UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
-- EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2000
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Commission file number I-71
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BORDEN, INC.
New Jersey 13-0511250
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(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 August 14, 2000:
198,974,994
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BORDEN, INC.
INTRODUCTION
The following filing with the Securities and Exchange Commission ("SEC") by
Borden, Inc. ("the Company") presents four separate financial statements:
Borden, Inc. Condensed Consolidated Financial Statements, Borden, Inc. and
Affiliates Condensed Combined Financial Statements, the Condensed Financial
Statements of Wise Holdings, Inc. ("Wise Holdings") and the Condensed Financial
Statements of Borden Foods Holdings Corporation ("Foods Holdings"). The
consolidated statements present the Company after the effect of the sales of (i)
the Company's former salty snacks business ("Wise") to Wise Holdings and its
subsidiaries and (ii) the Company's former domestic and international foods
business ("Foods") to Foods Holdings and its subsidiaries, as explained in Note
1 to the consolidated and combined financial statements. The Company, Wise
Holdings, and Foods Holdings are controlled by BW Holdings, LLC ("BWHLLC"). The
consolidated financial statements are those of the Company, which is the SEC
Registrant.
The Borden, Inc. and Affiliates ("the Combined Companies") Condensed Combined
Financial Statements are included herein to present the Company on a combined
historical basis, including the financial position, results of operations and
cash flows of Wise and Foods. The Combined Companies' 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. Also, in accordance with rule 3-10 of Regulation S-X, the
Condensed Financial Statements of Wise Holdings and Foods Holdings are included
in Part II of this Quarterly Report on Form 10-Q because Wise Holdings and Foods
Holdings are guarantors of the Company's credit facility and all of the
Company's outstanding publicly held debt.
2
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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 June 30, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
six months ended June 30, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Condensed Consolidated Balance Sheets, June 30, 2000 and December 31, 1999. . . . . . . . . . . . . 8
Condensed Consolidated Statements of Cash Flows, six months ended June 30, 2000 and 1999. . . . . . 10
Condensed Consolidated Statement of Shareholders' Equity, six months ended June 30, 2000. . . . . . 12
Condensed Combined Statements of Operations and Comprehensive Income,
three months ended June 30, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
six months ended June 30, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Condensed Combined Balance Sheets, June 30, 2000 and December 31, 1999. . . . . . . . . . . . . . . 15
Condensed Combined Statements of Cash Flows, six months ended June 30, 2000 and 1999. . . . . . . . 17
Condensed Combined Statement of Shareholders' Equity, six months ended June 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. . . . 24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
ITEM 6. EXHIBITS, GUARANTOR FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. . . . . . . . . . 34
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
BORDEN, INC.
Three months ended June 30,
(In millions) 2000 1999
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<S> <C> <C>
Net sales $384.5 $343.9
Cost of goods sold 268.0 229.9
------- -------
Gross margin 116.5 114.0
------- -------
Distribution expense 15.6 14.1
Marketing expense 24.5 19.9
General & administrative expense 37.9 25.5
Gain on sale of assets (10.4) (1.6)
Business realignment 9.0 10.0
------- -------
Operating income 39.9 46.1
------- -------
Interest expense 14.6 15.7
Affiliated interest expense, net of affiliated
interest income of $0.1 in 2000 and $0.2 in 1999 4.2 5.2
Interest income and other (4.6) (8.9)
Equity in net income of unconsolidated subsidiaries (0.5) (1.4)
------- -------
Income from continuing operations
before income tax 26.2 35.5
Income tax expense 13.8 12.9
------- -------
Income from continuing operations 12.4 22.6
------- -------
Gain on disposal of discontinued operations, net of tax 93.0 0.6
------- -------
Net income 105.4 23.2
Preferred stock dividends (18.5) (18.5)
------- -------
Net income applicable to common stock $ 86.9 $ 4.7
======= =======
Comprehensive income (see Note 4) $ 99.9 $ 33.5
======= =======
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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.
Three months ended June 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 $ 0.06 $ 0.12
Gain on disposal of discontinued operations, net of tax 0.47 -
------- -------
Net income 0.53 0.12
Preferred stock dividends (0.09) (0.09)
------- -------
Net income applicable to common stock $ 0.44 $ 0.03
======= =======
Dividends per common share $ 0.06 $ 0.06
Dividends per preferred share $ 0.75 $ 0.75
Average number of common shares outstanding
during the period 199.0 199.0
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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.
Six months ended June 30,
(In millions) 2000 1999
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<S> <C> <C>
Net sales $737.2 $650.8
Cost of goods sold 514.6 441.7
------- -------
Gross margin 222.6 209.1
------- -------
Distribution expense 31.2 26.1
Marketing expense 42.6 35.7
General & administrative expense 75.5 56.8
Gain on sale of assets (10.3) (1.8)
Business realignment 11.8 10.0
------- -------
Operating income 71.8 82.3
------- -------
Interest expense 29.3 31.0
Affiliated interest expense, net of affiliated
interest income of $0.2 in 2000 and 1999 8.3 10.0
Interest income and other (10.8) (17.6)
Equity in net (income) loss of unconsolidated subsidiaries (0.9) 3.9
------- -------
Income from continuing operations
before income tax 45.9 55.0
Income tax expense 21.2 19.1
------- -------
Income from continuing operations 24.7 35.9
------- -------
Gain on disposal of discontinued operations,net of tax 93.0 0.6
------- -------
Net income 117.7 36.5
Preferred stock dividends (36.9) (36.9)
------- -------
Net income (loss) applicable to common stock $ 80.8 $ (0.4)
======= =======
Comprehensive income (see Note 4) $109.8 $ 29.1
======= =======
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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.
Six months ended June 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 $ 0.12 $ 0.18
Gain on disposal of discontinued operations, net of tax 0.47 -
------- -------
Net income 0.59 0.18
Preferred stock dividends (0.18) (0.18)
------- -------
Net income applicable to common stock $ 0.41 $ -
======= =======
Dividends per common share $ 0.19 $ 0.12
Dividends per preferred share $ 1.50 $ 1.50
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 BALANCE SHEETS (UNAUDITED)
BORDEN, INC.
(In millions)
June 30, December 31,
ASSETS 2000 1999
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<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 32.0 $ 195.2
Accounts receivable (less allowance for doubtful
accounts of $10.8 in 2000 and $11.8 in 1999) 303.0 215.0
Loan receivable from affiliate 58.4 56.2
Inventories:
Finished and in-process goods 72.3 62.8
Raw materials and supplies 49.8 50.4
Deferred income taxes 46.2 42.4
Other current assets 14.3 15.3
---------- -----------
576.0 637.3
---------- -----------
INVESTMENTS AND OTHER ASSETS
Investments 64.0 64.0
Investment in affiliate 55.7 51.5
Deferred income taxes 27.0 109.5
Prepaid pension assets 125.3 129.7
Other assets 44.0 36.3
Assets sold under contractual arrangement (net of
allowance of $62.6 in 2000 and 1999) 46.0 48.2
---------- -----------
362.0 439.2
---------- -----------
PROPERTY AND EQUIPMENT
Land 25.6 25.6
Buildings 103.5 97.9
Machinery and equipment 728.3 739.1
---------- -----------
857.4 862.6
Less accumulated depreciation (319.2) (323.8)
---------- -----------
538.2 538.8
INTANGIBLES 186.2 112.1
---------- -----------
TOTAL ASSETS $ 1,662.4 $ 1,727.4
========== ===========
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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)
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts and drafts payable $ 153.3 $ 137.4
Debt payable within one year 20.6 17.7
Income taxes payable 87.2 244.1
Loans payable to affiliates 237.1 246.6
Other current liabilities 182.7 178.6
--------- ---------
680.9 824.4
--------- ---------
OTHER LIABILITIES
Liabilities sold under contractual arrangement 41.6 41.6
Long-term debt 588.7 541.1
Non-pension post-employment benefit obligations 170.0 176.1
Other long-term liabilities 66.7 80.0
--------- ---------
867.0 838.8
--------- ---------
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 333.1 355.7
Receivable from parent (414.9) (414.9)
Accumulated other comprehensive income (60.4) (52.5)
Accumulated deficit (359.7) (440.5)
--------- ---------
114.5 64.2
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,662.4 $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.
Six months ended June 30,
(In millions) 2000 1999
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<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income $ 117.7 $ 36.5
Adjustments to reconcile net income to net
cash from (used in) operating activities:
Gain on disposal of discontinued operations, net of tax (93.0) (0.6)
Gain on sale of assets (10.3) (1.8)
Business realignment 11.8 10.0
Deferred tax provision (benefit) 75.2 (7.7)
Depreciation and amortization 28.2 24.2
Unrealized gain on interest rate swap (4.0) (6.2)
Equity in net (income) loss of unconsolidated subsidiaries (0.9) 3.9
Net change in assets and liabilities:
Trade receivables (40.0) (25.4)
Inventories (1.7) 4.5
Accounts and drafts payable 17.6 3.8
Income taxes (66.2) 7.1
Other assets 4.2 6.7
Other liabilities (12.0) (25.1)
-------- -------
26.6 29.9
-------- -------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (41.7) (24.1)
Proceeds from the sale of assets 7.2 0.3
Purchase of businesses, net of cash acquired (88.0) (40.2)
Purchase of affiliate's receivables (50.0) -
Net investment from (in) affiliate 2.2 (1.9)
-------- -------
(170.3) (65.9)
-------- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net short-term debt borrowings (repayments) 13.2 (6.0)
Borrowings of long-term debt 48.0 -
Repayment of long-term debt (10.7) (0.3)
Affiliated repayments (9.8) (12.9)
Interest received from parent 24.2 24.6
Common stock dividends paid (37.2) (24.6)
Preferred stock dividends paid (36.9) (36.9)
Other distributions (10.3) -
-------- -------
(19.5) (56.1)
-------- -------
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
BORDEN, INC.
Six months ended June 30,
(In millions) 2000 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in cash and equivalents $(163.2) $(92.1)
Cash and equivalents at beginning
of period 195.2 672.1
-------- -------
Cash and equivalents at end
of period $ 32.0 $580.0
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest, net $ 29.6 $ 24.8
Taxes 12.2 19.4
Non-cash activity:
Accrued dividends on investment in affiliate 4.2 -
Capital contribution by parent 15.4 16.8
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
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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
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<S> <C> <C> <C> <C> <C> <C> <C>
Net income 117.7 117.7
Translation adjustments (7.9) (7.9)
Preferred stock dividends (36.9) (36.9)
Common stock dividends (37.2) (37.2)
Other distributions (16.3) (16.3)
Interest accrued on notes from parent (net of $8.8 tax) 15.5 15.5
Capital contribution from parent 15.4 15.4
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Balance, June 30, 2000 $614.4 $2.0 $333.1 $(414.9) $(60.4) $(359.7) $114.5
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See Notes to Condensed Consolidated and Condensed Combined Financial Statements
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CONDENSED COMBINED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
BORDEN, INC. AND AFFILIATES
Three months ended June 30,
(In millions) 2000 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $572.6 $519.1
Cost of goods sold 373.9 326.1
------- -------
Gross margin 198.7 193.0
------- -------
Distribution expense 34.6 30.6
Marketing expense 87.7 62.6
General & administrative expense 57.2 51.4
Gain on divestiture of businesses - (10.4)
Gain on sale of assets (10.4) (1.4)
Business realignment 9.0 10.0
------- -------
Operating income 20.6 50.2
------- -------
Interest expense 14.6 15.8
Affiliated interest expense 0.4 1.8
Interest income and other (4.6) (7.9)
Equity in net income of unconsolidated subsidiaries (0.5) (1.4)
------- -------
Income from continuing operations
before income tax 10.7 41.9
Income tax (benefit) expense (59.4) 26.3
------- -------
Income from continuing operations 70.1 15.6
------- -------
Gain on disposal of discontinued operations, net of tax 37.0 0.6
------- -------
Net income 107.1 16.2
Affiliate's share of loss - 0.6
Preferred stock dividends (18.5) (18.5)
------- -------
Net income (loss) applicable to common stock $88.6 $ (1.7)
======= =======
Comprehensive income (see Note 4) $98.5 $ 30.5
======= =======
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See Notes to Condensed Consolidated and Condensed Combined Financial Statements
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CONDENSED COMBINED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
BORDEN, INC. AND AFFILIATES
Six months ended June 30,
(In millions) 2000 1999
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $1,125.0 $1,015.6
Cost of goods sold 727.9 639.2
--------- ---------
Gross margin 397.1 376.4
--------- ---------
Distribution expense 69.5 59.0
Marketing expense 180.4 142.0
General & administrative expense 114.7 95.9
Gain on divestiture of businesses - (14.8)
Gain on sale of assets (10.3) (1.3)
Business realignment 11.8 10.0
--------- ---------
Operating income 31.0 85.6
--------- ---------
Interest expense 29.3 31.4
Affiliated interest expense 0.7 3.5
Interest income and other (10.8) (17.7)
Equity in net (income) loss of unconsolidated subsidiaries (0.9) 3.9
--------- ---------
Income from continuing operations
before income tax 12.7 64.5
Income tax (benefit) expense (57.5) 33.9
--------- ---------
Income from continuing operations 70.2 30.6
--------- ---------
Gain on disposal of discontinued operations, net of tax 37.0 0.6
--------- ---------
Income before cumulative effect of change
in accounting principle 107.2 31.2
Cumulative effect of change in accounting principle - (2.8)
--------- ---------
Net income 107.2 28.4
Affiliate's share of income (loss) 0.1 (0.3)
Preferred stock dividends (36.9) (36.9)
--------- ---------
Net income (loss) applicable to common stock $ 70.4 $ (8.8)
========= =========
Comprehensive income (see Note 4) $ 95.0 $ 23.5
========= =========
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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)
June 30, December 31,
ASSETS 2000 1999
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<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 58.4 $ 228.4
Accounts receivable (less allowance for doubtful
accounts of $14.8 in 2000 and $15.4 in 1999) 365.7 296.9
Loan receivable from affiliate 58.4 56.2
Inventories:
Finished and in-process goods 129.8 114.8
Raw materials and supplies 69.9 84.3
Deferred income taxes 62.3 60.8
Other current assets 23.6 24.0
--------- ---------
768.1 865.4
--------- ---------
INVESTMENTS AND OTHER ASSETS
Investments 64.0 64.0
Investment in affiliate 55.7 51.5
Deferred income taxes 28.5 109.8
Prepaid pension assets 136.4 140.8
Other assets 39.0 32.7
--------- ---------
323.6 398.8
--------- ---------
PROPERTY AND EQUIPMENT
Land 38.9 38.8
Buildings 197.7 192.6
Machinery and equipment 1,096.5 1,088.1
--------- ---------
1,333.1 1,319.5
Less accumulated depreciation (554.6) (548.2)
--------- ---------
778.5 771.3
INTANGIBLES 489.7 423.5
--------- ---------
TOTAL ASSETS $2,359.9 $2,459.0
========= =========
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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)
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts and drafts payable $ 205.4 $ 197.3
Debt payable within one year 21.1 18.1
Income taxes payable 99.8 255.8
Loans payable to affiliates 20.9 14.5
Other current liabilities 254.5 257.7
--------- ---------
601.7 743.4
--------- ---------
OTHER LIABILITIES
Long-term debt 591.6 544.1
Non-pension post-employment benefit obligations 187.4 193.9
Other long-term liabilities 80.9 114.8
--------- ---------
859.9 852.8
--------- ---------
COMMITMENTS AND CONTINGENCIES (See Note 6)
SHAREHOLDERS' EQUITY
Preferred stock 614.4 614.4
Common stock 2.0 2.0
Paid in capital 641.8 664.4
Receivable from parent (414.9) (414.9)
Affiliate's interest in subsidiary 66.1 66.2
Accumulated other comprehensive income (96.3) (84.1)
Retained earnings 85.2 14.8
--------- ---------
898.3 862.8
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,359.9 $2,459.0
========= =========
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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
Six months ended June 30,
(In millions) 2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income $ 107.2 $ 28.4
Adjustments to reconcile net income to net
cash from (used in) operating activities:
Gain on disposal of discontinued operations, net of tax (37.0) (0.6)
Gain on divestiture of businesses - (14.8)
Gain on sale of assets (10.3) (1.3)
Business realignment 11.8 10.0
Deferred tax provision 55.0 0.3
Depreciation and amortization 50.2 41.6
Unrealized gain on interest rate swap (4.0) (6.2)
Equity in net (income) loss of unconsolidated subsidiaries (0.9) 3.9
Net change in assets and liabilities:
Trade receivables (23.9) (29.3)
Inventories 6.0 15.4
Accounts and drafts payable 10.8 (6.3)
Income taxes (119.9) 28.0
Other assets 5.6 21.8
Other liabilities (15.2) (66.1)
-------- -------
35.4 24.8
-------- -------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (68.9) (52.4)
Proceeds from the divestiture of businesses - 16.5
Proceeds from the sale of assets 7.2 4.9
Purchase of business, net of cash acquired (88.0) (40.2)
Purchase of affiliate's receivables (50.0) -
-------- -------
(199.7) (71.2)
-------- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net short-term debt borrowings (repayments) 13.4 (11.6)
Borrowings of long-term debt 48.0 -
Repayment of long-term debt (10.9) -
Affiliated borrowings 4.0 2.9
Interest received from parent 24.2 24.6
Common stock dividends paid (37.2) (24.6)
Preferred stock dividends paid (36.9) (36.9)
Other distributions (10.3) -
-------- -------
(5.7) (45.6)
-------- -------
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CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
BORDEN, INC. AND AFFILIATES
Six months ended June 30,
(In millions) 2000 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in cash and equivalents $(170.0) $(92.0)
Cash and equivalents at beginning
of period 228.4 695.5
-------- -------
Cash and equivalents at end
of period $ 58.4 $603.5
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest, net $ 19.8 $ 18.1
Taxes 7.4 4.6
Non-cash activity:
Accrued dividends on investment in affiliate 4.2 -
Capital contribution by parent 15.4 16.8
Affiliate's share of (income) loss (0.1) 0.3
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 107.2 107.2
Translation adjustments (12.2) (12.2)
Preferred stock dividends (36.9) (36.9)
Common stock dividends (37.2) (37.2)
Other distributions (16.3) (16.3)
Interest accrued on notes from parent (net of $8.8 tax) 15.5 15.5
Capital contribution from parent 15.4 15.4
Affiliate's interest in subsidiary (0.1) 0.1 -
----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 $614.4 $2.0 $641.8 $(414.9) $66.1 $(96.3) $85.2 $898.3
----------------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Condensed Combined Financial Statements
</TABLE>
19
<PAGE>
NOTES TO CONDENSED CONSOLIDATED
AND CONDENSED COMBINED FINANCIAL STATEMENTS
(Dollars in millions except per share amounts and as otherwise indicated)
1. BASIS OF PRESENTATION
The Registrant, Borden, Inc. (the "Company") is engaged primarily in
manufacturing, processing, purchasing and distributing 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 Wise and Foods. In addition,
Wise Holdings and Foods Holdings provide financial guarantees to obligations
under the Company's credit facility and all of the Company's outstanding
publicly held debt. Because of the aforementioned control and guarantees, the
Company has included, supplementally in this filing, 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.
The accompanying unaudited interim Condensed Consolidated and Condensed Combined
Financial Statements contain all adjustments, consisting only of normal
adjustments, which in the opinion of management are necessary for a fair
statement of the results for the interim periods. Results for the interim
periods are not necessarily indicative of results for the full 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 June 30, 2000, Consumer
Adhesives' total assets are $186.1, including approximately $95 related to the
acquisition.
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
fourth 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 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.
20
<PAGE>
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.
Subsequent Event
-----------------
On July 28, 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.
3. DISCONTINUED OPERATIONS
As a result of a settlement reached with the Internal Revenue Service, 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 is 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.
4. COMPREHENSIVE INCOME
Comprehensive income was computed as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
CONSOLIDATED COMBINED
------------ -------------
2000 1999 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $105.4 $23.2 $107.1 $16.2
Foreign currency translation adjustments (5.5) 0.3 (8.6) 4.3
Reclassification adjustments - 10.0 - 10.0
------ ----- ------ -----
$ 99.9 $33.5 $ 98.5 $30.5
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
CONSOLIDATED COMBINED
------------- --------------
2000 1999 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $117.7 $ 36.5 $107.2 $ 28.4
Foreign currency translation adjustments (7.9) (17.4) (12.2) (14.9)
Reclassification adjustments - 10.0 - 10.0
------ ------ ------ ------
$109.8 $ 29.1 $ 95.0 $ 23.5
--------------------------------------------------------------------------------
</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.
21
<PAGE>
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 Philippines
operation.
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 $1.0 and $2.5 for the three months ended June 30, 2000
and 1999, respectively, and $2.5 and $4.9 for the six months ended June 30, 2000
and 1999, respectively.
At June 30, 2000, Foods had $219.5 cash invested with the Company and BWHLLC had
$17.6 cash invested with the Company and Combined Companies. Loans payable to
unconsolidated affiliates for the Combined Companies at June 30, 2000 also
includes $3.3 from an affiliate of the Combined Companies. These balances are
reflected as loans payable to affiliates in the consolidated and combined
balance sheets.
In June 2000, the Company purchased $50.0 of accounts receivable from World
Kitchen, Inc., an affiliate of the Company, in return for certain fees.
Collection of the purchased receivables is expected to occur within 90 days.
At June 30, 2000, the Company had loaned $58.4 in the form of demand notes and
accrued interest to CCPC Acquisition Corp., an affiliate of the Company, to
provide temporary financing to complete its 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 and Combined
Companies anticipate 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.
In the fourth quarter of 1999, the Company made a $50.0 investment in World
Kitchen, Inc. in the form of 16% cumulative junior preferred stock. The Company
has accrued cumulative dividends of $5.7 on the investment at June 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 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 $22 at June 30, 2000 and 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
22
<PAGE>
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 $4.4 in
liabilities at June 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.
23
<PAGE>
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.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
CONSOLIDATED COMBINED
---------------- -------------------
(Dollars in millions) 2000 1999 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES:
Foods ongoing $122.7 $111.7
Foods Unaligned - 4.5
Wise 65.4 59.0
Chemical $334.4 $307.2 334.4 307.2
Consumer Adhesives 50.1 34.1 50.1 34.1
Corporate and other - 2.6 - 2.6
------- ------- ------- -------
$384.5 $343.9 $572.6 $519.1
======= ======= ======= =======
ADJUSTED OPERATING EBITDA:
Foods ongoing $(12.5) $ 0.1
Foods Unaligned - 0.4
Wise 4.5 2.5
Chemical $ 53.3 $ 56.0 53.3 56.0
Consumer Adhesives 10.6 8.2 10.6 8.2
Corporate and other (1.0) 4.1 (1.0) 4.1
------- ------- ------- -------
TOTAL ADJUSTED OPERATING EBITDA (1) 62.9 68.3 54.9 71.3
Significant or unusual items (2) (9.0) (10.0) (9.0) 0.4
Depreciation and amortization (3) (14.0) (12.2) (25.3) (21.5)
------- ------- ------- -------
OPERATING INCOME $ 39.9 $ 46.1 $ 20.6 $ 50.2
======= ======= ======= =======
--------------------------------------------------------------------------------
<FN>
(1) 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).
(2) The 2000 Consolidated and Combined amount represents Chemical
realignment expenses relating primarily to the closure of a plant in the
United Kingdom. The 1999 Consolidated amount represents costs
associated with realignment of a Chemical business of $10.0. The 1999
Combined amount includes the $10.0 Chemical realignment charge offset
by 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 $10.4.
(3) 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>
24
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
CONSOLIDATED COMBINED
------------- ----------------
(DOLLARS IN MILLIONS) 2000 1999 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES:
Foods ongoing $265.0 $245.7
Foods Unaligned - 10.1
Wise 122.8 109.0
Chemical $662.8 $592.8 662.8 592.8
Consumer Adhesives 72.7 53.3 72.7 53.3
Corporate and other 1.7 4.7 1.7 4.7
------- ------- --------- ---------
$737.2 $650.8 $1,125.0 $1,015.6
======= ======= ======== =========
ADJUSTED OPERATING EBITDA:
Foods ongoing $(25.9) $ 0.6
Foods Unaligned - 2.1
Wise 7.1 3.2
Chemical $108.6 $105.7 108.6 105.7
Consumer Adhesives 13.3 11.0 13.3 11.0
Corporate and other (10.1) (0.2) (10.1) (0.2)
------- ------- -------- ---------
TOTAL ADJUSTED OPERATING EBITDA (1) 111.8 116.5 93.0 122.4
Significant or unusual items (2) (11.8) (10.0) (11.8) 4.8
Depreciation and amortization (3) (28.2) (24.2) (50.2) (41.6)
------- ------- -------- ---------
OPERATING INCOME $ 71.8 $ 82.3 $ 31.0 $ 85.6
======= ======= ======== =========
--------------------------------------------------------------------------------
<FN>
(1) 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).
(2) The 2000 Consolidated and Combined amount represents Chemical
realignment expenses relating primarily to plant closures in the United
Kingdom, Argentina and California. The 1999 Consolidated amount
represents costs associated with realignment of a Chemical business of
$10.0. The 1999 Combined amount includes the $10.0 Chemical realignment
charge 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 $14.8.
(3) 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>
25
<PAGE>
CONSOLIDATED AND COMBINED THREE MONTHS ENDED JUNE 30, 2000 VERSUS THREE MONTHS
ENDED JUNE 30, 1999
Consolidated Summary
---------------------
Consolidated sales increased $40.6 million, or approximately 12%, to $384.5
million in 2000 from $343.9 million in 1999. The increase in sales is attributed
primarily to improved volumes in the Chemical and Consumer Adhesives businesses
and the two Chemical acquisitions made in 1999. Adjusted operating EBITDA
decreased $5.4 million, or approximately 8%, to $62.9 million in 2000 from $68.3
million in 1999. The decrease is primarily due to the settlement and timing of
various corporate liabilities and expenses, with the impact of increases in raw
materials and selling, general and administrative costs in the Chemical business
that more than offset the impact of improved volumes.
Combined Summary
-----------------
Combined sales increased $53.5 million, or approximately 10%, from $519.1
million in 1999 to $572.6 million in 2000. The increase is primarily attributed
to increased volumes for Chemical and Consumer Adhesives. Combined adjusted
operating EBITDA decreased $16.4 million, or approximately 23%, from $71.3
million in 1999 to $54.9 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 in second quarter 2000 were up $27.2 million, or approximately
9%, from prior year sales of $307.2 million. The most significant items that
positively impacted 2000 sales were improved volumes for all business units,
primarily in North America, and two acquisitions in the United States and
Europe. The most significant items that negatively impacted sales were generally
lower pricing, unfavorable currency exchange rates in Latin America, and the
prior year exit from certain non-core businesses in the United States, Latin
America and the Philippines.
Overall volume improvement of 5%, excluding the effect of acquisitions and
strategic realignment activities, had a positive impact on 2000 sales of
approximately $28 million, with the largest contributors being the UV coatings,
melamine crystal and oil field proppant businesses. The improvement in UV
coatings reflects continuing growth in demand for optical fiber. The improvement
in melamine crystal reflects increased export sales due to tightening global
supply, while the improvement for oil field proppants is due to increased
drilling activity that reflects the escalating cost of natural gas.
The second quarter 1999 acquisition of Spurlock Industries, Inc. in the United
States and the third quarter 1999 acquisition of Blagden Chemicals, Ltd. in
Europe contributed incremental 2000 sales of $5.0 million and $12.8 million,
respectively.
Lower pricing in second quarter 2000 negatively impacted sales by approximately
$4 million, and is due to substantially reduced selling prices for melamine
crystal and melamine-based resins as well as downward pressure on prices from
very competitive market conditions across all businesses. The lower pricing for
melamine products reflects the global market imbalance for melamine crystal that
worsened throughout 1999 and has persisted through the first half of 2000. A
substantial portion of the 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 primary raw materials
(i.e. methanol, phenol and urea). Although the costs of these raw materials
escalated during second quarter 2000 to a level significantly higher than the
prior year quarter, selling prices did not increase appreciably due to the lag
time required for published indices to recognize the increases as well as the
contractual requirements that generally provide only for monthly or quarterly
price adjustments.
Unfavorable currency exchange rates, due primarily to significant currency
devaluation in Ecuador since the end of 1999, had an unfavorable impact on 2000
sales of approximately $7 million.
26
<PAGE>
The 1999 sale of the non-strategic United States molding compounds business and
closures or sales of non-strategic businesses in Latin America and the
Philippines caused 2000 sales to be $7.7 million lower compared to the prior
year.
Second quarter adjusted operating EBITDA was $2.7 million, or approximately 5%,
lower than the prior year. The overall decrease reflects substantial margin
erosion and higher selling, general and administrative expenses that more than
offset the positive impact of increased volume and 1999 acquisitions. The most
significant contributors to the overall gross margin erosion were the
significant second quarter increase in cost of all three primary raw materials,
substantially lower melamine crystal and resin selling prices due to depressed
global market conditions, and intensely competitive market conditions in Europe.
The higher selling, general and administrative expenses were due primarily to
systems implementation costs in Latin America and investments in e-commerce.
Consumer Adhesives
-------------------
Consumer Adhesives' net sales for the three months ended June 30, 2000 were
$50.1 million, an increase of $16.0 million, or approximately 47%, compared to
1999 net sales of $34.1 million for the same period. The increase is
attributable to significantly higher volumes from both existing and new 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 June
30, 2000 was $10.6 million, a $2.4 million, or approximately 29%, increase over
1999 adjusted operating EBITDA of $8.2 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.
Foods
-----
Foods' sales for the three months ended June 30, 2000 increased $6.5 million, or
approximately 6%, to $122.7 million from $116.2 million for the three months
ended June 30, 1999. Excluding sales of $4.5 million from divested businesses in
1999, sales from Foods' ongoing businesses increased $11.0, or approximately
10%. The increase was led by growth in sauce volumes due primarily to new
product introductions and expanded distribution. In addition, Foods improved
sales with the introduction of the new product, It's Pasta Anytime(TM).
Foods' adjusted operating EBITDA declined $13.0 million from $0.5 million in
1999 to a loss of $12.5 million in 2000. The decline in ongoing results was
primarily due to significantly higher marketing costs associated with the
introduction of new products. These additional costs were partially 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.
Wise
----
Wise net sales in the second quarter increased $6.4 million, or approximately
11%, to $65.4 million from $59.0 million in the second quarter of 1999. The
second quarter net sales increase continues the positive momentum of increased
volumes of previous quarters. Adjusted operating EBITDA in the second quarter
increased $2.0 million to $4.5 million from $2.5 million in 1999. This
improvement was primarily the result of higher volume and lower administrative
expenses compared to the same period last year.
Corporate and other
---------------------
Corporate and other sales declined $2.6 million for the three months ended June
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 $5.1 million to a loss of $1.0 million in the second quarter of
2000 versus income of $4.1 million in the second quarter of 1999 primarily due
to the timing and settlement of various corporate liabilities and expenses.
27
<PAGE>
CONSOLIDATED AND COMBINED SIX MONTHS ENDED JUNE 30, 2000 VERSUS SIX MONTHS ENDED
JUNE 30, 1999
Consolidated Summary
---------------------
Consolidated sales increased $86.4 million, or approximately 13%, to $737.2
million in 2000 from $650.8 million in 1999. The increase in sales is attributed
primarily to improved volumes in the Chemical and Consumer Adhesives businesses
and the two Chemical acquisitions made in 1999. Adjusted operating EBITDA
decreased $4.7 million, or approximately 4%, to $111.8 million in 2000 from
$116.5 million in 1999. The decrease is primarily due to the settlement and
timing of various corporate liabilities.
Combined Summary
-----------------
Combined sales increased $109.4 million, or approximately 11%, from $1,015.6
million in 1999 to $1,125.0 million in 2000. The increase is primarily
attributed to increased volumes in the Chemical, Consumer Adhesives and Wise
businesses. Combined adjusted operating EBITDA decreased $29.4 million, or
approximately 24%, from $122.4 million in 1999 to $93.0 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 in 2000 were up $70.0 million, or approximately 12%, from prior
year sales of $592.8 million. The most significant items that positively
impacted 2000 sales were improved volumes for all business units, primarily in
North America, and two acquisitions in the United States and Europe. The most
significant items that negatively impacted sales were generally lower pricing,
unfavorable currency exchange rates in Latin America, and the prior year exit
from certain non-core businesses in the United States, Latin America and the
Philippines.
Overall volume improvement of 9%, excluding the effect of acquisitions and
strategic realignment activities, had a positive impact on 2000 sales of
approximately $75 million, with the largest contributors being the North America
forest products resins, UV coatings and melamine crystal businesses. The
improved volume in North America forest products resins is driven by continued
high demand related to strong housing and construction activity. The improvement
in UV coatings reflects continuing growth in demand for optical fiber, while the
improvement in melamine crystal reflects increased export sales due to
tightening global supply.
The second quarter 1999 acquisition of Spurlock Industries, Inc. in the United
States and the third quarter 1999 acquisition of Blagden Chemicals, Ltd. in
Europe contributed incremental 2000 sales of $12.8 million and $30.0 million,
respectively.
Generally lower pricing over the first six months negatively impacted 2000 sales
by approximately $23 million, and is due primarily to substantially reduced
selling prices for melamine crystal and melamine-based resins as well as
downward pressure on prices from very competitive market conditions across all
businesses. The lower pricing for melamine products reflects the global market
imbalance for melamine crystal that worsened throughout 1999 and has persisted
through the first half of 2000. A substantial portion of the 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 primary raw 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, and therefore selling prices were generally lower. Although the
costs of all three primary raw materials escalated significantly during the
second quarter, selling prices did not increase appreciably due to the lag time
required for published indices to recognize the increases as well as the
contractual requirements that generally provide only for monthly or quarterly
price adjustments.
Unfavorable currency exchange rates, due primarily to significant currency
devaluation in Ecuador since the end of 1999, had an unfavorable impact on 2000
sales of approximately $11 million.
28
<PAGE>
The 1999 sale of the non-strategic United States molding compounds business and
closures or sales of non-strategic businesses in Latin America and the
Philippines caused 2000 sales to be $13.5 million lower compared to the prior
year.
Year-to-date adjusted operating EBITDA increased $2.9 million or approximately
3%, from 1999. The overall improvement reflects the positive impact of increased
volume and the 1999 acquisitions, which were substantially offset by gross
margin erosion and higher selling, general and administrative expenses. The most
significant contributors to the overall gross margin erosion were substantially
lower melamine crystal and resin selling prices due to depressed global market
conditions, intensely competitive market conditions in Europe, and the
substantial second quarter increase in cost of all three primary raw materials.
The higher selling, general and administrative expenses were due primarily to
systems implementation costs in Latin America and investments in e-commerce.
Consumer Adhesives
-------------------
Consumer Adhesives' net sales for the six months ended June 30, 2000 were $72.7
million, an increase of $19.4 million or approximately 36% compared to 1999 net
sales of $53.3 million for the same period. The increase is attributable to
significantly higher volumes from both existing and new products and the May
acquisition (See Note 2 to the Condensed Consolidated and Condensed Combined
Financial Statements).
Consumer Adhesives' adjusted operating EBITDA for the six months ended June 30,
2000 was $13.3 million, a $2.3 million or approximately 21% increase over 1999
adjusted operating EBITDA of $11.0 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.
Foods
-----
Foods' sales for the six months ended June 30, 2000 were $265.0 million, an
increase of $9.2 million or approximately 4%, compared to $255.8 million for the
six months ended June 30, 1999. Excluding sales of $10.1 million from divested
businesses in 1999, sales from Foods' ongoing businesses increased $19.3 million
or approximately 8%. The increase was led by growth in sauce volumes due
primarily to new product introductions and expanded distribution. In addition,
Foods improved sales with the introduction of the new product, It's Pasta
Anytime(TM). These improvements were slightly offset by modest pasta category
declines.
Foods' adjusted operating EBITDA declined $28.6 million from income of $2.7
million in 1999 to a loss of $25.9 million in 2000. Excluding the impact of
Foods Unaligned businesses sold in 1999 and a $7.5 million gain on the favorable
settlement of litigation in 1999, ongoing adjusted operating EBITDA decreased
$19.0 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 primarily as a result of issues related to the
1999 enterprise-wide systems implementation. These additional costs were
partially offset by improved volumes and a reduction in general and
administrative expenses due to the absence of enterprise-wide information
technology system implementation costs.
Wise
----
Wise year-to-date net sales increased $13.8 million, or approximately 13%, to
$122.8 million from $109.0 million in 1999. The net sales increase results from
successful, targeted marketing programs against most major classes of trade.
Adjusted operating EBITDA in the first half of 2000 improved $3.9 million, to
$7.1 million from $3.2 million in 1999. The improvement in operating performance
is primarily the result of increased volume and reduced administrative expenses.
Corporate and other
---------------------
Corporate and other sales decreased $3.0 million, or approximately 64%, to $1.7
million for the first two quarters of 2000 compared with $4.7 million for the
first two quarters of 1999 due to the divestiture of the infrastructure
management services business at the end of February 2000. Adjusted operating
EBITDA decreased $9.9 million to a loss of $10.1 million in 2000 from a loss of
29
<PAGE>
$0.2 million in 1999. The decline is primarily due to the timing and settlement
of various corporate liabilities and expenses.
NON-OPERATING EXPENSES AND INCOME TAXES
-------------------------------------------
Following is a comparison of non-operating expenses for the three months ended
June 30, 2000 and 1999:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
CONSOLIDATED COMBINED
------------ -------------
(Dollars in millions) 2000 1999 2000 1999
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest expense $14.6 $15.7 $14.6 $15.8
Affiliated interest expense, net 4.2 5.2 0.4 1.8
Interest income and other (4.6) (8.9) (4.6) (7.9)
Equity in net income of unconsolidated subsidiaries (0.5) (1.4) (0.5) (1.4)
----- ------ ------ -----
$13.7 $10.6 $ 9.9 $ 8.3
----------------------------------------------------------------------------------
</TABLE>
Consolidated non-operating expense increased $3.1 million for the three months
ended June 30, 2000 compared with the three months ended June 30, 1999. The
increase was primarily attributable to decreased interest income as a result of
lower average cash balances in 2000 compared to 1999.
Combined non-operating expense increased by $1.6 million for the three months
ended June 30, 2000 compared with the three months ended June 30, 1999. The
increase was primarily attributable to decreased interest income due to lower
average cash balances in 2000 versus 1999.
Following is a comparison of non-operating expenses for the six months ended
June 30, 2000 and 1999.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
CONSOLIDATED COMBINED
------------ ---------------
(Dollars in millions) 2000 1999 2000 1999
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest expense $ 29.3 $ 31.0 $ 29.3 $ 31.4
Affiliated interest expense, net 8.3 10.0 0.7 3.5
Interest income and other (10.8) (17.6) (10.8) (17.7)
Equity in net (income) loss of unconsolidated
subsidiaries (0.9) 3.9 (0.9) 3.9
------ ------ ------ ------
$ 25.9 $ 27.3 $ 18.3 $ 21.1
---------------------------------------------------------------------------------
</TABLE>
For the six months ended June 30, 2000, consolidated non-operating expense
decreased by $1.4 million compared with the corresponding period in the previous
year. The decrease was primarily attributable to equity in net income of
unconsolidated subsidiaries in 2000 compared with losses in 1999 and a reduction
in total interest expense due to credit line arrangement fees being fully
amortized at December 31, 1999, substantially offset by decreased interest
income as a result of lower average cash balances in 2000 compared to 1999.
For the six months ended June 30, 2000, combined non-operating expense decreased
by $2.8 million compared with the corresponding period in the prior year. The
decrease was primarily attributable to equity in net income of unconsolidated
subsidiaries compared with losses in 1999 and a reduction in total interest
expense due to credit line arrangement fees being fully amortized at December
31, 1999, substantially offset by decreased interest income and other as a
result of lower average cash balances in 2000 compared to 1999.
30
<PAGE>
Following is a comparison of income taxes for the three and six months ended
June 30, 2000 and 1999:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
CONSOLIDATED COMBINED
----------------- ---------------------
(Dollars in millions) 2000 1999 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income tax expense $13.8 $12.9 $(59.4) $26.3
Effective tax rate 53% 36% N/M 63%
--------------------------------------------------------------------------------
</TABLE>
The 2000 consolidated effective tax rate reflects the establishment of a
valuation reserve on foreign tax credits generated in 1999 and 1998. These
credits are no longer likely to be utilized by the Company as a consequence of a
settlement resolving federal examination issues for the years 1996 and 1997. See
also Note 3 to the Condensed Consolidated and Condensed Combined Financial
Statements.
The 2000 combined effective tax rate includes the above for consolidated and, as
a result of a 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). The combined effective tax rate for 1999 reflects the tax effect of
the disposal of Foods' Chinese subsidiary, which had substantial differences in
its net book value and tax basis.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
CONSOLIDATED COMBINED
---------------- --------------------
(Dollars in millions) 2000 1999 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income tax expense $21.2 $19.1 $(57.5) $33.9
Effective tax rate 46% 35% N/M 53%
--------------------------------------------------------------------------------
</TABLE>
The 2000 consolidated effective tax rate reflects the establishment of a
valuation reserve on foreign tax credits generated in 1999 and 1998. These
credits are no longer likely to be utilized by the Company as a consequence of a
settlement resolving federal examination issues for the years 1996 and 1997. See
also Note 3 to the Condensed Consolidated and Condensed Combined Financial
Statements.
The 2000 combined effective tax rate includes the above for consolidated, and as
a result of a 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). The combined effective tax rate for 1999 reflects the tax effect of
the disposal of Foods' 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 $26.6 million for the six
months ended June 30, 2000 was $3.3 million less than the $29.9 million in 1999.
Significant fluctuations from prior year include lower adjusted operating EBITDA
in 2000 of $4.7 million, a $14.6 million increase in accounts receivable
primarily for Consumer Adhesives due to higher sales volumes, and higher
inventory balances of $6.2 million primarily in the Chemical business as a
result of an increase in raw material prices. These increased outflows were
substantially offset by a $11.5 million increase in the Company's trade payables
primarily due to the timing of payments, decreased net interest and tax payments
of $2.4 million and the absence of a 1999 payment of approximately $13.0 million
to settle certain long-term disability claims.
Combined operating activities provided cash of $35.4 million for the six months
ended June 30, 2000 compared to $24.8 million in 1999, an improvement of $10.6
31
<PAGE>
million. Consolidated activity discussed above was more than offset by improved
accounts receivable cash flows of $20.0 million due primarily to the absence of
1999 collection issues associated with Foods' systems implementations, improved
cash flows of $5.6 million primarily due to Wise's timing of trade payments, the
absence of a $6.7 million payment made by Foods in 1999 to settle litigation,
and the absence of 1999 payments of $3.7 million related to the divestiture of
Foods' Unaligned businesses. These improvements were partially offset by a
reduction in adjusted operating EBITDA of $17.2 million, excluding a Foods
1999 $7.5 million favorable litigation settlement, and increased net interest
and tax payments of $6.9 million.
Investing Activities
---------------------
Consolidated investing activities used $170.3 million in the first two quarters
of 2000 versus $65.9 million in the first two quarters of 1999. The increase of
$104.4 million primarily represents the $50.0 million purchase of receivables
from World Kitchen, Inc., an affiliate of the Company, the acquisition made by
Consumer Adhesives for $88.0 million (see Note 2 to the Condensed Consolidated
and Condensed Combined Financial Statements), compared to the 1999 Spurlock
acquisition for $40.2 million, and increased capital expenditures in 2000 of
$17.6 million primarily for Chemical plant expansions. These outflows were
partially offset by additional proceeds from the sale of assets of $6.9 million
(see Note 2 to the Condensed Consolidated and Condensed Combined Financial
Statements).
Combined cash used by investing activities in the first two quarters of 2000 was
$199.7 million versus $71.2 million in 1999. In addition to the above, the
$128.5 million increase includes the absence of $16.5 million of proceeds from
the 1999 sale of Foods Unaligned businesses.
Financing Activities
---------------------
Consolidated financing activities used $19.5 million in 2000 compared to $56.1
million in 1999. The $36.6 million improvement is primarily due to long-term
debt borrowings of $48.0 million and short-term debt borrowings of $13.2 million
versus 1999 repayments of $6.0 million. 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. 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 used $5.7 million in 2000 compared to $45.6
million in 1999. The improvement of $39.9 million primarily reflects the
Consolidated factors discussed above.
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 continue to investigate the impact of these
pronouncements.
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.
32
<PAGE>
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. All provisions of the EITF 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 this EITF issue, 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.
33
<PAGE>
PART II
Item 1: LEGAL PROCEEDINGS
A private action against the Company and numerous other defendants, which was
pending in Los Angeles, California state court in connection with a landfill
site in Monterey Park, California, was settled in April 2000 with the Company
paying less than $0.1 million.
There have been no material developments in the other 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 and
Wise Holdings filed in accordance with rule 3-10 of Regulation S-X. Foods
Holdings and Wise Holdings are guarantors of the Company's credit facility and
all of the Company's outstanding publicly held debt.
c. Reports on Form 8-K
There were no reports on Form 8-K issued during the second quarter of 2000.
34
<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 August 14, 2000 By /s/ William H. Carter
----------------------
William H. Carter
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
35
BORDEN FOODS HOLDINGS CORPORATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2000 AND 1999
BFH 1
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION
Three Months Ended Six Months Ended
(In thousands except per share and share amounts) June 30, June 30,
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $122,636 $116,202 $ 264,957 $255,823
Cost of goods sold 64,675 58,767 136,010 127,762
--------- --------- ---------- ---------
Gross margin 57,961 57,435 128,947 128,061
--------- --------- ---------- ---------
Distribution expense 11,073 9,270 22,634 18,854
Marketing expense 52,902 34,028 118,413 89,486
General & administrative expense 14,227 19,496 28,765 28,235
Gain on divestiture of businesses - (10,383) - (13,471)
--------- --------- ---------- ---------
Operating (loss) income (20,241) 5,024 (40,865) 4,957
--------- --------- ---------- ---------
Interest income, net (4,289) (3,436) (8,625) (6,674)
Other income, net - (128) - (323)
--------- --------- ---------- ---------
(Loss) income before income tax (15,952) 8,588 (32,240) 11,954
Income tax (benefit) expense (6,038) 13,885 (12,138) 14,871
--------- --------- ---------- ---------
Loss before cumulative effect of accounting change (9,914) (5,297) (20,102) (2,917)
Cumulative effect of accounting change, net of tax - - - (2,806)
--------- --------- ---------- ---------
Net loss (9,914) (5,297) (20,102) (5,723)
Affiliate's share of income 9 656 123 (174)
--------- --------- ---------- ---------
Net loss applicable to common stock $ (9,905) $ (4,641) $ (19,979) $ (5,897)
========= ========= ========== =========
Comprehensive loss (Note 5) $ (9,810) $ (4,225) $ (21,851) $ (7,438)
========= ========= ========== =========
Basic and diluted loss per common share $(99,050) $(46,410) $(199,790) $(58,970)
Average number of common shares outstanding
during the period 100 100 100 100
------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to the Condensed Consolidated Financial Statements.
BFH 2
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN FOODS HOLDINGS CORPORATION
(In thousands)
June 30, December 31,
ASSETS 2000 1999
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 244,466 $ 266,825
Accounts receivable (less allowance for doubtful
accounts of $1,478 and $1,317, respectively) 36,446 55,201
Other receivables 2,109 3,947
Inventories:
Finished and in-process goods 52,681 48,066
Raw materials and supplies 16,610 30,089
Deferred income taxes 13,840 15,383
Amounts due from affiliates 1,513 2,833
Other current assets 4,280 5,013
---------- ---------
371,945 427,357
OTHER ASSETS 10,191 10,819
PROPERTY AND EQUIPMENT
Land 9,600 9,542
Buildings 39,404 40,763
Machinery and equipment 207,823 190,679
---------- ---------
256,827 240,984
Less accumulated depreciation (71,762) (64,462)
---------- ---------
185,065 176,522
INTANGIBLES
Goodwill 10,849 11,006
Trademarks and other intangibles 107,142 108,496
---------- ---------
117,991 119,502
---------- ---------
TOTAL ASSETS $ 685,192 $ 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)
June 30, December 31,
LIABILITIES AND SHAREHOLDER'S EQUITY 2000 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts and drafts payable $ 34,109 46,858
Accrued customer allowances 18,901 17,781
Debt payable within one year 564 346
Loans due to affiliates 3,263 2,513
Income tax payable 10,378 20,594
Other amounts due to affiliates 825 789
Other current liabilities 42,381 50,596
------------- ---------
110,421 139,477
OTHER LIABILITIES
Long-term debt 2,927 3,033
Deferred income taxes 14,017 34,585
Other long-term liabilities 24,008 22,820
------------- ---------
40,952 60,438
COMMITMENTS AND CONTINGENCIES (NOTE 8)
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 66,149 66,272
Accumulated translation adjustments (4,877) (3,128)
Retained earnings 45,345 65,324
-------------- ---------
533,819 534,285
-------------- ---------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 685,192 $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
Six Months Ended
(In thousands) June 30,
2000 1999
------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net loss $(20,102) $ (5,723)
Adjustments to reconcile net loss
to net cash from (used in) operating activities:
Depreciation and amortization 13,224 9,138
Deferred tax provision 2,360 6,159
Gain on divestiture of businesses - (13,471)
Net change in assets and liabilities:
Accounts receivable 18,755 (2,857)
Other receivables 1,838 3,331
Inventories 8,864 9,749
Accounts and drafts payable (12,749) (10,705)
Accrued customer allowances 1,120 (4,662)
Income taxes (9,356) 21,097
Other amounts due to/from affiliates 1,356 (1,905)
Other current assets and liabilities (5,555) (13,235)
Other assets and liabilities 423 (5,229)
--------- ---------
178 (8,313)
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital expenditures (23,505) (23,112)
Proceeds from the sale of fixed assets - 4,627
Proceeds from the sale of businesses - 16,588
--------- ---------
(23,505) (1,897)
--------- ---------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net short-term debt payments 218 (5,169)
Proceeds from loans payable to affiliate 750 2,968
--------- ---------
968 (2,201)
--------- ---------
DECREASE IN CASH AND EQUIVALENTS (22,359) (12,411)
CASH AND EQUIVALENTS AT BEGINNING
OF PERIOD 266,825 300,104
--------- ---------
CASH AND EQUIVALENTS AT END
OF PERIOD $244,466 $287,693
========= =========
------------------------------------------------------------------------------------------------
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
Six Months Ended
(In thousands) June 30,
2000 1999
------------------------------------------------------------------------------------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (received):
Interest $ (24) $ 340
Taxes, net of refunds (6,210) (14,888)
------------------------------------------------------------------------------------------------
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 (20,102) (20,102)
Foreign currency translation adjustments (1,749) (1,749)
Affiliate's share of income (123) 123 -
Increase in tax basis related to finalization
of purchase price allocation 21,385 21,385
------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 $427,202 $66,149 $(4,877) $45,345 $533,819
------------------------------------------------------------------------------------------------------------------------------
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, soups and bouillon. At June 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.
BFH 8
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. All provisions of the EITF 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 this EITF
issue, 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.
Activities related to the divestiture reserves during the three and six months
ended June 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 (1,105) (672) (420) (2,197)
-------------------------------------------------
Balance at March 31, 2000 $ 246 $7,598 $917 $8,761
Utilized (193) (40) - (233)
-------------------------------------------------
Balance at June 30, 2000 $ 53 $7,558 $917 $8,528
=================================================
------------------------------------------------------------------------------
<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.
------------------------------------------------------------------------------
</TABLE>
4. AFFILIATE'S SHARE OF INCOME
In accordance with BFC Investment LP's limited partnership agreement with BFC
and LLC, LLC was allocated an affiliate's share of income (see accompanying
condensed consolidated statements of operations) of $123 and ($174) during the
first six months of 2000 and 1999, respectively.
BFH 9
5. COMPREHENSIVE INCOME
Comprehensive income was computed as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
Three months ended June 30, Six months ended June 30,
2000 1999 2000 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Net income $(9,914) $(5,297) $(20,102) $(5,723)
Foreign currency translation
adjustments 104 1,072 (1,749) (1,715)
-------- -------- --------- --------
$(9,810) $(4,225) $(21,851) $(7,438)
======== ======== ========= ========
---------------------------------------------------------------------------------
</TABLE>
6. RELATED PARTIES
Borden and a subsidiary of Borden provide certain administrative services to BFC
at negotiated fees. These services include processing of payroll, active and
retiree group insurance claims, securing insurance coverage for catastrophic
claims, and information systems support. BFC also reimburses the Borden
subsidiary for payments for general disbursements and post-employment benefit
claims. The amount owed by BFC for reimbursement of payments, services, and
other liabilities was $606 at June 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.
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 six months
ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
------ ------ ------ -------
<S> <C> <C> <C> <C>
Employee benefits $1,115 $ 678 $2,022 $ 1,363
Group and general insurance - 841 626 2,091
Administrative services 1,022 4,078 2,505 7,407
------ ------ ------ -------
$2,137 $5,597 $5,153 $10,861
====== ====== ====== =======
--------------------------------------------------------------------------------
</TABLE>
BFC performs certain administrative services on behalf of other Borden
affiliates. These services include customer service, purchasing and quality
assurance. BFC charged affiliates $250 and $168 for such services for the three
months ended June 30, 2000 and 1999, respectively, and $372 and $405 for such
services for the six months ended June 30, 2000 and 1999, respectively. The
receivable for these services was $938 at June 30, 2000 and $972 at December 31,
1999.
BFH 10
BFC invests cash not used in operations with Borden. BFC's investment balance
was $219,450 at June 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 $4,014 and $3,402 on these
funds for the three months ended June 30, 2000 and 1999, respectively, and
$7,992 and $6,659 for the six months ended June 30, 2000 and 1999, respectively.
Amounts receivable for interest were $575 and $1,861 at June 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.
BFC has borrowed funds from LLC for use in operations at a variable interest
rate of approximately 5.7%. Loans payable to LLC were $3,263 and $2,513 as of
June 30, 2000 and December 31, 1999, respectively.
7. 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.
8. COMMITMENTS AND CONTINGENCIES
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.
BFH 11
WISE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE SIX MONTHS ENDED
JUNE 30, 2000 AND 1999
WH 1
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
THREE MONTHS ENDED
JUNE 30,
(In thousands except per share amounts) 2000 1999
---------------------------------------------------------------------------
<S> <C> <C>
Net sales $65,476 $59,016
Cost of goods sold 40,565 36,572
------- -------
Gross margin 24,911 22,444
Distribution expense 7,879 7,260
Marketing expense 10,235 8,661
General & administrative expense 4,092 5,488
------- -------
Operating income 2,705 1,035
Interest expense 155 166
Other expense 21 133
------- -------
Income before income taxes 2,529 736
Income tax expense 963 311
------- -------
Net income $ 1,566 $ 425
======= =======
Per Share Data
--------------
Basic and diluted income per common share $ 22.37 $ 6.07
Average number of common shares outstanding
during the period 70 70
---------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
</TABLE>
WH 2
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
SIX MONTHS ENDED
JUNE 30,
(In thousands except per share amounts) 2000 1999
------------------------------------------------------------------------------
<S> <C> <C>
Net sales $122,677 $108,972
Cost of goods sold 75,867 67,987
-------- ---------
Gross margin 46,810 40,985
Distribution expense 15,687 14,025
Marketing expense 19,339 16,797
General & administrative expense 8,279 9,863
-------- ---------
Operating income 3,505 300
Interest expense 271 285
Other expense 18 175
-------- ---------
Income (loss) before income taxes 3,216 (160)
Income tax expense (benefit) 1,232 (24)
-------- ---------
Net income (loss) $ 1,984 $ (136)
======== =========
Per Share Data
--------------
Basic and diluted income (loss) per common share $ 28.34 $ (1.94)
Average number of common shares outstanding
during the period 70 70
------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
</TABLE>
WH 3
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
(In thousands)
JUNE 30, DECEMBER 31,
ASSETS 2000 1999
-----------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 2,613 $ 2,072
Accounts receivable (less allowance for doubtful accounts
of $2,444 and $2,261, respectively) 24,199 22,690
Affiliated receivables 106 1
Inventories:
Finished goods 4,862 3,942
Raw materials and supplies 3,532 3,883
Deferred income taxes, net 1,598 1,923
Prepaid and other current assets 4,805 3,668
--------- ----------
41,715 38,179
--------- ----------
PROPERTY AND EQUIPMENT
Land 1,434 1,412
Buildings and improvements 6,513 6,103
Machinery and equipment 54,072 51,185
--------- ----------
62,019 58,700
Less accumulated depreciation 28,145 24,949
--------- ----------
33,874 33,751
--------- ----------
INTANGIBLES AND OTHER ASSETS
Trademarks (net of accumulated
amortization of $2,585 and $2,350, respectively) 16,226 16,461
Other assets 930 836
--------- ----------
17,156 17,297
--------- ----------
TOTAL ASSETS $ 92,745 $ 89,227
========= ==========
-----------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
</TABLE>
WH 4
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
(In thousands)
JUNE 30, DECEMBER 31,
LIABILITIES AND SHAREHOLDER'S EQUITY 2000 1999
---------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt payable within one year $ 3,900 $ 6,566
Accounts and drafts payable 18,030 12,996
Affiliated payables 131 238
Accrued liabilities 13,102 13,662
------- -------
35,163 33,462
------- -------
OTHER LIABILITIES
Deferred income taxes, net 582 1,539
Non-pension postemployment
benefit obligations 10,210 10,101
Affiliated employee benefit obligation 3,351 2,818
Other long-term liabilities 442 333
Minority interest 1,164 1,125
------- -------
15,749 15,916
------- -------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
SHAREHOLDER'S EQUITY
Common stock - $0.01 par value
70 shares authorized,
issued and outstanding - -
Preferred stock - $0.01 par value
30 shares authorized,
none issued and outstanding - -
Paid in capital 34,980 34,980
Retained earnings 6,853 4,869
------- -------
41,833 39,849
------- -------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $92,745 $89,227
======= =======
---------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
</TABLE>
WH 5
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
WISE HOLDINGS, INC. AND SUBSIDIARIES
SIX MONTHS ENDED
JUNE 30,
(In thousands) 2000 1999
------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income (loss) $ 1,984 $ (136)
Adjustments to reconcile net income (loss) to net cash
from operating activities
Minority interest's share in income (loss) 39 (1)
Depreciation 3,421 2,903
Amortization 235 235
Other non-cash 128 160
Net change in assets and liabilities:
Accounts receivable (1,692) 366
Affiliated receivables (105) (89)
Inventories (569) 790
Prepaid and other current assets (812) (27)
Other assets (94) 42
Accounts and drafts payable 5,034 652
Affiliated payables (107) (107)
Accrued liabilities (560) (1,977)
Post-employment benefits other than pensions 109 16
Affiliated employee benefit obligation 533 394
Other long-term liabilities (848) (186)
-------- --------
6,696 3,035
-------- --------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (3,697) (5,250)
Proceeds from sales of equipment 208 18
-------- --------
(3,489) (5,232)
-------- --------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Long-term borrowings - 2,450
Repayment of short-term borrowings (2,666) (61)
-------- --------
(2,666) 2,389
-------- --------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 541 192
Cash and equivalents at beginning of period 2,072 2,610
-------- --------
Cash and equivalents at end of period $ 2,613 $ 2,802
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest: $ 228 $ 345
Cash paid for taxes: 956 101
------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
</TABLE>
WH 6
WISE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except for per share information)
1. BACKGROUND
In September 1994, Borden, Inc. ("Borden") entered into a merger agreement that
provided for the acquisition (the "Acquisition") of all of Borden's outstanding
common stock by affiliates of Kohlberg Kravis Roberts & Co. ("KKR"). Borden
elected not to apply push down accounting in its consolidated financial
statements as a result of public debt that was outstanding prior to the
acquisition, and as such Borden's financial statements, including Wise Holdings,
Inc. ("Wise"), are reported on Borden's historical cost basis. As discussed in
the "Basis of Presentation," the accompanying financial statements of Wise have
been prepared on a purchase accounting basis from the date of KKR's acquisition
of Borden. The effective date of the merger agreement was January 1, 1995 for
accounting and financial statement presentation purposes.
Effective July 2, 1996, in a taxable transaction (the "Incorporation"), Borden
sold its salty snacks business ("Wise operations") to BW Holdings LLC
("BWHLLC"), a KKR affiliate, for $45 million. The purchase price was based on an
independent valuation of the business. There was no change in the financial
reporting basis of the assets and liabilities as of July 2, 1996 from that
described below under "Basis of Presentation" because Borden's principal
stockholders will continue to exercise significant financial control over Wise.
Wise fully and unconditionally guarantees obligations under Borden's credit
facility and all of Borden's publicly held debt on a pari passu basis. In
connection with this guarantee, Wise receives an annual fee of $210.
2. NATURE OF OPERATIONS
Wise is a producer and distributor of salty snacks in the eastern United States.
Wise's product line includes potato chips, cheese flavored baked and fried corn
snacks, pretzels, tortilla chips, corn chips, onion rings, pork rinds and other
assorted snacks. Wise markets its products under the brand names of WISE(R),
CHEEZ DOODLE(R), QUINLAN(R), NEW YORK DELI(R), KRUNCHERS!(R), BRAVO(R),
MOORE'S(R) AND WISE CHOICE(TM). Wise manufactures and distributes primarily in
the eastern United States. Wise's products are distributed through both
independent and company-owned distribution networks.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
-----------------------
As a result of the financial guarantee and in accordance with Regulation S-X
rule 3-10, Borden is required to include in its filings with the Securities and
Exchange Commission separate financial statements for Wise as if it were a
registrant. The accompanying financial statements were prepared on a purchase
accounting basis that allocates approximately $51 million of the original KKR
purchase price of Borden to the Wise operations. The purchase price has been
allocated to tangible and intangible assets and liabilities of Wise based on
independent appraisals and management estimates.
The consolidated financial statements include the accounts of Wise and its
subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation. Wise remains a wholly owned subsidiary of BWHLLC.
WH 7
The condensed consolidated financial statements of Wise collectively include the
financial position of Wise Holdings, Inc. and subsidiaries as of June 30, 2000
and December 31, 1999. These financial statements also include the statements of
operations of Wise for the three and six months ended June 30, 2000 and 1999 and
cash flows of Wise for the six months ended June 30, 2000 and 1999. These
unaudited interim condensed consolidated financial statements reflect all normal
and recurring adjustments that are, in the opinion of management, necessary for
the fair presentation of the results for the interim periods presented.
Per Share Information
-----------------------
Basic and diluted earnings (loss) per common share at June 30, 2000 and 1999 is
computed by dividing net income or loss by the weighted average number of common
shares outstanding during the period ended June 30, 2000 and 1999, respectively.
Use of Estimates
------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
most significant estimates in Wise's financial statements are related to
allowance for doubtful accounts, accruals for trade promotions, general and
group insurance, income taxes, postemployment benefits and asset lives. Actual
results could differ from those estimates.
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform with the 2000
presentation.
Recently Issued Accounting Statements
----------------------------------------
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 1999, the FASB issued SFAS 137,
which deferred the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000, and requires all derivatives be measured at fair value and
recorded on a company's balance sheet as an asset or liability, depending upon
the company's underlying rights or obligations associated with the derivative
instrument. Wise is investigating the impact of this pronouncement.
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 guidelines in this SAB will
not have material impact on the financial statements of Wise.
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. All provisions of the EITF are required to be
reflected no later than the fourth quarter of 2000. Wise is in the process of
accumulating and evaluating the information required to comply with this EITF
issue, which is not expected to have a material impact on reported net income,
however may result in an income statement reclassification of previously
reported amounts.
WH8
<PAGE>
4. ACCRUED LIABILITIES
<TABLE>
<CAPTION>
Accrued liabilities were as follows:
--------------------------------------------------------------------
June 30, December 31,
2000 1999
------- -------
<S> <C> <C>
Compensation $ 1,444 $ 2,670
General insurance 4,445 4,820
Advertising and promotion 3,139 3,800
Other 4,074 2,372
------- -------
Total $13,102 $13,662
------- -------
--------------------------------------------------------------------
</TABLE>
5. DEBT
AFFILIATED:
Wise entered into a loan agreement (the "Loan Agreement") to borrow funds from
Borden.
Revolving Loan
---------------
The Revolving Loan Agreement, as amended, provided for a revolving loan facility
of up to $5 million maturing in November 1999, at a variable interest rate equal
to Borden's cost of funds for 30 day LIBOR borrowings plus 0.25%. A commitment
fee of 0.10% is paid on the unused portion of the revolving loan.
In December 1999, Wise entered into a new revolving loan agreement, which
provided for a revolving facility of up to $15 million maturing in December 2000
at a variable interest rate equal to LIBOR borrowings plus between 75 and 175
basis points calculated using a debt to earnings ratio schedule. Wise had $3,900
and $6,450 of borrowings under this revolving agreement at June 30, 2000 and
December 31, 1999, respectively. A commitment fee between 0.15% and 0.35% is
paid on the unused portion of the revolving loan based on the same debt to
earnings ratio schedule.
Long-Term Loan
---------------
The Long Term Loan Agreement, as amended, also provided for a $10.145 million
term loan with a fixed interest rate of 11% maturing in November 2000. Wise
terminated this agreement in December 1999 and converted the remaining balance
to the revolving loan.
The Loan Agreement contains certain restrictions on the activities of Wise and
its subsidiaries, including restrictions on liens, the incidence of
indebtedness, mergers and consolidations, sales of assets, investments, payment
of dividends (requires prior approval from Borden, as creditor), changes in
nature of business, prepayments of certain indebtedness, transactions with
affiliates, capital expenditures, changes in control of the Company, hedging
activities and the use of proceeds from asset sales.
NON AFFILIATED:
Wise enters into unsecured agreements with a third party to finance insurance
premiums. Total borrowings under these agreements were $0 and $116 at June 30,
2000 and December 31, 1999, respectively.
WH 9
6. COMMITMENTS AND CONTINGENCIES
Environmental Contingencies
----------------------------
Wise, like others in similar businesses, is subject to extensive Federal, state
and local environmental laws and regulations. Although Wise's environmental
policies and practices are designed to ensure compliance with these laws and
regulations, future developments could require Wise to make additional
unforeseen environmental expenditures.
Environmental accruals are routinely reviewed as events and developments warrant
and are subject to an annual comprehensive review.
Litigation
----------
Wise is subject to various investigations, claims and legal proceedings covering
a wide range of matters in the ordinary course of its business activities. Each
of these matters is subject to various uncertainties and some of these matters
may be resolved unfavorably to Wise. Wise has established accruals for matters
that are probable and reasonably estimable. Management believes that any
liability that may ultimately result from the resolution of these matters in
excess of amounts provided will not have a material adverse effect on the
financial statements of Wise.
7. RELATED PARTIES
In addition to the affiliated debt agreement, Wise is engaged in various
transactions with Borden and its affiliated companies in the ordinary course of
business.
Borden provides certain administrative services to Wise at negotiated fees.
These services include: processing of payroll as well as active and retiree
group insurance claims and securing insurance coverage for catastrophic claims.
Wise reimburses the Borden subsidiary for payments for general disbursements and
general and group insurance and retirement benefit claims. The amount owed by
Wise for these services is included in affiliated payables and was $131 and $238
at June 30, 2000 and December 31, 1999, respectively.
In the first quarter of 2000, a subsidiary of Borden that provided certain
affiliated services was sold to a third party. The third party continues to
provide these services that include payroll processing and group insurance
claims. Subsequent to the sale of the subsidiary, fees for these services were
no longer considered affiliate charges.
In the second quarter of 2000, Wise began using a third party to provide certain
information system services that had previously been provided by a subsidiary of
Borden. Subsequent to the change in vendors, fees for these services were no
longer considered affiliate charges.
WH 10
<PAGE>
The following table summarizes the costs to Wise:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
Qtr ended June 30, Six months ended June 30,
2000 1999 2000 1999
----- ----- ------ ------
<S> <C> <C> <C> <C>
Employee benefits $326 $ 431 $ 713 $ 843
Group and general insurance 12 219 289 652
Information services 12 152 188 281
Corporate staff departments
and overhead 151 136 288 384
----- ----- ------ ------
$501 $ 938 $1,478 $2,160
===== ===== ====== ======
---------------------------------------------------------------------------------
</TABLE>
Wise also invests excess cash with Borden in one-day investments that totaled
$1,200 and $1,150 at June 30, 2000 and December 31, 1999, respectively, which is
included as a component of cash.
WH 11
