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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549

                                    FORM 10-Q



X    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
- -    EXCHANGE ACT OF 1934.                                                    

For the quarterly period ended             September 30, 1998
                              -----------------------------------------


Commission file number                   I-71
                      --------------------------------------------------

                                  BORDEN, INC.



          New Jersey                                        13-0511250
- ----------------------------------                ------------------------------
 (State or other jurisdiction of                         (I.R.S. Employer
  incorporation or organization)                        Identification No.)


                    180 East Broad Street, Columbus, OH 43215
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                    (Address of principal executive offices)

                                 (614) 225-4000
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              (Registrant's telephone number, including area code)

                                 Not Applicable
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              (Former name, former address and former fiscal year,
                         if changed since last report.)


Indicate by check mark whether the registrant(1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X   No
                                      ---    ---

Number of shares of common stock, $0.01 par value, outstanding as of the close
of business on November 12, 1998: 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 Condensed Financial
Statements of Borden Foods Holdings Corporation ("Foods Holdings"). The
consolidated statements present the Company after the effect of the sales of (i)
the Company's former salty snacks business ("Wise") to Wise Holdings and its
subsidiaries and (ii) the Company's former domestic and international foods
business ("Foods") to Foods Holdings and its subsidiaries, as explained in Note
1 to the consolidated and combined financial statements. The Company, Wise
Holdings, and Foods Holdings are controlled by BW Holdings, LLC ("BWHLLC"). The
consolidated financial statements are those of the Company, which is the SEC
Registrant.

The Borden, Inc. and Affiliates ("the Combined Companies") condensed combined
financial statements are included herein to present the Company on a combined
historical basis, including the financial position, results of operations and
cash flows of Wise and Foods. The Combined Companies condensed financial
statements are included because management of the Company continues to control
significant financial and managerial decisions with respect to Wise Holdings and
Foods Holdings. In accordance with rule 3-10 of Regulation S-X, the condensed
financial statements of Wise Holdings and Foods Holdings are included in Part II
of this Quarterly Report on Form 10-Q because Wise Holdings and Foods Holdings
are guarantors of the Company's credit facility and all of the Company's
outstanding publicly held debt. The Combined Companies condensed financial
statements do not reflect pushdown accounting and therefore present financial
information on a basis consistent with that on which credit was originally
extended to the Company.



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                                  BORDEN, INC.

                                      INDEX




PART I - FINANCIAL INFORMATION

BORDEN, INC. ("BORDEN")  CONDENSED  CONSOLIDATED AND
BORDEN, INC. AND AFFILIATES CONDENSED COMBINED FINANCIAL STATEMENTS

                                                                                                     
     Condensed Consolidated Statements of Operations and Comprehensive Income,
         three months ended September 30, 1998 and 1997..................................................  4
         nine months ended September 30, 1998 and 1997...................................................  6
     Condensed Consolidated Balance Sheets, September 30, 1998, and December 31, 1997....................  8
     Condensed Consolidated Statements of Cash Flows,
         nine months ended September 30, 1998 and 1997................................................... 10
     Condensed Consolidated Statement of Shareholders' Equity,
         nine months ended September 30, 1998............................................................ 12
     Condensed Combined Statements of Operations and Comprehensive Income,
         three months ended September 30, 1998 and 1997.................................................. 13
         nine months ended September 30, 1998 and 1997................................................... 14
     Condensed Combined Balance Sheets, September 30, 1998, and December 31, 1997........................ 15
     Condensed Combined Statements of Cash Flows, nine months ended September 30, 1998 and 1997.......... 17
     Condensed Combined Statement of Shareholders' Equity, nine months ended September 30, 1998.......... 19
     Notes to Condensed Consolidated and Combined Financial Statements................................... 20


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 25


PART II - OTHER INFORMATION

Item 1. Legal Proceedings ............................................................................... 35

Item 6. Exhibits, Guarantor Financial Statement Schedules and Reports on Form 8-K........................ 35
3 4
- -------------------------------------------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED) BORDEN, INC. Three Months Ended September 30, (In millions, except per share data) 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Net sales $ 335.6 $ 371.5 Cost of goods sold 237.2 279.6 --------------- ---------------- Gross margin 98.4 91.9 --------------- ---------------- Distribution expense 12.5 13.7 Marketing expense 20.6 24.3 General & administrative expense 30.0 24.2 --------------- ---------------- Operating income 35.3 29.7 --------------- ---------------- Interest expense 15.6 23.4 Affiliated interest expense (income), net of affiliated interest income of $0.4 and $6.2, respectively 5.9 (5.4) Interest income and other (7.2) (5.3) --------------- ---------------- Income from continuing operations before income tax 21.0 17.0 Income tax expense 9.3 5.4 --------------- ---------------- Income from continuing operations 11.7 11.6 --------------- ---------------- Discontinued operations: Income from operations, net of tax - 6.9 Income from disposal, net of tax 5.3 154.4 --------------- ---------------- Net income 17.0 172.9 Preferred stock dividends (18.4) (18.4) --------------- ---------------- Net (loss) income applicable to common stock $ (1.4) $ 154.5 =============== ================ Comprehensive income (See Note 6) $ 17.1 $ 167.8 =============== ================
4 5
- -------------------------------------------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED) (continued) BORDEN, INC. Three Months Ended September 30, (In millions, except per share data) 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Basic and Diluted Per Share Data - -------------------------------- Income from continuing operations $ 0.05 $ 0.06 Discontinued operations: Income from operations - 0.03 Income from disposal 0.03 0.78 --------------- ---------------- Net income 0.08 0.87 Preferred stock dividends (0.09) (0.09) --------------- ---------------- Net (loss) income applicable to common stock $(0.01) $ 0.78 =============== ================ 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 - -------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Combined Financial Statements 5 6
- -------------------------------------------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED) BORDEN, INC. Nine Months Ended September 30, (In millions, except per share data) 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Net sales $ 1,071.1 $ 1,120.3 Cost of goods sold 771.9 845.1 ---------------- ---------------- Gross margin 299.2 275.2 ---------------- ---------------- Distribution expense 39.0 40.0 Marketing expense 63.2 68.0 General & administrative expense 98.7 85.6 Business realignment 5.5 - (Gain) on divestiture of business (8.3) - ---------------- ---------------- Operating income 101.1 81.6 ---------------- ---------------- Interest expense 47.8 71.2 Affiliated interest expense (income), net of affiliated interest income of $2.0 and $19.7, respectively 16.1 (17.0) Interest income and other (20.6) (5.2) ---------------- ---------------- Income from continuing operations before income tax 57.8 32.6 Income tax expense 25.8 13.2 ---------------- ---------------- Income from continuing operations 32.0 19.4 ---------------- ---------------- Discontinued operations: Income from operations, net of tax 2.3 26.5 Income from disposal, net of tax 31.3 154.4 ---------------- ---------------- Net income 65.6 200.3 Preferred stock dividends (55.3) (55.3) ---------------- ---------------- Net income applicable to common stock $ 10.3 $ 145.0 ================ ================ Comprehensive income (See Note 6) $ 60.1 $ 186.2 ================ ================
6 7
- -------------------------------------------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED) (continued) BORDEN, INC. Nine Months Ended September 30, (In millions, except per share data) 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Basic and Diluted Per Share Data - -------------------------------- Income from continuing operations $ 0.16 $ 0.10 Discontinued operations: Income from operations 0.01 0.13 Income from disposal 0.16 0.78 --------------- ---------------- Net income 0.33 1.01 Preferred stock dividends (0.28) (0.28) --------------- ---------------- Net income applicable to common stock $ 0.05 $ 0.73 =============== ================ Dividends per common share $ 0.24 $ 0.19 Dividends per preferred share $ 2.25 $ 2.25 Average number of common shares outstanding during the period 199.0 199.0 - --------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Combined Financial Statements 7 8
- ---------------------------------------------------------------------------------------------------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) BORDEN, INC. (In millions) September 30, December 31, ASSETS 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and equivalents $ 701.0 $ 183.6 Accounts receivable (less allowance for doubtful accounts of $10.1 and $9.4, respectively) 230.2 242.2 Amount due from unconsolidated affiliate 3.9 - Inventories: Finished and in-process goods 64.7 74.8 Raw materials and supplies 43.3 54.3 Deferred income taxes 92.6 106.1 Other current assets 20.7 34.9 Net assets of discontinued operations (See Note 5) - 165.2 -------------- ----------------- 1,156.4 861.1 -------------- ----------------- INVESTMENTS AND OTHER ASSETS Investments 111.3 109.5 Deferred income taxes 64.1 170.4 Prepaid pension assets 136.2 140.2 Other assets 29.6 34.3 Assets sold under contractual arrangement (net of allowance of $62.1 and $609.6, respectively) (See Note 2) 47.2 302.1 -------------- ----------------- 388.4 756.5 -------------- ----------------- PROPERTY AND EQUIPMENT Land 23.2 23.5 Buildings 93.5 106.8 Machinery and equipment 679.0 738.4 -------------- ----------------- 795.7 868.7 Less accumulated depreciation (322.3) (360.8) -------------- ----------------- 473.4 507.9 INTANGIBLES 67.9 80.4 -------------- ----------------- TOTAL ASSETS $2,086.1 $2,205.9 ============== ================= - ----------------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Combined Financial Statements 8 9
- ------------------------------------------------------------------------------------------------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) BORDEN, INC. (In millions, except share data) September 30, December 31, LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES Debt payable within one year $ 20.3 $ 6.9 Accounts and drafts payable 114.0 137.3 Income taxes payable 279.0 309.6 Loans payable with affiliates 430.7 4.0 Other current liabilities 257.5 328.8 ------------------ ----------------- 1,101.5 786.6 ------------------ ----------------- OTHER LIABILITIES Liabilities sold under contractual arrangement 41.6 230.1 Long-term debt 553.6 788.3 Non-pension post-employment benefit obligations 201.6 226.3 Other long-term liabilities 84.6 94.9 ------------------ ----------------- 881.4 1,339.6 ------------------ ----------------- Commitments and contingencies (See Note 8) SHAREHOLDERS' EQUITY Preferred stock - Issued 24,574,751 shares 614.4 614.4 Common stock - $0.01 par value: authorized 300,000,000 shares, Issued 198,974,994 shares 2.0 2.0 Paid in capital 365.2 384.0 Receivable from parent (426.6) (464.1) Accumulated other comprehensive income (53.5) (48.0) Accumulated deficit (398.3) (408.6) ------------------ ----------------- 103.2 79.7 ------------------ ----------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,086.1 $2,205.9 ================== ================= - -------------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Combined Financial Statements 9 10
- ----------------------------------------------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) BORDEN, INC. Nine Months Ended September 30, (In millions) 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES Net income $ 65.6 $ 200.3 Adjustments to reconcile net income to net cash from (used in) operating activities: (Gain) on disposal of discontinued operations (102.7) (248.2) (Gain) on divestiture of business (8.3) - Deferred tax provision 116.9 181.8 Depreciation and amortization 37.7 27.1 Unrealized (gain) on interest rate swap (1.1) (3.4) Loss on net assets sold under contractual arrangement 1.1 - Business realignment 5.5 - Net change in assets and liabilities: Trade receivables (23.9) (16.9) Inventories (1.5) 3.2 Trade payables (11.4) 6.3 Due from affiliate (3.9) - Income taxes (10.3) (42.0) Other assets 43.8 (9.8) Other liabilities (85.5) (145.6) Discontinued operations working capital 3.0 (0.2) ---------------- ---------------- 25.0 (47.4) ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (39.2) (97.2) Proceeds from the divestiture of businesses 335.9 419.1 Purchase of business (14.4) (4.2) Proceeds from the sale of fixed assets 5.5 Return on investment in affiliate 65.3 9.2 ---------------- ---------------- 347.6 332.4 ---------------- ---------------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES Net short-term debt borrowings 8.7 16.4 Borrowings of long-term debt - 362.4 Repayment of long-term debt (235.3) (642.8) Affiliated borrowings 426.7 - Interest received from parent 47.4 38.1 Common stock dividends paid (47.4) (38.1) Preferred stock dividends paid (55.3) (55.3) ---------------- ---------------- 144.8 (319.3) ---------------- ---------------- - -----------------------------------------------------------------------------------------------------------------------
10 11
- ---------------------------------------------------------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued) BORDEN, INC. Nine Months Ended September 30, (In millions) 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and equivalents $ 517.4 $ (34.3) Cash and equivalents at beginning of period 183.6 125.0 ---------------- ---------------- Cash and equivalents at end of period $ 701.0 $ 90.7 ================ ================ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid: Interest, net $ 31.0 $ 25.2 Taxes 13.5 21.0 Non-cash activity: Distribution of note receivable from Company's parent to cancel options 28.5 - Investment retained in Decorative Products 10.5 - Capital contribution by parent 34.5 18.1 Additional proceeds on Foods sale - 20.0 Reclassification of minimum pension liability adjustment to prepaid pension cost - 97.7 - ----------------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Combined Financial Statements 11 12
- ----------------------------------------------------------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) BORDEN, INC. (In millions) - ----------------------------------------------------------------------------------------------------------------------------------- Accumulated Preferred Common Paid-in Receivable Other Accumulated Stock Stock Capital from Comprehensive Deficit Total Parent Income - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 $ 614.4 $ 2.0 $ 384.0 $ (464.1) $ (48.0) $ (408.6) $ 79.7 - ----------------------------------------------------------------------------------------------------------------------------------- Net income 65.6 65.6 Cash dividends-preferred stock (55.3) (55.3) Cash dividends-common stock (47.0) (47.0) Translation adjustments and other (5.5) (5.5) Interest accrued on notes from parent 23.1 9.0 32.1 Capital contribution from parent 34.5 34.5 Cancel option on Decorative Products (29.4) 28.5 (0.9) - ----------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1998 $ 614.4 $ 2.0 $ 365.2 $ (426.6) $ (53.5) $ (398.3) $ 103.2 - -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Combined Financial Statements 12 13
- ------------------------------------------------------------------------------------------------------------------- CONDENSED COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED) BORDEN, INC. AND AFFILIATES Three Months Ended September 30, (In millions) 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Net sales $ 536.2 $ 835.6 Cost of goods sold 351.9 555.9 --------------- ---------------- Gross margin 184.3 279.7 --------------- ---------------- Distribution expense 28.8 44.4 Marketing expense 75.2 117.8 General & administrative expense 51.5 66.3 Business realignment 17.0 - (Gain) on divestiture of businesses (18.6) - --------------- ---------------- Operating income 30.4 51.2 --------------- ---------------- Interest expense 15.9 20.1 Affiliated interest expense 2.1 0.1 Interest income and other (8.0) (1.5) --------------- ---------------- Income from continuing operations before income tax 20.4 32.5 Income tax expense 9.3 22.1 --------------- ---------------- Income from continuing operations 11.1 10.4 --------------- ---------------- Discontinued operations: Income from operations, net of tax - 6.9 Income from disposal, net of tax 5.3 154.4 --------------- ---------------- Net income 16.4 171.7 Affiliate's share of income (1.0) - Preferred stock dividends (18.4) (18.4) --------------- ---------------- Net (loss) income applicable to common stock $ (3.0) $ 153.3 =============== ================ Comprehensive income (See Note 6) $ 14.2 $ 153.6 =============== ================ - -------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Combined Financial Statements 13 14
- ------------------------------------------------------------------------------------------------------------------- CONDENSED COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED) BORDEN, INC. AND AFFILIATES Nine Months Ended September 30, (In millions) 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Net sales $ 1,762.3 $ 2,557.3 Cost of goods sold 1,186.8 1,717.7 --------------- ---------------- Gross margin 575.5 839.6 --------------- ---------------- Distribution expense 93.2 130.2 Marketing expense 246.2 416.3 General & administrative expense 167.0 187.8 Business realignment 22.5 - (Gain) on divestiture of businesses (329.4) - --------------- ---------------- Operating income 376.0 105.3 --------------- ---------------- Interest expense 48.7 68.5 Affiliated interest expense 3.3 0.2 Interest income and other (23.7) (8.8) --------------- ---------------- Income from continuing operations before income tax 347.7 45.4 Income tax expense 99.7 28.4 --------------- ---------------- Income from continuing operations 248.0 17.0 --------------- ---------------- Discontinued operations: Income from operations, net of tax 2.3 26.5 Income from disposal, net of tax 31.3 154.4 --------------- ---------------- Net income 281.6 197.9 Affiliate's share of income (131.0) - Preferred stock dividends (55.3) (55.3) --------------- ---------------- Net income applicable to common stock $ 95.3 $ 142.6 =============== ================ Comprehensive income (See Note 6) $ 265.6 $ 151.8 =============== ================ - -------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Combined Financial Statements 14 15
- ----------------------------------------------------------------------------------------------------------------------------------- CONDENSED COMBINED BALANCE SHEETS (UNAUDITED) BORDEN, INC. AND AFFILIATES (In millions) September 30, December 31, ASSETS 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and equivalents $ 723.4 $ 198.6 Accounts receivable (less allowance for doubtful accounts of $13.7 and $16.7, respectively) 304.8 425.6 Inventories: Finished and in-process goods 123.3 192.1 Raw materials and supplies 64.3 101.2 Deferred income taxes 142.3 149.3 Other current assets 35.2 67.1 Net assets of discontinued operation (See Note 5) - 165.2 ----------------- ----------------- 1,393.3 1,299.1 ----------------- ----------------- INVESTMENTS AND OTHER ASSETS Investments 111.3 109.5 Deferred income taxes 78.6 223.6 Prepaid pension assets 147.1 151.2 Other assets 32.8 38.7 ----------------- ----------------- 369.8 523.0 ----------------- ----------------- PROPERTY AND EQUIPMENT Land 37.2 42.2 Buildings 194.7 255.1 Machinery and equipment 1,008.8 1,227.9 ----------------- ----------------- 1,240.7 1,525.2 Less accumulated depreciation (567.9) (731.8) ----------------- ----------------- 672.8 793.4 INTANGIBLES 394.9 434.2 ----------------- ----------------- TOTAL ASSETS $ 2,830.8 $ 3,049.7 ================= ================= - -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Combined Financial Statements 15 16
- ----------------------------------------------------------------------------------------------------------------------------- CONDENSED COMBINED BALANCE SHEETS (UNAUDITED) BORDEN, INC. AND AFFILIATES (In millions) September 30, December 31, LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES Debt payable within one year $ 26.3 $ 28.0 Accounts and drafts payable 183.2 248.6 Income taxes payable 301.6 353.0 Loans with affiliates 135.0 4.0 Other current liabilities 470.6 486.5 ---------------- ---------------- 1,116.7 1,120.1 ---------------- ---------------- OTHER LIABILITIES Long-term debt 558.2 794.9 Non-pension post-employment benefit obligations 219.9 245.5 Other long-term liabilities 116.8 135.2 ---------------- ---------------- 894.9 1,175.6 ---------------- ---------------- Commitments and contingencies (See Note 8) SHAREHOLDERS' EQUITY Preferred stock 614.4 614.4 Common stock 2.0 2.0 Paid in capital 658.8 666.5 Receivable from parent (426.6) (464.1) Affiliate's interest in subsidiary 51.0 203.3 Accumulated other comprehensive income (88.8) (181.2) Retained earnings (deficit) 8.4 (86.9) ---------------- ---------------- 819.2 754.0 ---------------- ---------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,830.8 $ 3,049.7 ================ ================ - -----------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Combined Financial Statements 16 17
- ---------------------------------------------------------------------------------------------------------------------- CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED) BORDEN, INC. AND AFFILIATES Nine Months Ended September 30, (In millions) 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES Net income $ 281.6 $ 197.9 Adjustments to reconcile net income to net cash from (used in) operating activities: (Gain) on disposal of discontinued operations (102.7) (248.2) (Gain) on divestiture of businesses (329.4) - Deferred tax provision 144.9 189.9 Depreciation and amortization 64.4 70.7 Unrealized (gain) on interest rate swap (1.1) (3.4) Business realignment 22.5 - Net change in assets and liabilities: Trade receivables 30.5 (5.3) Inventories 20.1 (3.1) Trade payables (35.1) (20.8) Income taxes (30.2) (87.6) Other assets 85.4 (7.5) Other liabilities (74.3) (132.1) Discontinued operations working capital 3.0 (0.2) ---------------- ---------------- 79.6 (49.7) ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (66.4) (125.1) Proceeds from the divestiture of businesses 1,063.2 419.1 Proceeds from the sale of fixed assets 15.8 16.2 Purchase of business (14.4) (5.3) ----------------- ---------------- 998.2 304.9 ---------------- ---------------- CASH FLOWS (USED IN) FINANCING ACTIVITIES Net short-term debt borrowings 10.5 22.5 Borrowings of long-term debt - 362.4 Repayment of long-term debt (236.0) (643.4) Distribution to affiliates (272.2) - Interest received from parent 47.4 38.1 Common stock dividends paid (47.4) (38.1) Preferred stock dividends paid (55.3) (55.3) ---------------- ---------------- (553.0) (313.8) ---------------- ---------------- - ----------------------------------------------------------------------------------------------------------------------
17 18
- -------------------------------------------------------------------------------------------------------------------------- CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED) BORDEN, INC. AND AFFILIATES Nine Months Ended September 30, (In millions) 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and equivalents $ 524.8 $ (58.6) Cash and equivalents at beginning of period 198.6 160.2 ---------------- --------------- Cash and equivalents at end of period $ 723.4 $ 101.6 ================ =============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid: Interest, net $ 32.9 $ 65.6 Taxes 76.5 40.5 Non-cash activity: Distribution of note receivable from Company's parent to cancel options 28.5 Investment retained in Decorative Products 10.5 Capital contribution by parent 34.5 18.1 Affiliate's share of income 131.0 Additional proceeds on Foods sale - 20.0 Reclassification of minimum pension liability adjustment to prepaid pension cost - 97.7 - --------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Combined Financial Statements 18 19
- ----------------------------------------------------------------------------------------------------------------------------------- CONDENSED COMBINED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) BORDEN, INC. AND AFFILIATES (In millions) - ------------------------------------------------------------------------------------------------------------------------------------ Accumulated Preferred Common Paid-in Receivable Affiliate's Other Retained Stock Stock Capital from Interest in Comprehensive Earnings Total Parent Subsidiary Income (Deficit) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1997 $ 614.4 $ 2.0 $ 666.5 $ (464.1) $ 203.3 $ (181.2) $ (86.9) $ 754.0 - ------------------------------------------------------------------------------------------------------------------------------------ Net income 281.6 281.6 Cash dividends-preferred (55.3) (55.3) Cash dividends-common stock (47.0) (47.0) Translation adjustments and other 92.4 92.4 Interest accrued on notes from parent 23.1 9.0 32.1 Cancel option on Decorative Products (29.4) 28.5 (0.9) Capital contribution from parent 34.5 34.5 Affiliate's interest in subsidiary 11.1 (152.3) (131.0) (272.2) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, September 30, 1998 $ 614.4 $ 2.0 $ 658.8 $ (426.6) $ 51.0 $ (88.8) $ 8.4 $ 819.2 - ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Combined Financial Statements 19 20 NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS (Dollars in millions except per share amounts and as otherwise indicated) 1. BASIS OF PRESENTATION Borden, Inc. (the "Company") conducts operations in the following businesses: adhesives and resins ("Chemical"), and consumer adhesives and infrastructure management services ("Consumer Products and Services"). Borden, Inc. and Affiliates (the "Combined Companies") includes the financial condition and results of operations of the Company with the financial condition and results of operations of the Company's former international and domestic food operations ("Foods") and former salty snacks business ("Wise"). The Company's principal lines of business formerly included Foods and Wise. Subsidiaries of BW Holdings, LLC ("BWHLLC"), an affiliate of the Company's parent, together with subsidiaries of Wise Holdings, Inc. ("Wise Holdings") and subsidiaries of Borden Foods Holdings Corporation ("Foods Holdings,") purchased Wise and Foods on July 2, 1996 and October 1, 1996, respectively. As a result of these sales, Wise and Foods, as of their respective sale dates, are no longer legally part of Borden, Inc. (the "Registrant") on a consolidated basis. However, management of the Registrant continues to exercise significant operating and financial control over Wise and Foods. In addition, Wise Holdings and Foods Holdings provide financial guarantees to obligations under the Company's credit facility and all of the Company's outstanding publicly held debt. Because of the aforementioned control and guarantees, the Company has included, supplementally in this filing, the Combined Companies financial condition and results of operations and cash flows. The Combined Companies present financial information on a basis consistent with that upon which credit was originally extended to the Company. The accompanying unaudited interim consolidated and combined financial statements contain all adjustments, consisting only of normal adjustments, which in the opinion of management are necessary for a fair statement of the results for the interim periods. Results for the interim periods are not necessarily indicative of results for the full years. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ASSETS AND LIABILITIES HELD UNDER CONTRACTUAL ARRANGEMENTS - Management of the Company exercises significant control over and has provided financing to Wise and Foods. Becuase of this continuing financial interest, the assets and liabilities of Wise and Foods, as of their respective sale dates, were classified as "sold under contractual arrangements" in the consolidated financial statements. In addition, losses incurred by Wise and Foods were recorded in the consolidated financial statements to the extent of the Company's net investment in Wise and Foods. During the first quarter of 1998, Foods Holdings repaid its note to the Company relating to the October 1, 1996, purchase of Foods. This allowed the Company to treat the transaction as a divestiture, and as such the investment in Foods is no longer carried on the consolidated balance sheet. At September 30, 1998, the Company's net investment in Wise was $5.6. The December 31, 1997, net investment totaled $6.5 for Wise and $65.5 for Foods. For the nine months ended September 30, 1998, the Company recorded losses on the continuing investment totaling $1.1. The losses are recorded as other non-operating expense in the consolidated results of operations. The Combined Companies continue to report Wise and Foods at the Company's historical values since they remain members of the controlled group and since in management's best estimate, future operating cash flows from Wise and Foods are expected to exceed the historical carrying values of the businesses. RECENTLY ISSUED ACCOUNTING STATEMENTS - Recently, the Financial Accounting Standards Board has issued Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information," Financial Accounting Standard No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," and Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company is currently considering the impact of these pronouncements. 20 21 RECLASSIFICATION - Certain prior year amounts have been reclassified to conform with the 1998 presentation. 3. BUSINESS REALIGNMENT, ACQUISITIONS AND DIVESTITURES On February 6, 1998, the Company completed the acquisition of the resins and compounds division ("PMC") of Sun Coast Industries, Inc. for $14.4 in cash. The acquisition was accounted for using the purchase method and accordingly its results of operations have been included from the date of acquisition. On January 24, 1998, the Combined Companies completed the sale of the Signature Flavor businesses. The sale generated proceeds of $376.5 and a pre-tax gain of $296.9 ($237.2 after tax.) On February 12, 1998, the Combined Companies sold the KLIM business, including the KLIM milk powder business in Latin America and Asia, the non-dairy coffee creamer operations in South Africa, and the ice cream business in Puerto Rico. The Combined Companies received $335.7 for the sale of these operations and recognized an after tax loss of $19.1 ($1.5 gain before tax) in a prior year. On April 29, 1998, the Company completed the divestiture of its commercial and industrial wallcoverings business. Proceeds from the sale were approximately $15.6, and the pre-tax loss of $55.0 on the sale ($26.8 after tax) was recorded in a prior period. The business was previously classified within Businesses Held for Sale. On May 22, 1998, the Combined Companies sold a distributor in Puerto Rico. Proceeds were $8.8 million, and a pre-tax gain of $1.1 was recorded on the sale ($0.2 after tax.) On June 30, 1998, the Company sold a plastic films business in Latin America for cash proceeds of $15.5. The Company recorded a pre-tax gain of $8.3 on the sale ($6.0 after tax.) Included in the Combined Companies' other current liabilities at September 30, 1998, is approximately $124.3 of divestiture reserves related to the sales of Foods Unaligned businesses. Of this amount, approximately $26.0 relates to non-cash charges associated with assets to be sold. In the third quarter of 1998, the Combined Companies recorded gains of $18.6 ($11.2 after tax) related to a change in estimate to settle certain outstanding liabilities related to the sales of Foods Unaligned businesses. In the third quarter of 1998, the Combined Companies recorded a $23.1 charge related to consolidation of the pasta business, including a $6.1 charge recorded in cost of goods sold related to an adjustment of an inventory purchase commitment to fair market value. 4. AFFILIATE'S SHARE OF INCOME In association with the divestiture of the Signature Flavor businesses, an affiliate of the Company's parent (the "Affiliate") was allocated income of $130.0 (see accompanying combined statements of operations) in accordance with the limited partnership agreement between Foods and the Affiliate. In the second quarter of 1998, $272.2 was distributed to the Affiliate. 5. DISCONTINUED OPERATIONS The following operations are separate segments of the Company's business as defined by generally accepted accounting principles and have been reclassified to discontinued operations in the 1998 and 1997 statements of operations and cash flows. In addition, net assets relating to the Decorative Products business of $165.2 at December 31, 1997, have been reclassified to discontinued operations in the 1997 consolidated and combined balance sheets. 21 22 Decorative Products ------------------- On March 13, 1998, the Company completed the sale of its Decorative Products business. Proceeds consisted of $304.8 in cash plus a retained equity interest of 11 percent. The Company recorded a pre-tax gain of $90.7 ($26.0 after tax) in discontinued operations during the first quarter of 1998. In the third quarter of 1998, the Company recorded an additional gain of $12.0 ($5.3 after tax) related to the final settlement of the sale price. Immediately prior to the transaction the Company canceled options on all of the common stock of the Decorative Products business. The options were issued in 1996 to BWHLLC for $31.0 in exchange for notes receivable from the Company's parent. The cancellation payment of $28.5, also made in notes receivable from the Company's parent, was based on an independent valuation. Dairy ----- On September 4, 1997, the Company completed the sale of its dairy operations. The results included in the statement of operations for Decorative Products and Dairy discontinued operations follow:
THREE MONTHS ENDED SEPTEMBER 30, -------------------------------- 1998 1997 - --------------------------------------------------------------------------------------------------------------- Net sales $ - $ 215.6 Income before income taxes - 10.4 Income tax expense - 3.5 Income from discontinued operations - 6.9 - --------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1998 1997 - --------------------------------------------------------------------------------------------------------------- Net sales $ 73.2 $ 827.0 Income before income taxes 3.5 44.1 Income tax expense 1.2 17.6 Income from discontinued operations 2.3 26.5 - ---------------------------------------------------------------------------------------------------------------
6. COMPREHENSIVE INCOME Comprehensive income was computed as follows:
THREE MONTHS ENDED SEPTEMBER 30, -------------------------------- CONSOLIDATED COMBINED -------------- -------------- 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Net income $ 17.0 $ 172.9 $ 16.4 $ 171.7 Foreign currency translation adjustments 0.1 (5.1) (2.2) (18.1) ------ -------- ------- -------- Comprehensive income $ 17.1 $ 167.8 $ 14.2 $ 153.6 - --------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- CONSOLIDATED COMBINED -------------- -------------- 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Net income $ 65.6 $ 200.3 $ 281.6 $ 197.9 Foreign currency translation adjustments (5.5) (14.1) 92.4 (46.1) Less: Reclassification adjustments - - (108.4) - ------- -------- -------- -------- Comprehensive income $ 60.1 $ 186.2 $ 265.6 $ 151.8 - ---------------------------------------------------------------------------------------------------------------------
The reclassification adjustment represents the accumulated translation adjustment recognized on the sale of the Combined Companies' KLIM business. 22 23 7. RELATED PARTY TRANSACTIONS During the first quarter of 1998, the Company collected a note from Foods Holdings that stemmed from the October 1, 1996, purchase of Foods by Foods Holdings. The note repayment ends the Company's remaining financial interest in Foods. As a result, the Company eliminated Foods assets and liabilities held under contractual arrangements in the December 31, 1997, consolidated balance sheet. In 1998, the Company accounts for transactions with Foods as unconsolidated affiliated balances, not as an investment. The Company is engaged in various transactions with Foods in the ordinary course of business. These transactions include the processing of payroll and active and retiree group claims. Foods reimburses the Company for payments for general disbursements and group insurance. The amount due from Foods at September 30, 1998, was $3.9. In addition, Foods and BWHLLC, an affiliate of the Company's parent, invested cash not used in operations with the Company. At September 30, 1998, Foods had $295.7 invested with the Company and BWHLLC had $135.0 invested with the Company. This is reflected as net loans payable to unconsolidated affiliates in the consolidated balance sheet. The Foods investment eliminates in the Combined Companies' financial statements. The Company provides infrastructure management services to Foods and Wise. Fees received for these services are offset against the Company's general and administrative expenses. The fees from Foods and Wise offsetting the Company's general and administrative expenses for the three months ended September 30, 1998 and September 30, 1997 approximated $4.1 and $5.7, respectively. The amount of revenue from Foods and Wise offsetting the Company's general and administrative expenses for the nine months ended September 30, 1998 and September 30, 1997 approximated $12.3 and $17.2, respectively. 8. 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 the Company's and Combined Companies' 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 and are subjected to a comprehensive review annually during the fiscal fourth quarter. The Company and the Combined Companies have each accrued approximately $19.0 and $23.0 at September 30, 1998, and December 31, 1997, respectively, for probable environmental remediation and restoration liabilities. This is management's best estimate of these liabilities, based on currently available information and analysis. The Company and Combined Companies believe that it is reasonably possible that costs associated with such liabilities may exceed current reserves by amounts that may prove insignificant, or by amounts, in the aggregate, of up to approximately $12.0. LEGAL MATTERS - The Company and Combined Companies have recorded liabilities of $20.2 and $34.8, respectively, at September 30, 1998, for legal costs that management believes are probable and reasonably estimable. These liabilities at December 31, 1997, totaled $21.0 on a consolidated basis and $35.8 on a combined basis. Actual costs are not expected to exceed these amounts. In addition, the Company and Combined Companies may be held responsible for certain environmental liabilities incurred at Borden Chemicals and Plastics Limited Partnership facilities, which were previously owned by the Company. The Company and Combined Companies believe, based upon the information management currently possesses, and 23 24 taking into account established reserves for estimated liability and insurance coverage, that the ultimate outcome of the foregoing proceedings and actions is unlikely to have a material adverse effect on the Company's or Combined Companies' financial position or operating results. OTHER COMMITMENTS - A wholly owned subsidiary serving as general partner of Borden Chemicals and Plastics Limited Partnership ("BCP") has certain fiduciary responsibilities to BCP's unitholders. The Company believes that such responsibilities will not have a material adverse effect on its financial statements. 24 25 PART I FINANCIAL INFORMATION - ---------------------------- Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Following is a comparison of sales and operating income by business unit. (Dollars in millions) - -----------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- ------------------------------- NET SALES 1998 1997 1998 1997 - --------- ---- ---- ---- ---- Chemical $ 306.3 $ 318.6 $ 949.7 $ 965.0 Consumer Products and Services 29.3 27.0 84.6 75.9 Businesses Held for Sale -- 25.9 36.8 79.4 -------- -------- ---------- ---------- CONSOLIDATED NET SALES $ 335.6 $ 371.5 $ 1,071.1 $ 1,120.3 Foods ongoing 133.9 149.0 410.4 528.5 Foods Unaligned 11.1 253.8 110.1 727.9 -------- -------- ---------- ---------- Total Foods 145.0 402.8 520.5 1,256.4 Wise 55.6 61.3 170.7 180.6 -------- -------- ---------- ---------- COMBINED NET SALES $ 536.2 $ 835.6 $ 1,762.3 $ 2,557.3 ======== ======== ========== ========== OPERATING INCOME Chemical $ 37.8 $ 30.2 $ 113.0 $ 95.2 Consumer Products and Services 1.3 0.5 5.4 4.3 Corporate (3.8) (1.8) (15.9) (20.7) -------- -------- ---------- ---------- Subtotal 35.3 28.9 102.5 78.8 Businesses Held for Sale -- 0.8 (1.4) 2.8 -------- -------- ---------- ---------- CONSOLIDATED OPERATING INCOME $ 35.3 $ 29.7 $ 101.1 $ 81.6 Foods ongoing (22.5) (9.3) (42.1) (34.0) Gain on sale 18.6 -- 321.1 -- Foods Unaligned (1.6) 28.3 (1.8) 56.9 -------- -------- ---------- ---------- Total Foods (5.5) 19.0 277.2 22.9 Wise 0.6 2.5 (1.5) 0.8 Combining adjustments -- -- (0.8) -- -------- -------- ---------- ---------- COMBINED OPERATING INCOME $ 30.4 $ 51.2 $ 376.0 $ 105.3 ======== ======== ========== ========== - -----------------------------------------------------------------------------------------------------
25 26 CONSOLIDATED AND COMBINED THREE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS THREE MONTHS ENDED SEPTEMBER 30, 1997 Consolidated Summary - -------------------- Consolidated net sales declined $35.9 million or 10% from 1997 to $335.6 million. The majority of this decline was caused by the sale of the Company's commercial and industrial wallcoverings business (formerly classified as "Businesses Held for Sale") in April 1998. Lower Chemical sales, caused by the negative impact of foreign exchange rates in Asia and Latin America, also contributed to the decline. Consolidated operating income increased $5.6 million or 19% from 1997 to $35.3 million. This improvement reflects income from recently acquired Chemical businesses, as well as slightly higher margins in the forest products business, partially offset by lower contributions from Chemical businesses in Latin America and Asia. Combined Summary - ---------------- Combined sales declined $299.4 million or 36%, primarily reflecting the sale of Foods Unaligned businesses in 1998 and late 1997 and the exit from unprofitable private label sales in the Foods ongoing businesses, as well as the factors described for the Consolidated Company. Operating income declined $20.8 million or 41%, due mainly to the absence of $29.9 million of income from divested businesses and charges of $23.1 million taken in the third quarter for capacity reduction in the pasta businesses, partially offset by improvements in the ongoing Foods businesses, a gain of $18.6 million related to a change in estimate to settle certain outstanding liabilities related to the sales of Foods Unaligned businesses and the $5.6 million improvement described for the Consolidated Company. Chemical - -------- Chemical sales declined $12.3 million or 4% from 1997. This decrease reflects the approximate $12.0 million negative impact of currency exchange rates in Canada, Latin America and, most significantly, Asia Pacific, with lower pricing and European and Latin America sales declines offset by incremental sales from the new melamine and derivatives product line acquired within the last year. The unfavorable impact of lower pricing compared to 1997 was approximately $15 million and reflects highly competitive market conditions and contractual arrangements with customers that provide for the pass-through of significantly lower raw material costs, primarily for methanol, phenol and urea. A modest overall increase in volume, consisting primarily of improvement in North America that was partially offset by a substantial decline in Latin America, had a positive impact on sales of approximately $6 million. The melamine and derivatives product line includes Melamine Chemicals and the resins and compounds business of Sun Coast Industries, purchased in late 1997 and early 1998, respectively. This product line provided incremental sales of approximately $17 million in third quarter 1998 in response to strong pricing and market demand. Management expects these favorable conditions to continue throughout the remainder of 1998. The closure of a European operation and the sale of the Latin America plastic films business accounted for most of the remaining sales decline from 1997. Operating income increased $7.6 million or 25% from 1997. This improvement is due primarily to the melamine and derivatives businesses purchased in late 1997. Improved margins in North America, due to lower raw materials costs in the forest products business, also contributed to increased operating income. Operating income in Latin America declined significantly from the prior year due to poor economic conditions in the region that have resulted in receivable write-offs and increased inventory carrying costs due to slow sales. 26 27 Consumer Products and Services - ------------------------------ Consumer Products and Services sales increased $2.3 million or 9% from 1997 to $29.3 million. The increase was the result of infrastructure management services revenues from businesses outside the Combined Companies, as well as slightly higher seasonal sales in the consumer adhesives business. Operating income increased $0.8 million to $1.3 million. The increase was the result of improved sales of higher margin products in the consumer adhesives business, partially offset by administrative costs in the infrastructure management services business. Corporate - --------- Corporate general and administrative expenses increased by $2.0 million from $1.8 million of expenses in 1997 to $3.8 million in 1998. This increase was due mainly to timing differences in normal business expenses. Foods - ----- Foods sales from ongoing businesses decreased $15.1 million or 10% from 1997. This decline was the expected result of a reduction in pasta volume due to management's strategic decisions to exit the unprofitable private label business and unprofitable markets, and to eliminate low margin product lines and brands. The impact of these strategic decisions began to affect sales in the last four months of 1997. Sales for Foods Unaligned businesses fell $242.7 million from 1997, reflecting the sale of most of these businesses in early 1998 and late 1997. Foods operating results from ongoing operations declined $13.2 million to a loss of $22.5 million. This loss was due primarily to charges of $23.1 million during the third quarter related to consolidation of pasta production, including a $6.1 million charge recorded in cost of goods sold related to an adjustment of an inventory purchase commitment to fair market value . Excluding these nonrecurring expenses, ongoing operating results improved by $9.9 million to income of $0.6 million, primarily driven by lower corporate general and administrative expenses, the favorable net impact of exiting the unprofitable businesses described above, and improved manufacturing and trade promotion costs and efficiencies. Foods Unaligned businesses' results declined $29.9 million from 1997 due to the sale of most of these businesses in early 1998 and late 1997. In addition, Foods recorded gains of $18.6 million during the third quarter of 1998 related to a change in estimate to settle certain outstanding liabilities related to the sales of Foods Unaligned businesses. Wise - ---- Wise sales decreased $5.7 million or 9% from 1997 to $55.6 million. This decrease is due primarily to the absence of sales of $4.3 million from a business divested in 1998, augmented by a loss in volume due to competitors' ongoing pricing promotions and new product introductions. Operating income declined $1.9 million from 1997 to $0.6 million. This was primarily the result of reduced gross margins and sales volume declines. 27 28 CONSOLIDATED AND COMBINED NINE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1997 Consolidated Summary - -------------------- Consolidated net sales declined $49.2 million or 4% from 1997 to $1,071.1 million. The majority of this decline was caused by the sale of the Company's commercial and industrial wallcoverings business (formerly classified as "Businesses Held for Sale") in April 1998. Lower Chemical sales also contributed to the decline, caused primarily by the negative impact of foreign exchange rates in Asia and Latin America, and by unfavorable pricing, partially offset by incremental sales from new businesses and other volume improvements. Consolidated operating income increased $19.5 million or 24% from 1997 to $101.1 million. This improvement reflects income from recently acquired Chemical businesses, as well as slightly higher margins in the forest products business. Management and settlement of assets and liabilities relating to businesses sold in prior years also improved. These improvements were partially offset by lower contributions from Chemical businesses in Latin America and Asia than in 1997. Combined Summary - ---------------- Combined sales declined $795.0 million or 31%, reflecting the sale of Foods Unaligned businesses in 1998 and late 1997 and the exit from unprofitable private label sales in the Foods ongoing businesses, as well as the factors described for the Consolidated Company. Operating income improved $270.7 million, due mainly to gains of $321.1 on the sale of certain Foods Unaligned businesses. Excluding this gain, operating results declined $50.4 million, reflecting the absence of $58.7 million of income from divested businesses, charges of $23.1 million taken in the third quarter for capacity reduction in the pasta business offset by improvements in the ongoing Foods business, and the factors described for the Consolidated Company. Chemical - -------- Chemical sales declined $15.3 million or 2% from 1997. The impact on sales of unfavorable Canada, Latin America and Asia Pacific currency exchange rates was approximately $36 million, with half of the impact coming from Asia Pacific. Excluding this impact, Chemical sales were up over $20 million. The unfavorable impact of lower pricing compared to 1997 was approximately $30 million and reflects highly competitive market conditions and contractual arrangements with customers that provide for the pass-through of significantly lower raw material costs, primarily for methanol, phenol and urea. A modest overall increase in volume, consisting primarily of improvement in North America that was partially offset by substantial decline in Latin America, had a positive impact on sales of approximately $9 million. The melamine and derivatives product line includes Melamine Chemicals and the resins and compounds business of Sun Coast Industries, purchased in late 1997 and early 1998, respectively. This product line provided incremental sales of approximately $51 million in 1998 in response to strong pricing and market demand. Management expects these favorable conditions to continue throughout the remainder of 1998. The closure of a European operation and the sale of the Latin America plastic films business accounted for most of the remaining sales decline from 1997. 28 29 Operating income increased $17.8 million or 19% from 1997. This improvement is due primarily to the melamine and derivatives businesses purchased within the past year. Improved margins in North America, due primarily to lower raw materials costs in the forest products business, also contributed to increased operating income. Operating income in Latin America declined significantly from the prior year due to poor economic conditions in the region that have resulted in receivable write-offs and increased inventory carrying costs due to slow sales. Also, the second quarter sale of a Latin American plastic films business produced a gain of $8.3 million, which was partially offset by a $5.5 million severance charge related to the closure of a European operation. Consumer Products and Services - ------------------------------ Consumer Products and Services sales increased $8.7 million or 11% from 1997 to $84.6 million. This increase is primarily from improved seasonal sales in the consumer adhesives business and infrastructure management services revenues from businesses outside the Company. Operating income increased $1.1 million or 26% to $5.4 million, reflecting improved sales of higher margin products in the consumer adhesives business, partially offset by higher administrative costs in the infrastructure management services business. Corporate - --------- Corporate general and administrative expenses improved $4.8 million or 23% from 1997 to a loss of $15.9 million. This improvement was primarily the result of improved settlement of assets and liabilities relating to businesses sold in prior years and other one-time administrative charges. The remainder of the fluctuation is attributable to timing differences in normal business expenses. Foods - ----- Foods sales from ongoing businesses decreased $118.1 million or 22% from 1997. This decline was the expected result of a reduction in pasta volume due to management's strategic decisions to exit the unprofitable private label business and unprofitable markets, and to eliminate low margin product lines and brands. The impact of these strategic decisions began to affect sales in the last four months of 1997. Sales for Foods Unaligned businesses declined $617.8 million, reflecting the sale of most of these businesses in 1998 and late 1997. Foods operating results from ongoing operations declined $8.1 million to a loss of $42.1 million. This decline was the result of charges of $23.1 million in 1998 related to consolidation of pasta production, including a $6.1 million charge recorded in cost of goods sold related to an adjustment of an inventory purchase commitment to fair market value. Higher raw material costs also affected operating results, but were more than offset by lower general and administrative expenses, the favorable net impact of exiting the unprofitable businesses described above, and improved manufacturing and trade promotion costs and efficiencies. Foods Unaligned businesses' operating income declined $58.7 million due to the sale of most of these businesses in early 1998 and late 1997. Foods recorded gains of $321.1 million in the first nine months of 1998 on the sale of Unaligned businesses. 29 30 Wise - ---- Wise sales decreased $9.9 million or 5% from 1997 to $170.7 million. This decline is due primarily to the absence of sales of $7.3 million from a business divested in 1998, augmented by a loss in volume due to competitors' ongoing pricing promotions and new product introductions. Operating results declined $2.3 million from 1997 to a loss of $1.5 million. This decline was due primarily to the $1.3 million loss on the sale of a business, and lower sales volume. NON-OPERATING EXPENSES AND INCOME TAXES - --------------------------------------- Following is a comparison of non-operating expenses for the three months ended September 30, 1998 and 1997.
THREE MONTHS ENDED SEPTEMBER 30, -------------------------------- CONSOLIDATED COMBINED ------------ -------- (Dollars in millions) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------ Interest expense $ 15.6 $ 23.4 $ 15.9 $ 20.1 Affiliated interest expense (income), net 5.9 (5.4) 2.1 0.1 Interest income and other (7.2) (5.3) (8.0) (1.5) ------- ------- ------- ------- $ 14.3 $ 12.7 $ 10.0 $ 18.7 - ------------------------------------------------------------------------------------------------------------------
Following is a comparison of non-operating expenses for the nine months ended September 30, 1998 and 1997.
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- CONSOLIDATED COMBINED ------------ -------- (Dollars in millions) 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------------------------- Interest expense $ 47.8 $ 71.2 $ 48.7 $ 68.5 Affiliated interest expense (income), net 16.1 (17.0) 3.3 0.2 Interest income and other (20.6) (5.2) (23.7) (8.8) ------- ------- ------- ------- $ 43.3 $ 49.0 $ 28.3 $ 59.9 - ------------------------------------------------------------------------------------------------------------------
The favorable fluctuations in non-affiliated interest expense for the Company and the Combined Companies, for both the three months and nine months ended September 30, 1998, are primarily attributable to cash proceeds from the sale of the Decorative Products business unit used to pay down debt. Consolidated non-operating expense for the three months ended September 30, 1998, increased by $1.6 million. The decrease in non-affiliated interest expense was offset by a $11.3 million decrease in net affiliated interest income due to Foods' repayment of debt to the Company using proceeds from the sale of its Unaligned businesses. Consolidated non-operating expense for the nine months ended September 30, 1998, decreased $5.7 million to $43.3 million. In addition to the decrease in non-affiliated interest expense, the Company received $15.4 million more interest income, primarily from the investment of proceeds from the sale of certain Foods Unaligned businesses in short term investments. This improvement was partially offset by a $33.1 million decrease in net affiliated interest income, due primarily to Foods' repayment of debt to the Company using proceeds from the sale of its Unaligned businesses, and interest expense on amounts loaned by Foods and BWHLLC, an affiliate of the Company's parent. Combined non-operating expense for the three months ended September 30, 1998, improved $8.7 million to $10.0 million. This change reflects the decrease in non-affiliated interest expense, augmented by a $6.5 million increase in interest income from the investment of proceeds from the sale of certain Foods Unaligned businesses in short term investments. The increase in affiliated interest expense is due to amounts loaned by BWHLLC, an affiliate of the Company's parent. 30 31 Combined non-operating expense for the nine months ended September 30, 1998, improved $31.6 million to $28.3 million. This change reflects the decrease in non-affiliated interest expense, augmented by an $14.9 million increase in interest income, primarily from the investment of proceeds from the sale of certain Foods Unaligned businesses in short term investments. The increase in affiliate interest expense is due to amounts loaned by BWHLLC, an affiliate of the Company's parent. Following is a comparison of income tax provision related effective tax rates for the three and nine months ended September 30, 1998.
THREE MONTHS ENDED SEPTEMBER 30, -------------------------------- CONSOLIDATED COMBINED ------------ -------- (Dollars in millions) 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Income tax expense 9.3 5.4 9.3 22.1 Effective tax rate 44% 32% 46% 68% - ---------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- CONSOLIDATED COMBINED ------------ -------- (Dollars in millions) 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Income tax expense 25.8 13.2 99.7 28.4 Effective tax rate 45% 40% 29% 63% - ----------------------------------------------------------------------------------------------------------------
The 1998 consolidated effective income tax rate reflects the effect of non-deductible international charges for the closure of a European operation. The combined effective tax rate for the three months ended September 30, 1998, reflects changes in estimates on taxes related to businesses sold in the first quarter of 1998, as well as a change in the estimated annual effective tax rate. The Foods Unaligned business divestitures led to a lower effective tax rate for the Combined Companies for the nine months ended September 30, 1998, as a portion of the gain is not subject to corporate tax. The unusually high tax rate in 1997 for the Combined Companies is attributable to the finalization of the Foods purchase price leading to a $30.0 million adjustment in the tax basis of certain intangible assets. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Operating Activities - -------------------- For the nine months ended September 30, 1998, operating cash flows generated by the Company and the Combined Companies were $25.0 million and $79.6 million compared to cash used by the Company and the Combined Companies of $47.4 million and $49.7 million during the first nine months of 1997. The Company's $72.4 million increase is attributable to incremental cash inflows of $19.5 million from Chemical businesses purchased within the past 12 months. Also, the first nine months of 1997 included an outflow of approximately $40.0 million for the settlement of litigation. The Combined Companies' $129.3 million improvement in cash flows is attributable to the factors noted above and primarily an improvement in cash flow relating to Foods accounts receivable and inventories. The improved Foods inventory and receivable flows occurred prior to and in anticipation of the divestiture of certain businesses. Investing Activities - -------------------- Consolidated investing activities generated $347.6 million cash in the first nine months of 1998 compared to $332.4 million in the first nine months of 1997, due primarily to divestiture activity. 1998 proceeds from divestitures include $304.8 million from the sale of Decorative Products, $15.5 million from the sale of a Latin American plastic films business, and $15.6 million from the sale of the commercial and industrial wallcoverings business. 1997 proceeds from divestitures included $405.2 million from the sale of the Company's Dairy business. For 1998, investing activity also reflects $65.3 million relating to net repayments of affiliated borrowings by Foods and Wise, partially offset by the acquisition of a resins and compounds business from Sun Coast Industries for $14.4 million. 31 32 In addition to the above, the Combined Companies' divestiture activity reflects $725.1 million of proceeds from the sale of Foods Unaligned businesses. The Combined Companies sold certain unaligned product lines for $376.5 million; its worldwide KLIM milk powder business, a non-dairy creamer business in South Africa and an ice cream business in Puerto Rico for $335.7 million; and a distribution business in Puerto Rico for proceeds of $8.8 million. In the third quarter of 1998, Foods received proceeds of $4.1 million related to its sales of Ireland and Puerto Rico businesses. The $65.3 million return on investment in the consolidated investing flows is eliminated in the combined flows as the Foods and Wise operations are included in the Combined Companies. Capital expenditures for the Company and the Combined Companies decreased $58.0 million and $58.7 million, respectively. This is mainly a result of reduced Chemical capital expenditures of $33.7 million due to reduced plant additions and improvements and reduced capitalized system implementation costs, the divested Dairy business in the third quarter of 1997, and the Decorative Products business in March 1998. Financing Activities - -------------------- Consolidated financing activities generated $144.8 million cash in the first nine months of 1998, compared with the use of $319.3 million in the first nine months of 1997. In 1998, the Company borrowed $426.7 million from Foods related to proceeds from the sale of Foods Unaligned businesses. The inflow was partially offset by repayment of the $235.3 million outstanding balance on the revolving line of credit, and payment of preferred dividends. The use of cash in 1997 related to the net repayment of long-term debt using proceeds from the sale of businesses. Combined financing activities represent the above with the exception of the affiliated borrowings with Foods, which are eliminated. Also, the Combined financing activities include a $272.2 million distribution from Foods to an affiliate that is not within the Combined Companies controlled group, but has an ownership interest in the trademarks that were sold with the divested businesses. In the second quarter of 1998, the Company's revolving credit facility was reduced as a result of the sales of certain Foods Unaligned businesses in accordance with the terms of the agreement. As a result of this reduction, the $50.0 million 364-day revolving credit facility was canceled, and the $950.0 million five year revolving credit facility was reduced to $895.0 million. YEAR 2000 UPDATE - ---------------- Overview - -------- The year 2000 issue is the result of computer programs written using two digits rather than four to define the applicable year. Any of the Company's and Combined Companies' computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. If not addressed, the Year 2000 issue could have a material adverse impact on the business operations and financial results of the Company and Combined Companies. To address this issue, the Company's and Combined Companies' Year 2000 Program is a risk-based plan divided into three phases that are being executed by both internal and external resources. These phases are: Phase I - an inventory of all systems, assigning a business priority for each system and performing a preliminary assessment of Year 2000 susceptibility; Phase II - completion of a detailed Year 2000 susceptibility analysis and development of remediation plans and contingency plans; and Phase III - implementation of the remediation and, if necessary, contingency plan(s) and completing final system testing. 32 33 The Year 2000 efforts are divided into three areas that include, (1) systems being replaced by new enterprise-wide system implementations; (2) systems that will not be replaced by the new enterprise-wide system implementations, including non-information technology systems such as plant process controls; and (3) external suppliers and customers. A discussion of each area of activity relative to the three phased approaches follows. Enterprise-Wide Systems - ----------------------- The comprehensive new enterprise-wide system implementations being implemented by each of the Company's businesses and the Combined Companies will replace most business and accounting systems. The enterprise-wide system versions are warranted by the vendors to be Year 2000 compliant and include SAP, PeopleSoft and J.D. Edwards. Due to the relative complexity and importance of the existing business and accounting systems to ongoing operations, the new enterprise-wide system implementations will address the significant majority of the Company's and Combined Companies' internal Year 2000 risk. Implementations of these various new systems are underway with Phase I and II complete except for the development of certain contingency plans. Phase III has begun and is expected to be completed by June 30, 1999. Other Systems - ------------- For the systems not to be replaced by enterprise-wide implementations, Phase I is complete, Phase II is substantially complete, and Phase III remediation has begun. The Company and Combined Companies plan to substantially complete in 1998 the remediation of systems not to be replaced by new enterprise-wide systems. System remediation not completed in 1998 and all system testing activities are planned to be completed by June 30, 1999. Suppliers and Customers - ----------------------- The Company and Combined Companies are in Phase I of the plan to assess and address the risks related to third party suppliers and customers. As a result of initial inquiries, supplier and customer responses have been received. These responses will be evaluated and appropriate procedures will be performed to determine the extent to which the Company and Combined Companies may be vulnerable to the failure of third parties to resolve their own Year 2000 issues. Efforts related to suppliers and customers, including development of contingency plans where appropriate, are targeted for completion by June 30, 1999. Although the Company's and Combined Companies' systems do not rely significantly on systems of other companies, the Company and Combined Companies cannot provide assurance that failure of third parties to address the Year 2000 issue will not have an adverse impact on business operations and results. Costs - ----- Significant investments in enterprise-wide information systems have been made since 1996 that will total approximately $72 million for the Company and $112 million for the Combined Companies by the year 2000. The cost to make the remaining systems Year 2000 compliant is estimated to be $8 million for the Company and $20 million for the Combined Companies. As of September 30, 1998, the Company and Combined Companies had incurred costs of approximately $60 million and $64 million, respectively, for enterprise-wide systems and approximately $2 million and $4 million, respectively, for other systems and efforts. Risks - ----- Due to the general uncertainty inherent in the Year 2000 problem, including the uncertainty associated with suppliers and customers, the potential effect on the financial results and condition of the Company and Combined Companies has not been measured. The Company and Combined Companies intend the Year 2000 Program to be completed on a timely basis so as to significantly reduce the level of uncertainty and the impact on business operations and financial results. Contingency plans have been and will continue to be developed and implemented to mitigate Year 2000 risks and the effect of Year 2000 issues. To date, these contingency plans generally include remediation of legacy systems in the event the enterprise-wide implementations are delayed. To date, several of these plans are now being implemented to reduce the risk of potential delays in enterprise-wide system implementations. 33 34 Readers are cautioned that Forward-looking statements contained in the Year 2000 Update should be read in conjunction with the disclosure under the heading: "Forward-Looking and Cautionary Statements". FORWARD-LOOKING AND CAUTIONARY STATEMENTS - ----------------------------------------- The Company and its officers may, from time to time, make written or oral statements regarding the future performance of the Company, including statements contained in the Company's filings with the Securities and Exchange Commission. Investors should be aware that these statements are based on currently available financial, economic, and competitive data and on current business plans. Such statements are inherently uncertain and investors should recognize that events could cause the Company's actual results to differ materially from those projected in forward-looking statements made by or on behalf of the Company. Such risks and uncertainties are primarily in the areas of result of operations by business unit, liquidity, legal, environmental liabilities, year 2000 compliance, and risk management. 34 35 PART II Item 1: LEGAL PROCEEDINGS There have been no material developments in the ongoing legal proceedings that are discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and the quarterly report on Form 10-Q for the period ended March 31, 1998. The Company is involved in other litigation throughout the United States, which is considered to be in the ordinary course of the Company's business. The Company believes, based on the information it presently possesses, and taking into account its established reserves for estimated liability and its insurance coverages, that the ultimate outcome of the foregoing proceedings is unlikely to have a materially adverse effect on the Company's financial position or operating results. Item 6: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K a. Exhibits (27) Financial Data Schedule b. Financial Statement Schedules Included are the separate financial statements of Foods Holdings and Wise Holdings filed in accordance with rule 3-10 of Regulation S-X. Foods Holdings and Wise Holdings are guarantors of the Company's credit facility and all of the Company's outstanding publicly held debt. c. Reports on Form 8-K There were no reports on Form 8-K issued during the third quarter of 1998. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BORDEN, INC. Date November 12, 1998 By /s/ William H. Carter -------------------------------------- William H. Carter Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 35 36 BORDEN FOODS HOLDINGS CORPORATION CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS AND YEAR TO DATE ENDED SEPTEMBER 30, 1998 AND 1997 BFH1 37
- --------------------------------------------------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED) BORDEN FOODS HOLDINGS CORPORATION Three Months Ended Nine Months Ended September 30, September 30, ($ in thousands) 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------- Net sales $ 145,065 $ 402,832 $ 520,585 $ 1,256,456 Cost of goods sold 78,932 240,510 297,689 757,698 --------- --------- --------- ----------- Gross margin 66,133 162,322 222,896 498,758 --------- --------- --------- ----------- Distribution expense 9,255 23,428 33,002 70,012 Marketing expense 45,495 84,565 155,302 317,805 General & administrative expense 15,461 36,510 47,620 86,364 Gain on divestiture (18,600) -- (200,171) -- Business realignment 11,750 -- 17,868 -- --------- --------- --------- ----------- Operating income 2,772 17,819 169,275 24,577 --------- --------- --------- ----------- Interest expense 422 5,712 2,400 19,121 Interest income (4,513) (4,357) (15,341) (8,313) Other (income) expense, net (650) 2,489 (1,256) 1,819 --------- --------- --------- ----------- Income before income tax 7,513 13,975 183,472 11,950 Income tax expense 4,851 7,982 52,801 5,852 --------- --------- --------- ----------- Net income 2,662 5,993 130,671 6,098 Affiliate's share of income (958) -- (131,027) -- --------- --------- --------- ----------- Net income (loss) applicable to common stock 1,704 5,993 $ (356) 6,098 ========= ========= ========= =========== Comprehensive income (loss) Note 7 $ 3,448 $ (8,183) $ 127,046 $ (25,888) ========= ========= ========= =========== Basic and diluted income (loss) per common share $ 17 $ 60 $ (4) $ 61 Average number of common shares outstanding during the period 100 100 100 100 - ---------------------------------------------------------------------------------------------------------- See Notes to Condensed Consolidated Financial Statements
BFH2 38
- --------------------------------------------------------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) BORDEN FOODS HOLDINGS CORPORATION ($ in thousands) September 30, December 31, ASSETS 1998 1997 - --------------------------------------------------------------------------------------- CURRENT ASSETS Cash and equivalents $ 316,867 $ 28,736 Accounts receivable (less allowance for doubtful accounts of $1,453 and $4,821, respectively) 50,710 138,751 Other receivables 3,821 21,526 Inventories: Finished and in-process goods 55,519 112,669 Raw materials and supplies 17,285 43,112 Deferred income taxes 42,086 41,290 Other current assets 26,564 50,050 --------- --------- 512,852 436,134 OTHER ASSETS 14,220 14,981 PROPERTY AND EQUIPMENT Land 10,189 19,199 Buildings 40,536 64,908 Machinery and equipment 124,147 208,504 --------- --------- 174,872 292,611 Less accumulated depreciation (28,597) (50,878) --------- --------- 146,275 241,733 INTANGIBLES Goodwill 48,115 151,264 Trademarks and other intangibles 85,389 155,511 --------- --------- 133,504 306,775 --------- --------- TOTAL ASSETS $ 806,851 $ 999,623 ========= ========= - --------------------------------------------------------------------------------------- See Notes to Condensed Consolidated Financial Statements
BFH3 39
- --------------------------------------------------------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) BORDEN FOODS HOLDINGS CORPORATION ($ in thousands) September 30, December 31, LIABILITIES AND SHAREHOLDER'S EQUITY 1998 1997 - --------------------------------------------------------------------------------------- CURRENT LIABILITIES Debt payable within one year $ 5,788 $ 22,087 Loans due to affiliates -- 27,914 Accounts and drafts payable 55,810 98,718 Income taxes payable 34,113 30,158 Accrued customer allowances 28,454 32,106 Other amounts due affiliates 12,399 6,020 Other current liabilities 191,116 123,706 --------- --------- 327,680 340,709 --------- --------- OTHER LIABILITIES Long-term debt payable to Borden, Inc. -- 47,616 Other long-term debt 4,626 5,438 Deferred income taxes 37,474 25,821 Non-pension postemployment benefit obligations 8,681 9,279 Other long-term liabilities 16,402 20,894 --------- --------- 67,183 109,048 --------- --------- Commitments and Contingencies Note 10 SHAREHOLDER'S EQUITY Common stock - $0.01 par value; 100 shares -- -- Shareholder's investment in affiliate 50,971 203,297 Paid in capital 384,868 366,439 Accumulated other comprehensive income (12,646) (9,021) Retained deficit (11,205) (10,849) --------- --------- 411,988 549,866 --------- --------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 806,851 $ 999,623 ========= ========= - --------------------------------------------------------------------------------------- See Notes to Condensed Consolidated Financial Statements
BFH4 40
- ----------------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) BORDEN FOODS HOLDINGS CORPORATION Nine Months Ended September 30, ($ in thousands) 1998 1997 - ----------------------------------------------------------------------------------------- CASH FLOWS USED IN OPERATING ACTIVITIES Net income $ 130,671 $ 6,098 Adjustments to reconcile net income to net cash used in operating activities: Deferred tax provision 10,045 15,903 Depreciation and amortization 13,061 36,970 Gain on divestiture of businesses (200,171) -- Net change in assets and liabilities: Trade receivables 49,723 13,382 Other receivables 14,868 151 Inventories 20,049 (7,311) Trade payables (19,297) (29,268) Accrued customer allowances (3,652) (21,884) Income taxes (19,987) (7,412) Other amounts due to/from affiliates (894) (1,348) Other current assets and liabilities (62,185) 3,877 Long-term assets and liabilities (3,061) (8,501) Other, net 3,451 (35,685) --------- -------- (67,379) (35,028) --------- -------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES Capital expenditures (20,722) (24,356) Proceeds from the divestiture of businesses 725,226 -- Proceeds from the sale of fixed assets 15,852 11,089 --------- -------- 720,356 (13,267) --------- -------- CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES (Decrease) increase short-term debt (16,299) 4,565 (Decrease) increase in loans due to/from affiliates (27,914) 19,713 Unitholder distributions paid (272,205) -- Repayment of long-term debt to Borden, Inc. (47,616) -- (Decrease) increase in other long-term debt (812) 399 --------- -------- (364,846) 24,677 --------- -------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS 288,131 (23,618) CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 28,736 33,234 --------- -------- CASH AND EQUIVALENTS AT END OF PERIOD $ 316,867 $ 9,616 ========= ======== - ----------------------------------------------------------------------------------------- See Notes to Condensed Consolidated Financial Statements
BFH5 41
- --------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) BORDEN FOODS HOLDINGS CORPORATION Nine Months Ended ($ in thousands) September 30, 1998 1997 - --------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid: Interest $ 2,590 $ 26,296 Taxes 62,743 7,245 NON-CASH ACTIVITY: Minority interest (Note 6) (131,027) Affiliate's share of income (Note 6) 131,027 Capital contribution by Parent 20,000 Additional proceeds from Foods sale (20,000) - --------------------------------------------------------------------------------- See Notes to Condensed Consolidated Financial Statements
BFH6 42 BORDEN FOODS HOLDINGS CORPORATION NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. BACKGROUND In September 1994, Borden, Inc. ("Borden") entered into a merger agreement providing for the acquisition of all of Borden's outstanding common stock by affiliates of Kohlberg Kravis Roberts & Co. ("KKR", the "Acquisition"). The Acquisition was completed on March 14, 1995. Borden, a public registrant as a result of public debt that was outstanding prior to the Acquisition, elected not to apply push down accounting in its consolidated financial statements and as such Borden's financial statements (including Borden Foods through October 1, 1996) are reported on Borden's historical cost basis. As discussed in the basis of presentation, the accompanying financial statements have been prepared on a purchase accounting basis from the date of KKR's acquisition of Borden. In 1996, Borden Foods Corporation ("BFC") was formed for the purposes of acquiring and operating certain of Borden's food businesses ("Foods"). Borden Foods Holdings Corporation ("Foods Holdings"), a wholly owned subsidiary of Borden Foods Holdings, LLC (the "LLC"), owns approximately 98% of BFC; the remaining interest in BFC is owned directly by the LLC. The LLC is controlled by BW Holdings, LLC. BFC Investments LP (the "Investment LP"), which is owned by BFC and LLC, was formed for the purposes of acquiring, holding, and sub-licensing certain trademarks associated with the operation of Foods. In certain circumstances (see Note 6), allocation of income and gains may differ from the ownership percentages indicated. Effective October 1, 1996, Borden, in a taxable transaction, sold Foods and certain trademarks to BFC and Investment LP, respectively, for $550,000 less assets transferred plus liabilities assumed. The purchase price was based on an independent valuation of Foods. In connection with this sale, LLC issued approximately 73.6 million Class B units in exchange for $368,100 of notes from BW Holdings, LLC. Prior to October 1, 1996, LLC issued approximately 1.1 million Class A units to certain management employees of BFC in exchange for cash of $5,323. In addition, LLC transferred $241,300 of notes to Foods Holdings in exchange for 100 shares of common stock. Foods Holdings used the notes to acquire a 98% interest in BFC. LLC contributed $5,323 of cash to BFC in exchange for a 2% interest in BFC. BFC issued $166,990 of long-term debt (see Note 9) along with the notes contributed by BW Holdings, LLC to finance the purchase of Foods' net assets. In a series of transactions in 1996 and 1997, BFC used $244,000 of consideration to purchase a 70% interest in Investment LP and LLC used $104,600 of consideration to acquire a 30% interest in Investment LP. Investment LP transferred $348,600 of consideration to Borden in exchange for Foods' trademarks. Upon finalization of the valuation in September 1997, an additional $20,000 of consideration held by Investment LP was transferred to Borden to complete the purchase of Foods' trademarks. As a result of transactions concluded in 1998, including a transfer of tax basis from BFC to Investment LP, shareholder's investment in affiliate was increased $29,610. BFC used the remaining consideration to purchase the net assets (excluding trademarks) of Foods. There was no change in the book basis of Foods' assets and liabilities as of October 1, 1996 because the sale was between related parties and Borden's principal stockholders will continue to control BFC. Foods Holdings has fully and unconditionally guaranteed obligations under Borden's Credit Facility and all of Borden's publicly held debt on a pari passu basis. BFH7 43 The accompanying unaudited condensed financial statements contain all adjustments, consisting only of normal adjustments, which in the opinion of management are necessary for the fair presentation of operating results for the interim period. Results for the interim period are subject to seasonal variations and are not necessarily indicative of results for the full year. 2. NATURE OF OPERATIONS BFC is a manufacturer and distributor of food products worldwide, including pasta, pasta sauce, soups and bouillon. BFC's operations include 13 production facilities, 7 of which are located in North America. The remaining facilities are located primarily in Europe. Management expects to divest or close 5 of these facilities in 1998 as part of the business realignment (Note 5). 3. BASIS OF PRESENTATION As a result of the financial guarantee and in accordance with Regulation S-X rule 3-10, Borden includes in its filings with the Securities and Exchange Commission separate condensed financial statements for Foods Holdings as if it were a registrant. The accompanying condensed financial statements for the three months and nine months ended September 30, 1998 and 1997 were prepared on a purchase accounting basis which allocated approximately $750,000, plus cash retained, less debt assumed, of the December 1994 KKR purchase price to Foods Holdings. The purchase price was allocated to tangible and intangible assets and liabilities of Foods based on independent appraisals and management estimates. The condensed financial statements include the accounts of Foods Holdings after elimination of material intercompany accounts and transactions. Minority interest reflects the consolidation of international operations in which BFC owns more than a 50% interest but less than a 100% interest. The portion of BFC and the Investment LP directly owned by the LLC is recorded in Shareholder's Investment in Affiliate. 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates in the accompanying financial statements are the accruals for trade promotions, reserves for expenses on businesses sold, allocation of tax basis between Investment LP and BFC, litigation and general insurance liabilities. Actual results could differ from those estimates. RECENTLY ISSUED ACCOUNTING STATEMENTS - Recently, the Financial Accounting Standards Board issued Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information," Financial Accounting Standard No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits," and Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities." BFC is currently considering the impact of these pronouncements. RECLASSIFICATION - Certain prior year amounts have been reclassified to conform with the 1998 presentation. BFH8 44 5. BUSINESS REALIGNMENT In March 1997, BFC announced its intention to sell certain businesses from its current portfolio, which are not considered to be aligned with its grain-based meal solution strategy. Among the unaligned businesses were milk powder (KLIM), sweetened condensed milk and reconstituted lemon juice (Signature Flavor), and processed cheese. On January 24, 1998 BFC and Investment LP completed the sale of its Signature Flavor business. The sale generated proceeds of $376,500 and an after tax gain of $166,565, of which $1,380 was recorded in the third quarter relating to a change in estimate to settle certain outstanding liabilities. BFC and Investment LP sold the KLIM business, including the KLIM milk powder business in Latin America and Asia, the non-dairy coffee creamer operations in South Africa, and the ice cream business in Puerto Rico. BFC received $339,882 for the sale of these operations. An accrued after tax loss of $9,254 was recorded in the 1997 financial statements. An additional after tax loss of $19,542 was recorded in the nine month period ended September 30, 1998, which includes an after tax gain of $9,000 recorded in the third quarter relating to a change in estimate to settle certain outstanding liabilities. On May 22, 1998 BFC sold its Puerto Rican distributor. The sale generated proceeds of $8,844 and an after tax loss of $1,532, which includes an after tax gain of $600 recorded in the third quarter. Included in other current liabilities at September 30, 1998 is approximately $135,000 of divestiture reserves. Of this amount, approximately $40,000 relates to non-cash charges associated with assets to be sold. On September 17, 1998, BFC announced the closing of the Tolleson, Arizona pasta plant due to the consolidation of pasta production into other BFC pasta facilities. The plant is expected to cease production during the fourth quarter. An after tax loss of $9,779 resulting from the plant closure was recorded during the three month period ended September 30, 1998 (including a $6,118 charge, related to an adjustment of an inventory purchase commitment to fair market value, recorded in cost of goods sold). Reserves in the accompanying balance sheet for severance and assets to be sold are $16,300 before tax at September 30, 1998, including non-cash charges of $12,513 for assets to be sold. Additionally, two pasta lines were shut down during the third quarter resulting in a pre tax, non-cash charge of $1,669. 6. AFFILIATE'S SHARE OF INCOME The LLC was allocated an affiliate's share of income (see accompanying consolidated statement of operations) of $131,027 primarily in association with the divestiture of the Signature Flavor business. In accordance with Investment LP's limited partnership agreement with BFC and the LLC, the first allocation of the trademark gain is to BFC's priority return which is generally based on a 10% return to BFC based on BFC's net capital contributions. The allocation of the remaining gain, computed on a tax basis, is 10% to BFC and 90% to the LLC. In the second quarter of 1998, $272,205 was distributed to the LLC. 7. COMPREHENSIVE INCOME Comprehensive income is computed as follows:
- ---------------------------------------------------------------------------------------------- Three months ended Nine months ended September 30, September 30, ------------------- ------------------------ 1998 1997 1998 1997 ------ -------- --------- -------- Net income $2,662 $ 5,993 $ 130,671 $ 6,098 Foreign currency translation adjustments 786 (14,176) (3,921) (31,986) Less: Reclassification adjustments -- -- 296 -- ------ -------- --------- -------- Comprehensive income (loss) $3,448 $ (8,183) $ 127,046 $(25,888) - ----------------------------------------------------------------------------------------------
BFH9 45 The reclassification adjustment represents the accumulated translation adjustment recognized on the sale of the KLIM business offset by a reclassification to paid in capital. 8. RELATED PARTIES BFC is engaged in various transactions with Borden and its affiliates in the ordinary course of business. A subsidiary of Borden provides administrative services to BFC at negotiated fees. These services include processing of payroll and active and retiree group insurance claims. BFC reimburses the Borden subsidiary for payments for general disbursements and group insurance and postemployment benefit claims. The amount owed by BFC for reimbursement of payments and for services was $12,399 and $4,746 as of September 30, 1998 and December 31, 1997, respectively. BFC is generally self-insured for general insurance claims and postemployment benefits other than pensions. The liabilities for these obligations are included in Foods Holdings' financial statements. By agreement, Borden has retained the obligation for active group insurance claims incurred prior to 1997. Employee pension benefits are provided under the Borden domestic pension plans to which BFC contributes. The U.S. employees participate in the Borden retirement savings plan. Borden also provides certain health and life insurance benefits for eligible employees. BFC has recognized expenses associated with these benefits, certain of which are determined and allocated by Borden's actuary. BFC has assumed an actuarially-determined portion of Borden's U.S. net pension liability, however this amount is considered to be an amount due to affiliate since Borden retains the legal obligation for these benefits. Amounts payable by BFC for its portion of the net pension liability were $7,433 and $7,764 as of September 30, 1998 and December 31, 1997, respectively. BFC invested cash not used in operations with Borden. BFC's investment balance was $295,651 and $15,043 with Borden as of September 30, 1998 and December 31, 1997, respectively. The funds are invested overnight earning a rate set by Borden which generally approximates money market rates. Amounts receivable for interest were $14,399 and $0 as of September 30, 1998 and December 31, 1997, respectively. BFC performs certain administrative services on behalf of other Borden affiliates. These services include sales administration, promotion, purchasing, and research and development. BFC charged these affiliates $295 and $1,328 for such services for the three month periods ended September 30, 1998 and 1997, respectively, and $2,024 and $4,820 for the nine month periods ended September 30, 1998 and 1997, respectively. The receivable for services, merchandise sales, and other transactions related to the purchase of Foods' assets was $1,642 and $8,768 at September 30, 1998 and December 31, 1997, respectively. Borden continues to provide executive, financial and strategic management to BFC for which it charges a quarterly fee of $250. 9. AFFILIATED DEBT Cash balances in international businesses which are not repatriated to the U.S. can be loaned to other Borden affiliates at a variable rate for generally a 90 day period. Net lendings or borrowings by international BFH10 46 businesses are included in loans due from or to affiliates. Net short-term loans due to international affiliates were $0 at September 30, 1998 and $27,914 at December 31, 1997 at a weighted average variable rate of 6.7%. During 1996, BFC entered into a loan agreement (the "Loan Agreement") to borrow funds from Borden under a revolving loan facility and term loans. The revolving loan facility provided for borrowings up to $250,000 at a variable interest rate equal to prime. Effective December 30, 1997, the revolving loan facility was reduced to $50,000 with a maturity date of December 31, 1998. Borrowings with three days notice and outstanding at least 30 days incurred interest at Borden's cost of funds for 30 day LIBOR plus 0.25%. Same day borrowings incurred interest of prime. As an affiliate guarantor, Foods Holdings' liability shall not exceed the greater of its outstanding affiliated borrowings or 95% of its adjusted net assets while Borden or any other obligated parties have obligations outstanding. Borden's outstanding credit facility and public borrowings amounted to approximately $548,480 and $783,480 at September 30, 1998 and December 31, 1997, respectively. In connection with this guarantee, Foods Holdings charges Borden an annual fee of $1,050. As a result of the October 1, 1996 transaction, BFC issued $166,990 in long-term notes to Borden. Effective January 1, 1997, the interest rate on the long-term notes to Borden was changed from 12.0 % to 10.3%. The loan principal outstanding on the long-term notes was $47,616 at December 31, 1997 and was paid off in February 1998. Interest expense on the long term notes was $0 and $4,278 for the three months ended September 30, 1998 and 1997, respectively, and $575 and $12,834 for the nine months ended September 30, 1998 and 1997, respectively. Amounts payable for such charges were $37 and $1,274 as of September 30, 1998 and December 31, 1997, respectively. 10. COMMITMENTS AND CONTINGENCIES LEGAL MATTERS - There were no material developments during the third quarter related to the Helm Tomatoes litigation. A new trial is scheduled to begin during February of 1999. Details of first quarter events are discussed in the report filed for the three months ended March 31, 1998. BFC is involved in certain other legal proceedings arising through the normal course of business. Management is of the opinion that the final outcomes of such proceedings should not have a material impact on BFC's results of operations or financial position. OTHER CONTINGENCIES - The Year 2000 issue is the result of computer programs written using two rather than four digits to define the applicable year. Many of BFC's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. If not addressed, the Year 2000 issue could have a negative material impact on the business operations and financial results of BFC. BFC's Year 2000 Program is a risk-based plan divided into three phases that are being executed by both internal and external resources. These phases are: (I) an inventory of all systems, assigning a business priority for each system and performing a preliminary assessment of Year 2000 susceptibility, (II) completion of a detailed Year 2000 susceptibility analysis and development of remediation plans and contingency plans, and (III) implementation of the remediation and, if necessary, contingency plans and completing final system testing. BFH11 47 The Year 2000 efforts are divided into three categories: (1) systems being replaced by new enterprise-wide system implementation, (2) systems that will not be replaced by the new enterprise-wide system implementation, including non-information technology systems such as plant process controls, and (3) external suppliers and customers. The comprehensive new enterprise-wide system being implemented by BFC will replace most business and accounting systems. The enterprise-wide system versions are warranted by the vendor to be Year 2000 compliant by utilizing a four digit standard, including PeopleSoft, Vista and I2. Due to the relative complexity and importance of the business and accounting systems to ongoing operations, the new enterprise-wide system implementation will address the significant majority of BFC's internal Year 2000 risk. Implementation of the new system is underway and expected to be completed no later than June 30, 1999. BFC plans to substantially complete the remediation of systems not to be replaced by the enterprise-wide system in 1998. For these systems not to be replaced by the enterprise-wide implementation, Phase I is complete, Phase II is substantially complete, and Phase III has begun. BFC expects to complete system remediation and all system testing activities by June 30, 1999. The Year 2000 Program also includes procedures to assess the risks related to suppliers and customers. As a result of initial inquiries, supplier and customer responses have been received. These responses will be evaluated and appropriate procedures will be performed to determine the extent to which BFC may be vulnerable to such parties' failure to resolve their own Year 2000 issues. Efforts related to suppliers and customers, including development of contingency plans where appropriate, are targeted for completion by June 30, 1999. Although BFC's systems do not rely significantly on systems of other companies, BFC cannot provide assurance that failure of third parties to address the Year 2000 issue will not have an adverse impact on business operations and results. Significant investments in an enterprise-wide information system and Year 2000 program expenses addressing non-compliance across all areas of the company will total approximately $43,200 by the year 2000. This amount consists of $34,000 for the enterprise-wide information system and $9,200 of total Y2K costs and write-offs. Y2K costs and write-offs are comprised of $4,900 for business remediation, $2,600 for other related areas and program management, and $1,800 in write-offs of non-compliant hardware and systems. As of September 30, 1998, BFC has incurred expense and capital of approximately $6,900 for the enterprise-wide system and approximately $1,400 for Year 2000 compliance. Due to the general uncertainty inherent in the Year 2000 problem, including the uncertainty associated with suppliers and customers, the potential effect on the financial results and condition of BFC has not been measured. BFC intends the Year 2000 Program to be completed on a timely basis so as to significantly reduce the level of uncertainty and the impact on business operations and financial results. Contingency plans have been and will continue to be developed and implemented to mitigate Year 2000 risks and the effect of Year 2000 issues. To date, contingency plans are being implemented to reduce the risk of potential delays in the enterprise-wide system implementation. BFH12 48 [LOGO] WISE HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 WH-1 49
- ------------------------------------------------------------------------------ CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) WISE HOLDINGS, INC. AND SUBSIDIARIES THREE MONTHS ENDED SEPTEMBER 30, (Dollars in thousands) 1998 1997 - ------------------------------------------------------------------------------ Net sales $55,478 $ 61,296 Cost of goods sold 34,382 37,279 ------- -------- Gross margin 21,096 24,017 Distribution expense 7,053 7,283 Marketing expense 9,111 8,929 General & administrative expense 4,128 5,250 ------- -------- Operating income 804 2,555 Interest expense 129 222 Other expense(income) 55 (17) ------- -------- Income before income taxes 620 2,350 Income tax expense 247 910 ------- -------- Net income $ 373 $ 1,440 ======= ======== Per Share Data Basic and diluted income (loss) per common share $ 5.33 $ 20.57 Average number of common shares outstanding during the period 70 70 - ------------------------------------------------------------------------------ See Notes to Condensed Consolidated Financial Statements
WH-2 50
- --------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) WISE HOLDINGS, INC. AND SUBSIDIARIES NINE MONTHS ENDED SEPTEMBER 30, (Dollars in thousands) 1998 1997 - --------------------------------------------------------------------------------- Net sales $ 170,630 $ 180,579 Cost of goods sold 106,814 114,275 --------- --------- Gross margin 63,816 66,304 Distribution expense 21,192 20,156 Marketing expense 27,744 30,610 General & administrative expense 15,009 14,481 --------- --------- Operating income(loss) (129) 1,057 Interest expense 361 725 Other expense (income) 72 (112) --------- --------- Income(Loss) before income taxes (562) 444 Income tax expense(benefit) (213) 150 --------- --------- Net Income(loss) $ (349) $ 294 ========= ========= Per Share Data Basic and diluted income(loss) per common share $ (4.99) $ 4.20 Average number of common shares outstanding during the period 70 70 - --------------------------------------------------------------------------------- See Notes to Condensed Consolidated Financial Statements
WH-3 51
- -------------------------------------------------------------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) WISE HOLDINGS, INC. AND SUBSIDIARIES (Dollars in thousands, except per share amounts) SEPTEMBER 30, DECEMBER 31, ASSETS 1998 1997 - -------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and equivalents $ 4,947 $ 3,604 Accounts receivable (less allowance for doubtful accounts of $2,123 and $2,498, respectively) 20,040 23,131 Affiliated receivables 219 1,204 Inventories: Finished goods 3,088 4,621 Raw materials and supplies 3,739 3,841 Deferred income taxes, net 1,733 2,825 Prepaid and other current assets 4,711 4,509 ------- ------- 38,477 43,735 ------- ------- PROPERTY AND EQUIPMENT Land 1,407 1,347 Buildings and improvements 5,144 5,585 Machinery and equipment 43,266 38,592 ------- ------- 49,817 45,524 Less accumulated depreciation 19,429 16,442 ------- ------- 30,388 29,082 ------- ------- INTANGIBLES AND OTHER ASSETS Trademarks (net of accumulated amortization of $1,764 and $1,410, respectively) 17,047 17,401 Other assets 823 889 ------- ------- 17,870 18,290 ------- ------- TOTAL ASSETS $86,735 $91,107 ======= ======= - -------------------------------------------------------------------------------------------- See Notes to Condensed Consolidated Financial Statements
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- ---------------------------------------------------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) WISE HOLDINGS, INC. AND SUBSIDIARIES (Dollars in thousands, except per share amounts) SEPTEMBER, 30 DECEMBER 31, LIABILITIES AND SHAREHOLDER'S EQUITY 1998 1997 - -------------------------------------------------------------------------------------- CURRENT LIABILITIES Debt payable within one year $ 267 $ 270 Accounts and drafts payable 13,377 12,570 Affiliated payables 1,571 1,467 Accrued liabilities 12,021 15,735 ------- ------- 27,236 30,042 ------- ------- OTHER LIABILITIES Long-term debt payable to Borden, Inc. 7,000 7,000 Deferred income taxes, net 1,639 2,522 Non-pension postemployment benefit obligations 9,596 9,960 Affiliated employee benefit obligation 1,893 1,817 Other long-term liabilities 434 371 Minority interest 721 830 ------- ------- 21,283 22,500 ------- ------- Commitments and Contingencies (Note 6) SHAREHOLDER'S EQUITY Common stock - $0.01 par value 70 shares authorized, issued and outstanding -- -- Preferred stock - $0.01 par value 30 shares authorized, none issued and outstanding -- -- Paid in capital 34,980 34,980 Retained earnings 3,236 3,585 ------- ------- 38,216 38,565 ------- ------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $86,735 $91,107 ======= ======= - -------------------------------------------------------------------------------------- See Notes to Condensed Consolidated Financial Statements
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- --------------------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) WISE HOLDINGS, INC. AND SUBSIDIARIES NINE MONTHS ENDED SEPTEMBER 30, (Dollars in thousands) 1998 1997 - --------------------------------------------------------------------------------------------- Cash Flows From (Used In) Operating Activities Net loss $ (349) $ 294 Adjustments to reconcile net loss to net cash from operating activities Minority interest's share in income (6) 9 Depreciation 4,162 4,771 Amortization 354 353 Other non-cash 82 400 Net change in assets and liabilities: Accounts receivable 1,596 (1,040) Affiliated receivables 985 413 Inventories 643 1,028 Prepaid and other current assets (850) 238 Other assets 1,158 285 Accounts and drafts payable 2,239 (216) Affiliated payables 104 (295) Accrued liabilities (3,638) 2,416 Post-employment benefits other than pensions (192) 62 Affiliated employee benefit obligation 76 320 Other long-term liabilities (820) 134 ------- ------- 5,544 9,172 ------- ------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES Capital expenditures (6,388) (3,571) Acquisition of business -- (1,037) Divestiture of business 2,107 -- Proceeds from sales of equipment 83 332 ------- ------- (4,198) (4,276) ------- ------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES Short-term borrowings 267 742 Repayment of short-term borrowings (270) (175) Minority interest's equity contribution 40 ------- ------- (3) 607 ------- ------- INCREASE IN CASH AND EQUIVALENTS 1,343 5,503 Cash and equivalents at beginning of period 3,604 3,027 ------- ------- Cash and equivalents at end of period $ 4,947 $ 8,530 ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Exchange of Accounts Receivable for Assets of Business $ -- $ 878 Cash paid for interest: 388 922 Cash paid for taxes: 152 -- - --------------------------------------------------------------------------------------------- See Notes to Condensed Consolidated Financial Statements
WH-6 54 WISE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except for per share information) 1. BACKGROUND In September 1994, Borden, Inc. ("Borden") entered into a merger agreement that provided for the acquisition of all of Borden's outstanding common stock by affiliates of Kohlberg Kravis Roberts & Co. ("KKR"). Borden elected not to apply push down accounting in its consolidated financial statements as a result of public debt that was outstanding prior to the acquisition, and as such, Borden's financial statements (including Wise) are reported on Borden's historical cost basis. As discussed in the "Basis of Presentation," Wise's financial statements have been prepared on a purchase accounting basis from the date of KKR's acquisition of Borden. The effective date of the merger agreement was January 1, 1995 for accounting and financial statement presentation purposes. Effective July 2, 1996, in a taxable transaction (the "Incorporation"), Borden sold its salty snacks business ("Wise operations") to Wise Holdings Inc. ("Wise"), a KKR affiliate, for $45 million. The purchase price was based on an independent valuation of the business. There was no change in the financial reporting basis of the assets and liabilities as of July 2, 1996 from that described below under "Basis of Presentation" because Borden's principal stockholders continue to exercise significant financial control over Wise. Wise fully and unconditionally guarantees obligations under Borden's credit facility and all of Borden's publicly held debt on a pari passu basis. In connection with this guarantee, Wise receives an annual fee of $210. 2. NATURE OF OPERATIONS Wise is a producer and distributor of salty snacks in the eastern United States. Wise's product line includes potato chips, cheese flavored baked and fried corn snacks, pretzels, tortilla chips, corn chips, onion rings, pork rinds and other assorted snacks. Wise markets its products under the brand names of WISE(R), CHEEZ DOODLES(R), QUINLAN(R), NEW YORK DELI(R), KRUNCHERS!(R), BRAVOS(R), MOORE'S(R) and WISE CHOICE(TM) and conducts its business through two principal divisions: Wise and Moore's. The Wise and Moore's divisions manufacture and distribute primarily in the eastern United States. Wise's products are distributed through both independent and company-owned distribution networks. On May 11, 1998 Wise sold its Caribbean Snacks, Inc. subsidiary, which had served as a distribution center throughout Puerto Rico and the Caribbean. (see note 8 - Business Divestiture) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation As a result of the financial guarantee and in accordance with Regulation S-X rule 3-10, Borden is required to include in its filings with the Securities and Exchange Commission separate financial statements for Wise as if it were a registrant. The accompanying financial statements subsequent to the purchase by KKR have been prepared on a purchase accounting basis that allocates approximately $51 million of the original KKR purchase price of Borden to the Wise operations. The purchase price has been allocated to tangible and intangible assets and liabilities of Wise based on independent appraisals and management estimates. WH-7 55 The condensed consolidated financial statements of Wise collectively include the financial position of Wise Holdings, Inc. and subsidiaries as of September 30, 1998 and December 31, 1997. These financial statements also include the statements of operations of Wise for the three and nine months ended September 30, 1998 and 1997 and cash flows of Wise for the nine months ended September 30, 1998 and 1997. These unaudited interim condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the results for the interim periods presented. Reclassifications - ----------------- Certain prior year amounts have been reclassified to conform with the 1998 presentation. Per Share Information - --------------------- Basic and diluted loss per common share at September 30, 1998 and 1997 is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period ended September 30, 1998 and 1997, respectively. On April 24, 1998 the number of shares authorized and outstanding were reduced for administrative and tax purposes. The Per Share information for September 30, 1998 and 1997 is computed based on the adjusted shares outstanding. Options issued by subsidiaries that enable the holder to obtain stock of the subsidiary were not assumed exercised because they were antidilutive for both 1998 and 1997. Wise has no other potentially dilutive securities. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates in Wise's financial statements are related to allowance for doubtful accounts, accruals for trade promotions, general and group insurance, income taxes, post-retirement benefits, asset lives and corporate allocations. Actual results could differ from those estimates. 4. ACCRUED LIABILITIES Accrued liabilities were as follows: September 30, December 31, 1998 1997 - ------------------------------------------------------------------------------- Compensation $ 875 $ 2,758 General insurance 5,164 5,627 Advertising and promotion 2,883 3,591 Other 2,589 3,759 ------- -------- Total $11,511 $ 15,735 ======= ======== - ------------------------------------------------------------------------------- 5. AFFILIATED LONG-TERM DEBT In conjunction with the Incorporation, Wise entered into a long-term loan agreement (the "Loan Agreement") to borrow funds from Borden. WH-8 56 Revolving Loan - -------------- The Loan Agreement provides for a revolving loan facility of up to $5 million maturing in December 1998, at a variable interest rate equal to Borden's cost of funds for 30 day LIBOR borrowings plus 0.25%. A commitment fee based on a variable rate tied to Borden's leverage is charged on the unused portion of the revolving loan facility. Wise had no borrowings under the revolving agreement at September 30, 1998 and December 31, 1997. Long-Term Loan - -------------- The Loan Agreement also provides for a $10.145 million term loan with a fixed interest rate of 11% maturing in November, 1999, payable in full at the maturity date. At September 30, 1998 and December 31, 1997, $7.0 million remains outstanding under this loan agreement. The Loan Agreement contains certain restrictions on the activities of Wise and its subsidiaries, including restrictions on liens, the incidence of indebtedness, mergers and consolidations, sales of assets, investments, payment of dividends (requires prior approval from Borden), changes in nature of business, prepayments of certain indebtedness, transactions with affiliates, capital expenditures, changes in control of the company and the use of proceeds from asset sales. 6. COMMITMENTS AND CONTINGENCIES Environmental Contingencies - --------------------------- Wise, like others in similar businesses, is subject to extensive Federal, state and local environmental laws and regulations. Although Wise's environmental policies and practices are designed to ensure compliance with these laws and regulations, future developments and increasingly stringent regulations could require Wise to make additional unforeseen environmental expenditures. Environmental accruals are routinely reviewed on an interim basis as events and developments warrant and are subject to an annual comprehensive review. Litigation - ---------- Wise is subject to various investigations, claims and legal proceedings covering a wide range of matters in the ordinary course of its business activities. Each of these matters is subject to various uncertainties and some of these matters may be resolved unfavorably to Wise. Wise has established accruals for matters that are probable and reasonably estimable. Management believes that any liability that may ultimately result from the resolution of these matters in excess of amounts provided will not have a material adverse effect on the financial statements of Wise. 7. RELATED PARTIES Wise is engaged in various transactions with Borden and its affiliated companies in the ordinary course of business. A subsidiary of Borden provides certain administrative services to Wise at negotiated fees. These services include: processing of payroll and active and retiree group insurance claims. Wise reimburses the Borden subsidiary for payments for general disbursements, and general and group insurance and retirement benefit claims. The amount owed by Wise for these services is included in affiliated payables and was $1,571 and $1,467 at September 30, 1998 and December 31, 1997, respectively. Wise is generally self-insured for general insurance claims and post-employment benefits other than pensions. The liabilities for these obligations are included in Wise's financial statements. WH-9 57 The following table summarizes the charges to Wise for these costs.
Quarter ended Nine months ended September 30, September 30, 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------------------------- Employee benefits $ 447 $ 493 $1,396 $1,526 Group and general insurance 1,161 846 2,945 3,629 Information services 54 56 156 156 Corporate staff departments and overhead 221 646 1,130 1,402 ------ ------ ------ ------ $1,883 $2,041 $5,627 $6,713 ====== ====== ====== ====== - -----------------------------------------------------------------------------------------------------------------
Effective July 1, 1997, Wise secured the services of a third party for its general insurance needs related to losses that occur after the effective date, and makes payments directly to a third party vendor. Wise also invests excess cash with Borden in one-day investments that totaled $3,700 and $2,350 at September 30, 1998 and December 31, 1997, respectively which is included as a component of cash. 8. BUSINESS DIVESTITURE On May 11, 1998, Wise sold its subsidiary, Caribbean Snacks, Inc. for $2,107 resulting in a pretax loss of $438 (after tax loss $267). WH-10
 

5 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 507,400 193,600 230,200 10,100 108,000 1,156,400 795,700 322,300 2,086,100 1,101,500 553,500 0 614,400 2,000 (513,200) 2,086,100 1,071,100 1,071,100 771,900 771,900 193,600 0 47,800 57,800 25,800 32,000 33,600 0 0 65,600 .33 .33