1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D. C. 20549
FORM 10-Q
_X_X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)15(D) OF THE SECURITIES
-----
EXCHANGE ACT OF 1934
For the quarterly period ended JuneSeptember 30, 1996
----------------------------------------------
Commission file number 1-71
------------------------------------------------------
BORDEN, INC.
New Jersey 13-0511250
- -------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
180 East Broad Street, Columbus, OH 43215
----------------------------------------------------
(Address of principal executive offices)
(614) 225-4000
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_X No
___--- ---
Number of shares of common stock, $0.01 par value, outstanding as of the close
of business on August 12,November 14, 1996: 198,974,994
2
BORDEN, INC.
INTRODUCTION
The following filing with the Securities and Exchange Commission ("SEC") by
Borden, Inc. ("the Company") presents three separate financial statements:
Borden, Inc. Condensed Consolidated Financial Statements, Borden, Inc. and
Affiliates Condensed Combined Financial Statements, and the Summary Financial
Statements of Wise Holdings, Inc. ("Wise"). The condensed consolidated
statements present the Company after the effect of the Wise and BFC transactions
with affiliates of BW Holdings, LLC, an affiliate of the Company's principal
stockholder ("BWHLLC"), as explained in Note 1 to the Company's condensed
consolidated financial statements. The Company's condensed combined financial
statements are also included herein to present the Company on a combined
historical basis which included the financial position and results of operations
of Wise and BFC. The Company's condensed combined financial statements are
included because the Company indirectly has a controlling financial interest as
well as operating control of both Wise and BFC. The condensed combined financial
statements include all of the assets, liabilities and cash flows available to
creditors and are consistent with the financial information upon which credit
was originally granted and continually provided since issuance. Also, in
accordance with rule 3-10 of Regulation S-X, the summary financial statements of
Wise are included because Wise is a guarantor of the Company's credit facility
and all outstanding publicly held debt.
2
3
Borden, INC.
INDEX
PART I - ------------------------------------------------------------------------------FINANCIAL INFORMATION
BORDEN, INC. ("BORDEN") CONDENSED CONSOLIDATED AND BORDEN, INC. AND AFFILIATES
CONDENSED COMBINED FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations, three months ended September 30, 1996 and 1995....................... 4
Nine months ended September 30, 1996 and 1995..................................................................... 6
Condensed Consolidated Balance Sheets, September 30, 1996 and December 31, 1995....................................... 8
Condensed Consolidated Statements of Cash Flows, nine months ended September 30, 1996 and 1995........................ 10
Condensed Combined Statements of Operations, three months ended September 30, 1996 and 1995........................... 12
Nine months ended September 30, 1996 and 1995..................................................................... 13
Condensed Combined Balance Sheets, September 30, 1996 and December 31, 1995........................................... 14
Condensed Combined Statements of Cash Flows, nine months ended September 30, 1996 and 1995............................ 16
Notes to Condensed Consolidated and Condensed Combined Financial Statements........................................... 18
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Borden Condensed Consolidated and Borden, Inc. and Affiliates Combined ............................................... 23
GUARANTOR SUMMARY FINANCIAL STATEMENTS
WISE
Summary Statements of Operations, three months ended September 30, 1996 and 1995...................................... 28
Nine months ended September 30, 1996 and 1995..................................................................... 29
Summary Balance Sheets, September 30, 1996 and December 31, 1995...................................................... 30
Summary Statements of Cash Flows, nine months ended September 30, 1996 and 1995....................................... 32
Notes to Wise Summary Financial Statements............................................................................ 33
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................................................................ 37
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................................. 38
3
4
CONDENSED CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS (UNAUDITED)
BORDEN, INCINC.
Three Months Ended
JuneSeptember 30,
----------------------------------------------
(In millions, except per share data) 1996 1995
- ---------------------------------------------------------------------------------- --------
Net sales $ 1,457.0 $ 1,486.5911.5 $1,005.7
Cost of goods sold 995.7 1,035.5
--------- ---------669.3 744.0
-------- --------
Gross margin 461.3 451.0242.2 261.7
Distribution expense 91.0 93.455.5 66.1
Marketing expense 242.2 233.295.8 119.3
General & admin.adminstrative expense 82.0 103.541.3 59.7
Loss on divestiture 16.75.0 20.0
--------- ----------------- --------
Operating income 29.4 0.9(loss) 44.6 (3.4)
-------- --------
Interest expense 29.7 30.429.3 30.1
Minority interest 2.3 1.71.6 1.2
Other (income) expense (5.7) (0.9)
--------- ---------0.9 (8.3)
-------- --------
Income (loss) from continuing operations
before income taxes 3.1 (30.3)12.8 (26.4)
Income tax expense (benefit) 8.6 (7.4)
--------- ----------
Loss7.3 (13.6)
-------- --------
Income (loss) from continuing operations (5.5) (22.9)
--------- ---------5.5 (12.8)
-------- --------
Discontinued operations:
Income (loss) from operations 0.4
--------- ---------2.0 (10.4)
Income (loss) from disposal (330.7) 29.7
-------- --------
Net loss (5.5) (22.5)income (loss) (323.2) 6.5
Preferred stock dividends (18.4) (22.1)
--------- ---------(18.4)
-------- --------
Net loss applicable to common stock $ (23.9)(341.6) $ (44.6)
========= =========(11.9)
======== ========
24
3
- ------------------------------------------------------------------------------5
CONDENSED CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS (UNAUDITED) (continued)
BORDEN, INCINC.
Three Months Ended
JuneSeptember 30,
---------------------------------------------
(In millions, except per share data) 1996 1995
- -------------------------------------------------------------------------------------- --------
Per Share Data
----------
LossIncome (loss) from continuing operations $ (0.03)0.02 $ (0.11)(0.07)
Discontinued operations:
Income (loss) from operations 0.01 (0.05)
Income (loss) from disposal (1.66) 0.15
-------- --------
Net loss (0.03) (0.11)income (loss) (1.63) 0.03
Preferred stock dividends (0.09) (0.11)(0.09)
-------- -----------------
Net loss per common share $ (0.12)(1.72) $ (0.22)(0.06)
======== =================
Dividends per preferred share $ 0.75 $ 1.020.75
Average number of common shares outstanding 199.0 199.0
during the period
See Notes to Condensed Consolidated and Combined Financial Statements
5
6
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
BORDEN, INC.
Nine Months Ended
September 30,
-------------------------
(In millions, except per share data) 1996 1995
-------- --------
Net sales $2,885.8 $3,138.7
Cost of goods sold 2,082.1 2,322.8
-------- --------
Gross margin 803.7 815.9
Distribution expense 183.3 205.2
Marketing expense 330.0 347.9
General & administrative expense 149.3 229.1
(Gain) Loss on divestiture (61.2) 40.0
-------- --------
Operating income (loss) 202.3 (6.3)
-------- --------
Interest expense 84.7 103.3
Minority interest 4.5 13.9
Other (income) expense (9.9) 25.5
-------- --------
Income (loss) from continuing operations
before income taxes 123.0 (149.0)
Income tax expense (benefit) 67.5 (52.0)
-------- --------
Income (loss) from continuing operations 55.5 (97.0)
Discontinued operations:
Income (loss) from operations (9.1) 7.3
Income (loss) from disposal (330.7) 67.6
-------- --------
Net loss (284.3) (22.1)
Preferred stock dividends (55.3) (40.5)
-------- --------
Net loss applicable to common stock $ (339.6) $ (62.6)
======== ========
6
7
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (continued)
BORDEN, INC.
Nine Months Ended
September 30,
------------------------
(In millions, except per share data) 1996 1995
-------- --------
Per Share Data
Income (loss) from continuing operations $ 0.28 $ (0.51)
Discontinued operations:
Income (loss) from operations (0.05) 0.04
Income (loss) from disposal (1.66) 0.35
-------- --------
Net loss (1.43) (0.12)
Preferred stock dividends (0.28) (0.21)
-------- --------
Net loss per common share $ (1.71) $ (0.33)
======== ========
Dividends per preferred share $ 2.25 $ 1.77
Average number of common shares outstanding
during the period 199.0 199.0
- ------------------------------------------------------------------------------190.3
See Notes to Condensed Consolidated and Combined Financial Statements
37
4
- ------------------------------------------------------------------------------8
CONDENSED CONSOLIDATED STATEMENTS OF INCOMEBALANCE SHEETS (UNAUDITED)
BORDEN, INCINC.
(In millions)
Six Months Ended
June 30,
---------------------
(In millions, except per share data) 1996 1995
- ------------------------------------------------------------------------------
Net sales $2,887.5 $2,980.1
Cost of goods sold 1,983.3 2,088.0
-------- --------
Gross margin 904.2 892.1
Distribution expense 180.9 186.1
Marketing expense 497.4 469.8
General & admin. expense 156.0 199.5
(Gain) Loss on divestiture (66.2) 20.0
-------- --------
Operating income 136.1 16.7
Interest expense 57.2 76.6
Minority interest 3.2 13.3
Other (income) expense (14.1) 37.4
-------- --------
Income (loss) from continuing operations
before income taxes 89.8 (110.6)
Income tax expense (benefit) 50.9 (35.7)
-------- ---------
Income (loss) from continuing operations 38.9 (74.9)
-------- ---------
Discontinued operations:
Income from operations 8.5
Income from disposal 37.9
-------- --------
Net income (loss) 38.9 (28.5)
Preferred stock dividends (36.9) (22.1)
-------- --------
Net income (loss) applicable to common stock $ 2.0 $ (50.6)
======== ========
4
5
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (continued)
BORDEN, INC
Six Months Ended
June 30,
---------------------
(In millions, except per share data) 1996 1995
- ------------------------------------------------------------------------------
SHARE DATA
----------
Income (loss) from continuing operations $ 0.20 $ (0.40)
Discontinued operations:
Income from operations 0.05
Income from disposal 0.20
------ -------
Net income (loss) 0.20 (0.15)
Preferred stock dividends (0.19) (0.12)
------ -------
Net income (loss) per common share $ 0.01 $ (0.27)
====== =======
Dividends per preferred share $ 1.50 $ 1.02
Average number of common shares outstanding 199.0 186.6
during the period
- ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
5
6
- -------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN, INC.
(In millions)
JuneSeptember 30, December 31,
------------- -------------
ASSETS 1996 1995
- ---------------------------------------------------------------------------------------------------------- ---------
CURRENT Cash and equivalents $ 146.0134.1 $ 146.2
ASSETS Accounts receivable (less allowance
for doubtful accounts of $22.9$15.2 and $24.8,
respectively) 689.2511.7 660.1
Inventories:
Finished and in-process goods 376.8198.8 336.2
Raw materials and supplies 169.4110.9 184.1
Deferred income taxes 135.6 45.3
Other current assets 116.557.8 149.3
----------Net assets of discontinued operations 603.6
--------- 1,633.5---------
1,752.5 1,521.2
---------- --------- - ----------------------------------------------------------------------------------------------------------
INVESTMENTS Investments in and advances to
AND OTHER affiliated companies 34.232.3 36.7
ASSETS Deferred income taxes 237.5178.4 344.1
Other assets 111.585.8 110.2
----------Wise assets sold under contractual arrangement,
net of allowance of $50.9 54.1
--------- 383.2---------
350.6 491.0
---------- --------- - ----------------------------------------------------------------------------------------------------------
PROPERTY Land 90.269.1 93.6
AND Buildings 546.1383.1 562.4
EQUIPMENT Machinery and equipment 2,009.71,460.0 1,968.7
---------- --------- 2,646.0---------
1,912.2 2,624.7
Less accumulated depreciation (1,470.6)(1,051.0) (1,465.8)
---------- --------- 1,175.4---------
861.2 1,158.9
---------- --------- - ----------------------------------------------------------------------------------------------------------
INTANGIBLES Intangibles resulting from
business acquisitions 604.3209.0 616.4
---------- --------- - ----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 3,796.43,173.3 $ 3,787.5
========== ========= - -------------------------------------------------------------------------------------------------=========
See Notes to Condensed Consolidated and Combined Financial Statements
68
7
- -------------------------------------------------------------------------------------------------9
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN, INC.
(In millions)
June
September 30, December 31,
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
- ----------------------------------------------------------------------------------------------------------- ----------
CURRENT Debt payable within one year $ 401.2394.3 $ 140.4
LIABILITIES Accounts and drafts payable 496.5332.3 478.7
Restructuring reserve 12.5 15.5
Income taxes 204.5200.8 181.7
Other current liabilities 795.9 764.8
--------- ---------
1,910.6579.4 780.3
---------- ----------
1,506.8 1,581.1
--------- ---------
- ----------------------------------------------------------------------------------------------------------- ----------
OTHER Wise liabilities sold under contractual arrangement 44.0
LIABILITIES Long-term debt 920.81,019.4 1,211.8
Deferred income taxes 34.646.8 45.3
Non-pension postemployment
benefit obligations 324.1293.0 331.8
Other long-term liabilities 109.865.8 116.0
Minority interest 42.312.2 33.0
--------- ---------
1,431.6---------- ----------
1,481.2 1,737.9
--------- ------------------- ----------
Commitments and Contingencies
- -------------------------------------------------------------------------------------------------
SHAREHOLDERS' Preferred Stock - Issued 24,574,751 614.4 614.4
EQUITY Common stock - $0.01 par value
Authorized 300,000,000 shares
Issued 198,974,994 2.0 2.0
Paid in capital 358.4 312.7
312.7Receivable from parent (79.9)
Accumulated translation adjustment (145.9)(39.0) (129.6)
Minimum pension liability and other (107.9) (107.9)
Retained earnings (deficit) (221.1)Accumulated deficit (562.7) (223.1)
---------- ----------
185.3 468.5
--------- ---------
454.2 468.5
---------- ---------
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,796.43,173.3 $ 3,787.5
========= =========
- -------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated and Combined Financial Statements
79
8
- -------------------------------------------------------------------------------------------------10
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN, INC.
SixNine Months Ended
JuneSeptember 30,
-----------------------------------------------------------
(In millions) 1996 1995
- --------------------------------------------------------------------------------------------------------- --------
CASH FLOWS Net income (loss) $ 38.9(284.3) $ (28.5)(22.1)
FROM (USED IN) Adjustments to reconcile net income (loss) to net
OPERATING cash from operating activities:
ACTIVITIES Loss on disposal of discontinued operations 263.5 (98.3)
Depreciation and amortization 115.6 115.3
(Gain) loss on divestiture, net (61.2) 40.0
Unrealized (gain) loss on interest rate swap (12.6) 31.1
Loss on sale of investment 22.0
Restructuring (7.1) (27.5)
Net change in assets and liabilities:
Trade receivables 74.5 (9.8)
Inventories 24.5 (40.0)
Trade payables (142.1) (19.8)
Current and deferred taxes 94.1 (67.2)
Other assets 119.7 163.9
Other liabilities (92.0) (124.4)
Discontinued operations, working capital (72.6) 3.3
-------- --------
20.0 (33.5)
-------- --------
CASH FLOWS Proceeds sale of investment in RJR 282.1
FROM (USED IN) Capital expenditures (177.9) (124.3)
INVESTING Proceeds from the divestiture of businesses 137.1 0.8
ACTIVITIES Purchase of businesses (7.0)
-------- --------
(40.8) 151.6
-------- --------
CASH FLOWS Decrease in short-term debt (24.1) (202.4)
(USED IN) FROM Increase (decrease) in long-term debt 107.1 (412.4)
FINANCING Decrease in minority interest (19.0) (471.5)
ACTIVITIES Equity contribution 994.7
Dividends paid (55.3) (25.0)
Issuance of stock under stock options
and benefits and awards plans 3.3
-------- --------
8.7 (113.3)
-------- --------
10
11
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)
BORDEN, INC.
Nine Months Ended
September 30,
---------------------------
(In millions) 1996 1995
-------- -------
(Decrease) increase in cash and equivalents $ (12.1) $ 4.8
Cash and equivalents at beginning
of period 146.2 125.3
-------- -------
Cash and equivalents at end
of period $ 134.1 $ 130.1
======== =======
SUPPLEMENTAL Cash paid:
DISCLOSURES Interest $ 71.0 $ 87.9
OF CASH FLOW Income taxes 31.0 46.7
INFORMATION Non-cash activity:
Reclassification of note from long-term
to short-term 288.5
Non-cash proceeds relating to the Wise sale 44.3
Non-cash proceeds from the sale of options
recorded in equity 44.0
See Notes to Condensed Consolidated and Combined Financial Statements
11
12
CONDENSED COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
Three Months Ended
September 30,
-------------------------
(In millions) 1996 1995
-------- --------
Net sales $1,440.4 $1,458.7
Cost of goods sold 994.3 1,020.1
-------- --------
Gross margin 446.1 438.6
Distribution expense 87.1 90.5
Marketing expense 238.0 264.9
General & administrative expense 70.3 85.6
Loss on divestiture 5.0 20.0
-------- --------
Operating income (loss) 45.7 (22.4)
Interest expense 30.0 30.0
Minority interest 0.1 1.4
Other (income) expense 0.4 (9.1)
-------- --------
Income (loss) from continuing operations
before income taxes 15.2 (44.7)
Income tax expense (benefit) 6.7 (21.1)
-------- --------
Income (loss) from continuing operations 8.5 (23.6)
Discontinued operations:
Income from operations 0.4
Income from disposal 29.7
-------- --------
Net income 8.5 6.5
Preferred stock dividends (18.4) (18.4)
-------- --------
Net loss applicable to common stock (9.9) (11.9)
======== ========
See Notes to Condensed Consolidated and Combined Financial Statements
12
13
CONDENSED COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
Nine Months Ended
September 30,
------------------------
(In millions) 1996 1995
-------- --------
Net sales $4,327.9 $4,438.8
Cost of goods sold 2,977.6 3,108.1
-------- --------
Gross margin 1,350.3 1,330.7
Distribution expense 268.0 276.5
Marketing expense 735.3 734.8
General & administrative expense 225.9 293.2
(Gain) loss on divestitures (77.9) 40.0
-------- --------
Operating income (loss) 199.0 (13.8)
Interest expense 87.2 106.6
Minority interest 4.3 14.8
Other (income) expense (14.2) 20.2
-------- --------
Income (loss) from continuing
operations before income taxes 121.7 (155.4)
Income tax expense (benefit) 57.6 (56.9)
-------- --------
Income (loss) from continuing operations 64.1 (98.5)
Discontinued operations:
Income from operations 8.8
Income from disposal 67.6
-------- --------
Net income (loss) 64.1 (22.1)
Preferred stock dividends (55.3) (40.5)
-------- --------
Net income (loss) applicable to common stock $ 8.8 $ (62.6)
======== ========
See Notes to Condensed Consolidated and Combined Financial Statements
13
14
CONDENSED COMBINED BALANCE SHEETS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
(In millions)
September 30, December 31,
ASSETS 1996 1995
-----------------------------------
CURRENT Cash and equivalents $ 134.8 $ 146.2
ASSETS Accounts receivable (less allowance
for doubtful accounts of $22.6 and $24.8,
respectively) 714.1 660.1
Inventories:
Finished and in-process goods 374.1 336.2
Raw materials and supplies 182.5 184.1
Deferred income taxes 135.6 45.3
Other current assets 106.0 149.3
--------- ---------
1,647.1 1,521.2
--------- ---------
INVESTMENTS Investments in and advances to
AND OTHER affiliated companies 36.7 36.7
ASSETS Deferred income taxes 245.5 344.1
Other assets 104.6 110.2
--------- ---------
386.8 491.0
--------- ---------
PROPERTY Land 89.8 93.6
AND Buildings 550.5 562.4
EQUIPMENT Machinery and equipment 2,041.5 1,968.7
--------- ---------
2,681.8 2,624.7
Less accumulated depreciation (1,464.7) (1,465.8)
--------- ----------
1,217.1 1,158.9
--------- ---------
INTANGIBLES Intangibles resulting from
business acquisitions 597.9 616.4
--------- ---------
TOTAL ASSETS $ 3,848.9 $ 3,787.5
========= =========
See Notes to Condensed Consolidated and Combined Financial Statements
14
15
CONDENSED COMBINED BALANCE SHEETS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
(In millions)
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
------------- ------------
CURRENT Debt payable within one year $ 408.8 $ 140.4
LIABILITIES Accounts and drafts payable 499.9 478.7
Income taxes 201.5 181.7
Other current liabilities 772.0 780.3
-------- --------
1,882.2 1,581.1
-------- --------
OTHER Long-term debt 1,030.6 1,211.8
LIABILITIES Deferred income taxes 43.7 45.3
Non-pension postemployment
benefit obligations 315.8 331.8
Other long-term liabilities 86.3 116.0
Minority interest 19.3 33.0
-------- --------
1,495.7 1,737.9
-------- --------
Commitments and Contingencies
SHAREHOLDERS' Preferred Stock 614.4 614.4
EQUITY Common stock 2.0 2.0
Paid in capital 392.6 312.7
Receivable from parent (79.9)
Accumulated translation adjustment (135.9) (129.6)
Minimum pension liability and other (107.9) (107.9)
Accumulated deficit (214.3) (223.1)
-------- --------
471.0 468.5
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,848.9 $3,787.5
======== ========
See Notes to Condensed Consolidated and Combined Financial Statements
15
16
CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN, INC. AND AFFILIATES
Nine Months Ended
September 30,
-------------------------
(In millions) 1996 1995
------ ------
CASH FLOWS Net income (loss) $ 64.1 $(22.1)
FROM (USED IN) Adjustments to reconcile net income (loss) to net
OPERATING cash from operating activities:
ACTIVITIES Reversal of reserve for loss on disposal
of discontinued operations (54.6)(98.3)
Depreciation and amortization 75.7 77.0117.3 115.3
(Gain) loss on divestiture, net (66.8) 20.0(77.9) 40.0
Unrealized (gain) loss on interest rate swap (11.7) 32.6(12.6) 31.1
Loss on sale of investment 22.0
Write-off deferred financing costs 14.0
Restructuring (4.5) (18.5)(7.1) (27.5)
Net change in assets and liabilities:
Trade receivables (25.5) (1.2)(17.7) (9.8)
Inventories (25.9) (45.0)(38.2) (40.0)
Trade payables 13.5 (13.4)9.0 (19.8)
Current and deferred taxes 28.2 (47.3)27.3 (67.2)
Other assets 13.3 81.841.3 163.9
Other liabilities (3.5) (48.8)(87.6) (124.4)
Discontinued operations, (1.0)
--------- ---------
31.7 (10.9)
--------- ---------
- -------------------------------------------------------------------------------------------------working capital
and non-cash charges 3.3
------ ------
17.9 (33.5)
------ ------
CASH FLOWS SaleProceeds sale of investment in RJR Nabisco Holdings 282.1
FROM (USED IN) Capital expenditures (110.0) (73.5)(179.8) (124.3)
INVESTING DivestitureProceeds from the divestiture of businesses 135.9 0.7136.5 0.8
ACTIVITIES Purchase of businesses (7.0)
--------- ---------
25.9 202.3
--------- ---------
- ------------------------------------------------------------------------------------------------------- ------
(43.3) 151.6
------ ------
CASH FLOWS Decrease in receivables sold (250.0)short term debt (24.1) (202.4)
(USED IN) FROM Decrease in short-term debt (35.9) (191.1)
FINANCING Increase (decrease) in long-term debt 4.9 (256.7)
ACTIVITIES Long-term debt financing 0.8 0.6
Increase (decrease)107.1 (412.4)
FINANCING Decrease in minority interest 9.3 (471.7)(13.7) (471.5)
ACTIVITIES Equity contribution 994.7
Dividends paid (36.9)(55.3) (25.0)
Issuance of stock under stock options
and benefits and awards plans 3.3
--------- ---------
(57.8) (170.9)
--------- ---------
- ------------------------------------------------------------------------------------------------------- ------
14.0 (113.3)
------ ------
816
9
- ------------------------------------------------------------------------------
CONSOLIDATED17
CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)
BORDEN, INCINC. AND AFFILIATES
SixNine Months Ended
JuneSeptember 30,
------------------------------------------------------
(In millions) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------ ------
(Decrease) increase in cash and equivalents $(11.4) $ (0.2) $ 20.54.8
Cash and equivalents at beginning
of period 146.2 125.3
--------- --------------- ------
Cash and equivalents at end
of period $ 146.0 $ 145.8
========= ========
- ------------------------------------------------------------------------------------------------------------------$134.8 $130.1
====== ======
SUPPLEMENTAL Cash paid:
DISCLOSURES Interest $ 42.871.0 $ 54.987.9
OF CASH FLOW Income taxes 23.0 24.531.0 46.7
INFORMATION Non-cash activity:
Reclassification of note from long-term
to short-term 296.7
- ------------------------------------------------------------------------------------------------------------------
See Notes288.5
Non-cash proceeds relating to the Wise sale 44.3
Non-cash proceeds from the sale of options
recorded in equity 44.0
See Notes to Condensed Consolidated and Combined Financial Statements
917
1018
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
------------------------------------------
(Dollars in millions except per share amounts and as otherwise indicated)
1. Basis of Presentation
Borden, Inc. ("the Company") conducts operations in the following
businesses: pasta and foods ("BFC"), dairy ("BMG Dairies"), European bakery ("Bakeries"), salty snacks ("Wise"), glue
("Elmer's"), decorative products and wallcoverings ("Decorative
Products"), and adhesives and resins ("Chemical"), and. The Company sold
packaging and plastic films ("Packaging")business on October 11, 1996 (see note 3). TheAs
explained in notes 4 and 5, the Company is finalizingsold the redesignnet assets of its corporate organization along thesesalty
snack business lines("Wise"), on July 2, 1996 and the net assets of an
affiliate of its domestic and international foods business ("BFC"), on
October 1, 1996 to facilitate certain operating and capital market goalsaffiliates of BW Holdings, LLC ("BWHLLC"), the
Company's principal stockholder. Management of the Company. CertainCompany will continue
to exercise significant financial and managerial control with respect to
Wise and BFC. In addition Wise and BFC provide guarantees to obligations
under the Company's credit facility and all of these businesses are now conducted through
directthe Company's outstanding
publicly held debt on a pari passu basis. As a result of the continuing
control and indirect subsidiaries.the financial guarantees the Company has included,
supplementally, condensed combined financial statements in this filing
which present the financial condition and results of operations of the
Company including Wise and BFC, on a historical cost basis.
The accompanying unaudited interim consolidated and combined financial
statements of
the Company contain all adjustments, consisting only of normal
adjustments, which in the opinion of management are necessary for a
fair statement of the results for the interim periods. Results for the
interim periods are not necessarily indicative of results for the full
years.
During the second quarter 1996 the Company sold participation in its BMG
Dairies, Wise, Elmer's, Decorative Products and Chemical business units to
key management personnel. Management's cash investment totaled $7.8,
resulting in aggregate ownership percentages ranging from 1.08% to 1.87%
in each of the business units. In addition, options issued at fair value
which vest over five years, allow management to purchase additional shares
resulting in ownership of up to 10% of each business unit. Management's
ownership interest in the business units is recorded in the financial
statements as minority interest.
As explained in Note 3, effective July 2, 1996, the Company sold Wise to
an affiliate of the Company's principal stockholder. As part of the
transaction Wise has become a guarantor of the Company's indebtedness
under its $1.2 billion credit facility and under its publicly-held
indebtedness. Beginning in the third quarter 1996, the Company will
include both consolidated and combined (including Wise) financial
statements in its quarterly and year end reporting. The combined financial
statements will include the Company's consolidated financial statements
and the financial statements of Wise.
2. Reclassification
Certain prior year amounts have been reclassified to conform with 1996
presentation.
3. Asset Divestitures
In 1995 the Company began the process of redesigning its operating
structure. As a result of this redesign management determined that certain
businesses did not fit into the Company's long-term strategic plan, and
made the decision to divest these businesses. Businesses included in this
classification, "businesses held for sale," were the packaging and plastic
films business, sevena dairy plants,plant and the equity interest in a Spanish food
company, and two food plants.company. Appropriate reserves relating to the sale or divestiture of
these businesses were reflected in the December 31, 1995 financial
statements of the Company.
The Wise business unitdairy plant was includedclosed in businesses held for sale as of
June 30, 1996.
During the first quarter of 1996, the Company sold its remaining equity
interest in a Spanish food company for $139.8 resulting in a pretax gain
of $82.9 ($42.1 net of tax).
Six dairy plants were sold or closed in the fourth quarter of 1995 and the
seventh dairy was closed in June 1996. The two food plants continue to be
operated by the Company in 1996.
10
On October 11,
On June 20, 1996, the Company announced a definitive agreement forcompleted the sale of Borden Global
Packaging ("BGP"), its packaging and plastic films business, to AEP
Industries Inc. ("AEPI"). The purchase price is comprisedconsisted of $280 in cash,
subject to adjustment, and at least $80
in2,412,818 shares of newly issued AEPI common
shares of AEPI. No fewer than 2,412,818 AEPI shares
would be issued to the Company. If the value of common shares decreases
below $33.16 per share,stock valued at the average closing price over a 50 day trading
period prior to AEPI stockholders approval, additional shares will be
issued to equal at least $80 in common shares of AEPI. The average closing
price over the 25 day trading period ending July 31, 1996 was approximately
$39 per share. In no event will AEPI issue more than 4.0 million shares to
the Company. Assuming issuance of 2,412,818 shares, the Company would own
about$80.0 (approximately 34% of AEPI based on a new total of approximately 7.08 million shares
outstanding. A reserve for loss on sale was accruedAEPI), its value at December 31, 1995,
whenJune 30,
1996, the decision was made to sell the packaging business. The reserve
remains the Company's best estimatedate of the loss on the transaction. The
financial position and the results of operations for the packaging and
plastic films business are reported in the consolidated financial
statements.definitive agreement. The Company intends towill use cash
proceeds from the sale of the business primarilyto repay debt and for other general
corporate purposes.
The transaction is
expected to be finalizedFollowing are the results of operations and net assets for businesses held
for sale which were owned at September
18
19
30, 1996. These amounts are included in September 1996, at which timecontinuing operations in the
Company will
have a minority equity interest in AEPI.consolidated financial statements.
1996 1995
---- ----
Net sales:
Quarter ended September 30 $ 174.0 $ 182.0
Year-to-date September 30 524.6 555.2
Operating income (loss):
Quarter ended September 30 8.6 (0.2)
Year-to-date September 30 20.1 16.5
Net assets at September 30, 1996, and
December 31, 1995 347.7 364.5
4. Wise Divestiture
On July 2, 1996, the Company sold its Wise business unit to a newly-formedan affiliate
of the Company's principal stockholderBWHLLC for $45.1.$45.0. The purchase price of the business was determined
based upon an independent valuation by an investment banking firm. The
estimated loss on disposalproceeds consisted of these
operations$34.2 of notes receivable from the Company's parent,
which are recorded as a reduction of equity, a $10.1 note receivable from
Wise and $0.7 in cash. The excess of the book value over the proceeds of
$16.7 $16.5 after tax, washas been recorded in the second quarter
1996.consolidated financial statements.
The losscombined financial statements continue to report Wise at the
Company's historical values since Wise remains a member of the
controlled group and since management's best estimate of future
operating cash flows from Wise is expected to exceed the historical
carrying value of the business.
Because of the Company's continuing control over Wise, the assets and
liabilities of Wise, at the date of sale, are classified as "sold under
contractual arrangements" in the condensed consolidated financial
statements. In addition, any future losses incurred by Wise will only be
reflectedrecorded in the consolidated financial statements and will have no effect onto the combined financial statements.extent of the
Company's net investment in Wise. The proceedsCompany's net investment in Wise as
of September 30, 1996 was $10.1.
5. Discontinued Operations
On October 1, 1996, the Company sold BFC to an affiliate of BWHLLC for
$550.0. Proceeds consisted of $34.3$345.9 of receivables from the Company's
parent which will be recorded as a reduction toof shareholders' equity, a $10.1
note receivable from Wise,BFC for $198.8, and $0.7cash of $5.3. The purchase price
of the business was determined based upon an independent valuation by an
investment banking firm.
Net assets of $603.6 related to the discontinued operation have been
segregated in cash.
Following are the resultsSeptember 30, 1996 Consolidated Balance Sheet. This
amount consists of operationsthe assets and liabilities of the business sold less
the estimated loss on disposal plus net assets for businesses held
for sale which were owned at June 30,advances made to BFC aggregating
to $53.6 from January 1, 1996 to October 1, 1996. These amounts are included in
continuingThe excess of the book
value over the proceeds of $166.6 and, a tax effect of $67.2, and a
reversal of the accumulated translation adjustment of $96.9 has been
recorded as a loss from discontinued operations in the Consolidated Financial Statements.consolidated
financial statements and not recorded in the combined financial statements
since BFC remains a member of the controlled group and because
management's best estimate of future operating cash flows from BFC is
expected to exceed the historical carrying value of the business.
In 1993 the Company announced a program to divest the North American
snacks operations, seafood, jams and jellies, and various other
businesses. During 1995 management made the decision to retain the
remaining businesses classified as discontinued operations and reversed
the remaining reserve for loss on disposal, resulting in a net of tax
($30.7 and $14.0, respectively) income from disposal of $67.6 for the nine
months ended September 30, 1995 and $29.7 for the three months ended
September 30, 1995.
19
20
The operating losses relating to the businesses in this program which were
retained by the Company and were previously classified as discontinued
operations have been reclassified to continuing operations with an
offsetting net of tax ($5.6 and $0.2, respectively) credit in income from
discontinued operations of $8.8 for the nine months ended and $0.4 for the
three months ended September 30, 1995.
The results indicated below for the business being divested have been
reported separately as discontinued operations in the consolidated
statements of operations.
1996 1995
------------------------------------------------------------------------- ----
Net sales:
Quarter ended JuneSeptember 30 $ 263.1463.3 $ 349.5453.0
Year-to-date JuneSeptember 30 519.7 687.5
Operating1,376.5 1,300.2
Income (loss) before income (loss):taxes
Quarter ended JuneSeptember 30 4.7 7.40.9 (17.8)
Year-to-date JuneSeptember 30 2.8 (2.1)(19.5) 8.1
Income tax expense (benefit)
Quarter ended September 30 (1.1) (7.4)
Year-to-date September 30 (10.4) 0.8
Net assets at June 30, 1996,income(loss) from discontinued operations
Quarter-to-date 2.0 (10.4)
Year-to-date (9.1) 7.3
20
21
6. Shareholders' Equity
The following reconciles equity changes for the consolidated and combined
financial statements:
Receivable Accumulated Minimum
Preferred Common Paid In from Translation Pension Retained Total
Stock Stock Capital Parent Adjustment Liability Earnings
------- ----- ------- ------- ----------- ---------- -------- ------
Consolidated
Balance, December 31, 1995 397.8 475.3
---------------------------------------------------------------------$ 614.4 $ 2.0 $ 312.7 $ (129.6) $ (107.9) $(223.1) $ 468.5
Net loss (284.3) (284.3)
Preferred stock dividends (55.3) (55.3)
Translation adjustments 90.6 90.6
Note from sale of Wise (Note 4) $ (34.2) (34.2)
Options sold 44.0 (44.0)
Int. accrued on parent's notes 1.7 (1.7)
------- ----- ------- ------- -------- -------- -------- ------
Balance, September 30, 1996 614.4 2.0 358.4 (79.9) (39.0) (107.9) (562.7) 185.3
------- ----- ------- ------- -------- -------- -------- ------
Combining Adjustments
Wise: (Note 4)
Issue common stock 34.2 34.2
Reverse effect of disposal 16.7 16.7
Third quarter income 0.7 0.7
BFC: (Note 5)
Reverse effect of disposal 330.7 330.7
Translation and other (96.9) 0.3 (96.6)
------- ----- ------- ------- -------- -------- -------- ------
Combined balance,
September 30, 1996 $ 614.4 $ 2.0 $ 392.6 $ (79.9) $ (135.9) $ (107.9) $ (214.3) $471.0
------- ----- ------- ------- -------- -------- -------- ------
4.On August 16, 1996 the Company sold for $44.0, options to BWHLLC to
purchase all of the common stock of its Elmer's and Decorative Products
businesses for 110% of the August 16, 1996 fair market value of the common
stock. The options were issued at fair value and expire in five years. The
redemption price of the options is $54.1 for Elmer's and $108.4 for
Decorative Products, respectively.
On October 15, 1996 the Company declared and paid a dividend on its
outstanding shares of common stock in an aggregate amount of $3.8 to the
Company's parent and sole stockholder.
21
22
7. Commitments and Contingencies
ENVIRONMENTAL MATTERS - The Company, like others in similar businesses, is
subject to extensive Federal, state and local environmental laws and
regulations. Although Company environmental policies and practices are
designed to ensure compliance with these laws and regulations, future
developments and increasingly stringent regulation could require the
Company to make additional unforseen environmental expenditures.
Environmental accruals are routinely reviewed on an interim basis as
events and developments warrant and are subjected to a comprehensive
review annually during the fiscal fourth quarter.
OTHER COMMITMENTS - A wholly owned subsidiary as general partner of Borden
Chemicals and Plastics Limited Partnership ("BCP") has certain fiduciary
responsibilities to BCP's unitholders. The Company believes that such
responsibilities will not have a material adverse effect on its financial
statements.
11
12
The Company is subject to various investigations, claims and legal
proceedings covering a wide range of matters that arise 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 the Company. The Company 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 position of the Company.
1222
1323
PART I FINANCIAL INFORMATION
-----------------------------
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
QUARTER ENDED JUNE 30, 1996 VERSUS QUARTER ENDED JUNE 30, 1995
Following is a comparison of sales and operating income (loss) by business unit:
unit
on a consolidated and combined basis:
(Dollars in millions)
- ----------------------------------------------------------------------------------------------------------------------
3
Three months ended 3September 30, Nine months ended Increase PercentSeptember 30,
SALES June 30, 1996 June 30, 1995 (Decrease) Change1996 1995
- ----- ------------- ------------- ---------- ------ ------ ------ -----
BFC $451.2 $425.0 $26.2 6.2%
BMG Dairies 229.8 209.4 20.4 9.7$ 227.1 $ 211.1 $ 679.3 $ 627.6
Bakeries 98.0 101.6 (3.6) (3.5)98.1 98.6 295.0 291.0
Elmer's 27.8 26.7 1.1 4.124.9 21.5 68.3 63.1
Decorative Products 93.1 85.9 7.2 8.489.6 98.0 280.3 276.1
Chemical 293.3 288.4 4.9 1.7296.3 263.6 866.5 874.0
Other 0.7 0.0 0.7 N/M0.6 1.8
-------- ---------- --------- ------------------ ----------
Subtotal 1,193.9 1,137.0 56.9 5.0736.6 692.8 2,191.2 2,131.8
Businesses held for sale 263.1 349.5 (86.4) (24.7)174.9 312.9 694.6(1) 1,006.9(1)
-------- ---------- ---------- ----------
CONSOLIDATED NET SALES 911.5 1,005.7 2,885.8 3,138.7
-------- ---------- ---------- ----------
BFC 463.3 453.0 1,376.5 1,300.1
Wise (2) 65.6 67.1 209.7 213.3
Combining adjustments (3) (67.1) (144.1) (213.3)
-------- Net Sales $1,457.0 $1,486.5 $(29.5) (2.0)%---------- ---------- ----------
COMBINED NET SALES $1,440.4 $ 1,458.7 $ 4,327.9 $ 4,438.8
======== ======== =======
========== ========== ==========
3Three months ended 3September 30, Nine months ended Favorable PercentSeptember 30,
OPERATING INCOME (LOSS) June 30, 1996 June 30, 1995 (Unfavorable) Change
----------------------- ------------- ------------- ------------ ------1996 1995
---- ---- ---- ----
BFC $ (8.4) $3.7 $(12.1) (327.0)%
BMG Dairies 7.8 4.6$ 5.5 $ 5.5 $ 16.4 $ 13.6
Bakeries 2.4 0.3 7.6 6.0
Elmer's 3.2 69.6
Bakeries 2.7 3.3 (0.6) (18.1)
Elmer's 5.3 4.3 1.0 23.33.7 10.1 9.9
Decorative Products 8.6 8.5 0.1 1.25.1 7.2 23.0 21.8
Chemical 36.0 34.9 1.1 3.2
Loss29.9 32.9 98.6 106.3
Gain (loss) on divestiture (16.7)(5.0) (20.0) 3.3 16.561.2 (40.0)
Corporate (10.6) (45.8) 35.2 76.9(5.2) (19.4) (26.4) (109.0)
-------- ------- ----------------- ---------- ----------
Subtotal 24.7 (6.5) 31.2 480.035.9 10.2 190.5 8.6
Businesses held for sale 4.7 7.4 (2.7) (36.5)8.7 (13.6)(1) 11.8(1) (14.9)(1)
-------- ---------- ---------- ----------
CONSOLIDATED OPERATING INCOME (LOSS) 44.6 (3.4) 202.3 (6.3)
-------- -------
Total operating
income 29.4 0.9 28.5 3,166.7
Other expense 26.3 31.2 4.9 (15.7)
Income tax expense
(benefit) 8.6 (7.4) (16.0) 216.2---------- ---------- ----------
BFC (0.1) (19.0) (21.2) (7.5)
Wise (2) 1.2 (0.7) (4.9) (10.2)
Combining adjustments (3) 0.7 22.8 10.2
-------- -------- ------
Loss from continuing
operations---------- ---------- ----------
COMBINED OPERATING INCOME (LOSS) $ (5.5)45.7 $ (22.9)(22.4) $ 17.4 159.8 %
====== ======= ======199.0 $ (13.8)
======== ========== ========== ==========
131. Includes Wise results prior to sale to affiliate on July 2, 1996.
2. Represents 100% of Wise results for the applicable period presented.
3. Represents an adjustment to exclude the Wise results included with
consolidated results as well as loss on the sale of Wise, which is not
included in the combined results.
23
14
Net24
CONSOLIDATED AND COMBINED QUARTER ENDED SEPTEMBER 30, 1996 VERSUS QUARTER
ENDED SEPTEMBER 30, 1995
Consolidated net sales from continuing operations for the quarter ended
JuneSeptember 30, 1996 decreased $29.5$94.2 million or 2.0%9.4% to $1,457.0$911.5 million from
$1,486.5$1,005.7 million in 1995 primarily as a result of businesses sold late in 1995.
OperatingConsolidated operating income totaled $29.4$44.6 million, up $28.5$48.0 million from $0.9a
$3.4 million loss in 1995. The Company reported a consolidated net loss
applicable to common stock for the secondthird quarter 1996 of $23.9$341.6 million, or
$0.12$1.72 per share, after the effect of preferred dividendsa $330.7 million ($0.091.66 per share), charge
for discontinued operations related to the sale of BFC on October 1, 1996,
compared to a net loss applicable to common stock for the secondthird quarter of 1995
of $44.6$11.9 million, or $0.22$0.06 per share, aftershare. The loss on discontinued operations from
the effectBFC sale to an affiliate of preferred dividends ($0.11 per share).
Sales for Borden Foods Corporation (BFC) increased $26.2 million or 6.2% due to
volume increases in BFC's International Foods, FunCheese, and Signature Flavors
business units. The increase in International Foods is primarily attributable
to volume increases for Cremora non-dairy creamer in South Africa, and KLIM
milk powder in Colombia. FunCheese increases are primarily attributable to
sales of new "Big Cheese" products which were introduced during the year, and
anticipated July 1996 price increases which accelerated customer purchases
during June 1996. The increase in Signature Flavors is primarily attributable
to volume increases in ReaLemon and bouillon products.
BFC reported an operating loss of $8.4 million in 1996 versus income of $3.7
million in 1995. The decrease is primarily attributable to losses incurredKKR will not be reflected in the Italian Foods business unit. The gross margin percentage in Italian Foods
decreased ascombined
financial statements since BFC remains a resultmember of increased raw materialthe controlled group and
packaging costs which were
not recovered in selling price. In addition, Italian Foods increased its
advertising and trade expenditures duebecause management's best estimate of future operating cash flows from BFC is
expected to a more competitive environment.exceed the historical carrying value of the business.
BMG Dairies sales of $229.8$227.1 million increased $20.4$16.0 million or 9.7%7.6% from 1995.
The increase is attributable to higher volumes in certain western states and
raw milk cost increasescosts during the quarter which
were passed on to the
marketplacecustomers and which were generally reflected in product
pricing. Operating income increased $3.2
millionremained flat from period to $7.8 million as a result of improved operating efficiencies and an
increase in margins on low fat products.period.
Bakeries sales decreased 3.5%0.5% to $98.0$98.1 million in 1996. The decline is due
mainly to unfavorable foreign currency fluctuations as the U.S. dollar has
strengthened from the secondthird quarter of a year ago.the prior year. Operating income
decreased
$0.6increased $2.1 million to $2.7$2.4 million as a result of higher promotional costs brought
about by increasesbetter productivity in
competition.both the industrial and retail business sectors.
Sales for Elmer's increased $1.1$3.4 million or 4.1%15.8% to $27.8$24.9 million in 1996
reflecting volume1996. The
change is as a result of increases in School Glue Gel, and a newly introduced no
run product. Earlier than normal shipments of back to school orders also
contributed toproduct and stronger sales in the increase. Operating incomeglue stick category segment. In addition,
wood glues and wood fillers sales have increased $1.0 million to $5.3
million as a result of manufacturing efficiencies and the
timingintroduction of the "Pro-Bond" brand. Operating income declined 13.5%, from
$3.7 million in 1995 to $3.2 million in 1996. The decline reflects the impact
of increased advertising and promotional spending.spending to support new product introductions.
Decorative Products sales for 1996 were $93.1$89.6 million, updown from $85.9$98.0 million
in 1995. Sales in the North American wallcoverings operation were much lower
than prior year because sales to mass merchants in 1995 benefitted from a very
large initial order made during September 1995. The 8.4% increase is mainly attributable tolower sales in North America
were partially offset by the expansion ofcontinuing strong export sales from the U.K.UK to
Eastern Europe. The North American wallcovering
operations experiencedSales for the flexible vinyl films and sheeting business were up
in 1996 compared to 1995 because of an increaseimprovement in sales to mass merchants which was offset
by a decrease in sales to dealers.the pool and industrial
laminates industry. Operating income remained flat from yeardecreased $2.1 million to year.
Chemical sales increased 1.7% in 1996 to $293.3 million. The increase is
primarily attributable to volume increases in the North American forest and
industrial products unit partially offset by lower selling prices. Operating
income increased 3.2% to $36.0$5.1 million in
1996 as a result of the lower sales in North America, offset partly by an
increase discussed previously.in the UK operation.
Chemical sales increased 12.4% in 1996 to $296.3 million. The $16.7increase is
primarily as a result of an increase in volume in North American Forest and
Industrial Products. Increases in Forest Products resulted from increased
formaldehyde and wood fiber resins volume from the opening of two new plants
late in 1995, increased housing starts, and additional demand for plywood and
oriented fiber board created by hurricane damage in the Southeast. Volume
improvement for Industrial Products reflect increased oil field demand. Chemical
operating income decreased $3.0 million lossor 9.1% to $29.9 million in 1996. The
decline is as a result of price competition in Latin America and Spain, and
a one-time charge related to inventories taken during the third quarter of 1996.
Loss on divestiture charge in 1996 is the loss accrued for
the July 2, 1996 sale of Wise. The loss will only be reflected in the consolidated financial statements and will have no effect on the combined
financial statements which will be included in the Company's third quarter reporting. The combined financial statements will include the Company's
consolidated financial statements and the financial statements of Wise. The
1995 amount reflects a $20.0 million charge for the
loss associated with the planned disposal of certain dairy operations. The decreasea wallcovering operation and the
loss in sales for
businesses held forthe third quarter of 1996 reflects a change in estimate of the loss to
be incurred on the sale is due primarily to the divestiture of six dairy
plants late in 1995. The $2.7 million decrease in operating income is due to
a $4.5 million decrease for Wise attributable to increased advertising and
consumer marketing spending. This decrease is partially offset by savings
from the 1995 divestiture of six dairy plants.
14
15Packaging.
Corporate operating expenses decreased $35.2$14.2 million to $10.6$5.2 million in 1996.
The decrease is primarily a resultdue mainly to the absence of non-recurring charges recorded in
1995.
The major 1995 non-recurring charges include $13.5 million in litigation
reserves, $6.0 million in professionalfor legal and accounting fees relating toassociated with the Company'scompany's redesign, and
$6.0litigation accruals.
Sales for BFC increased $10.3 million for severance accruals.or 2.3% due to volume increases in BFC's
International Foods and
24
25
FunCheese business units. The remainder of the fluctuation is
attributable to decreasesincrease in general insurance, legal fees, and other general
corporate expenses.
Non-operating expenses totaled $26.3 million in 1996, down $4.9 million from
the 1995 total of $31.2 million. The decreaseInternational Foods is primarily
attributable to volume increases for non-dairy creamer, and milk powder.
FunCheese increases are primarily attributable to sales of new "Big Cheese"
products which were introduced during the year. In addition, selling prices were
increased to offset higher bulk cheese costs.
The BFC operating loss decreased $18.9 million to $0.1 million as a reductionresult of
$12.9the absence of non-recurring charges and lower trade spending.
Wise sales of $65.6 million in costs associated with interest rate swaps,
partially offset byis a $10.5decrease of $1.5 million decrease inor 2.2% from 1995 as a
result of decreased delivery route volume during the quarter. Operating results
improved from a loss of $0.7 million to income from an equity
investment in Borden Chemicals and Plastics Limited Partnership. The effective
tax rate of 277% in the second quarter$1.2 million as a result of
1996 is primarily due to the $16.7
million loss incurred for the Wise sale, which was primarily composed of
non-deductible goodwill. The effective tax rate, benefit, of 24% in the second
quarter of 1995 is lower than the statutory rate due primarily to valuation
allowances on foreign losses.
15
16
SIXpromotional expenses.
CONSOLIDATED AND COMBINED NINE MONTHS ENDED JUNESEPTEMBER 30, 1996 VERSUS SIXNINE
MONTHS ENDED JUNESEPTEMBER 30, 1995
Following is a comparison of sales and operating income (loss) by business
unit:
(Dollars in millions)
- ----------------------------------------------------------------------------------------------------------------------
6 months ended 6 months ended Increase Percent
SALES June 30, 1996 June 30, 1995 (Decrease) Change
----- ------------- ------------- ---------- ------
BFC $ 913.2 $ 847.2 $ 66.0 7.8 %
BMG Dairies 452.2 422.9 29.3 6.9
Bakeries 196.9 192.4 4.5 2.3
Elmer's 43.3 41.6 1.7 4.1
Decorative Products 190.7 178.1 12.6 7.1
Chemical 570.2 610.4 (40.2) (6.6)
Other 1.3 0.0 1.3 100.0
----------- ----------- ------------
Subtotal 2,367.8 2,292.6 75.2 3.3
Businesses held for
sale 519.7 687.5 (167.8) (24.4)
--------- --------- ---------
Net Sales $2,887.5 $2,980.1 $ (92.6) (3.1)%
======== ======== =========
6 months ended 6 months ended Favorable Percent
OPERATING INCOME June 30, 1996 June 30, 1995 (Unfavorable) Change
---------------- ------------- ------------- ------------ ------
(LOSS)
----
BFC $ (21.2) $ 9.4 $ (30.6) (325.5)%
BMG Dairies 11.0 9.2 1.8 19.6
Bakeries 5.3 5.8 (0.5) (8.6)
Elmer's 7.8 6.1 1.7 27.9
Decorative Products 17.9 14.6 3.3 22.6
Chemical 68.7 73.2 (4.5) (6.1)
Gain (loss) on
divestiture 66.2 (20.0) 86.2 431.0
Corporate (22.4) (79.5) 57.1 71.8
--------- --------- ---------
Subtotal 133.3 18.8 114.5 609.0
Businesses held for
sale 2.8 (2.1) 4.9 233.3
---------- ---------- ----------
Total operating income 136.1 16.7 119.4 715.0
Other expense 46.3 127.3 81.0 63.6
Income taxes 50.9 (35.7) (86.6) (242.6)
-------- -------- --------
Income (loss) from
continuing operations $ 38.9 $ (74.9) $ 113.8 151.9%
======== ======== ========
NetConsolidated net sales from continuing operations for the sixnine months ended
JuneSeptember 30, 1996 decreased $92.6$252.9 million or 3.1%8.1% to $2,887.5$2,885.8 million from
$2,980.1$3,138.7 million in 1995 primarily as a result of businesses sold late in 1995.
OperatingConsolidated operating income totaled $136.1$202.3 million, up $119.4$208.6 million from
the 1995 totalloss of $16.7 million.$6.3 million, as a result of a gain on divestitures of $61.2
million in 1996 compared to losses on divestitures amounting to $40.0 million
in 1995 and non-recurring charges in 1995. The Company reported a consolidated
net incomeloss applicable to common stock for the first sixnine months of 1996 of $2.0$339.6
million, or $0.01$1.71 per share, after the effect of
preferred dividendsa $330.7 million ($0.191.66 per share), charge
for discontinued operations, compared to a loss applicable to common stock for
1995 of $50.6$62.6 million, or $0.27$0.33 per share, aftershare. The loss on discontinued operations
from the effectBFC sale to an affiliate of preferred dividends ($0.12 per share).
Sales for BFC increased $66.0 million or 7.8% due to increases in product lines
within the International Foods, FunCheese, and Signature Flavors business
units. The increase in International Foods is primarily attributable to
16
17
volume increases for Cremora non-dairy creamer in South Africa, and KLIM milk
powder in Colombia, as well as increased selling pricesKKR will not be reflected in the Latin America
region. FunCheese increases are primarily attributablecombined
financial statements since BFC remains a member of the controlled group and
because management's best estimate of future operating cash flows from BFC is
expected to sales volume and
improved private label selling prices. The increase in Signature Flavors is
due mainly to volume increases in Cremora and bouillon products as well as
increased selling prices for Cracker Jack and ReaLemon, partially offset by
decreased volume in Cracker Jack.
The BFC operating lossexceed the historical carrying value of $21.2 million in 1996 was down $30.6 million from the 1995 operating income of $9.4 million. The decrease is primarily attributable
to the Italian Foods product line where the gross margin percentage decreased
as a result of increased raw material and packaging costs which were not
recovered in selling price. In addition, Italian Foods increased its
advertising and trade expenditures due to a more competitive environment.
Warehousing costs also increased due to higher inventory levels.business.
BMG Dairies sales of $452.2$679.3 million increased $29.3$51.7 million or 6.9%8.2% from 1995.
The increase is attributable to volume increases in certain western states andhigher raw milk cost increasescosts during the 1996 period
which were passed on to the
marketplacecustomers and reflected in product pricing.
Operating income increased $1.8$2.8 million to $11.0$16.4 million due to the increase in
sales and a decrease in administrative costs as a result of operating
efficiencies.
Bakeries sales increased 2.3%1.4% to $196.9$295.0 million in 1996. The improvement is
primarily attributable to volume increasesincreased market share in both the retail and
industrial bakery business.businesses. Operating income decreased $0.5increased $1.6 million to $5.3$7.6
million as a result of higher
promotional costs brought about by increasesbetter productivity in competition.both business sectors.
Sales for Elmer's increased $1.78.2% to $68.3 million or 4.1% to $43.3 million in 1996
reflecting volumeas a result of increases in
School Glue Gel, and a newly introduced no run product. The timing of back to school orders also contributed to the increase.
Operating incomeproduct, a stronger glue stick
category segment, and July 1995 price increases. In addition wood glues and wood
fillers sales have increased $1.7 million to $7.8 million as a result of manufacturing efficiencies and the timingintroduction of advertising and promotional
spending.the "Pro-Bond"
brand. Operating income remained flat from period to period.
Decorative Products sales for 1996 were $190.7$280.3 million, up from $178.1$276.1 million
in 1995. The 7.1% increase is mainly attributable to the U.K. operations
significant expansion of export sales to
Eastern Europe. The North American
wallcovering operations experienced an increase in sales to mass merchants
which was offset by a decrease in sales to dealers and home centers. Sales forEurope from the flexible films and sheeting business were down compared to 1995 because of
lower activity in the pool liner marketplace.UK operations. Operating income increased $3.3$1.2 million
to $17.9$23.0 million in 1996 as a result of increased gross margin
percentage from higher selling pricesreduced marketing spending in 1996.
Chemical sales decreased 6.6%0.9% in 1996 to $570.2$866.5 million, as a substantial volume
improvement was more than offset by a steep decline in formaldehyde prices from
1995 levels. Volume increases were primarily in the North American forestForest and
industrial productsIndustrial Products business, where demand led to the opening of two additional
plants late in 1995. Operating income decreased 6.1%7.2% to a 1996 level of $68.7$98.6
million as a result of the decreaseprice competition in sales.Latin America and a one-time
charge related to inventories.
Gain (loss) on Divestituredivestiture reflects the sale of the remaining equity interest in
a Spanish food company in the first quarter of 1996 partially offset by the
$16.7 million charge in the second quarter for the July 2, 1996 sale of Wise.
25
26
The loss on the sale of Wise will only be reflected in the consolidated
financial statements and willdoes not effectaffect the third quarter 1996 combined
financial statements. In addition, during the second quarterfirst nine months of 1995, $20.0$40.0
million was charged for the loss associated with the planned disposal of certain
dairy operations. The decrease in sales and increase in operating
income for businesses held for sale are due primarily to the divestiture of
six dairy plants late in 1995.wallcovering operations.
Corporate operating expenses decreased $57.1$82.6 million to $22.4$26.4 million in 1996.
The decrease is due mainly to the absence of non-recurring charges recorded in
1995 for severance, general insurance, legal and accounting fees associated with
the Company's redesign, litigation and environmental accruals.
Non-operating expenses totaled $46.3Sales for BFC increased $76.4 million or 5.9% due to increases in product lines
within the International Foods, FunCheese, and Italian Foods business units. The
increase in International Foods is primarily attributable to volume increases
for non-dairy creamer and milk powder, as well as increased selling prices in
the Latin America region. FunCheese increases are primarily attributable to
sales volume and improved private label selling prices. The increase in Italian
Foods is due to volume increases in dry pasta.
The BFC operating loss of $21.2 million in 1996 down $81.0increased $13.7 million from the
1995 operating loss of $7.5 million. The increase is primarily attributable to
the Italian Foods product line where the gross margin percentage decreased as a
result of increased raw material and packaging costs which were not recovered in
selling price. Warehousing and distribution costs also increased due to higher
inventory levels.
1996 sales for Wise decreased 1.7% to $209.7 million from $213.3 million in 1995
as a result of lower delivery route volume. Operating loss for 1996 improved
$5.3 million to a $4.9 million loss as a result of the absence of 1995 charges
of $13.3 million which related to asset writedowns partially offset by higher
advertising and consumer focused promotional expenses to support new product
roll-outs.
CONDENSED CONSOLIDATED NON-OPERATING EXPENSE FOR THE THREE MONTHS AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Three months ended September 30, Nine months ended September 30,
1996 1995 1996 1995
---- ---- ---- ----
Other expense $ 31.8 $ 23.0 $ 79.3 $ 142.7
Income tax expense (benefit) 7.3 (13.6) 67.5 (52.0)
Non-operating expenses for the three months ended September 30, 1996 totaled
$31.8 million, up $8.8 million from the 1995 total of $127.3$23.0 million. The
increase is attributable to a decrease in income from an equity investment in
Borden Chemicals and Plastics Limited Partnership
Non-operating expenses for the nine months ended September 30, 1996 totaled
$79.3 million, down $63.4 million from the 1995 total of $142.7 million. The
decrease is attributable to a reduction of $44.3$43.7 million in costs associated
with interest rate swaps, and a 17
18
$19.4$18.6 million reduction in interest expense
attributable to lower debt levels. In addition, minority interest expense
decreased $10.1$9.4 million primarily as a result of the reduction in the limited
partner's interest in the TMI partnership. AmortizationAssociates Limited Partnership, amortization of
deferred costs declined $10.3$8.5 million, and a loss on the sale of RJR Nabisco
Holdings shares of $22.0 million recorded in 1995 was not incurred in 1996.1995. These favorable variances
were partially offset by a $22.3$31.0 million dropdecrease in income from an equity
investment in Borden Chemicals and Plastics Limited Partnership.
The effective tax rate of 57% in the third quarter of 1996 is primarily due to
the $16.7 million loss incurred for the Wise sale, which was primarily composed
of non-deductible goodwill. The effective tax rate, benefit, of 52% in the
third quarter of 1995 is higher than the statutory ratesrate due primarily to
changes in the tax deductibility of certain expenses.
The effective tax rate of 54% in the nine months of 1996 is primarily due to
the $16.7 million loss fromincurred for the Wise sale, of Wise which was not deductible for income tax purposes.primarily composed
of non-deductible goodwill. The effective tax rate, benefit, of 32%35% in the nine
months of 1995 is lower thanapproximated the statutory rates due primarily
to valuation allowances on foreign losses.
ORGANIZATION REDESIGN PLAN
The Company is inrate for the process of redesigning its business units. Certain
business units are now held by the Company through direct and indirect
subsidiaries. The assets and liabilities of the Wise business unit were sold
to an affiliate of the Company's principal stockholder on July 2, 1996. Upon
sale, Wise became a guarantor of the Company's $1.2 billion credit facility and
publicly-held indebtedness. The Company is also considering the sale of the
BFC business unit to an affiliate of the Company's principal stockholder. If
such sale occurs BFC will also become a guarantor of the Company's $1.2 billion
credit facility and publicly-held indebtedness.Company.
26
27
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
- --------------------
OperatingConsolidated operating activities generated cash of $31.7$20.0 million in 1996
compared to a $10.9$33.5 million use of cash in 1995. The majority of the increase in
operating cash flow was due to increases in income before discontinued
operations and favorable changes in assets and liabilities.
This was partially offset byCombined operating activities generated cash of $17.9 million in 1996, compared
to a $33.5 million use in 1995. The combined operating activities reflect
changes inrelating to the gain on divestiture and the unrealized gain on the interest rate swaps.of Wise.
Investing Activities
- --------------------
CashConsolidated cash expenditures for new facilities and improvements were $110.0$177.9
million in 1996 compared to $73.5$124.3 million in 1995. Proceeds from divestitures
generated $135.9$137.1 million through the first sixnine months of 1996, $125.5 million
of which related to the sale of the remaining interest in a Spanish food
company.
Combined cash expenditures for new facilities and improvements were $179.8
million in 1996 compared to $124.3 million in 1995. The combined proceeds from
divestitures generated $136.5 million.
Financing Activities
- --------------------
FinancingConsolidated financing cash flows reflect a net use of cash of $57.8$8.7 million as
compared to a net use of $170.9$113.3 million in 1995. Proceeds from divestitures were
used to reduce short-term bank borrowings and to reinvest in the business.
Total usage under the Company's $1.2 billion long-term debt by $31.0revolving line of
credit increased from $339.3 million throughat December 31, 1995 to $471.5 million
at September 30, 1996, of which $84.3 million and $96.5 million were letters of
credit. Proceeds from the first six
monthssale of 1996.Packaging on October 11, 1996 were used
primarily to reduce borrowings under the revolving line of credit. Financing
cash flows through the secondthird quarter of 1995 reflect the capital contribution
of $994.7 million, which, when coupled with the sale of the RJR investment for
$282.1 million, allowed for the resulting reduction in long-term debt and
minority interest.
Combined financing cash flows reflect a net use of cash of $14.0 million as
compared to a net use of $113.3 million in 1995. The combined statements
include the minority interest relating to BFC.
Non-cash financing flows include the reclassification of a $296.7$288.5 million zero
coupon note due 2002 from long-term to short-term as the Company expects the
noteholders to exercise their May 1997 put option.
On May 7, 1996,option, and the receipt of notes
receivable from the parent relating to the Wise transaction and the sale of
options. The Company amendedcurrently plans to refinance debt maturing in 1997 using
its $1.2 billion credit facility. The
amendment was primarilylong-term revolving line of credit.
27
28
SUMMARY STATEMENTS OF OPERATIONS (UNAUDITED)
WISE
Three Months Ended
September 30,
------------------
(In thousands, except per share data) 1996 1995
- ------------------------------------------------------------------
Net sales $65,596 $ 67,092
Cost of goods sold 37,388 38,620
------- --------
Gross margin 28,208 28,472
Distribution expense 5,997 7,405
Marketing expense 16,809 19,026
General & administrative expense 4,221 3,018
------- --------
Operating income (loss) 1,181 (977)
Interest expense 329
Minority interest income 110
Income (loss) before income taxes 962 (977)
Income tax expense (benefit) 359 (258)
------- --------
Net income (loss) $ 603 $ (719)
======= ========
Pro Forma Share Data
- --------------------
Net income (loss) $ 6.03 $ (7.19)
Average number of common shares outstanding
during the period 100 100
See Notes to Summary Financial Statements
28
29
SUMMARY STATEMENTS OF OPERATIONS (UNAUDITED)
WISE
Nine Months Ended
September 30,
------------------
(In thousands, except per share data) 1996 1995
- ---------------------------------------------------------------------
Net sales $ 209,666 $213,989
Cost of goods sold 122,750 121,009
--------- --------
Gross margin 86,916 92,980
Distribution expense 18,939 22,912
Marketing expense 61,481 57,933
General & administrative expense 12,132 9,831
--------- --------
Operating income (loss) (5,636) 2,304
Interest expense 976
Minority interest income 110
--------- --------
Income (loss) before income taxes (6,502) 2,304
Income tax (benefit) expense (2,307) 1,266
Net (loss) income $ (4,195) $ 1,038
========= ========
Pro Forma Share Data
- --------------------
Net loss $ (41.95) $ 10.38
Average number of common shares outstanding
during the period 100 100
See Notes to Summary Financial Statements
29
30
SUMMARY BALANCE SHEETS (UNAUDITED)
WISE
(In thousands)
September 30, December 31,
ASSETS 1996 1995
- --------------------------------------------------------------------------------------------------------------------
CURRENT Cash and equivalents $ 705 $ 601
ASSETS Accounts receivable (less allowance
for doubtful accounts of $1,218 and $757,
respectively) 23,370 22,049
Affiliated receivables 1,403
Inventories:
Finished and in-process goods 4,161 3,806
Raw materials and supplies 4,574 6,803
Other current assets 4,262 5,371
------- -------
38,475 38,630
------- -------
OTHER Other assets 2,061 2,159
ASSETS ------- -------
2,061 2,159
------- -------
PROPERTY Land 1,291 1,291
AND Buildings 5,306 4,499
EQUIPMENT Machinery and equipment 35,873 34,033
------- -------
42,470 39,823
Less accumulated depreciation (10,777) (6,373)
------- -------
31,693 33,450
-------- -------
INTANGIBLES Trademarks 17,855 18,589
------- -------
17,855 18,589
------- -------
TOTAL ASSETS $90,084 $92,828
======= =======
See Notes to Summary Financial Statements
30
31
SUMMARY BALANCE SHEETS (UNAUDITED)
WISE
(In thousands)
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
- ------------------------------------------------------------------------------------------------------------------
CURRENT Accounts and drafts payable $ 15,063 $14,086
LIABILITIES Affiliated payables 1,174
Other current liabilities 15,945 14,747
--------- -------
32,182 28,833
--------- -------
OTHER Affiliated long-term debt 10,145
Non-pension postemployment
benefit obligations 10,052 10,155
Other long-term liabilities 2,357 1,983
Minority interest 545
--------- -------
23,099 12,138
--------- -------
Commitments and Contingencies
SHAREHOLDERS' Common stock - ($0.01 par value
EQUITY Authorized 100 shares
Issued 100)
Paid in capital 34,200
Owners investment 51,857
Retained earnings,
(from incorporation, July 2, 1996) 603
--------- -------
34,803 51,857
--------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 90,084 $92,828
========= =======
See Notes to Summary Financial Statements
31
32
SUMMARY STATEMENTS OF CASH FLOWS (UNAUDITED)
WISE
Nine Months Ended
September 30,
-------------------------
(In thousands) 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS Net income (loss) $ (4,195) $ 1,038
FROM (USED IN) Adjustments to reconcile net income (loss) to net
OPERATING cash from operating activities:
ACTIVITIES Depreciation and amortization 5,138 5,514
Net change in assets and liabilities:
Trade receivables (1,321) 2,396
Inventories 1,874 35
Trade payables 977 204
Other assets 196 (1,547)
Other liabilities 650 (6,283)
--------- ---------
3,319 1,357
--------- ---------
CASH FLOWS Capital expenditures (3,215) (1,591)
FROM Acquisition of business (655)
INVESTING --------- ---------
ACTIVITIES (3,870) (1,591)
--------- ---------
CASH FLOWS
(USED IN) FROM
FINANCING
ACTIVITIES Equity contribution from management 655
--------- ---------
655
--------- ---------
Increase (decrease) in cash and equivalents $ 104 $ (234)
Cash and equivalents at beginning
of period 601 871
------ ------
Cash and equivalents at end
of period $ 705 $ 637
======= ========
SUPPLEMENTAL Cash paid:
DISCLOSURES Interest $ 27
OF CASH FLOW Noncash activity:
INFORMATION Acquisition of Wise net assets (44,345)
Issuance of stock in exchange
for notes from principal stockholder 34,200
Issuance of notes payable to finance
acquisition of Wise net assets 10,145
See Notes to Summary Financial Statements
32
33
NOTES TO WISE
SUMMARY FINANCIAL STATEMENTS
(in thousands)
1. BACKGROUND
In September 1994, Borden, Inc. ("Borden") entered into a merger agreement,
culminating in December 1994, providing for the purposeacquisition of all of
Borden's outstanding common stock by an affiliates of Kohlberg Kravis
Roberts & Co. ("KKR"). Borden, a public reporting registrant as a result of
public debt that was outstanding prior to the acquisition, elected not to
apply push down accounting in its consolidated financial statements and as
such Borden's financial statements (including the Wise operations) are
reported on Borden's historical cost basis. As discussed in the basis of
presentation, these financial statements have been prepared on a purchase
accounting basis from the date of KKR's acquisition of Borden.
Effective July 2, 1996 Borden, in a taxable transaction, sold its salty
snacks business ("Wise Operations") to BWHLLC, for $45 million, which
approximated net book value. The purchase price was based on an independent
valuation of the business. There is no change in the book basis of the
assets and liabilities as of July 2, 1996 because it is a sale between
related parties and Borden's principal stockholders will continue to
control Wise. Borden will continue to exercise significant financial
control over Wise and Wise will fully and unconditionally guarantee
obligations under Borden's credit facility and all of Borden's publicly
held debt on a pari passu basis.
The accompanying unaudited interim summary financial statements of
Wise contain all adjustments, consisting only of normal adjustments, which
in the opinion of management are necessary for a fair statement of the
results for the interim periods. Results for the interim periods are not
necessarily indicative of results for the full years.
2. BASIS OF PRESENTATION, NATURE OF OPERATIONS, ESTIMATES AND 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
separate financial statements for Wise as if it were a registrant in its
filings with the SEC. Based on discussions with the SEC these financial
statements were prepared on a purchase accounting basis which allocates
approximately $52 million of the December 1994 KKR purchase price to the
salty snack business of Borden. The purchase price has been allocated to
tangible and intangible assets and liabilities of Wise based on preliminary
estimates of their fair values. Accordingly, the allocation of the purchase
price may be adjusted when the initial allocation is finalized. While the
final asset and liability values may differ from those set forth in the
balance sheet, the changes are not expected to have a material effect on
the financial condition or results of operations of Wise. Wise is included
in Borden's consolidated financial statements through the date of sale on
Borden's historical basis and continues to be reported in the combined
financial statements included elsewhere herein on a historical cost basis.
Prior to the July 2, 1996 sale, Wise foods operated as a profit center of
Borden, which was included in Borden's December 31, 1995 financial
statements. Under this structure Borden incurred various costs in
connection with the operation of the Wise foods business which included
corporate controlled expenses, such as general and group insurance,
employee benefits, and administrative overhead, such as accounting, legal,
tax, credit and informational services departments and executive
management. Management believes these amounts in the accompanying financial
statements have been allocated in a reasonable and consistent manner in
order to depict balance sheets, statements of income and cash flows of Wise
on a stand alone basis. As a profit center of Borden essentially all
treasury functions including financing of working capital and other cash
needs were performed by Borden. Allocation of interest expense associated
with this financing is not practical and therefore is not included in
these financial statements.
During 1996 Wise sold equity interests in its business to key management
personnel for consideration of $655, resulting in an ownership percentage
of 1.87%. In addition, options issued at fair value which vest over five
years, allow management to purchase additional shares resulting in an
ownership of up to 10%. Management's ownership interest in Wise is recorded
in the financial statements as minority interest.
33
34
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The most significant estimates in
Wise's financial statements are the allowance for doubtful accounts,
accrual for general and group insurance and the corporate allocations.
Actual results could differ from those estimates.
REVENUE RECOGNITION - Trade revenues are recognized when products are
shipped.
ADVERTISING AND PROMOTION EXPENSE - Production costs of future media
advertising are expensed on the first airdate or print release date of the
advertising. All other advertising is expensed as incurred. Promotional
costs are allocated ratably in interim periods based upon their
relationship to estimated annual sales.
CASH AND CASH EQUIVALENTS - Wise considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
INVENTORIES - Finished goods and raw materials inventories are stated at
the lower of cost or market with cost being determined using the average
cost method.
IMPAIRMENT - The carrying value of buildings, machinery and equipment, and
intangibles is evaluated periodically in relation to the expected future
undiscounted cash flows of the underlying business.
PROPERTY, PLANT & EQUIPMENT - Property, plant and equipment are stated at
cost and where appropriate includes capitalized interest during
construction. Depreciation is recorded on the straight-line basis over
useful lives ranging from 3 to 40 years. Major renewals and betterments are
capitalized. Maintenance, repairs and minor renewals are expensed as
incurred. When properties are retired or otherwise disposed of, related
cost and accumulated depreciation are removed from the accounts and any
related gain or loss is recorded in the statement of income.
INTANGIBLES - Intangible assets consist primarily of trademarks that are
amortized on a straight-line basis over not more than twenty years.
GENERAL INSURANCE - Wise is generally self-insured for losses and
liabilities relating to workers' compensation, health and welfare claims,
physical damage to property, business interruption and comprehensive
general, product and vehicle liability. Losses are accrued for the
estimated aggregate liability for claims incurred using certain actuarial
assumptions followed in the insurance industry and Wise experience.
INCOME TAXES - Income taxes are accounted for using the liability method in
accordance with Statements of Financial Accounting Standard No. 109
"Accounting for Income Taxes." Subsequent to July 2, 1996 deferred income
taxes are recorded to recognize the future effects of temporary differences
which arise between financial statement assets and liabilities and their
basis for income tax reporting purposes. Prior to July 2, 1996 Wise was
included in Borden's consolidated tax return, and accordingly, income tax
liabilities and
34
35
assets determined on a separate return basis are included in owners
investment in the accompanying financial statements. The tax basis of Wise
was changed in conjunction with the July 2, 1996 related party purchase.
PENSION AND RETIREMENT SAVINGS PLANS - Most of the employees of Wise are
covered under one of Borden's pension plans or one of the union-sponsored
plans to which Borden contributes. Substantially all domestic employees
participate in Borden's retirement savings plans. Borden's cost of
providing the Companyretirement savings plans represents its matching of eligible
contributions made by participating employees and is recognized as a charge
to income in the year the cost is incurred.
NON-PENSION POSTEMPLOYMENT BENEFITS - Wise provides certain health and life
insurance benefits for eligible retirees and their dependents. The cost of
providing these benefits is recognized as a charge to income in the period
the benefits were earned. Wise provides certain postemployment benefits to
qualified former or inactive employees. Wise accrues the cost of benefits
provided to former or inactive employees after employment, but before
retirement, when it is probable that a benefit will be provided. The cost
of providing these benefits is recognized as a charge to income in the
period the benefits were earned.
3. RELATED PARTIES
Wise is engaged in various transactions with Borden and its affiliated
companies in the ordinary course of business. Such transactions include,
among other things, the sharing of certain general and administrative costs
which are allocated to Wise and totaled $1,517 and $2,475 for the three
months ended September 30, 1996 and 1995, respectively. Affiliated expenses
for the first nine months of 1996 and 1995 were $4,485 and $7,428,
respectively.
During the third quarter 1996 Wise entered into a loan agreement (the "Loan
Agreement") to borrow funds from Borden. The Loan Agreement provides for a
revolving loan facility of up to $10,000 at a variable interest rate equal
to prime, and term loans with the flexibilityamounts and terms to implementbe determined by
Borden. Wise has no outstanding borrowings on the revolving loan facility
as of September 30, 1996. In conjunction with the July 2, 1996 transaction
Wise issued $10,145 in long-term notes to Borden at a fixed 12% interest
rate due on December 31, 1999. The Note Agreement contains customary
conditions to borrowings, representations and warranties, and affirmative
covenants similar to those contained in Borden's credit facility.
4. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS - Wise, like others in similar businesses, is subject
to extensive Federal, state and local environmental laws and regulations.
Although Wise environmental policies and practices are designed to ensure
compliance with these laws and regulations, future developments and
increasingly stringent regulation could require Wise to make additional
unforseen environmental expenditures.
Environmental accruals are routinely reviewed on an interim basis as events
and developments warrant and are subjected to a comprehenvive review
annually during the fiscal fourth quarter.
Wise is subject to various investigations, claims and legal proceedings
covering a wide range of matters that arise in the ordinary course of its
redesign planbusiness activities. Each of these matters is subject to various
uncertainties, and includes provisionssome of these matters may be resolved unfavorably to
Wise. Wise has established accruals for matters that certain
subsidiaries sold to affiliates become guarantorsare 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 Company'sfinancial position
of Wise.
35
36
GUARANTEE - Wise guarantees obligations under theBorden's credit agreement.
18facility and
all of Borden's outstanding publicly held debt on a pari passu basis.
36
1937
PART II
Item 1: LEGAL PROCEEDINGS
In December 1994, the Company agreed to a proposed settlement of twelve
putative class actions that were filed by purported company shareholders in the
New Jersey and Ohio state courts against the Company, members of the Board and,
in two of the cases, Kohlberg Kravis Roberts & Co. These actions alleged,
among other things, that the Company was being sold at too low a price, and
that the Company's directors breached their fiduciary duties by failing to
"auction" the Company and by "locking up" a transaction that was not in the
best interests of shareholders. In April 1996, the settlement was approved by
both the Federal District Court in New York and the State Court in New Jersey.
The only monetary settlement was plaintiffs' counsel's fees of $3,250,000 which
were approved by New Jersey State Court in May 1996.
There have been no material developments in the additional ongoing legal proceedings that
are discussed in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 or the FormForms 10-Q for the periodperiods ended March 31, 1996
and June 30, 1996.
The Company is involved in other litigation throughout the United States which
is considered to be in the ordinary course of the Company's business.
The Company believes, based upon the information it presently 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 materialmaterially adverse effect on the Company's
financial position or operating results.
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Item 6: EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
(4)(i) First Supplemental Indenture,No. 2.1 Conveyance and Transfer Agreement, dated
as of June 26,October 1, 1996 to the May 21, 1992 Indenture, providing for
the issuance of Zero Coupon Notes Due 2002, among Borden, Inc., Wise Holdings,BDH One,
Inc., BDH Two, Inc., Borden Foods Investments
Corporation, Borden Foods Holdings, Corporation, and the Bank of New York.
(ii) Second Supplemental Indenture, dated as of June 26,
1996, to the December 15, 1986 Indenture, as
supplemented by a First Supplemental Indenture,
dated as of December 15, 1986, relating to the 9
7/8% Notes Due 1997 and Medium-Term Notes, Series A,
among Borden, Inc., Wise Holdings, Inc.,LLC, Borden
Foods Holdings Corporation, and The Bank of New
York.
(iii) Third Supplemental Indenture, dated as of June 26,
1996, to the December 15, 1987 Indenture, as
supplemented by a First Supplemental Indenture,
dated as of December 15, 1987, and as supplemented
by a Second Supplemental Indenture, dated as of
February 1, 1993, relating to the following
Debentures:
(a) The 9.2% Debentures due 2021
(b) The 7.875% Debentures due 2023
(c) The 9 1/4% Sinking Fund Debentures due 2019,
among Borden, Inc., Wise Holdings, Inc., Borden Foods
Holdings Corporation, and The Bank of New
York.
(iv) Second Supplemental Indenture, dated as of June 26,
1996, to the Indenture dated as of January 15, 1983,
as supplemented by a First Supplemental Indenture,
dated as of March 31, 1986, relating to the 8 3/8%
Sinking Fund Debentures Due 2016, among Borden,
Inc., Wise Holdings, Inc., Borden Foods Holdings
Corporation, and The First National Bank of Chicago.
(10)(i) Stockholders Agreement, dated as of June 20, 1996,
by and among Borden, Inc. and J. Brendan Barba, Paul
M. Feeny, David MacFarland, Robert Cron, Kenneth J.
Avia, Melanie K. Barba, John Powers, Lauren Powers,
Carolyn Vegliante and Lawrence Noll, incorporated
herein by reference to Exhibit 2 to Schedule 13D,
dated July 1, 1996, File No. 005-37385.
(ii) Voting Agreement, dated as of June 20, 1996, by and
among Borden, Inc. and EGS Partners L.L.C., EGS
Associates,BFC Investments L.P., BEV Partners, L.P., JONAS
Partners, L.P., William Ehrman, Frederic Greenberg,
Frederick Ketcher, Jonas Gerstl, James McLauren,
Beverly Ehrman, Beverly Ehrman as custodian for
Stephanie Ehrman and Linda Greenberg, incorporated
herein by reference to Exhibit 3 to Schedule 13D,
dated July 1, 1996, File No. 005-37385.
(iii) Purchase Agreement, dated as of June 20, 1996,
between Borden, Inc. and AEP IndustriesBDS Two,
Inc., incorporated herein by reference to Exhibit
42.1 to Schedule 13D,Form 8K, dated July 1,October 16, 1996, File No.
005-37385.
(iv) Governance Agreement, dated001-00071.
3(ii) By-Laws of Borden, Inc., as of June 20, 1996,
between Borden, Inc. and AEP Industries Inc.,
incorporated herein by reference to Exhibit 5 to
Schedule 13D, dated July 1, 1996, File No.
005-37385.
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21
(v) Amended and Restated Credit Agreement dated as of
May 7, 1996 to the Credit Agreement dated as of
December 15, 1994 among Borden, Inc., Borden Foods
Holdings Corporation, Wise Holdings, Inc., and the
lenders named therein, Citibank, N.A., as
administrative agent for the Lenders, BT Securities
Corporation, Chase Securities Inc., Citicorp
Securities Inc. and Credit Suisse, as arrangers, BT
Securities and Chase Securities as co- syndication
agents and Credit Suisse, as Issuing Bank and
documentation agent.
(vi) Employment Agreement with Mr. William F. Stoll, Jr.,
Senior Vice President and General Counsel, dated
June 6,August 14, 1996.
(27)27 Financial Data Schedule
b. Reports on Form 8-K - There were no reports on8-K.
On October 16, 1996 Borden, Inc., filed a Form 8-K announcing
the sale of its pasta and foods business to an affiliate of the
Company's principal stockholder, and the completion of the sale
of the Company's packaging and plastic films business to AEP
Industries, Inc. Unaudited pro forma condensed consolidated
financial statements were filed forto reflect the quarter ended June 30, 1996.effects of the
above transactions.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BORDEN, INC.
Date: August 12,November 14, 1996 By /s/ William H. Carter
-----------------------------------------------
William H. Carter
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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