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, 2000
--------------------
Commission file number I-71
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BORDEN, INC.
New Jersey 13-0511250
----------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
180 East Broad Street, Columbus, OH 43215
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(Address of principal executive offices)
(614) 225-4000
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant(1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of shares of common stock, $0.01 par value, outstanding as of the close
of business on November 14, 2000: 198,974,994
1
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BORDEN, INC.
INTRODUCTION
The following filing with the Securities and Exchange Commission ("SEC") by
Borden, Inc. ("the Company") presents three separate financial statements:
Borden, Inc. Condensed Consolidated Financial Statements, Borden, Inc. and
Affiliates Condensed Combined Financial Statements and the Condensed Financial
Statements of Borden Foods Holdings Corporation ("Foods Holdings"). The
consolidated statements present the Company after the effect of the sales of (i)
the Company's former salty snacks business ("Wise") to Wise Holdings and its
subsidiaries and (ii) the Company's former domestic and international foods
business ("Foods") to Foods Holdings and its subsidiaries, as explained in Note
1 to the consolidated and combined financial statements. The Company and Foods
Holdings are controlled by BW Holdings, LLC ("BWHLLC"). The consolidated
financial statements are those of the Company, which is the SEC Registrant.
The Borden, Inc. and Affiliates ("the Combined Companies") Condensed Combined
Financial Statements are included herein to present the Company on a combined
historical basis, including the financial position, results of operations and
cash flows of Wise and Foods. The Combined Companies' financial statements are
included, supplementally, to present financial information on a basis consistent
with that on which credit was originally extended to the Company (prior to push
down accounting) and because management of the Company will continue to control
significant financial and managerial decisions with respect to Wise Holdings and
Foods Holdings. On October 30, 2000, Wise was sold and its financial guarantees
ceased (See Note 3). Accordingly, Condensed Financial Statements of Wise
Holdings are no longer included in Part II of the Company's quarterly financial
filings with the SEC. In accordance with rule 3-10 of Regulation S-X, the
Condensed Financial Statements of Foods Holdings are included in Part II of this
Quarterly Report on Form 10-Q because Foods Holdings is a guarantor of the
Company's credit facility and all of the Company's outstanding publicly held
debt.
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BORDEN, INC.
INDEX
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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, 2000 and 1999. . . . . . . . . . . . . . . . . . . . . . . . . . 4
nine months ended September 30, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Condensed Consolidated Balance Sheets, September 30, 2000 and December 31, 1999 . . . . . . . . . . 8
Condensed Consolidated Statements of Cash Flows, nine months ended September 30, 2000 and 1999. . . 10
Condensed Consolidated Statement of Shareholders' Equity, nine months ended September 30, 2000. . . 12
Condensed Combined Statements of Operations and Comprehensive Income,
three months ended September 30, 2000 and 1999. . . . . . . . . . . . . . . . . . . . . . . . . . 13
nine months ended September 30, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Condensed Combined Balance Sheets, September 30, 2000 and December 31, 1999 . . . . . . . . . . . . 15
Condensed Combined Statements of Cash Flows, nine months ended September 30, 2000 and 1999. . . . . 17
Condensed Combined Statement of Shareholders' Equity, nine months ended September 30, 2000. . . . . 19
Notes to Condensed Consolidated and Condensed Combined Financial Statements . . . . . . . . . . . . 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . 25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
ITEM 6. EXHIBITS, GUARANTOR FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. . . . . . . . . . 36
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
BORDEN, INC.
Three months ended September 30,
(In millions) 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Net sales $399.2 $350.7
Cost of goods sold 296.9 241.3
------- -------
Gross margin 102.3 109.4
------- -------
Distribution expense 15.2 14.4
Marketing expense 27.3 20.6
General & administrative expense 42.2 31.1
Business realignment and asset write-offs 1.8 21.6
------- -------
Operating income 15.8 21.7
------- -------
Interest expense 17.5 15.6
Affiliated interest expense, net of affiliated
interest income of $0.3 in 2000 and 1999 3.9 4.5
Interest income and other (3.6) (6.5)
Equity in net income of unconsolidated subsidiaries (1.6) (1.3)
------- -------
(Loss) income from continuing operations
before income tax (0.4) 9.4
Income tax expense 7.6 5.6
------- -------
Net (loss) income (8.0) 3.8
Preferred stock dividends (18.4) (18.4)
------- -------
Net loss applicable to common stock $(26.4) $(14.6)
======= =======
Comprehensive income (see Note 4) $ (9.6) $ 4.9
======= =======
--------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED) (CONTINUED)
BORDEN, INC.
Three months ended September 30,
(In millions, except per share data) 2000 1999
-------------------------------------------------------------------
<S> <C> <C>
Basic and Diluted Per Share Data
--------------------------------
Net (loss) income $(0.04) $ 0.02
Preferred stock dividends (0.10) (0.10)
------- -------
Net loss applicable to common stock $(0.14) $(0.08)
======= =======
Dividends per common share $ 0.06 $ 0.14
Dividends per preferred share $ 0.75 $ 0.75
Average number of common shares outstanding
during the period 199.0 199.0
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See Notes to Condensed Consolidated and Condensed Combined Financial Statements
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
BORDEN, INC.
Nine months ended September 30,
(In millions) 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $1,136.4 $1,001.5
Cost of goods sold 811.5 683.0
--------- ---------
Gross margin 324.9 318.5
--------- ---------
Distribution expense 46.4 40.5
Marketing expense 69.9 56.3
General & administrative expense 117.7 87.9
Net gain on sale of assets (10.3) (1.8)
Business realignment and asset write-offs 13.6 31.6
--------- ---------
Operating income 87.6 104.0
--------- ---------
Interest expense 46.8 46.6
Affiliated interest expense, net of affiliated
interest income of $0.3 in 2000 and $0.7 in 1999 12.2 14.5
Interest income and other (14.4) (24.1)
Equity in net (income) loss of unconsolidated subsidiaries (2.5) 2.6
--------- ---------
Income from continuing operations
before income tax 45.5 64.4
Income tax expense 28.8 24.7
--------- ---------
Income from continuing operations 16.7 39.7
--------- ---------
Gain on disposal of discontinued operations, net of tax 93.0 0.6
--------- ---------
Net income 109.7 40.3
Preferred stock dividends (55.3) (55.3)
--------- ---------
Net income (loss) applicable to common stock $ 54.4 $ (15.0)
========= =========
Comprehensive income (see Note 4) $ 100.2 $ 34.0
========= =========
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See Notes to Condensed Consolidated and Condensed Combined Financial Statements
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED) (CONTINUED)
BORDEN,INC.
Nine months ended September 30,
(In millions, except per share data) 2000 1999
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<S> <C> <C>
Basic and Diluted Per Share Data
--------------------------------
Income from continuing operations $ 0.08 $ 0.20
Income on disposal of discontinued operations, net of tax 0.47 -
------- -------
Net income $ 0.55 $ 0.20
Preferred stock dividends (0.28) (0.28)
------- -------
Net income (loss) applicable to common stock $ 0.27 $(0.08)
======= =======
Dividends per common share $ 0.25 $ 0.26
Dividends per preferred share $ 2.25 $ 2.25
Average number of common shares outstanding
during the period 199.0 199.0
---------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN, INC.
(In millions)
September 30, December 31,
ASSETS 2000 1999
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<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 33.4 $ 195.2
Accounts receivable (less allowance for doubtful
accounts of $10.9 in 2000 and $11.8 in 1999) 261.5 215.0
Purchased receivables from affiliate 40.0 -
Loan receivable from affiliate 60.6 56.2
Inventories:
Finished and in-process goods 72.9 62.8
Raw materials and supplies 53.4 50.4
Deferred income taxes 43.5 42.4
Other current assets 17.6 15.3
--------------- --------------
582.9 637.3
--------------- --------------
INVESTMENTS AND OTHER ASSETS
Investments 63.9 64.0
Investment in affiliate 58.0 51.5
Deferred income taxes 29.5 109.5
Prepaid pension assets 114.6 129.7
Other assets 43.8 36.3
Assets sold under contractual arrangement (net
of allowance of $62.6 in 1999) (See Note 5) - 48.2
--------------- --------------
309.8 439.2
--------------- --------------
PROPERTY AND EQUIPMENT
Land 25.4 25.6
Buildings 95.3 97.9
Machinery and equipment 769.0 739.1
--------------- --------------
889.7 862.6
Less accumulated depreciation (326.9) (323.8)
--------------- --------------
562.8 538.8
INTANGIBLES 212.0 112.1
--------------- --------------
TOTAL ASSETS $ 1,667.5 $ 1,727.4
=============== ==============
---------------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN, INC.
(In millions, except share data)
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts and drafts payable $ 169.1 $ 137.4
Debt payable within one year 43.2 17.7
Income taxes payable 87.7 244.1
Loans payable to affiliates 226.5 246.6
Other current liabilities 171.7 178.6
--------------- --------------
698.2 824.4
--------------- --------------
OTHER LIABILITIES
Liabilities sold under contractual arrangement (See Note 5) - 41.6
Long-term debt 655.6 541.1
Non-pension post-employment benefit obligations 165.3 176.1
Other long-term liabilities 58.8 80.0
--------------- --------------
879.7 838.8
--------------- --------------
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 336.2 355.7
Receivable from parent (414.9) (414.9)
Accumulated other comprehensive income (62.0) (52.5)
Accumulated deficit (386.1) (440.5)
--------------- --------------
89.6 64.2
--------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,667.5 $ 1,727.4
=============== ==============
-----------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN, INC.
Nine months ended September 30,
(In millions) 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income $ 109.7 $ 40.3
Adjustments to reconcile net income to net
cash from operating activities:
Gain on disposal of discontinued operations, net of tax (93.0) (0.9)
Net gain on sale of assets (10.3) (1.8)
Business realignment and asset write-offs 13.6 31.6
Deferred tax provision 72.5 2.8
Depreciation and amortization 45.4 38.6
Unrealized gain on interest rate swap (4.9) (8.1)
Equity in net (income) loss of unconsolidated subsidiaries (2.5) 2.6
Net change in assets and liabilities:
Trade receivables (44.8) (21.6)
Inventories (6.0) 9.9
Accounts and drafts payable 34.6 5.2
Income taxes (62.4) (12.0)
Other assets 13.2 1.9
Other liabilities (32.6) (53.3)
-------- --------
32.5 35.2
-------- --------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (69.7) (40.4)
Proceeds from the sale of fixed assets 8.4 5.5
Purchase of businesses, net of cash acquired (136.5) (110.5)
Purchase of affiliate's receivables, net of cash collected (40.0) -
Net investment from (in) affiliate 6.6 (5.1)
-------- --------
(231.2) (150.5)
-------- --------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net short-term debt borrowings (repayments) 28.9 (1.0)
Borrowings of long-term debt 122.0 -
Repayment of long-term debt (10.9) (0.4)
Affiliated repayments/loans (24.5) (305.5)
Interest received from parent 36.3 36.7
Common stock dividends paid (49.3) (36.7)
Preferred stock dividends paid (55.3) (55.3)
Other distributions (10.3) -
-------- --------
36.9 (362.2)
-------- --------
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
BORDEN, INC.
Nine months ended September 30,
(In millions) 2000 1999
-----------------------------------------------------------------------------------
<S> <C> <C>
Decrease in cash and equivalents $(161.8) $(477.5)
Cash and equivalents at beginning
of period 195.2 672.1
-------- --------
Cash and equivalents at end
of period $ 33.4 $ 194.6
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest, net $ 54.3 $ 48.2
Taxes 17.0 33.9
Non-cash activity:
Accrued dividends on investment in affiliate 6.4 -
Capital contribution by parent 22.9 19.0
Distribution of net assets of infrastructure management
services business to the Company's parent 6.0 -
-----------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
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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, 1999 $ 614.4 $ 2.0 $ 355.7 $ (414.9) $ (52.5) $ (440.5) $ 64.2
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income 109.7 109.7
Translation adjustments (9.5) (9.5)
Preferred stock dividends (55.3) (55.3)
Common stock dividends (49.3) (49.3)
Other distributions (16.3) (16.3)
Interest accrued on notes from parent (net of $13.1 tax) 23.2 23.2
Capital contribution from parent 22.9 22.9
------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000 $ 614.4 $ 2.0 $ 336.2 $ (414.9) $ (62.0) $ (386.1) $ 89.6
------------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
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<CAPTION>
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CONDENSED COMBINED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
BORDEN, INC. AND AFFILIATES
Three months ended September 30,
(In millions) 2000 1999
------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $538.1 $473.6
Cost of goods sold 368.4 298.9
------- -------
Gross margin 169.7 174.7
------- -------
Distribution expense 25.7 24.1
Marketing expense 76.1 68.2
General & administrative expense 58.4 46.5
Gain on divestiture of businesses (3.1) (32.7)
Business realignment and asset write-offs 6.6 21.6
------- -------
Operating income 6.0 47.0
------- -------
Interest expense 17.5 15.3
Affiliated interest expense 0.4 1.6
Interest income and other (4.1) (5.9)
Equity in net loss (income) of unconsolidated subsidiaries 0.1 (1.3)
------- -------
(Loss) income from continuing operations
before income tax (7.9) 37.3
Income tax expense 9.7 18.4
------- -------
(Loss) income from continuing operations (17.6) 18.9
------- -------
Income from discontinued operations, net of tax 1.8 0.9
------- -------
Net (loss) income (15.8) 19.8
Affiliate's share of income - (0.5)
Preferred stock dividends (18.4) (18.4)
------- -------
Net (loss) income applicable to common stock $(34.2) $ 0.9
======= =======
Comprehensive income (see Note 4) $(19.4) $ 21.1
======= =======
------------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
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<CAPTION>
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CONDENSED COMBINED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
BORDEN, INC. AND AFFILIATES
Nine months ended September 30,
(In millions) 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $1,540.3 $1,380.2
Cost of goods sold 1,020.1 869.9
--------- ---------
Gross margin 520.2 510.3
--------- ---------
Distribution expense 79.6 69.1
Marketing expense 237.1 193.4
General & administrative expenses 164.6 132.9
Gain on divestiture of businesses (3.1) (47.5)
Net gain on sale of assets (10.3) (1.1)
Business realignment and asset write-offs 18.4 30.8
--------- ---------
Operating income 33.9 132.7
--------- ---------
Interest expense 46.8 46.7
Affiliated interest expense 1.0 5.1
Interest income and other (14.7) (23.4)
Equity in net (income) loss of unconsolidated subsidiaries (0.9) 2.6
--------- ---------
Income from continuing operations
before income tax 1.7 101.7
Income tax (benefit) expense (49.0) 52.4
--------- ---------
Income from continuing operations 50.7 49.3
--------- ---------
Discontinued operations:
Income from operations, net of tax 3.8 1.1
Gain on disposal, net of tax 37.0 0.6
--------- ---------
Income before cumulative effect of change
in accounting principle 91.5 51.0
Cumulative effect of change in accounting principle - 2.8
--------- ---------
Net income 91.5 48.2
Affiliate's share of loss (income) 0.1 (0.8)
Preferred stock dividends (55.3) (55.3)
--------- ---------
Net income (loss) applicable to common stock $ 36.3 $ (7.9)
========= =========
Comprehensive income (see Note 4) $ 75.6 $ 44.6
========= =========
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See Notes to Condensed Consolidated and Condensed Combined Financial Statements
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CONDENSED COMBINED BALANCE SHEETS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
(In millions)
September 30, December 31,
ASSETS 2000 1999
-----------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 62.4 $ 227.5
Accounts receivable (less allowance for doubtful
accounts of $11.8 in 2000 and $15.4 in 1999) 302.9 274.1
Purchased receivables from affiliate 40.0 -
Loan receivable from affiliate 60.6 56.2
Inventories:
Finished and in-process goods 120.9 110.9
Raw materials and supplies 76.2 80.5
Deferred income taxes 54.7 58.5
Other current assets 22.7 20.3
Net assets of discontinued operations (See Note 3) 58.0 61.8
--------------- --------------
798.4 889.8
--------------- --------------
INVESTMENTS AND OTHER ASSETS
Investments 63.9 64.0
Investment in affiliate 58.0 51.5
Deferred income taxes 29.5 81.7
Prepaid pension assets 125.6 140.8
Other assets 36.4 31.8
--------------- --------------
313.4 369.8
--------------- --------------
PROPERTY AND EQUIPMENT
Land 35.7 36.0
Buildings 167.7 171.2
Machinery and equipment 1,064.4 1,009.6
--------------- --------------
1,267.8 1,216.8
Less accumulated depreciation (501.8) (486.6)
--------------- --------------
766.0 730.2
INTANGIBLES 491.5 403.2
--------------- --------------
TOTAL ASSETS $ 2,369.3 $ 2,393.0
=============== ==============
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See Notes to Condensed Consolidated and Condensed Combined Financial Statements
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CONDENSED COMBINED BALANCE SHEETS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
(In millions)
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts and drafts payable $ 213.1 $ 184.3
Debt payable within one year 44.1 18.0
Income taxes payable 99.4 254.9
Loans payable to affiliate 18.5 14.5
Other current liabilities 229.0 244.9
--------------- ---------------
604.1 716.6
--------------- ---------------
OTHER LIABILITIES
Long-term debt 658.4 544.1
Non-pension post-employment benefit obligations 172.4 183.8
Other long-term liabilities 70.8 85.7
--------------- ---------------
901.6 813.6
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 6)
SHAREHOLDERS' EQUITY
Preferred stock 614.4 614.4
Common stock 2.0 2.0
Paid in capital 644.9 664.4
Receivable from parent (414.9) (414.9)
Affiliate's interest in subsidiary 66.1 66.2
Accumulated other comprehensive income (100.0) (84.1)
Retained earnings 51.1 14.8
--------------- ---------------
863.6 862.8
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,369.3 $ 2,393.0
================ ===============
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See Notes to Condensed Consolidated and Condensed Combined Financial Statements
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CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
Nine months ended September 30,
(In millions) 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income $ 91.5 $ 48.2
Adjustments to reconcile net income to net
cash from operating activities:
Income from discontinued operations, net of tax (3.8) (1.1)
Gain on disposal of discontinued operations, net of tax (37.0) (0.6)
Gain on divestiture of businesses (3.1) (47.5)
Net gain on sale of assets (10.3) (1.1)
Business realignment and asset write-offs 18.4 30.8
Deferred tax provision 55.3 27.0
Depreciation and amortization 73.8 60.2
Unrealized gain on interest rate swap (4.9) (8.1)
Equity in net (income) loss of unconsolidated subsidiaries (0.9) 2.6
Net change in assets and liabilities:
Trade receivables (33.8) (24.6)
Inventories 0.7 7.6
Accounts and drafts payable 32.8 (9.1)
Income taxes (114.9) 3.3
Other assets 21.1 26.0
Other liabilities (39.3) (85.8)
Net assets of discontinued operations 7.6 (4.4)
-------- --------
53.2 23.4
-------- --------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (111.6) (82.6)
Proceeds from the divestiture of businesses - 23.6
Proceeds from the sale of fixed assets 8.6 6.2
Purchase of businesses, net of cash acquired (136.5) (110.5)
Purchase of affiliate's receivables, net of cash collected (40.0) -
-------- --------
(279.5) (163.3)
-------- --------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net short-term debt borrowings (repayments) 29.5 (7.2)
Borrowings of long-term debt 122.0 -
Repayment of long-term debt (11.2) (0.3)
Affiliated repayments/loans (0.5) (268.0)
Interest received from parent 36.3 36.7
Common stock dividends paid (49.3) (36.7)
Preferred stock dividends paid (55.3) (55.3)
Other distributions (10.3) -
-------- --------
61.2 (330.8)
-------- --------
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CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
BORDEN, INC. AND AFFILIATES
Nine months ended September 30,
(In millions) 2000 1999
-----------------------------------------------------------------------------------
<S> <C> <C>
Decrease in cash and equivalents $(165.1) $(470.7)
Cash and equivalents at beginning
of period 227.5 694.6
-------- --------
Cash and equivalents at end
of period $ 62.4 $ 223.9
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest, net $ 40.1 $ 38.1
Taxes 10.6 19.2
Non-cash activity:
Accrued dividends on investment in affiliate 6.4 -
Capital contribution by parent 22.9 19.0
Affiliate's share of (loss) income (0.1) 0.8
Distribution of net assets of infrastructure management
services business to the Company's parent 6.0 -
----------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
</TABLE>
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, 1999 $614.4 $2.0 $664.4 $(414.9) $66.2 $(84.1) $14.8 $862.8
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income 91.5 91.5
Translation adjustments (15.9) (15.9)
Preferred stock dividends (55.3) (55.3)
Common stock dividends (49.3) (49.3)
Other distributions (16.3) (16.3)
Interest accrued on notes from parent (net of $13.1 tax) 23.2 23.2
Capital contribution from parent 22.9 22.9
Affiliate's interest in subsidiary (0.1) 0.1 -
--------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000 $614.4 $2.0 $644.9 $(414.9) $66.1 $(100.0) $51.1 $863.6
--------------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
</TABLE>
19
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 primarily forest products
and industrial resins, formaldehyde, melamine crystal and other specialty and
industrial chemicals worldwide as well as consumer glues and adhesives in North
America.
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, together with subsidiaries
of Wise Holdings, Inc. ("Wise Holdings") and subsidiaries of Borden Foods
Holdings Corporation ("Foods Holdings") purchased Wise and Foods on July 2, 1996
and October 1, 1996, respectively. As a result of these sales, Wise and Foods,
as of their respective sale dates, are no longer legally part of the Company on
a consolidated basis. However, management of the Company continues to exercise
significant operating and financial control over Foods and Wise. In addition,
Foods Holdings and Wise Holdings provide financial guarantees to obligations
under the Company's credit facility and all of the Company's outstanding
publicly held debt. Because of the aforementioned control and guarantees, the
Company has included, supplementally in this filing, Condensed Combined
Financial Statements of Borden, Inc. and Affiliates (the "Combined Companies")
which present the financial condition and results of operations and cash flows
of the Company, Wise and Foods. The Combined Companies' financial statements
do not reflect push-down accounting and therefore present financial information
on a basis consistent with that upon which credit was originally extended to the
Company.
On October 30, 2000, Wise was sold to Palladium Equity Partners, LLC (See Note
3).
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
presentation of the results for the interim periods. Results for the interim
periods are not necessarily indicative of results for the full year.
Information about the Company's and Combined Companies' operating segments is
provided in Item 2 (Management's Discussion and Analysis of Financial Condition
and Results of Operations) and is an integral part of the Condensed Consolidated
and Condensed Combined Financial Statements. Due to acquisitions made in the
second quarter of 2000 (See Note 2), the Company's consumer glues and adhesives
business, ("Consumer Adhesives"), now meets the quantitative thresholds of SFAS
131 and is reflected as a separate operating segment for all periods presented.
Total assets reported in the "Corporate and Other" segment in the 1999 Form 10-K
included $58.1 related to Consumer Adhesives. At September 30, 2000, Consumer
Adhesives' total assets are $180.7, including approximately $95 related to the
acquisition. As a result of a definitive agreement, the Company's printing inks
business has been reflected as a business held for sale for all periods
presented (See Note 2). Total assets reported for Chemical in the 1999 Form 10-K
included $14.8 related to printing inks. At September 30, 2000, printing inks
total assets were $15.5.
The 1999 Condensed Combined Statement of Operations and Comprehensive Income
reflects the cumulative effect of a change in accounting principle recorded in
the 1999 Form 10-K, related to the adoption of Statement of Position 98-5 in the
first quarter of 1999.
Certain prior year amounts have been reclassified to conform with the 2000
presentation.
2. BUSINESS ACQUISITIONS, REALIGNMENT AND OTHER CHANGES
In the third quarter of 2000, the Company signed a definitive agreement to sell
its printing inks business. Certain preconditions to closing are currently being
negotiated, but the sale is expected to close in the fourth quarter of 2000.
20
In the third quarter of 2000, the Company acquired the formaldehyde and certain
other assets from Borden Chemicals and Plastics Limited Partnership, an
affiliate of the Company, for $48.5, comprised of $38.8 cash and a $9.7
interest-bearing note due in six months. The excess purchase price over net
tangible assets is approximately $30 and is anticipated to be amortized over a
period of 40 years.
In the third quarter of 2000, the Company recorded a charge of $1.8 related
primarily to additional environmental remediation costs associated with the
first quarter 2000 closure of chemical resins operations in Argentina. This
amount is classified as business realignment in the Condensed Consolidated and
Condensed Combined Statements of Operations and Comprehensive Income.
Subsequent to the 1996 sales of Foods and Wise, The Company's pension plan
retained the employees of these businesses. Thus, the Company's projected
benefit obligation and plan assets include the domestic obligation and assets
for Foods and Wise. In the third quarter of 2000, the Company recognized
$7.6 for pension and post-retirement settlement and curtailment charges for
individuals no longer participating in the plans.
In the third quarter of 2000, the Combined Companies recorded a charge of $4.8
related to a Foods corporate workforce reduction program. The program was put in
place to take advantage of the efficiencies generated from the implementation of
enterprise-wide technology systems in 1999. This amount is classified as
business realignment in the Condensed Combined Statements of Operations and
Comprehensive Income.
In the third quarter of 2000, the Combined Companies recorded gains of $3.1 due
to lower than anticipated exit costs primarily associated with the 1998
divestiture of the Signature Flavors business. This amount is recorded as gain
on the divestiture of businesses in the Condensed Combined Statements of
Operations and Comprehensive Income.
In the second quarter of 2000, the Company recorded a charge of $9.0 related
primarily to the closure of a United Kingdom formaldehyde and resins plant as a
result of the acquisition of Blagden Chemicals, Ltd. in 1999. This amount is
classified as business realignment in the Condensed Consolidated and Condensed
Combined Statements of Operations and Comprehensive Income.
In June 2000, the Company sold certain rights to harvest shellfish for $10.5,
resulting in a pre-tax gain of $10.5 ($6.8 after tax). This amount is recorded
as gain on the sale of assets in the Condensed Consolidated and Condensed
Combined Statements of Operations and Comprehensive Income.
In May 2000, the Company acquired certain assets and liabilities of a Canadian
based business for $88.0 in cash. The business manufactures glue, glue sticks,
paints, tapes and craft/stationery products at its manufacturing facility in
Ontario, Canada. The acquisition was accounted for using the purchase method of
accounting, and as such, the business' results of operations have been included
since the acquisition date. The excess purchase price over net tangible and
identifiable intangible assets is approximately $38 and will be amortized over a
period of 15 years.
In the first quarter of 2000, the Company recorded $2.8 related to the closure
of Chemicals resins operations primarily in Argentina and California. These
amounts are classified as business realignment on the Condensed Consolidated and
Condensed Combined Statements of Operations and Comprehensive Income.
3. DISCONTINUED OPERATIONS
In the third quarter of 2000, BWHLLC agreed to sell Wise to Palladium Equity
Partners, LLC. As a result, the financial results of Wise have been
reclassified to discontinued operations in the Condensed Combined Statements of
Operations and Cash Flows for all periods presented. In addition, net assets of
Wise have been reclassified to discontinued operations in the Condensed Combined
Balance Sheets at September 30, 2000 and December 31, 1999. For purposes of the
Combined Companies, the net assets of Wise will be distributed to BWHLLC in the
fourth quarter of 2000 when the sale is completed.
21
<PAGE>
The results below for Wise are reported separately as discontinued operations in
the Condensed Combined Statements of Operations:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
2000 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 64.4 $ 58.0
Income before income taxes $ 3.0 $ 1.3
Income tax expense $ 1.2 $ 0.4
Income from discontinued operations $ 1.8 $ 0.9
-------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Net sales $187.2 $167.0
Income before income taxes $ 6.0 $ 1.4
Income tax expense $ 2.2 $ 0.3
Income from discontinued operations $ 3.8 $ 1.1
-------------------------------------------------------------------------------
</TABLE>
As a result of a settlement reached with the Internal Revenue Service in the
second quarter of 2000, amounts established for tax issues related to the
divestiture of certain segments of the Company's business are no longer
considered necessary. A portion of these amounts for the Company and Combined
Companies was classified as gain on the sale of discontinued operations in the
second quarter of 2000, consistent with the classification of these amounts when
established. Amounts differ between Consolidated and Combined because Foods is
not reflected as a sale of a discontinued operation in Combined. (See also Item
2 relating to Management's discussion on income tax expense.)
4. COMPREHENSIVE INCOME
Comprehensive income was computed as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
CONSOLIDATED COMBINED
------------ --------
2000 1999 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $(8.0) $ 3.8 $(15.8) $19.8
Foreign currency translation adjustments (1.6) 1.1 (3.6) 2.5
Reclassification adjustments - - - (1.2)
------ ------ ------- -----
$(9.6) $ 4.9 $(19.4) $21.1
-------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
CONSOLIDATED COMBINED
------------ --------
2000 1999 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $109.7 $ 40.3 $ 91.5 $ 48.2
Foreign currency translation adjustments (9.5) (16.3) (15.9) (12.4)
Reclassification adjustments - 10.0 - 8.8
------- ------- ------- -------
$100.2 $ 34.0 $ 75.6 $ 44.6
-------------------------------------------------------------------------------
</TABLE>
The Company's 2000 foreign currency translation adjustments primarily represent
amounts recorded in the Chemical business for fluctuations in the British Pound.
The Combined Companies' 2000 amount also includes fluctuations in the Canadian
Dollar recorded by Foods.
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.
22
5. RELATED PARTY TRANSACTIONS
In February 2000, the Company distributed 100% of its ownership in the
infrastructure management services business to the Company's parent. The
distribution was recorded at net book value of $16.3, including $8.6 owed by the
Company to the infrastructure management services business in accordance with a
tax sharing agreement. Subsequent to the distribution, substantially all of the
assets of the infrastructure management services business were sold to a
subsidiary of Interliant, Inc. in exchange for $2.5 in cash and 1,041,179 shares
of Interliant, Inc. stock. In June 2000, the remaining assets of the
infrastructure management services business, with a net book value of
approximately $0.3, were distributed back to the Company from the Company's
parent.
The Company provides administrative services to Foods and Wise. Fees received
for these services are offset against the Company's general and administrative
expenses and approximated $0.3 and $1.6 for the three months ended September 30,
2000 and 1999, respectively, and $2.8 and $6.5 for the nine months ended
September 30, 2000 and 1999, respectively.
At September 30, 2000, Foods had $208.6 cash invested with the Company, Wise had
$2.6 cash invested with the Company, BWHLLC had $13.0 cash invested with the
Company and Combined Companies and Borden Foods Holdings LLC, Foods' parent, had
$2.3 cash invested with the Company and Combined Companies. These balances are
reflected as loans payable to affiliates in the consolidated and combined
balance sheets. Loans payable to affiliates for the Combined Companies at
September 30, 2000 also includes $3.2 due to an affiliate of the Combined
Companies.
During the third quarter of 2000, Wise repaid its note receivable to the
Company. This repayment ended the Company's remaining financial interest in Wise
and therefore at September 30, 2000, transactions with Wise are reflected as
unconsolidated affiliated balances, and the Company has eliminated the assets
and liabilities held under contractual arrangements in the September 30, 2000
Condensed Consolidated Balance Sheet.
In September 2000, the Company purchased $40.0 of accounts receivable from World
Kitchen, Inc. ("WKI"), an affiliate of the Company, in return for certain fees.
Collection of the purchased receivables is expected to occur within 90 days. In
June 2000, the Company purchased $50.0 of accounts receivable from WKI, in
return for certain fees. All amounts related to the June 2000 purchase have been
collected at September 30, 2000.
In the third quarter of 2000, the Company entered into a credit agreement with
WKI to provide up to $40.0 of short-term financing. Amounts outstanding under
this agreement bear interest at (a) a variable rate based on the greatest of
the Prime Rate, the Federal Reserve Bank Three-Month CD Rate plus 1% or the
Federal Funds Effective Rate plus 0.5% plus (b) 3%. The agreement expires on
December 31, 2000, with all unpaid amounts due at that time. At September 30,
2000, no amounts were outstanding under this agreement. As of November 10, 2000,
$11.9 was outstanding.
At September 30, 2000, the Company had $60.6 outstanding in the form of demand
notes and accrued interest to CCPC Acquisition Corp., WKI's parent and an
affiliate of the Company. This amount provided CCPC Acquisition Corp. temporary
financing to complete its 1999 acquisition of EKCO Group, Inc. ("EKCO"). The
loan bears interest at the monthly prime rate as quoted by The Wall Street
Journal and matures on December 31, 2000. The Company anticipates repayment of
the loan and interest upon the sale of a business unit acquired with EKCO that
is held for sale by CCPC Acquisition Corp.
The Company has a $50.0 investment in WKI in the form of 16% cumulative junior
preferred stock. The Company has accrued cumulative dividends of $8.0 on the
investment at September 30, 2000.
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
23
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 each
accrued approximately $21 at September 30, 2000 and $22 at December 31, 1999,
for probable environmental remediation and restoration liabilities. This is
management's best estimate of these liabilities, based on currently available
information and analysis. The Company and Combined Companies believe that it is
reasonably possible that costs associated with such liabilities may exceed
current reserves by amounts that may prove insignificant, or by amounts, in the
aggregate, of up to approximately $12.
LEGAL MATTERS - The Company and Combined Companies have recorded $4.1 in
liabilities at September 30, 2000, for legal costs that they believe are
probable and reasonably estimable. These liabilities at December 31, 1999,
totaled $5.1 and $8.5 for the Company and Combined Companies, respectively.
Actual costs are not expected to exceed these amounts. In addition, the Company
may be held responsible for certain environmental liabilities incurred at Borden
Chemicals and Plastics Limited Partnership ("BCP") facilities, which were
previously owned by the Company. Management believes, based upon the information
it currently possesses, and taking into account its established reserves for
estimated liability and its insurance coverage, that the ultimate outcome of the
foregoing proceedings and actions is unlikely to have a material adverse effect
on the Company's or Combined Companies' financial statements.
OTHER COMMITMENTS - A wholly owned subsidiary serving as general partner of
BCP has certain fiduciary responsibilities to BCP's unitholders. The Company
believes that such responsibilities will not have a material adverse effect on
its financial statements.
24
PART 1. FINANCIAL INFORMATION
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS BY BUSINESS UNIT:
--------------------------------------------
Following is a comparison of net sales and adjusted operating EBITDA by
operating segment for both the Company and Combined Companies. As a result of
the sale (See Note 3 to the Condensed Consolidated and Condensed Combined
Financial Statements), the financial results of Wise have been reclassified to
discontinued operations and are no longer included in Management's Discussion
and Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
CONSOLIDATED COMBINED
------------ --------
(Dollars in millions) 2000 1999 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES:
Foods ongoing $138.9 $121.9
Foods unaligned - 1.0
Chemical $337.8 $307.7 337.8 307.7
Consumer Adhesives 50.2 30.4 50.2 30.4
Business held for sale (1) 11.2 10.1 11.2 10.1
Corporate and other - 2.5 - 2.5
------ ------ ------ ------
$399.2 $350.7 $538.1 $473.6
====== ====== ====== ======
ADJUSTED OPERATING EBITDA:
Foods ongoing $ 2.3 $ (0.5)
Foods unaligned - 0.7
Chemical $ 43.4 $ 56.3 43.4 56.3
Consumer Adhesives 6.5 5.3 6.5 5.3
Business held for sale (1) 1.2 0.9 1.2 0.9
Corporate and other (16.3) (4.8) (16.3) (4.8)
------ ------ ------ ------
TOTAL ADJUSTED OPERATING EBITDA (2) 34.8 57.7 37.1 57.9
Significant or unusual items (3) (1.8) (21.6) (3.5) 11.1
Depreciation and amortization (4) (17.2) (14.4) (27.6) (22.0)
------ ------ ------ ------
OPERATING INCOME $ 15.8 $ 21.7 $ 6.0 $ 47.0
====== ====== ====== ======
--------------------------------------------------------------------------------
<FN>
(1) Represents the Company's printing inks business (See Note 2 to the
Condensed Consolidated and Condensed Combined Financial Statements).
(2) Adjusted Operating EBITDA represents net income (loss) excluding
discontinued operations, non-operating income and expenses, interest, taxes,
depreciation, amortization and significant or unusual items (see below).
(3) Significant or unusual items represent business realignment expenses,
asset write-offs and gains and losses on the divestiture of business. The 2000
Consolidated amount represents Chemical costs of $1.8 relating primarily to
additional environmental remediation costs associated with the first quarter
2000 plant closure in Argentina. The 2000 Combined amount includes the Chemical
charges, Foods costs of $4.8 relating to a corporate workforce reduction program
and Foods gains of $3.1 due to lower than anticipated exit costs related
primarily to the 1998 Signature Flavors sale. The 1999 Consolidated amount
represents costs associated with realignment of a Chemical business of $6.6 and
Chemical plant asset write-offs of $15.0. The 1999 Combined amount 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.
(4) The increase in Combined depreciation and amortization reflects the
depreciation associated with Foods 1999 enterprise-wide systems implementation
and plant improvements.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
------ --------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
CONSOLIDATED COMBINED
------------ --------
(DOLLARS IN MILLIONS) 2000 1999 2000 1999
--------- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES:
Foods ongoing $ 403.9 $ 367.6
Foods unaligned - 11.1
Chemical $ 980.4 $ 880.9 980.4 880.9
Consumer Adhesives 122.9 83.7 122.9 83.7
Business held for sale (1) 31.4 29.7 31.4 29.7
Corporate and other 1.7 7.2 1.7 7.2
-------- -------- -------- --------
$1,136.4 $1,001.5 $1,540.3 $1,380.2
======== ======== ======== ========
ADJUSTED OPERATING EBITDA:
Foods ongoing $ (23.6) -
Foods unaligned - $ 2.8
Chemical $ 151.0 $ 160.9 151.0 160.9
Consumer Adhesives 19.8 16.3 19.8 16.3
Business held for sale (1) 2.2 2.0 2.2 2.0
Corporate and other (26.4) (5.0) (26.4) (5.0)
-------- -------- -------- --------
TOTAL ADJUSTED OPERATING EBITDA (2) 146.6 174.2 123.0 177.0
Significant or unusual items (3) (13.6) (31.6) (15.3) 15.9
Depreciation and amortization (4) (45.4) (38.6) (73.8) (60.2)
-------- -------- -------- --------
OPERATING INCOME $ 87.6 $ 104.0 $ 33.9 $ 132.7
======== ======== ======== ========
-----------------------------------------------------------------------------------
<FN>
(1) Represents the Company's printing inks business (See Note 2 to the
Condensed Consolidated and Condensed Combined Financial Statements).
(2) Adjusted Operating EBITDA represents net income (loss) excluding
discontinued operations, cumulative effect of change in accounting principle,
non-operating income and expenses, interest, taxes, depreciation, amortization
and significant or unusual items (see below).
(3) Significant or unusual items represent business realignment expenses,
asset write-offs and gains and losses on the divestiture of business. The 2000
Consolidated amount represents Chemical costs of $1.8 relating primarily to
additional environmental remediation costs associated with the first quarter
2000 plant closure in Argentina, and Chemical realignment expenses of $11.8
relating primarily to plant closures in the United Kingdom, Argentina and
California. The 2000 Combined amount includes the Chemical charges, Foods costs
of $4.8 relating to a corporate workforce reduction program and Foods gains of
$3.1 due to lower than anticipated exit costs related primarily to the 1998
Signature Flavors sale. The 1999 Consolidated amount represents costs associated
with realignment of Chemical businesses of $16.6 and Chemical plant asset
write-offs of $15.0. The 1999 Combined amount 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.
(4) The increase in Consolidated depreciation and amortization is primarily
the result of the 1999 Chemical acquisitions. The Combined increase also
reflects the depreciation associated with Foods 1999 enterprise-wide systems
implementation and plant improvements.
</TABLE>
26
CONSOLIDATED AND COMBINED THREE MONTHS ENDED SEPTEMBER 30, 2000 VERSUS THREE
MONTHS ENDED SEPTEMBER 30, 1999
Consolidated Summary
---------------------
Consolidated sales increased $48.5 million, or approximately 14%, to $399.2
million in 2000 from $350.7 million in 1999. The increase in sales is attributed
primarily to improved volumes in the Chemical and Consumer Adhesives businesses
and acquisitions made in 2000. Adjusted operating EBITDA decreased $22.9
million, or approximately 40%, to $34.8 million in 2000 from $57.7 million in
1999. The decrease is primarily due to increases in raw material costs in the
Chemical business that more than offset the impact of improved volumes, as well
as the settlement and timing of various corporate liabilities and expenses.
Combined Summary
-----------------
Combined sales increased $64.5 million, or approximately 14%, from $473.6
million in 1999 to $538.1 million in 2000. The increase is primarily attributed
to increased volumes in the Chemical, Consumer Adhesives and Foods businesses.
Combined adjusted operating EBITDA decreased $20.8 million, or approximately
36%, from $57.9 million in 1999 to $37.1 million in 2000. The consolidated
factors described above were partially offset by reductions in Foods' general
and administrative expenses.
Chemical
--------
Chemical sales of $337.8 million in third quarter 2000 were $30.1 million, or
10% higher than the prior year quarter sales of $307.7 million. The most
significant items that positively impacted 2000 sales were volume improvements
in the oilfield products, UV coatings and melamine businesses, higher selling
prices for forest products resins, and an acquisition in the U.S. The most
significant items that negatively impacted sales were lower volumes for forest
products resins, unfavorable currency exchange rates and the prior year exit
from certain non-core businesses in the U.S., Europe and Latin America.
Overall third quarter volume, excluding the effect of acquisitions and strategic
realignment activities, was flat; however, increased volumes of higher priced
products were the major contributors to a $7 million positive impact on 2000
sales. Sales improved substantially in the higher priced oilfield products and
UV coatings businesses and also in the melamine products businesses. Oilfield
products volume has benefited from increased drilling activity that reflects
substantially higher natural gas and oil prices. The volume improvement in UV
coatings reflects growth in demand for optical fiber. Melamine products volume
reflects increased export sales of melamine crystal, due to tightening global
supply, and increased market share of high-pressure laminates. Third quarter
forest products resins volume was down, reflecting some softening in demand for
wood panel products and intense competitive activity.
Selling prices in the third quarter had a $32 million net positive impact on
2000 sales. The net improvement reflects generally higher selling prices
globally for forest products resins and formaldehyde, partially offset by the
impact of downward pressure on selling prices of very competitive market
conditions across all businesses. The generally higher selling prices for forest
products resins and formaldehyde reflect the partial pass-through of
substantially higher raw material costs. A substantial portion of the Company's
sales volume, especially for North America forest products, is sold under
contracts that provide for monthly or quarterly selling price adjustments based
on published cost indices for the Company's primary raw materials (i.e.
methanol, phenol and urea). The cost of all three primary raw materials have
escalated significantly over the second and third quarters, which has resulted
in upward adjustments in selling prices.
In third quarter 2000, the Company acquired the formaldehyde and certain other
assets from Borden Chemicals and Plastics Limited Partnership (BCP), which
provided incremental 2000 sales of $8 million (See Note 2 to the Condensed
Consolidated and Condensed Combined Financial Statements).
27
<PAGE>
Unfavorable currency exchange rates, primarily in the U.K. and Ecuador, had an
unfavorable impact on third quarter 2000 sales of $9 million. The unfavorable
exchange rate for Ecuador reflects significant currency devaluation throughout
1999 and through May 2000 when the local currency exchange rate was fixed to the
U.S. dollar.
The 1999 sale of the non-strategic U.S. molding compounds business and closures
or sales of non-strategic businesses in Europe and Latin America caused third
quarter 2000 sales to be $9 million lower compared to the prior year quarter.
Third quarter adjusted operating EBITDA of $43.4 million was $12.9 million, or
approximately 23%, lower than prior year adjusted operating EBITDA of $56.3
million. The overall decline reflects substantial margin erosion, generally
higher plant operating and selling, general and administrative costs, and weak
economic conditions in the U.K., which were partially offset by the effects of
higher volumes in the oilfield products and UV coatings businesses and the
acquisition of BCP's formaldehyde and other assets. The most significant
contributors to the overall margin erosion were substantially higher costs of
methanol, phenol and urea and intensely competitive market conditions. The
significant increase in raw material costs had a substantial negative impact on
margins, primarily in forest products resins, because of the time lag required
for published indices to recognize the increases as well as contractual
provisions that generally provide only for monthly or quarterly price
adjustments. Higher energy costs were the major contributor to higher plant
operating costs. The higher selling, general and administrative expenses reflect
systems implementation costs and inflationary factors in Latin America.
Consumer Adhesives
-------------------
Consumer Adhesives' net trade sales for the three months ended September 30,
2000 were $50.2 million, an increase of $19.8 million or approximately 65%
compared to 1999 net trade sales of $30.4 million for the same period. The
increase is attributable to higher volume from both new and existing products
and the May acquisition (See Note 2 to the Condensed Consolidated and Condensed
Combined Financial Statements).
Consumer Adhesives adjusted operating EBITDA for the three months ended
September 30, 2000 was $6.5 million, a $1.2 million or approximately 23%
increase over 1999 EBITDA of $5.3 million for the same period. The increase is
primarily due to higher volumes, which were partially offset by higher raw
material and distribution costs resulting primarily from higher natural gas and
oil costs and the May acquisition (See Note 2 to the Condensed Consolidated and
Condensed Combined Financial Statements).
Foods
-----
Foods' sales for the three months ended September 30, 2000 increased $16.0
million, or approximately 13%, to $138.9 million from $122.9 million for the
three months ended September 30, 1999. Excluding sales of $1.0 million from
divested businesses in 1999, sales from Foods' ongoing businesses increased
$17.0, or approximately 14%. The increase was led by the introduction of the new
product, It's Pasta Anytime. In addition, Foods improved sales with growth in
sauce volumes due primarily to new product introductions and expanded
distribution.
Foods' adjusted operating EBITDA increased $2.1 million from $0.2 million in
1999 to $2.3 million in 2000. Excluding the impact of Foods Unaligned businesses
sold in 1999 and a $1.8 million gain on the favorable settlement of litigation
in 1999, ongoing adjusted operating EBITDA increased $4.6 million. The increase
in ongoing results was primarily due to a reduction in general and
administrative expenses due primarily to the absence of implementation costs
associated with enterprise-wide information technology systems.
Business Held for Sale
-------------------------
The business held for sale classification represents the Company's printing inks
business. Net sales and adjusted operating EBITDA are consistent with prior
years.
28
Corporate and other
---------------------
Corporate and other sales declined $2.5 million for the three months ended
September 30, 2000 compared to the prior year due to the divestiture of the
infrastructure management services business at the end of February 2000.
Adjusted operating EBITDA declined $11.5 million to a loss of $16.3 million in
the third quarter of 2000 versus a loss of $4.8 million in the third quarter of
1999 primarily due to the timing and settlement of various corporate liabilities
and expenses, including a $7.6 million charge for a pension settlement.
CONSOLIDATED AND COMBINED NINE MONTHS ENDED SEPTEMBER 30, 2000 VERSUS NINE
MONTHS ENDED SEPTEMBER 30, 1999
Consolidated Summary
---------------------
Consolidated sales increased $134.9 million, or approximately 13%, to $1,136.4
million in 2000 from $1,001.5 million in 1999. The increase in sales is
attributed primarily to improved volumes in the Chemical and Consumer Adhesives
businesses, acquisitions made by Chemical and Consumer Adhesives in 2000 and the
two Chemical acquisitions made in 1999. Adjusted operating EBITDA decreased
$27.6 million, or approximately 16%, to $146.6 million in 2000 from $174.2
million in 1999. The decrease is primarily due to increases in raw material
costs in the Chemical business and the settlement and timing of various
corporate liabilities.
Combined Summary
-----------------
Combined sales increased $160.1 million, or approximately 12%, from $1,380.2
million in 1999 to $1,540.3 million in 2000. The increase is primarily
attributed to increased volumes in the Chemical, Consumer Adhesives and Foods
businesses. Combined adjusted operating EBITDA decreased $54.0 million, or
approximately 31%, from $177.0 million in 1999 to $123.0 million in 2000. In
addition to the consolidated factors described above, Foods' comparative results
declined primarily due to higher marketing costs associated with the
introduction of new products.
Chemical
--------
Chemical sales of $980.4 million in 2000 were up $99.5 million, or approximately
11%, from prior year sales of $880.9 million. The most significant items that
positively impacted 2000 sales were volume improvements for all business units,
but primarily in North America, higher selling prices for forest products
resins, two acquisitions in the U.S. and one acquisition in Europe. The most
significant items that negatively impacted sales were lower selling prices for
some product lines, unfavorable currency exchange rates, and the prior year exit
from certain non-core businesses in the U.S., Latin America and the Philippines.
Overall volume, excluding the effect of acquisitions and strategic realignment
activities, improved 6% and had a positive impact on 2000 sales of $82 million.
The largest contributors were the North America forest products resins, UV
coatings, oilfield products, and melamine products businesses. The improved
volume in North America forest products resins has been driven by stronger
housing and construction activity in the first half of the year. The improvement
in UV coatings reflects growth in demand for optical fiber. Oilfield products
volume has benefited from increased drilling activity which reflects
substantially higher natural gas and oil prices. Melamine products volume
reflects increased export sales of melamine crystal, due to tightening global
supply, and increased market share of high-pressure laminates.
Selling prices in the first nine months of the year have had a $9 million net
positive impact on 2000 sales. The net improvement reflects generally higher
selling prices globally for forest products resins and formaldehyde, partially
offset by lower pricing for melamine products and UV coatings, as well as the
impact of downward pressure on selling prices of very competitive market
conditions across all businesses. The generally higher selling prices for forest
products resins and formaldehyde reflect the partial pass-through of
substantially higher raw material costs. The lower pricing for melamine products
reflects the global market imbalance for melamine crystal that worsened
throughout 1999 and has persisted through the first nine months of 2000. Prices
for UV coatings were reduced for competitive purposes. A substantial portion of
the Company's sales volume, especially for North America forest products, is
sold under contracts that provide for monthly or quarterly selling price
adjustments based on published cost indices for the Company's primary raw
29
materials (i.e. methanol, phenol and urea). During the first quarter of 2000,
the costs of these raw materials were generally lower than prior year, therefore
selling prices were generally lower. However, the cost of all three primary raw
materials have escalated significantly over the second and third quarters, which
has resulted in upward adjustments in selling prices.
In third quarter 2000, the Company acquired the formaldehyde and certain other
assets from Borden Chemicals and Plastics Limited Partnership (BCP), which
provided incremental 2000 sales of $8 million (See Note 2 to the Condensed
Consolidated and Condensed Combined Financial Statements). The second quarter
1999 acquisition of Spurlock Industries, Inc. in the U.S. and the third quarter
1999 acquisition of Blagden Chemicals, Ltd. in Europe contributed incremental
2000 sales of $12 million and $27 million, respectively.
Unfavorable currency exchange rates, primarily in the U.K. and Ecuador, had an
unfavorable impact on 2000 sales of $20 million. The unfavorable exchange rate
for Ecuador reflects significant currency devaluation throughout 1999 and
through May 2000 when the local currency exchange rate was fixed to the U.S.
dollar.
The 1999 sale of the non-strategic U.S. molding compounds business and closures
or sales of non-strategic businesses in Latin America and the Philippines caused
2000 sales to be $20 million lower compared to the prior year.
Year-to-date adjusted operating EBITDA of $151.0 million was $9.9 million, or
approximately 6%, lower than prior year adjusted operating EBITDA of $160.9
million. The overall decline reflects substantial margin erosion, generally
higher plant operating and selling, general and administrative costs, and weak
economic conditions in the U.K., which were substantially offset by the effects
of higher volume and acquisitions. The most significant contributors to the
overall margin erosion were substantially higher costs of methanol, phenol and
urea, intensely competitive market conditions, and significantly lower selling
prices for melamine products and UV coatings. The significant increase in raw
material costs had a substantial negative impact on margins, primarily in forest
products resins, because of the time lag required for published indices to
recognize the increases as well as contractual provisions that generally provide
only for monthly or quarterly price adjustments. Higher plant operating costs
were caused primarily by higher energy costs. The increase in selling, general
and administrative costs reflects systems implementation costs and inflationary
factors in Latin America and investments in e-commerce.
Consumer Adhesives
-------------------
Consumer Adhesives' net trade sales for the nine months ended September 30, 2000
were $122.9 million, an increase of $39.2 million or approximately 47% compared
to 1999 net trade sales for the same period of $83.7 million. The increase is
attributable to higher volume from both new and existing products and the May
acquisition (See Note 2 to the Condensed Consolidated and Condensed Combined
Financial Statements).
Consumer Adhesives adjusted operating EBITDA for the nine months ended September
30, 2000 was $19.8 million, a $3.5 million or approximately 21% increase over
1999 EBITDA of $16.3 million for the same period. The increase is primarily due
to higher volumes, which were partially offset by higher raw material and
distribution costs resulting primarily from higher natural gas and oil costs and
the May acquisition (See Note 2 to the Condensed Consolidated and Condensed
Combined Financial Statements).
Foods
-----
Foods' sales for the nine months ended September 30, 2000 were $403.9 million,
an increase of $25.2 million, or approximately 7%, compared to $378.7 million
for the nine months ended September 30, 1999. Excluding sales of $11.1 million
from divested businesses in 1999, sales from Foods' ongoing businesses increased
$36.3, or approximately 10%. The increase was led by the introduction of the new
product, It's Pasta Anytime. In addition, Foods improved sales with growth in
domestic and international sauce volumes due primarily to new product
introductions and expanded distribution. These improvements were partially
offset by pasta category declines.
30
Foods' adjusted operating EBITDA declined $26.4 million from income of $2.8
million in 1999 to a loss of $23.6 million in 2000. Excluding the impact of
Foods Unaligned businesses sold in 1999 and a $9.3 million gain on the favorable
settlement of litigation in 1999, ongoing adjusted operating EBITDA decreased
$14.3 million. The decline in ongoing results was primarily due to significantly
higher marketing costs associated with the introduction of new products and
increased distribution expenses resulting from increased fuel and warehousing
costs. Higher conversion costs primarily in the pasta business and start-up
costs associated with the introduction of new products also contributed to the
overall decline. These additional costs were substantially offset by improved
volumes and a reduction in general and administrative expenses due to the
absence of implementation costs associated with enterprise-wide information
technology systems.
Business Held for Sale
-------------------------
The business held for sale classification represents the Company's printing inks
business. Net sales and adjusted operating EBITDA are consistent with prior
years.
Corporate and other
---------------------
Corporate and other sales decreased $5.5 million, or approximately 76%, to $1.7
million for the first three quarters of 2000 compared with $7.2 million for the
first three quarters of 1999 due to the divestiture of the infrastructure
management services business at the end of February 2000. Adjusted operating
EBITDA decreased $21.4 million to a loss of $26.4 million in 2000 from a loss of
$5.0 million in 1999. The decline is primarily due to the timing and settlement
of various corporate liabilities and expenses, including a $7.6 million charge
for a pension settlement, partially offset by the $10.5 million gain on
the sale of certain rights to harvest shellfish (See Note 2 to the Condensed
Consolidated and Condensed Combined Financial Statements).
NON-OPERATING EXPENSES AND INCOME TAXES
-------------------------------------------
Following is a comparison of non-operating expenses for the three months ended
September 30, 2000 and 1999:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
CONSOLIDATED COMBINED
------------ --------
(Dollars in millions) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest expense $17.5 $15.6 $17.5 $15.3
Affiliated interest expense, net 3.9 4.5 0.4 1.6
Interest income and other (3.6) (6.5) (4.1) (5.9)
Equity in net (income) loss of unconsolidated subsidiaries (1.6) (1.3) 0.1 (1.3)
------ ------ ------ ------
$16.2 $12.3 $13.9 $ 9.7
-------------------------------------------------------------------------------------------------
</TABLE>
Consolidated non-operating expenses increased $3.9 million for the three months
ended September 30, 2000 compared with the three months ended September 30,
1999. The increase was primarily attributable to higher interest expense due to
higher outstanding long-term debt balances and a reduction in interest income
due to lower average cash balances in 2000 compared to 1999. These increases
were partially offset by dividend income on the World Kitchen, Inc. (WKI)
cumulative junior preferred stock (See Note 5 to the Condensed Consolidated and
Condensed Combined Financial Statements) and decreased affiliated interest
expense due to lower average loan balances outstanding in 2000 compared to 1999.
For the three months ended September 30, 2000, combined operating expenses
increased $4.2 million compared with the corresponding period in the previous
year. The increase was primarily attributable to increased interest expense due
to higher outstanding long-term debt balances and a reduction in interest income
due to lower average cash balances in 2000 compared to 1999. These increases
were partially offset by dividend income on the WKI cumulative junior preferred
stock (See Note 5 to the Condensed Consolidated and Condensed Combined Financial
Statements) and decreased affiliated interest expense due to lower average loan
balances outstanding in 2000 compared to 1999.
31
<PAGE>
Following is a comparison of non-operating expenses for the nine months ended
September 30, 2000 and 1999:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
CONSOLIDATED COMBINED
------------ --------
(Dollars in millions) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest expense $ 46.8 $ 46.6 $ 46.8 $ 46.7
Affiliated interest expense, net 12.2 14.5 1.0 5.1
Interest income and other (14.4) (24.1) (14.7) (23.4)
Equity in net (income) loss of unconsolidated subsidiaries (2.5) 2.6 (0.9) 2.6
------- ------- ------- -------
$ 42.1 $ 39.6 $ 32.2 $ 31.0
------------------------------------------------------------------------------------------------
</TABLE>
Consolidated non-operating expenses increased $2.5 million for the nine months
ended September 30, 2000 compared with the nine months ended September 30, 1999.
The increase is primarily attributable to a reduction in interest income due to
lower average cash balances in 2000 compared to 1999. This increase was
substantially offset by dividend income on the WKI cumulative junior preferred
stock (See Note 5 to the Condensed Consolidated and Condensed Combined Financial
Statements), lower affiliated interest expense due to lower average outstanding
loan balances and equity in net income of unconsolidated subsidiaries in 2000
compared with losses in 1999.
For the nine months ended September 30, 2000, combined non-operating expenses
increased $1.2 million compared with the corresponding period in the previous
year. The increase is primarily attributable to a reduction in interest income
due to lower average cash balances in 2000 compared to 1999. This increase was
substantially offset by dividend income on the WKI cumulative junior preferred
stock (See Note 5 to the Condensed Consolidated and Condensed Combined Financial
Statements), lower affiliated interest expense due to lower average outstanding
loan balances and equity in net income of unconsolidated subsidiaries in 2000
compared with losses in 1999.
Following is a comparison of income taxes for the three and nine months ended
September 30, 2000 and 1999:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
CONSOLIDATED COMBINED
------------ --------
(Dollars in millions) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income tax expense $7.6 $5.6 $9.7 $18.4
Effective tax rate N/M 60% N/M 49%
------------------------------------------------------------------------------------------------
</TABLE>
The 2000 consolidated effective tax rate reflects valuation reserves recorded on
foreign tax credits generated in 2000 and 1999. These credits are not likely to
be utilized by the Company as a consequence of limitations on usage imposed by
the Internal Revenue Code for such credits. In addition, the 2000 consolidated
effective tax rate for the three months ended September 30, 2000 reflects
amounts identified in the filing of the Company's 1999 tax returns. The
consolidated effective tax rate for 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 2000 and 1999 combined effective tax rate includes the above for
consolidated. In addition, the combined effective tax rate for 1999 reflects the
tax effect of the disposal of Food's Chinese subsidiary, which had substantial
differences in its net book value and tax basis.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
CONSOLIDATED COMBINED
------------ --------
(Dollars in millions) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income tax expense $28.8 $24.7 $(49.0) $52.4
Effective tax rate 63% 38% N/M 52%
------------------------------------------------------------------------------------------------
</TABLE>
32
The 2000 consolidated effective tax rate reflects valuation reserves recorded on
foreign tax credits generated in 2000, 1999 and 1998. These credits are not
likely to be utilized by the Company as a consequence of a settlement resolving
federal examination issues for the years 1996 and 1997 as well as usage
limitations imposed by the Internal Revenue Code for such credits. (See also
Note 3 to the Condensed Consolidated and Condensed Combined Financial
Statements.) In addition, the 2000 consolidated effective tax rate for the nine
months ended September 30, 2000 reflects amounts identified in the filing of the
Company's 1999 tax returns. The 1999 consolidated effective rate for the nine
months ended September 30, 1999 reflects a higher portion of net income derived
from foreign operations and the effect of lower tax rates in foreign
jurisdictions.
The 2000 and 1999 combined effective tax rate includes the above for
consolidated and, as a result of the settlement reached with the Internal
Revenue Service, the 2000 combined tax rate reflects amounts related to the
divestiture of certain businesses of the Combined Companies that are no longer
considered necessary. These amounts are included in combined but not in
consolidated tax expense because combined does not reflect the sale of Foods as
a discontinued operation. (See also Note 3 to the Condensed Consolidated and
Condensed Combined Financial Statements). In addition, the 2000 combined
effective tax rate for the nine months ended September 30, 2000 reflects amounts
identified in the filing of the Company's 1999 tax returns. The combined
effective tax rate for 1999 reflects the tax effect of the disposal of Food's
Chinese subsidiary, which had substantial differences in its net book value and
tax basis.
LIQUIDITY AND CAPITAL RESOURCES
----------------------------------
Operating Activities
---------------------
Consolidated cash provided by operating activities of $32.5 million for the nine
months ended September 30, 2000 was $2.7 million less than the $35.2 million
provided in 1999. Significant fluctuations from prior year include lower
adjusted operating EBITDA in 2000 of $27.6 million, higher inventory balances of
$15.9 million primarily in the Chemical business as a result of an increase in
raw material prices, and a $24.3 million increase in accounts receivable
primarily in the Chemical business due to the higher raw material prices being
passed through to customers. These increased outflows were substantially offset
by a $29.4 million increase in trade payables primarily in the Chemical business
due to higher raw material costs as well as the timing of payments, the absence
of a 1999 payment of approximately $13.0 million to settle certain long-term
disability claims, the absence of 1999 settlement payments of approximately $6.4
million related to divested businesses and lower net interest and tax payments
of $10.8 million.
Combined operating activities provided cash of $53.2 million for the nine months
ended September 30, 2000 compared to $23.4 million in 1999, an improvement of
$29.8 million. Consolidated activity discussed above was more than offset by
improved accounts receivable cash flows of $14.0 million due primarily to the
absence of 1999 collection issues associated with Foods' systems
implementations, improved cash flows of $12.5 million primarily due to Foods'
timing of trade payments, improvement primarily in the working capital of
discontinued operations of $12.0 million, lower inventory balances of $9.0
million primarily as a result of Foods' depletion of favorable tomato purchases
made in the fourth quarter of 1999, and the absence of 1999 payments of $6.1
million related to the divestiture of Foods' Unaligned businesses. These
improvements were partially offset by a reduction in adjusted operating EBITDA
of $17.1 million, excluding a Foods 1999 $9.3 million favorable litigation
settlement, and higher net interest and tax payments of $4.2 million.
Investing Activities
---------------------
Consolidated investing activities used $231.2 million in the first nine months
of 2000 versus $150.5 million in the first nine months of 1999. The increase of
$80.7 million primarily represents $40.0 million of purchased receivables,
net of cash collected, from World Kitchen, Inc. ("WKI"), an affiliate of the
Company, the acquisitions made by Consumer Adhesives and Chemical for $136.5
million (see Note 2 to the Condensed Consolidated and Condensed Combined
Financial Statements), compared to the 1999 Spurlock and Blagden acquisitions
for $110.5 million, and increased capital expenditures in 2000 of $29.3 million
primarily for Chemical plant expansions. These outflows were partially offset by
the collection of outstanding debt which eliminated the Company's investment in
affiliate (See Note 5 to the Condensed Consolidated and Condensed Combined
Financial Statements).
33
<PAGE>
Combined cash used by investing activities in the first nine months of 2000 was
$279.5 million versus $163.3 million in 1999. The $116.2 million increase
reflects the Consolidated activity described above, excluding the affiliated
collections of $11.7, and the absence of $23.6 million of proceeds from the 1999
sale of Foods Unaligned businesses.
Financing Activities
---------------------
Consolidated financing activities generated cash of $36.9 million in 2000
compared to $362.2 million cash used in 1999. The $399.1 million improvement is
primarily due to short and long-term borrowings in 2000 compared to affiliated
loans and repayments in 1999. The nine months ended September 30, 2000 includes
long-term debt borrowings of $122.0 million and short-term debt borrowings of
$28.9 million. Year to date September 30, 1999 included a $132.6 million loan
made to CCPC Acquisition Corp. to provide financing for acquisitions, and 1999
repayments of affiliated borrowings from BWHLLC, an affiliate of the Company's
parent, and Foods totaling $172.9 million. Additionally, 2000 includes a $10.3
million repayment of Industrial Bonds, higher common stock dividends paid of
$12.6 million and the distribution of $10.3 million in cash temporarily held by
the infrastructure management services business for the benefit of its
customers. The $10.3 million distribution represents payroll related
withholdings for which the infrastructure management services business was
liable when the business was distributed to the Company's parent (See Note 5 to
the Condensed Consolidated and Condensed Combined Financial Statements).
Combined financing activities generated cash of $61.2 million in 2000 compared
to $330.8 million cash used in 1999. The $392.0 million improvement is primarily
due to long-term debt borrowings of $122.0 million, $29.5 million of short-term
debt borrowings in 2000 compared to repayments of $7.2 million in 1999, the
absence of a $132.6 million loan made in 1999 to CCPC Acquisition Corp., and the
absence of a $138.2 million 1999 loan repayment to BWHLLC. These inflows were
partially offset by a $10.3 million repayment of Industrial Bonds, higher common
stock dividends paid of $12.6 million and the distribution of $10.3 million in
cash temporarily held by the infrastructure management services business for the
benefit of its customers.
Total amounts outstanding under the Company's credit facility as of September
30, 2000 were $122.0.
In the third quarter of 2000, the Company entered into a credit agreement with
WKI to provide up to $40.0 million of short-term financing. As of November 10,
2000, there was $12.5 million outstanding under this agreement. (See Note 5 to
the Condensed Consolidated and Condensed Combined Financial Statements).
In addition, amounts owed to the Company by WKI's parent, CCPC Acquisition
Corp., are to be repaid from proceeds received from the sale of a business unit
acquired by CCPC Acquisition Corp. with the 1999 purchase of EKCO Group, Inc.
(See Note 5 to the Condensed Consolidated and Condensed Combined Financial
Statements). In the event CCPC Acquisition Corp. realizes less than originally
anticipated on the sale of this business unit, WKI will be required to remit
additional consideration to its parent.
RECENT ACCOUNTING PRONOUNCEMENTS
----------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard requires all derivatives be
measured at fair value and recorded on a company's balance sheet as an asset or
a liability, depending on the company's underlying rights or obligations
associated with the derivative instrument. In June 1999, the FASB issued SFAS
No. 137, "Accounting for Derivative Instrument and Hedging Activities - Deferral
of Effective Date of FASB Statement No. 133." This statement defers the
effective date of SFAS No. 133 to all fiscal quarters of all fiscal years
beginning after June 15, 2000. In June 2000, the FASB issues SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
which is an amendment of SFAS No. 133. SFAS No. 138 addresses a limited number
of implementation issues resulting from the application of SFAS No. 133. The
Company and Combined Companies have an implementation plan and expect the
implementation to be completed by January 1, 2001.
34
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101 - Revenue Recognition, which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. Registrants must comply with the SAB no later
than the fourth quarter of 2000. Application of the guidance in this SAB will
not have a material impact on the financial statements of the Company or
Combined Companies.
In July 2000, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 00-14, "Accounting for Certain Sales Incentives", which addresses the
recognition, measurement and income statement classification for sales
incentives offered to customers. In September 2000, the EITF reached a consensus
on Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs," which
addresses the income statement classification for shipping and handling fees and
costs. All provisions of these EITF's are required to be reflected no later than
the fourth quarter of 2000. The Company and Combined Companies are in the
process of accumulating and evaluating the information required to comply with
these EITF issues, but do not expect reported financial results will be
significantly impacted.
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.
35
<PAGE>
PART II
Item 1: LEGAL PROCEEDINGS
There have been no material developments in the ongoing legal proceedings that
are discussed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
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
statements.
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 condensed financial statements of Foods Holdings filed
in accordance with rule 3-10 of Regulation S-X. Foods Holdings is a guarantor 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 2000.
36
<PAGE>
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 14, 2000 By
---------------------
Deborah K. Roche
Vice President,
General Auditor
and Controller
(Principal Accounting
Officer)
37
BORDEN FOODS HOLDINGS CORPORATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999
BFH 1
<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,
2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $138,918 $122,850 $ 403,875 $378,673
Cost of goods sold 70,852 57,431 206,862 185,193
--------- --------- ---------- ---------
Gross margin 68,066 65,419 197,013 193,480
--------- --------- ---------- ---------
Distribution expense 10,570 9,666 33,204 28,520
Marketing expense 48,783 47,693 167,196 137,179
General & administrative expense 14,707 14,323 43,472 42,558
Gain on divestiture of businesses (3,101) (30,609) (3,101) (44,080)
Business realignment 4,747 - 4,747 -
--------- --------- ---------- ---------
Operating (loss) income (7,640) 24,346 (48,505) 29,303
--------- --------- ---------- ---------
Interest income, net (3,968) (3,718) (12,593) (10,392)
Other income, net - (9) - (332)
--------- --------- ---------- ---------
(Loss) income before income tax (3,672) 28,073 (35,912) 40,027
Income tax expense (benefit) 2,090 11,260 (10,048) 26,131
--------- --------- ---------- ---------
(Loss) income before cumulative effect of accounting change (5,762) 16,813 (25,864) 13,896
Cumulative effect of accounting change, net of tax - - - (2,806)
--------- --------- ---------- ---------
Net (loss) income (5,762) 16,813 (25,864) 11,090
Affiliate's share of income (13) (562) 110 (827)
--------- --------- ---------- ---------
Net (loss) income applicable to common stock $ (5,775) $ 16,251 $ (25,754) $ 10,263
========= ========= ========== =========
Comprehensive (loss) income (Note 6) $ (6,073) $ 16,924 $ (27,924) $ 9,486
========= ========= ========== =========
Basic and diluted (loss) earnings per common share $(57,750) $162,510 $(257,540) $102,630
Average number of common shares outstanding
during the period 100 100 100 100
--------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to the Condensed Consolidated Financial Statements.
</TABLE>
BFH 2
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION
(In thousands)
September 30, December 31,
ASSETS 2000 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $237,560 $266,825
Accounts receivable (less allowance for doubtful
accounts of $895 and $1,317, respectively) 42,539 55,201
Inventories:
Finished and in-process goods 47,903 48,066
Raw materials and supplies 22,769 30,089
Deferred income taxes 10,553 15,383
Other current assets 9,148 11,793
--------- ---------
370,472 427,357
OTHER ASSETS 9,241 10,819
PROPERTY AND EQUIPMENT
Land 9,551 9,542
Buildings 38,820 40,763
Machinery and equipment 218,900 190,679
--------- ---------
267,271 240,984
Less accumulated depreciation (77,852) (64,462)
--------- ---------
189,419 176,522
INTANGIBLES
Goodwill 10,771 11,006
Trademarks and other intangibles 106,445 108,496
--------- ---------
117,216 119,502
--------- ---------
TOTAL ASSETS $686,348 $734,200
========= =========
------------------------------------------------------------------------------------------------------
See accompanying Notes to the Condensed Consolidated Financial Statements.
</TABLE>
BFH 3
<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 2000 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts and drafts payable $ 43,971 46,858
Accrued customer allowances 15,926 17,781
Debt payable within one year 900 346
Loans due to affiliates 3,222 2,513
Income tax payable 11,584 20,594
Other current liabilities 43,001 51,385
--------- ---------
118,604 139,477
OTHER LIABILITIES
Long-term debt 2,875 3,033
Deferred income taxes 12,773 34,585
Other long-term liabilities 24,350 22,820
--------- ---------
39,998 60,438
COMMITMENTS AND CONTINGENCIES (NOTE 9)
SHAREHOLDER'S EQUITY
Common stock - $0.01 par value; 100 shares
authorized, issued, and outstanding - -
Paid in capital 427,202 405,817
Shareholder's investment in affiliates 66,162 66,272
Accumulated translation adjustments (5,188) (3,128)
Retained earnings 39,570 65,324
--------- ---------
527,746 534,285
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $686,348 $734,200
========= =========
-----------------------------------------------------------------------------------------------------
See accompanying Notes to the Condensed Consolidated Financial Statements.
</TABLE>
BFH 4
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION
Nine Months Ended
(In thousands) September 30,
2000 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $(25,864) $ 11,090
Adjustments to reconcile net (loss) income to
net cash from (used in) operating activities:
Depreciation and amortization 21,630 14,913
Deferred tax provision 4,404 15,886
Gain on divestiture of businesses (3,101) (44,080)
Business realignment 4,747 -
Net change in assets and liabilities:
Accounts receivable 12,662 (1,997)
Other receivables 1,492 (202)
Inventories 7,483 (1,096)
Accounts and drafts payable (2,887) (14,302)
Accrued customer allowances (1,855) (3,966)
Income taxes (9,010) 22,327
Other amounts due to/from affiliates 1,165 (3,467)
Other current assets and liabilities (7,826) (5,783)
Other assets and liabilities 3,590 (6,744)
--------- ---------
Net cash provided by (used in) operating activities 6,630 (17,421)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (37,158) (34,941)
Proceeds from the sale of fixed assets - 4,466
Proceeds from the sale of businesses - 23,571
--------- ---------
Net cash used in investing activities (37,158) (6,904)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net short-term debt borrowings (payments) 554 (6,057)
Proceeds from loans payable to affiliate 709 2,884
--------- ---------
Net cash provided by (used in) financing activities 1,263 (3,173)
--------- ---------
DECREASE IN CASH AND EQUIVALENTS (29,265) (27,498)
CASH AND EQUIVALENTS AT BEGINNING
OF PERIOD 266,825 300,104
--------- ---------
CASH AND EQUIVALENTS AT END
OF PERIOD $237,560 $272,606
========= =========
-------------------------------------------------------------------------------------------------
See accompanying Notes to the Condensed Consolidated Financial Statements.
</TABLE>
BFH 5
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
BORDEN FOODS HOLDINGS CORPORATION
Nine Months Ended
(In thousands) September 30,
2000 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (received):
Interest $ 33 $ 424
Taxes, net of refunds (7,409) (14,952)
-------------------------------------------------------------------------------------------------
See accompanying Notes to the Condensed Consolidated Financial Statements.
</TABLE>
BFH 6
<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, 1999 $405,817 $66,272 $(3,128) $65,324 $534,285
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net loss (25,864) (25,864)
Foreign currency translation adjustments (2,060) (2,060)
Affiliate's share of income (110) 110 -
Increase in tax basis related to finalization
of purchase price allocation 21,385 21,385
---------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 $427,202 $66,162 $(5,188) $39,570 $527,746
---------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to the Condensed Consolidated Financial Statements.
</TABLE>
BFH 7
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, bouillon, dry soups, and shelf stable meals. At
September 30, 2000, BFC's operations included 8 production facilities, 4 of
which are located in the United States. The remaining facilities are located in
Canada and Italy.
2. BASIS OF PRESENTATION
Foods Holdings has fully and unconditionally guaranteed obligations under
Borden, Inc.'s ("Borden") Credit Facility and all of Borden's publicly held debt
on a pari passu basis. As a result of the financial guarantee and in accordance
with Regulation S-X rule 3-10, Borden is required to include in its filings with
the Securities and Exchange Commission separate financial statements for Foods
Holdings as if it were a registrant. Foods Holdings' financial statements are
prepared on a purchase accounting basis. Borden elected not to apply push down
accounting in its consolidated or combined financial statements and, as such,
Borden's financial statements are reported on a historical cost basis.
The accompanying unaudited condensed consolidated financial statements include
all adjustments (consisting only of normal recurring adjustments) which
management believes to be necessary for the fair presentation of operating
results for the interim periods. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The results
for the interim period are subject to seasonal variations and are not
necessarily indicative of results for the full year. The interim financial
statements should be read in conjunction with Foods Holdings' audited financial
statements for the year ended December 31, 1999.
During 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities."
SOP 98-5 requires the costs of opening a new facility, introducing a new product
or service, conducting business in a new market, or similar start-up activities
be expensed as incurred. Amounts previously capitalized are to be expensed and
reported as a cumulative effect of a change in accounting principle in the year
of adoption. Accordingly, BFC adopted SOP 98-5 in 1999 and reported a charge of
$2,806 (net of tax benefit of $1,794) to write-off amounts previously
capitalized.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition", which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. Registrants must comply with the SAB no later
than the fourth quarter of 2000. Application of the guidance in this SAB will
not have a material impact on the financial statements of BFC.
BFH8
In July 2000, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 00-14, "Accounting for Certain Sales Incentives", which addresses the
recognition, measurement and income statement classification for sales
incentives offered to customers. In September 2000, the EITF reached a
consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees and
Costs", which addresses the income statement classification for shipping and
handling fees and costs. All provisions of the EITF's are required to be
reflected no later than the fourth quarter of 2000. BFC is in the process of
accumulating and evaluating the information required to comply with these EITF
issues, but does not expect reported financial results to be significantly
impacted.
Certain prior year amounts have been reclassified to conform to the 2000
presentation.
3. DIVESTED BUSINESSES
During the first quarter of 1999, BFC received proceeds of $9,476 for working
capital settlements on the sale of KLIM, and reduced current liabilities by
$2,012, as costs were lower than previously estimated.
During the second quarter of 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.
During the third quarter of 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.
BFC also reduced current liabilities by $29,767 for the resolution of
divestiture related severance and lower than expected exit costs.
During the third quarter of 2000, BFC reduced current liabilities by $3,101 due
to lower than expected exit costs.
Activities related to the divestiture reserves during the three and nine months
ended September 30, 2000, 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, 1999 $1,351 $8,270 $1,337 $10,958
Utilized (1,298) (712) (420) (2,430)
------- ------ ------ -------
Balance at June 30, 2000 $53 $7,558 $917 $8,528
Utilized (46) (124) (243) (413)
Other (4) - (2,470) (631) (3,101)
------- ------ ------ -------
Balance at September 30, 2000 $7 $4,964 $43 $5,014
======= ====== ====== =======
<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>
BFH9
4. BUSINESS REALIGNMENT
During the third quarter of 2000, BFC recorded charges of $4,747 to implement a
workforce reduction plan. The workforce reduction plan was put into place to
take advantage of the efficiencies generated from the implementation of
enterprise-wide information technology systems in 1999 and work process
redesign. The plan is expected to reduce ongoing general and administrative
expenses. As of September 30, 2000, reserves primarily for severance were
$4,108.
5. 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 (loss) income (see
accompanying condensed consolidated statements of operations) of ($110) and $827
during the first nine months of 2000 and 1999, respectively.
6. COMPREHENSIVE INCOME
Comprehensive (loss) income was computed as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net (loss) income $(5,762) $16,813 $(25,864) $11,090
Foreign currency translation adjustments (311) 393 (2,060) (1,322)
Reclassification adjustment - (282) - (282)
------- ------- --------- --------
$(6,073) $16,924 $(27,924) $ 9,486
======= ======= ========= ========
---------------------------------------------------------------------------------
</TABLE>
The reclassification adjustment in 1999 represents the accumulated translation
adjustment recognized on the sale of the chocolate milk business located in
Denmark.
7. 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 $249 at September 30, 2000 and $777 at December 31, 1999.
During the first quarter of 2000, the subsidiary of Borden was sold to a third
party. The third party continues to provide services that include processing of
payroll, active and retiree group insurance claims, and securing insurance
coverage for catastrophic claims. Subsequent to the sale of the subsidiary,
fees for these services were no longer considered affiliate charges.
BFH10
Eligible U.S. employees are provided employee pension benefits under the Borden
domestic pension plan to which BFC contributes, and can participate in the
Borden retirement savings plan. BFC has recognized expenses associated with
these benefits, certain of which are determined by Borden's actuary. The
liabilities for these obligations are included in BFC's financial statements.
The following summarizes the affiliate charges for the three and nine months
ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
------ ------ ------ -------
<S> <C> <C> <C> <C>
Employee benefits $ 975 $ 739 $2,997 $ 2,102
Group and general insurance - 1,133 626 3,224
Administrative services 284 3,259 2,789 10,666
------ ------ ------ -------
$1,259 $5,131 $6,412 $15,992
====== ====== ====== =======
------------------------------------------------------------------
</TABLE>
BFC performs certain administrative services on behalf of other Borden
affiliates. These services include customer service, purchasing and quality
assurance. BFC charged affiliates $205 and $128 for such services for the three
months ended September 30, 2000 and 1999, respectively, and $577 and $533 for
such services for the nine months ended September 30, 2000 and 1999,
respectively. The receivable for these services was $280 at September 30, 2000
and $972 at December 31, 1999.
BFC invests cash not used in operations with Borden. BFC's investment balance
was $208,646 at September 30, 2000 and $234,550 at December 31, 1999. The funds
are invested overnight earning a rate set by Borden that generally approximates
money market rates. BFC earned interest income of $3,621 and $3,421 on these
funds for the three months ended September 30, 2000 and 1999, respectively, and
$11,613 and $10,080 for the nine months ended September 30, 2000 and 1999,
respectively. Amounts receivable for interest were $336 and $1,861 at September
30, 2000 and December 31, 1999, respectively.
Borden continues to provide executive, financial and strategic management to BFC
for which it charges a quarterly fee of $250. The fee is paid at the end of
each quarter.
Foods Holdings has fully and unconditionally guaranteed obligations under
Borden's Credit Facility and all of Borden's publicly held debt on a pari passu
basis. In connection with this guarantee, Foods Holdings charges Borden an
annual fee of $1,050. The receivable for the guarantee was $788 at September
30, 2000. The fee is paid at the end of each calendar year.
BFC has borrowed funds from LLC for use in operations at a variable interest
rate of approximately 7.25%. Loan balance and interest payable to LLC were
$3,222 and $276, respectively, as of September 30, 2000 and $2,513 and $789,
respectively, as of December 31, 1999.
BFH11
8. UNIT INCENTIVE PLAN
During the first quarter of 2000, LLC sold 99,492 Class D units to certain BFC
management employees. The Class D 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
$8.50 per unit for each Class D unit purchased. The UAR entitles the unitholder
to receive an amount in cash equal to the excess of the market price (as defined
in the UAR agreement) of the unit over the exercise price of the UAR. The UAR's
vest ratably over five years and expire upon certain events, including
termination of the unitholders' employment, but in no case to exceed ten years.
9. COMMITMENTS AND CONTINGENCIES
Commitments
-----------
BFC has entered into a long-term production agreement through 2005, subject to
renewal thereafter, for the production and packaging of sauce. Under a
financing arrangement, the contracted party must install a glass packaging
machinery line at its facility. BFC has agreed to provide payments based on
unit production until the equipment costs are fully recovered. Upon expiration
or termination of this agreement for any cause other than for special reasons,
BFC shall pay for any unrecovered costs of equipment at such time. Total
obligations under this financing arrangement are $5,800.
In conjunction with the production agreement, BFC has entered into a long-term
supply agreement through 2004 with the same party, subject to renewal
thereafter, for diced tomatoes and tomato concentrates. The supply agreement
requires BFC to purchase, at prices determined by formulas, 100% of its
requirements for diced tomatoes and a minimum of 20 million pounds of tomato
concentrate per crop year. Based on the pricing formula, the minimum purchase
commitment for tomato concentrate is approximately $5,400 per crop year.
Legal Matters
--------------
BFC is involved in certain 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.
BFH12
