures (34,941) (20,722)
Proceeds from the sale of fixed assets 4,466 15,852
Proceeds from the sale of businesses 23,571 725,226
--------- ----------
(6,904) 720,356
--------- ----------
CASH FLOWS USED IN FINANCING ACTIVITIES
Net short-term debt payments (6,057) (16,299)
Repayment of loans payable to affiliates - (27,914)
Repayment of long-term debt payable to affiliate - (47,616)
Repayment of other long-term debt - (812)
Proceeds from loans payable to affiliate 2,884 -
Distribution to affiliate - (272,205)
--------- ----------
(3,173) (364,846)
--------- ----------
(DECREASE) INCREASE IN CASH AND EQUIVALENTS (27,498) 288,131
CASH AND EQUIVALENTS AT BEGINNING
OF PERIOD 300,104 28,736
--------- ----------
CASH AND EQUIVALENTS AT END
OF PERIOD $272,606 $ 316,867
========= ==========
- ---------------------------------------------------------------------------
</TABLE>
See accompanying Notes to the Condensed Consolidated Financial Statements.
BFH 5
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- --------------------------------------------------------------------------
BORDEN FOODS HOLDINGS CORPORATION
Nine Months Ended
(In thousands) September 30,
1999 1998
--------- ----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest $ 424 $ 2,590
Taxes, net of refunds (14,952) 62,743
Non-cash activity:
Shareholder's investment in affiliates (Note 4) $ (827) $(131,027)
Affiliate's share of income (Note 4) 827 131,027
- --------------------------------------------------------------------------
</TABLE>
See accompanying Notes to the Condensed Consolidated Financial Statements.
BFH 6
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION
(In thousands)
- ------------------------------------------------------------------------------------------------------------
Shareholder's Accumulated
Paid in Investment Translation Retained
Capital in Affiliate Adjustments Earnings Total
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $390,988 $60,824 $(8,106) $31,054 $474,760
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income 14,543 14,543
Foreign currency translation adjustments (1,322) (1,322)
Affiliate's share of income 827 (827) -
Increase in tax basis related to finalization
of purchase price allocation 14,829 14,829
- ------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 $405,817 $ 61,651 $(9,428) $44,770 $502,810
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to the Condensed Consolidated Financial Statements.
BFH 7
<PAGE>
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 September 30, 1999, BFC's
operations included 8 production facilities, 4 of which are located in the
United States. The remaining facilities are located 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 periods 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.
On September 17, 1998, BFC announced the closing of the Tolleson, Arizona pasta
plant due to the consolidation of production into other pasta facilities and
recorded pre-tax charges of $16,300, which included a $6,118 fair market value
adjustment of inventory purchase commitments (recorded in cost of goods sold).
As of September 30, 1999 and December 31, 1998, reserves related to the
restructuring of aligned businesses of $0 and $7,570, respectively, remained in
other current liabilities.
BFH 8
<PAGE>
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.
On April 30, 1999, BFC sold the milk powder business located in China to Royal
Numico. The sale generated proceeds of $7,112, resulting in a pre-tax gain of
$10,838 and an after tax gain of $3,528. BFC had previously elected to exit the
milk powder business and sold significant operations, excluding China, to
Nestle, S.A. in 1998. At that time, BFC established divestiture reserves of
$4,289 for costs to close operations in China, and recorded $12,794 to
write-down assets to estimated net realizable value. As a result of the sale,
certain remaining liabilities for closure costs of $3,112 were no longer
required.
On July 14, 1999, BFC sold the chocolate milk business located in Denmark. The
sale generated proceeds of $6,692 and a pre-tax gain of $1,667. Also during the
third quarter of 1999, BFC reduced current liabilities by $29,767 for the
resolution of divestiture related severance and lower than expected exit costs.
In 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
$339,882. As a result of these divestitures, BFC recorded a pre-tax gain of
$200,854, net of charges for work-force reductions, closure of facilities,
selling and legal fees, contract terminations, transition services and other
miscellaneous costs. In addition, BFC sold its Puerto Rican distributor during
the second quarter of 1998. The sale generated proceeds of $8,844 and a pre-tax
loss of $683.
Activities related to the divestiture reserves during the three and nine months
ended September 30, 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 (1,436) (3,943) (5,196) (10,575)
Other(4) (1,343) (224) (3,557) (5,124)
-------------- --------------- --------- ---------
Balance at June 30, 1999 $ 4,331 $ 30,904 $ 10,958 $ 46,193
Utilized (2,014) (91) (34) (2,139)
Other(4) 10 (22,062) (7,715) (29,767)
-------------- --------------- --------- ---------
Balance at September 30, 1999 $ 2,327 $ 8,751 $ 3,209 $ 14,287
============== =============== ========= =========
<FN>
- -------------------------------------------------------------------------------------
(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>
BFH 9
<PAGE>
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 $827 and $131,027 during the
first nine months of 1999 and 1998, respectively. The 1998 allocation was
primarily due to a gain on divestiture of the Signature Flavor business. In the
second quarter of 1998, $272,205 was distributed to the LLC.
5. COMPREHENSIVE INCOME
Comprehensive income was computed as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 19,259 $ 2,662 $ 14,543 $ 130,671
Foreign currency translation adjustments 393 786 (1,322) (6,805)
Reclassification adjustment (282) - (282) 34,914
----------- ---------- ----------- -----------
$ 19,370 $ 3,448 $ 12,939 $ 158,780
=========== ========= ========== ===========
- ----------------------------------------------------------------------------------------------------
</TABLE>
The reclassification adjustments in 1999 and 1998 represent the accumulated
translation adjustment recognized on the sale of the chocolate milk business
located in Denmark and the KLIM business, respectively.
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 $1,567 as of September 30, 1999 and $2,935 as 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.
BFH 10
<PAGE>
The following summarizes the affiliate charges for the three and nine months
ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Employee benefits $ 739 $ 1,780 $ 2,102 $ 4,018
Group and general insurance 1,133 1,340 3,224 3,987
Administrative services 3,259 5,640 10,666 12,625
---------- ---------- --------- --------
$ 5,131 $ 8,760 $ 15,992 $20,630
=========== ========== ========= =========
</TABLE>
- --------------------------------------------------------------------------------
BFC performs certain administrative services on behalf of other Borden
affiliates. These services include sales administration, promotion, purchasing
and research and development. BFC charged affiliates $128 and $228 for such
services for the three months ended September 30, 1999 and 1998, respectively,
and $533 and $810 for the nine months ended September 30, 1999 and 1998,
respectively. The receivable for these services was $1,110 at September 30,
1999 and $505 at December 31, 1998.
BFC invests cash not used in operations with Borden. BFC's investment balance
was $243,350 at September 30, 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 $3,421 and $4,187 on these
funds for the three months ended September 30, 1999 and 1998, respectively, and
$10,080 and $14,603 for the nine months ended September 30, 1999 and 1998,
respectively. Amounts receivable for interest were $1,351 and $1,625 as of
September 30, 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 and 590,500 UAR's to
non-unitholders. The UAR entitles the holder to receive an amount in cash equal
to the excess of the market price (as defined in the UAR agreement) of the 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. Compensation expense is
accrued in other current liabilities and shall be adjusted in subsequent periods
up to the measurement date for changes, increase or decreases, in the market
price of the UAR's.
BFH 11
<PAGE>
8. COMMITMENTS AND CONTINGENCIES
Legal Matters
- -------------
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.
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,
contingency planing and completing final system testing.
The Year 2000 efforts are divided into three categories: (I) ERP - business
systems replaced by new enterprise-wide system implementation, (II) Non-ERP -
business systems that were not replaced by the new enterprise-wide system
implementation, including non-information technology systems such as plant
process controls, and (III) Third Parties - external suppliers and customers.
ERP - The comprehensive new enterprise-wide system implemented by BFC replaced
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. These vendors include 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 addresses the
significant majority of BFC's internal Year 2000 risk. Implementation of the
new system was completed and tested as of June 30, 1999.
Non-ERP - BFC substantially completed system remediation and system testing
activities as of September 30, 1999. Contingency plans are in place for those
systems for which remediation and testing is planned, but work was not yet
completed.
Third Parties - The Year 2000 Program included 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 were evaluated and
appropriate procedures were 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, were substantially completed as of September 30, 1999.
Third Party work included validation of supplier Year 2000 programs through site
visits to mission critical suppliers, extensive phone interviews to critical
suppliers, and documented questionnaire responses from suppliers rated as
important and marginal. Although BFC's systems do not rely significantly on
BFH 12
<PAGE>
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.
Business Contingency Planning is in process to minimize exposure (spread and
duration) from internal and external events and to mitigate the financial impact
of Year 2000 events. Examples of these plans are the pre-building of key inputs
and critical finished goods inventory, plant shut downs over the millennium with
staggered startups, and the establishment of a war room as a communications
focal point. Testing of the plans are substantially completed as of September
30, 1999.
Significant investments in an enterprise-wide information system and Year 2000
program expenses addressing non-compliance across all areas of the company will
total approximately $43,200 by the year 2000. This amount consists of $36,200
for the enterprise-wide information system and $7,000 of total Year 2000 costs
and write-offs. Year 2000 costs and write-offs are comprised of $3,900 for
business remediation, $2,300 for other related areas and program management, and
$800 in write-offs of non-compliant hardware and systems.
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 has
substantially completed the Year 2000 Program 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 continue to
be developed and implemented to mitigate Year 2000 risks and the effect of Year
2000 issues.
BFH 13
<PAGE>
WISE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998
WH 1
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
THREE MONTHS ENDED
SEPTEMBER 30,
(Dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 58,062 $ 55,478
Cost of goods sold 35,152 34,382
----------- --------
Gross margin 22,910 21,096
Distribution expense 7,397 7,053
Marketing expense 9,270 9,111
General & administrative expense 4,772 4,128
----------- --------
Operating income 1,471 804
Interest expense 236 129
Other expense 18 55
----------- --------
Income before income taxes 1,217 620
Income tax expense 489 247
----------- --------
Net income $ 728 $ 373
============ ========
Per Share Data
- --------------
Basic and diluted income per common share $ 10.40 $ 5.33
Average number of common shares outstanding
during the period 70 70
- ----------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
WH 2
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
NINE MONTHS ENDED
SEPTEMBER 30,
(Dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 167,034 $ 170,630
Cost of goods sold 103,139 106,814
---------- ---------
Gross margin 63,895 63,816
Distribution expense 21,422 21,192
Marketing expense 26,067 27,744
General & administrative expense 14,635 15,009
---------- ---------
Operating income (loss) 1,771 (129)
Interest expense 521 361
Other expense 193 72
----------- ---------
Income (loss) before income taxes 1,057 (562)
Income tax expense (benefit) 465 (213)
---------- ---------
Net income (loss) $ 592 $ (349)
========== =========
Per Share Data
- --------------
Basic and diluted income (loss) per common share $ 8.46 $ (4.99)
Average number of common shares outstanding
during the period 70 70
- ----------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
WH 3
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
(Dollars in thousands)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
- ----------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 2,930 $ 2,610
Accounts receivable (less allowance for doubtful
accounts of $2,220 and $2,427, respectively) 22,672 22,181
Affiliated receivables 159 15
Inventories:
Finished goods 4,068 4,045
Raw materials and supplies 3,648 3,886
Deferred income taxes, net 2,583 2,651
Prepaid and other current assets 3,826 3,660
--------------- --------------
39,886 39,048
--------------- --------------
PROPERTY AND EQUIPMENT
Land 1,412 1,412
Buildings and improvements 5,335 5,352
Machinery and equipment 50,679 45,120
--------------- --------------
57,426 51,884
Less accumulated depreciation (23,576) (19,769)
--------------- --------------
33,850 32,115
--------------- --------------
INTANGIBLES AND OTHER ASSETS
Trademarks (net of accumulated
amortization of $2,240 and $1,880, respectively) 16,571 16,931
Other assets 804 808
--------------- --------------
17,375 17,739
--------------- --------------
TOTAL ASSETS $ 91,111 $ 88,902
=============== ==============
- ----------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
WH 4
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share amounts)
SEPTEMBER 30, DECEMBER 31,
LIABILITIES AND SHAREHOLDER'S EQUITY 1999 1998
- ----------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt payable within one year $ 183 $ 168
Accounts and drafts payable 12,972 16,060
Affiliated payables 302 463
Accrued liabilities 14,260 14,954
-------------- -------------
27,717 31,645
-------------- -------------
OTHER LIABILITIES
Long-term debt payable to Borden, Inc. 9,450 5,000
Deferred income taxes, net 1,799 2,198
Non-pension post-employment
benefit obligations 9,691 9,513
Affiliated employee benefit obligation 2,757 2,165
Other long-term liabilities 299 455
Minority interest 1,098 218
-------------- -------------
25,094 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 3,320 2,728
-------------- -------------
38,300 37,708
-------------- -------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 91,111 $ 88,902
============== =============
- ----------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
WH 5
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
NINE MONTHS ENDED
SEPTEMBER 30,
(Dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 592 $ (349)
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Minority interest's share in income 12 (6)
Depreciation 4,573 4,162
Amortization 360 354
Other non-cash 164 82
Net change in assets and liabilities:
Accounts receivable (284) 1,596
Affiliated receivables (144) 985
Inventories 215 643
Prepaid and other current assets (166) (850)
Other assets 4 1,158
Accounts and drafts payable (3,088) 2,239
Affiliated payables (161) 104
Accrued liabilities (160) (3,638)
Post-employment benefits other than pensions 178 (192)
Affiliated employee benefit obligation 592 76
Other long-term liabilities (487) (820)
--------------- --------
2,200 5,544
--------------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital expenditures (7,272) (6,388)
Divestiture of business - 2,107
Proceeds from sales of equipment 59 83
--------------- --------
(7,213) (4,198)
--------------- --------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Short-term borrowings 331 267
Repayment of short-term borrowings (316) (270)
Borrowings under affiliated long-term loan agreement 4,450 -
Management contributions 868 -
--------------- --------
5,333 (3)
--------------- --------
Increase in cash and equivalents 320 1,343
Cash and equivalents at beginning of period 2,610 3,604
--------------- --------
Cash and equivalents at end of period $ 2,930 $ 4,947
=============== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 604 $ 388
Cash paid for taxes $ 269 $ 152
- ----------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
WH 6
<PAGE>
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.
The condensed consolidated financial statements of Wise collectively include the
financial position of Wise Holdings, Inc. and subsidiaries as of September 30,
1999 and December 31, 1998. These financial statements also include the
statements of operations of Wise for the three and nine months ended September
30, 1999 and 1998 and cash flows of Wise for the nine months ended September 30,
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 September 30, 1999 and 1998 is
computed by dividing net income or loss by the weighted average number of common
shares outstanding during the period ended September 30, 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
September 30, 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.
WH 7
<PAGE>
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 $384 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. In June 1999, the FASB issued SFAS 137,
which deferred the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000 and requires all derivatives be measured at fair value and
recorded on a company's balance sheet as an 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.
4. ACCRUED LIABILITIES
<TABLE>
<CAPTION>
Accrued liabilities were as follows:
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Compensation $ 1,433 $ 2,557
General insurance 5,466 5,292
Advertising and promotion 4,059 3,772
Other 3,302 3,333
------------- ------------
Total $14,260 $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 September 30, 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 September 30, 1999 and December 31, 1998, $9.5 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.
WH 8
<PAGE>
6. COMMITMENTS AND CONTINGENCIES
Environmental Contingencies
- ---------------------------
Wise, like others in similar businesses, is subject to extensive Federal, state
and local environmental laws and regulations. Although Wise's environmental
policies and practices are designed to ensure compliance with these laws and
regulations, future developments and increasingly stringent regulations could
require Wise to make additional unforeseen environmental expenditures.
Environmental accruals are routinely reviewed on an interim basis as events and
developments warrant and are subject to an annual comprehensive review.
Litigation
- ----------
Wise is subject to various investigations, claims and legal proceedings covering
a wide range of matters in the ordinary course of its business activities. Each
of these matters is subject to various uncertainties and some of these matters
may be resolved unfavorably to Wise. Wise has established accruals for matters
that are probable and reasonably estimable. Management believes that any
liability that may ultimately result from the resolution of these matters in
excess of amounts provided will not have a material adverse effect on the
financial statements of Wise.
7. RELATED PARTIES
Wise is engaged in various transactions with Borden and its affiliated companies
in the ordinary course of business. A subsidiary of Borden provides certain
administrative services to Wise at negotiated fees. These services include:
processing of payroll and active and retiree group insurance claims. Wise
reimburses the Borden subsidiary for payments for general disbursements, and
general and group insurance and retirement benefit claims. The amount owed by
Wise for these services is included in affiliated payables and was $302 and $463
at September 30, 1999 and December 31, 1998, respectively.
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>
Three months ended Nine months ended
1999 1998 1999 1998
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Employee benefits $ 431 $ 484 $1,292 $1,433
Group and general insurance 1,177 1,228 3,306 3,012
Information services 89 54 324 156
Corporate staff departments and overhead 246 269 796 1,178
------- -------- -------- -------
$1,943 $2,035 $5,718 $5,779
==========================================================================================
</TABLE>
Wise also invests excess cash with Borden in one-day investments that totaled
$1,500 and $1,700 at September 30, 1999 and December 31, 1998, respectively,
which is included as a component of cash.
WH 9
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 194600
<SECURITIES> 0
<RECEIVABLES> 230600
<ALLOWANCES> 11700
<INVENTORY> 103700
<CURRENT-ASSETS> 727600
<PP&E> 901000
<DEPRECIATION> 356000
<TOTAL-ASSETS> 1778800
<CURRENT-LIABILITIES> 869200
<BONDS> 541300
0
614400
<COMMON> 2000
<OTHER-SE> (554300)
<TOTAL-LIABILITY-AND-EQUITY> 1778800
<SALES> 1001500
<TOTAL-REVENUES> 1001500
<CGS> 683000
<TOTAL-COSTS> 683000
<OTHER-EXPENSES> 214500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46600
<INCOME-PRETAX> 64400
<INCOME-TAX> 24700
<INCOME-CONTINUING> 39700
<DISCONTINUED> 600
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40300
<EPS-BASIC> .20
<EPS-DILUTED> .20
</TABLE>
