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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                 March 31, 1999
                              -------------------------------------------------


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

                                  BORDEN, INC.



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


                    180 East Broad Street, Columbus, OH 43215
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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 May 14, 1999: 198,974,994
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BORDEN, INC.


INTRODUCTION

The following filing with the Securities and Exchange Commission ("SEC") by
Borden, Inc. ("the Company") presents four separate financial statements:
Borden, Inc. Condensed Consolidated Financial Statements, Borden, Inc. and
Affiliates Condensed Combined Financial Statements, the Condensed Financial
Statements of Wise Holdings, Inc. ("Wise Holdings") and the Condensed Financial
Statements of Borden Foods Holdings Corporation ("Foods Holdings"). The
consolidated statements present the Company after the effect of the sales of (i)
the Company's former salty snacks business ("Wise") to Wise Holdings and its
subsidiaries and (ii) the Company's former domestic and international foods
business ("Foods") to Foods Holdings and its subsidiaries, as explained in Note
1 to the consolidated and combined financial statements. The Company, Wise
Holdings, and Foods Holdings are controlled by BW Holdings, LLC ("BWHLLC"). The
consolidated financial statements are those of the Company, which is the SEC
Registrant.

The Borden, Inc. and Affiliates ("the Combined Companies") Condensed Combined
Financial Statements are included herein to present the Company on a combined
historical basis, including the financial position, results of operations and
cash flows of Wise and Foods. The Combined Companies' 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

ITEM 1. BORDEN, INC. ("BORDEN") CONDENSED CONSOLIDATED AND BORDEN, INC. AND
AFFILIATES CONDENSED COMBINED FINANCIAL STATEMENTS

     Condensed Consolidated Statements of  Operations and Comprehensive Income,
        three months ended March 31, 1999 and 1998...........................  4
     Condensed Consolidated Balance Sheets, March 31, 1999 
        and December 31, 1998................................................  6
     Condensed Consolidated Statements of Cash Flows, three months 
        ended March 31, 1999  and 1998.......................................  8
     Condensed Consolidated Statement of Shareholders' Equity, three months 
        ended March 31, 1999................................................. 10
     Condensed Combined Statements of Operations and Comprehensive Income
        three months ended March 31, 1999 and 1998........................... 11
     Condensed Combined Balance Sheets, March 31, 1999 and 
        December 31, 1998.................................................... 12
     Condensed Combined Statements of Cash Flows, three months ended 
        March 31, 1999 and 1998.............................................. 14
    Condensed Combined Statement of Shareholders' Equity,
        three months ended March 31, 1999.................................... 16
    Notes to Condensed Consolidated and Condensed Combined
        Financial Statements................................................. 17

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
RESULTS OF OPERATIONS........................................................ 20

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.................................................... 26
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...... 26










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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
BORDEN, INC.
Three months ended March 31, (In millions) 1999 1998 - ---------------------------------------------------------------------------------------- Net sales $ 306.9 $ 367.1 Cost of goods sold 211.8 274.8 ------- ------- Gross margin 95.1 92.3 ------- ------- Distribution expense 12.0 12.3 Marketing expense 15.8 19.4 General & administrative expense 31.1 35.4 ------- ------- Operating income 36.2 25.2 ------- ------- Interest expense 15.3 16.4 Affiliated interest expense, net of affiliated interest income of $1.1 in 1998 4.8 4.7 Interest income and other (8.7) (5.3) Equity in net loss (income) of unconsolidated subsidiaries 5.3 (0.6) ------- ------- Income from continuing operations before income tax 19.5 10.0 Income tax expense 6.2 4.2 ------- ------- Income from continuing operations 13.3 5.8 ------- ------- Discontinued operations: Income from operations, net of tax -- 2.3 Gain on disposal, net of tax -- 26.0 ------- ------- Net income 13.3 34.1 Preferred stock dividends (18.4) (18.4) ------- ------- Net (loss) income applicable to common stock $ (5.1) $ 15.7 ======= ======= Comprehensive income (see Note 3) $ (4.4) $ 36.3 ======= ======= - ----------------------------------------------------------------------------------------
4 5 - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED) (continued) BORDEN, INC.
Three months ended March 31, (In millions, except per share data) 1999 1998 - -------------------------------------------------------------------------------- Basic and Diluted Per Share Data - -------------------------------- Income from continuing operations $ 0.07 $ 0.03 Discontinued operations: Income from operations -- 0.01 Gain on disposal, net of tax -- 0.13 -------- -------- Net income 0.07 0.17 Preferred stock dividends (0.09) (0.09) -------- -------- Net (loss) income applicable to common stock $ (0.02) $ 0.08 ======== ======== Dividends per common share $ 0.06 $ 0.07 Dividends per preferred share $ 0.75 $ 0.75 Average number of common shares outstanding during the period 199.0 199.0
- -------------------------------------------------------------------------------- See Notes to Condensed Consolidated and Condensed Combined Financial Statements 5 6 - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) BORDEN, INC. (In millions)
March 31, December 31, ASSETS 1999 1998 - -------------------------------------------------------------------------------- CURRENT ASSETS Cash and equivalents $ 617.1 $ 672.1 Accounts receivable (less allowance for doubtful accounts of $10.4 in 1999 and 1998) 212.4 210.7 Inventories: Finished and in-process goods 60.9 61.9 Raw materials and supplies 45.4 50.6 Deferred income taxes 55.3 73.3 Other current assets 19.1 18.4 -------- -------- 1,010.2 1,087.0 -------- -------- INVESTMENTS AND OTHER ASSETS Investments 75.8 81.3 Deferred income taxes 113.2 89.4 Prepaid pension assets 133.1 133.3 Other assets 38.2 38.0 Assets sold under contractual arrangement (net of allowance of $63.3 in 1999 and $62.6 in 1998) 47.8 46.0 -------- -------- 408.1 388.0 -------- -------- PROPERTY AND EQUIPMENT Land 25.1 25.7 Buildings 90.7 93.2 Machinery and equipment 653.3 676.0 -------- -------- 769.1 794.9 Less accumulated depreciation (307.8) (324.0) -------- -------- 461.3 470.9 INTANGIBLES 65.3 66.3 -------- -------- TOTAL ASSETS $1,944.9 $2,012.2 ======== ========
- -------------------------------------------------------------------------------- See Notes to Condensed Consolidated and Condensed Combined Financial Statements 6 7 - ------------------------------------------------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) BORDEN, INC. (In millions, except share data)
March 31, December 31, LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998 - ------------------------------------------------------------------------------- CURRENT LIABILITIES Debt payable within one year $ 10.5 $ 16.1 Accounts and drafts payable 113.8 113.5 Income taxes payable 277.3 284.7 Loans payable to affiliates 418.6 415.8 Other current liabilities 180.7 208.2 -------- -------- 1,000.9 1,038.3 -------- -------- OTHER LIABILITIES Liabilities sold under contractual arrangement 41.6 41.6 Long-term debt 551.9 552.0 Non-pension post-employment benefit obligations 186.0 197.3 Other long-term liabilities 94.0 93.7 -------- -------- 873.5 884.6 -------- -------- Commitments and contingencies (See Note 5) SHAREHOLDERS' EQUITY Preferred stock - Issued 24,574,751 shares 614.4 614.4 Common stock - $0.01 par value: authorized 300,000,000 shares, Issued 198,974,994 shares 2.0 2.0 Paid in capital 362.5 358.9 Receivable from parent (414.9) (415.3) Accumulated other comprehensive income (68.7) (51.0) Accumulated deficit (424.8) (419.7) -------- -------- 70.5 89.3 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,944.9 $2,012.2 ======== ========
- ------------------------------------------------------------------------------- See Notes to Condensed Consolidated and Condensed Combined Financial Statements 7 8 - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) BORDEN, INC.
Three months ended March 31, (In millions) 1999 1998 - --------------------------------------------------------------------------------- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES Net income $ 13.3 $ 34.1 Adjustments to reconcile net income to net cash from (used in) operating activities: Gain on disposal of discontinued operations -- (90.7) Deferred tax provision (benefit) (2.9) 61.4 Depreciation and amortization 12.0 13.0 Unrealized gain on interest rate swap (2.9) (1.7) Equity in net loss (income) of unconsolidated subsidiaries 5.3 (0.6) Due from affiliate -- (6.3) Net change in assets and liabilities: Trade receivables (11.5) (13.5) Inventories 2.5 1.4 Trade payables 1.3 7.0 Income taxes (6.1) 26.2 Other assets (2.3) 4.0 Other liabilities (29.6) (46.3) Discontinued operations working capital -- 3.0 ------- ------- (20.9) (9.0) ------- ------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES Capital expenditures (9.2) (16.3) Proceeds from the divestiture of businesses -- 304.8 Purchase of businesses, net of cash acquired -- (14.4) Return of investment in affiliate (1.8) 66.9 ------- ------- (11.0) 341.0 ------- ------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES Net short-term debt (repayments) borrowings (5.6) 5.4 Repayment of long-term debt (0.1) (235.0) Affiliated borrowings 1.0 599.7 Interest received from parent 12.4 13.3 Common stock dividends paid (12.4) (13.3) Preferred stock dividends paid (18.4) (18.4) ------- ------- (23.1) 351.7 ------- -------
- -------------------------------------------------------------------------------- 8 9 - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued) BORDEN, INC.
Three months ended March 31, (In millions) 1999 1998 - ------------------------------------------------------------------------------------------ (Decrease) increase in cash and equivalents $ (55.0) $ 683.7 Cash and equivalents at beginning of period 672.1 183.6 ------- ------- Cash and equivalents at end of period $ 617.1 $ 867.3 ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid: Interest, net $ 20.4 $ 20.4 Taxes 15.3 2.2 Non-cash activity: Distribution of note receivable from Company's parent to cancel options -- 28.5 Investment retained in IHDG -- 10.5 Capital contribution by parent 8.4 6.1
- -------------------------------------------------------------------------------- See Notes to Condensed Consolidated and Condensed Combined Financial Statements 9 10 - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) BORDEN, INC. (In millions)
Accumulated Receivable Other Preferred Common Paid-in from Comprehensive Accumulated Stock Stock Capital Parent Income Deficit Total - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 $ 614.4 $ 2.0 $ 358.9 $ (415.3) $ (51.0) $ (419.7) $ 89.3 - ----------------------------------------------------------------------------------------------------------------------------- Net income 13.3 13.3 Translation adjustments (17.7) (17.7) Preferred stock dividends (18.4) (18.4) Common stock dividends (12.1) (12.1) Interest accrued on notes from parent 7.3 0.4 7.7 Capital contribution from parent 8.4 8.4 - ----------------------------------------------------------------------------------------------------------------------------- Balance, March 31, 1999 $ 614.4 $ 2.0 $ 362.5 $ (414.9) $ (68.7) $ (424.8) $ 70.5 - ----------------------------------------------------------------------------------------------------------------------------- See Notes to Condensed Consolidated and Condensed Combined Financial Statements
10 11 - -------------------------------------------------------------------------------- CONDENSED COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED) BORDEN, INC. AND AFFILIATES
Three months ended March 31, (In millions) 1999 1998 - --------------------------------------------------------------------------------------- Net sales $ 496.5 $ 643.6 Cost of goods sold 313.2 442.1 ------- ------- Gross margin 183.3 201.5 ------- ------- Distribution expense 28.4 33.8 Marketing expense 81.0 93.3 General & administrative expense 44.5 57.3 Gain on divestiture of businesses, net (4.4) (301.4) ------- ------- Operating income 33.8 318.5 ------- ------- Interest expense 15.5 16.9 Affiliated interest expense 1.7 -- Interest income and other (9.7) (7.4) Equity in net loss (income) of unconsolidated subsidiaries 5.3 (0.6) ------- ------- Income from continuing operations before income tax 21.0 309.6 Income tax expense 7.0 66.8 ------- ------- Income from continuing operations 14.0 242.8 ------- ------- Discontinued operations: Income from operations, net of tax -- 2.3 Gain on disposal, net of tax -- 26.0 ------- ------- Net income 14.0 271.1 Affiliate's share of income (0.9) (128.7) Preferred stock dividends (18.4) (18.4) ------- ------- Net (loss) income applicable to common stock $ (5.3) $ 124.0 ======= ======= Comprehensive income (see Note 3) $ (5.2) $ 380.1 ======= =======
- -------------------------------------------------------------------------------- See Notes to Condensed Consolidated and Condensed Combined Financial Statements 11 12 - -------------------------------------------------------------------------------- CONDENSED COMBINED BALANCE SHEETS (UNAUDITED) BORDEN, INC. AND AFFILIATES (In millions)
March 31, December 31, ASSETS 1999 1998 - --------------------------------------------------------------------------------- CURRENT ASSETS Cash and equivalents $ 635.3 $ 695.5 Accounts receivable (less allowance for doubtful accounts of $13.6 in 1999 and $13.8 in 1998) 287.5 291.7 Inventories: Finished and in-process goods 104.0 108.9 Raw materials and supplies 69.2 81.3 Deferred income taxes 79.9 99.2 Other current assets 33.0 33.3 -------- -------- 1,208.9 1,309.9 -------- -------- INVESTMENTS AND OTHER ASSETS Investments 75.8 81.3 Deferred income taxes 113.2 89.4 Prepaid pension assets 140.9 140.8 Other assets 34.7 34.8 -------- -------- 364.6 346.3 -------- -------- PROPERTY AND EQUIPMENT Land 38.4 39.4 Buildings 189.9 194.3 Machinery and equipment 983.3 1,000.4 -------- -------- 1,211.6 1,234.1 Less accumulated depreciation (541.1) (554.6) -------- -------- 670.5 679.5 INTANGIBLES 383.6 386.2 -------- -------- TOTAL ASSETS $2,627.6 $2,721.9 ======== ========
- -------------------------------------------------------------------------------- See Notes to Condensed Consolidated and Condensed Combined Financial Statements 12 13 - -------------------------------------------------------------------------------- CONDENSED COMBINED BALANCE SHEETS (UNAUDITED) BORDEN, INC. AND AFFILIATES (In millions)
March 31, December 31, LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998 - ------------------------------------------------------------------------------------ CURRENT LIABILITIES Debt payable within one year $ 17.4 $ 23.1 Accounts and drafts payable 170.9 185.4 Income taxes payable 286.4 279.8 Loans payable to affiliate 140.0 138.2 Other current liabilities 307.7 362.6 -------- -------- 922.4 989.1 -------- -------- OTHER LIABILITIES Long-term debt 554.5 554.6 Non-pension post-employment benefit obligations 202.9 214.6 Other long-term liabilities 119.3 129.7 -------- -------- 876.7 898.9 -------- -------- Commitments and contingencies (See Note 5) SHAREHOLDERS' EQUITY Preferred stock 614.4 614.4 Common stock 2.0 2.0 Paid in capital 671.3 653.5 Receivable from parent (414.9) (415.3) Affiliate's interest in subsidiary 61.7 60.8 Accumulated other comprehensive income (108.4) (89.2) Retained earnings 2.4 7.7 -------- -------- 828.5 833.9 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,627.6 $2,721.9 ======== ========
- -------------------------------------------------------------------------------- See Notes to Condensed Consolidated and Condensed Combined Financial Statements 13 14 - -------------------------------------------------------------------------------- CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED) BORDEN, INC. AND AFFILIATES
Three months ended March 31, (In millions) 1999 1998 CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES Net income $ 14.0 $ 271.1 Adjustments to reconcile net income to net cash from (used in) operating activities: Gain on disposal of discontinued operations -- (90.7) Gain on divestiture of businesses (4.4) (301.4) Deferred tax provision (benefit) (1.1) 97.2 Depreciation and amortization 20.1 23.6 Unrealized gain on interest rate swap (2.9) (1.7) Equity in net loss (income) of unconsolidated subsidiaries 5.3 (0.6) Net change in assets and liabilities: Trade receivables (2.2) 22.0 Inventories 13.1 11.5 Trade payables (7.3) (13.9) Income taxes (7.3) 22.7 Other assets 0.6 (29.3) Other liabilities (57.4) (48.1) Discontinued operations working capital -- 3.0 ------- ------- (29.5) (34.6) ------- ------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES Capital expenditures (18.4) (22.5) Proceeds from the divestiture of businesses 9.5 994.3 Proceeds from the sale of fixed assets 2.4 8.8 Purchase of business, net of cash acquired -- (14.4) ------- ------- (6.5) 966.2 ------- ------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES Net short-term debt (repayments) borrowings (5.7) 1.4 Repayment of long-term debt (0.1) (235.3) Interest received from parent 12.4 13.3 Common stock dividends paid (12.4) (13.3) Preferred stock dividends paid (18.4) (18.4) ------- ------- (24.2) (252.3) ------- -------
- -------------------------------------------------------------------------------- 14 15 - -------------------------------------------------------------------------------- CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED) BORDEN, INC. AND AFFILIATES
Three months ended March 31, (In millions) 1999 1998 - ------------------------------------------------------------------------------ (Decrease) increase in cash and equivalents $ (60.2) $ 679.3 Cash and equivalents at beginning of period 695.5 198.6 ------- ------- Cash and equivalents at end of period $ 635.3 $ 877.9 ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid: Interest, net $ 17.0 $ 21.2 Taxes 15.4 34.7 Non-cash activity: Distribution of note receivable from Company's parent to cancel options -- 28.5 Investment retained in IHDG -- 10.5 Capital contribution by parent 8.4 6.1 Affiliate's share of income 0.9 128.7
- -------------------------------------------------------------------------------- See Notes to Condensed Consolidated and Condensed Combined Financial Statements 15 16 - -------------------------------------------------------------------------------- CONDENSED COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) BORDEN, INC. AND AFFILIATES (In millions)
Accumulated Receivable Affiliate's Other Preferred Common Paid-in from Interest in Comprehensive Retained Stock Stock Capital Parent Subsidiary Income Earnings Total - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 $ 614.4 $ 2.0 $ 653.5 $ (415.3) $ 60.8 $ (89.2) $ 7.7 $ 833.9 - ---------------------------------------------------------------------------------------------------------------------------------- Net income 14.0 14.0 Translation adjustments (19.2) (19.2) Preferred stock dividends (18.4) (18.4) Common stock dividends (12.1) (12.1) Interest accrued on notes from parent 7.3 0.4 7.7 Capital contribution from parent 8.4 8.4 Transfer of tax basis among affiliates 14.2 14.2 Affiliate's interest in subsidiary 0.9 (0.9) 0.0 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, March 31, 1999 $ 614.4 $ 2.0 $ 671.3 $ (414.9) $ 61.7 $ (108.4) $ 2.4 $ 828.5 - ---------------------------------------------------------------------------------------------------------------------------------- See Notes to Condensed Consolidated and Condensed Combined Financial Statements
16 17 NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS (Dollars in millions except per share amounts and as otherwise indicated) 1. BASIS OF PRESENTATION The Registrant, Borden, Inc. (the "Company"), is engaged primarily in manufacturing, processing, purchasing and distributing a broad range of products worldwide. The Company's principal line of business is chemicals ("Chemical"), including formaldehyde, melamine, resins, coatings and other specialty and industrial chemicals. The Company also produces and sells consumer adhesives and provides infrastructure management services. The Company's principal lines of business formerly included its international and domestic foods operations ("Foods") and salty snacks business ("Wise"). Subsidiaries of BWHLLC, an affiliate of the Company's parent, together with subsidiaries of Wise Holdings, Inc. ("Wise Holdings") and subsidiaries of Borden Foods Holdings Corporation ("Foods Holdings") purchased Wise and Foods on July 2, 1996 and October 1, 1996, respectively. As a result of these sales, Wise and Foods, as of their respective sale dates, are no longer legally part of the Company on a consolidated basis. However, management of the Company continues to exercise significant operating and financial control over Wise and Foods. In addition, Wise Holdings and Foods Holdings provide financial guarantees to obligations under the Company's credit facility and all of the Company's outstanding publicly held debt. Because of the aforementioned control and guarantees, the Company has included, supplementally in this filing, the financial condition and results of operations and cash flows for Borden, Inc. and Affiliates (the "Combined Companies"). The Combined Companies present financial information on a basis consistent with that upon which credit was originally extended to the Company. The accompanying unaudited interim condensed consolidated and condensed combined financial statements contain all adjustments, consisting only of normal adjustments, which in the opinion of management are necessary for a fair statement of the results for the interim period. Results for the interim period are not necessarily indicative of results for the full year. 2. DISCONTINUED OPERATION The Decorative Products business was sold on March 13, 1998. Since the business was a separate segment of the Company's business as defined by generally accepted accounting principles, the business' results have been reclassified to discontinued operations in the 1998 statements of operations and cash flows. A summary of the results included in these consolidated and combined financial statements follows.
THREE MONTHS ENDED MARCH 31, 1999 1998 ------------------------------------------------------------------------- Net sales - $ 73.2 Income before income taxes - 3.5 Income tax expense - 1.2 Income from discontinued operations - 2.3 -------------------------------------------------------------------------
17 18
3. COMPREHENSIVE INCOME Comprehensive income was computed as follows: THREE MONTHS ENDED MARCH 31, CONSOLIDATED COMBINED ---------------- ---------------- 1999 1998 1999 1998 ------------------------------------------------------------------------- Net income $ 13.3 $34.1 $ 14.0 $271.1 Foreign currency translation adjustments (17.7) 2.2 (19.2) 0.6 Reclassification adjustment -- -- -- 108.4 ------ ----- ------ ------ $ (4.4) $36.3 $ (5.2) $380.1 -------------------------------------------------------------------------
The foreign currency translation adjustment in 1999 relates primarily to Latin American Chemical businesses. The reclassification adjustment in 1998 represents the accumulated translation adjustment recognized on the sale of the Combined Companies' KLIM business. 4. RELATED PARTY TRANSACTIONS Foods and BWHLLC, an affiliate of the Company's parent, invest cash not used in operations with the Company. At March 31, 1999, Foods had $278.6 invested with the Company and BWHLLC had $140.0 invested with the Company. These balances are reflected as a net loan payable to an unconsolidated affiliate in the consolidated balance sheet. The Company provides infrastructure management services to Foods and Wise. Fees received for these services are offset against the Company's general and administrative expenses, and approximated $2.4 and $3.2 for the three months ended March 31, 1999 and 1998, respectively. 5. COMMITMENTS AND CONTINGENCIES ENVIRONMENTAL MATTERS - The Company and Combined Companies, like others in similar businesses, are subject to extensive federal, state and local environmental laws and regulations. Although environmental policies and practices are designed to ensure compliance with these laws and regulations, future developments and increasingly stringent regulation could require the Company and Combined Companies to make additional unforeseen environmental expenditures. Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Environmental accruals are routinely reviewed on an interim basis as events and developments warrant. The Company and the Combined Companies have each accrued approximately $19.0 and $19.6 at March 31, 1999, and December 31, 1998, respectively, for probable environmental remediation and restoration liabilities. This is management's best estimate of these liabilities, based on currently available information and analysis. The Company and Combined Companies believe that it is reasonably possible that costs associated with such liabilities may exceed current reserves by amounts that may prove insignificant, or by amounts, in the aggregate, of up to approximately $12.0. LEGAL MATTERS - The Company and Combined Companies have recorded $16.8 and $23.5, respectively, in liabilities at March 31, 1999, for legal costs that they believe are probable and reasonably estimable. These liabilities at December 31, 1998, totaled $17.6 for the Company and $32.1 for the Combined Companies. Actual costs are not expected to exceed these amounts. In addition, the Company and Combined Companies may be held responsible for certain environmental liabilities incurred at Borden Chemicals and Plastics Limited Partnership facilities, which were previously owned by the Company. Management believes, based upon the information it currently possesses, and taking into account its established reserves for estimated liability and its insurance coverage, that the ultimate outcome of the foregoing proceedings and actions is unlikely to have a material adverse effect on the Company's or Combined Companies' financial position or operating results. 18 19 OTHER COMMITMENTS - A wholly owned subsidiary serving as general partner of Borden Chemicals and Plastics Limited Partnership ("BCP") has certain fiduciary responsibilities to BCP's unitholders. The Company and Combined Companies believe that such responsibilities will not have a material adverse effect on their financial statements. 6. SEGMENT INFORMATION
SALES TO UNAFFILIATED CUSTOMERS: ---------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, ----------------------------------------- CONSOLIDATED COMBINED ----------------- ----------------- 1999 1998 1999 1998 ---------------------------------------------------------------------------- Foods ongoing $134.0 $149.6 Foods Unaligned 5.6 73.0 Wise 50.0 53.9 Chemical $285.6 $319.7 285.6 319.7 Corporate and other 21.3 19.3 21.3 19.3 Businesses held for sale - 28.1 - 28.1 ------ ------ ------ ------ $306.9 $367.1 $496.5 $643.6 ---------------------------------------------------------------------------- OPERATING EBITDA: ---------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, ----------------------------------------- CONSOLIDATED COMBINED ----------------- ----------------- 1999 1998 1999 1998 ---------------------------------------------------------------------------- Foods ongoing $ (1.2) $ 0.1 Foods Unaligned 1.7 3.8 Wise 0.8 (0.6) Chemical $ 49.6 $ 44.2 49.6 44.2 Corporate and other (1.4) (7.0) (1.4) (7.0) Businesses held for sale - 1.0 - 1.0 Combining adjustments - - - (0.8) ------ ------ ------ ------ ADJUSTED OPERATING EBITDA (1) 48.2 38.2 49.5 40.7 Significant unusual items (2) - - 4.4 301.4 ------ ------ ------ ------ OPERATING EBITDA 48.2 38.2 53.9 342.1 Depreciation and amortization (12.0) (13.0) (20.1) (23.6) ------ ------ ------ ------ OPERATING INCOME $ 36.2 $ 25.2 $ 33.8 $318.5 ---------------------------------------------------------------------------- (1) Adjusted Operating EBITDA represents net income (loss), excluding discontinued operations, non-operating income and expense, interest, taxes, depreciation, amortization and significant unusual items. (2) 1999 includes gains on the sale of Foods Unaligned businesses due to additional proceeds and lower than expected exit costs related to the 1998 KLIM sale. 1998 includes gains on the sale of Foods Unaligned businesses.
19 20 PART I. FINANCIAL INFORMATION - ------- --------------------- Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Following is a comparison of sales and operating income by business unit.
(Dollars in millions) - ---------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, -------------------------------------- NET SALES 1999 1998 - --------- -------------- --------------- Chemical $ 285.6 $ 319.7 Businesses held for sale - 28.1 Corporate and other 21.3 19.3 -------------- --------------- CONSOLIDATED NET SALES 306.9 367.1 -------------- --------------- Foods ongoing 134.0 149.6 Foods Unaligned 5.6 73.0 -------------- --------------- Total Foods 139.6 222.6 Wise 50.0 53.9 -------------- --------------- COMBINED NET SALES $ 496.5 $ 643.6 ============== =============== OPERATING INCOME - ---------------- Chemical $ 39.7 $ 34.1 Businesses held for sale - (0.3) Corporate and other (3.5) (8.6) -------------- --------------- CONSOLIDATED OPERATING INCOME 36.2 25.2 -------------- --------------- Foods ongoing (7.5) (7.0) Foods Unaligned 1.6 1.8 Gain on sale of Foods Unaligned businesses 4.4 301.4 -------------- --------------- Total Foods (1.5) 296.2 Wise (0.9) (2.1) Combining adjustment - (0.8) -------------- --------------- COMBINED OPERATING INCOME $ 33.8 $ 318.5 ============== =============== - ----------------------------------------------------------------------------------------------------------------------------
20 21 CONSOLIDATED AND COMBINED THREE MONTHS ENDED MARCH 31, 1999 VERSUS THREE MONTHS ENDED MARCH 31, 1998 Consolidated Summary - -------------------- Consolidated sales decreased $60.2 million or approximately 16% from $367.1 million in 1998 to $306.9 million in 1999. The sales decline was caused primarily by the 1998 divestiture of the commercial and industrial wallcoverings business, previously classified as "Businesses held for sale," and lower Chemical sales due primarily to unfavorable currency exchange rates and lower unit pricing, partially offset by improved volume in North America Chemical businesses. Operating income improved $11.0 million from $25.2 million in 1998 to $36.2 million in 1999, due primarily to improved volume and margins in the Chemical business and timing differences in corporate expenses. Combined Summary - ---------------- Combined sales decreased $147.1 million or approximately 23% from $643.6 million in 1998 to $496.5 million in 1999. The decline in sales was caused primarily by the divestiture of Foods Unaligned businesses in 1998, reduction in pasta volumes, and the factors described above for consolidated sales. Combined operating income declined $284.7 million primarily due to $301.4 million of gains on divestitures of Foods Unaligned businesses in 1998, compared to $4.4 million in 1999. Absent these gains, operating income improved $12.3 million or approximately 72%, and primarily reflects the consolidated operating income results, as well as a decline in Foods operating results offset by a $7.5 million gain on the favorable settlement of litigation in 1999. Chemical - -------- Chemical sales were down $34.1 million or approximately 11% from 1998. The decline reflects unfavorable currency exchange rates in Canada and Latin America, substantially lower North America pricing, the 1998 shutdown of a European operation, and the 1998 sales of non-core businesses in North America and Latin America, all partially offset by improved volumes, primarily in the North America forest products resins business. The impact of unfavorable currency exchange rates on sales was approximately $15 million, with most of the impact coming from Latin America, reflecting the recent currency devaluation in Brazil. The effect of significantly lower pricing in North America was approximately $20 million and reflects competitive market conditions as well as contractual arrangements that require pass-through of significantly lower raw material costs, primarily for methanol, phenol and urea. The 1998 closure of a European operation and the 1998 sales of the North America paper resins business and the Latin America plastic films business resulted in a sales decline of approximately $12 million versus the prior year. Overall volume improvement of 4% had a positive impact on sales of approximately $12 million, with most of the improvement coming from the North America forest products resins business. The improved volume in North America was driven by continued low interest rates and strong housing and construction activity, especially in Canada. Operating income increased $5.6 million or approximately 16% from 1998. The improvement is due primarily to improved gross margins, which reflect significantly higher volumes, lower raw material costs, and lower manufacturing costs resulting from specific cost reduction and control programs. These improvements were partially offset by higher selling, general and administrative expenses, and unfavorable currency exchange rates in Canada and Latin America. The favorable impact of significantly lower raw materials costs was substantially offset by lower selling prices necessitated by contractual arrangements, under which resin selling prices are tied directly to raw material costs. Operating income in Latin America was down just 10% despite the recent significant currency devaluation in Brazil, as management was able to increase prices to mitigate the effect of higher imported raw material costs. 21 22 Corporate and other - ------------------- Corporate and other sales increased $2.0 million or 10% from $19.3 million in 1998 to $21.3 million in 1999 due to improved volumes and sales mix in the consumer adhesives business. Operating income improved $5.1 million from a loss of $8.6 million to a loss of $3.5 million, due primarily to timing differences in normal business expenses. Foods - ----- Foods sales for the three months ended March 31, 1999, were $139.6 million, down $83.0 million or approximately 37% compared to $222.6 million for the three months ended March 31, 1998. The decrease is due primarily to the absence of sales from Foods Unaligned businesses sold during 1998. Sales from ongoing businesses declined $15.6 million primarily due to lower pasta volumes caused primarily by the timing of promotional programs and customer inventory adjustments. Foods operating results declined $297.7 million from income of $296.2 million to a loss of $1.5 million in 1999. This decline is primarily due to gains on the sale of Foods Unaligned businesses in 1998. Results from Foods ongoing businesses declined $0.5 million or 7% from a loss of $7.0 million in 1998 to a loss of $7.5 million in 1999. Excluding a $7.5 million gain on the favorable settlement of litigation in 1999, results of ongoing operations decreased $8.0 million. The positive effects of improving gross margins through lower raw materials prices and manufacturing efficiencies were more than offset by the volume decline, increased investment in brands, and $3.8 million additional general and administrative expense related to implementing enterprise-wide information technology systems. Wise - ---- Wise sales declined $3.9 million or approximately 7% from the first quarter of 1998. This sales decline is the result of the sale of the company's Caribbean based distributorship. Operating results improved $1.2 million from a loss of $2.1 million in 1998 to a loss of $0.9 million in 1999. The improvement was primarily due to the absence of a $1.0 million loss recorded on the sale of the company's Caribbean based distributorship in the first quarter of 1998. NON-OPERATING EXPENSES AND INCOME TAXES - --------------------------------------- Following is a comparison of non-operating expenses for the three months ended March 31, 1999 and 1998.
- -------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, -------------------------------------------- CONSOLIDATED COMBINED ------------------- ------------------- (Dollars in millions) 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Interest expense $ 15.3 $ 16.4 $ 15.5 $ 16.9 Affiliated interest expense, net 4.8 4.7 1.7 - Interest income and other (8.7) (5.3) (9.7) (7.4) Equity in net loss (income) of unconsolidated subsidiaries 5.3 (0.6) 5.3 (0.6) ------- ------- ------- ------- $ 16.7 $ 15.2 $ 12.8 $ 8.9 - --------------------------------------------------------------------------------
Consolidated non-operating expense increased $1.5 million from $15.2 million in 1998 to $16.7 million in 1999. This increase was primarily due to equity in net losses of unconsolidated subsidiaries in 1999 compared to income in 1998, partially offset by greater interest income on a higher average cash balance in 1999 than 1998. Average cash balances were higher in the first quarter of 1999 due to the sale of certain businesses in 1998. The Company's affiliated net interest expense remained flat. Combined non-operating expense increased $3.9 million from $8.9 million in 1998 to $12.8 million in 1999. The increase resulted primarily from the factors described above for consolidated reporting, adjusted for the elimination of Foods and Wise activity. 22 23 Following is comparison of income taxes for the three months ended March 31, 1999 and 1998.
THREE MONTHS ENDED MARCH 31, ---------------------------------------------------- CONSOLIDATED COMBINED ------------------------ ------------------------ (Dollars in millions) 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Income tax expense $ 6.2 $ 4.2 $ 7.0 $ 66.8 Effective tax rate 32% 42% 33% 22% - -------------------------------------------------------------------------------
The 1999 consolidated and combined effective tax rates reflect a higher portion of net income derived from foreign operations and the effect of lower tax rates in foreign jurisdictions. The 1998 consolidated effective income tax rate approximates the statutory rate for the Company. The Foods Unaligned divestitures in 1998 led to a lower effective tax rate for the Combined Companies as a portion of the gains are not subject to corporate tax. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Operating Activities - -------------------- Consolidated cash used in operating activities totaled $20.9 million for the first quarter of 1999 and $9.0 million for the first quarter of 1998. Although there was improvement in 1999 working capital and net income before gain on divestiture, the increase in cash used between years is due primarily to an increase in tax payments of $13.1 million and the payment of approximately $13.0 million to settle certain long term disability claims. The Combined Companies reduced cash outflows from operating activities by $5.1 million for the first quarter of 1999. Combined operating cash flows reflect the items noted above, a reduction of cash taxes paid by Foods and a reduction of cash generated by Wise operating activities. Higher cash taxes paid by Foods in the first quarter of 1998 related to gains recognized on the sale of certain Foods Unaligned businesses. The reduction in cash generated from Wise's first quarter operating activities is primarily due to the timing of payments. Investing Activities - -------------------- First quarter consolidated investing activities used cash of $11.0 million in 1999 compared to generating cash of $341.0 million in 1998. The decline of $352.0 million between years is due primarily to the absence of proceeds from business sales in 1998 and reduced affiliated debt repayments from Foods, which repaid its outstanding affiliated debt balance in 1998. Combined investing cash flows reflect primarily the items noted above excluding the affiliated debt repayments which are eliminated. Financing Activities - -------------------- Consolidated financing activities used $23.1 million in cash during the first quarter of 1999 compared to $351.7 million generated during the same period in 1998. In the first quarter of 1998, cash generated from investing activities was used to repay the $235.0 million outstanding revolving line of credit balance. The Company's $599.7 million affiliated borrowings in the first quarter of 1998 represent proceeds from the sale of Foods Unaligned businesses, which were in turn invested in cash equivalents. Combined financing activities primarily reflect the above with the exception of the Foods affiliated borrowing activity which is eliminated. 23 24 IMPACT OF THE YEAR 2000 ISSUE - ----------------------------- Overview - -------- The Year 2000 issue is the result of computer programs written using two digits rather than four to define the applicable year. Any of the Company's and Combined Companies' computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. If not addressed, the Year 2000 issue could have a material adverse impact on the business operations and financial results of the Company and Combined Companies. To address this issue, the Company's and Combined Companies' Year 2000 Program is a risk-based plan divided into three phases that are being executed by both internal and external resources. These phases are: Phase I - an inventory of all systems, assigning a business priority for each system and performing a preliminary assessment of Year 2000 susceptibility; Phase II - completion of a detailed Year 2000 susceptibility analysis and development of remediation plans and contingency plans; and Phase III - implementation of the remediation plans and, if necessary, contingency plan(s) and completing final system testing. The Year 2000 efforts are divided into three areas that include (1) systems being replaced by new enterprise-wide system implementations; (2) systems that will not be replaced by the new enterprise-wide system implementations, including non-information technology systems such as plant process controls; and (3) external suppliers and customers. A discussion of each area of activity relative to the three phased approach follows. Enterprise-Wide Systems - ----------------------- The comprehensive new enterprise-wide system being implemented by each of the Company's and the Combined Companies' businesses will replace most business and accounting systems. The enterprise-wide system versions are said to be Year 2000 compliant by the vendors and include SAP, PeopleSoft and J.D. Edwards. Due to the relative complexity and importance of the existing business and accounting systems to ongoing operations, the new enterprise-wide system implementations will address the significant majority of the Company's and Combined Companies' internal Year 2000 risk. Three out of five of these new system implementations were substantially completed by April 30, 1999. All of the new enterprise-wide system implementations are planned to be completed by July 1, 1999. Other Systems - ------------- For the systems not to be replaced by enterprise-wide implementations, Phase I and Phase II are complete, and Phase III remediation and testing are in process. As of March 31, 1999, the Company and Combined Companies have completed approximately 80% of the needed remediation work for these other systems. The remaining remediation work and all system testing activities are planned to be completed by June 30, 1999. Suppliers and Customers - ----------------------- The Company and Combined Companies have completed Phase I of the plan to assess and address the risks related to third party suppliers and customers. Supplier and customer responses are being evaluated and appropriate procedures are being performed to determine the extent to which the Company and Combined Companies may be vulnerable to the failure of third parties to resolve their own Year 2000 issues. Efforts related to suppliers and customers, including development of contingency plans where appropriate, are targeted for completion by June 30, 1999. Although the Company's and Combined Companies' systems do not rely significantly on systems of other companies, the Company and Combined Companies cannot provide assurance that failure of third parties to address the Year 2000 issue will not have an adverse impact on business operations and results. 24 25 Costs - ----- Significant investments in enterprise-wide information systems have been made since 1996 that will total approximately $74 million for the Company and $118 million for the Combined Companies by the Year 2000. The cost to make the remaining systems Year 2000 compliant is estimated to be $7 million for the Company and $15 million for the Combined Companies. As of March 31, 1999, the Company and Combined Companies had incurred costs of approximately $69 million and $105 million, respectively, for enterprise-wide systems and approximately $4 million and $11 million, respectively, for other systems and efforts. Risks - ----- Due to the general uncertainty inherent in the Year 2000 problem, including primarily the uncertainty associated with suppliers and customers, the potential effect of the Year 2000 issue on the financial results and condition of the Company and Combined Companies has not been measured. The Company and Combined Companies intend the Year 2000 Program, as described above, to be completed on a timely basis so as to significantly reduce the level of uncertainty and the impact on business operations and financial results. Contingency plans have been and will continue to be developed and implemented to mitigate Year 2000 risks and the effect of Year 2000 issues. Previously, these contingency plans primarily related to remediation of existing business systems in the event the enterprise-wide implementations are delayed beyond the targeted completion dates. Contingency plans will also be developed to address potential Year 2000 incidents and issues, primarily related to third parties, that may occur in 2000. Readers are cautioned that forward-looking statements contained in the Year 2000 Update should be read in conjunction with the disclosure under the heading "Forward-Looking and Cautionary Statements." FORWARD-LOOKING AND CAUTIONARY STATEMENTS - ----------------------------------------- The Company and its officers may, from time to time, make written or oral statements regarding the future performance of the Company, including statements contained in the Company's filings with the Securities and Exchange Commission. Investors should be aware that these statements are based on currently available financial, economic, and competitive data and on current business plans. Such statements are inherently uncertain and investors should recognize that events could cause the Company's actual results to differ materially from those projected in forward-looking statements made by or on behalf of the Company. Such risks and uncertainties are primarily in the areas of results of operations by business unit, liquidity, legal, environmental liabilities, and Year 2000 compliance. 25 26 PART II Item 1: LEGAL PROCEEDINGS There have been no material developments in the ongoing legal proceedings that are discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. The Company is involved in various litigation throughout the United States, which is considered to be in the ordinary course of the Company's business. The Company believes, based on the information it presently possesses, and taking into account its established reserves for estimated liability and its insurance coverages, that the ultimate outcome of the foregoing proceedings is unlikely to have a materially adverse effect on the Company's financial position or operating results. Item 6: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a. Exhibits (27) Financial Data Schedule b. Financial Statement Schedules Included are the separate financial statements of Foods Holdings and Wise Holdings filed in accordance with rule 3-10 of Regulation S-X. Foods Holdings and Wise Holdings are guarantors of the Company's credit facility and all of the Company's outstanding publicly held debt. c. Reports on Form 8-K There were no reports on Form 8-K issued during the first quarter of 1999. 26 27 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BORDEN, INC. Date May 14, 1999 By /s/ William H. Carter -------------------------------- William H. Carter Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 27 28 BORDEN FOODS HOLDINGS CORPORATION CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 BFH 1 29 - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED) BORDEN FOODS HOLDINGS CORPORATION
Three Months Ended (In thousands except per share and share amounts) March 31, 1999 1998 - -------------------------------------------------------------------------------- Net sales $ 139,621 $ 222,618 Cost of goods sold 68,995 132,053 --------- --------- Gross margin 70,626 90,565 --------- --------- Distribution expense 9,584 14,555 Marketing expense 57,065 64,695 General & administrative expense 8,739 13,509 Gain on divestiture of businesses (3,088) (187,146) --------- --------- Operating (loss) income (1,674) 184,952 --------- --------- Interest expense 210 1,408 Interest income (3,448) (6,102) Other income, net (195) (213) --------- --------- Income before income tax 1,759 189,859 Income tax expense 359 37,310 --------- --------- Net income 1,400 152,549 Affiliate's share of income (866) (128,745) --------- --------- Net income applicable to common stock $ 534 $ 23,804 ========= ========= Comprehensive income (Note 5) $ (1,387) $ 184,384 ========= ========= Basic and diluted earnings per common share $ 5,340 $ 238,040 Average number of common shares outstanding during the period 100 100
- -------------------------------------------------------------------------------- See accompanying Notes to the Condensed Consolidated Financial Statements. BFH 2 30 - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) BORDEN FOODS HOLDINGS CORPORATION (In thousands)
March 31, December 31, ASSETS 1999 1998 - -------------------------------------------------------------------------------- CURRENT ASSETS Cash and equivalents $ 295,480 $ 300,104 Accounts receivable (less allowance for doubtful accounts of $1,386 and $1,391, respectively) 39,153 47,339 Other receivables 16,949 12,513 Inventories: Finished and in-process goods 38,923 42,933 Raw materials and supplies 20,678 26,853 Deferred income taxes 22,165 24,181 Amounts due from affiliates 2,063 2,130 Other current assets 10,137 11,076 --------- --------- 445,548 467,129 OTHER ASSETS 9,615 9,138 PROPERTY AND EQUIPMENT Land 10,262 10,879 Buildings 42,367 44,094 Machinery and equipment 151,557 147,720 --------- --------- 204,186 202,693 Less accumulated depreciation (60,640) (59,535) --------- --------- 143,546 143,158 INTANGIBLES Goodwill 14,177 15,658 Trademarks and other intangibles 110,210 110,987 --------- --------- 124,387 126,645 --------- --------- TOTAL ASSETS $ 723,096 $ 746,070 ========= =========
- -------------------------------------------------------------------------------- See accompanying Notes to the Condensed Consolidated Financial Statements. BFH 3 31 - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) BORDEN FOODS HOLDINGS CORPORATION (In thousands except per share and share amounts)
March 31, December 31, LIABILITIES AND SHAREHOLDER'S EQUITY 1999 1998 - -------------------------------------------------------------------------------- CURRENT LIABILITIES Debt payable within one year $ 6,774 $ 6,824 Accounts and drafts payable 43,321 55,847 Accrued customer allowances 17,738 19,600 Amounts due to affiliates 3,147 2,948 Income tax payable 17,869 5,418 Other current liabilities 94,434 116,349 --------- --------- 183,283 206,986 OTHER LIABILITIES Long-term debt 2,643 2,602 Deferred income taxes 22,827 38,823 Other long-term liabilities 26,141 22,899 --------- --------- 51,611 64,324 Commitments and Contingencies (Note 8) SHAREHOLDER'S EQUITY Common stock - $0.01 par value; 100 shares authorized, issued, and outstanding -- -- Shareholder's investment in affiliates 61,690 60,824 Paid in capital 405,817 390,988 Accumulated translation adjustment (10,893) (8,106) Retained earnings 31,588 31,054 --------- --------- 488,202 474,760 --------- --------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 723,096 $ 746,070 ========= =========
- -------------------------------------------------------------------------------- See accompanying Notes to the Condensed Consolidated Financial Statements. BFH 4 32 - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) BORDEN FOODS HOLDINGS CORPORATION
Three Months Ended (In thousands) March 31, 1999 1998 - -------------------------------------------------------------------------------- CASH FLOWS USED IN OPERATING ACTIVITIES Net income $ 1,400 $ 152,549 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 3,969 6,201 Deferred tax provision 849 3,301 Gain on divestiture of businesses (3,088) (187,146) Net change in assets and liabilities: Accounts receivable 8,186 41,773 Other receivables 2,164 5,287 Inventories 5,995 9,280 Accounts and drafts payable (12,526) (17,271) Accrued customer allowances (1,862) (4,884) Income taxes (488) 4,820 Other amounts due to/from affiliates 266 666 Other current assets and liabilities (10,867) (34,740) Other assets and liabilities (3,367) (11,425) --------- --------- (9,369) (31,589) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (7,105) (4,711) Proceeds from the sale of fixed assets 2,424 8,806 Proceeds from the sale of businesses 9,476 686,224 --------- --------- 4,795 690,319 --------- --------- CASH FLOWS USED IN FINANCING ACTIVITIES Net short-term debt payments (50) (3,973) Repayment of loans with affiliates -- (12,962) Repayment of long-term debt payable to affiliates -- (47,616) --------- --------- (50) (64,551) --------- --------- (DECREASE) INCREASE IN CASH AND EQUIVALENTS (4,624) 594,179 CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 300,104 28,736 --------- --------- CASH AND EQUIVALENTS AT END OF PERIOD $ 295,480 $ 622,915 ========= =========
- -------------------------------------------------------------------------------- See accompanying Notes to the Condensed Consolidated Financial Statements. BFH 5 33 - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) BORDEN FOODS HOLDINGS CORPORATION
Three Months Ended (In thousands) March 31, 1999 1998 - -------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid: Interest $ 253 $ 1,987 Taxes 112 32,113 Non-cash activity: Shareholder's investment in affiliates (Note 4) $ (866) $(128,745) Affiliate's share of income (Note 4) 866 128,745
- -------------------------------------------------------------------------------- See accompanying Notes to the Condensed Consolidated Financial Statements. BFH 6 34 - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (UNAUDITED) BORDEN FOODS HOLDINGS CORPORATION (In thousands)
- ----------------------------------------------------------------------------------------------------------------------------------- Shareholder's Accumulated Paid in Investment Retained Translation Capital in Affiliate Earnings Adjustments Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $ 390,988 $ 60,824 $ 31,054 $ (8,106) $ 474,760 - ----------------------------------------------------------------------------------------------------------------------------------- Net income 1,400 1,400 Foreign currency translation adjustments (2,787) (2,787) Affiliate's share of income 866 (866) - Transfer of tax basis among affiliates 14,829 14,829 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at March 31, 1999 $ 405,817 $ 61,690 $ 31,588 $ (10,893) $ 488,202 - -----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to the Condensed Consolidated Financial Statements. BFH 7 35 BORDEN FOODS HOLDINGS CORPORATION NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) 1. NATURE OF OPERATIONS Borden Foods Holdings Corporation ("Foods Holdings"), a wholly owned subsidiary of Borden Foods Holdings, LLC ("LLC"), owns approximately 98% of Borden Foods Corporation ("BFC"). The remaining interest in BFC is owned directly by LLC. BFC is a manufacturer and distributor of a variety of food products worldwide, including pasta, pasta sauce, soups and bouillon. At March 31, 1999, BFC's operations included 11 production facilities, 4 of which are located in the United States. The remaining facilities are located primarily in Canada and Europe. 2. BASIS OF PRESENTATION Foods Holdings has fully and unconditionally guaranteed obligations under Borden, Inc.'s ("Borden") Credit Facility and all of Borden's publicly held debt on a pari passu basis. As a result of the financial guarantee and in accordance with Regulation S-X rule 3-10, Borden is required to include in its filings with the Securities and Exchange Commission separate financial statements for Foods Holdings as if it were a registrant. Foods Holdings' financial statements are prepared on a purchase accounting basis. Borden elected not to apply push down accounting in its consolidated or combined financial statements and, as such, Borden's financial statements are reported on a historical cost basis. The accompanying unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) which management believes to be necessary for the fair presentation of operating results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The results for the interim period are subject to seasonal variations and are not necessarily indicative of results for the full year. The interim financial statements should be read in conjunction with Foods Holdings' audited financial statements for the year ended December 31, 1998. Certain prior year amounts have been reclassified to conform to the 1999 presentation. 3. BUSINESS REALIGNMENT Restructuring of Aligned Businesses - ----------------------------------- In 1996, management approved the closure of five domestic pasta plants in order to reduce its SKU complexity and manufacturing capacity. On January 5, 1999, a remaining facility was sold for proceeds of $2,424. As of March 31, 1999 and December 31, 1998, reserves related to the restructuring of aligned businesses of $1,669 and $7,570, respectively, remained in other current liabilities. It is anticipated that the remaining balance will be disbursed by the end of fiscal 1999. BFH 8 36 Divested Businesses - ------------------- During the first quarter of 1999, BFC received proceeds of $9,476 for working capital settlements on the sale of KLIM, of which $8,400 was included in other receivables as of December 31, 1998, and reduced current liabilities by $2,012, as costs were lower than previously estimated. During the first quarter of 1998, BFC and Investment LP sold the Signature Flavor business to Eagle Family Foods, Inc. for $376,500 and the KLIM business to Nestle, S.A for $330,000. As a result of these divestitures, BFC recorded a pre-tax gain of $187,146, net of charges for work-force reductions, closure of facilities, selling and legal fees, contract terminations, transition services and other miscellaneous costs. Activities related to the divestiture reserves during the three months ended March 31, 1999, which were recorded in other current liabilities, were as follows:
- ---------------------------------------------------------------------------------------- Business & Selling, Work-Force Contractual Legal & Reductions(1) Obligations(2) Other(3) TOTAL -------------------------------------------------------- Balance at December 31, 1998 $ 7,110 $ 35,071 $ 19,711 $ 61,892 Utilized (536) (3,815) (275) (4,626) Other(4) (2,012) (2,012) -------- -------- -------- -------- Balance at March 31, 1999 $ 6,574 $ 31,256 $ 17,424 $ 55,254 ======== ======== ======== ======== - ---------------------------------------------------------------------------------------- (1) Includes severance and other employee related benefits. (2) Includes charges related to the termination of leases, distributor arrangements, and other contractual agreements. (3) Includes selling and legal fees, facility closings, and other miscellaneous costs. (4) Changes in estimates. - ----------------------------------------------------------------------------------------
Subsequent Divestiture - ---------------------- On April 30, 1999, BFC sold the milk powder business located in China to Royal Numico for approximately $7.1 million, which resulted in a pre-tax gain of approximately $10.8 million. BFH 9 37 4. AFFILIATE'S SHARE OF INCOME In accordance with BFC Investment LP's limited partnership agreement with BFC and LLC, LLC was allocated an affiliate's share of income (see accompanying condensed consolidated statements of operations) of $866 and $128,745 during the first quarter of 1999 and 1998, respectively. The 1998 allocation was primarily due to a gain on divestiture of the Signature Flavor business. 5. COMPREHENSIVE INCOME Comprehensive income (loss) was computed as follows:
------------------------------------------------------------------------------------------ Three months ended March 31, 1999 1998 ---- ---- Net income $ 1,400 $ 152,549 Foreign currency translation adjustments (2,787) (3,079) Reclassification adjustment - 34,914 ------- --------- $(1,387) $ 184,384 ======= ========= ------------------------------------------------------------------------------------------
The reclassification adjustment in 1998 represents the accumulated translation adjustment recognized on the sale of the KLIM business. 6. RELATED PARTIES Borden and a subsidiary of Borden provide certain administrative services to BFC at negotiated fees. These services include processing of payroll, active and retiree group insurance claims, securing insurance coverage for catastrophic claims, and information systems support. BFC also reimburses the Borden subsidiary for payments for general disbursements and post-employment benefit claims. The amount owed by BFC for reimbursement of payments, services, and other liabilities was $3,135 at March 31, 1999 and $2,935 at of December 31, 1998. Eligible U.S. employees are provided employee pension benefits under the Borden domestic pension plan to which BFC contributes, and can participate in the Borden retirement savings plan. BFC has recognized expenses associated with these benefits, certain of which are determined by Borden's actuary. The liabilities for these obligations are included in BFC's financial statements. The following summarizes the affiliate charges for the three months ended March 31, 1999 and 1998:
- ------------------------------------------------------------------------------------------------------ Three months ended March 31, 1999 1998 Employee benefits $ 685 $ 1,351 Group and general insurance 1,250 1,399 Administrative services 3,329 4,102 -------- -------- $ 5,264 $ 6,852 ======== ======== - ------------------------------------------------------------------------------------------------------
BFH 10 38 BFC performs certain administrative services on behalf of other Borden affiliates. These services include sales administration, promotion, purchasing and research and development. BFC charged affiliates $237 and $285 for such services for the three months ended March 31, 1999 and 1998, respectively. The receivable for these services was $769 at March 31, 1999 and $505 at December 31, 1998. BFC invests cash not used in operations with Borden. BFC's investment balance was $278,550 at March 31, 1999 and $277,591 at December 31, 1998. The funds are invested overnight earning a rate set by Borden that generally approximates money market rates. BFC earned interest income of $3,257 and $5,815 on these funds for the three months ended March 31, 1999 and 1998, respectively. Amounts receivable for interest were $1,294 and $1,625 as of March 31, 1999 and December 31, 1998, respectively. Borden continues to provide executive, financial and strategic management to BFC for which it charges a quarterly fee of $250. 7. UNIT INCENTIVE PLAN During the first quarter of 1999, LLC sold 389,125 Class C units to certain BFC management employees. The Class C units are generally restricted as to transfer and allow for LLC, at its discretion, to repurchase the units, upon certain conditions including termination of the unitholders' employment, prior to full vesting after five years. Under the Unit Incentive Plan, BFC issued four UAR's with an exercise price of $8 per unit for each Class C unit purchased. The UAR entitles the unitholder to receive an amount in cash equal to the excess of the market price (as defined in the UAR agreement) of the unit over the exercise price of the UAR. The UAR's vest ratably over five years and expire upon certain events, including termination of the unitholders' employment, but in no case to exceed ten years. 8. COMMITMENTS AND CONTINGENCIES Legal Matters - ------------- In early 1999, BFC and Helm Tomatoes, Inc. reached agreement to settle a claim of wrongful termination of a tomato packing agreement with payments from BFC of $3,300 in May 1999 and $3,400 in May 2000. A gain of $7,500, derived from the difference between an initial reserve of $14,500 less the settlement and legal fees, was recorded in general and administrative expense during the first quarter of 1999. BFC is involved in certain other legal proceedings arising through the normal course of business. Management is of the opinion that the final outcomes of such proceedings should not have a material impact on BFC's results of operations or financial position. Year 2000 - --------- The Year 2000 issue is the result of computer programs written using two rather than four digits to define the applicable year. Many of BFC's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. If not addressed, the Year 2000 issue could have a negative material impact on the business operations and financial results of BFC. BFH 11 39 BFC's Year 2000 Program is a risk-based plan divided into three phases that are being executed by both internal and external resources. These phases are: (I) an inventory of all systems, assigning a business priority for each system and performing a preliminary assessment of Year 2000 susceptibility, (II) completion of a detailed Year 2000 susceptibility analysis and development of remediation plans and contingency plans, and (III) implementation of the remediation and, if necessary, contingency plans and completing final system testing. The Year 2000 efforts are divided into three categories: (1) ERP - business systems being replaced by new enterprise-wide system implementation, (2) Non-ERP - - business systems that will not be replaced by the new enterprise-wide system implementation, including non-information technology systems such as plant process controls, and (3) Third Parties - external suppliers and customers. ERP - The comprehensive new enterprise-wide system being implemented by BFC will replace most business and accounting systems. The enterprise-wide system versions are warranted by the vendor to be Year 2000 compliant by utilizing a four digit standard, including PeopleSoft, Vista and I2. Due to the relative complexity and importance of the business and accounting systems to ongoing operations, the new enterprise-wide system implementation will address the significant majority of BFC's internal Year 2000 risk. Implementation of the new system is underway and expected to be completed no later than June 30, 1999. Non-ERP - BFC plans to remediate systems not to be replaced by the enterprise-wide system. For these systems, Phase I is complete, Phase II is complete, and Phase III is approximately 75% complete. BFC expects to complete system remediation and all system testing activities by June 30, 1999. Third Parties - The Year 2000 Program also includes procedures to assess the risks related to suppliers and customers. As a result of initial inquiries, supplier and customer responses have been received. These responses will be evaluated and appropriate procedures will be performed to determine the extent to which BFC may be vulnerable to such parties' failure to resolve their own Year 2000 issues. Efforts related to suppliers and customers, including development of contingency plans where appropriate, are targeted for substantial completion by June 30, 1999. Although BFC's systems do not rely significantly on systems of other companies, BFC cannot provide assurance that failure of third parties to address the Year 2000 issue will not have an adverse impact on business operations and results. Significant investments in an enterprise-wide information system and Year 2000 program expenses addressing non-compliance across all areas of the company will total approximately $42,700 by the year 2000. This amount consists of $35,500 for the enterprise-wide information system and $7,200 of total Year 2000 costs and write-offs. Year 2000 costs and write-offs are comprised of $4,400 for business remediation, $1,900 for other related areas and program management, and $900 in write-offs of non-compliant hardware and systems. As of March 31, 1999, BFC has incurred expense and capital of $27,110 for the enterprise-wide system and $4,502 for Year 2000 compliance. Due to the general uncertainty inherent in the Year 2000 problem, including the uncertainty associated with suppliers and customers, the potential effect on the financial results and condition of BFC has not been measured. BFC intends the Year 2000 Program to be completed on a timely basis so as to significantly reduce the level of uncertainty and the impact on business operations and financial results. Contingency plans have been and will continue to be developed and implemented to mitigate Year 2000 risks and the effect of Year 2000 issues. To date, contingency plans are being implemented to reduce the risk of potential delays in the enterprise-wide system implementation. BFH 12 40 [LOGO] WISE HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 WH 1 41 - ------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) WISE HOLDINGS, INC. AND SUBSIDIARIES
THREE MONTHS ENDED MARCH 31, (Dollars in thousands) 1999 1998 - ------------------------------------------------------------------------------- Net sales $ 49,956 $ 53,881 Cost of goods sold 31,415 33,730 -------- -------- Gross margin 18,541 20,151 Distribution expense 6,765 6,941 Marketing expense 8,136 9,211 General & administrative expense 4,375 5,242 -------- -------- Operating loss (735) (1,243) Interest expense 119 122 Other expense(income) 42 (10) -------- -------- Loss before income taxes (896) (1,355) Income tax benefit (335) (608) -------- -------- Net loss $ (561) $ (747) ======== ======== Per Share Data Basic and diluted loss per common share $ (8.01) $ (10.67) Average number of common shares outstanding during the period 70 70 - -------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements WH 2 42 - ------------------------------------------------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) WISE HOLDINGS, INC. AND SUBSIDIARIES (Dollars in thousands)
MARCH 31, DECEMBER 31, ASSETS 1999 1998 - -------------------------------------------------------------------------------------- CURRENT ASSETS Cash and equivalents $ 3,271 $ 2,610 Accounts receivable (less allowance for doubtful accounts of $1,789 and $1,971, respectively) 20,181 22,181 Affiliated receivables 57 15 Inventories: Finished goods 4,151 4,045 Raw materials and supplies 3,177 3,886 Deferred income taxes, net 2,452 2,651 Prepaid and other current assets 3,685 3,660 ------- ------- 36,974 39,048 ------- ------- PROPERTY AND EQUIPMENT Land 1,412 1,412 Buildings and improvements 5,527 5,352 Machinery and equipment 45,850 45,120 ------- ------- 52,789 51,884 Less accumulated depreciation 20,880 19,769 ------- ------- 31,909 32,115 ------- ------- INTANGIBLES AND OTHER ASSETS Trademarks (net of accumulated amortization of $1,999 and $1,880, respectively) 16,812 16,931 Other assets 657 808 ------- ------- 17,469 17,739 ------- ------- TOTAL ASSETS $86,352 $88,902 ======= ======= - --------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements WH 3 43 - ---------------------------------------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) WISE HOLDINGS, INC. AND SUBSIDIARIES (Dollars in thousands)
MARCH 31, DECEMBER 31, LIABILITIES AND SHAREHOLDER'S EQUITY 1999 1998 - ---------------------------------------------------------------------- CURRENT LIABILITIES Debt payable within one year $ 170 $ 168 Accounts and drafts payable 13,811 16,060 Affiliated payables 500 463 Accrued liabilities 13,090 14,954 ------- ------- 27,571 31,645 ------- ------- OTHER LIABILITIES Long-term debt payable to Borden, Inc. 7,450 5,000 Deferred income taxes, net 1,882 2,198 Non-pension postemployment benefit obligations 9,475 9,513 Affiliated employee benefit obligation 2,362 2,165 Other long-term liabilities 250 455 Minority interest 215 218 ------- ------- 21,634 19,549 ------- ------- Commitments and Contingencies (Note 6) SHAREHOLDER'S EQUITY Common stock - $0.01 par value 70 shares authorized, issued and outstanding -- -- Preferred stock - $0.01 par value 30 shares authorized, none issued and outstanding -- -- Paid in capital 34,980 34,980 Retained earnings 2,167 2,728 ------- ------- 37,147 37,708 ------- ------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $86,352 $88,902 ======= ======= - ----------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements WH 4 44 - ------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) WISE HOLDINGS, INC. AND SUBSIDIARIES THREE MONTHS ENDED MARCH 31, (Dollars in thousands) 1999 1998 - ------------------------------------------------------------------------------- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES Net loss $ (561) $ (747) Adjustments to reconcile net loss to net cash from operating activities Minority interest's share in loss (3) (97) Depreciation 1,429 1,308 Amortization 119 118 Other non-cash 123 164 Net change in assets and liabilities: Accounts receivable 2,182 2,440 Affiliated receivables (42) 67 Inventories 603 756 Prepaid and other current assets (25) 179 Other assets 151 52 Accounts and drafts payable (2,249) 2,823 Affiliated payables 37 (472) Accrued liabilities (1,447) (2,284) Post-employment benefits other than pensions (38) (53) Affiliated employee benefit obligation 197 322 Other long-term liabilities (205) 36 ------- ------- 271 4,612 ------- ------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES Capital expenditures (2,065) (1,484) Proceeds from sales of equipment 3 8 ------- ------- (2,062) (1,476) ------- ------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES Short-term borrowings 2 -- Long-term borrowings 2,450 Repayment of short-term borrowings -- (270) ------- ------- 2,452 (270) ------- ------- INCREASE IN CASH AND EQUIVALENTS 661 2,866 Cash and equivalents at beginning of period 2,610 3,604 ------- ------- Cash and equivalents at end of period $ 3,271 $ 6,470 ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest: $ 175 $ -- Cash paid for taxes: 92 -- - -------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements WH 5 45 WISE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except for per share information) 1. BACKGROUND In September 1994, Borden, Inc. ("Borden") entered into a merger agreement that provided for the acquisition of all of Borden's outstanding common stock by affiliates of Kohlberg Kravis Roberts & Co. ("KKR"). Borden elected not to apply push down accounting in its consolidated financial statements as a result of public debt that was outstanding prior to the acquisition, and as such, Borden's financial statements (including Wise) are reported on Borden's historical cost basis. As discussed in the "Basis of Presentation," Wise's financial statements have been prepared on a purchase accounting basis from the date of KKR's acquisition of Borden. The effective date of the merger agreement was January 1, 1995 for accounting and financial statement presentation purposes. Effective July 2, 1996, in a taxable transaction (the "Incorporation"), Borden sold its salty snacks business ("Wise operations") to Wise Holdings Inc. ("Wise"), a KKR affiliate, for $45 million. The purchase price was based on an independent valuation of the business. There was no change in the financial reporting basis of the assets and liabilities as of July 2, 1996 from that described below under "Basis of Presentation" because Borden's principal stockholders continue to exercise significant financial control over Wise. Wise fully and unconditionally guarantees obligations under Borden's credit facility and all of Borden's publicly held debt on a pari passu basis. In connection with this guarantee, Wise receives an annual fee of $210. 2. NATURE OF OPERATIONS Wise is a producer and distributor of salty snacks in the eastern United States. Wise's product line includes potato chips, cheese flavored baked and fried corn snacks, pretzels, tortilla chips, corn chips, onion rings, pork rinds and other assorted snacks. Wise markets its products under the brand names of WISE(R), CHEEZ DOODLES(R), QUINLAN(R), NEW YORK DELI(R), KRUNCHERS!(R), BRAVOS(R), MOORE'S(R) and WISE CHOICE(TM) and conducts its business through two principal divisions: Wise and Moore's. The Wise and Moore's divisions manufacture and distribute primarily in the eastern United States. Wise's products are distributed through both independent and company-owned distribution networks. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - --------------------- As a result of the financial guarantee and in accordance with Regulation S-X rule 3-10, Borden is required to include in its filings with the Securities and Exchange Commission separate financial statements for Wise as if it were a registrant. The accompanying financial statements subsequent to the purchase by KKR have been prepared on a purchase accounting basis that allocates approximately $51 million of the original KKR purchase price of Borden to the Wise operations. The purchase price has been allocated to tangible and intangible assets and liabilities of Wise based on independent appraisals and management estimates. WH 6 46 The condensed consolidated financial statements of Wise collectively include the financial position of Wise Holdings, Inc. and subsidiaries as of March 31, 1999 and December 31, 1998. These financial statements also include the statements of operations of Wise for the three months ended March 31, 1999 and 1998 and cash flows of Wise for the three months ended March 31, 1999 and 1998. These unaudited interim condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the results for the interim periods presented. Reclassifications - ----------------- Certain prior year amounts have been reclassified to conform with the 1999 presentation. Per Share Information - --------------------- Basic and diluted loss per common share at March 31, 1999 and 1998 is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period ended March 31, 1999 and 1998, respectively. On April 24, 1998 the number of shares authorized and outstanding were reduced for administrative and tax purposes. The Per Share information for March 31, 1999 and 1998 is computed based on the adjusted shares outstanding. Options issued by subsidiaries that enable the holder to obtain stock of the subsidiary were not assumed exercised because they were antidilutive for both 1999 and 1998. Wise has no other potentially dilutive securities. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates in Wise's financial statements are related to allowance for doubtful accounts, accruals for trade promotions, general and group insurance, income taxes, post-retirement benefits, asset lives and corporate allocations. Actual results could differ from those estimates. Recently Issued Accounting Statements - ------------------------------------- In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Wise implemented this pronouncement as of January 1, 1999. Wise estimates that internal costs approximating $600 will be eligible for capitalization in 1999 which would have been expensed as incurred. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This standard is effective for fiscal years beginning after June 15, 1999 and requires all derivatives be measured at fair value and recorded on a company's balance sheet as a asset or liability, depending upon the company's underlying rights or obligations associated with the derivative instrument. Wise is investigating the impact of this pronouncement, but does not expect it to have a material impact on the company's results of operations, financial position or cash flows. WH 7 47 4. ACCRUED LIABILITIES Accrued liabilities were as follows:
March 31, December 31, 1999 1998 - --------------------------------------------------------------------------------------------- Compensation $ 1,661 $ 2,557 General insurance 5,282 5,292 Advertising and promotion 3,560 3,772 Other 2,587 3,333 ------- ------- Total $13,090 $14,954 ======= ======= - ---------------------------------------------------------------------------------------------
5. AFFILIATED LONG-TERM DEBT In conjunction with the Incorporation, Wise entered into a long-term loan agreement (the "Loan Agreement") to borrow funds from Borden. Revolving Loan - -------------- The Loan Agreement provides for a revolving loan facility of up to $5 million maturing in December 1999, at a variable interest rate equal to Borden's cost of funds for 30 day LIBOR borrowings plus 0.25%. A commitment fee based on a variable rate tied to Borden's leverage is charged on the unused portion of the revolving loan facility. Wise had no borrowings under the revolving agreement at March 31, 1999 and December 31, 1998. Long-Term Loan - -------------- The Loan Agreement also provides for a $10 million term loan with a fixed interest rate of 11% maturing in November 2000, payable in full at the maturity date. At March 31, 1999 and December 31, 1998, $7.5 million and $5.0 million respectively remained outstanding under this loan agreement. The Loan Agreement contains certain restrictions on the activities of Wise and its subsidiaries, including restrictions on liens, the incidence of indebtedness, mergers and consolidations, sales of assets, investments, payment of dividends (requires prior approval from Borden), changes in nature of business, prepayments of certain indebtedness, transactions with affiliates, capital expenditures, changes in control of the company and the use of proceeds from asset sales. 6. COMMITMENTS AND CONTINGENCIES Environmental Contingencies - --------------------------- Wise, like others in similar businesses, is subject to extensive Federal, state and local environmental laws and regulations. Although Wise's environmental policies and practices are designed to ensure compliance with these laws and regulations, future developments and increasingly stringent regulations could require Wise to make additional unforeseen environmental expenditures. Environmental accruals are routinely reviewed on an interim basis as events and developments warrant and are subject to an annual comprehensive review. WH 8 48 Litigation - ---------- Wise is subject to various investigations, claims and legal proceedings covering a wide range of matters in the ordinary course of its business activities. Each of these matters is subject to various uncertainties and some of these matters may be resolved unfavorably to Wise. Wise has established accruals for matters that are probable and reasonably estimable. Management believes that any liability that may ultimately result from the resolution of these matters in excess of amounts provided will not have a material adverse effect on the financial statements of Wise. 7. RELATED PARTIES Wise is engaged in various transactions with Borden and its affiliated companies in the ordinary course of business. A subsidiary of Borden provides certain administrative services to Wise at negotiated fees. These services include: processing of payroll and active and retiree group insurance claims. Wise reimburses the Borden subsidiary for payments for general disbursements, and general and group insurance and retirement benefit claims. The amount owed by Wise for these services is included in affiliated payables and was $500 and $463 at March 31, 1999 and December 31, 1998, respectively. Wise is generally self-insured for general insurance claims and post-employment benefits other than pensions. The liabilities for these obligations are included in Wise's financial statements. The following table summarizes the charges to Wise for these costs.
Quarter ended March 31, 1999 1998 - -------------------------------------------------------------------------------- Employee benefits $ 431 $ 564 Group and general insurance 1,164 761 Information services 109 65 Corporate staff departments and overhead 360 514 ------ ------ $2,064 $1,904 ====== ====== - --------------------------------------------------------------------------------
Wise also invests excess cash with Borden in one-day investments that totaled $1,950 and $1,700 at March 31, 1999 and December 31, 1998, respectively which is included as a component of cash. WH 9
 

5 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 231,100 386,000 212,400 10,400 106,300 1,010,200 769,100 307,800 1,944,900 1,000,900 551,900 0 614,400 2,000 (545,900) 1,944,900 306,900 306,900 211,800 211,800 58,900 0 15,300 19,500 6,200 13,300 0 0 0 13,300 .07 .07