UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended:December 31, 1999 Commission file number: 1-71
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BORDEN, INC.
New Jersey 13-0511250
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(State of incorporation) (I.R.S. Employer Identification No.)
180 East Broad St., Columbus, OH 43215 614-225-4000
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(Address of principal executive offices) (Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
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8 3/8% Sinking Fund Debentures New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in any amendment to this Form 10-K. [x].
Aggregate market value in thousands of the voting stock held by nonaffiliates of
the Registrant based upon the average bid and asked prices of such stock on
March 17, 2000: $0.
Number of shares of common stock, par value $0.01 per share, outstanding as of
the close of business on March 17, 2000: 198,974,994
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated
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none none
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The Exhibit Index is Located herein at sequential pages 87 through 89.
BORDEN, INC.
INTRODUCTION
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The following filing with the Securities and Exchange Commission ("SEC") by
Borden, Inc. ("the Company") presents four separate financial statements:
Borden, Inc. Consolidated Financial Statements, Borden, Inc. and Affiliates
Combined Financial Statements, the Financial Statements of Wise Holdings, Inc.
("Wise Holdings") and the Financial Statements of Borden Foods Holdings
Corporation ("Foods Holdings"). The consolidated statements present the Company
after the effect of the sale of (i) the Company's former salty snacks business
("Wise") to Wise Holdings and its subsidiaries and (ii) the Company's former
domestic and international foods business ("Foods") to Foods Holdings and its
subsidiaries, as explained in Notes 1 and 4 to the consolidated and combined
financial statements. The Company, Wise Holdings and Foods Holdings are
controlled by BW Holdings, LLC ("BWHLLC"). The consolidated financial statements
are those of the Company, which is the SEC Registrant.
The Borden, Inc. and Affiliates ("the Combined Companies") combined financial
statements are included herein to present the Company on a combined historical
basis, including the financial position, results of operations and cash flows of
Wise and Foods. The Combined Companies' financial statements are included,
supplementally, to present financial information on a basis consistent with that
on which credit was originally extended to the Company (prior to push down
accounting) and because management of the Company will continue to control
significant financial and managerial decisions with respect to Wise Holdings and
Foods Holdings. Also, in accordance with rule 3-10 of Regulation S-X, the
financial statements of Wise Holdings and Foods Holdings are included in Part IV
of this Registration Statement on Form 10-K because Wise Holdings and Foods
Holdings are guarantors of the Company's credit facility and all of the
Company's outstanding publicly held debt. The financial statements for Wise
Holdings and Foods Holdings are prepared on a purchase accounting basis.
2
BORDEN, INC.
INDEX
PART I
Item 1 - Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2 - Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3 - Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 4 - Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . . . 10
PART II
Item 5 - Market for the Registrant's Common Stock and Related Stockholder Matters . . . . . . . . . . 10
Item 6 - Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 7A - Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . . . . . . . . . . 25
Item 8 - Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . . . . . . . 26
BORDEN, INC. ("BORDEN") CONSOLIDATED AND BORDEN, INC. AND AFFILIATES
COMBINED FINANCIAL STATEMENTS
Consolidated Statements of Operations,
years ended December 31, 1999, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . 26
Consolidated Balance Sheets, December 31, 1999 and 1998. . . . . . . . . . . . . . . . . . . 28
Consolidated Statements of Cash Flows, years ended December 31, 1999, 1998 and 1997. . . . . 30
Consolidated Statement of Shareholders' Equity, years ended December 31, 1999, 1998 and 1997 32
Combined Statements of Operations,
years ended December 31, 1999, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . 34
Combined Balance Sheets, December 31, 1999 and 1998. . . . . . . . . . . . . . . . . . . . . 35
Combined Statements of Cash Flows, years ended December 31, 1999, 1998 and 1997. . . . . . . 37
Combined Statement of Shareholders' Equity, years ended December 31, 1999, 1998 and 1997 . . 39
Notes to Consolidated and Combined Financial Statements. . . . . . . . . . . . . . . . . . . 41
Independent Auditors' Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . 69
PART III
Item 10 - Directors and Executive Officers of the Registrant. . . . . . . . . . . . . . . . . . . . . 69
Item 11 - Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Item 12 - Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . . 78
Item 13 - Certain Relationships and Related Transactions. . . . . . . . . . . . . . . . . . . . . . . 79
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . 80
3
PART I
ITEM 1. BUSINESS
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The Company was incorporated on April 24, 1899. The Company is engaged primarily
in manufacturing, processing, purchasing and distributing specialty chemicals
and consumer adhesives. The Combined Companies primarily includes the specialty
chemicals, consumer adhesives, Wise and Foods businesses. Corporate departments
provide certain governance functions for all business units. The Company's
executive and administrative offices are located in Columbus, Ohio. Production
facilities are located throughout the United States and in many foreign
countries.
As a result of a merger completed on March 14, 1995, the Company is controlled
by affiliates of Kohlberg Kravis Roberts & Co. ("KKR").
In 1996, the Company sold its Wise business to Wise Holdings and sold its Foods
business to Foods Holdings. Management of the Company continues to exercise
significant financial and managerial control with respect to Wise Holdings and
Foods Holdings. In addition, Wise Holdings and Foods Holdings have guaranteed
the Company's obligations under its credit facility and its outstanding publicly
held debt securities.
In 1995, the Company began the process of redesigning its operating structure.
As a result, management decided to divest certain businesses that did not fit
into the Company's long-term strategic plan. The business included in the
classification "business held for sale" for the segment data is the commercial
and industrial wallcoverings business sold in 1998 (see Note 4 to the
consolidated and combined financial statements).
On September 4, 1997, the Company sold its Borden/Meadow Gold Dairies business
("Dairy"). On March 13, 1998, the Company sold its Decorative Products business.
Both businesses are included in discontinued operations for all periods
presented.
PRODUCTS
The Company's Chemical business ("Chemical") includes formaldehyde, melamine,
resins, coatings and other specialty and industrial chemicals. The Company's
consumer adhesives and infrastructure management services businesses are
included in the "Corporate and Other" heading for business segment information
and Management's Discussion and Analysis (Item 7).
The Combined Companies includes the Company and its subsidiaries, together with
the Foods and Wise businesses. In 1996, Foods management announced its strategy
to focus on grain-based meal solutions and, therefore, its intent to divest all
businesses not aligned with this strategy (the "Unaligned" businesses). The
ongoing Foods business includes pasta and sauces, bouillon and dehydrated soups.
Foods' principal Unaligned businesses included processed cheese, candy coated
popcorn, non-dairy creamer, sweetened condensed milk, reconstituted lemon and
lime juices, and milk powder. Certain of these principal Unaligned businesses
were sold in December 1997, with the significant remaining businesses sold in
early 1998 and all Unaligned business sales completed in 1999. The Wise business
manufactures salty snacks, including potato chips, pretzels and corn snacks and
chips. Its Caribbean based distributorship was sold in 1998.
MARKETING AND DISTRIBUTION
Domestic products for the Chemical and the consumer adhesives businesses are
sold throughout the United States to industrial users, and by in-house and
independent sales forces to distributors, wholesalers, jobbers and retailers. To
the extent practicable, international distribution techniques parallel those
used in the United States. However, raw materials, production considerations,
pricing competition, government policy toward industry and foreign investment,
and other factors may vary substantially from country to country.
The domestic Foods and Wise products are marketed primarily through food brokers
and distributors, and directly to wholesalers, retail stores, food service
businesses, food processors, institutions and government agencies. To the extent
practicable, international distribution techniques parallel those used in the
United States. Raw materials, production considerations, pricing, competition,
government policy toward industry and foreign investment, and other factors may
vary substantially from country to country.
4
COMPETITION
Chemical is the leading global producer of thermosetting resins for the forest
products industry and a leading producer of thermosetting resins for foundry and
industrial applications. These resins are used to bind or coat other materials
during the manufacturing process. UV coatings and specialty inks are produced
for applications in a variety of industries. Chemical is also the world's
largest producer of formaldehyde and a leading producer of melamine crystal.
Much of the formaldehyde and melamine crystal materials are consumed internally
to produce thermosetting resins, with the remainder sold to third parties.
Chemical manufactures and distributes products in North America, Europe, Latin
America, Australia and east Asia and, generally, holds a leading market position
in the areas it competes. Chemical resins are provided to a wide variety of
customers for use in the manufacture of, among other products, plywood, particle
board, laminate veneers, insulation binders and automotive brakes, and to coat
cores and molds in the metal casting process. The major competitors of Chemical
are Ashland Chemical, Georgia Pacific, Neste, and several regional international
competitors. Product performance, customer service and price are the primary
areas in which Chemical competes.
Foods is the second largest manufacturer and marketer of dry pasta in the United
States and Canada, holds the number one position in the United States and Canada
premium pasta sauce market, and holds the number one position in the United
States bouillon market. Foods also competes in the total United States and
Canada sauce markets, holding the third and first positions, respectively. Other
markets in which Foods competes include United States dry soups and dry pasta in
Italy. The pasta, sauces, bouillon and soups businesses are highly competitive,
with competition taking place primarily on the basis of price. The primary
competitors of pasta products are New World Pasta, CPC International, and
Barilla in the United States, and Nabisco Brands and Ital in Canada. Primary
sauce competitors are Unilever plc, Campbell Soup and ConAgra, Inc. Bouillon
competitors include Best Foods and Hormel.
Wise operates its salty snacks business in the eastern United States. Frito-Lay
holds the leading market position throughout the United States as well as the
eastern United States with a market share in excess of 50%. Wise holds the
number two position in the eastern United States market in which it
operates and is the largest regional snacks company in the United States.
The salty snacks business is a competitively priced category.
The consumer adhesives business is the leading United States producer of
household and school glues and manufactures a full line of consumer adhesives,
including home repair products, caulks and sealants. Competition is primarily on
the basis of brand equity.
MANUFACTURING AND RAW MATERIALS
The primary raw materials used by Chemical are methanol, phenol, urea and
formaldehyde. The primary raw materials used by the consumer adhesives business
are methanol and polyvinyl alcohol. Raw materials are generally available from
numerous sources in sufficient quantities, but are subject to price fluctuations
which cannot always be passed on to the Company's customers. The primary raw
materials used by the Foods and Wise businesses are flour, tomato products, oil
and potatoes.
Long-term purchase agreements are used in certain circumstances to assure
availability of adequate raw material supplies at guaranteed prices, for both
the Company and the Combined Companies.
CUSTOMERS
The Company and the Combined Companies do not depend on any single customer nor
is their business limited to a group of customers, the loss of which would have
a material adverse effect on their businesses. The primary customers consist of
food brokers and distributors, retail stores and manufacturers.
PATENTS AND TRADEMARKS
The Company and the Combined Companies own various patents, trademark
registrations, and patent and trademark applications around the world, which are
held for use or currently used in their operations. A majority of the patents
relate to the development of new products and processes for manufacturing and
use thereof, and will expire at various times between 2000 and 2005. No
individual patent is considered to be material.
5
RESEARCH AND DEVELOPMENT
Research and development expenditures were $23.8 million, $18.7 million and
$24.9 million in 1999, 1998 and 1997, respectively, for the Company and $43.8
million, $39.0 million and $44.4 million for the Combined Companies. Development
and marketing of new products are carried out at the business unit level and
integrated with quality control for existing product lines.
WORKING CAPITAL
Working capital for all segments is generally funded through operations and
borrowings under the Company's credit facility.
EMPLOYEES
At December 31, 1999, the Company had approximately 4,000 employees. The
Combined Companies had approximately 7,600 employees. Relationships with union
and non-union employees are generally good.
FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS
In accordance with Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), the Company and Combined Companies determined their operating segments on
the same basis that is used internally to evaluate segment performance and
allocate resources.
The Company and Combined Companies have a decentralized organization structure
with stand-alone businesses. Each of the business units has a separate
management team and infrastructure, and offers different products. The
businesses within the Company include a chemical business and a consumer
adhesives business. The Combined Companies also include the Foods and Wise
businesses.
In accordance with SFAS 131, each business is an operating segment that is not
aggregated with another business because the economic characteristics between
the businesses differ. Because the consumer adhesives business does not meet the
quantitative thresholds of SFAS 131, it is combined with corporate functional
departments and infrastructure management services in the "Corporate and other"
category.
In the consolidated and combined financial information that follows, the Dairy
and Decorative Products businesses are shown as discontinued operations in both
the Depreciation and Amortization Expense chart and the Capital Expenditures
chart, prior to their sales on September 4, 1997 and March 13, 1998,
respectively. These businesses, consistent with treatment as discontinued
operations, are excluded from the Sales to Unaffiliated Customers and Adjusted
operating EBITDA charts.
In the consolidated and combined financial information that follows, the
business held for sale classification includes the commercial and industrial
wallcoverings business through the date of its sale on March 13, 1998.
Adjusted operating EBITDA information (as defined on page 7) is presented
because it is the primary measure used by the chief operating decision maker to
evaluate operating results.
6
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OPERATING SEGMENTS:
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SALES TO UNAFFILIATED CUSTOMERS:
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CONSOLIDATED COMBINED
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(Dollars in millions) 1999 1998 1997 1999 1998 1997
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Foods ongoing $ 536.8 $ 586.3 $ 724.2
Foods Unaligned 11.1 119.8 1,027.5
Wise 229.0 228.7 242.2
Chemical $ 1,249.6 $ 1,260.3 $ 1,290.8 1,249.6 1,260.3 1,290.8
Corporate and other 110.6 102.7 92.6 110.6 102.7 92.6
Business held for sale - 36.7 104.3 - 36.7 104.3
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$ 1,360.2 $ 1,399.7 $ 1,487.7 $ 2,137.1 $ 2,334.5 $ 3,481.6
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TOTAL ASSETS AT YEAR END:
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CONSOLIDATED COMBINED
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(Dollars in millions) 1999 1998 1999 1998
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Foods ongoing $ 924.8 $ 908.5
Foods Unaligned - 37.5
Wise 101.3 100.0
Chemical $ 999.7 $ 878.5 999.7 878.5
Business held for sale - 4.4 - 4.4
Elimination of intercompany accounts (0.2) (6.9) (255.2) (288.3)
Corporate and other 727.9 1,128.7 660.7 1,073.8
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$ 1,727.4 $ 2,004.7 $ 2,431.3 $ 2,714.4
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ADJUSTED OPERATING EBITDA:
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CONSOLIDATED COMBINED
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(Dollars in millions) 1999 1998 1997 1999 1998 1997
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Foods ongoing $ 13.5 $ 11.4 $ (5.8)
Foods Unaligned 1.6 (1.7) 113.5
Wise 11.8 7.7 10.6
Chemical $ 216.9 $ 185.9 $ 154.4 216.9 185.9 154.4
Corporate and other (2.0) (0.9) (7.0) (3.1) (1.7) (7.0)
Business held for sale - 0.5 7.0 - 0.5 7.0
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ADJUSTED OPERATING EBITDA (1) 214.9 185.5 154.4 240.7 202.1 272.7
Significant or unusual items (2) (34.2) 5.8 (16.0) 14.2 351.0 124.9
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OPERATING EBITDA 180.7 191.3 138.4 254.9 553.1 397.6
Depreciation and amortization (54.2) (50.9) (38.9) (92.1) (86.6) (96.3)
------- ------- ------- ------- ------- -------
OPERATING INCOME $ 126.5 $ 140.4 $ 99.5 $ 162.8 $ 466.5 $ 301.3
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<FN>
(1) Adjusted Operating EBITDA represents net income, excluding discontinued operations, cumulative effect of change in
accounting principle, non-operating income and expense, interest, taxes, depreciation, amortization and Significant or
Unusual Items (see page 8).
(2) Includes Significant or Unusual Items shown on page 8 and page 16 of Management's Discussion and Analysis of
Financial Condition and Results of Operations.
7
SIGNIFICANT OR UNUSUAL
ITEMS AFFECTING COMPARABILITY OF OPERATING EBITDA: (1)
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CONSOLIDATED COMBINED
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(Dollars in millions) 1999 1998 1997 1999 1998 1997
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Foods ongoing $ - $(23.3) $ 3.1
Foods Unaligned 50.5 371.7 137.8
Wise (0.7) (3.2) -
Chemical $(41.6) $ 5.8 $(16.0) (41.6) 5.8 (16.0)
Corporate and other (2) 7.4 - - 6.0 - -
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$(34.2) $ 5.8 $(16.0) $ 14.2 $351.0 $124.9
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<FN>
(1) See page 16 of the Management's Discussion and Analysis of Financial Condition and Results of Operations
for further information concerning these items.
(2) Consolidated includes gains eliminated in Combined.
DEPRECIATION AND AMORTIZATION EXPENSE:
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CONSOLIDATED COMBINED
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(Dollars in millions) 1999 1998 1997 1999 1998 1997
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Foods ongoing $ 30.2 $ 28.1 $ 34.1
Foods Unaligned 0.2 0.9 16.3
Wise 7.5 6.7 7.0
Chemical $46.1 $41.9 $ 28.6 46.1 41.9 28.6
Business held for sale - 1.9 5.2 - 1.9 5.2
Discontinued operations - 2.0 19.9 - 2.0 19.9
Corporate and other 8.1 7.1 5.1 8.1 7.1 5.1
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$54.2 $52.9 $ 58.8 $ 92.1 $ 88.6 $ 116.2
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CAPITAL EXPENDITURES:
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CONSOLIDATED COMBINED
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(Dollars in millions) 1999 1998 1997 1999 1998 1997
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Foods ongoing $ 58.1 $ 36.4 $ 19.7
Foods Unaligned 0.1 1.6 15.6
Wise 8.9 9.7 5.2
Chemical $66.3 $39.6 $ 80.8 66.3 39.6 80.8
Business held for sale - 1.7 3.6 - 1.7 3.6
Discontinued operations - 1.1 29.3 - 1.1 29.3
Corporate and other 8.5 10.1 16.0 8.5 10.1 16.0
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$74.8 $52.5 $129.7 $141.9 $100.2 $170.2
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GEOGRAPHIC AREAS:
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SALES TO UNAFFILIATED CUSTOMERS: (3)
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CONSOLIDATED COMBINED
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(Dollars in millions) 1999 1998 1997 1999 1998 1997
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United States $ 910.3 $ 942.1 $ 969.0 $1,545.4 $1,649.8 $2,340.9
Canada 150.4 141.9 143.3 253.4 241.4 292.8
Other International 299.5 315.7 375.4 338.3 443.3 847.9
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Total $1,360.2 $1,399.7 $1,487.7 $2,137.1 $2,334.5 $3,481.6
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<FN>
(3) For purposes of geographic area disclosures, sales are attributed to the country in which individual
business locations reside.
8
LONG-LIVED ASSETS: (1)
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CONSOLIDATED COMBINED
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(Dollars in millions) 1999 1998 1999 1998
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United States $374.2 $344.1 $557.1 $492.6
Canada 41.9 40.8 83.8 77.9
Other International 122.7 86.0 130.4 109.0
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Total $538.8 $470.9 $771.3 $679.5
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<FN>
(1) Long-lived assets include property, plant and equipment, net of accumulated
depreciation.
ITEM 2. PROPERTIES
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As of December 31, 1999, the Company operated 32 domestic Chemical production
and manufacturing facilities in 19 states, the most significant being the
Chemical plant in Louisville, Kentucky. In addition, the Company operated 25
foreign Chemical production and manufacturing facilities primarily in Canada,
South America, Europe, Australia and the Far East.
As of December 31, 1999, the Company operated one domestic facility in New York
for producing and manufacturing household, school and consumer glues.
As of December 31, 1999, the Foods and Wise businesses operated 8 domestic food
manufacturing facilities in 7 states. In addition, the Foods business operated 4
foreign food manufacturing and processing facilities located in Canada and
Italy.
The Company's and the Combined Companies' manufacturing and processing
facilities are generally well maintained and effectively utilized. Substantially
all facilities are owned.
The Company and the Combined Companies are actively engaged in complying with
environmental protection laws, as well as various federal and state statutes and
regulations relating to manufacturing, processing and distributing their many
products. In connection with this, the Company incurred capital expenditures of
$2.7 million in 1999, $2.8 million in 1998, and $8.3 million in 1997. The
Company estimates that it will spend $2.5 million for environmental control
facilities during 2000. The Combined Companies incurred environmental capital
expenditures of $3.3 million in 1999, $3.7 million in 1998, and $12.0 million
1997. The Combined Companies estimate $2.8 million will be spent in 2000
relating to environmental control facilities.
ITEM 3. LEGAL PROCEEDINGS
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Environmental Proceedings
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The Company has been notified that it is or may be a potentially responsible
party with respect to the cleanup of 51 waste sites in proceedings brought under
the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") or similar state environmental laws. The Company's ultimate liability
will depend on many factors including its volumetric share of waste, the
financial viability of other responsible parties, the remediation methods and
technology used, the amount of time necessary to accomplish remediation, and the
availability of insurance coverage. While the Company cannot predict with
certainty the total cost of such cleanup, the Company has recorded approximately
$22 million of liabilities for environmental remediation costs for these and
other sites in amounts that it believes are probable and reasonably estimable.
Based on currently available information and analysis, the Company believes that
it is reasonably possible that costs associated with such sites may exceed
current reserves by amounts that may prove insignificant or by amounts, in the
aggregate, of up to approximately $13 million. This estimate of the range of
reasonably possible additional costs is less certain than the estimates upon
which reserves are based, and in order to establish the upper limit of such
range, assumptions least favorable to the Company among the range of reasonably
possible outcomes were used. In estimating both its current reserves for
environmental remediation and the possible range of additional costs, the
Company has not assumed that it will bear the entire cost of remediation of
every site to the exclusion of other known potentially responsible parties who
may be jointly and severally liable. The ability of other potentially
9
responsible parties to participate has been taken into account, based generally
on the parties' probable contributions on a per site basis. No attempt has been
made to discount the estimated amounts to net present value, and no amounts have
been recorded for potential recoveries from insurance carriers.
Private actions against the Company and numerous other defendants are pending in
a U.S. District Court in Baton Rouge, Louisiana, alleging personal injuries and
property damage in connection with a waste disposal site in Louisiana. A similar
action is pending in a Los Angeles, California state court in connection with a
landfill site in Monterey Park, California.
On April 2, 1999, Borden Chemical settled allegations of violations of the Clean
Air Act at its Aurora, Illinois plant by payment to the United States
Environmental Protection Agency of a penalty in the amount of approximately $0.2
million.
Borden Chemicals and Plastics Limited Partnership
- -------------------------------------------------
In 1987 the Company's chemical and polyvinyl chloride resin businesses located
at Geismar, Louisiana, and Illiopolis, Illinois, were acquired by the Borden
Chemicals and Plastics Limited Partnership ("BCP"). BCP Management, Inc.,
("BCPM"), a wholly owned subsidiary of the Company serves as general partner of
BCP and has certain fiduciary responsibilities to BCP's unitholders. Under an
Environmental Indemnity Agreement ("EIA"), the Company has agreed, subject to
certain conditions and limitations, to indemnify BCP from certain environmental
liabilities arising from facts or circumstances that existed and requirements in
effect prior to November 30, 1987, and share on an equitable basis those arising
from facts or circumstances existing and requirements in effect both prior to
and after such date. No claim can be made by BCP under the EIA after November
30, 2002.
Other Legal Proceedings
- -----------------------
The Company and Combined Companies are involved in other litigation throughout
the United States, which is considered to be in the ordinary course of business.
Anticipated Impact
- ------------------
Management believes, based upon the information it currently possesses, and
taking into account its established reserves for estimated liability, that the
ultimate outcome of the foregoing environmental and legal proceedings and
actions is unlikely to have a material adverse effect on the financial position
or results of operations of the Company or Combined Companies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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The Company's Annual Shareholder Meeting was held December 2, 1999. The
Company's Board of Directors was re-elected in its entirety by unanimous vote of
the 198,974,994 shares of the Company's common stock outstanding.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
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AND RELATED STOCKHOLDER MATTERS
-------------------------------
As a result of the merger on March 14, 1995, all common stock was canceled and
retired and was de-listed from trading on exchanges in the United States, Japan
and Switzerland. The Company's authorized common stock consists of 300,000,000
shares with a par value of $0.01 per share, 198,974,994 of which are issued and
outstanding and controlled by affiliates of KKR. No shares of such common stock
trade on any exchange. The Company declared $64.1 million in dividends on common
stock during 1999, $59.5 million in dividends on common stock during 1998, and
$51.4 million during 1997. The Company's ability to pay dividends on its common
stock is restricted by its credit agreement with certain banks. See Notes 10 and
14 to the Consolidated and Combined Financial Statements.
10
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
- --------------------------------------------------------------------------------------------------------------
FIVE YEAR SELECTED FINANCIAL DATA
(All dollar and share amounts in millions, except per share data)
The following represents five year selected financial data for the Company and
the Combined Companies, restated for discontinued operations. See pages 8 and 16
for items impacting comparability between 1999, 1998 and 1997.
- --------------------------------------------------------------------------------------------------------------
CONSOLIDATED FOR THE YEARS 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
SUMMARY OF EARNINGS
Net Sales $ 1,360.2 $1,399.7 $1,487.7 $2,388.0 $2,902.1
Income (loss) from continuing operations 55.3 23.6 17.2 44.7 (428.2)
(Loss) income applicable to common stock (20.8) (11.1) 147.6 (333.1) (424.9)
- --------------------------------------------------------------------------------------------------------------
Basic and diluted income (loss) per common share
from continuing operations $ 0.28 $ 0.12 $ 0.09 $ 0.23 $ (2.22)
Basic and diluted (loss) income per common share (0.10) (0.06) 0.74 (1.67) (2.21)
- --------------------------------------------------------------------------------------------------------------
Dividends per share
Common share $ 0.32 $ 0.30 $ 0.26 $ 0.08
Preferred series A 3.00 3.00 3.00 3.13 $ 2.39
Average number of common shares
outstanding during the year 199.0 199.0 199.0 199.0 192.3
- --------------------------------------------------------------------------------------------------------------
FINANCIAL STATISTICS
Total Assets $ 1,727.4 $2,004.7 $2,175.3 $2,490.0 $3,207.9
Long-term debt 541.1 552.0 788.3 567.2 1,200.1
- --------------------------------------------------------------------------------------------------------------
Operating EBITDA (1) $ 180.7 $ 191.3 $ 138.4 $ 277.7 $ (148.3)
Adjusted Operating EBITDA (1) 214.9 185.5 154.4 215.7 82.6
- --------------------------------------------------------------------------------------------------------------
COMBINED FOR THE YEARS 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
SUMMARY OF EARNINGS
Net Sales $ 2,137.1 $2,334.5 $3,481.6 $4,456.8 $4,741.0
Income (loss) from continuing operations 92.2 271.3 93.1 45.0 (469.2)
Income (loss) applicable to common stock 7.1 94.6 131.1 5.1 (424.9)
- --------------------------------------------------------------------------------------------------------------
FINANCIAL STATISTICS
Total Assets $ 2,431.3 $2,714.4 $3,019.2 $3,084.7 $3,617.9
Long-term debt 544.1 554.6 794.9 581.8 1,210.7
- --------------------------------------------------------------------------------------------------------------
Operating EBITDA (1) $ 254.9 $ 553.1 $ 397.6 $ 330.2 $ (162.2)
Adjusted Operating EBITDA (1) 240.7 202.1 272.7 274.3 108.3
- --------------------------------------------------------------------------------------------------------------
<FN>
(1) Operating EBITDA represents net income, excluding discontinued operations, cumulative effect of change in
accounting principle, non-operating income and expense, interest, taxes, depreciation and amortization. Adjusted
operating EBITDA is comprised of operating EBITDA excluding the effects of Significant or Unusual Items as shown on
page 8 and page 16 of Management's Discussion and Analysis for the years 1999, 1998 and 1997. EBITDA information is
presented because it is the primary measure used by the chief operating decision maker to evaluate operating
results and because management understands that such information is considered by certain investors to be an
additional basis for evaluating the ability to pay interest and repay debt. EBITDA should not be considered an
alternative to measures of operating performance as determined in accordance with generally accepted accounting
principles, including net income, as a measure of the Company's operating results and cash flows or as a measure of
the Company's liquidity. Because EBITDA is not calculated identically by all companies, the presentation herein may
not be comparable to other similarly titled measures of other companies.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
RESULTS OF OPERATIONS BY BUSINESS UNIT:
- --------------------------------------
Following is a comparison of net sales and adjusted operating EBITDA by
operating segment for both the Company and the Combined Companies:
SALES TO UNAFFILIATED CUSTOMERS:
- ------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
--------------------------------- --------------------------
(Dollars in millions) 1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------------------------------
Foods ongoing $ 536.8 $ 586.3 $ 724.2
Foods Unaligned 11.1 119.8 1,027.5
Wise 229.0 228.7 242.2
Chemical $1,249.6 $1,260.3 $1,290.8 1,249.6 1,260.3 1,290.8
Corporate and other 110.6 102.7 92.6 110.6 102.7 92.6
Business held for sale (1) - 36.7 104.3 - 36.7 104.3
-------- -------- -------- -------- -------- --------
$1,360.2 $1,399.7 $1,487.7 $2,137.1 $2,334.5 $3,481.6
- ------------------------------------------------------------------------------------------------
OPERATING INCOME:
- ---------------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
------------------------------ ----------------------------
(Dollars in millions) 1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
Adjusted Operating EBITDA
- --------------------------
Foods ongoing $ 13.5 $ 11.4 $ (5.8)
Foods Unaligned 1.6 (1.7) 113.5
Wise 11.8 7.7 10.6
Chemical $216.9 $185.9 $154.4 216.9 185.9 154.4
Corporate and other (2.0) (0.9) (7.0) (3.1) (1.7) (7.0)
Business held for sale (1) - 0.5 7.0 - 0.5 7.0
------- ------- ------- ------- ------- -------
Total Adjusted Operating
EBITDA (2) 214.9 185.5 154.4 240.7 202.1 272.7
Significant or unusual items (3) (34.2) 5.8 (16.0) 14.2 351.0 124.9
Depreciation and amortization (4) (54.2) (50.9) (38.9) (92.1) (86.6) (96.3)
------- ------- ------- ------- ------- -------
OPERATING INCOME $126.5 $140.4 $ 99.5 $162.8 $466.5 $301.3
- ----------------------------------------------------------------------------------------------------------
<FN>
(1) See page 4 for the business included in this classification.
(2) Adjusted Operating EBITDA represents net income, excluding discontinued
operations, cumulative effect of change in accounting principle, non-operating
income and expense, interest, taxes, depreciation, amortization and Significant
or Unusual Items (see below).
(3) Includes Significant or Unusual Items shown on page 8 and page 16 of
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
(4) The increase in Consolidated depreciation and amortization in 1999 and
1998 resulted primarily from Chemical acquisitions. Combined Companies'
depreciation and amortization changes reflect that described for Consolidated,
and the sale of Foods Unaligned businesses in 1997, 1998 and 1999.
CONSOLIDATED SUMMARY
Net Sales
- ---------
Consolidated net sales decreased $39.5 million, or approximately 3%, to $1,360.2
million from $1,399.7 million in 1998. The sales decline was primarily the
result of the 1998 divestiture of the commercial and industrial wallcoverings
business recorded in businesses held for sale. Chemical net sales also declined
$10.7 million or approximately 1% due to lower pricing, unfavorable currency
exchange rates and the exit of non-core businesses in 1998, partially offset by
improved volumes in the North America Chemical businesses and increased sales
from two acquisitions in 1999.
12
Operating Income
- ----------------
Adjusted operating EBITDA increased $29.4 million, or approximately 16%, to
$214.9 million from $185.5 million in 1998. The increase is due to substantially
higher Chemical volumes, as well as overall gross margin improvements, partially
offset by higher selling, general, and administrative expenses. Significant and
unusual items include $16.6 million charged in 1999 related to the closure of
Chemical operations in the Philippines, Brazil and Uruguay and $25.0 million
charged in 1999 related to Chemical plant asset write-offs.
COMBINED SUMMARY
Net Sales
- ---------
Combined net sales decreased $197.4 million, or approximately 8%, to $2,137.1
million from $2,334.5 million in 1998. The decrease in net sales was caused
primarily by the divestiture of Foods Unaligned businesses in 1998, reduction in
pasta and sauce volumes, and the factors described above for consolidated net
sales.
Operating Income
- ----------------
Combined adjusted operating EBITDA increased $38.6 million, or approximately
19%, to $240.7 million from $202.1 million in 1998. The increase is due to
improved results of operations in the Foods' unaligned businesses and favorable
settlements of Foods litigation, partially offset by reduced Foods volumes and
pricing, as well as the consolidated results described above. Comparative
significant or unusual items include gains on the sale of Foods Unaligned
businesses in 1998 of $371.7 million versus $50.5 million in 1999.
1999 VS. 1998
Chemical
- --------
Chemical sales in 1999 were down $10.7 million, or approximately 1%, from the
prior year. The most significant items that negatively impacted 1999 sales were
generally lower pricing, unfavorable currency exchange rates in Latin America,
and the prior year exit from certain non-core businesses in North America,
Europe and Latin America. These declines were substantially offset by improved
volumes, primarily in the North America forest products resins and UV coatings
businesses, and two acquisitions in the United States and Europe.
Significantly lower pricing, which negatively impacted sales by $76.5 million,
reflects competitive market conditions as well as contractual arrangements,
primarily in North America, that require pass-through of significantly lower raw
material costs, primarily for methanol, phenol and urea.
Unfavorable currency exchange rates, due primarily to the significant currency
devaluation in Brazil in early 1999, had an unfavorable impact on 1999 sales of
$58.0 million.
The 1998 divestitures of the North America paper resins business and Latin
America plastic films business and the 1998 closure of a European operation
caused 1999 sales to be $30.7 million lower versus the prior year. The second
quarter acquisition of Spurlock Industries, Inc. and the third quarter
acquisition of Blagden Chemicals, Ltd. contributed incremental 1999 sales of
$17.5 million and $34.1 million, respectively.
Overall volume improvement of approximately 10%, excluding the effect of
acquisitions and divestitures, had a positive impact on 1999 sales of $104.9
million, with most of the improvement coming from the North America forest
products resins and UV coatings businesses. The improved volume in North America
forest products resins is driven by continued low interest rates and strong
housing and construction activity. The improved volume in UV coatings reflects
significant demand for optical fiber.
Adjusted operating EBITDA increased $31.0 million, or approximately 17%, from
1998. The improvement is due primarily to the significantly higher volume,
including increased volume from acquisitions, but also reflects overall gross
margin improvement. Negatively impacting adjusted operating EBITDA are higher
selling, general and administrative expenses and the effect of unfavorable
currency exchange rates, primarily in Latin America. The gross margin
improvement reflects significantly lower raw material costs, which were
substantially offset by lower selling prices that reflect both contractual
arrangements, under which pricing is tied directly to raw material costs, and
13
continuing competitive pressures in the market. As a result of specific programs
to improve manufacturing processes and other manufacturing cost reduction and
control programs, overall plant processing costs were flat compared to prior
year.
Corporate and other
- -------------------
Corporate and other net sales increased $7.9 million, or approximately 8%, to
$110.6 million from $102.7 million. The improvement was primarily due to higher
volumes and improved mix in the consumer adhesives business.
Adjusted operating EBITDA declined $1.1 million, to a loss of $2.0 million in
1999 from a loss of $0.9 million in 1998, principally due to higher general and
administrative expense. Lower net expense of $1.8 million due to gains on
disposal of property in 1999 compared to losses in 1998 and improved cost
management resulting in lower 1999 salary costs of $1.8 million were more than
offset by a net increase in 1999 related to settlement of various corporate
liabilities and administrative expenses.
Business held for sale
- ----------------------
The commercial and industrial wallcoverings business classified as business held
for sale was divested in 1998, resulting in no reported sales or adjusted
operating EBITDA in 1999 compared to sales and adjusted operating EBITDA of
$36.7 million and $0.5 million, respectively, in 1998.
Foods
- -----
Foods' sales for the year ended December 31, 1999 decreased $158.2 million, or
approximately 22%, to $547.9 million from $706.1 million in 1998. The Foods
Unaligned businesses sold during 1999 and 1998 accounted for $108.7 million or
approximately 69% of the decline. Net sales from ongoing businesses decreased
$49.5 million. The decline was driven by four key factors: 1) Management
decision to shift its promotion strategy on a portion of its pasta line to
Every Day Low Pricing, which reduced sales offset by a reduction in promotion
spending; 2) reduction in customer inventories, especially in pasta;
3) management decision to de-emphasize non-core, lower profit pasta brands
and channels; 4) increased competition in the foodservice and soup and bouillon
businesses.
Foods' adjusted operating EBITDA increased $5.4 million, or approximately 56%,
to $15.1 million in 1999 from $9.7 million in 1998. This increase is attributed
to the $3.3 million improvement of Foods Unaligned businesses and an improvement
in Foods' ongoing operations of $2.1 million. Most of the Foods Unaligned
businesses were sold in 1998 with all Foods Unaligned business sales completed
in 1999. When excluding $9.3 million of gains on the favorable settlements of
litigation in 1999, ongoing operating results declined $7.2. Lower raw material
costs and improved pasta manufacturing operations were offset by costs
associated with the implementation of new systems. Additionally, incremental
marketing investments primarily related to new products and previously mentioned
reduced volumes, contributed to the decline.
Wise
- ----
Excluding decreased sales of $5.7 million due to the sale of its Caribbean based
distributorship in May of 1998, Wise sales increased $6.0 million, or
approximately 3%, from 1998 to 1999. The improvement reflects increased volumes
in northern and southern regions, small bag sales and private label. Adjusted
operating EBITDA increased from $7.7 million in 1998 to $11.8 million in 1999
due primarily to increased volume and manufacturing and distribution
efficiencies, partially offset by higher 1999 general and administrative costs.
1998 VS. 1997
Chemical
- --------
Chemical sales were down $30.5 million, or approximately 2%, from 1997. The
decline reflects unfavorable currency exchange rates in Canada, Latin America
and Asia Pacific, substantially lower pricing, the mid-year shutdown of a
European operation, and the mid-year sale of a plastic films business in Latin
America, all partially offset by improved volume in North America and
incremental sales provided by the melamine and derivatives businesses acquired
in late 1997 and early 1998.
The combined impact on sales of unfavorable currency exchange rates was
approximately $47 million, with nearly half of the impact coming from Asia
Pacific.
14
The significant unfavorable impact of lower pricing was approximately $46
million and reflects highly competitive market conditions and contractual
arrangements that necessitated the pass-through of significantly lower raw
material costs, primarily for methanol, phenol and urea.
Volume improvement of 4% in North America, excluding the melamine and
derivatives acquisitions, had a positive impact on sales of approximately $32
million but was partially offset by a 10% decline in Latin America volume that
had a $12.1 million negative impact on sales. The improved volume in North
America was driven by low interest rates and strong housing activity throughout
1998 while the decline in Latin America reflects the region's struggling
economy.
The melamine and derivatives product line includes Melamine Chemicals acquired
in November 1997 and the resins and compounds business of Sun Coast Industries
acquired in February 1998. The addition of Melamine Chemicals secured a supply
of a crucial raw material for the Company's current business and allowed the
Company to expand in the growing specialty business of melamine resins. The
February 1998 acquisition of a Sun Coast Industries, Inc. division that
manufactures melamine-based products has further expanded the Company's growth
in this market. These acquisitions provided incremental sales of approximately
$60 million in 1998 and had very good operating results, reflecting strong
pricing and market demand throughout the year.
The mid-year closure of a European operation and sale of the Latin America
plastic films business resulted in sales declines of approximately $8 million
and $9 million, respectively, compared to the prior year.
Adjusted operating EBITDA increased $31.5 million, or approximately 20%, from
1997. The increase in adjusted operating EBITDA reflects primarily the impact of
volume improvement in North America, substantially lower raw material costs, and
the acquisition of the melamine and derivatives businesses, all partially offset
by substantially lower selling prices, higher general and administrative costs,
and unfavorable currency exchange rates. Chemical general and administrative
expenses increased approximately $20 million from 1997 to 1998 due primarily to
additional expenses from newly acquired businesses, consulting fees, bad debt
write-offs, and environmental expenses. Adjusted operating EBITDA in Latin
America was down significantly from the prior year due to poor economic
conditions in the region, resulting in late payments by customers and debt
write-offs of $2.5 million.
Corporate and other
- -------------------
Corporate and other adjusted operating EBITDA improved $6.1 million from a 1997
loss of $7.0 million to a loss of $0.9 million in 1998. The difference is
primarily due to a gain of $9.5 million related to the 1998 settlement of the
majority of the Company's workers compensation liability and a gain of $3.0
million related to the 1998 favorable settlement of a note receivable from the
1996 sale of the German bakery business. These gains represented an improvement
of $3.9 million from 1997, when similar gains of approximately $8.6 million were
recorded.
Business held for sale
- ----------------------
The remaining business classified as business held for sale was divested in
1998, leading to the reported declines in net sales and adjusted operating
EBITDA.
Foods
- -----
Foods' sales during 1998 decreased approximately 60% to $706.1 million from
$1,751.7 million in 1997. Of this $1,045.6 million decrease, $907.7 million was
related to sales of Foods' Unaligned businesses in late 1997 and early 1998.
Sales from ongoing businesses declined $137.9 million as a result of reductions
in pasta volume due to management's strategic decisions to exit the unprofitable
private label business and unprofitable markets, and to eliminate low margin
product lines and brands. The impact of these strategic decisions began to
affect sales in the last four months of 1997.
Foods adjusted operating EBITDA declined $98.0 million, or approximately 91%, to
$9.7 million in 1998 from $107.7 million in 1997. Adjusted operating EBITDA from
ongoing businesses improved by $17.2 million during 1998 to adjusted operating
EBITDA of $11.4 million, from adjusted operating EBITDA loss of $5.8 million in
1997. Operating income improvements driven by exiting unprofitable markets and
the private label pasta business, reducing production and distribution costs,
and lowering administrative costs, were partially offset by reductions of pasta
volumes and non-capitalizable systems implementation and Year 2000 expenses.
15
Adjusted operating EBITDA from Foods Unaligned businesses declined $115.2
million, as most of the businesses were sold in 1997 and early 1998.
Wise
- ----
Wise sales declined $13.5 million, or approximately 6%, from 1997 to 1998. This
sales decline is primarily the result of the sale of the Caribbean based
distributorship and increased domestic competitive pressures. Absent the reduced
sales due to the divestiture, 1998 sales decreased approximately $1.5 million
from 1997.
Adjusted operating EBITDA fell from $10.6 million in 1997 to $7.7 million in
1998. The lower sales volume, increased commodity prices and new information
system costs were the primary reasons for the operating EBITDA decline.
SIGNIFICANT OR UNUSUAL ITEMS EXCLUDED FROM ADJUSTED OPERATING EBITDA:
- ---------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
----------------------- --------------------------
(Dollars in millions) 1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------------------------------
Gain on disposal of businesses, net $ 7.4 $ 8.3 $ 56.5 $378.7 $122.6
Business realignment and asset
write-offs (41.6) (2.5) $(16.0) (42.3) (27.7) (16.0)
Changes in estimate - - - - - 18.3
------- ------ ------- ------- ------- -------
$(34.2) $ 5.8 $(16.0) $ 14.2 $351.0 $124.9
- -------------------------------------------------------------------------------------------------
Note: See also the Significant or Unusual Items on page 8.
1999
The Company and Combined Companies' business realignment charges of $41.6
million and $42.3 million, respectively, primarily include a Chemical plant
expansion project that was cancelled resulting in the write-off of engineering,
equipment and other costs of $25.0 million. In addition, certain Chemical
operations in the Philippines, Brazil, and Uruguay were closed as part of an
effort to consolidate its operations, resulting in a total charge of $16.6
million.
The Company's 1999 gain on disposal of businesses primarily relates to gains on
the sale of the commercial and industrial wallcoverings business. In addition to
the Company's gain, the Combined Companies' 1999 gain on disposal of businesses
primarily includes gains of $48.6 million on the sale of Foods Unaligned
businesses due to additional proceeds and lower than expected exit costs related
to the 1998 KLIM sale.
1998
The Company's gain on disposal of businesses relates to the sale of a
non-strategic Chemical business in Latin America. The Combined Companies' gain
on disposal of businesses reflects the Chemical gain as well as gains of $371.7
million on the sale of Foods Unaligned businesses and a loss of $1.3 million on
the Wise sale of its Caribbean based distributorship.
The Company's business realignment charge of $2.5 million relates to the closure
of a European Chemical operation. The Combined Companies' business realignment
charges include the Chemical charge as well as charges for the closure of a
Foods plant and impairment of assets of two other Foods plants totaling $23.3
million, and charges for the downsizing of Wise's research facility of $1.9
million.
1997
The Company's and Combined Companies' $16.0 million business realignment charge
related to the closure of a European Chemical operation. In addition to the
$122.6 million net gain on the sale of Foods Unaligned businesses, Foods reduced
prior year accruals for trade promotions in the combined financial statements by
$18.3 million. Due to better management of trade spending, these redemptions
were significantly lower than management had anticipated.
16
NON-OPERATING EXPENSES AND INCOME TAX EXPENSE:
- ----------------------------------------------
NON-OPERATING EXPENSES
- ----------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
------------------------------- ------------------------
(Dollars in millions) 1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
Interest expense $ 63.1 $ 64.4 $ 93.0 $ 63.2 $ 65.5 $93.3
Affiliated interest expense (income) 19.1 22.8 (26.5) 5.3 5.4 -
Interest income and other (34.8) (30.9) (6.4) (33.8) (34.8) (9.1)
Impairment of investments 3.0 26.7 - 3.0 26.7 -
----------- ---------- ------- ------- ------- ------
$ 50.4 $ 83.0 $ 60.1 $ 37.7 $ 62.8 $84.2
- ----------------------------------------------------------------------------------------------------
1999 vs. 1998
- -------------
Consolidated non-operating expenses decreased $32.6 million for the year ended
December 31, 1999 to $50.4 million from $83.0 million. The decrease is primarily
attributable to reduced impairment charges on investments. The 1999 impairment
charge of $3.0 relates to the Company's investment in Imperial Home Decor Group
("IHDG"). (See Note 9 to the Consolidated and Combined Financial Statements.)
Interest income and other increased $3.9 million primarily due to the unrealized
gain on an interest rate swap which is marked to market, offset partially by
lower average cash balances in 1999.
Combined non-operating expenses decreased $25.1 million for the year ended
December 31, 1999 to $37.7 million from $62.8 million. The decrease is primarily
attributable to the reduced impairment charges on investments discussed above.
1998 vs. 1997
- -------------
Consolidated non-operating expenses for the year ended December 31, 1998 totaled
$83.0 million, up $22.9 million from the 1997 total of $60.1 million. The net
increase is primarily attributable to a $26.7 million charge for the impairment
of the Company's equity investment in AEP Industries ("AEPI"). (See Note 9 to
the Consolidated and Combined Financial Statements.) Interest expense decreased
from $93.0 million to $64.4 million due to the paydown of the Company's line of
credit using proceeds from the sale of the Decorative Products business. The
interest expense decrease was more than offset by the $49.3 million increase in
affiliated interest expense on amounts loaned by Foods and BWHLLC. Interest
income and other increased $24.5 million, primarily from the investment of
proceeds from the sale of certain Foods Unaligned businesses in short-term
investments.
Combined non-operating expense decreased $21.4 million from $84.2 million to
$62.8 million. The decrease is primarily attributable to the $27.8 million
decrease in interest expense, augmented by a $25.7 million increase in interest
income and other, due to the use and investment of proceeds from the sale of
Decorative Products and Foods Unaligned businesses as described above. These
improvements were partially offset by a $26.7 million charge for the impairment
of the Company's equity investment in AEPI and affiliated interest expense on
amounts loaned by BWHLLC.
INCOME TAX EXPENSE
- ----------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
---------------------- -----------------------------
(Dollars in millions) 1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------
Income tax expense $20.8 $33.8 $22.2 $32.9 $132.4 $124.0
Effective tax rate 27% 59% 56% 26% 33% 57%
- -----------------------------------------------------------------------------------------
1999 vs. 1998
- -------------
The lower 1999 consolidated effective tax rate reflects net income derived from
foreign operations, offset by foreign tax credits on foreign taxes paid at
significantly higher rates than the Company's effective tax rate in the United
States.
In addition to the discussion above for consolidated tax rates, the 1999
combined effective tax rate primarily reflects lower net tax rates primarily
applicable to foreign divestitures.
17
1998 vs. 1997
- -------------
Greater income tax expense was incurred by the Company in 1998 when compared to
1997. This was primarily the result of higher earnings before income taxes. The
high effective rate in 1998 primarily reflects repatriation from foreign
countries of earnings that became subject to U.S. taxes.
Greater income tax expense was incurred by the Combined Companies in 1998 when
compared to 1997. This was primarily the result of substantially higher earnings
before income taxes. The lower effective rate in 1998 is primarily due to an
affiliate's share of gains on the sale of certain Foods Unaligned businesses
that are not subject to corporate tax, offset in part by the repatriation of
foreign earnings discussed above.
CASH FLOWS:
- -----------
OPERATING
1999 vs. 1998
- -------------
Consolidated cash provided by operating activities totaled $71.7 million in 1999
and $46.0 million in 1998, an increase of $25.7 million. The most significant
components of the increase include an overall improvement in adjusted operating
EBITDA of $29.4 million (see page 12), an increase of $5.4 million due to a
smaller increase in inventories in 1999 primarily in the Chemical business
caused by reduced raw material costs and inventory reduction programs, and
improvements due to the timing of trade payments of $31.3 million, all
partially offset by higher net interest and tax payments of $32.4 million.
Combined cash provided by operating activities totaled $78.5 million in 1999,
compared to cash used in operations of $33.6 million in 1998. The $112.1 million
improvement consisted primarily of an overall improvement in adjusted operating
EBITDA of $38.6 million (see page 12), improvements due to the timing of trade
payments of $34.7 million and lower net interest and tax payments of $58.7
million. These improvements were all partially offset by net reduced operating
cash inflows related to divested businesses and an increase in 1999 inventories
of $13.0 million to take advantage of favorable supplier pricing.
1998 vs 1997
- ------------
Operating cash flows generated by the Company were $46.0 million in 1998
compared to cash used of $97.0 million in 1997. Over half of the $143.0 million
improvement was due to the absence in 1998 of a $75.0 million tax settlement
payment. Also contributing to the improvement were lower net cash interest
payments of $36.9 million and cash generated from improved adjusted operating
EBITDA of $31.1 million (see page 12). Cash interest paid was lower as
divestiture proceeds were used to repay debt resulting in lower average debt
outstanding and interest costs when compared to 1997. Higher adjusted operating
EBITDA (see page 12) is due primarily to improved gross margins in the Company's
Chemical business.
Operating cash flows used by the Combined Companies were $33.6 million in 1998
compared to $52.6 million in 1997. The $19.0 million improvement from 1997
resulted from: the non-recurrence of the $75.0 million tax payment partially
offset by a $31.3 million increase in taxes paid related to gains on divested
businesses, an improvement in Foods' net working capital occurring in
anticipation of and as a result of the divestiture of certain businesses, net
working capital improvements in Foods' continuing operations, and lower net cash
interest payments of $48.3 million. Partially offsetting these net improvements
was a decline in adjusted operating EBITDA (see page 12) directly attributable
to the absence of operating results of the Foods Unaligned businesses in 1998.
18
INVESTING
1999 vs. 1998
- -------------
Consolidated investing activities used $229.5 million cash in 1999 compared to
cash generated of $336.6 million in 1998, a decrease of $566.1 million. The
purchases of Spurlock, Blagden and the resins manufacturing plant in Minnesota
by Chemical used $119.6 million in 1999 compared to $14.4 million used to
purchase Sun Coast Industries, Inc. in 1998. The divestiture proceeds in 1999
include $7.6 million from the sale of Chemical's molding compounds business
compared to divestiture proceeds in 1998 of $304.8 million from the sale of
Decorative Products, $15.5 million from the sale of a Latin American plastic
films business, and $15.6 million from the sale of the commercial and industrial
wallcoverings business. Investing activity in 1998 also includes $67.6 million
relating to net repayments of affiliated borrowings by Foods and Wise, compared
to net Foods and Wise 1999 affiliated borrowings of $2.3 million and a 1999
$50.0 million investment in the form of 16% cumulative junior preferred stock in
WKI Holding Company, Inc. ("World Kitchen"), an affiliate of the Company's
parent.
The Combined Companies investing activity used $266.1 million in 1999 compared
to generating cash of $972.4 million in 1998, a decrease of $1,238.5 million. In
addition to the above, the Combined Companies' 1999 divestiture activity
reflects $23.6 million of proceeds from the sale of Foods Unaligned businesses
compared to $733.2 million in 1998. The 1999 and 1998 (loss) return on
investment of ($2.3) million and $67.6 million, respectively, in the
consolidated investing flows is eliminated in the combined flows as the Foods
and Wise operations are included in the Combined Companies.
Capital expenditures for the Company in 1999 increased $22.3 million to $74.8
million in 1999 from $52.5 million in 1998. Capital expenditures for the
Combined Companies increased $41.7 million to $141.9 million in 1999 from $100.2
million in 1998. The increase is the result of plant expansion projects to
increase capacity in the Chemical operations, the implementation of an
enterprise-wide system and new product manufacturing line investments in the
Foods business.
The Company's and Combined Companies' planned 2000 capital expenditures are
approximately $108 million and $186 million, respectively. The budgeted capital
expenditures include plans to continue to increase capacity in the Chemical
operations and to further invest in new product manufacturing lines in the Foods
business. The capital expenditures will be financed through operations and,
potentially, the available line of credit.
1998 vs. 1997
- -------------
The $336.6 million of cash generated by the Company from investing activities in
1998 was a $94.2 million decline from the $430.8 million generated in 1997. The
decline is primarily due to reduced business divestiture proceeds and reduced
affiliated debt repayments from Foods, which had repaid most of its outstanding
affiliated debt balance in 1997. These 1998 inflow reductions from 1997 levels
were partially offset by reduced 1998 capital expenditures and a reduction of
1998 funds used for business purchases.
The $335.9 million in 1998 proceeds from business divestitures of the Company
consisted of: $304.8 million from the sale of Decorative Products, $15.5 million
from the sale of a Latin American plastic films business and $15.6 million from
the sale of the commercial and industrial wallcoverings business. The 1997
divestiture proceeds of $458.6 million included $405.2 million for the dairy
business, $40.0 million from the sale of a trademark and $13.4 million of
additional proceeds related to the sale of a Spanish food company.
The $972.4 million of cash generated by the Combined Companies from investing
activities in 1998 was a $611.5 million improvement over 1997. This improvement
is primarily due to increased proceeds from the sale of businesses and reduced
expenditures for business purchases.
In addition to the business divestiture proceeds listed above for the Company,
the Combined Companies' 1998 business divestiture proceeds included $733.2
million from the sale of Foods Unaligned businesses, and $2.1 million from the
sale of the Wise Caribbean based distributorship. The Combined Companies' 1997
business sales included the sale of Foods' Cracker Jack and domestic cheese
businesses.
19
Capital expenditures in 1998 for the Company and Combined Companies decreased
$77.2 million and $70.0 million, respectively, compared to 1997. This is mainly
the result of reduced Chemical expenditures of $41.3 million related to reduced
plant additions and improvements and reduced capitalized computer system
implementation costs, and the absence of capital expenditures in 1998 of
businesses divested in late 1997 and early 1998.
FINANCING
1999 vs. 1998
- -------------
Consolidated financing activities used $319.1 million cash in 1999 compared to
cash generated of $105.9 million in 1998. The difference of $425.0 million is
primarily due to $411.8 million of 1998 affiliated borrowings from Foods,
representing proceeds from the sale of Foods Unaligned businesses, and BWHLLC,
compared to 1999 net affiliated repayments/loans of $225.5 million. The 1999
affiliated activity includes repayments to BWHLLC and Foods of $169.3 million
and a short-term loan of $56.2 million to CCPC Acquisition Corp., an affiliate
of the Company's parent, as described in Note 19. The 1998 borrowings from Foods
were partially offset by repayment of a $236.0 million revolving line of credit.
Combined financing activities used $279.5 million in 1999 compared to $441.9
million used in 1998. The $162.4 million increased use of cash in 1998 was
primarily due to $236.7 million repayment of a revolving line of credit using
business divestiture proceeds and a $272.2 million distribution to a Foods
affiliate, partially offset by 1998 borrowings from BWHLLC of $134.3 million.
The 1999 financing activities include net repayment of affiliated borrowings
from BWHLLC of $123.4 million and a short-term loan of $56.2 million provided to
CCPC Acquisition Corp. (See Note 19 to the Consolidated and Combined Financial
Statements).
1998 vs. 1997
- -------------
Financing activity for the Company generated cash of $105.9 million in 1998
compared to using cash of $259.7 million in 1997. The difference of $365.6
million is due primarily to the net debt repayments and affiliated borrowings.
In 1998 the Company borrowed a total of $411.8 million from Foods, which Foods
had received as proceeds from the sale of its Unaligned businesses, and BWHLLC,
of which $236.0 was used to repay a revolving line of credit. The 1997 financing
activities included long-term debt net repayments of $188.8 million and no
affiliated borrowings or repayments.
Combined Companies' financing activities in 1998 used $441.9 million compared to
a use of $254.4 million in 1997. The Combined Companies financing activities
include the above with the exception of the affiliated borrowings from Foods
which are eliminated. The Combined Companies' financing activities also included
a $272.2 million distribution from Foods to an affiliate that is not within the
Combined Companies controlled group, but has an ownership interest in the
trademarks that were sold with the Foods Unaligned businesses.
LIQUIDITY AND CAPITAL RESOURCES:
- --------------------------------
As of December 31, 1999, the Company and the Combined Companies had $895.0
million in contractually committed lines of credit (the "Credit Agreement") of
which $797.1 million (net of $97.9 million in letters of credit) was available.
The cash held by the Company of $195.2 million and the Combined Companies of
$228.4 million as of December 31, 1999 and the cash available under the Credit
Agreement may be used for acquisitions and to fund working capital needs and
capital expenditures.
As part of the common control exercised over the Company and Combined Companies,
procedures are established to enter into borrowings between the business units
at market interest rates.
The Company and Combined Companies expect to have enough liquidity to fund
working capital requirements, support capital expenditures and pay preferred
dividends during 2000 and in future years due to cash from operations and
amounts available under the Credit Agreement.
As of December 31, 1999, the Company and the Combined Companies had $180.6
million and $192.5 million, respectively, in deferred tax assets that related to
foreign and alternative minimum tax credits as well as net operating loss
20
carryforwards. These credits and carryforwards, net of valuation allowances of
$37.7 million and $43.0 million for the Company and Combined Companies,
respectively, are expected to reduce future tax liabilities.
RISK MANAGEMENT:
- ----------------
The Company and Combined Companies enter into various financial instruments,
primarily to hedge interest rate risk and foreign currency exchange risk. The
Company and Combined Companies also enter into raw materials purchasing
contracts and contracts with customers to mitigate commodity price risks.
FOREIGN EXCHANGE RISK
- ---------------------
In 1999 and 1998, international operations accounted for approximately 33% and
28% of the Company's and Combined Companies' sales, respectively. As a result,
there is exposure to foreign exchange risk on transactions that are denominated
in a currency other than the business unit's functional currency. Such
transactions include foreign currency denominated imports and exports of raw
materials and finished goods (both intercompany and third party), and loan
payments (both intercompany and third party). In almost all cases, the
functional currency is the unit's local currency.
It is the Company's and Combined Companies' policy to reduce foreign currency
cash flow exposure due to exchange rate fluctuations by hedging firmly committed
foreign currency transactions wherever economically feasible. The use of forward
and option contracts protects cash flows against unfavorable movements in
exchange rates, to the extent of the amount under contract. The Company and
Combined Companies do not hedge foreign currency exposure in a manner that would
entirely eliminate the effect of changes in foreign currency exchange rates on
net income and cash flow. The Company and Combined Companies do not speculate in
foreign currency and do not hedge foreign currency translation or foreign
currency net assets and liabilities. The counterparties to the forward contracts
are financial institutions with investment grade credit ratings.
Foreign exchange risk is also mitigated because the Company and Combined
Companies operate in many foreign countries, reducing the concentration of risk
in any one currency. In addition, foreign operations have limited imports and
exports, reducing the potential impact of foreign currency exchange rate
fluctuations. With other factors being equal, such as the performance of
individual foreign economies, an average 10% foreign exchange increase or
decrease in any one country would not materially impact operating results or
cash flow, except for Canada which would significantly impact the Company's
operating results. Although considered unlikely, an average 10% foreign exchange
increase or decrease in all countries may materially impact operating results of
the Company and Combined Companies.
In accordance with current accounting standards, the Company and the Combined
Companies defer unrealized gains and losses arising from contracts that hedge
existing and identified foreign currency exposure against commitments until the
related transactions occur. Gains and losses arising from contracts that hedge
existing transactions are offset against gains or losses arising from the
transactions being hedged.
A summary of forward currency and option contracts outstanding as of December
31, 1999 and 1998, follows. All contracts summarized for 1999 are entered into
by the Company and Combined Companies except the European Monetary Unit which
relates only to the Combined Companies. All contracts summarized for 1998 were
entered into by the Company and Combined Companies except the Italian Lire which
relates only to the Combined Companies. Fair values are determined from quoted
market prices at December 31, 1999 and 1998.
21
- -------------------------------------------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------- ----------------------------------------------
AVERAGE AVERAGE FORWARD FAIR VALUE AVERAGE AVERAGE FORWARD FAIR VALUE
DAYS CONTRACT POSITION GAIN/(LOSS) DAYS CONTRACT POSITION GAIN/ (LOSS)
TO MATURITY RATE (IN MILLIONS) (IN MILLIONS) TO MATURITY RATE (IN MILLIONS)(IN MILLIONS)
-------- --------- -------------- ------------- ------------ -------- ----------- ------------
CURRENCY TO BUY
WITH U.S. DOLLARS
- --------------------
Canadian Dollars - - - - 4 1.55 $ 26.8 $ 0.2
Japanese Yen (1) 29 112.42 $ 3.7 $ 0.4 96 114.6 1.9 -
CURRENCY TO SELL
FOR U.S. DOLLARS
- ---------------------
Australian Dollars 11 0.65 0.5 - 57 .61 2.0 -
British Pound 35 1.61 73.1 (0.3) - - - -
Canadian Dollars 56 1.46 0.3 - 56 1.53 9.0 0.1
European Monetary Unit 60 1.01 14.1 0.1 - - - -
Italian Lire - - - - 29 1,682.6 16.1 (0.3)
- ----------------------------------------------------------------------------------------------------------------
<FN>
(1) At December 31, 1999, amounts include option contracts of $2.5 million, with 38 average days to maturity, 111.39 average
contract rate and fair value gain of $0.2 million. There were no option contracts outstanding at December 31, 1998.
INTEREST RATE RISK
The Company has historically utilized interest rate swaps to lower funding costs
or to alter interest rate exposures between fixed and floating rates on
long-term debt. The Company does not enter into speculative swaps or other
financial contracts. As of December 31, 1999 and 1998, two interest rate swaps
were outstanding with a combined notional value of $224.3 million. Although
originally entered into as a hedge, an interest rate swap having a notional
amount of $200 million no longer meets the criteria for hedge accounting and is
marked to market.
Fair values of the swaps are independently provided using estimated mid-market
levels. Under interest rate swaps, the Company agrees with other parties to
exchange, at specified intervals, the difference between the fixed rate and
floating rate interest amounts calculated by reference to the agreed notional
principal amount. On average, the Company paid 10.4% and received 5.2% on the
swaps in 1999 and paid 10.4% and received 5.6% in 1998. These swaps mature on
September 1, 2000, and December 1, 2002. A 1% increase or decrease in market
interest rates would result in a $2.2 million increase or decrease,
respectively, in the fair value of the interest rate swap agreements at December
31, 1999 and 1998. The Company is exposed to credit related losses in the event
of nonperformance by the counterparties to these swaps, although no such losses
are expected as the counterparties are financial institutions having an
investment grade credit rating.
A summary of interest rate swaps for both the Company and Combined Companies as
of December 31, 1999 and 1998 follows:
- -----------------------------------------------------------------------------------------------------------
1999 1998
--------------------------------- ----------------------------------
NOTIONAL AVERAGE FAIR AVERAGE FAIR
AMOUNT TRADE TERMINATION FIXED RECEIVE VALUE FIXED RECEIVE VALUE
(IN MILLIONS) DATE DATE PAY RATE RATE (IN MILLIONS) PAY RATE RATE (IN MILLIONS)
- ------------ ------- ----------- --------- -------- ------------- --------- -------- --------------
$24.3 12/1/92 12/01/02 13.65% 5.4% (4.4) 13.65 % 5.9 % (7.3)
200.0 9/17/85 9/01/00 10.00% 5.2% (10.6) 10.00 % 5.5 % (21.4)
- -----------------------------------------------------------------------------------------------------------
22
The interest rate on most debt agreements is fixed or essentially fixed through
the use of interest rate swaps discussed above. A 10% increase or decrease in
the interest rate of the variable debt agreements would have an immaterial
effect on the Company's and Combined Companies' net income. The fair value of
publicly held debt is based on the price at which the bonds are trading at
December 31, 1999 and 1998. All other debt fair values are determined from
quoted market interest rates at December 31, 1999 and 1998.
A summary of the Company's outstanding debt as of December 31, 1999 and 1998
follows:
- ----------------------------------------------------------------------------------------------------------------------
1999 1998 (1)
--------------------------------------------- ----------------------------------------------
Weighted Fair Weighted Fair
Debt Average Value Debt Average Value
Year (in millions) Interest Rate (in millions) (in millions) Interest Rate (in millions)
- -------------------- -------------- --------------- -------------- -------------- -------------- --------------
2000 $ 17.7 8.3% $ 17.7 $ 10.3 7.2% $ 10.6
2001 1.8 9.5% 1.8 1.8 9.4% 1.8
2002 3.3 8.1% 3.3 3.9 8.4% 4.1
2003 - - - - - -
2004 - - - - - -
2005 and thereafter 536.0 8.4% 451.1 536.0 8.1% 534.4
------- ------- ------- --------
$ 558.8 $ 473.9 $ 552.0 $ 550.9
- ----------------------------------------------------------------------------------------------------------------------
<FN>
(1) December 31, 1998 amounts reflect outstanding debt for years shown.
A summary of the Combined Companies' outstanding debt as of December 31, 1999
and 1998 follows:
- ---------------------------------------------------------------------------------------------------------------------
1999 1998 (1)
---------------------------------------------- ---------------------------------------------
Weighted Fair Weighted Fair
Debt Average Value Debt Average Value
Year (in millions) Interest Rate (in millions) (in millions) Interest Rate (in millions)
- -------------------- -------------- --------------- -------------- -------------- -------------- --------------
2000 $ 18.1 8.2% $ 18.2 $ 10.3 7.2% $ 10.6
2001 2.1 7.9% 2.1 2.4 6.9% 2.4
2002 3.6 7.3% 3.7 4.6 7.2% 4.7
2003 0.7 0.2% 0.7 0.7 0.0% 0.5
2004 0.8 0.2% 0.8 0.6 0.0% 0.5
2005 and thereafter 536.9 8.4% 451.8 536.0 8.1% 534.3
-------------- -------------- -------------- -------------
$ 562.2 $ 477.3 $ 554.6 $ 553.0
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(1) December 31, 1998 amounts reflect outstanding debt for years shown.
The Company and Combined Companies do not use derivative financial instruments
in investment portfolios. Cash equivalent investments are placed with
instruments that meet credit quality standards. These standards are established
within the Company's investment policies, which also limit the exposure to any
one issue. At December 31, 1999 and 1998, approximately $73.3 million and $661.6
million, respectively, for the Company and $73.3 million and $671.4 million,
respectively, for Combined Companies was invested primarily in commercial paper
and money market funds. At December 31, 1999 and 1998, the average maturity
period of the commercial paper investments was 25 days and 18 days,
respectively, with an average interest rate of 6.2% and 5.3%, respectively. The
average rate on December 31, 1999 and 1998 of the money market fund investments
was 5.7% and 5.1%, respectively. Due to the short maturity of the Company's cash
equivalents, the carrying value on these investments approximates fair value and
the interest rate risk is not significant. A 10% increase or decrease in
interest returns on invested cash would have an immaterial effect on the
Company's and Combined Companies' net income and cash flow at December 31, 1999
and 1998.
The $56.2 million carrying value of the Company and Combined Companies' loan
receivable from affiliate approximates fair value as the loan bears interest at
a market interest rate.
23
COMMODITY RISK
- --------------
The Company is exposed to price risks associated with raw materials purchases,
most significantly with methanol, phenol and urea. For these commodity raw
materials, the Company has supply contracts, with periodic price adjustment
provisions. The commodity risk is significantly moderated through use of
customer contracts with selling price provisions that are indexed to publicly
available indices for these commodity raw materials. There are no active futures
markets for the major raw materials used by the Company.
In addition to that described above for the Company, the Combined Companies
enter into contracts with suppliers with specified prices and volumes. Except
for vegetable oils and corn, there are no active futures markets for major
commodities used by the Combined Companies. In the case of oils and corn used by
Wise, the futures markets are used to determine prices contracted with
suppliers.
EQUITY PRICE RISK
- -----------------
As partial consideration for two divested business units, the Company and
Combined Companies received and hold as of December 31, 1999, a 33% investment
in AEPI and an 11% investment in IHDG (see Note 9 to the Consolidated and
Combined Financial Statements). As of December 31, 1998, the Company and
Combined Companies reduced the carrying amount of the AEPI investment by $26.7
million to the closing December 31, 1998, market stock price, as stated on the
NASDAQ, to reflect the drop in market price in 1998 which was judged by
management to be "other than temporary". In 1999, the Company and Combined
Companies recorded a charge of $3.0 million to reduce the carrying value of the
IHDG investment to zero due to the significant declines in the business, which
were judged by management to be "other than temporary". Shares of IHDG are not
publicly traded.
The carrying value of the Company's and Combined Companies' $50.0 million
investment in World Kitchen preferred stock is considered by management to equal
the fair value as a result of World Kitchen's recent fourth quarter 1999
acquisitions to which the investment relates.
A summary of the AEPI investment as of December 31, 1999 and 1998 follows:
- -------------------------------------------------------------------------------------------
1999 1998
----------------------------- ------------------------------
CARRYING FAIR CARRYING FAIR
DATE VALUE VALUE VALUE VALUE
DESCRIPTION ACQUIRED (IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
- ----------------- -------- -------------- -------------- -------------- --------------
AEPI common stock 10/11/96 $ 47.0 $ 62.1 $ 52.5 $ 52.5
- -------------------------------------------------------------------------------------------
Readers are cautioned that forward-looking statements contained under the
heading of "Risk Management" should be read in conjunction with the disclosure
under the heading: "Forward-Looking and Cautionary Statements".
IMPACT OF THE YEAR 2000 ISSUE:
- ------------------------------
The Company and Combined Companies completed their Year 2000 preparedness
program on a timely basis. Costs to complete the program included investments in
enterprise-wide information systems of approximately $73 million and $120
million for the Company and Combined Companies, respectively, and an approximate
$7 million and $15 million for the Company and Combined Companies, respectively,
to make the remaining systems Year 2000 compliant. Since the rollover to January
1, 2000, the Year 2000 issue has not significantly impacted the operations or
results of the Company or Combined Companies, or their significant suppliers and
customers. Although management cannot provide assurances regarding the impact of
the Year 2000 issue on suppliers and customers, the potential future disruption
caused by such parties, if any, are expected to be isolated and not materially
impact the financial condition or results of the Company or Combined Companies.
Readers are cautioned that forward-looking statements contained in the Year 2000
Update should be read in conjunction with the disclosure under the heading:
"Forward-Looking and Cautionary Statements".
24
RECENTLY ISSUED ACCOUNTING STANDARDS
- ------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This standard requires all derivatives be
measured at fair value and recorded on a company's balance sheet as an asset or
liability, depending upon the company's underlying rights or obligations
associated with the derivative instrument. In June 1999, the FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133". This statement defers
the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company and Combined Companies continue to
investigate the impact of this pronouncement.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
- -----------------------------------------
The Company, Combined Companies and their officers may, from time to time, make
written or oral statements regarding the future performance of the Company or
Combined Companies including statements contained in the filings with the
Securities and Exchange Commission. Investors should be aware that these
statements are based on currently available financial, economic and competitive
data and on current business plans. Such statements are inherently uncertain and
investors should recognize that events could cause the Company's and/or Combined
Companies' actual results to differ materially from those projected in
forward-looking statements made by or on behalf of the Company and/or Combined
Companies. Such risks and uncertainties are primarily in the areas of results of
operations by business unit, liquidity, legal, environmental liabilities, Year
2000 compliance and risk management.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------- -----------------------------------------------------------
Refer to the "Risk Management" section included in Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operation.
25
- --------------------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
BORDEN, INC.
Year ended December 31,
(In millions, except per share data) 1999 1998 1997
- --------------------------------------------------------------------------------------------
Net sales $1,360.2 $1,399.7 $1,487.7
Cost of goods sold 936.0 1,008.2 1,124.5
--------- --------- ---------
Gross margin 424.2 391.5 363.2
--------- --------- ---------
Distribution expense 56.0 51.0 52.8
Marketing expense 75.4 78.9 87.2
General & administrative expense 132.1 127.0 107.7
Business realignment and asset write-offs 41.6 2.5 16.0
Gain on divestiture of businesses (7.4) (8.3) -
--------- --------- ---------
Operating income 126.5 140.4 99.5
--------- --------- ---------
Interest expense 63.1 64.4 93.0
Affiliated interest expense (income), net of affiliated
interest income of $0.9, $2.2 and $27.1, respectively 19.1 22.8 (26.5)
Interest income and other (34.8) (30.9) (6.4)
Impairment of investments 3.0 26.7 -
--------- --------- ---------
Income from continuing operations
before income tax 76.1 57.4 39.4
Income tax expense 20.8 33.8 22.2
--------- --------- ---------
Income from continuing operations 55.3 23.6 17.2
--------- --------- ---------
Discontinued operations:
(Loss) income from operations, net of tax (0.4) 2.3 30.7
(Loss) gain on disposal, net of tax (2.0) 36.7 173.4
--------- --------- ---------
Net income 52.9 62.6 221.3
Preferred stock dividends (73.7) (73.7) (73.7)
--------- --------- ---------
Net (loss) income applicable to common stock $ (20.8) $ (11.1) $ 147.6
========= ========= =========
- ---------------------------------------------------------------------------------------------
26
CONSOLIDATED STATEMENTS OF OPERATIONS
(CONTINUED)
BORDEN, INC.
Year ended December 31,
(In millions, except per share data) 1999 1998 1997
- --------------------------------------------------------------------------
Basic and Diluted Per Share Data
--------------------------------
Income from continuing operations $ 0.28 $ 0.12 $ 0.09
Discontinued operations:
Income from operations - 0.01 0.15
(Loss) gain on disposal, net of tax (0.01) 0.18 0.87
------- ------- -------
Net income 0.27 0.31 1.11
Preferred stock dividends (0.37) (0.37) (0.37)
------- ------- -------
Net (loss) income applicable to common stock $(0.10) $(0.06) $ 0.74
======= ======= =======
Dividends per common share $ 0.32 $ 0.30 $ 0.26
Dividends per preferred share $ 3.00 $ 3.00 $ 3.00
Average number of common shares outstanding
during the period 199.0 199.0 199.0
- --------------------------------------------------------------------------
See Notes to Consolidated and Combined Financial Statements
27
- ---------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
BORDEN, INC.
(In millions)
December 31, December 31,
ASSETS 1999 1998
- ---------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and equivalents $ 195.2 $ 672.1
Accounts receivable (less allowance for doubtful
accounts of $11.8 in 1999 and $10.4 in 1998) 215.0 210.7
Loan receivable from affiliate 56.2 -
Inventories:
Finished and in-process goods 62.8 61.9
Raw materials and supplies 50.4 50.6
Deferred income taxes 42.4 58.2
Other current assets 15.3 18.4
-------------- --------------
637.3 1,071.9
-------------- --------------
INVESTMENTS AND OTHER ASSETS
Investments 64.0 73.8
Investment in affiliate 51.5 -
Deferred income taxes 109.5 104.5
Prepaid pension assets 129.7 133.3
Other assets 36.3 38.0
Assets sold under contractual arrangement (net of
allowance of $62.6 in 1999 and 1998) (See Note 4) 48.2 46.0
-------------- --------------
439.2 395.6
-------------- --------------
PROPERTY AND EQUIPMENT
Land 25.6 25.7
Buildings 97.9 93.2
Machinery and equipment 739.1 676.0
-------------- --------------
862.6 794.9
Less accumulated depreciation (323.8) (324.0)
-------------- --------------
538.8 470.9
INTANGIBLES
Net of accumulated amortization of $16.1 in 1999 and
$12.3 in 1998 112.1 66.3
-------------- --------------
TOTAL ASSETS $ 1,727.4 $ 2,004.7
============== ==============
- ---------------------------------------------------------------------------------------
See Notes to Consolidated and Combined Financial Statements
28
- ------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
BORDEN, INC.
(In millions, except share data)
December 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
- ------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts and drafts payable $ 137.4 $ 113.5
Debt payable within one year 17.7 16.1
Income taxes payable 244.1 284.7
Loans payable with affiliates 246.6 415.8
Other current liabilities 178.6 200.7
--------- ---------
824.4 1,030.8
--------- ---------
OTHER LIABILITIES
Liabilities sold under contractual arrangement 41.6 41.6
Long-term debt 541.1 552.0
Non-pension post-employment benefit obligations 176.1 197.3
Other long-term liabilities 80.0 93.7
--------- ---------
838.8 884.6
--------- ---------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 20)
SHAREHOLDERS' EQUITY
Preferred stock - Issued 24,574,751 shares 614.4 614.4
Common stock - $0.01 par value: authorized 300,000,000 shares,
Issued 198,974,994 shares 2.0 2.0
Paid in capital 355.7 358.9
Receivable from parent (414.9) (415.3)
Accumulated other comprehensive income (52.5) (51.0)
Accumulated deficit (440.5) (419.7)
--------- ---------
64.2 89.3
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,727.4 $2,004.7
========= =========
- ------------------------------------------------------------------------------------------
See Notes to Consolidated and Combined Financial Statements
29
- ----------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
BORDEN, INC.
Year ended December 31,
(In millions) 1999 1998 1997
- ----------------------------------------------------------------------------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income $ 52.9 $ 62.6 $ 221.3
Adjustments to reconcile net income to net
cash from (used in) operating activities:
Loss (gain) on disposal of discontinued operations 3.1 (111.6) (308.2)
Gain on divestiture of businesses (7.4) (8.3) -
Deferred tax provision 4.5 84.5 70.8
Depreciation and amortization 54.2 50.9 38.9
Unrealized gain on interest rate swap (10.8) (4.1) (4.1)
Business realignment and asset write-offs 41.6 2.5 16.0
Impairment of investment 3.0 26.7 -
Net change in assets and liabilities:
Trade receivables 3.9 (0.9) (9.4)
Inventories (0.4) (5.8) 1.8
Trade payables 13.5 (17.8) (14.2)
Income taxes (30.6) 27.3 (50.8)
Other assets (6.3) 44.8 12.0
Other liabilities (49.5) (107.8) (132.4)
Discontinued operations working capital - 3.0 61.3
-------- -------- --------
71.7 46.0 (97.0)
-------- -------- --------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES
Capital expenditures (74.8) (52.5) (129.7)
Proceeds from the divestiture of businesses 7.6 335.9 458.6
Purchase of businesses, net of cash acquired (119.6) (14.4) (90.9)
Proceeds from the sale of fixed assets 9.6 - 6.7
Return from (investment in) affiliate (52.3) 67.6 186.1
-------- -------- --------
(229.5) 336.6 430.8
-------- -------- --------
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES
Net short-term debt (repayments) borrowings (3.8) 3.8 2.8
Borrowings of long-term debt - - 235.0
Repayment of long-term debt (0.6) (236.0) (423.8)
Affiliated borrowings (repayments/ loans) (225.5) 411.8 -
Interest received from parent 48.9 60.4 50.8
Common stock dividends paid (64.4) (60.4) (50.8)
Preferred stock dividends paid (73.7) (73.7) (73.7)
-------- -------- --------
(319.1) 105.9 (259.7)
-------- -------- --------
- -----------------------------------------------------------------------------------
30
- --------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
BORDEN, INC.
Year ended December 31,
(In millions) 1999 1998 1997
- --------------------------------------------------------------------------------------------
(Decrease) increase in cash and equivalents $(476.9) $488.5 $ 74.1
Cash and equivalents at beginning
of year 672.1 183.6 109.5
-------- ------- ------
Cash and equivalents at end
of year $ 195.2 $672.1 $183.6
======== ======= ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest, net $ 55.1 $ 47.6 $ 84.5
Taxes 46.1 21.2 111.6
Non-cash activity:
Distribution of note receivable from Company's parent
to cancel options - 39.2 -
Investment retained in IHDG - 3.0 -
Capital contribution by parent 26.4 42.9 24.5
Non-cash proceeds relating to the Foods sale - - 20.0
Accrued dividends on investment in affiliate 1.5 - -
Reclassification of minimum pension liability adjustment
from/(to) shareholders' equity 1.5 (3.6) 109.2
- -------------------------------------------------------------------------------------------
See Notes to Consolidated and Combined Financial Statements
31
- ------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
BORDEN, INC.
(In millions)
- ------------------------------------------------------------------------------------------------------------------------
Accumulated
Preferred Common Paid-in Receivable Other Accumulated
Stock Stock Capital from Comprehensive Deficit Total
Parent Income
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $614.4 $2.0 $379.9 $(443.6) $(136.4) $(556.2) $(139.9)
- ------------------------------------------------------------------------------------------------------------------------
Net income 221.3 221.3
Translation adjustments and other (20.8) (20.8)
Minimum pension liability (net of $69.8 tax) 109.2 109.2
--------
COMPREHENSIVE INCOME 309.7
--------
Preferred stock dividends (73.7) (73.7)
Common stock dividends (51.4) (51.4)
Interest accrued on notes from parent (net of $20.0 tax) 31.0 (0.5) 30.5
Capital contribution from parent 24.5 24.5
Additional note from Foods
transaction (20.0) (20.0)
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $614.4 $2.0 $384.0 $(464.1) $ (48.0) $(408.6) $ 79.7
- ------------------------------------------------------------------------------------------------------------------------
Net income 62.6 62.6
Translation adjustments and other 0.6 0.6
Minimum pension liability (net of $2.0 tax) (3.6) (3.6)
--------
COMPREHENSIVE INCOME 59.6
--------
Preferred stock dividends (73.7) (73.7)
Common stock dividends (59.5) (59.5)
Interest accrued on notes from parent (net of $19.9 tax) 30.7 9.6 40.3
Capital contribution from parent 42.9 42.9
Cancel option on Decorative Products (39.2) 39.2 -
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $614.4 $2.0 $358.9 $(415.3) $ (51.0) $(419.7) $ 89.3
- ------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated and Combined Financial Statements
32
- ----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
BORDEN, INC.
(In millions)
- ----------------------------------------------------------------------------------------------------------------------
Accumulated
Preferred Common Paid-in Receivable Other Accumulated
Stock Stock Capital from Comprehensive Deficit Total
Parent Income
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $614.4 $2.0 $358.9 $(415.3) $(51.0) $(419.7) $89.3
- ----------------------------------------------------------------------------------------------------------------------
Net income 52.9 52.9
Translation adjustments and other (3.0) (3.0)
Minimum pension liability (net of $0.8 tax) 1.5 1.5
-------
COMPREHENSIVE INCOME 51.4
-------
Preferred stock dividends (73.7) (73.7)
Common stock dividends (64.1) (64.1)
Interest accrued on notes from parent (net of $14.0 tax) 34.5 0.4 34.9
Capital contribution from parent 26.4 26.4
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $614.4 $2.0 $355.7 $(414.9) $ (52.5) $(440.5) $ 64.2
- ----------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated and Combined Financial Statements
33
- --------------------------------------------------------------------------------------
COMBINED STATEMENTS OF OPERATIONS
BORDEN, INC. AND AFFILIATES
Year ended December 31,
(In millions) 1999 1998 1997
- --------------------------------------------------------------------------------------
Net sales $2,137.1 $2,334.5 $3,481.6
Cost of goods sold 1,342.8 1,548.6 2,302.1
--------- --------- ---------
Gross margin 794.3 785.9 1,179.5
--------- --------- ---------
Distribution expense 127.6 124.3 175.7
Marketing expense 309.5 327.1 557.6
General & administrative expense 208.6 225.1 251.5
Business realignment and asset write-offs 42.3 21.6 16.0
Gain on divestiture of businesses (56.5) (378.7) (122.6)
--------- --------- ---------
Operating income 162.8 466.5 301.3
--------- --------- ---------
Interest expense 63.2 65.5 93.3
Affiliated interest expense 5.3 5.4 -
Interest income and other (33.8) (34.8) (9.1)
Impairment of investments 3.0 26.7 -
--------- --------- ---------
Income from continuing operations
before income tax 125.1 403.7 217.1
Income tax expense 32.9 132.4 124.0
--------- --------- ---------
Income from continuing operations 92.2 271.3 93.1
--------- --------- ---------
Discontinued operations:
(Loss) income from operations, net of tax (0.4) 2.3 30.7
(Loss) gain on disposal, net of tax (3.1) 36.7 154.4
--------- --------- ---------
Income before cumulative effect of change
in accounting principle 88.7 310.3 278.2
Cumulative effect of change in accounting principle (2.8) - -
--------- --------- ---------
Net income 85.9 310.3 278.2
Affiliate's share of income (5.1) (142.0) (73.4)
Preferred stock dividends (73.7) (73.7) (73.7)
--------- --------- ---------
Net income applicable to common stock $ 7.1 $ 94.6 $ 131.1
========= ========= =========
- --------------------------------------------------------------------------------------
See Notes to Consolidated and Combined Financial Statements
34
- -----------------------------------------------------------------------------------------------------
COMBINED BALANCE SHEETS
BORDEN, INC. AND AFFILIATES
(In millions)
December 31, December 31,
ASSETS 1999 1998
- -----------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and equivalents $ 228.4 $ 695.5
Accounts receivable (less allowance for doubtful accounts of $15.4
in 1999 and $13.8 in 1998) 296.9 291.7
Loan receivable from affiliate 56.2 -
Inventories:
Finished and in-process goods 114.8 108.9
Raw materials and supplies 84.3 81.3
Deferred income taxes 60.8 84.1
Other current assets 24.0 33.3
-------------- --------------
865.4 1,294.8
-------------- --------------
INVESTMENTS AND OTHER ASSETS
Investments 64.0 73.8
Investment in affiliate 51.5 -
Deferred income taxes 82.1 104.5
Prepaid pension assets 140.8 140.8
Other assets 32.7 34.8
-------------- --------------
371.1 353.9
-------------- --------------
PROPERTY AND EQUIPMENT
Land 38.8 39.4
Buildings 192.6 194.3
Machinery and equipment 1,088.1 1,000.4
-------------- --------------
1,319.5 1,234.1
Less accumulated depreciation (548.2) (554.6)
-------------- --------------
771.3 679.5
INTANGIBLES
Net of accumulated amortization of $146.9 in 1999 and
$132.0 in 1998 423.5 386.2
-------------- --------------
TOTAL ASSETS $ 2,431.3 $ 2,714.4
============== ==============
- -----------------------------------------------------------------------------------------------------
See Notes to Consolidated and Combined Financial Statements
35
- ----------------------------------------------------------------------------
COMBINED BALANCE SHEETS
BORDEN, INC. AND AFFILIATES
(In millions)
December 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
- ----------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts and drafts payable $ 197.3 $ 185.4
Debt payable within one year 18.1 23.1
Income taxes payable 255.8 279.8
Loans with affiliates 14.5 138.2
Other current liabilities 257.7 355.1
-------------- --------------
743.4 981.6
-------------- --------------
OTHER LIABILITIES
Long-term debt 544.1 554.6
Non-pension post-employment
benefit obligations 193.9 214.6
Other long-term liabilities 87.1 129.7
-------------- --------------
825.1 898.9
-------------- --------------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 20)
SHAREHOLDERS' EQUITY
Preferred stock 614.4 614.4
Common stock 2.0 2.0
Paid in capital 664.4 653.5
Receivable from parent (414.9) (415.3)
Affiliate's interest in subsidiary 66.2 60.8
Accumulated other comprehensive income (84.1) (89.2)
Retained earnings 14.8 7.7
-------------- --------------
862.8 833.9
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,431.3 $ 2,714.4
============== ==============
- ----------------------------------------------------------------------------
See Notes to Consolidated and Combined Financial Statements
36
- ------------------------------------------------------------------------------------
COMBINED STATEMENTS OF CASH FLOWS
BORDEN, INC. AND AFFILIATES
Year ended December 31,
(In millions) 1999 1998 1997
- ------------------------------------------------------------------------------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income $ 85.9 $ 310.3 $ 278.2
Adjustments to reconcile net income to net
cash from (used in) operating activities:
Loss (gain) on disposal of discontinued operations 4.9 (111.6) (248.2)
Gain on divestiture of businesses (56.5) (378.7) (122.6)
Deferred tax provision 24.4 157.0 30.3
Depreciation and amortization 92.1 86.6 96.3
Unrealized gain on interest rate swap (10.8) (4.1) (4.1)
Business realignment and asset write-offs 42.3 27.7 17.0
Impairment of investment 3.0 26.7 -
Net change in assets and liabilities:
Trade receivables (5.5) 51.8 4.9
Inventories (12.0) 15.7 24.1
Trade payables 1.5 (33.2) (61.7)
Income taxes (16.6) (21.4) 48.4
Other assets 13.9 75.7 (35.6)
Other liabilities (88.1) (239.1) (115.9)
Discontinued operations working capital - 3.0 36.3
-------- --------- --------
78.5 (33.6) (52.6)
-------- --------- --------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES
Capital expenditures (141.9) (100.2) (170.2)
Proceeds from the divestiture of businesses 31.2 1,071.2 603.6
Purchase of businesses (119.6) (14.4) (91.9)
Proceeds from the sale of fixed assets 14.2 15.8 19.4
Investment in affiliate (50.0) - -
-------- -------- --------
(266.1) 972.4 360.9
-------- --------- --------
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES
Net short-term debt (repayments) borrowings (10.5) 6.4 15.9
Borrowings of long-term debt - - 235.0
Repayment of long-term debt (0.2) (236.7) (431.6)
Affiliated borrowings (repayments/ loans) (179.6) 134.3 -
Distribution to affiliate - (272.2) -
Interest received from parent 48.9 60.4 50.8
Common stock dividends paid (64.4) (60.4) (50.8)
Preferred stock dividends paid (73.7) (73.7) (73.7)
-------- --------- --------
(279.5) (441.9) (254.4)
-------- --------- --------
- --------------------------------------------------------------------------------------
37
- -------------------------------------------------------------------------------------------
COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)
BORDEN, INC. AND AFFILIATES
Year ended December 31,
(In millions) 1999 1998 1997
- -------------------------------------------------------------------------------------------
(Decrease) increase in cash and equivalents $(467.1) $496.9 $ 53.9
Cash and equivalents at beginning
of year 695.5 198.6 144.7
-------- ------- ------
Cash and equivalents at end
of year $ 228.4 $695.5 $198.6
======== ======= ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest, net $ 40.8 $ 32.0 $ 80.3
Taxes 21.5 89.0 132.7
Non-cash activity:
Distribution of note receivable from Company's parent
to cancel options - 39.2 -
Proceeds relating to the Foods stock sale - - 20.0
Investment retained in IHDG - 3.0 -
Capital contribution by parent 26.4 42.9 44.5
Affiliate's share of income 5.1 142.0 73.4
Accrued dividends on investment in affiliate 1.5 - -
Reclassification of minimum pension liability adjustment
from/(to) shareholders' equity 3.3 (5.4) 109.2
- -------------------------------------------------------------------------------------------
See Notes to Consolidated and Combined Financial Statements
38
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
BORDEN, INC. AND AFFILIATES
(In millions)
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Receivable Affiliate's Other Retained
Preferred Common Paid-in from Interest in Comprehensive Earnings
Stock Stock Capital Parent Subsidiary Income (Deficit) Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $614.4 $2.0 $683.1 $(443.6) $87.9 $(230.4) $(218.0) $495.4
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 278.2 278.2
Translation adjustments and other (60.0) (60.0)
Minimum pension liability (net of $69.8 tax) 109.2 109.2
--------
COMPREHENSIVE INCOME 327.4
--------
Preferred stock dividends (73.7) (73.7)
Common stock dividends (51.4) (51.4)
Interest accrued on notes from parent (net of $20.0 tax) 31.0 (0.5) 30.5
Additional note from Foods
transaction (20.0) (20.0)
Capital contribution from parent 44.5 44.5
Affiliate's interest in subsidiary (40.7) 115.4 (73.4) 1.3
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $614.4 $2.0 $666.5 $(464.1) $203.3 $(181.2) $ (86.9) $ 754.0
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 310.3 310.3
Translation adjustments and other (0.2) 97.4 97.2
Minimum pension liability (net of $3.0 tax) (5.4) (5.4)
--------
COMPREHENSIVE INCOME 402.1
--------
Preferred stock dividends (73.7) (73.7)
Common stock dividends (59.5) (59.5)
Interest accrued on notes from parent (net of $19.9 tax) 30.7 9.6 40.3
Cancel option on Decorative Products (39.2) 39.2 -
Capital contribution from parent 42.9 42.9
Affiliate's interest in subsidiary 12.3 (142.5) (142.0) (272.2)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $614.4 $2.0 $653.5 $(415.3) $ 60.8 $ (89.2) $ 7.7 $ 833.9
- ----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated and Combined Financial Statements
39
- -----------------------------------------------------------------------------------------------------------------------------
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
BORDEN, INC. AND AFFILIATES
(In millions)
- -----------------------------------------------------------------------------------------------------------------------------
Accumulated
Receivable Affiliate's Other
Preferred Common Paid-in from Interest in Comprehensive Retained
Stock Stock Capital Parent Subsidiary Income Earnings Total
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $614.4 $2.0 $653.5 $(415.3) $60.8 $(89.2) $7.7 $833.9
- ------------------------------------------------------------------------------------------------------------------------------
Net income 85.9 85.9
Translation adjustments and other 1.8 1.8
Minimum pension liability (net of $1.7 tax) 3.3 3.3
-------
COMPREHENSIVE INCOME 91.0
-------
Preferred stock dividends (73.7) (73.7)
Common stock dividends (64.1) (64.1)
Interest accrued on notes from parent (net of $14.0 tax) 34.5 0.4 34.9
Capital contribution from parent 26.4 26.4
Increase in foreign tax basis and other 14.1 0.3 14.4
Affiliate's interest in subsidiary 5.1 (5.1) -
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $614.4 $2.0 $664.4 $(414.9) $66.2 $(84.1) $ 14.8 $862.8
- -------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated and Combined Financial Statements
40
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in millions except per share data)
1. BACKGROUND
As a result of a merger completed on March 14, 1995, Borden, Inc. (the
"Company", the "Registrant") is controlled by affiliates of Kohlberg Kravis
Roberts & Co. ("KKR"). The Company is a Registrant under the Securities and
Exchange Commission Rules and Regulations as a result of public debt outstanding
prior to the merger and therefore elected not to apply push-down accounting in
its consolidated financial statements.
At the time of the merger, the Company's principal lines of business included
international and domestic food operations ("Foods") and a salty snacks business
("Wise"), as well as those described in Note 2, below, under Nature of
Operations. Subsidiaries of BW Holdings, LLC ("BWHLLC", an affiliate of KKR),
Wise Holdings, Inc. ("Wise Holdings") and Borden Foods Holdings Corporation
("Foods Holdings"), purchased Wise and Foods on July 2, 1996, and October 1,
1996, respectively (See Note 4). As a result of these sales, Wise and Foods, as
of their respective sales dates, are no longer legally part of the Company on a
consolidated basis. However, management of the Company continues to exercise
significant operating and financial control over Wise and Foods. In addition,
Wise Holdings and Foods Holdings provide financial guarantees to obligations
under the Company's credit facility and all of the Company's outstanding
publicly held debt. Because of the aforementioned control and guarantees, the
Company has included, supplementally in this filing, combined financial
statements of Borden, Inc. and Affiliates (the "Combined Companies") which
present the financial condition and results of operations and cash flows of the
Company combined with the financial condition and results of operations and cash
flows of Wise and Foods. The Combined Companies' financial statements do not
reflect push-down accounting and therefore present financial information on a
basis consistent with that upon which credit was originally extended to the
Company.
2. NATURE OF OPERATIONS
The Company is engaged primarily in manufacturing, processing, purchasing and
distributing primarily forest products and industrial resins, formaldehyde,
melamine crystal and other specialty and industrial chemicals worldwide as well
as consumer glues and adhesives in North America. The Company also provides
infrastructure management services (see Note 21). Prior to 1998, the Company
engaged in a Decorative Products business and a Dairy business. These businesses
were sold on March 13, 1998 and September 4, 1997, respectively. The operating
results for each of these business units are included in the Company's
discontinued operations for all periods presented, consistent with the Company's
ownership.
In addition to the Company's businesses, the Combined Companies includes the
Foods and Wise businesses, which are engaged primarily in manufacturing,
processing and distributing food products.
Domestic products for the chemical business are sold throughout the United
States to industrial users. To the extent practicable, international
distribution techniques parallel those used in the United States and are
concentrated in Canada, Western Europe, Latin America and the Far East. The
Foods and Wise products included in the Combined Companies are marketed
primarily through food brokers and distributors.
Approximately 55% of the Company's and the Combined Companies' manufacturing and
processing facilities are located in the United States and the remainder are
located in foreign countries. The majority of the long-lived assets of the
Company and the Combined Companies are located in the United States.
Approximately 33% and 28% of the Company and Combined Companies' sales are
generated in foreign countries.
Information about the Company's operating and geographic segments is provided in
Item 1 on pages 6 to 9 and is an integral part of the Consolidated and Combined
Financial Statements.
41
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed by the Company, as summarized below,
are in conformity with generally accepted accounting principles. The Combined
Companies' policies are consistent with those of the Company.
PRINCIPLES OF CONSOLIDATION AND COMBINATION - The consolidated financial
statements include the accounts of Borden, Inc. and its subsidiaries, after
elimination of intercompany accounts and transactions. The combined financial
statements include the accounts of Borden, Inc., Foods and Wise, after the
elimination of intercompany accounts and transactions. The Company's share of
the net earnings of 20% to 50% owned companies is included in income on an
equity basis. The Company amortizes any excess of cost over the underlying
equity in net assets of an equity investment.
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,
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. Significant estimates included in the financial statements
include reserves for expenses related to the business redesign initiated in
1996, valuation allowances for deferred tax assets and general insurance
liabilities. Other significant estimates include accruals for trade promotion,
litigation and environmental remediation. Actual results could differ from those
estimates.
CASH AND EQUIVALENTS - The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents. Included in the Company's cash equivalents are interest bearing
time deposits of $100.6 in 1999 and $16.8 in 1998. The Combined Companies' cash
equivalents included interest bearing time deposits of $107.6 in 1999 and $26.5
in 1998. The effect of exchange rate changes on cash is not material.
INVENTORIES - Inventories are stated at lower of cost or market. Cost is
determined using the average cost and first-in, first-out methods.
PROPERTY AND EQUIPMENT - Land, buildings, and machinery and equipment are
carried at cost. Depreciation is recorded on the straight-line basis by charges
to expense at rates based on estimated useful lives of properties (average rates
for buildings 4%; machinery and equipment 7%). Major renewals and betterments
are capitalized. Capitalized interest costs for the Company aggregated $0.8 for
the year ended December 31, 1997. The Combined Companies capitalized interest
costs of $0.2 and $1.1 for the years ended December 31, 1998 and 1997,
respectively. No interest costs were capitalized for the Company or Combined
Companies for the year ended December 31, 1999 or for the Company for the year
ended December 31, 1998. Capitalized interest costs relate to the purchase and
construction of long-term assets and are amortized over the respective useful
lives of the related assets. Maintenance, repairs and minor renewals are
expensed as incurred.
INTANGIBLES - The excess of purchase price over net tangible assets of
businesses acquired ("goodwill") is carried as intangibles in the consolidated
and combined balance sheets. It is the Company's and Combined Companies' policy
to carry goodwill arising prior to November 1, 1970, at cost, while goodwill
arising after that date is amortized on a straight-line basis over not more than
40 years. Also included in intangibles are certain trademarks, patents and other
intangible assets used in the operations of the businesses which amounted to
$7.9 and $9.3 for the Company ($23.3 and $26.6 for the Combined Companies) at
December 31, 1999 and 1998, respectively. These intangibles are amortized on a
straight-line basis over the shorter of the legal or useful life of the asset.
IMPAIRMENT - The Company and Combined Companies periodically evaluate the
recoverability of property, equipment, investments and intangibles by assessing
whether the carrying value can be recovered over its remaining useful life
through the expected future undiscounted operating cash flows of the underlying
business. Any impairment loss required is determined by comparing the carrying
value of the asset to operating cash flows on a discounted basis (See Notes 4
and 9).
42
REVENUE RECOGNITION - Revenues are recognized when products are shipped.
ADVERTISING AND PROMOTION EXPENSE - Production costs of future media advertising
are deferred until the advertising first occurs. All other advertising costs are
expensed when incurred. Promotional expenses are generally expensed ratably over
the year in relation to revenues or other performance measures.
FOREIGN CURRENCY TRANSLATIONS - Assets and liabilities of foreign affiliates,
other than those located in highly inflationary economies, are translated at the
exchange rates in effect at the balance sheet date, and the related translation
adjustments are reported as a component of shareholders' equity. Income and
expenses are translated at average exchange rates prevailing during the year.
The Company and the Combined Companies incurred realized and unrealized net
foreign exchange (gains) losses aggregating ($0.7) and ($2.5), respectively, in
1999, ($0.3) and $1.5 in 1998, and $1.0 and $3.4 in 1997.
INCOME TAXES - Income tax expense is based on reported results of operations
before income taxes. Deferred income taxes reflect the temporary difference
between amounts of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes. Deferred tax balances are
adjusted to reflect tax rates, based on current tax laws, that will be in effect
in the years in which temporary differences are expected to reverse. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company primarily uses two types of
derivatives: interest rate swaps (which effectively convert a portion of the
Company's variable rate obligations to fixed) and forward exchange contracts
(which reduce the Company's cash flow exposure to changes in foreign exchange
rates). The Company enters into interest rate swaps to lower funding costs or to
alter interest rate exposures between fixed and floating rates on long-term
debt. Under interest rate swaps, the Company agrees with other parties to
exchange, at specific intervals, the difference between fixed rate and floating
rate interest amounts calculated by reference to an agreed notional principal
amount. Interest rate swaps that are in excess of outstanding obligations are
marked to market through other income and expense. The fair values of forward
exchange contracts that hedge firm third party commitments are deferred and
recognized as part of the underlying transactions as they occur, those that
hedge existing transactions are recognized in income currently, and offset gains
and losses of transactions being hedged.
EARNINGS PER SHARE - Basic and diluted net income attributable to common stock
is computed by dividing net income by the weighted average number of common
shares outstanding during the period. Options issued by subsidiaries that enable
the holder to obtain stock of the subsidiary were assumed to be exercised if
they were dilutive.
At December 31, 1999, there were 6.2 million options to purchase subsidiary
stock outstanding, of which 5.0 million were considered dilutive to Earnings Per
Share ("EPS"). At December 31, 1998, there were 5.6 million options to purchase
subsidiary stock outstanding, none of which were considered dilutive to EPS. At
December 31, 1997, there were 6.9 million options to purchase subsidiary stock
outstanding, of which 1.3 million were considered dilutive to EPS.
43
The Company's diluted EPS is calculated as follows:
- --------------------------------------------------------------------------------
1999 1998 1997
------- ------- -------
Net (loss) income applicable to common shareholders $(20.8) $(11.1) $147.6
Effect of dilutive options in subsidiary stock (0.5) - (0.6)
------- ------- -------
Diluted EPS - Numerator $(21.3) $(11.1) $147.0
======= ======= =======
Weighted average shares - Denominator 199.0 199.0 199.0
======= ======= =======
Diluted EPS $(0.11) $(0.06) $ 0.74
======= ======= =======
- --------------------------------------------------------------------------------
CONCENTRATIONS OF CREDIT RISK - Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally of temporary
cash investments and accounts receivable. The Company places its temporary cash
investments with high quality institutions and, by policy, limits the amount of
credit exposure to any one institution. Concentrations of credit risk with
respect to accounts receivable are limited, due to the large number of customers
comprising the Company's customer base and their dispersion across many
different industries and geographies. The Company generally does not require
collateral or other security to support customer receivables.
RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This standard requires all derivatives be measured at fair value
and recorded on a company's balance sheet as an asset or liability, depending
upon the company's underlying rights or obligations associated with the
derivative instrument. The Company and Combined Companies continue to
investigate the impact of this pronouncement. In June 1999, the FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133". This statement defers
the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company and Combined Companies plan to
implement SFAS No. 133 January 1, 2001.
Also in 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities". SOP 98-5 requires the costs of opening a new facility, introducing
a new product or service, conducting business in a new market, or similar
start-up activities to be expensed as incurred. Amounts previously capitalized
are to be expensed and reported as a cumulative effect of a change in accounting
principle in the year of adoption. Accordingly, the Company and Combined
Companies adopted SOP 98-5 in 1999 and the Combined Companies recorded a charge
of $2.8 (net of tax expense of $1.8). Adoption of SOP 98-5 had no impact on the
Company.
RECLASSIFICATION - Certain prior year amounts have been reclassified to conform
with the 1999 presentation.
4. BUSINESS ACQUISITIONS, DIVESTITURES AND OTHER CHANGES
In 1995, the Company began the process of redesigning its operating structure.
As a result of this redesign, the Company and the Combined Companies proceeded
to divest certain businesses that did not fit into management's long-term
strategic plan. While management has continued to build its core businesses
through strategic acquisitions and investments in the existing businesses, the
divestiture phase of this redesign was substantially complete by year-end 1998.
Acquisitions
- ------------
In the fourth quarter of 1999, the Company purchased a resins manufacturing
plant in Minnesota for $7.5. The facility produces resins for use in the
manufacturing of wood and industrial products. The acquisition was accounted for
using the purchase method of accounting and accordingly its results of
operations have been included from the date of acquisition. The purchase price
approximates the fair value of the assets acquired.
44
Early in the third quarter of 1999, the Company completed the acquisition of
Blagden Chemicals, Ltd. ("Blagden") for $71.5 in cash. Blagden produces
formaldehyde and resins for forest products, foundry, and industrial
applications at three manufacturing facilities in the United Kingdom and a
fourth in the Netherlands. The acquisition was accounted for using the purchase
method of accounting and, accordingly, its results of operations have been
included from the date of acquisition. Goodwill based on a preliminary
allocation approximates $31 and will be amortized over 40 years.
In May 1999, the Company completed the acquisition of Spurlock Industries, Inc.
("Spurlock") for $40.6. Spurlock is a formaldehyde and resins producer primarily
for forest products applications with manufacturing facilities in Virginia,
Arksansas, and New York. The acquisition was accounted for using the purchase
method of accounting and, accordingly, its results of operations have been
included from the date of acquisition. Based on preliminary allocation, the
approximate $14 of goodwill will be amortized over a period of 40 years.
In February 1998, the Company acquired the resins and compounds division ("PMC")
of Sun Coast Industries, Inc. for $14.4 in cash. The acquisition of this
business further expanded the Company's growth in the melamine market. The
acquisition was accounted for using the purchase method and accordingly its
results of operations have been included from the date of acquisition. Goodwill
of $4.2 was recorded related to this acquisition and is being amortized over 40
years.
In November 1997, the Company completed the acquisition of Melamine Chemicals,
Inc. in a cash tender offer for $20.50 per share, totaling $120.0 including cash
acquired of $30.0. Melamine Chemicals produces and markets melamine crystal,
which is used to make resins for various adhesive, laminate, and coatings
applications, and is a complementary material to the existing Chemical range of
products. The acquisition was accounted for using the purchase method and,
accordingly, its results of operations have been included from the date of
acquisition. Goodwill of $36.2 was recorded related to this acquisition and is
being amortized over 40 years.
Divestitures
- ------------
The Company's realignment which began in 1996 continued through 1997 and 1998
with the sale of the Dairy, Decorative Products, commercial and industrial
wallcovering, and Latin American films businesses. In October 1999, the Company
sold the molding compounds business, a division of Sun Coast Industries acquired
in 1998.
In addition to cash proceeds, consideration received on the sale of the
Decorative Products business included a retained interest in the buyer (See
Note 9).
Foods began a redesign of its business in 1996 to focus on grain-based meal
solutions. Foods substantially completed its realignment with the divestiture of
most of the KLIM operations and the Signature Flavors businesses and the sale of
two international Foods operations in 1998. In 1999, Foods sold its China KLIM
business for approximately $7.1, which resulted in a pre-tax gain of
approximately $10.8 ($3.5 after tax). Also, in 1999, $37.8 of additional pre-tax
gain was recorded due primarily to lower than expected exit costs related to the
1998 KLIM sale. The remaining reserves related to the KLIM sale are
approximately $5.0.
In July 1999, Foods sold the chocolate milk business located in Denmark. The
sale generated proceeds of $6.7 which resulted in a pre-tax gain of $1.9 ($1.2
after tax).
In the fourth quarter of 1999, the Company recorded $7.4 of additional pre-tax
gain due to lower than expected exit costs related primarily to the commercial
and industrial wallcoverings sale.
45
The following schedule summarizes the net cash proceeds, pre-tax and after-tax
gains and losses associated with business divestiture activities over the last
three years.
- ----------------------------------------------------------------------------------------------------------
NET CASH PROCEEDS GAIN (LOSS)
-------------------------------------- -------------------------
1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
CONTINUING OPERATIONS
Commercial & industrial
wallcoverings (1) $ 15.6 $ 5.5
Latin America Films 15.5 $ 8.3
Spanish food company (2) $ 13.4
Molding compounds business $ 7.6
Other 1.9
----- ------ ------ ------ ------ ------
TOTAL CONSOLIDATED PRE-TAX $ 7.6 $ 31.1 $ 13.4 $ 7.4 $ 8.3 -
----- ------ ------ ------ ------ ------
KLIM 16.9 339.9 48.6 55.9 $ 1.5
Signature Flavors 376.5 304.5
Cracker Jack & Domestic Cheese 185.0 5.7 121.1
Other 6.7 18.9 0.5 4.3
----- ------ ------ ------ ------ ------
TOTAL COMBINED PRE-TAX $31.2 $766.4 $198.4 $56.5 $378.7 $122.6
===== ====== ====== ====== ====== ======
CONSOLIDATED AFTER-TAX GAIN $ 4.8 $ 6.0 $ -
====== ====== ======
COMBINED AFTER-TAX GAIN $45.0 $269.7 $ 79.5
====== ====== ======
DISCONTINUED OPERATIONS (NOTE 6)
Decorative Products $304.8 $102.7
Dairy $405.2 $ 0.9 8.9 $248.2
Other (3) (5.8)
----- ------ ------ ------ ------ ------
TOTAL COMBINED PRE-TAX - 304.8 405.2 (4.9) 111.6 248.2
----- ------ ------ ------ ------ ------
Borden Foods (4) 40.0 1.8 60.0
----- ------ ------ ------ ------ ------
TOTAL CONSOLIDATED PRE-TAX $ - $304.8 $445.2 $(3.1) $111.6 $308.2
===== ====== ====== ====== ====== ======
COMBINED AFTER-TAX GAIN (LOSS) $(3.1) $ 36.7 $154.4
====== ====== ======
CONSOLIDATED AFTER-TAX GAIN (LOSS) $(2.0) $ 36.7 $173.4
====== ====== ======
- ----------------------------------------------------------------------------------------------------------
<FN>
(1) A loss on the sale of the business was accrued in a period prior to 1997.
(2) Represents partial proceeds received. An additional $125.5 was received in 1996.
(3) In accordance with equity method accounting, the discontinued operations recorded by the
Company's investee, AEPI (See Note 9), are presented as if AEPI was a consolidated subsidiary.
(4) See discussion of the Borden Foods transactions in the section titled "Foods and Wise
Transactions" below.
The Foods and Wise Transactions
- -------------------------------
Sale of Borden Foods
On October 1, 1996, the Company sold the Foods business to Foods Holdings for
$550.0 less assets transferred plus liabilities assumed. Upon finalization of
the independent valuation in September 1997, additional proceeds of $20.0
consisting of receivables from the Company's parent were transferred to the
Company and recorded as additional income from disposals. Tax expense of $25.0
was provided to adjust for the additional proceeds and the estimated impact on
the tax provision related to the sales of the Foods Unaligned businesses.
On December 31, 1997, the Company sold a trademark right that it had previously
licensed to Foods for five years to a third party ad infinitum. This was done in
connection with the Combined Companies sale of its domestic cheese business. As
a result, the Company recorded a pre-tax gain of $40.0 ($24.0 after-tax), in
46
discontinued operations. For the Combined Companies, the $40.0 is recorded as
proceeds and gains related to continuing operations (See footnote 4 in the
table above).
Sale of Wise Salty Snacks
On July 2, 1996, the Company sold the Wise salty snacks business to Wise
Holdings. Because management of the Company exercises significant control over
Wise and a continued creditor relationship exists, the assets and liabilities,
as of the sale date, were classified as "sold under contractual arrangement" in
the consolidated financial statements to the extent of the Company's net
investment in Wise. The Company's net investment in Wise was $6.6 and $4.4 as of
December 31, 1999 and 1998 (See Note 19).
Other Changes
- -------------
In June 1999, the Company finalized a plan for the closure of the Chemical
resins operations in the Philippines. As part of this plan, long-lived assets
will be disposed of and were written down to net realizable value as of June 30,
1999 based upon estimated proceeds of $5.0. This resulted in a 1999 charge of
$13.0 which is classified as business realignment on the Consolidated and
Combined Statement of Operations and as a reduction of accumulated translation
adjustments previously recorded on the balance sheet for the Philippines.
In the third quarter of 1999, management approved a plan to close a Brazil
Chemical operation and Uruguay Chemical business. As a result, a charge of $3.6
was recorded which relates primarily to fixed assets and is recorded as business
realignment and asset write-offs on the Consolidated and Combined Statements of
Operations.
In 1999, management of the Company discontinued a plant expansion project. As a
result, the Company has written off $25.0 of engineering, equipment and other
costs which are classified under business realignment and asset write-offs for
the Consolidated and Combined Statements of Operations.
In September 1998, the Combined Companies approved the closure of a domestic
pasta plant in order to reduce manufacturing capacity. As a result, the Combined
Companies recorded, and classified as a business realignment and asset
write-offs, a $17.2 charge related to the closure of the plant and an additional
charge of $6.1 to cost of goods sold for the write-down of inventory. The plant
ceased operations in the fourth quarter of 1998.
In December 1997, the Company committed to exit a European Chemical operation
and accrued a business realignment charge on this business in 1997 of $16.0.
During 1998, the exit of this business was completed, and a pre-tax charge of
$2.5 was recorded in 1998 for additional expenses incurred to exit this
business, primarily severance.
5. AFFILIATE'S SHARE OF INCOME
In association with a limited partnership agreement between Foods and an
Affiliate of the Company's parent, the affiliate was allocated income and gains
on the sale of trademarks of $5.1, $142.0 and $73.4 in 1999, 1998, and 1997,
respectively (see accompanying Combined Statements of Operations). In addition,
a $272.2 cash distribution of a portion of the sale proceeds was made to the
affiliate in 1998.
6. DISCONTINUED OPERATIONS
The Decorative Products and Dairy operations were separate segments of the
Company's and Combined Companies' business as defined by generally accepted
accounting principles and have been reclassified to discontinued operations in
the 1998 and 1997 statements of operations and cash flows.
47
The 1999 results below represent the loss from discontinued operations recorded
by the Company's investee, AEPI. The results indicated below for Decorative
Products and Dairy are reported separately as discontinued operations in the
Consolidated and Combined Statements of Operations. Decorative Products is
included in the 1998 and 1997 results and Dairy is included in 1997 results
only.
- ---------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------
Net sales $ - $73.2 $910.0
Income before income taxes - 3.5 51.9
Income tax expense - 1.2 21.2
(Loss)/income from discontinued operations (0.4) 2.3 30.7
- ----------------------------------------------------------------------
In addition to the amounts shown above, losses (net of tax) recognized on the
sale of discontinued operations are included in the discontinued operations of
the consolidated and combined financial statements (see Note 4). The
Consolidated 1999 net of tax loss from discontinued operations of $2.0
represents the loss of $3.7 recorded by the Company's investee, AEPI, offset by
a favorable claim settlement related to the 1997 divestiture of Dairy for $0.6,
and a gain of $1.1 due to lower than expected exit costs related to the 1996
sale of the Foods business.
The Combined Companies had a 1999 net of tax loss from discontinued operations
of $3.1. The losses differ from that of the Company because the $1.1 gain on the
sale of Foods business is eliminated in the Combined financial statements.
7. COMPREHENSIVE INCOME
Comprehensive income included foreign currency translation adjustment
reclassifications as shown in the following table:
- -------------------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
---------------------------- --------------------------
1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustments $ 10.4 $ 0.6 $(20.8) $ 11.8 $(11.0) $(60.0)
Reclassification adjustments (13.4) - - (10.0) 108.4 -
------- ----- ------- ------- ------- -------
$ (3.0) $ 0.6 $(20.8) $ 1.8 $ 97.4 $(60.0)
======= ===== ======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------
The reclassification adjustments in 1999 primarily represent the accumulated
translation adjustment included as part of the charge to close the Chemical
operations in the Philippines. The reclassification adjustment in 1998 reflects
the accumulated translation adjustment recognized on the sale of the Combined
Companies' KLIM business.
8. CHANGE IN ACCOUNTING ESTIMATE
In 1997, Foods reduced accruals and marketing expense for trade promotions in
the Combined financial statements by $18.3. These accruals had been provided in
earlier years for anticipated customer redemptions in the ordinary course of
business. Due to a concerted effort to better manage trade spending, these
redemptions were significantly lower than management had previously estimated.
This change in estimate has no effect on the Company.
9. INVESTMENTS
In 1996, the Company completed the sale of its packaging and plastic films
business to AEP Industries Inc. ("AEPI") and received 2,412,818 shares of newly
issued AEPI common stock valued at $80.0 (approximately 33% of AEPI). The
Company accounts for the AEPI investment using the equity method. In December
1998, the Company recorded a $26.7 impairment loss on this investment after a
significant decline in the quoted market price of the AEPI investment was judged
48
by Company management to be "other than temporary". As of December 31, 1999 and
1998, the carrying value of this investment was $47.0 and $52.5, respectively.
At December 31, 1999 and 1998, the unamortized excess of the Company's
investment over its equity in the underlying net assets of AEPI was $16.5 and
$17.0, respectively.
As a portion of the proceeds from the decorative products sale (discussed in
Note 4), the Company retained an 11% interest, accounted for using the cost
method, in Imperial Home Decor Group ("IHDG"). In the fourth quarter of 1999,
the Company recorded a charge of $3.0 to reduce the carrying value of this
investment to zero due to the significant declines in the business, which were
judged by Company management to be "other than temporary".
Early in the fourth quarter of 1999, the Company made a $50.0 investment in WKI
Holding Company, Inc. ("World Kitchen"), an affiliate of the Company's parent,
in the form of 16% cumulative junior preferred stock.
The Company's investments also include certain other partnership and subsidiary
interests.
10. DEBT, LEASE OBLIGATIONS AND RELATED COMMITMENTS
Debt outstanding at December 31, 1999 and 1998 is as follows:
- ---------------------------------------------------------------------------------------------------------------
1999 1998
------------------------ ---------------------
Due Within Due Within
Long-Term One Year Long-Term One Year
--------- -------- ---------- ---------
9.2% Debentures due 2021 $117.1 $117.1
7.875% Debentures due 2023 250.0 250.0
Sinking fund debentures:
8-3/8% due 2016 78.5 78.5
9-1/4% due 2019 48.7 48.7
Industrial Revenue Bonds (at an average
rate of 8.5% for both years) 43.2 $ 10.3 53.5
Other (at an average rate of 9.8% and 4.5%,
respectively) 3.6 7.4 4.2 $ 4.9
- ----------------------------------------------------------------------------------------------------------------
Total current maturities of long-term debt 17.7 4.9
Short-term debt (primarily foreign bank loans
at an average rate of 8.3%) 11.2
- ----------------------------------------------------------------------------------------------------------------
Total debt - Consolidated $541.1 $ 17.7 $552.0 $16.1
- ----------------------------------------------------------------------------------------------------------------
Other Foods debt (at an average rate of 0.0% and
3.0%, respectively) 3.0 2.6 1.7
Foods and Wise short-term debt (primarily foreign bank
loans at an average rate of 6.0%
and 7.3%, respectively) 0.4 5.3
- ----------------------------------------------------------------------------------------------------------------
Total debt - Combined $544.1 $ 18.1 $554.6 $23.1
- ----------------------------------------------------------------------------------------------------------------
As of December 31, 1999, the Company and Combined Companies had contractually
committed lines of credit (the "Credit Agreement") of $895.0. In the second
quarter of 1998, the Credit Agreement was reduced due to the sales of certain
Foods Unaligned businesses in accordance with the terms of the Credit Agreement.
As a result, the $950.0 five year revolver (maturing July 13, 2002) was reduced
to $895.0, and the $50.0, 364-day convertible revolver was canceled. Current
49
pricing under the LIBOR based borrowing option is LIBOR plus 25 basis points.
The commitment fee on the unused portion of the facility is 10 basis points.
The Credit Agreement, as amended, contains covenants that significantly limit or
prohibit, among other things, the Company's and its subsidiaries' ability to
incur indebtedness, make prepayments of certain indebtedness, pay dividends,
engage in transactions with affiliates, create liens, make changes in its
businesses or control of the Company, sell assets, engage in mergers and
consolidations, and use proceeds from asset sales and certain debt and equity
issuances. In addition, the Credit Agreement requires that the Combined
Companies limit its capital expenditures to certain specified amounts and
maintain other financial ratios, including a minimum ratio of EBITDA (Earnings
Before Interest, Taxes, Depreciation and Amortization) to interest expense and a
maximum ratio of total debt to EBITDA.
At December 31, 1999 and 1998, there were no outstanding debt balances under the
Credit Agreement. Provisions under the Credit Agreement require Foods and Wise
to guarantee the Company's obligations under the Credit Agreement. The Company
had $797.1 (net of $97.9 in letters of credit) available for borrowing under its
Credit Agreement at December 31, 1999, and incurred commitment fees of $0.8 in
1999 and $0.9 in 1998.
Aggregate maturities of total debt and minimum annual rentals under operating
leases at December 31, 1999, for the Company and the Combined Companies are as
follows:
- ------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
------------------------ ------------------------
MINIMUM MINIMUM
RENTALS UNDER RENTALS UNDER
DEBT OPERATING LEASES DEBT OPERATING LEASES
---- ---------------- ----- ----------------
2000 $ 17.7 $23.8 $ 18.1 $30.5
2001 1.8 22.6 2.1 27.5
2002 3.3 21.3 3.6 25.1
2003 - 20.0 0.7 22.4
2004 - 19.8 0.8 20.3
2005 and thereafter 536.0 12.8 536.9 13.2
------ -------
$558.8 $562.2
- ------------------------------------------------------------------------------------
Consolidated rental expense amounted to $22.2, $17.3 and $16.8 in 1999, 1998,
and 1997, respectively. Combined rental expense amounted to $28.6, $26.1 and
$27.0 in 1999, 1998 and 1997, respectively.
11. INCOME TAXES
Comparative analysis of the Company's provision (benefit) for income taxes from
continuing operations follows:
- --------------------------------------------------------------------
CURRENT DEFERRED
--------------------- ---------------------
1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------
Federal $(2.6) $(58.3) $(58.2) $ 7.1 $75.2 $62.6
State and Local 1.5 1.6 (7.6) (0.3) 1.2 11.3
Foreign 16.1 6.0 17.2 (1.0) 8.1 (3.1)
------ ------- ------- ------ ----- ------
$15.0 $(50.7) $(48.6) $ 5.8 $84.5 $70.8
- --------------------------------------------------------------------
The Company's income tax expense (benefit) from discontinued operations'
operating results was $(0.2), $1.2 and $21.2 in 1999, 1998 and 1997,
respectively. The Company's income tax (benefit) expense from discontinued
operations' loss/gain on disposal was $(1.1), $74.9 and $134.8 in 1999, 1998
and 1997, respectively.
50
The Combined Companies' provision (benefit) for income taxes from continuing operations is as follows:
- -------------------------------------------------------------------------------------
CURRENT DEFERRED
----------------------------- --------------------
1999 1998 1997 1999 1998 1997
------ -------- ------- ------ ------- ------
Federal $(10.5) $(40.6) $57.7 $22.3 $137.7 $25.1
State and Local 1.6 5.8 8.5 2.6 12.6 4.3
Foreign 13.6 9.8 27.5 3.3 7.1 0.9
------- ------- ----- ----- ------ -----
$ 4.7 $(25.0) $93.7 $28.2 $157.4 $30.3
- -------------------------------------------------------------------------------------
The Combined Companies' income tax expense (benefit) from discontinued
operations' operating results was $(0.2), $1.2 and $21.2 in 1999, 1998 and 1997,
respectively. The Combined Companies' income tax expense (benefit) from
discontinued operations' loss/gain on disposal was $(1.8), $74.9 and $93.8
in 1999, 1998 and 1997, respectively.
The income tax benefit from the cumulative effect of change in accounting
principle was $1.8 in 1999.
Reconciliations of the Company's and the Combined Companies' differences between
income taxes computed at Federal statutory tax rates and provisions for income
taxes are as follows:
- ----------------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
--------------------------------- --------------------------
1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Income taxes computed at
Federal statutory tax rate $26.6 $20.1 $13.8 $ 43.8 $141.3 $ 76.0
State tax provision, net of
Federal benefits 1.2 2.3 2.4 3.2 12.4 8.3
Foreign tax differentials 0.2 (2.5) 6.6 1.2 1.6 6.9
Foreign source income subject
to U.S. taxation (7.2) 8.8 - (7.3) 8.8 -
Asset write-offs and divestiture
tax rate differentials - - 0.8 (11.0) - 38.7
Gains not subject
to corporate tax - - - - (35.7) (8.0)
Losses and other expenses
not deductible for tax - 2.1 0.5 2.9 5.1 0.9
Adjustment of prior estimates - 3.0 (1.9) 0.1 (1.1) 1.2
------ ------ ------ ------- ------- -------
Provision for income taxes $20.8 $33.8 $22.2 $ 32.9 $132.4 $124.0
- -----------------------------------------------------------------------------------------------------------
The domestic and foreign components of the Company's and the Combined Companies'
income from continuing operations before income taxes are as follows:
- --------------------------------------------------------------------------------
CONSOLIDATED COMBINED
-------------------------------- --------------------------
1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------
Domestic $33.3 $35.4 $10.6 $ 80.5 $385.2 $149.5
Foreign 42.8 22.0 28.8 44.6 18.5 67.6
----- ----- ----- ------ ------ ------
$76.1 $57.4 $39.4 $125.1 $403.7 $217.1
- --------------------------------------------------------------------------------
51
The tax effects of the Company's and the Combined Companies' significant
temporary differences, and loss and credit carryforwards, which comprise the
deferred tax assets and liabilities at December 31, 1999 and 1998 follow:
- -------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
------------------- -----------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------
ASSETS
Non-pension postemployment benefit
obligations $ 58.0 $ 65.2 $ 64.4 $ 72.6
Divestiture reserve 9.0 17.8 13.3 41.9
Accrued expenses and other expenses 65.1 71.6 76.9 77.1
Foreign accrued expenses and other expenses 4.3 (3.4) 0.2 (3.4)
Foreign property, plant and equipment 0.7 0.9 0.7 0.9
Foreign pensions 1.9 0.7 1.9 0.7
Loss and credit carryforwards 180.6 162.2 192.5 167.5
------- ------- ------- -------
Gross deferred tax assets 319.6 315.0 349.9 357.3
Valuation allowance (37.7) (38.4) (43.0) (43.7)
------- ------- ------- -------
281.9 276.6 306.9 313.6
LIABILITIES
Property, plant, equipment and intangibles 68.6 63.4 89.0 87.2
Foreign property, plant, equipment/other 22.1 6.8 28.8 20.9
Certain foreign intangibles (4.3) (1.2) 3.5 (1.2)
Pension liability 41.0 45.8 37.6 43.5
Deferred gain on sale of partnership interest 13.7 8.1 13.7 8.1
Other prepaids 0.5 0.2 3.0 5.0
------- ------- ------- -------
Gross deferred tax liabilities 141.6 123.1 175.6 163.5
- --------------------------------------------------------------------------------------------------
Net asset $140.3 $153.5 $131.3 $150.1
- --------------------------------------------------------------------------------------------------
The Company and Combined Companies' net change of $0.7 in valuation allowance in
1999 is primarily related to loss carryforwards which expired.
The Company's net deferred tax asset at December 31, 1999 was $140.3. Of this
amount, $151.1 represents net domestic deferred tax assets related to future tax
benefits. Included in the domestic deferred tax asset is $0.1 of net operating
loss carryforward for U.S. federal tax purposes, which begin expiring in 2020.
Realization of the domestic net operating loss is dependent upon generation of
approximately $0.4 of future income before the expiration dates. Also included
within the domestic deferred tax asset is $92.6 of foreign tax credits. This
amount consists of $61.8 of foreign tax credit carryover which was generated in
1998 and will begin expiring in 2004 and $30.8 of foreign tax credit which was
generated in 1999 and will begin expiring in 2005. Realization of the entire net
domestic deferred tax asset is dependent on generation of approximately $431.7
of future taxable income.
The Combined Companies' net deferred tax asset at December 31, 1999 was $131.3.
Of this amount, $160.8 represents net domestic deferred tax assets related to
future tax benefits. Included in the domestic deferred tax asset is $0.1 of net
operating loss carryforward for U.S. federal tax purposes, which begin expiring
in 2020. Realization of the domestic net operating loss is dependent upon
generation of approximately $0.4 of future income before the expiration dates.
Also included within the domestic deferred tax asset is $97.7 of foreign tax
credits. This amount consists of $61.8 of foreign tax credit carryover which was
generated in 1998 and will begin expiring in 2004 and $35.9 of foreign tax
credit which was generated in 1999 and will begin expiring in 2005. Realization
of the entire net domestic deferred tax asset is dependent on generation of
approximately $459.4 of future taxable income.
The Company has not recorded income taxes applicable to undistributed earnings
of foreign subsidiaries that are indefinitely reinvested in foreign operations.
Undistributed earnings permanently reinvested amounted to $154.9 at December 31,
1999.
52
12. PENSION AND RETIREMENT SAVINGS PLANS
Most U.S. employees of the Company and the Combined Companies are covered under
a non-contributory defined benefit plan ("the Borden, Inc. Plan"). The Borden,
Inc. Plan provides benefits for salaried employees based on eligible
compensation and years of credited service and for hourly employees based on
years of credited service. Certain employees in other countries are covered
under contributory and non-contributory defined benefit foreign plans.
Additionally, eligible salaried and hourly employees may contribute up to 5% of
their pay (7% for certain longer service salaried employees), which is currently
matched by the Company at a range of 50-75%. The Company has the option to match
up to 100% of this amount and in certain cases the Company may match up to 125%,
based on financial performance. Charges to operations for matching contributions
under the Company's retirement savings plans in 1999, 1998 and 1997 amounted to
$5.9, $5.3 and $7.3, respectively. Charges for matching contributions under the
Combined Companies retirement savings plans in 1999, 1998 and 1997 amounted to
$7.7, $7.4 and $10.3, respectively.
The Company's and the Combined Companies' funding of their pension plans equals
or exceeds the minimum funding requirements imposed by Federal and foreign laws
and regulations. The Consolidated projected benefit obligation and plan assets
include the domestic obligation and assets for Foods and Wise. The Company has
recorded receivables from Foods and Wise for their actuarially determined
liability.
53
The plan assets and benefit obligation of the plans was as follows:
- ------------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
--------------------- --------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $351.0 $ 496.7 $373.0 $ 523.9
Service cost 5.0 8.6 5.4 9.3
Interest cost 22.2 34.7 23.3 36.3
Contributions by plan participants - 0.3 - 0.3
Actuarial (gains) losses (5.8) 7.1 (7.4) 8.8
Foreign currency exchange rate changes 0.2 (1.6) 1.3 (2.8)
Benefits paid (42.0) (46.7) (44.1) (48.5)
Plan amendments 2.0 1.6 2.0 1.6
Settlements/curtailments (0.3) (149.7) (0.3) (155.9)
------- -------- ------- --------
$332.3 $ 351.0 $353.2 $ 373.0
------- -------- ------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $347.7 $ 536.0 $371.3 $ 566.3
Actual return on plan assets 75.4 (8.1) 75.9 (6.6)
Foreign currency exchange rate changes 0.2 (1.0) 1.6 (2.6)
Employer contribution 0.7 17.5 2.4 17.7
Contributions by plan participants - 0.3 - 0.3
Benefits paid (42.0) (46.7) (44.1) (48.5)
Settlements/curtailments (1.0) (150.3) (1.0) (155.3)
------- -------- ------- --------
Fair value of plan assets at end of year $381.0 $ 347.7 $406.1 $ 371.3
------- -------- ------- --------
Plan assets in excess of (less than)
benefit obligation $ 48.7 $ (3.3) $ 52.9 $ (1.7)
Unrecognized net actuarial loss 73.3 130.8 78.5 138.3
Unrecognized initial transition gain (0.4) (0.8) (0.4) (0.8)
Unrecognized prior service cost 6.1 5.1 6.1 5.1
------- -------- ------- --------
Prepaid pension asset $127.7 $ 131.8 $137.1 $ 140.9
- ------------------------------------------------------------------------------------------------------
Amounts recognized in the balance sheets consist of:
- ----------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------
Prepaid benefit cost based on a September 30
measurement date $129.9 $133.6 $140.9 $140.8
Accrued benefit liability (5.6) (7.4) (7.2) (8.3)
Accumulated other comprehensive income 3.4 5.6 3.4 8.4
------- ------- ------- -------
$127.7 $131.8 $137.1 $140.9
- -----------------------------------------------------------------------------------------------------------
Plan assets consist primarily of equity securities and corporate obligations.
54
Consolidated expense excludes the expenses related to the Foods and Wise
domestic pension plan. Following are the components of net pension expense
recognized by the Company and Combined Companies:
- -----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
------------------------------------- ----------------------------
1999 1998 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
Service cost $ 3.1 $ 6.0 $ 8.1 $ 5.6 $ 9.3 $ 11.3
Interest cost on projected benefit obligation 17.8 29.9 33.2 23.7 36.3 39.9
Expected return on assets (22.2) (29.9) (37.1) (29.7) (37.0) (44.8)
Amortization of prior service cost 0.7 (2.0) (1.3) 0.9 (2.1) (1.8)
Amortization of initial transition asset (0.4) (2.1) (2.7) (0.4) (2.3) (3.0)
Recognized actuarial loss 5.4 9.4 11.0 6.9 11.5 13.3
Settlement/curtailment loss (1) 0.6 27.1 25.5 0.6 24.2 25.5
------- ------- ------- ------- ------- --------
Net pension expense $ 5.0 $ 38.4 $ 36.7 $ 7.6 $ 39.9 $ 40.4
- -----------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes $0.1 in 1998 and $14.4 in 1997 related to discontinued operations.
The weighted average rates used to determine net pension expense for both
the Company and the Combined Companies were as follows:
- -----------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------
Discount rate 6.7% 7.4% 7.7%
Rate of increase in future compensation levels 4.2% 4.3% 4.6%
Expected long-term rate of return on plan assets 7.9% 8.4% 8.7%
- -----------------------------------------------------------------------
In 1999, the Company and Combined Companies elected to update the mortality
table used to determine the projected benefit obligation and pension expense.
The impact of this change in assumption was an increase in the obligation at
December 31, 1999, of approximately $7.0 for the Company and Combined Companies
and an estimated increase in expense for fiscal year 2000 of approximately $0.8
and $1.1 for the Company and Combined Companies, respectively.
The projected benefit obligation and fair value of plan assets for the Company's
pension plans with benefit obligations in excess of plan assets were $11.6 and
$4.5, respectively, as of December 31, 1999, and $11.6 and $4.0, respectively,
as of December 31, 1998.
The projected benefit obligation and fair value of plan assets for the Combined
Companies' pension plans with benefit obligations in excess of plan assets were
$12.0 and $4.5, respectively, as of December 31, 1999, and $20.1 and $10.9,
respectively, as of December 31, 1998.
Most employees not covered by the Company's plans are covered by collectively
bargained agreements, which are generally effective for five years. Under
Federal pension law, there would be continuing liability to these pension trusts
if the Company ceased all or most participation in any such trust, and under
certain other specified conditions. The consolidated financial statements
include charges of $1.3, $1.0 and $1.2 in 1999, 1998 and 1997, respectively,
for payments to pension trusts on behalf of employees not covered by the
Company's plans. The Combined financial statements include charges of $2.0,
$1.9 and $2.7 in 1999, 1998 and 1997, respectively.
55
13. NON-PENSION POSTRETIREMENT BENEFIT
The Company provides certain health and life insurance benefits for eligible
domestic and Canadian retirees and their dependents. The cost of postretirement
benefits is accrued during employees' working careers. Domestic participants who
are not eligible for Medicare are provided with the same medical benefits as
active employees, while those who are eligible for Medicare are provided with
supplemental benefits. Canadian participants are provided with supplemental
benefits to the national healthcare plan in Canada. The domestic postretirement
medical benefits are contributory; the Canadian medical benefits are
non-contributory. The domestic and Canadian postretirement life insurance
benefits are noncontributory. Benefits are funded on a pay-as-you-go basis.
- ---------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
--------------------- -----------------
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $107.0 $131.8 $120.7 $147.7
Service cost - - - 0.1
Interest cost 6.7 9.2 7.8 10.5
Contributions by plan participants 2.2 1.6 2.8 2.0
Actuarial (gains) losses 6.4 (13.8) 8.3 (15.3)
Benefits paid (12.4) (12.4) (14.8) (14.9)
Plan amendment (6.5) - (6.5) -
Divestitures - (9.4) - (9.4)
------- ------- ------- -------
Benefits obligation end of year 103.4 107.0 118.3 120.7
Unrecognized net actuarial gain 35.5 44.8 35.6 45.4
Unrecognized prior service benefit 28.9 31.1 28.9 31.1
------- ------- ------- -------
Accrued postretirement
obligation at end of year $167.8 $182.9 $182.8 $197.2
- ---------------------------------------------------------------------------------------------
The weighted average discount rate used in determining the postretirement
benefit obligation at December 31, 1999 and 1998, was 7.8% and 6.8%,
respectively. For measurement purposes, health care costs are assumed to
increase 8.1% in 2000 grading down gradually to a constant 5.8% annual increase
for both pre-65 and post-65 benefits by the year 2004. The comparable
assumptions for the prior year were 7.7% and 4.8% by the year 2004.
In 1999, the Company and Combined Companies elected to update the mortality
table used to determine the projected benefit obligation and related expense.
The impact of this change in assumption was an increase in the obligation at
December 31, 1999 of $3.5 for the Company and Combined Companies, and an
estimated increase in the expense for fiscal year 2000 of $0.4 and $0.5 for the
Company and Combined Companies, respectively.
56
Following are the components of net postretirement benefit recognized for 1999,
1998 and 1997:
- -------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
------------------------------- -------------------------
1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Service cost $ - $ - $ 0.1 $ - $ 0.1 $ 0.2
Interest cost on projected benefit obligation 6.7 9.2 10.9 7.8 10.5 12.3
Amortization of prior service benefit (8.7) (9.5) (11.1) (8.7) (9.5) (11.1)
Immediate recognition of initial
obligation 1.0 - - 2.2 - -
Recognized actuarial gain (2.7) (1.8) (2.1) (3.2) (2.1) (2.4)
Settlement/curtailment gain (1) - (6.1) (15.2) - (6.6) (15.2)
------ ------ ------- ------ ------ -------
Net postretirement benefit $(3.7) $(8.2) $(17.4) $(1.9) $(7.6) $(16.2)
- -------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes $(0.3) in 1998 and $(13.2) in 1997 related to discontinued operations.
Assumed health care cost trend rates have a significant effect on the amounts
reported for health care plans. A one-percentage-point change in the assumed
health care cost trend rates would have the following effects:
- -----------------------------------------------------------------------------------------
1% increase 1% decrease
----------- -----------
Effect on total service cost and interest cost components $ 0.6 $ (0.5)
Effect on postretirement benefit obligation 7.2 (6.5)
- -----------------------------------------------------------------------------------------
14. SHAREHOLDERS' EQUITY
Preferred Stock
- ---------------
The Company has 24,574,751 shares of series A Cumulative Preferred Stock
("Preferred Stock") outstanding with a total of 100,000,000 shares authorized.
Each share has a liquidation preference of $25 and is entitled to cumulative
dividends at an annual rate of 12% payable quarterly in arrears. These shares
are redeemable, in whole or in part, at the Company's discretion. At December
31, 1999, the redemption price is 106% of the issuance price and declines
ratably in each year to par at June 26, 2005. At this time, the Company has no
plans to redeem these shares.
Common Stock
- ------------
The Company has 198,974,994 shares of $0.01 par value common stock issued and
outstanding and 300,000,000 shares authorized. Foods Holdings and Wise Holdings
are capitalized with 100 and 70 shares of $0.01 par value common stock,
respectively.
Other Shareholders' Equity
- --------------------------
At December 31, 1999, the Company held $404.9 of notes receivable from its
parent, which accrue interest at 12% per year, payable quarterly. The notes were
received from an affiliate of the Company's parent as proceeds from the sales of
Wise ($34.2) and Foods ($365.9) and the issuance of options on the common stock
of Elmer's Holdings, Inc. and Borden Decorative Products Holdings, Inc. ($44.0).
As described below, notes totaling $39.2 were transferred to BWHLLC in 1998.
Interest is received quarterly at 12% and the notes mature on September 29,
2005. At December 31, 1999, Other Shareholders' Equity included accrued interest
of $10.0. See Notes 4 and 6 for additional information on the sale of Wise and
Foods.
During 1996 the Company sold options to BWHLLC on all of the common stock of
Elmer's Holdings, Inc. and Borden Decorative Products Holdings, Inc. for 110% of
the August 16, 1996, fair market value of the common stock. The options were
issued at fair value with a five-year expiration. The exercise price of the
option for Elmer's Holdings, Inc. is $54.1. The option on the common stock of
Borden Decorative Products Holdings, Inc. was cancelled prior to the March 13,
1998 sale of the business. In settlement of this early cancellation, the Company
57
transferred $39.2 of notes receivable from the Company's parent to BWHLLC,
representing the fair value of the option at March 13, 1998.
The Combined Companies' equity includes $66.2 and $60.8 of affiliate's interest
in subsidiary at December 31, 1999 and 1998, respectively, representing the 30%
interest held by an affiliate of the Company's parent in a consolidated
subsidiary of Foods. See Note 5 for additional information.
The Company declared common stock dividends of $64.1, $59.5 and $51.4 during
1999, 1998 and 1997, respectively. The dividends were recorded as a charge to
paid-in capital to reflect a return of capital to the Company's parent.
In addition, $26.4, $42.9 and $24.5 were recorded during 1999, 1998 and 1997,
respectively, as a credit to paid-in capital representing tax benefits
contributed to the Company by its parent. The Company is included in its
parent's tax return and the deductible interest expense on the parent's notes
payable reduces the Company's tax liability.
During 1999 and 1998, the Company recorded a minimum pension liability
adjustment of $1.5 and $3.6, respectively ($3.3 and $5.4 for the Combined
Companies in 1999 and 1998, respectively) relating to underfunded pension plans,
which is reflected in accumulated other comprehensive income.
15. STOCK OPTION PLANS AND OTHER STOCK BASED COMPENSATION
Unit Appreciation Rights
- ------------------------
Effective January 1, 1996, key employees of the Company and Combined Companies
were offered units and unit appreciation rights ("UAR's") in their respective
holding companies. Additional UAR's have been granted under these plans in 1999,
1998 and 1997. The UAR's vest over 5 years, and any compensation expense
incurred in conjunction with the UAR's will be charged to the Company or the
Combined Companies. For 1999, 1998 and 1997, the Company has not recorded any
compensation expense attributable to the UAR's. During 1999, Foods recorded $0.9
of compensation expense related to their UAR's. Foods had no compensation
expense in 1998 or 1997. There were 25,326,860 UAR's outstanding at December 31,
1999, and 2,576,320 UAR's available for future grants.
Stock Options
- -------------
Key subsidiaries of the Company and Combined Companies have issued stock options
under their individual Stock Purchase and Option Plans for Key Employees. Under
these plans, equity in the Chemical, Wise, Elmer's, infrastructure management
services, Decorative Products and Dairy business units was sold to key
management personnel. Fixed stock options were granted to purchase additional
shares at varying exercise prices between $5 and $10. In addition, each company
has granted fixed stock options to employees under their respective broad-based
option plans. The options were issued with exercise prices at or above fair
value, vest over five years and expire ten years from the date of the grant. As
of December 31, 1999 there are 6,774,905 options outstanding among the companies
and 1,226,158 options available for future grants.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Under the provisions of Accounting
Principles Board ("APB") 25, "Accounting for Stock Issued to Employees", there
was no compensation expense attributable to these stock options in 1999. In
1998, compensation cost of $1.6 related to the sale of Decorative Products.
Compensation cost of $16.6 was recorded in 1997 in conjunction with the Dairy
sale. Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant date consistent with the provisions of
SFAS No. 123, the Company's net income (loss) and basic and diluted net income
(loss) per share would have been the amounts presented below:
58
- --------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------
Net (loss) income applicable to common stock - as reported $(20.8) $(11.1) $147.6
Net (loss) income applicable to common stock - pro forma (22.1) (10.7) 156.2
Basic and diluted net income (loss) per share - as reported (0.10) (0.06) 0.74
Basic and diluted net income (loss) per share - pro forma (0.11) (0.05) 0.78
- --------------------------------------------------------------------------------------------------
Pro forma net income applicable to common stock for the Combined Companies is
$5.6 in 1999, $95.0 in 1998, and $139.7 in 1997.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with a risk free weighted average interest
rate of 5.9% and expected lives ranging from five to ten years.
Information regarding the management stock option plans for the Company and Wise
is as follows:
- --------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------------------------------------------
Options outstanding, beginning of year 5,624,155 $5.07 6,912,405 $ 5.18 7,082,034 $5.18
Options exercised - (1,306,250) 5.00 (1,047,284) 5.00
Options granted 1,728,750 8.22 1,203,000 5.00 1,242,655 5.15
Options forfeited (578,000) 5.00 (1,185,000) 5.92 (365,000) 5.00
---------- ----------- -----------
Options outstanding, end of year 6,774,905 5.88 5,624,155 5.07 6,912,405 5.18
- ---------------------------------------------------------------------------------------------------------------------
These amounts include outstanding options for Wise of 544,500, 82,000 and
300,000 at December 31, 1999, 1998 and 1997, respectively, with a weighted
average exercise price of $10.00.
The options exercised in 1997 were in conjunction with the September 4, 1997,
sale of the Dairy business. The options exercised in 1998 related to the sale of
the Decorative Products business.
The following table summarizes information about fixed-price stock options at
December 31, 1999:
- ------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------- ----------------------
Weighted Average Weighted
Range of Fair Value Number Weighted Average Weighted Average Number Exercise
Exercise Price At Grant Outstanding Remaining Life Exercise Price Exercisable Price
- ------------------------------------------------------------------------------------------------------------
$ 5.00 $ 1.12 5,101,155 3 years $ 5.00 2,408,043 $ 5.00
$ 7.50-10.00 $ 2.03 1,673,750 5 years $ 8.57 76,450 $ 9.32
----------- -----------
$ 5.00-10.00 $ 1.35 6,774,905 4 years $ 5.88 2,484,493 $ 5.13
- ------------------------------------------------------------------------------------------------------------
There were 1,538,531 options exercisable at December 31, 1998, with a weighted
average exercise price of $5.09. There were 1,133,950 options exercisable at
December 31, 1997, with a weighted average exercise price of $5.23.
16. DERIVATIVE FINANCIAL INSTRUMENTS
Interest Rate Swaps
- -------------------
The Company enters into interest rate swaps to lower funding costs or to alter
interest rate exposures between fixed and floating rates on long-term debt.
Under interest rate swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between fixed rate and floating rate
interest amounts calculated by reference to an agreed notional principal amount.
The notional amount of interest rate swaps was $224.3 at December 31, 1999 and
59
1998. These swaps have maturities ranging from 2000 to 2002. The net impact of
interest rate swaps was an increase in the Company's and the Combined Companies'
interest expense of $11.6 in 1999, $10.7 in 1998, and $10.5 in 1997. The
year-end fair value of the interest rate swaps was a loss of $15.0 in 1999 and
$28.7 in 1998.
The following table summarizes the weighted average interest rates for the swaps
used by the Company and Combined Companies. Variable rates change with market
conditions and may vary significantly in the future. A 1% increase in market
interest rates would result in a $2.2 increase in the fair value of the interest
rate swap agreements. A 1% decline in the interest rates would result in a $2.2
decrease in the fair value of the interest rate swap agreements.
- --------------------------------------------------------------------------------
1999 1998 1997
----- ----- -----
Pay fixed swaps
Average rate paid 10.4% 10.4% 10.4%
Average rate received 5.2% 5.6% 5.7%
- --------------------------------------------------------------------------------
An interest rate swap, having a notional amount of $200.0, no longer meets the
criteria for hedge accounting and is marked to market. The unrealized gains on
this instrument of $10.8, $4.1 and $4.1 in 1999, 1998 and 1997, respectively,
were included in the Consolidated and Combined Statements of Operations and
other long-term liabilities. The Company does not hold or issue derivative
financial instruments for trading purposes.
Foreign Exchange and Option Contracts
- -------------------------------------
International operations account for a significant portion of the Company's
revenue and operating income. With the divestiture of almost all Foods Unaligned
international businesses in 1997, 1998 and 1999, the portion of the Combined
Companies' revenue and operating income derived from the international
operations is reduced. It is the policy of the Company and Combined Companies to
reduce foreign currency cash flow exposure due to exchange rate fluctuations by
hedging anticipated and firmly committed transactions wherever economically
feasible (within the risk limits established in the Company's policy). These
contracts are part of a worldwide program to minimize foreign currency exchange
operating income and balance sheet exposure.
The Company and Combined Companies closely monitor foreign currency cash flow
transactions and enter into forward and option contracts to buy and sell foreign
currencies only to reduce foreign exchange exposure and protect the U.S. dollar
value of such transactions to the extent of the amount under contract.
In accordance with current accounting standards, gains and losses arising from
contracts that hedge future transactions are deferred until the related
transactions occur. Those arising from contracts that hedge existing
transactions (e.g., outstanding payables denominated in foreign currency) are
recorded in income and offset the gains and losses that occur as exchange rates
change. The cash flows from forward and option contracts accounted for as hedges
of identifiable transactions are classified consistent with the cash flows from
the transaction being hedged.
At December 31, 1999 and 1998, the Company had $75.1 and $39.7, respectively, of
notional value of forward foreign currency exchange contracts outstanding. The
Combined Companies had $89.2 and $55.8 of notional value of forward foreign
exchange contracts outstanding at December 31, 1999 and 1998, respectively. At
December 31, 1999, the Company and Combined Companies had foreign currency
option contracts outstanding of $2.5 and no outstanding foreign currency option
contracts at December 31, 1998. The unsecured contracts mature within 12 months
and are principally with banks. The Company is exposed to credit loss in the
event of non-performance by the other parties to the contracts. The Company
evaluates the creditworthiness of the counterparties' financial condition and
does not expect default by the counterparties.
60
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying or notional amounts and fair values of
the Company's financial instruments at December 31, 1999 and 1998. The fair
value of a financial instrument is the estimated amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. Fair values are determined from quoted market
prices where available or other independent valuation methods.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable and other accruals are considered reasonable estimates of their fair
values. The carrying value of the loans receivable from and payable to
affiliates approximates fair values as the loans bear interest at market
interest rates.
- --------------------------------------------------------------------------------------------------
1999 1998
------------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- ---------- --------
Nonderivatives
Assets
Investment securities $ 47.0 $ 62.1 $ 52.5 $ 52.5
Liabilities
Debt 558.8 473.9 568.1 567.0
Notional Fair Notional Fair
Amount Value Amount Value
-------- ------- ---------- -------
Derivatives relating to:
Foreign currency contracts - gain $ 1.7 $ 0.2 $ 32.3 $ 0.3
Foreign currency contracts - loss 73.4 (0.3) 7.4 -
Option contracts - gain 2.5 0.2 - -
Interest rate swaps - loss 224.3 (15.0) 224.3 (28.7)
- --------------------------------------------------------------------------------------------------
The carrying or notional amounts of the Combined Companies' financial
instruments and their related fair values based on dealer quotes are as follows:
- --------------------------------------------------------------------------------------------------
1999 1998
------------------------ ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- ---------- ---------
Nonderivatives
Assets
Investment securities $ 47.0 $ 62.1 $ 52.5 $ 52.5
Liabilities
Debt 562.2 477.3 577.7 576.1
Notional Fair Notional Fair
Amount Value Amount Value
-------- -------- ---------- --------
Derivatives relating to:
Foreign currency contracts - gain $ 15.8 $ 0.3 $ 32.3 $ 0.3
Foreign currency contracts - loss 73.4 (0.3) 23.5 (0.3)
Option contracts - gain 2.5 0.2 - -
Interest rate swaps - loss 224.3 (15.0) 224.3 (28.7)
- --------------------------------------------------------------------------------------------------
The carrying value of the Company's $50.0 investment in World Kitchen is
considered to equal the fair value as a result of the recent World Kitchen 1999
fourth quarter acquisitions to which the investment relates.
61
18. SUPPLEMENTAL INFORMATION
- ---------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
----------------------------- ---------------------
1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------
Depreciation $50.5 $47.5 $35.8 $ 77.2 $ 72.4 $ 81.9
Amortization 3.7 3.4 3.1 14.9 14.2 14.4
Advertising 2.1 2.9 4.4 16.3 13.6 48.9
Promotions 22.1 21.1 20.7 188.0 195.6 318.3
Research and Development 23.8 18.7 24.9 43.8 39.0 44.4
- ---------------------------------------------------------------------------------------------
Other current liabilities include the following amounts:
- ---------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
------------------- -----------------
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------
General insurance accruals $20.4 $20.7 $32.3 $34.9
Reserves for sale of businesses 5.3 28.0 16.0 99.7
- ---------------------------------------------------------------------------------------------
19. RELATED PARTY TRANSACTIONS
Foods and Wise
- --------------
Wise and Foods were sold to affiliates of the Company during 1996. Because of
the Company's continuing control over Wise and Foods, their assets and
liabilities, at the date of sale, are classified as "sold under contractual
arrangements" in the consolidated financial statements, as long as the Company
has a net affiliated receivable from Wise or Foods. The Company's net investment
balance in Wise was $6.6 and $4.4 at December 31, 1999 and 1998, respectively.
In 1998, Foods repaid their term loan with the Company. This repayment ended the
Company's remaining financial interest in Foods and therefore, at December 31,
1998, transactions with Foods are reflected as unconsolidated affiliated
balances, not as an investment. See Notes 1 and 4 for additional information.
The net investment in Wise included a term loan receivable of $5.0 at December
31, 1998, at an interest rate of 11% which was repaid during 1999. The Foods
investment included a $47.6 term loan receivable at December 31, 1997, at an
interest rate of 10.25%, which was repaid during 1998. Affiliated interest
income of $0.8, $0.6, and $1.0, net of amounts paid for overnight investments,
was accrued related to Wise during 1999, 1998 and 1997, respectively. The
Company recorded affiliated interest (expense) / income of $(14.7), $(18.0) and
$25.5 related to Foods during 1999, 1998 and 1997, respectively.
The Loan Agreement with Foods and Wise provides a revolving loan feature. During
1997, the revolving loan facility for Foods was $100.0. Effective December 30,
1997, the revolving loan facility was reduced to $50.0 with a maturity date of
December 31, 1998. As of December 31, 1998, this facility has been extended to
December 31, 2000. The Wise revolving loan facility provides for borrowings up
to $15.0 maturing December 31, 2000. The Foods and Wise variable interest rate
is equal to the Company's cost of funds for 30 day LIBOR borrowings plus 0.25%
for Foods and between 0.75% and 1.75% for Wise. Wise had borrowings of $6.5
outstanding under this facility at December 31, 1999. Foods had no borrowings
under this facility at December 31, 1999.
Foods and Wise invest cash overnight at an interest rate set by the Company,
which generally approximates money market rates. Foods had $234.6 invested at
December 31, 1999 and $277.6 invested at December 31, 1998, which is included in
loans payable with affiliates. Wise had $1.2 and $1.7 invested at December 31,
1999 and 1998, respectively, which is classified in assets sold under
contractual arrangements.
The Company provides infrastructure management services to Foods and Wise. Fees
received for these services are offset against the Company's general and
administrative expenses, and totaled $12.9, $15.1 and $20.1 for the years ended
December 31, 1999, 1998 and 1997, respectively. (See also Note 21).
62
Included in consolidated accounts payable at December 31, 1999, is a $2.1 net
payable to Foods primarily related to interest earned on funds invested
overnight with the Company. Included in other assets is a $8.8 receivable from
Foods for its portion of the Combined Companies' pension liability. The effects
of transactions among Wise, Foods and the Company have been eliminated in the
Combined financial statements.
Other Related Parties
- ---------------------
BWHLLC's invested cash with the Company and Combined Companies was $11.3 and
$138.2 at December 31, 1999 and 1998, which accrues interest at rates that
generally approximate market. The Company recorded $5.2 and $5.4 of interest
expense on amounts invested by BWHLLC during 1999 and 1998, respectively.
Included in other current liabilities at December 31, 1999 and 1998,
respectively, was $0.1 and $1.7 of affiliated interest payable related to these
amounts. Cash invested with the Company and Combined Companies by the Company's
parent was $0.7 and $0.0 at December 31, 1999 and 1998, respectively.
During 1998, CCPC Acquisitions Corp., an affiliate of the Company's parent,
acquired a controlling interest in Corning Consumer Products Company ("CCPC")
from Corning Incorporated in a recapitalization transaction valued at
approximately $603. In connection with this transaction, the Company loaned
$346.0 to CCPC on a short-term basis at rates which approximated market
conditions. The Company recorded $1.2 of interest income related to this loan,
which is reflected in interest income and other in the 1998 consolidated and
combined Statements of Operations. CCPC repaid the loan in 1998. In 1999, CCPC
changed its name to World Kitchen.
At December 31, 1999, the Company had loaned $56.2 in the form of demand notes
to CCPC Acquisition Corp., to provide temporary financing to complete the
acquisition of EKCO Group. The loan bears variable interest at the monthly prime
rate as quoted by The Wall Street Journal and matures on December 31, 2000. The
Company anticipates repayment upon the sale of a business unit acquired with
EKCO Group, Inc. that is held for sale by CCPC Acquisition Corp. Additionally,
early in the fourth quarter, the Company made a $50.0 investment in World
Kitchen in the form of 16% cumulative junior preferred stock and has accrued
dividends of $1.5.
The Company renders management, consulting and financial services to World
Kitchen for an annual fee of $1.5, payable monthly in arrears.
KKR renders management, consulting and financial services to the Company and its
businesses for an annual fee of $10.0, payable quarterly in arrears.
During 1999, 1998 and 1997, the Company purchased $64.7, $66.4, and $108.9 of
raw materials from Borden Chemicals and Plastics Limited Partnership, of which
the Company is the general partner.
20. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS - The Company and Combined Companies, like others in
similar businesses, is subject to extensive Federal, state and local
environmental laws and regulations. Although Company and Combined Companies
environmental policies and practices are designed to ensure compliance with
these laws and regulations, future developments and increasingly stringent
regulation could require the Company and Combined Companies to make additional
unforeseen environmental expenditures.
Accruals for environmental matters are recorded when it is probable that a
liability has been incurred and the amount of the liability can be reasonably
estimated. Environmental accruals are routinely reviewed on an interim basis as
events and developments warrant and are subjected to a comprehensive review
annually during the fiscal fourth quarter. The Company and the Combined
Companies have each accrued approximately $22 at December 31, 1999, for probable
environmental remediation and restoration liabilities. These liabilities at
December 31, 1998, totaled approximately $20. This is management's best estimate
of these liabilities. Based on currently available information and analysis, the
Company believes that it is reasonably possible that costs associated with such
63
liabilities may exceed current reserves by amounts that may prove insignificant,
or by amounts, in the aggregate, of up to approximately $13.
LEGAL MATTERS - The Company and Combined Companies have recorded $5.1 and $8.5
in liabilities at December 31, 1999, for legal costs in amounts that management
believes are probable and reasonably estimable. These liabilities at December
31, 1998, totaled $17.6 and $32.1 for the Company and Combined Companies,
respectively. Actual costs are not expected to exceed these amounts. The Company
may be held responsible for certain environmental liabilities incurred at Borden
Chemicals and Plastics Limited Partnership facilities, which were previously
owned by the Company. The Company believes, based upon the information it
currently possesses, and taking into account its established reserves for
estimated liability and its insurance coverage, that the ultimate outcome of the
foregoing proceedings and actions is unlikely to have a material adverse effect
on the Company's financial position or operating results.
OTHER COMMITMENTS - A wholly owned subsidiary serving as general partner of
Borden Chemicals and Plastics Limited Partnership ("BCP") has certain fiduciary
responsibilities to BCP's unitholders. The Company believes that such
responsibilities will not have a material adverse effect on its financial
statements.
21. SUBSEQUENT EVENT
On February 25, 2000, the Company distributed 100% of its ownership in the
infrastructure management services business to its parent. The distribution was
treated as a dividend at the recorded net book value of approximately $8
million. Subsequently, substantially all of the assets of the infrastructure
management services business were sold to a subsidiary of Interliant, Inc. in
exchange for $2.5 million in cash and 1,041,179 shares of Interliant, Inc.
stock.
64
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents Quarterly Financial Data for the Company:
1999 QUARTERS FIRST SECOND THIRD FOURTH (1)
- ------------------------------------------------------------------------------------------------------------
Net Sales $306.9 $343.9 $350.7 $358.7
- ------------------------------------------------------------------------------------------------------------
Gross profit (2) 83.1 99.9 95.0 90.2
- ------------------------------------------------------------------------------------------------------------
Business realignment and asset write-offs - 10.0 21.6 10.0
Gain on divestiture of businesses - - - 7.4
- ------------------------------------------------------------------------------------------------------------
Income from continuing operations 13.3 22.6 3.8 15.6
- ------------------------------------------------------------------------------------------------------------
Discontinued operations:
Loss from operations, net of tax - - - (0.4)
Gain (loss) on disposal, net of tax - 0.6 - (2.6)
- ------------------------------------------------------------------------------------------------------------
Net income 13.3 23.2 3.8 12.6
- ------------------------------------------------------------------------------------------------------------
Preferred stock dividends 18.4 18.5 18.4 18.4
- ------------------------------------------------------------------------------------------------------------
Net (loss) income applicable to common stock (5.1) 4.7 (14.6) (5.8)
- ------------------------------------------------------------------------------------------------------------
Basic and diluted, per share of common stock:
Income (loss) from continuing operations 0.07 0.12 0.02 0.07
Net (loss) income applicable to common stock (0.02) 0.03 (0.08) (0.03)
Dividends per common share 0.06 0.06 0.14 0.06
Dividends per preferred share 0.75 0.75 0.75 0.75
Average number of common share outstanding 199.0 199.0 199.0 199.0
- ------------------------------------------------------------------------------------------------------------
1998 QUARTERS FIRST SECOND THIRD FOURTH (3)
- ------------------------------------------------------------------------------------------------------------
Net Sales $367.1 $368.4 $335.6 $328.6
- ------------------------------------------------------------------------------------------------------------
Gross profit (2) 80.0 94.2 85.9 80.4
- ------------------------------------------------------------------------------------------------------------
Gain on sale of business - 8.3 - -
- ------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 5.8 14.4 11.7 (8.3)
- ------------------------------------------------------------------------------------------------------------
Discontinued operations:
Income from operations, net of tax 2.3 - - -
Gain on disposal, net of tax 26.0 - 5.3 5.4
- ------------------------------------------------------------------------------------------------------------
Net income (loss) 34.1 14.4 17.0 (2.9)
- ------------------------------------------------------------------------------------------------------------
Preferred stock dividends 18.4 18.4 18.4 18.5
- ------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock 15.7 (4.0) (1.4) (21.4)
- ------------------------------------------------------------------------------------------------------------
Basic and diluted, per share of common stock:
Income (loss) from continuing operations 0.03 0.07 0.05 (0.03)
Discontinued operations:
Income from operations 0.01 - - -
Gain on disposal 0.13 - 0.03 0.02
Net income (loss) applicable to common stock 0.08 (0.02) (0.01) (0.11)
Dividends per common share 0.07 0.10 0.06 0.07
Dividends per preferred share 0.75 0.75 0.75 0.75
Average number of common share outstanding 199.0 199.0 199.0 199.0
- ------------------------------------------------------------------------------------------------------------
<FN>
(1) - As described in Note 4, the Company's fourth quarter 1999 results include a $10.0 charge related to a
plant expansion project that was discontinued.
(2) - Gross profit is defined as gross margin less distribution expense.
(3) - As discussed in Note 9, the Company's fourth quarter 1998 results reflect a $26.7 impairment charge on
an investment.
65
The following represents Quarterly Financial Data for the Combined Companies:
1999 QUARTERS FIRST SECOND THIRD FOURTH (1)
- ---------------------------------------------------------------------------------------------------------------
Net Sales $496.5 $519.1 $531.6 $589.9
- ---------------------------------------------------------------------------------------------------------------
Gross profit (2) 154.9 162.4 165.9 183.5
- ---------------------------------------------------------------------------------------------------------------
Business realignment and asset write-offs - 10.0 21.6 10.7
Gain on divestiture of businesses 4.4 10.4 32.7 9.0
- ---------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 14.0 14.8 22.2 41.2
- ---------------------------------------------------------------------------------------------------------------
Discontinued operations:
Loss from operations, net of tax - - - (0.4)
Gain (loss) on disposal, net of tax - 0.6 - (3.7)
- ---------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting
principle - - - (2.8)
- ---------------------------------------------------------------------------------------------------------------
Net income 14.0 15.4 22.2 34.3
- ---------------------------------------------------------------------------------------------------------------
Preferred stock dividends 18.4 18.5 18.4 18.4
- ---------------------------------------------------------------------------------------------------------------
Net (loss) income applicable to common stock (5.3) (2.5) 3.3 11.6
- ---------------------------------------------------------------------------------------------------------------
1998 QUARTERS FIRST SECOND THIRD FOURTH (3)
- ---------------------------------------------------------------------------------------------------------------
Net Sales $643.6 $582.5 $536.2 $572.2
- ---------------------------------------------------------------------------------------------------------------
Gross profit (2) 167.7 159.0 155.5 179.4
- ---------------------------------------------------------------------------------------------------------------
Gain on sale of business 301.4 9.4 18.6 49.3
- --------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 242.8 (5.9) 11.1 23.3
- ---------------------------------------------------------------------------------------------------------------
Discontinued operations:
Income from operations, net of tax 2.3 - - -
Gain on disposal, net of tax 26.0 - 5.3 5.4
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) 271.1 (5.9) 16.4 28.7
- ---------------------------------------------------------------------------------------------------------------
Affiliate's share of income 128.7 1.3 1.0 11.0
Preferred stock dividends 18.4 18.4 18.4 18.5
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock 124.0 (25.6) (3.0) (0.8)
- ---------------------------------------------------------------------------------------------------------------
<FN>
(1) - As described in Note 4, the Combined Companies fourth quarter 1999 results include a $10.0 charge
related to a plant expansion project that was discontinued.
(2) - Gross profit is defined as gross margin less distribution expense.
(3) - The Combined Companies' fourth quarter 1998 results reflect a pre-tax gain of $21.0 for additional
proceeds on the sale of a business, a change in estimate of $28.3 for costs related to certain divestitures,
and a $26.7 impairment charge on an investment.
66
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Shareholders of Borden, Inc.
We have audited the accompanying consolidated balance sheets of Borden, Inc. (a
wholly owned subsidiary of Borden Holdings, Inc.) and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Borden, Inc. and subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Columbus, Ohio
February 11, 2000, except for Note 21 as
to which the date is February 25, 2000
67
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Shareholders of Borden, Inc.
We have audited the accompanying combined balance sheets of Borden, Inc. and
subsidiaries, Borden Foods Holdings Corporation and subsidiaries and Wise
Holdings, Inc. and subsidiaries (affiliated corporations), all of which are
under common ownership and common management, as of December 31, 1999 and 1998,
and the related combined statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the combined financial position of Borden, Inc., Borden Foods Holdings
Corporation and Wise Holdings, Inc. (affiliated corporations) at December 31,
1999 and 1998, and the combined results of their operations and their combined
cash flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Columbus, Ohio
February 11, 2000, except for Note 21 as
to which the date is February 25, 2000
68
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
- ------- ---------------------------------------------
ON ACCOUNTING AND FINANCIAL DISCLOSURE
--------------------------------------
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
Set forth below are the names and ages of the Directors and Executive Officers
of the Company as of March 13, 2000, and the positions and offices with the
Company held by each of them. Their terms of office extend to the next Annual
Meeting of the Board of Directors or until their earlier resignation or
replacement.
Served in
Age on Present
Dec. 31, Position
Name Position & Office 1999 Since
- ----------------------------------------------------------------------------------
C.R. Kidder Chairman of the Board, Director
Chief Executive Officer and President 55 1995
H.R. Kravis Director 55 1995
A. Navab Director 34 1995
G.R. Roberts Director 56 1995
S. M. Stuart Director 40 1995
W.H. Carter Executive Vice President and
Chief Financial Officer 46 1995
K.M. Kelley Executive Vice President Corporate Strategy
& Development 42 1999
N.A. Reardon Senior Vice President-Human Resources
and Corporate Affairs 47 1997
R.P. Starkman Senior Vice President and Treasurer 45 1995
W.F. Stoll, Jr. Senior Vice President and General Counsel 51 1996
- ----------------------------------------------------------------------------------
69
C. Robert Kidder was elected a Director, Chairman of the Board and Chief
Executive Officer of the Company on January 10, 1995. He was Chairman of the
Board of Duracell International, Inc. and Duracell, Inc. from August 1991
through October 1995 and served as Chairman of the Board and Chief Executive
Officer of both companies from April 1992 through September 30, 1995, Chairman
of the Board, President and Chief Executive Officer of both companies from
August 1991 until April 1992, and President and Chief Executive Officer of both
companies from June 1984 until August 1991. He is also a director of Electronic
Data Systems Corporation and Morgan Stanley Dean Witter & Co. He is a member of
the Executive and Compensation Committees of the Borden Board.
Henry R. Kravis acted as Chairman of the Board of the Company from December 21,
1994, to January 10, 1995. He has been a member of KKR & Co., LLC since 1996,
was a General Partner of Kohlberg Kravis Roberts & Co. from its establishment
through 1995 and has been a General Partner of KKR Associates, L.P. since its
establishment. He is also a Director of Accuride Corporation, Amphenol
Corporation, The Boyds Collection, Ltd., Evenflo Company Inc., The Gillette
Company, IDEX Corporation, KinderCare Learning Centers, Inc. KSL Recreation
Corporation, Owens-Illinois, Inc., PRIMEDIA Inc., Regal Cinemas, Inc., Safeway,
Inc., Sotheby's Holdings, Inc., Spalding Holdings Corporation and TI Group, PLC.
He is a member of the Executive Committee of the Borden Board. Messrs. Kravis
and Roberts are first cousins.
Alexander Navab has been an Executive of Kohlberg Kravis Roberts & Co. since
June 1993. He was employed by James D. Wolfensohn Incorporated, an investment
banking firm, from September 1991 to June 1993. He is also a Director of KSL
Recreation Corporation and Regal Cinemas, Inc., CAIS Internet Inc. and
Intermedia Communications, Inc. He is Chairman of the Audit Committee and a
member of the Compensation Committee of the Borden Board.
George R. Roberts has been a member of KKR & Co., LLC since 1996, was a General
Partner of Kohlberg Kravis Roberts & Co. from its establishment through 1995,
and has been a General Partner of KKR Associates, L.P. since its establishment.
He is also a Director of Accuride Corporation, Amphenol Corporation, The Boyds
Collection, Ltd., Evenflo Company Inc., IDEX Corporation, KinderCare Learning
Centers, Inc., KSL Recreation Corporation, Owens-Illinois, Inc., PRIMEDIA Inc.,
Safeway, Inc., and Spalding Holdings Corporation. Messrs. Kravis and Roberts are
first cousins.
Scott M. Stuart has been a member of KKR & Co., LLC since 1996, was a General
Partner of Kohlberg Kravis Roberts & Co. and has been a General Partner of KKR
Associates, L.P. since January 1995. He began as an Executive with Kohlberg
Kravis Roberts & Co. in 1986. He is also a Director of AEP Industries, Inc., The
Boyds Collection, Ltd. and KSL Recreation Corporation. He is Chairman of the
Compensation Committee and a member of the Audit and Executive Committees of the
Borden Board.
William H. Carter was elected Executive Vice President and Chief Financial
Officer effective April 3, 1995. Prior to that, since 1987, he was a partner in
Price Waterhouse LLP.
Kevin M. Kelley was elected Executive Vice President, Corporate Strategy and
Development effective April 5, 1999. Prior to that, since April 1996, he was
Managing Director of Ripplewood Holdings LLC. From January 1995 to April 1996 he
was a Managing Director with Onex Investment Corporation.
Nancy A. Reardon was elected Senior Vice President, Human Resources and
Corporate Affairs effective March 3, 1997. Previously she was Senior Vice
President-Human Resources and Communications for Duracell International, Inc.
from 1991 through February 1997.
70
Ronald P. Starkman was elected Senior Vice President and Treasurer of the
Company effective November 20, 1995. He was Senior Managing Director of
Claremont Capital Group, Inc. from December 1994 to November 1995. Prior to
that he was Senior Vice President-Investment Banking for Lehman Brothers from
1993 to 1994, and Vice President and Assistant Treasurer at American Express
from 1986 to 1993.
William F. Stoll, Jr. was elected Senior Vice President and General Counsel
effective July 1, 1996. Prior to joining the Company at that time, he was a Vice
President of Westinghouse Electric Corporation since 1993, and served as its
Deputy General Counsel from 1988 to 1996.
71
The following table provides certain summary information concerning compensation of the Company's Chief Executive
Officer and the four other most highly compensated Executive Officers as of December 31, 1999 (the "Named Executive
Officers") for the periods indicated.
SUMMARY COMPENSATION TABLE
--------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------- ---------------------------------------
AWARDS PAYOUTS
------------------------------------- -------------------------- -----------
OTHER RESTRICTED SECURITIES LONG TERM (4) ALL
NAME AND ANNUAL STOCK UNDERLYING INCENTIVE OTHER
PRINCIPAL COMPENSATION AWARD(S) OPTIONS/LSAR PLAN (LTIP) COMPENSATION
POSITION YEAR SALARY ($) BONUS ($) ($) ($) (#) PAYOUTS ($) ($)
- --------------------- ---- ---------- ---------- ------------- ----------- ------------- ----------- -------------
C.R. Kidder 1999 1,171,500 1,054,350 (1)75,608 NONE (5) NONE 90,255
Chairman, President & 1998 1,100,000 547,470 (2)92,467 NONE (5) NONE 96,731
Chief Executive 1997 1,000,000 742,500 (3)121,900 NONE (5) NONE 87,255
Officer
W.H. Carter 1999 437,538 247,541 0 NONE (5) NONE 32,815
Executive Vice 1998 415,000 150,000 0 NONE (5) NONE 31,238
President & Chief 1997 395,667 180,000 0 NONE (5) NONE 28,589
Financial Officer
- ---------------------
K.M. Kelley 1999 334,327 185,625 (6)13,835 NONE (5) NONE 48,957
Executive Vice
President, Corporate
Strategy &
Development
- ---------------------
N.A. Reardon 1999 365,295 206,575 0 NONE (5) NONE 18,754
Senior Vice President 1998 345,250 107,973 0 NONE (5) NONE 17,747
Human Resources and 1997 277,750 128,000 (6)31,223 NONE (5) NONE 40,264
Corporate Affairs
W.F. Stoll, Jr. 1999 362,425 206,168 0 NONE (5) NONE 18,754
Senior Vice President 1998 335,500 106,453 0 NONE (5) NONE 17,906
and General Counsel 1997 310,500 142,000 (6)1,200 NONE (5) NONE 45,623
<FN>
(1) Includes $60,000 pursuant to the Executive Perquisite Benefit Plan and $15,608 not paid to Mr. Kidder but
allocable to his personal use of company aircraft.
(2) Includes $60,000 pursuant to the Executive Perquisite Benefit Plan and $31,842 not paid to Mr. Kidder but
allocable to his personal use of company aircraft.
(3) Includes $60,000 pursuant to the Executive Perquisite Benefit Plan and $61,900 not paid to Mr. Kidder but
allocable to his personal use of company aircraft.
(4) All other compensation is identified and quantified in the table below
(5) No Executive Officer of the Company owns any stock of Borden, Inc., or options to acquire stock in Borden, Inc.
For information on equity securities of Borden's parent or subsidiary entities owned by management, see
Item 12.
(6) Tax gross-up payment
72
(a) RSP and ESP refer to the Company's Retirement Savings Plan and the
executive supplemental benefit plans.
MATCHING
CONTRIBUTIONS RELOCATION
YEAR (RSP AND ESP)(a) EXPENSE TOTAL
---- ---------------- ------- ------
C.R. KIDDER 1999 90,255 0 90,255
1998 96,731 0 96,731
1997 87,255 0 87,255
W.H. CARTER 1999 32,815 0 32,815
1998 31,238 0 31,238
1997 28,589 0 28,589
K.M. KELLEY 1999 11,250 37,707 48,957
N.A. REARDON 1999 18,754 0 18,754
1998 17,747 0 17,747
1997 10,415 29,849 40,264
W.F. STOLL 1999 18,754 0 18,754
1998 17,906 0 17,906
1997 11,873 33,750 45,623
73
The following table provides information on option/SAR exercises during 1999 by
the Named Executive Officers and the value of their unexercised options/SARS at
December 31, 1999.
===============================================================================================
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
===============================================================================================
# OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS/SARS AT MONEY OPTIONS/SARS AT FISCAL
FISCAL YEAR END YEAR END ($)
--------------------------- --------------------------
SHARES
ACQUIRED ON VALUE
EXERCISE REALIZED
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------- ------------ --------- ----------- -------------- ----------- -------------
C. R. KIDDER N/A N/A 0 7,391,380(1) 0 0
- ------------- ------------ --------- ----------- -------------- ----------- -------------
W. H. CARTER N/A N/A 0 2,409,620(1) 0 0
- ------------- ------------ --------- ----------- -------------- ----------- -------------
K. M. KELLEY N/A N/A 0 2,409,620(1) 0 0
- ------------- ------------ --------- ----------- -------------- ----------- ------------
N. A. REARDON N/A N/A 0 2,409,620(1) 0 0
- ------------- ------------ --------- ----------- -------------- ----------- -------------
W. F. STOLL N/A N/A 0 2,409,620(1) 0 0
============= ============ ========= =========== ============== =========== =============
<FN>
(1) Represents unit appreciation rights in BW Holdings, LLC.
74
The following table provides information on option/SAR grants during 1999 to the Named Executive Officers.
=============================================================================================================
OPTION/SAR GRANTS IN LAST FISCAL YEAR
=============================================================================================================
POTENTIAL REALIZABLE ALTERNATIVE TO
VALUE AT ASSUMED (F) AND (G):
ANNUAL RATES OF GRANT DATE
INDIVIDUAL GRANTS STOCK PRICE VALUE
APPRECIATION
FOR OPTION TERM
======================================================================= =================== ===============
# OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS/SAR'S
OPTIONS/SAR' GRANTED TO EXERCISE OR
S GRANTED EMPLOYEES IN BASE PRICE EXPIRATION GRANT DATE (3)
NAME (#) (1) FISCAL YEAR ($/SHARE) DATE @ 5% ($) @ 10% ($) PRESENT VALUE $
============= ============= ============== ============ =========== ======== ========= ===============
C. R. KIDDER 0 0 N/A N/A
- ------------- ------------- -------------- ------------ ----------- -------- --------- ----------------
W. H. CARTER 722,880 11.3% (2) 6/1/09 375,898
- ------------- ------------- -------------- ------------ ----------- -------- --------- ----------------
K. M. KELLEY 2,409,620 37.7% (2) 6/1/09 1,253,003
- ------------- ------------- -------------- ------------ ----------- -------- --------- ----------------
N. A. REARDON 722,880 11.3% (2) 6/1/09 375,898
- ------------- ------------- -------------- ------------ ----------- -------- --------- ----------------
W. F. STOLL 1,204,820 18.9% (2) (4) 626,507
============= ============= ============== ============ =========== ======== ========= ===============
<FN>
(1) Represents Unit Appreciation Rights in BW Holdings, LLC
(2) 50% have a trigger price at $4.15 and 50% have a trigger price at $5.00
(3) The fair value of each option grant is estimated on the date of grant using the Black-Scholes option
pricing model with risk free interest rates of
5.8%, dividend rates of 2.9%, expected volatility of 0.1% and expected life of five years.
(4) 481,920 of Mr. Stoll's UARs have an expiration date of 12/31/05 and 722,900 of Mr. Stoll's UARs have an
expiration date of 6/1/09.
75
The Long-Term Incentive Plans-Awards In Last Fiscal Year table has been omitted
since the Registrant has no long-term incentive plan.
Retirement Benefits
- -------------------
The Borden Employees Retirement Income Plan ("ERIP") for salaried employees was
amended as of January 1, 1987, to provide benefit credits of 3% of earnings
which are less than the Social Security wage base for the year plus 6% of
earnings in excess of the wage base. Earnings include annual incentive awards
paid currently but exclude any long-term incentive awards. Benefits for service
through December 31, 1986, are based on the plan formula then in effect and have
been converted to opening balances under the plan. Both opening balances and
benefit credits receive interest credits at one-year Treasury bill rates until
the participant commences receiving benefit payments. For the year 1999, the
interest rate was 4.536%. Benefits vest after completion of five years of
employment for employees hired on or after July 1, 1990.
The Company has supplemental plans which will provide those benefits which are
otherwise produced by application of the ERIP formula, but which, under Section
415 or Section 401 (a)(17) of the Internal Revenue Code, are not permitted to be
paid through a qualified plan and its related trust. The supplemental plan also
provides a pension benefit using the ERIP formula based on deferred incentive
compensation awards and certain other deferred compensation, which are not
considered as part of compensation under the ERIP.
The total projected annual benefits payable under the formulas of the ERIP at
age 65 without regard to the Section 415 or 401(a)(17) limits and recognizing
supplemental pensions as described above, are as follows for the Named Executive
Officers of the Company in 1999: W. H. Carter - $117,390, C. R. Kidder -
$170,075, N. A. Reardon - $41,006, K.M. Kelley - $111,039, and W.F. Stoll -
$57,251.
In addition, certain Executive Officers receive Company matching contributions
on the first 7% of contributions to the Retirement Savings Plan. Company
matching contributions on employee contributions in excess of 5% are provided
under the supplemental plans. This benefit is not provided if the executive has
any other pension benefit guarantee.
Compensation of Directors
- -------------------------
Each director who is not currently an employee of the Company receives an annual
retainer of $45,000. Directors who are also employees of the Company receive no
remuneration for serving as directors.
Directors who served prior to March 15, 1995 and who were not employees of the
Company are provided, upon attaining age 70, annual benefits through a funded
grantor trust equal to their final annual retainer if they served in at least
three plan years. Such benefits can continue for up to fifteen years.
76
- ------
Employment, Termination and Change in Control Arrangements
- ----------------------------------------------------------
Pursuant to a separation agreement dated November 7, 1997, with Douglas A.
Smith, Former Chairman and CEO of Borden Foods Corporation and Executive Vice
President of the Company, Mr. Smith received monthly payments until November 1,
1999, outplacement services, and the continuation of executive and other
employee benefits and perquisites.
The Company has a special retirement arrangement with William F. Stoll, Jr.,
Senior VP and General Counsel. Under this arrangement the Company will calculate
the benefit Mr. Stoll would have received from his former employer, using
predetermined assumptions, and deduct from this amount the retirement benefits
accrued under the Borden Retirement Programs. Any shortfall in benefits will be
paid by the Company as a non-qualified benefit. Special provisions also apply in
the event of death or disability.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
Mr. Stuart and Mr. Navab are members of the Company's Compensation Committee.
Mr. Stuart is a general partner and Mr. Navab is an executive of KKR Associates,
L.P. See "Certain Relationships and Related Transactions." Mr. Kidder,
Chairman and Chief Executive Officer of the Company, is also a member of the
Compensation Committee.
77
- ------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
- -------- ----------------------------------------
OWNERS AND MANAGEMENT
---------------------
The following table sets forth certain information regarding the beneficial
ownership of the Registrant's Common Stock and other equity securities issued by
affiliated entities, as of March 13, 2000, by (a) persons known to the
Registrant to be the beneficial owners of more than five percent of the
outstanding voting stock of the Registrant, (b) each director of the
Registrant, (c) each of the Named Executive Officers of the Registrant during
the 1999 fiscal year of the Registrant and (d) all directors and executive
officers of the Registrant as a group. Except as otherwise noted, the persons
named in the table below have sole voting and investment power with respect to
all securities shown as beneficially owned by them.
Name of Beneficial Ownership
Beneficial Owner of Equity Securities
- ------------------ ----------------------------
Shares/Units Percent
------------ -------
KKR Associates (1) 198,974,994 100.0
9 West 57th Street
New York, New York 10019
C. Robert Kidder 369,569 (2) *
Henry R. Kravis (1) -- *
George R. Roberts (1) -- *
Scott M. Stuart (1) -- *
Alexander Navab -- *
William H. Carter 120,481 (2) *
Kevin M. Kelley 120,481 (2) *
Nancy A. Reardon 120,481 (2) *
William F. Stoll, Jr. 120,481 (2) *
All Directors and Executive Officers
as a group (2) 851,493 (2) *
* Beneficial ownership does not exceed 1.0% of the respective class of
securities.
(1) The Borden Common Stock shown as beneficially owned by KKR Associates is
directly held by Borden Holdings, Inc., a Delaware corporation which is wholly
owned by BW Holdings, LLC, a Delaware limited liability company, the managing
member of which is a limited partnership, of which KKR Associates is the sole
general partner and as to which it possesses sole voting and investment power.
KKR Associates is also the beneficial owner of 632,000,000 units of BW Holdings,
LLC. KKR Associates is a limited partnership of which Messrs. Edward A. Gilhuly,
Perry Golkin, James H. Greene, Jr., Henry R. Kravis, Robert I. MacDonnell,
Michael W. Michelson, Paul E. Raether, George R. Roberts, Scott M. Stuart and
Michael T. Tokarz are the general partners. Such persons may be deemed to share
beneficial ownership of the shares shown as owned by KKR Associates. The
foregoing persons disclaim beneficial ownership of any such shares.
(2) Represents units in BW Holdings, LLC. No director or executive officer
owns directly any stock of the Registrant or options to acquire such stock.
78
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------- --------------------------------------------------
All of the Company's common stock is owned by a holding company which is owned
by an affiliate of KKR Associates, a New York limited partnership of which
Messrs. Edward A. Gilhuly, Perry Golkin, James H. Greene, Henry R. Kravis,
Robert I. MacDonnell, Michael W. Michelson, Paul E. Raether, George R. Roberts,
Scott M.Stuart and Michael T. Tokarz are the general partners. KKR Associates
has sole voting and investment power with respect to such shares. Messrs.
Kravis, Roberts and Stuart are directors of the Company.
KKR renders management, consulting and financial services to the Company and its
businesses for an annual fee of $10 million, payable quarterly in arrears.
Messrs. Kravis, Roberts, and Stuart are general partners of KKR, and Mr. Navab,
a director of the Company, is an executive of KKR.
79
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------- ------------------------------------------------------------------
(a) List of documents filed as part of this report
------------------------------------------------------
1. Financial Statements
---------------------
All financial statements of the registrant are set forth under
Item 8 of this Report on Form 10-K.
2. Financial Statement Schedules
-----------------------------
Report of Independent Auditors (page 81)
For the three years ended December 31, 1999:
Schedule II - Valuation and Qualifying Accounts (page 82)
3. Exhibits (page 83)
80
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Borden, Inc.
We have audited the consolidated financial statements of Borden, Inc. and
subsidiaries (a wholly owned subsidiary of Borden Holdings, Inc.) as of December
31, 1999 and 1998, and for each of the three years in the period ended December
31, 1999, and have issued our report thereon dated February 11, 2000, except for
Note 21 as to which the date is February 25, 2000; such report is included
elsewhere in this Form 10-K. Our audits also included the consolidated financial
statement schedule of Borden, Inc. and subsidiaries, listed in Item 14. This
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Columbus, Ohio
February 11, 2000
81
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance Charged to Balance
December 31, 1996 Expense Write-offs December 31, 1997
------------------------------------------------------------------------
Allowance for
doubtful accounts $ 11.7 $ 1.0 $ (3.3) $ 9.4
- ---------------------------------------------------------------------------------------------
Balance Charged to Balance
December 31, 1997 Expense Write-offs December 31, 1998
------------------------------------------------------------------------
Allowance for
doubtful accounts $ 9.4 $ 2.9 $ (1.9) $ 10.4
- ---------------------------------------------------------------------------------------------
Balance Charged to Balance
December 31, 1998 Expense Write-offs December 31, 1999
------------------------------------------------------------------------
Allowance for
doubtful accounts $ 10.4 $ 3.3 $ (1.9) $ 11.8
- ---------------------------------------------------------------------------------------------
82
3. Exhibits
--------
Management contracts, compensatory plans and arrangements are listed herein
at Exhibits (10)(v) through (10) (xvi).
(3)(i) Restated Certificate of Incorporation dated March 14, 1995, and
Certificate of Amendment of Restated Certificate of Incorporation dated June 23,
1995, both incorporated herein by reference from Exhibit (3) to the June 30,
1995 Form 10-Q.
(ii) By-Laws incorporated herein by reference from Exhibit (3)(ii) to
the September 30, 1996, Form 10-Q.
(4)(i) Form of Indenture dated as of January 15, 1983, as supplemented
by the First Supplemental Indenture dated as of March 31, 1986, and the Second
Supplemental Indenture, dated as of June 26, 1996, relating to the $200,000,000
8-3/8% Sinking Fund Debentures due 2016, incorporated herein by reference from
Exhibits 4(a) and (b) to Amendment No. 1 to Registration Statement on Form S-3,
File No. 33-4381 and Exhibit 4(iv) to the June 30, 1996, Form 10-Q.
(ii) Form of Indenture dated as of December 15, 1987, as supplemented
by the First Supplemental Indenture dated as of December 15, 1987, and the
Second Supplemental Indenture dated as of February 1, 1993, and the Third
Supplemental Indenture dated as of June 26, 1996, incorporated herein by
reference from Exhibits 4(a) through (d) to Registration Statement on Form S-3,
File No. 33-45770, and Exhibit 4(iii) to the June 30, 1996, Form 10-Q, relating
to the following Debentures and Notes:
(a) The $150,000,000 9-1/4% Sinking Fund Debentures due 2019.
(b) The $200,000,000 9-1/5% Debentures due 2021.
(c) The $250,000,000 7-7/8% Debentures due 2023.
(iii) Form of Indenture relating to Senior Securities, incorporated
hereinby reference from Exhibit 4.1 to the Company's Registration Statement
on Form S-3, File No. 33-57577.
(iv) Form of Indenture relating to Subordinated Securities incorporated
herein by reference from Exhibit 4.2 to the Company's Registration Statement on
Form S-3, File No. 33-57577.
(10)(i) Recapitalization Agreement, dated as of October 14, 1997,
among BORDEN, INC., a New Jersey corporation, BORDEN DECORATIVE PRODUCTS
HOLDINGS, INC., a Delaware corporation and an indirect wholly owned subsidiary
of Borden, and BDPI HOLDINGS CORPORATION, a Delaware corporation incorporated
herein by reference to Exhibit (10)(i) to the 1997 Form 10-K Annual Report.
(ii) Credit Agreement dated as of December 15, 1994 amended and
restated as of July 14, 1997, incorporated herein by reference to Exhibit
10(ii) to the June 30, 1997, Form 10-Q.
83
(iii) 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.
(iv) Governance Agreement, dated 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.
(v) Amended and Restated 1996 Unit Incentive Plan for Key Employees of
Borden, Inc. and Associated Persons, as of June 29, 1999.
(vi) Descriptions of 1998 Management Incentive Plans for Borden Capital
Management Partners and Borden Chemical, incorporated by reference to Exhibit 10
(ix) to the 1998 Form 10-K Annual Report.
(vii) 1994 Management Incentive Plan incorporated by reference to Exhibit
10(iv) to the 1993 Form 10-K Annual Report.
(viii) Amendment to 1994 Management Incentive Plan, incorporated by
reference to Exhibit 10(xii) to the Company's 1995 Form 10-K Annual Report.
(ix) 1994 Stock Option Plan incorporated by reference to Exhibit 10(v)
to the 1993 Form 10-K Annual Report.
(x) Executive Supplemental Pension Plan Amended and Restated as of
January, 1996 incorporated by reference to Exhibit 10(xiii) to the 1998 Form
10-K Annual Report.
(xi) Advisory Directors Plan, incorporated herein by reference from
Exhibit 10(viii) to the 1989 Form 10-K Annual Report.
(xii) Advisory Directors Plan Trust Agreement, incorporated herein by
reference from Exhibit 10(ix) to the 1988 Form 10-K Annual Report.
(xiii) Management Agreements
----------------------
(a) Agreement with R. L. deNey, incorporated herein by reference
to Exhibit 10 to the June 30, 1998 Form 10-Q.
(b) Employment Agreement with W. F. Stoll, Jr., dated June 6, 1996,
incorporated by reference to Exhibit 10(vi) to the June 30, 1996 Form 10-Q.
(c) Summary of Terms of Employment for Kevin M. Kelley, incorporated
herein by reference to Exhibit (10) to the June 30, 1999 Form 10-Q.
(xiv) Executive Perquisite Benefits Plan dated January 1, 1996,
incorporated by reference to Exhibit 10(xxiv) to the 1995 Form 10-K Annual
Report.
84
(xv) Consulting Agreement dated August 21, 1995, incorporated herein by
reference to Exhibit 10 to the September 30, 1995, Form 10-Q.
(xvi) 1999 Management Incentive Plan for Borden Capital Management
Partners.
(21) Subsidiaries of Registrant.
(23)(i) Accountants' Consent.
(27) Financial Data Schedule
4. Financial Statement Schedules
-----------------------------
The following are the separate financial statements of Foods Holdings and Wise
Holdings filed in accordance with rule 3-10 of Regulation S-X. Foods Holdings
and Wise Holdings are guarantors of the Company's credit facility and all of the
Company's outstanding publicly held debt.
(b) Reports on Form 8-K
----------------------
No reports on Form 8-K were filed by the Company during the fourth quarter of
1999.
85
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BORDEN, INC.
By /s/ William H. Carter
-----------------------------
William H. Carter, Executive Vice President
and Chief Financial Officer (Principal Financial
and Principal Accounting Officer)
Date: March 17, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated, on the date set forth above.
Signature Title
- --------- ------
/s/ C. Robert Kidder Chairman of the Board and
- ----------------------------- Chief Executive Officer
(C. Robert Kidder)
/s/ Henry R. Kravis Director
- -----------------------------
(Henry R. Kravis)
/s/ George R. Roberts Director
- -----------------------------
(George R. Roberts)
/s/ Scott M. Stuart Director
- -----------------------------
(Scott M. Stuart)
/s/ Alexander Navab Director
- -----------------------------
(Alexander Navab)
86
Exhibit 21
BORDEN, INC., CONSOLIDATED
SUBSIDIARIES OF REGISTRANT AS OF DECEMBER 31, 1999
--------------------------------------------------
The percentage of State or other
voting securities jurisdiction of
owned, or other incorporation
Subsidiaries of Registrant basis of control or organization
- -------------------------- ----------------- ---------------
BCP Finance Corporation 100 Delaware
BCP Management, Inc. 100 Delaware
BDS Two, Inc. 100 Delaware
BDS Three, Inc. 100 Delaware
BDH One, Inc. 100 Delaware
BFE Corp 100 Delaware
BDH Two, Inc. 100 Delaware
BDS One, Inc 100 Delaware
BFI Ltd., L.P. 100 Delaware
Borden Chemical Holdings, Inc. 95.5 Delaware
Borden Chemical Investments, Inc. 100 Delaware
Borden Chemical, Inc. 100 Delaware
Borden Chemical International, Inc. 100 Delaware
Compania Quimica Borden, S.A. 100 Panama
Melamine Chemicals, Inc. 100 Delaware
MMP, Inc. 100 Delaware
Melamine Chemicals FSC-V.I., Inc. 100 US V.I.
Manufacturing Investments, Inc. 100 Louisiana
Spurlock Industries, Inc. 100 Virginia
Spurlock Adhesives, Inc. 100 Virginia
Borden Australia (Pty.) Ltd. 100 Australia
Borden Australia Superannuation (Pty) Limited 100 Australia
Borden Chemical Holdings (Panama), S.A. 100 Panama
Alba Quimica Industria e Comercio Ltda. 99 Brazil
Alba Amazonia S.A. Industrias Quimicas 99.9 Brazil
Alba Nordeste Industrias Quimica Ltda. 100 Brazil
The Wenham Corp., S.A. 100 Uruguay
Borden Chemical (M.) Sdn. Bhd. 100 Malaysia
Italcolor, S.A. 39.38 Uruguay
Quimica Borden Argentina S.A. 94.2 Argentina
Borden Chimie, S.A. 100 France
Borden International Holdings, Ltd. 100 UK
Borden Chemical GB, Ltd. 100 UK
Borden Chemical U.K. Ltd. 100 UK
Borden Bray, Ltd. 100 Ireland
Borden International Philippines, Inc. 98 Philippines
Quimica Borden Espana, S.A. 95.74 Spain
Borden Division de Consumo, S.A. 100 Spain
Compania Quimica Borden Ecuatoriana, S.A. 83.3 Ecuador
Gun Ei Borden International Resin Co. Ltd. 50 Japan
Italcolor S.A. 60.62 Uruguay
Borden Company Limited, The 100 Canada
Elmer's Holdings, Inc. 98.5 Delaware
Elmer's Products, Inc. 100 Delaware
Elmer's Products Canada, Inc. 100 Canada
Elmer's Investments, Inc. 100 Delaware
87
BORDEN, INC., CONSOLIDATED
SUBSIDIARIES OF REGISTRANT AS OF DECEMBER 31, 1999
--------------------------------------------------
The percentage of State or other
voting securities jurisdiction of
owned, or other incorporation
Subsidiaries of Registrant basis of control or organization
- -------------------------- ----------------- ----------------
Productos Borden, Inc. 100 New Jersey
reSource Partner, Inc. 100 Delaware
T.M.I. Associates, L.P. 77.28 Delaware
Zeelandia Investerings Partnership 100 New York
T. K. Partner, Inc. 100 Delaware
Zip Corporation 100 Delaware
Zcan Investments Ltd. 100 Canada
NOTE: The above subsidiaries have been included in Borden's Consolidated
Financial Statements on a consolidated or equity basis as appropriate. The
names of certain subsidiaries, active and inactive, included in the Consolidated
Financial Statements and of certain other subsidiaries not included therein, are
omitted since when considered in the aggregate as a single subsidiary they do
not constitute a significant subsidiary.
88
EXHIBIT 21
BORDEN, INC.
The following entities are included in the Combined businesses as of December31,
1999, but not included in the Registrant
The percentage of State or other
voting securities jurisdiction of
owned, or other incorporation
basis of control or organization
---------------- ---------------
Borden Foods Holdings Corporation 100 Delaware
Borden Foods Corporation 100 Delaware
Albadoro S.p.A. 100 Italy
Monder Aliment S.p.A. 100 Italy
BF Foods International Corp. 100 Delaware
Borden, S.A. 100 Panama
Borden Company Limited, The 100 Ireland
Borden Foods Limited 100 Ireland
Borden Exports Limited 100 Ireland
Borden Foods de El Salvador S.A. 99.8 El Salvador
Borden International (Europe) Ltd. 100 Delaware
Codoveca C por A. 100 Dominican Republic
BF (Alisa) SDAD LtdA. 100 Panama
BFC (Colombia) S.A. 100 Panama
BF (Colombia) LLC 100 Delaware
BFC One Corporation 100 Delaware
BFC Two Corporation 100 Delaware
BFC Three Corporation 100 Delaware
BFC Four Corporation 100 Delaware
BFC Five Corporation 100 Delaware
BFC Six Corporation 100 Delaware
BFC Seven Corporation 100 Delaware
Borden Foods International Corp. 100 Delaware
Borden Foods Canada Corporation 100 Canada
Borden Foods World Trade Corporation 100 Ohio
Borden International, Inc. 100 Delaware
Borden International Foods (Asia-Pacific) Ltd. 100 Hong Kong
Chef's of the World Ltd. 100 United Kingdom
Borden Redevelopment Corp. 100 Missouri
International Gourmet Specialties Company 100 New Jersey
Prince Company, Inc., The 100 Massachusetts
Qihe Dairy Corp. Ltd. 62 Republic of China
Qihe Investment Corporation 100 Delaware
Wise Holdings, Inc. 100 Delaware
Wise Foods Holdings, Inc. 100 Delaware
Wise Foods, Inc. 100 Delaware
Wise Foods Investments, Inc. 100 Delaware
Moore's Quality Snack Foods, Inc. 100 Virginia
89
Exhibit 10 (v)
AMENDED AND RESTATED
1996 UNIT INCENTIVE PLAN
FOR KEY EMPLOYEES OF
BORDEN, INC. AND ASSOCIATED PERSONS
as of June 29, 1999
1. Purpose of Plan
---------------
The 1996 Unit Incentive Plan for Key Employees of Borden, Inc. and
Associated Persons (the "Plan") is designed:
(a) to promote the long term financial interests and growth of
Borden, Inc. (the "Corporation") and its Associated Persons by attracting and
retaining management personnel with the training, experience and ability to
enable them to make a substantial contribution to the success of the
Corporation's business;
(b) to motivate management personnel by means of
growth-related incentives to achieve long range goals; and
(c) to further the identity of interests of Participants with
those of the direct and indirect equityholders of the Corporation through
opportunities to participate in increased value of, or distributions by, the
Corporation and/or its Associated Persons.
2. Definitions
-----------
As used in the Plan, the following words shall have the following
meanings:
(a) "Associated Person" shall mean any Subsidiary of BW Holdings,
-----------------
including, without limitation, the Corporation, or any Subsidiary of the
Corporation, and any other entity designated by the Board of Directors, which
may include, without limitation, a successor to BW Holdings.
(b) "BW Holdings" shall mean BW Holdings, LLC, a Delaware limited
-----------
liability company.
(c) "BW Holdings Unit" shall mean a unit of limited liability company
----------------
interest in BW Holdings.
(d) "Board of Directors" means the Board of Directors of the Corporation.
------------------
(e) "Committee" means the Compensation Committee of the Board of
---------
Directors.
(f) "Employee" means a person, including an officer, in the regular
--------
full-time employment of the Corporation or one of its Associated Persons who, in
the opinion of the Committee, is, or is expected to be, primarily responsible
for the management, growth or protection of some part or all of the business of
the Corporation or its Associated Persons.
(g) "Equivalent Company" shall mean any Person so designated by the
------------------
Committee that, at the relevant time, owns or operates, directly or indirectly,
substantially all of the business and assets of BW Holdings and its
Subsidiaries.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
90
Exhibit 10 (v)
(i) "Fair Value" means such value of a BW Holdings Unit or similar
------------
ownership interest in an Equivalent Company as determined in accordance with any
applicable resolutions or regulations of the Committee in effect at the relevant
time and in accordance with the provisions of a Grant Agreement.
(j) "Grant" means an award made to a Participant pursuant to the Plan and
-----
described in Paragraph 5, including, without limitation, an award of a BW
Holdings Unit Option, Unit Appreciation Right, Purchase BW Holdings Unit or
Other Unit-Based Grant, or any combination of the foregoing.
(k) "Grant Agreement" means an agreement between the Corporation and a
---------------
Participant that sets forth the terms, conditions and limitations applicable to
a Grant.
(l) "Participant" means an Employee selected to participate in the Plan by
-----------
the Committee in its sole discretion and to whom one or more Grants have been
made and such Grants have not all been forfeited or terminated under the Plan;
provided, however, a non-employee director of the Corporation or one of its
------- -------
Associated Persons may not be a Participant.
(m) "Subsidiary" means any corporation, partnership or other entity in an
----------
unbroken chain of corporations, partnerships or other entities beginning with BW
Holdings if each of the corporations, partnerships or other entities, or group
of commonly controlled corporations, partnerships or other entities other than
the last corporation, partnership or other entity in the unbroken chain then
owns 50% or more of the voting stock or other ownership interests in one of the
other corporations, partnerships or other entities in such chain.
3. Administration of Plan
----------------------
(a) The Plan shall be administered by the Committee. The Committee may
adopt its own rules of procedure, and the action of a majority of the Committee,
taken at a meeting or taken without a meeting by a writing signed by such
majority, shall constitute action by the Committee. The Committee shall have
the power and authority to administer, construe and interpret the Plan, to make
rules for carrying it out and to make changes in such rules. Any such
interpretations, rules and administration shall be consistent with the basic
purposes of the Plan.
(b) The Committee may delegate to the Chief Executive Officer and to other
senior officers of the Corporation its duties under the Plan subject to such
conditions and limitations as the Committee shall prescribe, except that only
the Committee may designate and make Grants to Participants who are subject to
Section 16 of the Exchange Act at the time of such Grant.
(c) The Committee may employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Committee, the Corporation, and the
officers and directors of the Corporation shall be entitled to rely upon the
advice, opinions or valuations of any such persons. All actions taken and all
interpretations and determinations made by the Committee in good faith shall be
final and binding upon all Participants, the Corporation and all other
interested persons. No member of the Committee or the Board of Directors, or
the board of directors or similar management body of any Associated Person, and
none of the Corporation, BW Holdings, any Associated Person or any affiliate of
any thereof shall be liable (personally or otherwise) for any action,
determination or interpretation made in good faith with respect to the Plan or
the Grants, and all such persons shall be fully protected by the Corporation
with respect to any such action, determination or interpretation.
4. Eligibility
-----------
The Committee may from time to time make Grants under the Plan to such
Employees and in such form having such terms, conditions and limitations as the
Committee may determine in its sole discretion. No Grants may be made under
this Plan to non-employee directors of Corporation or any of is Subsidiaries.
Grants may be granted singly, in combination or in tandem. The terms,
conditions and limitations of each Grant under the Plan shall be set forth in a
Grant Agreement, in a form approved by the Committee, consistent, however, with
91
Exhibit 10 (v)
the terms of the Plan; provided, however, such Grant Agreement shall contain
-------- -------
provisions dealing with the treatment of Grants in the event of the termination,
death or disability of a Participant, and may also include provisions concerning
the treatment of Grants in the event of a change of control.
5. Grants
------
From time to time, the Committee will determine the forms and amounts of Grants
for Participants. Such Grants may take the following forms in the Committee's
sole discretion:
(a) BW Holdings Unit Options - These are options to purchase BW Holdings
------------------------
Units. At the time of the Grant the Committee shall determine, and shall have
contained in the Grant Agreement or other Plan rules, the option exercise
period, the option exercise price, and such other conditions or restrictions on
the grant or exercise of the option as the Committee deems appropriate, which
may include the requirement that the grant of options is predicated on the
acquisition of Purchase BW Holdings Units by the optionee.
(b) Unit Appreciation Rights - These are rights that entitle the holder
------------------------
to receive payments from time to time from the Corporation in amounts and at
times corresponding to the amounts and times when distributions on the BW
Holdings Units are made and/or in amounts determined based on the relative
values of a BW Holdings Unit at the time of payment and at the time of Grant, as
specified in a Grant Agreement. Generally, Unit Appreciation Rights will
provide for payments by the Corporation when the aggregate distributions on each
BW Holding Unit exceeds a trigger price specified in the Grant Agreement. The
Committee, in the Grant Agreement or by the other Plan rules, may impose such
conditions or restrictions on the Unit Appreciation Rights, may provide for the
conversion of the Unit Appreciation Rights into BW Holdings Units, or options to
purchase BW Holdings Units or other ownership interests in BW Holdings or any
Associated Person, and may provide for such other terms and conditions
applicable to the Unit Appreciation Rights as it deems appropriate. Unit
Appreciation Rights may also be called "UARs" in a Grant Agreement.
(c) Purchase BW Holdings Unit - Purchase BW Holdings Units are BW
-------------------------
Holdings Units offered to a Participant at such price as determined by the
Committee, the acquisition of which will make him eligible to receive Grants
under the Plan; provided, however, that the price of such Purchase BW Holdings
-------- -------
Units may not be less than 50% of the fair market value (as determined by the
Committee) of the BW Holdings Units on the date such Purchase BW Holdings Units
are offered.
(d) Other Unit-Based Grants - The Committee may make other Grants under
-----------------------
the Plan pursuant to which BW Holdings Units (or similar ownership interests of
an Equivalent Company) are or may in the future be acquired, or payments are or
may in the future be made, in each case, based on the performance or value of
the Corporation and its Associated Persons. The Committee, in the Grant
Agreement or by other Plan rules, may impose such conditions or restrictions on
any such Grant as it deems appropriate, consistent with the purposes of the
Plan. Such Other Unit-Based Grants may include, without limitation,
appreciation rights providing for payments to the Employee when a specified
value of the Units is achieved relative to a value specified at the time of the
Grant in the Grant Agreement.
6. Limitations and Conditions
--------------------------
(a) The number of BW Holdings Units available for Grants under this Plan,
and the number of such Units on which Grants under this Plan may be based, shall
be 1,108,579 but may be increased or decreased (but in no event decreased to a
number lower than the number of BW Holdings Units theretofore granted or with
respect to which Grants theretofore have been made under the Plan), by the
Committee in its sole discretion. Unless restricted by applicable law, the
number of BW Holdings Units related to Grants that are forfeited, terminated,
cancelled or expire shall immediately become available for Grants.
92
Exhibit 10 (v)
(b) No Grants shall be made under the Plan beyond ten years after the
effective date of the Plan, but the terms of Grants made on or before the
expiration thereof may extend beyond such expiration. At the time a Grant is
made or amended or the terms or conditions of a Grant are changed, the Committee
may provide for limitations or conditions on such Grant.
(c) Nothing contained herein shall affect the right of the Corporation to
terminate any Participant's employment at any time or for any reason.
(d) Deferrals of Grant payouts may be provided for, at the sole discretion
of the Committee, in the Grant Agreements.
(e) Except as otherwise prescribed by the Committee, the amounts of
the Grants for any employee of a Subsidiary, along with interest, dividend and
other expenses accrued on deferred Grants shall be charged to the Participant's
employer during the period for which the Grant is made. If the Participant is
employed by more than one Subsidiary or by both the Corporation and a Subsidiary
during the period for which the Grant is made, the Participant's Grant and
related expenses will be allocated between the companies employing the
Participant in a manner prescribed by the Committee.
(f) Other than as specifically provided with regard to the death of a
Participant, no Grant or right to payment in respect thereof under the Plan
shall be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance or charge, and any attempt to do so shall be
void. No Grant or right to payment in respect thereof shall, prior to receipt
thereof by the Participant, be in any manner liable for or subject to the debts,
contracts, liabilities, engagements or torts of the Participant.
Notwithstanding the foregoing, the Committee may, in its discretion, authorize
all or a portion of the options or UARs to be granted to an optionee to be on
terms which permit transfer by such optionee to (1) the spouse, children or
grandchildren of the optionee ("Immediate Family Members"), (ii) a trust or
trusts for the exclusive benefit of such Immediate Family Members, or (iii) a
partnership or other entity in which such Immediate Family members are the only
partners, members or beneficiaries, provided that, (x) the stock option
-------- ----
agreement pursuant to which such options are granted must be approved by the
Committee, and must expressly provide for transferability in a manner consistent
with this Section, (y) subsequent transfers of transferred options shall be
prohibited except transfers by will or by the applicable laws of this Plan.
Following transfer, any such options shall continue to be subject to the same
terms and conditions as were applicable immediately prior to transfer.
(g) Participants shall not be, and shall not have any of the rights or
privileges of, members of BW Holdings or equity holders in any Associated Person
in respect of any BW Holdings Units or interests in an Associated Person
purchasable in connection with any Grant unless and until such Participant is
registered as the owner thereof and, if applicable, certificates representing
any such BW Holdings Units or such other interests have been issued by BW
Holdings or such Associated Person to such Participants.
(h) No election as to benefits or exercise of BW Holdings Unit Options,
Unit Appreciation Rights or other rights may be made during a Participant's
lifetime by anyone other than the Participant except by a legal representative
appointed for or by the Participant.
(i) Absent express provisions to the contrary, any grant under this Plan
shall not be deemed compensation for purposes of computing benefits or
contributions under any retirement plan of the Corporation or its Subsidiaries
and shall not affect any benefits under any other benefit plan of any kind or
subsequently in effect under which the availability or amount of benefits is
related to level of compensation. This Plan is not a "Retirement Plan" or
"Welfare Plan" under the Employee Retirement Income Security Act of 1974, as
amended.
(j) Unless the Committee determines otherwise, no benefit or promise under
the Plan shall be secured by any specific assets of the Corporation or any of
its Subsidiaries, nor shall any assets of the Corporation or any of its
Subsidiaries be designated as attributable or allocated to the satisfaction of
the Corporation's obligations under the Plan.
93
Exhibit 10 (v)
7. Transfers and Leaves of Absence
-------------------------------
For purposes of the Plan, unless the Committee determines otherwise: (a) a
transfer of a Participant's employment without an intervening period of
separation among the Corporation and any Associated Person shall not be deemed a
termination of employment, and (b) a Participant who is granted in writing a
leave of absence shall be deemed to have remained in the employ of the
Corporation during such leave of absence.
8. Adjustments
-----------
In the event that the Corporation (or any Equivalent Company) consummates a
Public Offering, or any similar event occurs, or there is a change in the
powers, designations, preferences and relative participating, optional or other
rights, if any, or the qualifications, limitations or restrictions of the
outstanding BW Holdings Units or equity interests in an Equivalent Company or a
reclassification, recapitalization or merger, change of control, or similar
event affecting the Corporation, BW Holdings or an Equivalent Company, the
Committee may adjust appropriately the outstanding Grants as it deems to be
equitably required, including without limitation converting the Grants into
common equity of, or grants of options or other rights to purchase ownership
interests in, the Corporation or the Equivalent Company that consummates a
Public Offering on such terms as the Committee deems to be appropriate in its
sole discretion.
9. Merger, Consolidation, Exchange, Acquisition, Liquidation or Dissolution
------------------------------------------------------------------------
In its absolute discretion, and on such terms and conditions as
it deems appropriate, coincident with or after the grant of any BW Holdings Unit
Option, Unit Appreciation Right or any Other Unit-Based Grant, the Committee may
provide that such BW Holdings Unit Option, Unit Appreciation Right or Other
Unit-Based Grant cannot be exercised or triggered after the merger or
consolidation of BW Holdings or the Corporation into another corporation, the
exchange of all or substantially all of the assets of BW Holdings or the
Corporation for the securities of another corporation, the sale of all or
substantially all the assets of BW Holdings or the Corporation, the acquisition
by another corporation of 80% or more of BW Holdings's or the Corporation's then
outstanding units or shares of voting stock or the recapitalization,
reclassification, liquidation or dissolution of BW Holdings or the Corporation,
and if the Committee so provides, it shall, on such terms and conditions as it
deems appropriate in its absolute discretion, also provide, either by the terms
of such BW Holdings Unit Option, Unit Appreciation Right or Other Unit-Based
Grant or by a resolution adopted prior to the occurrence of such merger,
consolidation, exchange, acquisition, recapitalization, reclassification,
liquidation or dissolution, that, for some period of time prior to such event,
such BW Holdings Unit Option, Unit Appreciation Right or Other Unit-Based Grant
shall be exercisable or able to be triggered as to all units or shares subject
thereto, notwithstanding anything to the contrary herein (but subject to the
provisions of Paragraph 6(b)) and that, upon the occurrence of such event, such
BW Holdings Unit Option, Unit Appreciation Right or Other Unit-Based Grant shall
terminate and be of no further force or effect; provided, however, that the
-------- -------
Committee may also provide, in its absolute discretion, that even if the BW
Holdings Unit Option, Unit Appreciation Right or Other Unit-Based Grant shall
remain exercisable or able to be triggered after any such event, from and after
such event, any such BW Holdings Unit Option, Unit Appreciation Right or Other
Unit-Based Grant shall be exercisable or able to be triggered only for the kind
and amount of securities and/or other property, or the cash equivalent thereof,
receivable as a result of such event by the holder of Unit Appreciation Rights
immediately prior to such event or a number of units or shares of stock for
which such BW Holdings Unit Option or Other Unit-Based Grant could have been
exercised immediately prior to such event.
94
Exhibit 10 (v)
10. Amendment and Termination
-------------------------
The Committee shall have the authority to make such amendments to any terms
and conditions applicable to outstanding Grants as are consistent with this Plan
provided that, except for adjustments under Paragraph 8 or 9 hereof, no such
action shall modify such Grant in a manner adverse to the Participant without
the Participant's consent except as such modification is provided for or
contemplated in the terms of the Grant.
The Board of Directors may amend, suspend or terminate the Plan except that
no such action, other than an action under Paragraph 8 or 9 hereof, may be taken
which would decrease the exercise price or trigger price of outstanding BW
Holdings Unit Options or Unit Appreciation Rights, change the requirements
relating to the Committee or extend the term of the Plan.
11. Foreign Options and Rights
--------------------------
The Committee may make Grants to Employees who are subject to the laws of
nations other than the United States, which Grants may have terms and conditions
that differ from the terms thereof as provided elsewhere in the Plan for the
purpose of complying with foreign laws.
12. Withholding Taxes
-----------------
The Corporation shall have the right to deduct from any cash payment made
under the Plan any federal, state or local income or other taxes required by law
to be withheld with respect to such payment. It shall be a condition to the
obligation of the Corporation to deliver BW Holdings Units upon exercise of a BW
Holdings Unit Option or exercise or settlement of any Other Unit-Based Grant
that the Participant pay to the Corporation such amount as may be requested by
the Corporation for the purpose of satisfying any liability for such withholding
taxes. Any Grant Agreement may (but is not required to) provide that the
Participant may elect, in accordance with any conditions set forth in such Grant
Agreement, to satisfy a portion or all of such withholding taxes in the form of
a reduced payment by the Corporation (including by reducing the number of BW
Holdings Units to be received upon exercise of a BW Holdings Unit Option).
13. Effective Date and Termination Dates
------------------------------------
The Plan shall be effective on and as of the date of its approval by the
stockholders of the Corporation and shall terminate ten years later, subject to
earlier termination by the Board of Directors pursuant to Paragraph 10.
95
Exhibit 10 (xvi)
BORDEN CAPITAL
MANAGEMENT PARTNERS
1999 INCENTIVE PLAN
OVERVIEW
96
Exhibit 10 (xvi)
TABLE OF CONTENTS
PERFORMANCE HAS ITS REWARDS. . . . . . . . . . . . . . 98
SUMMARY OF HOW THE INCENTIVE PLAN WORKS. . . . . . . . 99
PLAN PARTICIPATION . . . . . . . . . . . . . . . . . . 100
Who's Eligible . . . . . . . . . . . . . . . . . . . . 100
Target Award . . . . . . . . . . . . . . . . . . . . . 100
ESTABLISHING PERFORMANCE TARGETS . . . . . . . . . . . 100
Financial Target . . . . . . . . . . . . . . . . . . . 101
Operating EBITDA . . . . . . . . . . . . . . . . . . . 101
Performance Objectives . . . . . . . . . . . . . . . . 101
Company Objectives . . . . . . . . . . . . . . . . . . 101
Individual Performance Objectives. . . . . . . . . . . 102
DETERMINING THE INCENTIVE AWARD. . . . . . . . . . . . 102
Determine BWHLLC's Operating EBITDA. . . . . . . . . . 102
Determine BCMP's Overall Performance Rating Against
Objectives and Total Award Pool . . . . . . . . . . 103
The Incentive Award Table. . . . . . . . . . . . . . . 103
Determine Your Individual Performance Rating and Award 104
LEAVING THE PLAN . . . . . . . . . . . . . . . . . . . 105
If You Leave the Borden Family of Companies. . . . . . 105
If you Retire, Die or Become Disabled. . . . . . . . . 105
If You Transfer. . . . . . . . . . . . . . . . . . . . 105
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . 105
FOCUS ON PERFORMANCE . . . . . . . . . . . . . . . . . 106
97
Exhibit 10 (xvi)
PERFORMANCE HAS ITS REWARDS
The Incentive Plan provides a form of compensation that is driven by individual
and company performance, and in the process supports BCMP's values. Awards from
the Incentive Plan will be paid in addition to your regular salary increases and
in no way affect your annual salary review at midyear.
Strong teamwork is rewarded in special ways by the Incentive Plan. The Plan is
designed to reward team players who add value to BCMP over the years to come.
The 1999 Incentive Plan bases its rewards in part on the financial measure
called EBITDA - Earnings Before Interest, Taxes, Depreciation and Amortization.
EBITDA is a powerful financial tool for letting us know how we're doing in
managing the business for profitable growth. The other important factors in the
incentive plan are BCMP performance against overall goals and your performance
against individual performance objectives.
This document explains the basics of the Borden Capital Management Partners
Incentive Plan. Please read it carefully so you'll understand how the Plan ties
your compensation to your performance.
98
Exhibit 10 (xvi)
SUMMARY OF HOW THE INCENTIVE PLAN WORKS
- ---------------------------------------------------------------------------------------------------------------------
- YOU MEET THE ELIGIBILITY CRITERIA.
YOU PARTICIPATE IN THE PLAN - YOUR TARGET AWARD IS ESTABLISHED.
- ---------------------------------------------------------------------------------------------------------------------
- WE STRIVE TO ACHIEVE AND EXCEED THE GOALS WE SET FOR
WE WORK HARD THROUGHOUT THE YEAR TO - OURSELVES AND THE COMPANY.
INCREASE EBITDA.
- ---------------------------------------------------------------------------------------------------------------------
THE YEAR ENDS AND THE BOOKS CLOSE. - BWHLLC'S EBITDA IS COMPARED TO THE EBITDA
- TARGET.
- USING A RATING SYSTEM, THE COMPANY AND YOU WILL BE
- RATED ON PERFORMANCE AGAINST OBJECTIVES.
- RATINGS INCREASE WHEN WE ACHIEVE OUR SUPER GOALS OR
- PERFORM AT AN EXTRAORDINARY LEVEL.
- YOU WILL RECEIVE AN AWARD EARLY THE FOLLOWING YEAR AS
- LONG AS EBITDA RESULTS ARE ABOVE MINIMUM TARGET
- AND YOUR PERFORMANCE MEETS CERTAIN MINIMUM
- REQUIREMENTS.
- ---------------------------------------------------------------------------------------------------------------------
YOU MAY RECEIVE AN AWARD FROM THE - THE AMOUNT AWARDED DEPENDS ON NUMEROUS FACTORS,
PLAN. - INCLUDING THE YEAR'S EBITDA ACHIEVEMENT AND
- PERFORMANCE RATINGS FOR THE COMPANY AND YOU.*
- ---------------------------------------------------------------------------------------------------------------------
*All awards payable from the Incentive Plan are subject to the approval and
discretion of the CEO and the Borden, Inc. Board of Directors.
99
Exhibit 10 (xvi)
PLAN PARTICIPATION
WHO'S ELIGIBLE
All associates employed by Borden Capital Management Partners beginning on
January 1, 1999, or hired during the year prior to October 1, 1999, will be
eligible to participate in the Incentive Plan. There is no eligibility waiting
period.
TARGET AWARD
The Incentive Plan is designed to generate a certain level of additional income
for you when the annual EBITDA Target and performance objectives are met. That
amount is called your TARGET AWARD. The Target Award depends on your band
within the BCMP organizational chart shown below.
BAND INCENTIVE TARGET %
- -------------------------------------------------------
Band G Partners 55%+
Band F Principals 35 - 45%
Band E Engagement Managers 20 - 35%
Band D Consultants 15 - 20%
Band C Analysts 10%
Band B Administrators 5 - 10%
Band A Administrative Assistants 5%
- -------------------------------------------------------
When BCMP and individual associates accomplish and exceed objectives, the
Incentive Plan awards combined with base salary will deliver total cash
compensation that is above competitive markets.
ESTABLISHING PERFORMANCE TARGETS
The Incentive Plan rewards us based on how well we have accomplished the
established performance targets. Our targets are aggressive but they are also
realistic. Accomplishing set objectives defines for us a job well done. But
before we know how well we are doing, we have to define what we are trying to
accomplish. Each year, we will formally establish the financial target and
performance objectives at two levels within the organization, against which we
will judge our achievements.
FINANCIAL TARGET PERFORMANCE OBJECTIVES
- ---------------- ----------------------
BW Holdings, LLC - Company
Operating EBITDA - Individual
- ---------------- ----------------------
100
Exhibit 10 (xvi)
FINANCIAL TARGET
OPERATING EBITDA
The financial measure chosen for BCMP's 1999 Incentive Plan is EBITDA, or
Earnings Before Interest, Taxes, Depreciation and Amortization.
You are probably all familiar with this fundamental measure of profitability.
Our focus is on the BWHLLC operating EBITDA - essentially the aggregate cash
earnings achieved by each member of the Borden Family of Companies in running
its day-to-day operations (including businesses in the process of divestment).
BCMP influences these results through partnering on strategic and other
projects, governance, and functional counseling and support.
The EBITDA is measured at BWHLLC to include Wise, CCPC and Borden Foods as well
as the other operating companies. BCMP's own financial performance includes the
small ownership portions of AEP and BCP. Operating EBITDA also reflects the
expenses incurred by BCMP, and thus the degree to which we can control those
costs and partly offset them with income, e.g., from successful tail management.
The operating EBITDA measure, however, excludes both restructuring charges and
one-time gains or losses on acquisitions or divestitures (but success in either
area can benefit the rating of BCMP performance objectives). If we make a
significant acquisition or divestiture, the financial target will be revised,
e.g., when CCPC was acquired in April 1998, the BWHLLC EBITDA target was
revised.
While BCMP uses BWHLLC's operating EBITDA for incentive purposes, most of the
Borden Family Companies use Economic Value Added, or EVA as the measure for
incentive.
For BCMP, EVA doesn't work well because of three factors: acquisitions and
divestitures; the complex financial and legal structure of our organization; and
tax considerations.
The BCMP Partners and Borden Board of Directors have agreed that operating
EBITDA is the best measure of how well we are achieving day-to-day and long-term
objectives that align with the underlying goal of increasing the value and
financial health of BWHLLC for its investors. That measure in turn will drive
potential awards under the Incentive Plan.
The 1999 EBITDA Target has been set at $297.8 million, with a positive and
negative swing (explained later) of $59.6 million. This creates an overall
range from $238.2 million ($297.8 - $59.6) to $357.4 million ($297.8 + $59.6).
PERFORMANCE OBJECTIVES
Besides EBITDA, your individual Incentive Award is also based on setting and
meeting performance objectives at two different levels - company and individual.
Measurements for each of the performance objectives are established plus super
goals as appropriate. SUPER GOALS are aggressive milestones or outstanding
performance levels that result in extraordinary positive impact on the
department or organization. Setting super goals is a way to "aim high" in hopes
of exceeding our normal expectations. The purpose of setting super goals is to
articulate as clearly as possible a "home run". Not every objective will have a
defined super goal.
COMPANY OBJECTIVES
To help meet the overall EBITDA Target, the Partners will articulate certain
business objectives and super goals with more potential organizational impact
than others. While associates are accountable for achieving all objectives,
101
Exhibit 10 (xvi)
high impact objectives should receive the most focus. As with financial
objectives, performance objectives may be revised due to changing business
needs.
INDIVIDUAL PERFORMANCE OBJECTIVES
Each year, you will be asked to develop a list of your individual performance
objectives for the coming year. The defined objectives should support the
objectives of the company.
You will also set super goals for yourself. These are measurements for specific
objectives that are considered extraordinary for your level.
Tips on how to write "aligned objectives"
- --------------------------------------------------------------------------------
- - Align objectives to BCMP objectives whenever possible.
------------------------------------------------------------
- - Determine how objectives could support a part of a BCMP objective.
--------------------------------------------------------------------------
- - If an individual associate's job design is such that a direct link to BCMP
objectives is difficult, negotiate goals that move the organization forward,
e.g., improve quality and customer service, implement efficiencies, and/or
simplify processes.
- --------------------------------------------------------------------------------
A planning template has been provided to all associates to assist you in writing
up your individual performance objectives and super goals. You will coordinate
your list with your manager, who will help ensure that your objectives are
appropriately aggressive, yet attainable - and, of course, in line with the
goals of the company.
DETERMINING THE INCENTIVE AWARD
There are three steps to arrive at your individual Incentive Award.
Step 1. Determine BWHLLC's operating EBITDA.
Step 2. Determine BCMP's overall performance rating against objectives and
total award pool.
Step 3. Determine your individual performance rating and award.
STEP 1. DETERMINE BWHLLC'S OPERATING EBITDA
This leads us to a total Incentive Award to be shared by all BCMP associates.
Actual 1999 EBITDA performance will be compared to the 1999 financial
performance range ($238.2 million to $357.4 million). Financial performance
must exceed $238.2 million in order for incentive payments to be made. Target
Incentive Awards will be paid if the EBITDA target of $297.8 million is
achieved.
102
Exhibit 10 (xvi)
STEP 2. DETERMINE BCMP'S OVERALL PERFORMANCE RATING AGAINST
OBJECTIVES AND TOTAL AWARD POOL
At the end of each year, the Board of Directors will assess BCMP's performance
against objectives and assign an overall rating using the following scale:
PERFORMANCE RATINGS
- ------------------------------------------------------------------------------------------------------------
1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
MEETS NO - MEETS 50% - MEETS - MEETS OBJECTIVES - MEETS OBJECTIVES
OBJECTIVES OF OBJECTIVES OBJECTIVES & 50% OF SUPER & ALL OF SUPER
GOALS GOALS
- -------------------------------------------------------------------------------------------------------------
The combination of BWHLLC's operating EBITDA and BCMP's overall performance
rating against objectives is then compared to the Incentive Award Table
described below to determine BCMP's total award pool.
THE INCENTIVE AWARD TABLE
Using the table on the next page, we locate the combination of the EBITDA and
the performance rating. The percentage we find represents the amount of the
Target Award that will become the Incentive Award pool for the year.
The left-most column on the table reflects BWHLLC's operating EBITDA Target plus
and minus the swing, which is divided into fifths that differentiate the rows up
and down.
Each $11.9 million ($59.6/5) increase or decrease in actual 1999 EBITDA over
or under the EBITDA Target moves you one row higher or lower on the table, and
the Incentive Award will increase or decrease as shown. If actual EBITDA
performance falls between two rows, the incentive award will be determined using
a proportional increase or decrease.
If EBITDA exceeds the high end of the range, Incentive Awards continue to rise
following the established pattern. Below the bottom of the range, however, no
Incentive Awards are paid.
103
Exhibit 10 (xvi)
PERCENTAGE OF TARGET
- -------------------------------------------------------------------------------------
BWHLLC
- -------
EBITDA
- -------------------------------------------------------------------------------------
357.4M 0% 50% 100% 150% 200% 250% 300% 350% 400%
-- --- ---- ---- ---- ---- ---- ---- ----
0% 50% 100% 140% 180% 200% 250% 300% 350%
-- --- ---- ---- ---- ---- ---- ---- ----
0% 50% 100% 130% 160% 170% 200% 250% 300%
-- --- ---- ---- ---- ---- ---- ---- ----
0% 50% 100% 120% 140% 150% 160% 200% 250%
-- --- ---- ---- ---- ---- ---- ---- ----
0% 50% 100% 110% 120% 130% 140% 150% 200%
- -------------------------------------------------------------------------------------
TARGET
- -------------------------------------------------------------------------------------
297.8M 0% 40% 80% 90% 100% 110% 120% 130% 150%
-- --- ---- ---- ---- ---- ---- ---- ----
0% 35% 70% 80% 90% 100% 110% 120% 138%
-- --- ---- ---- ---- ---- ---- ---- ----
0% 30% 60% 70% 80% 90% 100% 110% 126%
-- --- ---- ---- ---- ---- ---- ---- ----
0% 25% 50% 60% 70% 80% 90% 100% 114%
-- --- ---- ---- ---- ---- ---- ---- ----
0% 20% 40% 50% 60% 70% 80% 90% 102%
-- --- ---- ---- ---- ---- ---- ---- ----
$338.2M 0% 15% 30% 40% 50% 60% 70% 80% 90%
- -------------------------------------------------------------------------------------
EBITDA achievement below this level results in no incentive award.
PERFORMANCE RATINGS
- ----------------------------------------------------------------------------------------------
1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
MEETS MEETS MEETS MEETS
NO - 50% - MEETS - OBJECTIVES - OBJECTIVES
OBJECTIVES OF OBJECTIVES & 50% & ALL SUPER
OBJECTIVES OF SUPER GOALS
GOALS
- -----------------------------------------------------------------------------------------------
EXAMPLE: DETERMINING BCMP'S TOTAL INCENTIVE AWARD
Let's look at a few examples to see how to apply the Incentive Award Table.
EXAMPLE A: Assume that BWHLLC's 1999 EBITDA Target of $297.8 million is met
exactly. The company is then evaluated based on its objectives and receives a
3.0 rating. Using the chart, the total award from the Incentive Plan would be
100% of the Target Award.
EXAMPLE B: Now let's say that BWHLLC exceeds the EBITDA Target by achieving
$321.6 million in 1999. Remember that the swing has been set at $59.6 million,
creating plus or minus increments of $11.9 million. Again using the table, the
$23.8 million EBITDA achievement over Target ($321.6 - $297.8) elevates the
award exactly two rows above the Target EBITDA. The company's 3.0 rating would
result in a total award of 140% of the Target Award.
STEP 3. DETERMINE YOUR INDIVIDUAL PERFORMANCE RATING AND AWARD
After the end of the year, you should provide a self-assessment of your
performance against objectives to your manager. Your manager will consider this
input in reaching an overall performance rating for you. Achieving super goals
or exceptional performance may substantially raise performance ratings. Rating
performance is not an exact science; the process does require judgment.
Your overall performance rating will be compared to the Incentive Award table to
determine your individual incentive award. Remember that the overall financial
performance continues to determine which row of the table is used. The total of
104
Exhibit 10 (xvi)
individual awards may not exceed the total BCMP award pool created by the
combination of BWHLLC financial performance and BCMP's overall performance
against objectives.
It's recognized that managers may be inconsistent in their ratings and planned
objectives may not always be aligned. BCMP partners will review individual
associate ratings across departments prior to submission to the Board of
Directors to ensure consistency and relative fairness.
EXAMPLE: DETERMINING YOUR INDIVIDUAL AWARD
Assume that as an Analyst with a base salary of $40,000 with a 10% target, your
Target Award is $4,000. Using Example A, Target EBITDA is met, and BCMP
receives a 3.0 rating to receive 100% of the Target Award. Your individual
rating is 4.0, so your Incentive Target Award is $4,800 (120% of your Target
Award from the table).
Using Example B, BWHLLC financial performance exceeds EBITDA Target by achieving
$321.6 million with a BCMP performance against objectives rating of 3.0. Your
individual rating is 4.0 and by using the chart your award is 160% or $6,400.
LEAVING THE PLAN
IF YOU LEAVE THE BORDEN FAMILY OF COMPANIES
The Incentive Plan is designed to award associates who are contributing to the
success of BW Holdings, LLC. You must be actively employed within the Borden
Family of Companies on December 31 to be eligible for an award earned during
that year. If your employment ends for reason other than transfer to another
Borden Family Company or retirement, death or disability, you will no longer be
eligible for Incentive Awards.
IF YOU RETIRE, DIE OR BECOME DISABLED
If you retire at or after age 55 with at least 10 years of service, die or
become disabled, you (or your beneficiary) will receive a cash payment equal to
your Incentive Award for the year pro-rated for the number of months you worked.
This payment will be made after the end of the year in which your employment
ends.
IF YOU TRANSFER
If you transfer to another company within the Borden Family and are actively
employed at the end of the year, you will receive a cash payment equal to your
Incentive Award for the year prorated for the number of months you worked at
BCMP.
TAXES
Payments from the Incentive Plan are treated as regular income. The company
will withhold regular income tax and the payment will appear on your Form W-2.
You may want to speak to your tax advisor regarding the tax implications of the
Incentive Plan.
105
Exhibit 10 (xvi)
FOCUS ON PERFORMANCE
With the Incentive Plan, all BCMP associates have a mechanism in place that can
truly reward a job well done. What you need to do every day - for yourself and
the company - is to focus on increasing EBITDA and achieving your individual
performance objectives.
Keep in mind, the Incentive Plan does NOT replace your regular salary review and
recommended increases; it is a means to turn a solid performance on the job into
a cash bonus in addition to those increases. The evaluation of your performance
against your individual performance objectives is an important process not only
for the Incentive Plan, but also as part of your July competency evaluation and
base salary review.
If you have any questions about the Incentive Plan, please speak to your Human
Resources representative.
ALL INCENTIVE PLAN PAYMENTS ARE SUBJECT TO DISCRETION. Notwithstanding the
attainment of financial results or part or all of performance objectives, all
awards under the Incentive Plan are subject to the approval of the CEO and the
Borden, Inc. Board of Directors.
The company expects and intends to continue this Plan indefinitely but reserves
the right to end or amend it at any time.
This document is intended to summarize the Incentive Plan for eligible
associates of Borden Capital Management Partners, and it does not attempt to
cover every detail. For complete details, please refer to the official Plan
Document which governs the Plan. To obtain a copy of the Plan Document, contact
your Human Resources representative. Every attempt has been made to ensure that
all information presented here is accurate, however, if there are any
discrepancies between this document and the official Plan Document, the official
Plan Document will govern.
106
Exhibit (23)(i)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-57577 of Borden, Inc. on Form S-3 of our reports for each of Borden, Inc.
and Borden, Inc. and Affiliates dated February 11, 2000, except for Note 21
as to which the date is February 25, 2000, and Borden Foods Holdings
Corporation and Wise Holdings, Inc. each dated February 11, 2000 appearing
in this Annual Report on Form 10-K of Borden, Inc. for the year ended
December 31, 1999.
DELOITTE & TOUCHE LLP
Columbus, Ohio
March 17, 2000
107
BFH1
BORDEN FOODS HOLDINGS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1999
BFH2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
And Shareholder of Borden Foods Holdings Corporation
We have audited the accompanying consolidated balance sheets of Borden Foods
Holdings Corporation and subsidiaries (a wholly owned subsidiary of Borden Foods
Holdings, LLC) as of December 31, 1999 and 1998, and the related consolidated
statements of operations, shareholder's equity and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Borden Foods Holdings Corporation
and subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Columbus, Ohio
February 11, 2000
BFH3
- -------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
BORDEN FOODS HOLDINGS CORPORATION
(In thousands, except per share and share amounts) Year ended December 31,
1999 1998 1997
- -------------------------------------------------------------------------------------------
Net sales $547,934 $ 706,088 $1,751,683
Cost of goods sold 264,012 393,062 1,026,214
--------- ---------- -----------
Gross margin 283,922 313,026 725,469
--------- ---------- -----------
Distribution expense 42,650 44,947 96,760
Marketing expense 198,693 211,430 430,938
General & administrative expense 51,959 69,185 116,208
Gain on divestiture of businesses (46,938) (243,845) (68,067)
Business realignment - 9,003 3,794
--------- ---------- -----------
Operating income 37,558 222,306 145,836
--------- ---------- -----------
Interest expense 486 2,475 26,065
Interest income (15,820) (20,293) (3,409)
Other (income) expense, net (332) 2,013 3,458
--------- ---------- -----------
Income before income taxes and cumulative
effect of accounting change 53,224 238,111 119,722
Income tax expense 11,050 54,175 59,453
--------- ---------- -----------
Income before cumulative effect of accounting change 42,174 183,936 60,269
Cumulative effect of accounting change, net of tax (2,806) - -
--------- ---------- -----------
Net income 39,368 183,936 60,269
Affiliate's share of income (5,098) (142,033) (73,446)
--------- ---------- -----------
Net income (loss) applicable to common shares $ 34,270 $ 41,903 $ (13,177)
========= ========== ===========
Per Share Data
- --------------
Basic and diluted earnings (loss) per common share
before cumulative effect of accounting change $370,760 $ 419,030 $ (131,770)
Cumulative effect of accounting change per common share (28,060) - -
--------- ---------- -----------
Net basic and diluted earnings (loss) per common share $342,700 $ 419,030 $ (131,770)
========= ========== ===========
Average number of common shares outstanding
during the year 100 100 100
- ------------------------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements.
BFH4
- ---------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
BORDEN FOODS HOLDINGS CORPORATION
(In thousands)
December 31,
ASSETS 1999 1998
- ---------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and equivalents $ 266,825 $300,104
Accounts receivable (less allowance for doubtful
accounts of $1,317 and $1,391, respectively) 55,201 47,339
Other receivables 3,947 12,513
Inventories:
Finished and in-process goods 48,066 42,933
Raw materials and supplies 30,089 26,853
Deferred income taxes 15,383 24,181
Amounts due from affiliates 2,833 2,130
Other current assets 5,013 11,076
---------------- ---------
427,357 467,129
OTHER ASSETS 10,819 9,138
PROPERTY AND EQUIPMENT
Land 9,542 10,879
Buildings 40,763 44,094
Machinery and equipment 190,679 147,720
---------------- ---------
240,984 202,693
Less accumulated depreciation (64,462) (59,535)
---------------- ---------
176,522 143,158
INTANGIBLES, NET
Goodwill 11,006 15,658
Trademarks and other intangibles 108,496 110,987
---------------- ---------
119,502 126,645
---------------- ---------
TOTAL ASSETS $ 734,200 $746,070
================ =========
- ----------------------------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements.
BFH5
- -----------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
BORDEN FOODS HOLDINGS CORPORATION
(In thousands, except per share and share amounts)
December 31,
LIABILITIES AND SHAREHOLDER'S EQUITY 1999 1998
- -----------------------------------------------------------------------------------------
CURRENT LIABILITIES
Debt payable within one year $ 346 $ 6,824
Loans due to affiliates 2,513 -
Accounts and drafts payable 46,858 55,847
Income tax payable 20,594 5,418
Other amounts due to affiliates 789 2,948
Accrued customer allowances 17,781 19,600
Other current liabilities 50,596 116,349
---------- ---------
139,477 206,986
OTHER LIABILITIES
Other long-term debt 3,033 2,602
Deferred income taxes 34,585 38,823
Other long-term liabilities 22,820 22,899
---------- --------
60,438 64,324
COMMITMENTS AND CONTINGENCIES (SEE NOTE 18)
SHAREHOLDER'S EQUITY
Common stock - $0.01 par value; 100 shares
authorized, issued, and outstanding - -
Paid in capital 405,817 390,988
Shareholder's investment in affiliates 66,272 60,824
Retained earnings 65,324 31,054
Accumulated translation adjustments (3,128) (8,106)
----------- --------
534,285 474,760
----------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 734,200 $746,070
========== =========
- -------------------------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements.
BFH6
- --------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
BORDEN FOODS HOLDINGS CORPORATION
(In thousands) Year ended December 31,
1999 1998 1997
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income $ 39,368 $ 183,936 $ 60,269
Adjustments to reconcile net income
to net cash from (used in) operating activities:
Depreciation 17,614 13,422 37,342
Amortization 3,754 3,887 9,644
Deferred tax provision 19,387 11,301 22,442
Gain on divestiture of businesses (46,938) (243,845) (68,067)
Business realignment - 9,003 (1,000)
Net change in assets and liabilities:
Trade receivables (7,862) 49,564 13,672
Other receivables 717 8,054 (2,963)
Inventories (14,111) 21,394 44,194
Trade payables (8,989) (16,600) (46,645)
Accrued customer allowances (1,819) (11,006) (40,341)
Current tax payable 15,137 (24,912) 17,022
Other current assets and liabilities (13,779) (78,707) (21,954)
Other long-term assets and liabilities (1,760) (6,927) (2,774)
Other, net (180) 7,248 (13,778)
--------- ---------- ----------
539 (74,188) 7,063
--------- ---------- ----------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES
Capital expenditures (58,190) (37,952) (35,153)
Proceeds from the sale of fixed assets 4,466 15,852 11,915
Proceeds from the divestiture of businesses 23,571 733,226 145,067
--------- ---------- ----------
(30,153) 711,126 121,829
--------- ---------- ----------
CASH FLOWS (USED IN) FINANCING ACTIVITIES
Net short-term debt payments (6,178) (15,263) 6,380
Proceeds (repayment) of loans due to affiliates 2,513 (27,914) (19,133)
Repayment of long-term debt payable to affilliates - (47,616) (119,374)
Repayment of other long-term debt - (2,572) (1,263)
Distribution to affiliate - (272,205) -
--------- ---------- ----------
(3,665) (365,570) (133,390)
--------- ---------- ----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (33,279) 271,368 (4,498)
CASH AND EQUIVALENTS AT BEGINNING
OF YEAR 300,104 28,736 33,234
--------- ---------- ----------
CASH AND EQUIVALENTS AT END
OF YEAR $266,825 $ 300,104 $ 28,736
========= ========== ==========
- ---------------------------------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements.
BFH7
- --------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
BORDEN FOODS HOLDINGS CORPORATION
(In thousands) For the year ended December 31,
1999 1998 1997
- --------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest $ 493 $ 3,619 $45,640
Income taxes, net of refunds (25,264) 67,614 19,989
Non-cash activity:
Issuance of Class B units in exchange for notes
of principal unitholder (See Note 1) $ 20,000
Acquisition of Borden's food businesses (See Note 1) (20,000)
- --------------------------------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements.
BFH8
- --------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
BORDEN FOODS HOLDINGS CORPORATION
(In thousands)
- --------------------------------------------------------------------------------------------------------
Shareholder's Retained Accumulated
Paid in Investment Earnings Translation
Capital in Affiliate (Deficit) Adjustments Total
- --------------------------------------------------------------------------------------------------------
Balance at January 1, 1997 $ 378,922 $ 87,859 $ 2,328 $ (4,391) $ 464,718
- --------------------------------------------------------------------------------------------------------
Net income 60,269 60,269
Foreign currency translation adjustments (39,248) (39,248)
----------
COMPREHENSIVE INCOME 21,021
==========
Reallocation of consideration from BFC
to Investment LP (40,710) 40,710 -
Affiliate's share of income 74,728 (73,446) 1,282
Increase in tax basis related to adjustment of -
purchase price allocation 67,383 67,383
Other (4,538) (4,538)
- --------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $401,057 $ 203,297 $ (10,849) $(43,639) $ 549,866
- --------------------------------------------------------------------------------------------------------
Net income 183,936 183,936
Foreign currency translation adjustments (4,409) (4,409)
Reclassification adjustment 39,942 39,942
----------
COMPREHENSIVE INCOME 219,469
==========
Reallocation of consideration to BFC
from Investment LP 12,301 (12,301) -
Affiliate's share of income 142,033 (142,033) -
Distribution to affiliate (272,205) (272,205)
Decrease in tax basis related to adjustment
of purchase price allocation (24,314) (24,314)
Contribution from affilitate 1,944 1,944
- --------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $390,988 $ 60,824 $ 31,054 $ (8,106) $ 474,760
- --------------------------------------------------------------------------------------------------------
Net income 39,368 39,368
Foreign currency translation adjustments 4,696 4,696
Reclassification adjustment 282 282
----------
COMPREHENSIVE INCOME 44,346
==========
Affiliate's share of income 5,098 (5,098) -
Increase in tax basis related to adjustment
of purchase price allocation and other 14,829 350 15,179
- --------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $405,817 $ 66,272 $ 65,324 $ (3,128) $ 534,285
- --------------------------------------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements.
BFH9
BORDEN FOODS HOLDINGS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
1. BACKGROUND
In 1994, Borden, Inc. ("Borden") entered into a merger agreement providing for
the acquisition ("Acquisition") of all of Borden's outstanding common stock by
affiliates of Kohlberg Kravis Roberts & Co. ("KKR"). The Acquisition was
completed on March 14, 1995. Borden, a public registrant as a result of public
debt that was outstanding prior to the Acquisition, elected not to apply push
down accounting in its consolidated financial statements and, as such, Borden's
financial statements are reported on Borden's historical cost basis. As
discussed in the basis of presentation, the accompanying financial statements
have been prepared on a purchase accounting basis from the date of KKR's
acquisition of Borden.
Borden Foods Corporation ("BFC") was formed for the purposes of acquiring and
operating certain of Borden's food businesses ("Foods"). Borden Foods Holdings
Corporation ("Foods Holdings"), a wholly owned subsidiary of Borden Foods
Holdings, LLC ("LLC"), owns approximately 98% of BFC; the remaining interest in
BFC is owned directly by the LLC. LLC is controlled by BW Holdings, LLC. BFC
Investments LP (the "Investment LP"), which is owned by BFC and LLC, was formed
for the purposes of acquiring, holding, and sub-licensing certain trademarks
associated with the operation of Foods. In certain circumstances (see Note 6),
allocation of income and gains may differ from the ownership percentages
indicated.
In connection with the formation of Foods Holdings, LLC issued approximately
73.6 million Class B units in exchange for $368,100 of notes from BW Holdings,
LLC. In addition, LLC issued approximately 1.1 million Class A units to certain
management employees of BFC in exchange for cash of $5,323. LLC transferred
notes of $256,345 to Foods Holdings in exchange for 100 shares of common stock.
Foods Holdings used the notes to acquire a 98% interest in BFC. LLC contributed
$5,323 of cash to BFC in exchange for the remaining 2% interest in BFC.
In 1996, Borden, in a taxable transaction, sold Foods and certain trademarks to
BFC and Investment LP, respectively, for $570,000 less assets transferred plus
liabilities assumed. The purchase price was based on an independent valuation
of Foods. There was no change in the book basis of Foods' assets and liabilities
because the sale was between related parties and Borden's principal stockholders
will continue to control BFC. BFC issued $166,990 of long-term debt (see Note
10) along with nominal cash and interest to finance the purchase of Foods' net
assets (excluding trademarks). As a result of the sale, Foods Holdings has
fully and unconditionally guaranteed obligations under Borden's Credit Agreement
and all of Borden's publicly held debt on a pari passu basis (see Note 10).
In a series of transactions in 1996 and 1997, BFC used $255,288 of consideration
to purchase a 70% interest in Investment LP and LLC used $109,409 of
consideration to acquire a 30% interest in Investment LP. Investment LP
transferred $371,447 of consideration to Borden in exchange for Foods'
trademarks. As a result of transactions concluded in 1998, including a transfer
of tax basis from BFC to Investment LP, shareholder's investment in affiliate
was increased $28,409.
BFH10
2. NATURE OF OPERATIONS
BFC is a manufacturer and distributor of a variety of food products worldwide,
including pasta, pasta sauce, soups and bouillon. At December 31, 1999, BFC's
operations included 8 production facilities, 4 of which are located in the
United States. The remaining facilities are located in Canada and Europe.
3. BASIS OF PRESENTATION
As a result of the financial guarantee and in accordance with Regulation S-X
rule 3-10, Borden is required to include in its filings with the Securities and
Exchange Commission separate financial statements for Foods Holdings as if it
were a registrant. The accompanying financial statements were prepared on a
purchase accounting basis, which allocates approximately $750,000, plus cash
retained, less debt assumed, of the KKR purchase price to Foods. The purchase
price has been allocated to tangible and intangible assets and liabilities of
Foods based on independent appraisals and management estimates.
The financial statements include the accounts of Foods Holdings after
elimination of material intercompany accounts and transactions. Minority
interest reflects the consolidation of international operations in which BFC
owns more than a 50% interest but less than a 100% interest. Minority interest
is included in other long-term liabilities in the accompanying balance sheet.
The portion of BFC and Investment LP directly owned by LLC is recorded in
Shareholder's Investment in Affiliates.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates in the accompanying financial
statements are the accruals for trade and consumer promotions, reserves for
expenses on businesses sold, allocation of tax basis between Investment LP and
BFC, litigation, general insurance liabilities, and employee benefit plan
liabilities. Actual results could differ from those estimates.
REVENUE RECOGNITION - Net sales are generally recognized when products are
shipped to customers. Reserves for estimated returns, allowances and consumer
and trade discounts are established when revenues are recognized.
ADVERTISING AND PROMOTION COSTS - Production costs of future media advertising
are expensed on the first air-date or print release date of the advertising.
All other advertising costs are charged to marketing expense as incurred.
Advertising costs were $14,156, $10,130 and $42,648 in 1999, 1998 and 1997,
respectively. Promotion costs are generally expensed when the related products
are shipped. Promotion costs with written contracts are expensed over the life
of the contract in accordance with performance measures. Promotion costs were
$142,829, $152,037 and $277,032 in 1999, 1998 and 1997, respectively.
RESEARCH AND DEVELOPMENT COSTS - Significant funds are committed to the research
and development of new, innovative products that are expected to contribute to
operating profits in future years. All cost associated with research and
development are charged to expense as incurred. Research and development costs
were $19,235, $18,643 and $17,704 in 1999, 1998 and 1997, respectively.
BFH11
CASH AND EQUIVALENTS - Cash and equivalents consist of highly liquid investments
purchased with an original maturity of three months or less. Included in cash
equivalents are overnight investments with Borden (see Note 8).
INVENTORIES - Finished goods inventories are stated at the lower of cost or
market with cost being determined using the average cost and first-in, first-out
methods. Raw materials are stated at actual costs.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost and, where
appropriate, include capitalized interest during construction. Depreciation is
recorded on the straight-line basis over useful lives ranging from 3 to 10 years
for machinery and equipment and 30 years for buildings and improvements. Major
renewals and betterments are capitalized. Maintenance, repairs and minor
renewals are expensed when incurred.
INTANGIBLES - The excess of purchase price over the value of net tangible assets
of Foods is carried as intangibles in the balance sheet. Trademarks and patents
are amortized on a straight-line basis over the shorter of their legal or useful
lives; goodwill is amortized on a straight-line basis over 40 years.
Accumulated amortization of intangibles was $17,624 and $14,672 at December 31,
1999 and 1998, respectively.
IMPAIRMENT - BFC periodically evaluates the recoverability of property,
equipment and intangibles by assessing whether the net book value of the assets
can be recovered through expected future cash flows (undiscounted and before
interest) of the underlying business. The amount of impairment loss is measured
as the difference between the net book value of the assets and the estimated
fair value of the related assets.
INCOME TAXES - Income taxes are accounted for using the liability method in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109
"Accounting for Income Taxes". Deferred income taxes are recorded to recognize
the future effects of temporary differences which arise between financial
statement assets and liabilities and their bases for income tax reporting
purposes. Taxes related to foreign operations have been provided for in
accordance with SFAS No. 109.
FOREIGN CURRENCY TRANSLATIONS - The local currency is the functional currency
for international subsidiaries and, as such, assets and liabilities are
translated at the exchange rates in effect at the balance sheet date. Income
and expenses are translated at average exchange rates prevailing during the
year. Translation adjustments resulting from changes in exchange rates are
reported as a separate component of shareholder's equity. BFC realized a net
foreign exchange gain of $1,820 in 1999 and net foreign exchange losses of
$1,773 and $2,442 in 1998 and 1997, respectively.
RECLASSIFICATION ADJUSTMENTS WITHIN COMPREHENSIVE INCOME - Adjustments shall be
made to reflect comprehensive income items that are included in net income
during the current period. The reclassification adjustments represent the
accumulated translation adjustment recognized on the sale of Denmark Foods in
1999 and on the sale of KLIM and Belgium Foods businesses in 1998.
DERIVATIVE FINANCIAL INSTRUMENTS - BFC uses forward exchange contracts which
reduce BFC's cash flow exposure to changes in foreign exchange rates. The fair
values of forward exchange contracts that hedge firm third party commitments are
deferred and recognized as part of the underlying transactions as they occur,
those that hedge existing transactions are recognized in income currently, and
offset gains and losses of hedged transactions.
BFH12
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially subject
BFC to concentrations of credit risk consist principally of temporary cash
investments, marketable securities, and accounts receivable. BFC places its
temporary cash investments with Borden and its affiliates. Concentrations of
credit risk with respect to accounts receivable are limited, due to the large
number of customers comprising BFC's customer base and their dispersion across
many different industries and geographies. BFC generally does not require
collateral or other security to support customer receivables.
UNITS AND UNIT APPRECIATION RIGHTS ("UAR") - The Financial Accounting Standards
Board ("FASB") issued SFAS No. 123, Accounting for Stock-Based Compensation,
which was adopted for disclosure only. As permitted by SFAS No. 123, Foods
Holdings will continue to apply its current accounting policy of the intrinsic
value method under Accounting Principles Board Opinion No. 25 and will include
the additional disclosures required by SFAS No. 123.
PER SHARE INFORMATION - Basic and diluted earnings or loss per common share is
computed by dividing net income or loss by the weighted average number of common
shares outstanding during the year.
RECENTLY ISSUED ACCOUNTING STATEMENTS - The FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measures
those instruments at fair value. In June 1999, FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." This statement defers the effective
date of SFAS No. 133 to all fiscal quarters and all fiscal years beginning after
January 1, 2001. Foods Holdings is currently considering the impact of these
pronouncements.
In 1998, the American Institute of Certified Public Accountants issued Statement
of Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidance on the capitalization of
costs incurred for computer software developed or obtained for internal use.
BFC adopted SOP 98-1 on a prospective basis as of January 1, 1999, with an
estimated impact of approximately $1,325 in costs being capitalized in 1999 that
would have been expensed prior to adoption.
Also in 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities."
SOP 98-5 requires the costs of opening a new facility, introducing a new product
or service, conducting business in a new market, or similar start-up activities
be expensed as incurred. Amounts previously capitalized are to be expensed and
reported as a cumulative effect of a change in accounting principle in the year
of adoption. Accordingly, BFC adopted SOP 98-5 in 1999 and reported a charge of
$2,806 (net of tax benefit of $1,794) to write-off amounts previously
capitalized.
RECLASSIFICATION - Certain prior year amounts have been reclassified to conform
to the 1999 presentation.
5. BUSINESS REALIGNMENT
Restructuring of Aligned Businesses
- --------------------------------------
In 1997, pre-tax charges of $3,794, primarily for severance, pension settlements
and other employee related benefits, were recorded for the closure of certain
pasta plants. In 1998, the loss was decreased by $2,646, as net proceeds from
the sale of facilities were greater than previously estimated. The sale of
these facilities, as well as the machinery and equipment, generated proceeds of
$2,424, $15,892, and $10,000 in 1999, 1998 and 1997, respectively.
BFH13
In 1998, BFC announced the closing of the Tolleson, Arizona pasta plant due to
the consolidation of production into other pasta facilities and recorded pre-tax
charges of $16,300. These charges included (a) $8,195 non-cash charge to write
down the facility to its net realizable value, (b) $6,118 fair market value
adjustment of an inventory purchase commitment (recorded in cost of goods sold),
and (c) $1,987 for severance, pension settlements and other employee related
benefits.
As of December 31, 1998, reserves related to the restructuring of aligned
businesses of $7,570, primarily for an inventory purchase commitment remained in
other current liabilities. No reserve amounts remained at December 31, 1999.
Divested Businesses
- --------------------
In March 1997, BFC announced its intention to sell certain businesses from its
current portfolio, which were not considered to be aligned with its grain-based
meal solution strategy. Among the unaligned businesses were the milk powder,
sweetened condensed milk, reconstituted lemon juice, candy popcorn and processed
cheese businesses.
On December 31, 1997, BFC and Investment LP completed the sale of the domestic
Cracker Jack candy popcorn business to Recot, Inc., a subsidiary of Frito-Lay
which is a Texas based unit of PepsiCo, Inc., and the domestic FunCheese
business to Mid-America Dairymen, Inc., a dairy marketing co-op headquartered in
Missouri.
On January 24, 1998, BFC and Investment LP completed the sale of the Signature
Flavor business to Eagle Family Foods, Inc. a newly formed entity managed by GE
Investments and Warburg, Pincus & Co. LLC. Signature Flavor grocery brands
included Eagle Brand, Cremora, ReaLemon, Kava, and None Such.
On February 12, 1998, BFC and Investment LP completed the sale of the KLIM
business, including the KLIM milk powder business in Latin America and Asia, the
non-dairy coffee creamer operations in South Africa and the ice cream business
in Puerto Rico, to Nestle, S.A. An estimated after tax loss from the sale was
recorded in 1997. In 1999, BFC received additional proceeds of $9,476 for
working capital settlements on the sale of KLIM, of which $8,400 was included in
other receivables as of December 31, 1998.
On May 22, 1998, BFC completed the sale of Borden Foods Puerto Rico, Inc., a
Puerto Rican foods distributor. BFC and Investment LP also completed the sale
of Belgium Foods to Meroso Invest N.V. on November 13, 1998.
On April 30, 1999, BFC sold the milk powder business located in China to Royal
Numico. BFC had previously elected to exit the milk powder business and sold
significant KLIM operations, excluding China, to Nestle, S.A. in 1998. At that
time, BFC established divestiture reserves of $4,289 for costs to close
operations in China, and recorded $12,794 to write-down assets to estimated net
realizable value. As a result of the sale, certain remaining liabilities for
closure costs of $3,112 were no longer required.
On July 14, 1999, BFC completed the sale of the chocolate milk business located
in Denmark.
The unaligned businesses generated a combined operating income of $1,896 and
$115,218 from net sales of $11,067 and $1,027,542 in 1999 and 1997,
respectively, and a combined operating loss of $323 from net trade sales of
$119,802 in 1998.
BFH14
The proceeds, gains and taxes related to the divestitures in 1999, 1998 and 1997
were as follows:
- ------------------------------------------------------------------------------------------
DIVESTED BUSINESS PROCEEDS PRE-TAX GAIN (LOSS)
--------------------------- ------------------------------
1999 1998 1997 1999 1998 1997
------- --------- -------- --------- ------- --------
Cracker Jack & FunCheese $145,067 $ 7,385 $52,972
Signature Flavor $ 376,500 209,447
KLIM $ 9,767 339,882 34,549 32,700 15,095
China 7,112 10,838
Borden Foods Puerto Rico 8,844 (683)
Belgium Foods 8,000 (5,004)
Denmark Foods 6,692 1,551
---------------------------- ------------------------------
TOTAL $23,571 $ 733,226 $145,067 $ 46,938 $243,845 $68,067
============================
TAX EXPENSE (7,831) (55,247) (34,821)
------------------------------
AFTER TAX GAIN $39,107 $188,598 $ 33,246
==============================
- ------------------------------------------------------------------------------------------
During 1998 and 1997, BFC established reserves of $134,811 and $15,210,
respectively, for work-force reductions, closure of facilities, selling and
legal fees, contract terminations, transition services and other costs related
to the divestiture of unaligned businesses. Of the 1998 amount, $19,317 related
to non-cash charges associated with remaining assets to be sold. In 1999, BFC
reduced current liabilities by $37,159, which includes $3,112 related to closing
operations in China, for the resolution of divestiture related severance and
lower than expected exit costs.
Activities related to divestiture reserves during 1999, 1998 and 1997, which
were recorded as other current liabilities, were as follows:
- -------------------------------------------------------------------------------
Business & Selling,
Work-Force Contractual Legal &
Reductions(1) Obligations(2) Other(3) TOTAL
------------- -------------- -------- -------
Provided on December 31, 1997 $ 1,515 $ 2,867 $ 10,828 $ 15,210
Provided 23,682 47,430 44,382 115,494
Utilized (17,087) (13,426) (33,406) (63,919)
Other(4) (1,000) (1,800) (2,093) (4,893)
--------- --------- --------- ---------
Balance at December 31, 1998 $ 7,110 $ 35,071 $ 19,711 $ 61,892
Utilized (3,529) (4,608) (5,638) (13,775)
Other(4) (2,230) (22,193) (12,736) (37,159)
--------- --------- --------- ---------
Balance at December 31, 1999 $ 1,351 $ 8,270 $ 1,337 $ 10,958
========= ========= ========= =========
- --------------------------------------------------------------------------------
<FN>
(1) Includes severance and other employee related benefits.
(2) Includes charges related to the termination of leases, distributor
arrangements, and other contractual agreements.
(3) Includes selling and legal fees, facility closings, and other miscellaneous
costs.
(4) Changes in estimates.
- --------------------------------------------------------------------------------
BFH15
6. AFFILIATE'S SHARE OF INCOME
In accordance with Investment LP's limited partnership agreement with BFC and
LLC, the first allocation of a trademark gain is to BFC's priority return, which
is a return of 10% per annum, cumulative and compounded annually on BFC's net
capital contributions. The allocation of the remaining gain, computed in
accordance with the partnership agreement, is 10% to BFC and 90% to LLC.
Primarily in association with the divestitures of the candy popcorn, domestic
processed cheese, Signature Flavor, Belgium Foods and KLIM businesses, LLC was
allocated an affiliate's share of income (see accompanying consolidated
statements of operations) of $5,098, $142,033 and $73,446 in 1999, 1998 and
1997, respectively. During the second quarter of 1998, a $272,205 distribution
of a portion of the sale proceeds was made to LLC.
7. CHANGE IN ACCOUNTING ESTIMATE
BFC reduced accruals corresponding to trade spending by approximately $5,700 and
$18,300 during 1998 and 1997, respectively. These accruals had been provided in
earlier years for anticipated customer settlements in the ordinary course of
business. Due to a concerted effort to improve the management of trade
spending, the settlements have been significantly lower than management had
previously estimated. The income recognized for the change in estimates is
included in marketing expense.
8. RELATED PARTIES
Borden and a subsidiary of Borden provide certain administrative services to BFC
at negotiated fees. These services include processing of payroll, active and
retiree group insurance claims, securing insurance coverage for catastrophic
claims, and information systems support. BFC reimburses the Borden subsidiary
for payments for general disbursements and post-employment benefit claims. The
amount owed by BFC for reimbursement of payments, services, and other
liabilities was $777 and $2,935 as of December 31, 1999 and 1998, respectively.
The following summarizes the affiliate charges in 1999, 1998 and 1997:
- --------------------------------------------------------------------------------
Year ended December 31,
-----------------------
1999 1998 1997
------- ------- -------
Employee benefits $ 2,803 $ 3,365 $ 8,385
Group and general insurance 4,732 4,688 3,875
Administrative services 12,151 12,984 16,363
------- ------- -------
$19,686 $21,037 $28,623
======= ======= =======
- --------------------------------------------------------------------------------
BFC performs certain administrative services on behalf of other Borden
affiliates. These services include sales administration, promotion, purchasing
and research and development. BFC charged these affiliates $765, $1,122, and
$1,749 for such services in 1999, 1998 and 1997, respectively. BFC also sold
certain merchandise to Borden affiliates totaling $218, $119, and $4,506 in
1999, 1998 and 1997, respectively. The receivable for services, merchandise
sales, and other transactions was $972 and $505 at December 31, 1999 and 1998,
respectively.
BFH16
BFC invests cash not used in operations with Borden. BFC's investment balance
was $234,550 and $277,591 at December 31, 1999 and 1998, respectively. The
funds are invested overnight earning a rate set by Borden that generally
approximates money market rates. BFC earned interest income of $14,753,
$19,423, and $516 on these funds during 1999, 1998 and 1997, respectively.
Amounts receivable for interest were $1,861 and $1,625 at December 31, 1999 and
1998, respectively.
Eligible U.S. employees are provided employee pension benefits under the Borden
domestic pension plan to which BFC contributes, and can participate in the
Borden retirement savings plan. BFC has recognized expenses associated with
these benefits, certain of which are determined by Borden's actuary. The
liabilities for these obligations are included in BFC's financial statements
(see Note 13).
Borden continues to provide executive, financial and strategic management to BFC
for which it charges an annual fee of $1,000.
9. DEBT
Debt outstanding at December 31, 1999 and 1998 consisted of the following:
- -------------------------------------------------------------------------------
1999 1998
-------------------- -------------------
Due Due
within within
Long-term one year Long-term one year
--------- -------- --------- --------
Loans due to affiliates (see Note 10) $2,513
Foreign bank loans $ 263 346 $6,824
Industrial Revenue Bonds 2,770 $2,602
------ ------ ------ ------
Total debt $3,033 $2,859 $2,602 $6,824
====== ====== ====== ======
- -------------------------------------------------------------------------------
The foreign bank loans currently bear interest at rates ranging from 3% to 6%.
The Industrial Revenue Bonds do not bear interest. Maturities of debt for the
next five years are as follows:
- ------------------------------------------------------------------
2000 $2,859
2001 393
2002 366
2003 697
2004 788
Thereafter 789
--------
$5,892
- ------------------------------------------------------------------
BFH17
10. AFFILIATED CREDIT FACILITIES
In 1999, BFC borrowed funds from LLC for use in operations. At December 31,
1999, loans payable to LLC were $2,513 carrying a variable interest rate of
approximately 5.7%.
In 1996, BFC issued $166,990 in long-term notes to Borden. The loan principal
outstanding was reduced to $47,616 in 1997 and was paid off in February 1998.
The interest rate on the long-term notes to Borden was 10.3%. Interest expense
on the long-term notes was $575 in 1998 and $19,558 in 1997.
BFC renewed a loan agreement to borrow funds from Borden under a revolving loan
facility with a maturity date of December 31, 2000. The revolving loan facility
provides for borrowings up to $10,000 at a variable interest rate equal to
prime. Borrowings with three days notice and outstanding at least 30 days
incurred interest at Borden's cost of funds for 30 day LIBOR plus 0.25%. Same
day borrowings incurred interest at the prime rate. There was no outstanding
balance under the revolving loan facility as of December 31, 1999 and 1998. A
nominal commitment fee based on a variable rate tied to Borden's leverage is
charged on the unused portion of the revolving loan facility.
Cash balances in international businesses, which are not repatriated to the
U.S., can be loaned to other Borden affiliates at a variable rate for generally
a 90 day period. Net lendings or borrowings by international businesses are
included in loans due from or to affiliates. At December 31, 1997 net
short-term loans due to international affiliates were $27,914 at a weighted
average variable rate of 6.7%. BFC did not have any short-term loans due from
or to international affiliates as of December 31, 1999 and 1998. Interest
expense on these short-term loans was $0, $807, and $6,022 in 1999, 1998 and
1997, respectively.
Foods Holdings has fully and unconditionally guaranteed obligations under
Borden's Credit Agreement and all of Borden's publicly held debt on a pari passu
basis. During 1998, Borden's Credit Agreement was restructured, as a result of
sales of certain businesses in accordance with the terms of the Credit
Agreement. The $950,000 five-year revolver (maturing July 13, 2002) was reduced
to $895,000, and the $50,000 364-day convertible revolver was canceled. Borden's
outstanding credit facility and public borrowings amounted to approximately
$547,745 at December 31, 1999 and 1998. In connection with this guarantee,
Foods Holdings charges Borden an annual fee of $1,050. As an affiliated
guarantor, Foods Holdings' liability shall not exceed the greater of its
outstanding affiliated borrowings or 95% of its adjusted net assets while Borden
or any other obligated parties have obligations outstanding.
The Credit Agreement, as amended, contains covenants that significantly limit or
prohibit, among other things, Foods Holdings and its subsidiaries' ability to
incur indebtedness, make prepayments of certain indebtedness, pay dividends,
engage in transactions with affiliates, create liens, make changes in its
business or control of Foods Holdings, sell assets, engage in mergers and
consolidations, and use proceeds from asset sales and certain debt and equity
issuances. In addition, the Credit Agreement requires that Food Holdings limit
its capital expenditures to certain specified amounts and maintain other
financial ratios, including a minimum ratio of EBITDA (Earnings Before Interest,
Taxes, Depreciation and Amortization) to interest expense and a maximum ratio of
total debt to EBITDA.
BFH18
11. LEASES
BFC leases warehouse space, production facilities, office space and vehicles.
The future minimum lease payments under these operating lease agreements for the
years ending December 31 are as follows:
- ---------------------------------------------
Non-
Affiliated Affiliated
----------- -----------
2000 $ 2,120 $ 1,646
2001 2,232 580
2002 2,343 349
2003 1,636 278
2004 - 216
Thereafter - 213
----------- -----------
$ 8,331 $ 3,282
=========== ===========
- ---------------------------------------------
Total rental expense for operating leases was $4,214, $4,232 and $8,272 for the
years ended December 31, 1999, 1998 and 1997, respectively, which includes
$1,987, $1,747, and $2,912 for affiliated leases.
12. INCOME TAXES
As stated in Note 3, the accompanying financial statements reflect the assets of
Foods on a purchase accounting basis from December 31, 1994. The tax basis of
Foods' net assets was not affected by the December 1994 KKR acquisition.
Deferred tax assets and liabilities reflect the differences between the purchase
accounting book basis and the ongoing tax basis of Foods' net assets.
Upon finalization of the valuation and purchase price allocation in 1997, an
additional $20,000 of notes held by Investment LP were transferred to Borden.
In 1999, 1998 and 1997, the initial capitalization and tax basis was adjusted
due to additional basis received and reallocations between BFC and Investment
LP. These changes had no impact on the 1999, 1998 or 1997 tax provision.
However, the additional domestic tax basis resulted in an increase in deferred
tax assets and Shareholder's Equity of $57,898 in accordance with Emerging
Issues Task Force 94-10, "Accounting by a Company for the Income Tax Effects of
Transactions among or with Its Shareholders under FASB Statement No. 109".
BFH19
Income tax provision for the years ended December 31, 1999, 1998 and 1997,
consisted of the following:
- ----------------------------------------------------------------
1999 1998 1997
------- ------- --------
Current:
Federal $(7,567) $32,675 $23,050
State and local (193) 6,167 4,314
Foreign (577) 4,032 9,647
-------- -------- -------
(8,337) 42,874 37,011
-------- -------- -------
Deferred: $13,445 $10,361 $14,829
Federal 3,468 1,740 2,778
State and local 2,474 (800) 4,835
-------- -------- -------
Foreign 19,387 11,301 22,442
-------- -------- -------
$11,050 $54,175 $59,453
======== ======== =======
- ----------------------------------------------------------------
The domestic and foreign components of income before income taxes were as
follows:
- ---------------------------------------------------------
1999 1998 1997
------- --------- --------
Domestic $51,455 $241,604 $ 78,825
Foreign 1,769 (3,493) 40,897
------- --------- --------
Total 53,224 238,111 119,722
======= ========= ========
- --------------------------------------------------------
The following table reconciles the maximum statutory U.S. Federal income tax
rate multiplied by income before taxes to the recorded income tax expense:
- --------------------------------------------------------------------------------------
1999 1998 1997
--------- -------- ----------
U.S. Federal income tax at statutory rate $ 18,628 $ 83,339 $41,903
State income tax expense, net of Federal 2,129 5,140 4,610
Divestiture tax differential (10,474) (39,304) 13,195
Foreign rate differentials 1,278 4,454 (555)
Other (511) 546 300
--------- --------- --------
Income tax expense $ 11,050 $ 54,175 $59,453
========= ========= ========
- --------------------------------------------------------------------------------------
BFH20
Temporary differences are associated with the financial statements' assets and
liabilities shown in the table below. Deferred income tax assets and
liabilities have been recorded at December 31, 1999 and 1998 as follows:
- ----------------------------------------------------------------------
ASSETS: 1999 1998
--------- --------
Non-pension post-employment $ 2,996 $ 3,034
Pension 2,945 2,046
Coupon accrual 1,885 1,886
Divestiture reserves 4,347 24,105
Foreign tax credit carryover 5,145 -
Other 5,360 -
Loss carryforwards 4,427 4,747
--------- ---------
Gross deferred tax assets 27,105 35,818
Valuation allowance (4,427) (4,747)
--------- ---------
22,678 31,071
LIABILITIES:
Property and equipment 22,149 22,967
Trademarks and other intangibles 16,608 20,883
Other 3,123 1,863
--------- ---------
41,880 45,713
--------- ---------
NET ASSET (LIABILITY) $(19,202) $(14,642)
========= =========
- ----------------------------------------------------------------------
Foods Holdings recorded valuation allowances of $4,427 and $4,747 at December
31, 1999 and 1998, respectively, for the foreign net operating losses, which
expire through 2003, due to uncertainty as to whether the deferred tax asset is
realizable. The decrease from 1998 is due to the utilization and expiration of
operating loss carryforwards relating to operations in Italy.
13. PENSION AND OTHER BENEFIT PLANS
Most employees of BFC participate in foreign and domestic pension plans. For
most salaried employees, benefits under these plans generally are based on
compensation and credited service. For most hourly employees, benefits under
these plans are based on specified amounts per year of credited service.
Pension benefits to eligible U.S. employees are provided under the Borden
domestic pension plan to which BFC contributes. BFC has assumed an
actuarially-determined portion of Borden's net pension liability; however, this
amount is considered to be an amount due to affiliate since Borden retains the
legal obligation for these benefits. Amounts payable by BFC for its portion of
the net pension liability were $8,776 and $7,910 as of December 31, 1999 and
1998, respectively, which were recorded in other long-term liabilities.
BFC provides certain health and life insurance benefits for eligible domestic
and Canadian retirees and their dependents. The costs of these benefits are
accrued as a form of deferred compensation earned during the period that
employees render service. Benefits are funded on a pay-as-you-go basis.
BFH21
Domestic participants who are not eligible for Medicare are provided with
the same medical benefits as active employees, while those who are eligible for
Medicare are provided with supplemental benefits. Canadian participants are
provided with supplemental benefits to the national healthcare plan in Canada.
The domestic postretirement medical benefits are contributory for retirements
after 1983. The Canadian medical benefits are non-contributory. The domestic and
Canadian postretirement life insurance benefit are non-contributory.
BFC also provides certain post-employment benefits, primarily medical and life
insurance benefits for long-term disabled employees, to qualified former or
inactive employees. The cost of benefits provided to former or inactive
employees after employment, but before retirement, are accrued when it is
probable that a benefit will be provided. The amounts of such charges are not
considered significant.
A reconciliation of the changes in Borden's domestic pension plan and other
postretirement (or post-employment) plans' benefit obligations and fair value of
assets over the two-year period ended December 31, 1999, and statements of the
funded status as of December 31, 1999 and 1998 were as follows:
- --------------------------------------------------------------------------------------------
BORDEN BFC
PENSION BENEFIT OTHER BENEFITS
------------------- ------------------
CHANGE IN BENEFIT OBLIGATION 1999 1998 1999 1998
-------- -------- -------- --------
Benefit obligation at beginning of year $338,984 $345,035 $ 7,303 $ 8,032
Service cost 4,317 5,623 15 15
Interest cost 21,433 24,269 685 744
Plan participants' contributions - - 409 330
Actuarial loss (gain) (4,753) 5,889 1,238 491
Benefits paid (41,291) (43,407) (2,174) (2,309)
Amendments and other 1,973 1,575 1,075 -
------------------- -------------------
Benefit obligation at end of year $320,663 $338,984 $ 8,551 $ 7,303
--------- --------- -------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $342,706 $385,151 - -
Actual returns on plan assets 75,045 (12,708) - -
Employer contributions - 13,670 $ 1,765 $ 1,979
Plan participants' contributions - - 409 330
Benefits paid (41,291) (43,407) (2,174) (2,309)
------------------- -------------------
Fair value of plan assets at end of year $376,460 $342,706 $ 0 $ 0
------------------- -------------------
FUNDED STATUS
Funded status at end of year $ 55,797 $ 3,722 $(8,551) $(7,303)
Unrecognized net actuarial loss (gain) (41,553) 10,936 1,021 (131)
Unrecognized prior service cost 5,314 3,732 - -
------------------- ------------------
Prepaid (accrued) benefit cost at end of year $ 19,558 $ 18,390 $(7,530) $(7,434)
=================== ==================
- ---------------------------------------------------------------------------------------------
BFH22
The assumptions used in the measurement of the benefit obligations of Borden for
the domestic pension plan and of BFC for other postretirement (or
post-employment) plans were as follows:
- ------------------------------------------------------------------------
BORDEN BFC
PENSION BENEFIT OTHER BENEFITS
--------------- --------------
WEIGHTED AVERAGE ASSUMPTIONS AS OF
DECEMBER 31, 1999 1998 1999 1998
----- ----- ----- -----
Discount rate 7.75% 6.75% 7.75% 6.75%
Expected rate of return on plan assets 8.75% 8.00% N/A N/A
Rate of compensation increase 4.75% 4.25% N/A N/A
- ------------------------------------------------------------------------
For measurement purposes, health care costs are assumed to increase 8.08% in
2000. The rate was assumed to decrease gradually until 2004 to a 5.75% annual
increase for both pre-65 and post-65 benefits
The components of net periodic benefit costs for the Borden domestic pension
plan and other postretirement (or post-employment) plans provided by BFC for the
years ended December 31, 1999, 1998 and 1997 were as follows:
- ------------------------------------------------------------------------------------------------
BORDEN BFC
PENSION BENEFIT OTHER BENEFITS
----------------------------- ----------------------
COMPONENTS OF NET PERIODIC BENEFIT COST 1999 1998 1997 1999 1998 1997
--------- -------- -------- ------- ----- ------
Service cost $ 4,317 $ 5,623 $ 7,146 $ 15 $ 15 $ 38
Interest cost 21,433 24,269 27,275 685 744 812
Expected return on plan assets (27,309) (26,693) (30,929) - - -
Amortization of prior service cost 391 281 288 - - -
Recognized net actuarial loss (gain) - - - - 43 52
Settlement / Curtailment loss (gain) - (1,419) 1,528 - (147) 401
Other - - - 1,160 - -
--------- --------- --------- ------ ------ ------
Net periodic benefit cost $ (1,168) $ 2,061 $ 5,308 $1,860 $ 655 $1,303
========= ========= ========= ====== ====== ======
- --------------------------------------------------------------------------------------------------
Amounts charged to BFC for participation in the Borden domestic pension plan
were $1,243, $855 (including a curtailment gain of $905 due to the divestiture
of the Signature Flavor business), and $5,660 (including a curtailment loss and
settlement loss of $862 and $2,474, respectively, due to the divestiture of the
domestic candy popcorn and cheese businesses) for the years ended December 31,
1999, 1998 and 1997, respectively.
Assumed health care cost trend rates have a significant effect on the amounts
reported for health care plans. A 1% change in the assumed health care cost
trend rates would have the following effects:
- -------------------------------------------------------------------------------------------
1% INCREASE 1% DECREASE
------------ -------------
Effect on total service cost and interest cost components of
net periodic health care benefit cost $ 39 $ (34)
Effect on the health care component of the accumulated
benefit obligation 541 (487)
- -------------------------------------------------------------------------------------------
BFH23
Certain employees of BFC participate in a Canadian pension plan. A
reconciliation of the changes in the Canadian pension plan's benefit obligations
and fair value of assets over the two-year period ended December 31, 1999, and
statements of the funded status as of December 31, 1999 and 1998 were as
follows:
- --------------------------------------------------------------------
BFC
PENSION BENEFIT
------------------
CHANGE IN BENEFIT OBLIGATION 1999 1998
-------- --------
Benefit obligation at beginning of year $20,980 $17,428
Service cost 327 369
Interest cost 976 1,090
Actuarial (gain) loss (1,608) 1,282
Benefits paid (1,275) (1,521)
Amendments 58 -
Reorganization of Plan - 3,562
Adjustment for change in exchange rates 1,072 (1,230)
------------------
Benefit obligation at end of year $20,530 $20,980
------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $23,526 $22,419
Actual returns on plan assets 539 1,307
Benefits paid (1,275) (1,521)
Employer contributions 1,095 -
Reorganization of Plan - 2,899
Adjustment for change in exchange rates 1,203 (1,578)
------------------
Fair value of plan assets at end of year $25,088 $23,526
-------- --------
FUNDED STATUS
Funded status at end of year $ 4,558 $ 2,546
Unrecognized net actuarial loss 1,870 2,357
Unrecognized prior service cost 5 5
------------------
Net amount recognized $ 6,433 $ 4,908
======= ========
- -------------------------------------------------------------------
The assumptions used in the measurement of BFC's benefit obligation for the
Canadian pension plan were as follows:
- -----------------------------------------------------------------
BFC
PENSION BENEFIT
---------------
WEIGHTED AVERAGE ASSUMPTIONS AS OF
DECEMBER 31, 1999 1998
---- ----
Discount rate 6.75% 6.00%
Expected rate of return on plan assets 7.75% 7.00%
Rate of compensation increase 3.75% 3.00%
- ---------------------------------------------------------------------
BFH24
The components of net periodic benefit costs for BFC's Canadian pension plan for
the years ended December 31, 1999, 1998 and 1997 were as follows:
- --------------------------------------------------------------------
BFC
PENSION BENEFIT
--------------------------
COMPONENTS OF NET PERIODIC BENEFIT 1999 1998 1997
------- ------ ------
Service cost $ 437 $ 369 $ 256
Interest cost 1,302 1,090 1,215
Expected return on plan assets (1,918) (1,676) (1,844)
Amortization of prior service cost 6 1 1
------- ------- --------
Net periodic benefit $ (173) $ (216) $ (372)
======== ======== ========
- --------------------------------------------------------------------
Certain employees of BFC participate in other international pension plans.
These other international pension plans have not been included in the notes to
the consolidated financial statements as they are not considered material.
Most employees not covered by one of the above plans are covered by collectively
bargained agreements, which are generally effective for five years. Under
federal pension law, there would be continuing liability to these pension trusts
if Borden ceased all or most participation in such trusts, and under certain
other specified conditions. Charges to BFC for payments to pension trusts on
behalf of employees not covered by Borden plans were not considered significant.
14. RETIREMENT SAVINGS PLAN
Eligible salaried and hourly non-bargaining U.S. employees of BFC may contribute
to a Borden sponsored retirement savings plan. BFC provides a 50% matching
contribution up to 5% of an employee's pay (7% for certain longer service
salaried employees). Amounts incurred by BFC for matching contributions were
$1,125, $1,522 and $2,084 for the years ended December 31, 1999, 1998 and 1997,
respectively.
15. DERIVATIVE FINANCIAL INSTRUMENTS
BFC is exposed to foreign exchange risk on transactions, which are denominated
in a currency other than the operating unit's functional currency. It is BFC's
policy to reduce foreign currency cash flow exposure due to exchange rate
fluctuations by hedging anticipated and firmly committed transactions wherever
economically feasible (within the risk limits established in the BFC policy).
BFC closely monitors its foreign currency cash flow transactions and enters into
forward contracts to buy and sell foreign currencies only to reduce its foreign
exchange exposure and protect the U.S. dollar value of such transactions, to the
extent of the amount under contract.
In accordance with current accounting standards, gains and losses arising from
contracts that hedge future transactions are deferred until the related
transactions occur. Those arising from contracts that hedge existing
BFH25
transactions (i.e., outstanding payables denominated in foreign currency), are
recorded currently in income and offset the gains and losses that occur as
exchange rates change. The cash flows from forward contracts accounted for as
hedges of identifiable transactions are classified consistent with the cash
flows from the transaction being hedged.
At December 31, 1999 and 1998, BFC had $14,136 and $16,005 of notional value,
respectively, of forward foreign currency exchange contracts outstanding. These
contracts are part of a worldwide program to minimize foreign currency exchange
operating income and balance sheet exposure. The unsecured contracts mature
within 12 months and are executed, by an affiliate, with banks. BFC is exposed
to credit loss in the event of non-performance by the other parties to the
contracts. BFC evaluates the creditworthiness of the counterparties' financial
condition and does not expect default by the counterparties.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the notional amount and fair value, based on dealer
quotes, of BFC's financial instruments at December 31, 1999 and 1998. The fair
value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. The carrying amounts of cash and cash equivalents,
accounts receivable and payable, accrued liabilities and debt are considered
reasonable estimates of their fair values.
- -------------------------------------------------------------------------------------
1999 1998
---------------------- ---------------------
Notional Fair Notional Fair
Amount Value Amount Value
-------- ------ -------- -----
DERIVATIVES RELATING TO:
Foreign currency contracts - gains $14,136 $94
Foreign currency contracts - losses $16,005 $(319)
------- ---- ------- ------
$14,136 $94 $16,005 $(319)
======= ==== ======= ======
- -------------------------------------------------------------------------------------
As discussed in Note 10, Foods Holdings guarantees obligations under Borden's
Credit Agreement and all of Borden's outstanding publicly held debt on a pari
passu basis. Management does not expect these guarantees to have a material
adverse effect on the financial position of Foods Holdings. Fair value was not
assigned to these guarantees due to the complexity of the arrangements and the
absence of the expected funding and market for these financial instruments.
17. UNIT INCENTIVE PLAN
A Unit Incentive Plan ("Incentive Plan") was formed which provides for the
granting of options, UAR's, units and other unit-based equity interests in LLC
to key employees of BFC and associated persons.
LLC sold 1,080,000 Class A units to certain management employees of BFC under
the Incentive Plan. The Class A units are generally restricted as to transfer
and allow for LLC, at its discretion, to repurchase the units, upon certain
conditions including termination of the unitholders' employment, prior to full
vesting after five years. Since the initial offering, LLC sold an additional
20,000 Class A units and repurchased 777,000 Class A units from management.
Class A units outstanding at December 31, 1999 and 1998 were 323,000 and
416,000, respectively.
BFH26
In 1999, LLC sold 389,125 Class C units to certain management employees of BFC.
The Class C units are generally restricted as to transfer and allow for LLC, at
its discretion, to repurchase the units, upon certain conditions including
termination of the unitholders' employment, prior to full vesting after five
years. LLC repurchased 3,125 Class C units from management during 1999.
In 2000, BFC sold 99,492 Class D units to certain management employees of BFC.
The Class D units are generally restricted as to transfer and allow for LLC, at
its discretion, to repurchase the units, upon certain conditions including
termination of the unitholders' employment, prior to full vesting after five
years.
Under the Incentive Plan, BFC issued Unit Appreciation Rights (UAR's) to the
unitholders. The UAR entitles the unitholder to receive an amount in cash equal
to the excess of the market price (as defined in the UAR agreement) of the Class
A, Class C, or Class D unit over the exercise price of the UAR. The UAR's vest
ratably over five years and expire upon certain events, including termination of
the unitholders' employment, but in no case to exceed ten years. Four UAR's
were issued for each Class A unit purchased (one UAR with an exercise price of
$10 per unit and three UAR's with an exercise price of $20 per unit), for each
Class C unit purchased (four UAR's with an exercise price of $8 per unit) and
for each Class D unit purchased (four UAR's with an exercise price of $8.50 per
unit). During 1998, the exercise prices for Class A units were revalued to
$5.85 and $15.85, respectively.
In 1999, BFC issued 592,000 UAR's with an exercise price of $8 per unit to
non-unitholders. The UAR entitles the recipient to receive an amount in cash
equal to the excess of the market price (as defined in the UAR agreement) of the
unit over the exercise price of the UAR. The UAR's vest ratably over five years
and expire upon certain events, including termination of the recipient's
employment, but in no case to exceed ten years. Non-unitholders had 581,000
UAR's outstanding at December 31, 1999.
The weighted-average remaining contractual life of the outstanding UAR's is
approximately 7.71 years as of December 31, 1999. UAR's awarded to Class A
unitholders will expire on January 1, 2006. UAR's awarded to Class C
unitholders and non-unitholders will expire on October 1, 2008.
Compensation expense is accrued in other current liabilities and shall be
adjusted in subsequent periods up to the measurement date for changes, increase
or decreases, in the market price of the UAR's. Compensation expense was $867
for the year ended December 31, 1999. Since the exercise price exceeded the
underlying value of the UAR's, no compensation expense was recorded in relation
to the issuance of UAR's in 1998 or 1997.
As the UAR's are settled in cash, the change in value of the UAR's is accounted
for under the liability method as prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25). Due to
the cash nature of the award, treatment under SFAS No. 123, "Accounting for
Stock Based Compensation," would be synonymous with APB No. 25 and accordingly,
no fair market value disclosures are applicable.
BFH27
18. COMMITMENTS AND CONTINGENCIES
Legal Matters
- --------------
In July 1995, a Fresno, California jury returned a verdict against BFC for
wrongful termination of a tomato packing agreement. In granting the award for
lost profits to Helm Tomatoes, Inc., the jury found that while the business had
a legal right to terminate the agreement, it was estopped from doing this by an
oral representation made by a former employee. BFC had previously established a
reserve in other current liabilities of $14,500 for the verdict, interest and
legal costs. In 1999, BFC and Helm Tomatoes, Inc. reached agreement to settle
the claim with payments from BFC of $3,300 in May 1999 and $3,400 in May 2000.
A gain of $7,500, derived from the difference between the initial reserve less
the settlement and legal fees, was recorded in general and administrative
expense during 1999.
BFC is involved in certain other legal proceedings arising through the normal
course of business. Management is of the opinion that the final outcomes of
such proceedings should not have a material impact on BFC's results of
operations or financial position.
Inventory Commitments and Risks
- ----------------------------------
Raw materials, such as semolina and tomatoes account for a high percentage of
BFC's total production costs. BFC purchases a major portion of these materials
under market sensitive supply contracts, and therefore BFC's operating results
are subject to short term fluctuations in these raw material market prices.
Because of the highly competitive and price sensitive nature of the markets in
which BFC operates, BFC's ability to pass these raw material price increases
through to the customer is limited and often depends upon BFC's competitors
raising their prices as well.
WISE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1999
WH2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Shareholder of Wise Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Wise Holdings,
Inc. and subsidiaries (a wholly owned subsidiary of BW Holdings LLC) as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, shareholder's equity and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Wise Holdings, Inc. and
subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with generally accepted accounting principles.
Columbus, Ohio
February 11, 2000
WH3
WISE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands, except per share amounts) 1999 1998 1997
- --------------------------------------------------------------------------------------------
Net sales $229,008 $228,739 $242,176
Cost of goods sold 139,984 142,153 150,316
--------- --------- ---------
Gross margin 89,024 86,586 91,860
Distribution expense 28,915 28,662 27,501
Marketing expense 35,362 36,781 39,459
General and administrative expense 19,815 19,181 21,247
Loss on divestiture of business 438
Business realignment expense 720 1,900
--------- --------- ---------
Operating income (loss) 4,212 (376) 3,653
Interest expense 840 756 1,146
Interest income (129) (257) (290)
Other (income) expense (9) 161 (331)
--------- --------- ---------
Income (loss) before income tax 3,510 (1,036) 3,128
Income tax expense (benefit) 1,369 (179) 1,292
--------- --------- ---------
Net income (loss) $ 2,141 $ (857) $ 1,836
========= ========= =========
Per Share Data
- ---------------
Basic and diluted income (loss) per common share $ 30.59 $ (12.24) $ 26.23
Average number of common shares outstanding
during the period 70 70 70
- --------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
WH4
WISE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 2,072 $ 2,610
Accounts receivable (net of allowance for doubtful accounts of $2,261 and $2,427, respectively) 22,690 22,181
Affiliated receivables 1 15
Inventories:
Finished goods 3,942 4,045
Raw materials and supplies 3,883 3,886
Deferred income taxes, net 1,923 2,651
Prepaid and other current assets 3,668 3,660
------- -------
38,179 39,048
------- -------
PROPERTY AND EQUIPMENT
Land 1,412 1,412
Buildings and improvements 6,103 5,352
Machinery and equipment 51,185 45,120
------- -------
58,700 51,884
Less accumulated depreciation 24,949 19,769
------- -------
33,751 32,115
------- -------
INTANGIBLES AND OTHER ASSETS
Trademarks (net of accumulated amortization of
$2,350 and $1,880, respectively) 16,461 16,931
Other Assets 836 808
------- -------
17,297 17,739
------- -------
TOTAL ASSETS $89,227 $88,902
======= =======
- ------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
WH5
WISE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
(In thousands, except per share amounts) 1999 1998
- --------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Debt payable within one year $ 6,566 $ 168
Accounts and drafts payable 12,996 16,060
Affiliated payables 197 463
Accrued liabilities 13,703 14,954
------- -------
33,462 31,645
------- -------
OTHER LIABILITIES
Long-term debt payable to Borden, Inc. - 5,000
Deferred income taxes, net 1,539 2,198
Non-pension postemployment benefit obligations 10,101 9,513
Affiliated employee benefit obligations 2,818 2,165
Other long-term liabilities 333 455
Minority interest 1,125 218
------- -------
15,916 19,549
------- -------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
SHAREHOLDER'S EQUITY
Common stock - $0.01 par value 70 shares authorized, issued and outstanding
Preferred stock - $0.01 par value, 30 shares authorized, none issued and outstanding
Paid in capital 34,980 34,980
Retained earnings 4,869 2,728
------- -------
39,849 37,708
------- -------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $89,227 $88,902
======= =======
- --------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
WH6
WISE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income (loss) $ 2,141 $ (857) $ 1,836
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and amortization 6,774 6,031 6,555
Provision (benefit) for deferred income taxes 69 (150) (1,455)
Business realignment 720 1,900
Other non cash 428 571 1,057
Net change in assets and liabilities:
Accounts receivable (343) (599) (666)
Affiliated receivables 14 1,189 1,778
Inventories 106 (461) 959
Prepaid and other current assets (8) 201 297
Other assets (28) 81 413
Accounts and drafts payable (3,064) 4,922 (3,354)
Affiliated payables (266) (1,004) (696)
Accrued liabilities (1,426) (2,605) 1,297
Non-pension postemployment 588 (275) 32
Affiliated employee benefit obligations 653 348 570
Other long-term liabilities (122) 84 371
-------- -------- --------
6,236 9,376 8,994
-------- -------- --------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (8,952) (9,770) (5,359)
Proceeds on sale of equipment 98 189 759
Purchase of business (186) (273) (1,037)
Divestiture of business 2,107
-------- -------- --------
(9,040) (7,747) (5,637)
--------- -------- --------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Management ownership 868 (521) 95
Short-term borrowings 6,780 365 742
Repayment of short-term borrowings (382) (467) (472)
Payment of affiliated long term debt (5,000) (2,000) (3,145)
--------- -------- --------
2,266 (2,623) (2,780)
--------- -------- --------
(Decrease) increase in cash and equivalents (538) (994) 577
Cash and equivalents at beginning of year 2,610 3,604 3,027
--------- -------- --------
Cash and equivalents at end of year $ 2,072 $ 2,610 $ 3,604
========= ======== ========
- ------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
WH7
WISE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash Paid:
Interest $973 $581 $1,474
Taxes 659 152
Non-cash Activity:
Exchange of accounts receivable for assets of business 62 878
Change in affiliated tax sharing arrangement 780
- ---------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
WH8
WISE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
COMMON PAID IN RETAINED
(In thousands) SHARES CAPITAL EARNINGS TOTAL
- ----------------------------------------------------------------------------------------
Balance, December 31, 1996 100 $ 34,200 $ 1,749 $ 35,949
- ----------------------------------------------------------------------------------------
Change in affiliated tax sharing
arrangement 780 780
Net income 1,836 1,836
- ----------------------------------------------------------------------------------------
Balance, December 31, 1997 100 34,980 3,585 38,565
- ----------------------------------------------------------------------------------------
Change in authorized shares
Outstanding (30)
Net (loss) (857) (857)
- ----------------------------------------------------------------------------------------
Balance, December 31, 1998 70 34,980 2,728 37,708
- ----------------------------------------------------------------------------------------
Net income 2,141 2,141
- ----------------------------------------------------------------------------------------
Balance, December 31, 1999 70 $ 34,980 $ 4,869 $ 39,849
- ----------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
WH9
WISE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except for per share information)
1. BACKGROUND
In September 1994, Borden, Inc. ("Borden") entered into a merger agreement that
provided for the acquisition (the "Acquisition") of all of Borden's outstanding
common stock by affiliates of Kohlberg Kravis Roberts & Co. ("KKR"). Borden
elected not to apply push down accounting in its consolidated financial
statements as a result of public debt that was outstanding prior to the
Acquisition, and as such Borden's financial statements, including Wise Holdings,
Inc. ("Wise"), are reported on Borden's historical cost basis. As discussed in
the "Basis of Presentation," the accompanying financial statements of Wise have
been prepared on a purchase accounting basis from the date of KKR's acquisition
of Borden. The effective date of the merger agreement was January 1, 1995 for
accounting and financial statement presentation purposes.
Effective July 2, 1996, in a taxable transaction (the "Incorporation"), Borden
sold its salty snacks business ("Wise operations") to BW Holdings LLC
("BWHLLC"), a KKR affiliate, for $45 million. The purchase price was based on an
independent valuation of the business. There was no change in the financial
reporting basis of the assets and liabilities as of July 2, 1996 from that
described below under "Basis of Presentation" because Borden's principal
stockholders will continue to exercise significant financial control over Wise.
Wise fully and unconditionally guarantees obligations under Borden's credit
facility and all of Borden's publicly held debt on a pari passu basis. In
connection with this guarantee, Wise receives an annual fee of $210.
2. NATURE OF OPERATIONS
Wise is a producer and distributor of salty snacks in the eastern United States.
Wise's product line includes potato chips, cheese flavored baked and fried corn
snacks, pretzels, tortilla chips, corn chips, onion rings, pork rinds and other
assorted snacks. Wise markets its products under the brand names of WISER(R),
CHEEZ DOODLE(R), QUINLAN(R), NEW YORK DELI(R), KRUNCHERS!(R), BRAVO(R),
MOORE'S(R) AND WISE CHOICe(TM) and conducts its business through two principal
divisions: Wise and Moore's. The Wise and Moore's divisions manufacture and
distribute primarily in the eastern United States. Wise's products are
distributed through both independent and company-owned distribution networks.
On May 11, 1998 Wise sold its Caribbean Snacks, Inc. subsidiary, which had
served as a distribution center throughout Puerto Rico and the Caribbean (See
Note 16 - - Business Acquisitions and Divestiture).
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
As a result of the financial guarantee and in accordance with Regulation S-X
rule 3-10, Borden is required to include in its filings with the Securities and
Exchange Commission separate financial statements for Wise as if it were a
registrant. The accompanying financial statements were prepared on a purchase
accounting basis that allocates approximately $51 million of the original KKR
purchase price of Borden to the Wise operations. The purchase price has been
allocated to tangible and intangible assets and liabilities of Wise based on
independent appraisals and management estimates.
WH10
The consolidated financial statements include the accounts of Wise and its
subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation. Wise remains a wholly owned subsidiary of BWHLLC.
Cash and Equivalents
- --------------------
Cash and equivalents include cash on deposit and all highly liquid investments
purchased with an original maturity of three months or less.
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.
Property and Equipment
- ----------------------
Depreciation is recorded on the straight-line basis over the estimated useful
lives of the assets. The estimated useful lives are principally 10 to 40 years
for buildings and improvements and 3 to 13 years for equipment. Major renewals
and betterments are capitalized; maintenance, repairs and minor renewals are
expensed as incurred.
Trademarks
- ----------
Trademarks are amortized on a straight-line basis over not more than forty
years.
Revenue Recognition
- -------------------
Product 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 and promotion
expenses are expensed as incurred.
General Insurance
- -----------------
Wise has insurance policies to cover potential losses and liabilities relating
to workers' compensation, health and welfare claims, physical damage to property
(other than autos), business interruption and comprehensive general, product and
vehicle liability. However, many of these policies have deductibles of $100 and
in most cases higher amounts. Losses are accrued for the estimated aggregate
liability for claims incurred using certain actuarial assumptions and Wise's
experience.
Futures Contracts
- -----------------
Wise uses futures to hedge the price risks associated with raw materials used in
the production of salty snacks. Wise defers the impact of changes in the market
value of these contracts until such time as the hedged transaction is completed.
Changes in market value of the futures contracts are included in the measurement
amounts of qualifying subsequent purchases of raw materials. These contracts
generally mature in less than one year.
Income Taxes
- ------------
Wise accounts for income taxes pursuant to Statement of Financial Accounting
Standard ("SFAS") No. 109, Accounting for Income Taxes, which uses the liability
method to calculate deferred income taxes. 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.
WH11
- ------
Earnings Per Share
- ------------------
Basic and diluted earnings (loss) per common share are computed by dividing net
income by the weighted average number of common shares outstanding during the
period ended December 31, 1999 and 1998, respectively. On April 24, 1998 the
number of shares authorized and outstanding was reduced for administrative and
tax purposes. The per share information for December 31, 1999, 1998 and 1997 is
computed based on the adjusted shares outstanding.
Concentrations of Credit Risk
- -----------------------------
Financial instruments that potentially subject Wise to concentrations of credit
risk consist principally of temporary cash investments, marketable securities,
and accounts receivable. Wise invests its excess cash with Borden which in turn
places temporary cash investments and marketable securities with high quality
institutions and performs ongoing evaluations of the financial condition of the
institutions. Wise, by policy, limits the amount of credit exposure to any one
institution. Concentrations of credit risk with respect to accounts receivable
are limited; however, a group of distributors generally under common control
comprise approximately 20% of net trade sales. Wise generally does not require
collateral or other security to support customer receivables, however under some
circumstances Wise will obtain collateral to mitigate risk. Wise monitors its
exposure to credit losses and maintains allowances for anticipated losses.
Impairment
- ----------
Periodically and as circumstances warrant Wise evaluates the recoverability of
property and equipment and intangibles by assessing whether the carrying value
can be recovered over its remaining useful life through expected future
undiscounted cash flows. In the opinion of management, no such impairment
existed at December 31,1999 and 1998.
Stock Options
- -------------
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 123,
Accounting for Stock-Based Compensation. As permitted by SFAS No. 123, Wise will
continue to apply its current accounting policy of the intrinsic value method
under Accounting Principles Board Opinion No. 25 and will include the additional
disclosures required by SFAS No. 123.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
most significant estimates in Wise's financial statements are related to
allowance for doubtful accounts, accruals for trade promotions, general and
group insurance, income taxes, postemployment benefits and asset lives. Actual
results could differ from those estimates.
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform with the 1999
presentation.
Recently Issued Accounting Statements
- -------------------------------------
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. Wise implemented this pronouncement as
of January 1, 1999. Internal costs of $384 were capitalized in 1999 which would
have been expensed as incurred.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 1999, the FASB issued SFAS 137,
which deferred the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000, and requires all derivatives be measured at fair value and
recorded on a company's balance sheet as an asset or liability, depending upon
the company's underlying rights or obligations associated with the derivative
instrument. Wise is investigating the impact of this pronouncement.
WH12
4. ACCRUED LIABILITIES
Accrued liabilities at December 31 were as follows:
- ---------------------------------------------
1999 1998
------------------
Compensation $ 2,670 $ 2,557
General insurance 4,820 5,292
Advertising and promotion 3,800 3,772
Other 2,413 3,333
------------------
Total $13,703 $14,954
- ---------------------------------------------
5. DEBT
AFFILIATED:
Wise entered into a loan agreement (the "Loan Agreement") to borrow funds from
Borden.
Revolving Loan
- --------------
The Revolving Loan Agreement, as amended, provided for a revolving loan facility
of up to $5 million maturing in November 1999, at a variable interest rate equal
to Borden's cost of funds for 30 day LIBOR borrowings plus 0.25%. A commitment
fee of 0.10% is paid on the unused portion of the revolving loan. Wise had no
borrowings under this agreement at December 31, 1998 and terminated this
agreement in December 1999.
In December 1999, Wise entered into a new revolving loan agreement, which
provided for a revolving facility of up to $15 million maturing in December 2000
at a variable interest rate equal to Borden's cost of funds for 30 day LIBOR
borrowings plus between 75 and 175 basis points calculated using a debt to
earnings ratio schedule. Wise had $6,450 of borrowings under this revolving
agreement at December 31, 1999 at a rate of 7.20%. A commitment fee between
0.15% and 0.35% is paid on the unused portion of the revolving loan based on the
same debt to earnings ratio schedule.
Long-Term Loan
- --------------
The Long Term Loan Agreement, as amended, also provided for a $10.145 million
term loan with a fixed interest rate of 11% maturing in November 2000, payable
in full at the maturity date. Wise terminated this agreement in December 1999.
Borrowings under this agreement at December 31, 1998 were $5 million.
Interest charges under the Loan Agreement amounted to $840, $756 and $1,146 in
1999, 1998 and 1997 respectively.
The Loan Agreement contains certain restrictions on the activities of Wise and
its subsidiaries, including restrictions on liens, the incidence of
indebtedness, mergers and consolidations, sales of assets, investments, payment
of dividends (requires prior approval from Borden, as creditor), changes in
nature of business, prepayments of certain indebtedness, transactions with
affiliates, capital expenditures, changes in control of the Company, hedging
activities and the use of proceeds from asset sales.
WH13
NON AFFILIATED:
Wise enters into unsecured agreements with a third party to finance insurance
premiums. Total borrowings under these agreements were $116 and $168 at December
31, 1999 and 1998, respectively. The interest rates under these agreements are
variable, and were 6.30% and 5.49% at December 31, 1999 and 1998, respectively.
6. RETIREMENT INCOME PLANS
Borden sponsors a defined contribution retirement savings plan in which eligible
salaried and hourly non-bargaining employees may contribute up to 5% of their
pay (7% of certain longer service salaried employees), which are generally
matched 50% by Borden. Charges to operations for matching contributions for Wise
employees under Borden's retirement savings plan for 1999, 1998 and 1997
amounted to $602, $708 and $726, respectively.
Most employees of Wise participate in defined benefit pension plans sponsored by
Borden or one of the union-sponsored plans. For most salaried employees,
benefits under these plans generally are based on compensation and years of
credited service. For most hourly employees, benefits under these plans are
based on specified amounts per year of credited service.
Wise has recorded a net pension liability of $2,818 and $2,165 at December 31,
1999 and 1998, respectively, which approximates the portion of the total pension
assets or liabilities of Borden that relate to the employees of Wise. The gross
pension obligation was allocated to Wise based upon the actuarially determined
obligation relating to Wise's employees. The pension expense allocated to Wise
for Borden's plans was $400, $556 and $511 during 1999, 1998 and 1997,
respectively.
Most Wise employees who are not covered by Borden's plans are covered by
collectively bargained agreements, which are generally effective for five years.
Under Federal pension law, there would be continuing liability to these pension
trusts if Wise or Borden ceased all or most participation in any trust, and
under certain other specified conditions. Operations were charged $222, $218 and
$234 in 1999, 1998 and 1997, respectively, for payments to pension trusts on
behalf of employees not covered by Borden plans.
Borden's funding of its pension plans equals or exceeds the minimum funding
requirements imposed by Federal and foreign laws and regulations.
WH14
For informational purposes, the funded status of the Borden plan on a purchase
accounting basis, at December 31 is as follows:
BORDEN, INC.
Pension Benefit
- ---------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATIONS 1999 1998
--------------------
Benefit obligation at beginning of year $338,984 $345,035
Service cost 4,317 5,623
Interest cost 21,433 24,269
Actuarial loss (4,753) 5,889
Benefits paid (41,291) (43,407)
Amendments 1,973 1,575
--------------------
Benefit obligations at end of year 320,663 338,984
--------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 342,706 385,151
Actual return on plan assets 75,045 (12,708)
Employer contributions - 13,670
Benefits paid (41,291) (43,407)
--------------------
Fair value of plan assets at end of year 376,460 342,706
--------------------
Funded Status 55,797 3,722
Unrecognized net actuarial loss (gain) (41,553) 10,936
Unrecognized prior service cost 5,314 3,732
--------------------
Prepaid pension asset $ 19,558 $ 18,390
- ---------------------------------------------------------------------
Assumptions:
Discount rate 7.75% 6.75%
Expected return on plan assets 8.75% 8.00%
Rate of compensation increase 4.75% 4.25%
Plan assets consist primarily of equity securities and corporate obligations.
7. NON-PENSION POSTEMPLOYMENT BENEFITS
Wise uses Borden sponsored plans to provide 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 these benefits as a form of deferred
compensation earned during the period that employees render service when it is
probable that the benefit will be provided.
Participants who are not eligible for Medicare are provided with the same
medical benefits as active employees, while those who are eligible for Medicare
are provided with supplemental benefits. The postretirement medical benefits are
contributory, the postretirement life insurance is noncontributory. Benefits are
funded on a pay-as-you-go basis.
WH15
- ---------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATIONS 1999 1998
--------------------
Benefit obligation at beginning of year $ 6,366 $ 7,914
Service cost 9 5
Interest cost 412 555
Plan participants' contributions 150 32
Actuarial gain (427) (1,954)
Benefits paid (182) (186)
--------------------
Benefit obligations at end of year 6,328 6,366
--------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year - -
Actual return on plan assets - -
Employer contributions 32 154
Plan participants' contributions 150 32
Benefits paid (182) (186)
--------------------
Fair value of plan assets at end of year - -
--------------------
Funded Status (6,328) (6,366)
Unrecognized net actuarial gain (2,833) (2,407)
--------------------
Accrued postretirement liability ($9,161) ($8,773)
- ---------------------------------------------------------------------
The discount rate used in determining the accumulated postretirement benefit
obligation at December 31, 1999 and 1998 was 7.75% and 6.75%, respectively. For
measurement purposes, health care costs are assumed to increase 8.08% in 2000
grading down gradually to a constant level 5.75% annual increase for both pre-65
and post-65 benefits by the year 2004. The comparable assumptions for the prior
year were 7.67%, declining to 4.75% by the year 2004.
Components of the net benefit expense for the years ended December 31, 1999,
1998 and 1997 are as follows:
- ----------------------------------------------------
1999 1998 1997
--------------------
Service cost $ 9 $ 5 $ 19
Interest cost 412 555 582
Recognized net actuarial loss - 32 37
--------------------
Net expense $ 421 $ 592 $ 638
- ----------------------------------------------------
Assumed health care cost rates have a significant effect on the amounts reported
for health care plans. A one-percentage-point change in the assumed health care
cost trend rates would have the following effects as of and for the year ending
December 31, 1999:
1% 1%
INCREASE DECREASE
---------- ---------
Effect on total service cost and interest cost components $ 37 ($33)
Effect on postretirement benefit obligation $ 458 ($412)
WH16
8. FINANCIAL INSTRUMENTS
Futures Contracts
- -----------------
During 1997, Wise entered into commodity futures to hedge the risk of
fluctuating raw material prices. At December 31, 1997 there were $900 of
commodity futures outstanding. The fair value of commodity futures as of
December 31, 1997 was unfavorable $61 (based on dealer quotes). This amount was
deferred by Wise as of December 31, 1997 and was reflected in the cost of the
commodity as it was actually purchased. Total deferred losses at December 31,
1997 relating to contracts closed but not yet amortized were $10. Wise did not
have any commodity futures outstanding at December 31, 1998 and 1999.
Wise is exposed to credit-related losses in the event of nonperformance by
counterparties to financial instruments, but it does not expect any
counterparties to fail as all counterparties have investment grade credit
ratings.
Debt Guarantees
- ---------------
As discussed in Note 11, Wise guaranteed obligations under Borden's credit
facility and all of Borden's outstanding publicly held debt on a pari passu
basis. Wise also guarantees outstanding debt for an independent distributor.
Management does not expect these guarantees to have a material adverse effect on
the consolidated results of operations or financial position of Wise. Fair value
was not assigned to these guarantees due to the complexity of the arrangements
and both the absence of expected funding and market for these financial
instruments.
Assets and Liabilities
- ----------------------
The carrying amount for cash and cash equivalents, receivables, accounts payable
and accrued liabilities approximates fair value due to the short maturities of
these instruments. The fair value of long-term debt is estimated based on
current rates offered to Wise for debts of like maturities and approximates its
carrying value.
9. INCOME TAXES
Wise files its income tax returns as a separate legal entity.
The provision (benefit) for income taxes consisted of:
- -------------------------------------------
1999 1998 1997
--------------------------
FEDERAL
Current $1,124 $ (25) $ 2,466
Deferred 56 (129) (1,307)
--------------------------
1,180 (154) 1,159
--------------------------
STATE AND LOCAL
Current 176 (4) 281
Deferred 13 (21) (148)
--------------------------
189 (25) 133
--------------------------
Total provision $1,369 $(179) $ 1,292
- -------------------------------------------
WH17
A reconciliation of the statutory U.S. Federal income tax rate to the effective
tax rate is as follows:
- ------------------------------------------------------------------
1999 1998 1997
-----------------------
Federal income tax (benefit) at statutory
rate $1,193 $(352) $1,094
State and local income taxes,
less Federal income tax benefit 128 (18) 94
Stock sale of Caribbean Snacks - 151 -
Meals and entertainment 68 79 82
Other (20) (39) 22
-----------------------
Total $1,369 $(179) $1,292
- ------------------------------------------------------------------
The net current and non-current components of deferred income taxes recognized
in the balance sheets at December 31, 1999 and 1998 follow:
- ------------------------------------------------------------------
1999 1998
------------------
Net current asset $ 1,923 $ 2,651
Net non-current liability (1,539) (2,198)
------------------
Net asset $ 384 $ 453
- ------------------------------------------------------------------
The tax effects of significant temporary differences and loss carry forwards
which comprise the deferred tax assets and liabilities at December 31, 1999 and
1998 follow:
- ------------------------------------------------------------------
1999 1998
--------------
DEFERRED TAX ASSETS:
Reserve for doubtful accounts $ 882 $ 769
Employee benefits and related items 4,017 3,937
General insurance 1,880 2,064
Other-net 547 253
Other long term liabilities 1,233 836
Restructuring reserve - 640
--------------
Total deferred tax assets $8,559 $8,499
==============
DEFERRED TAX LIABILITIES:
Parts and samples inventory $1,017 $999
Prepaid and other assets 353 302
Property and equipment 5,797 6,024
Trademarks 1,008 721
--------------
Total deferred tax liabilities 8,175 8,046
==============
Net deferred tax asset $384 $453
- ------------------------------------------------------------------
The Company's net deferred tax asset at December 31, 1999 was $384. Realization
of the entire deferred tax asset is dependent on generation of approximately
$985 of future taxable income. Management believes that it is more likely than
not that sufficient additional income will be earned to fully realize this
benefit. Accordingly, no valuation allowance is necessary at December 31, 1999.
WH18
In a limited tax sharing arrangement with Borden, Wise was reimbursed for taxes
paid subsequent to July 2, 1996 for an aggregate sum of $2,562. At Incorporation
Borden agreed to reimburse Wise $1,782 under this arrangement. Upon finalization
of Borden's 1996 corporate tax return, Borden agreed to increase tax
reimbursements by $780 in 1997. This change in affiliated tax sharing
arrangement has been accounted for as a permanent increase to paid-in-capital.
During 1999 and 1998, Borden paid taxes on the behalf of Wise under this tax
sharing arrangement of $0 and $1,101, respectively.
10. MINORITY INTEREST
As part of the Incorporation, Wise sold equity interests in Wise Foods Holdings,
Inc. ("Wise Foods"), a subsidiary, to key management personnel for consideration
of $655, resulting in an ownership percentage of 1.87%. At that time, options
were also issued which vest over five years and allow management to purchase
additional shares resulting in an ownership of up to 6% of the subsidiary. In
1997 Wise sold equity interests to key management for consideration of $95,
increasing the minority interest ownership percentage to 2.15%. In 1998 Wise
repurchased equity interests from management in consideration of $521,
decreasing the minority ownership percentage to .6% under similar circumstances
as described above. In 1999 Wise sold equity interests to key management for
consideration of $868, increasing the minority interest ownership percentage to
1.83%. Wise Foods imposes significant restrictions on transfers of shares of
this common stock. These shares are generally non-transferable prior to the
fifth anniversary from the initial purchase of the common stock. In addition, on
or prior to full vesting, Wise Foods retains the right, but is not obligated, to
repurchase stock from the purchaser for various reasons, but principally upon
termination of employment. Management's ownership interest in Wise Foods is
recorded in the financial statements of Wise as minority interest and included
in Other Expense.
11. COMMITMENTS AND CONTINGENCIES
Lease Obligations
- -----------------
Wise leases warehouses, office facilities, motor vehicles and various types of
equipment under operating leases. Lease terms generally range from one to eight
years.
Future minimum annual rentals under operating leases at December 31, 1999 are as
follows:
- ------------------------------------------------
NON-
AFFILIATED AFFILIATED
---------------------------
2000 $ 994 $ 1,986
2001 601 1,546
2002 334 802
2003 170 304
2004 88 150
2005 and beyond 15 154
---------------------------
Total $ 2,202 $ 4,942
- ------------------------------------------------
The affiliated leases are part of a lease agreement that Borden has with a third
party lender. As such, management believes Wise benefits through lower lease
payments due to Borden's volume purchasing ability and credit standing with the
creditor.
Total rental expense for operating leases in 1999, 1998 and 1997 was $4,729,
$4,710 and $4,855, respectively.
WH19
- ------
Environmental Contingencies
- ---------------------------
Wise, like others in similar businesses, is subject to extensive Federal, state
and local environmental laws and regulations. Although Wise's environmental
policies and practices are designed to ensure compliance with these laws and
regulations, future developments could require Wise to make additional
unforeseen environmental expenditures.
Environmental accruals are routinely reviewed as events and developments warrant
and are subject to an annual comprehensive review.
Litigation
- ----------
Wise is subject to various investigations, claims and legal proceedings covering
a wide range of matters in the ordinary course of its business activities. Each
of these matters is subject to various uncertainties and some of these matters
may be resolved unfavorably to Wise. Wise has established accruals for matters
that are probable and reasonably estimable. Management believes that any
liability that may ultimately result from the resolution of these matters in
excess of amounts provided will not have a material adverse effect on the
financial statements of Wise.
Raw Materials
- -------------
Wise purchases raw materials used in manufacturing and processing its snack food
products on the open market and under contract through brokers and directly from
growers. In accordance with purchase practice, Wise typically secures
approximately 75% of the following year's estimated potato requirement under
purchase contracts. Wise has also entered into purchase contracts for 100% of
estimated year 2000 requirements of oil, cornmeal, flour, popcorn and pretzel
flour. A large part of the raw materials used by Wise consists of farm
commodities which are subject to precipitous change in supply and price. Weather
varies from season to season and directly affects both the quality and supply
available. Wise has no control of the agricultural aspects and its profits are
affected accordingly.
Debt Guarantees
- ---------------
As an affiliate guarantor, Wise has guaranteed Borden's credit facility and all
of Borden's outstanding publicly held debt on a pari passu basis. Wise's
aggregate liability under this guarantee shall not exceed the greater of its
outstanding affiliated borrowings, or 95% of its adjusted net assets while
Borden or any other obligated parties have obligations outstanding. Borden's
outstanding credit facility and outstanding public borrowings amounted to
$547,745 at December 31, 1999. Wise also guarantees $602 of outstanding debt for
an independent distributor of Wise products.
Management does not expect these guarantees will have a material adverse effect
on the consolidated financial statements of Wise.
12. RELATED PARTIES
In addition to the affiliated debt and lease agreements, Wise is engaged in
various transactions with Borden and its affiliated companies in the ordinary
course of business.
Borden provides certain administrative services to Wise at negotiated fees.
These services include: processing of payroll as well as active and retiree
group insurance claims and securing insurance coverage for catastrophic claims.
Wise reimburses the Borden subsidiary for payments for general disbursements and
general and group insurance and retirement benefit claims. The amount owed by
Wise for these services is included in affiliated payables and was $197 and $463
at December 31, 1999 and 1998, respectively. Effective July 1, 1997, Wise
secured the services of a third party for its general insurance needs related to
losses that occur after the effective date and makes payments directly to a
third party vendor.
WH20
Wise is generally self-insured for general insurance claims and post-employment
benefits other than pensions. The liabilities for these obligations are included
in Wise's financial statements. By agreement, Borden has retained the obligation
for active group insurance claims incurred in 1996 and paid in 1997.
During 1997, the majority of hourly employees at two plants converted their
group insurance coverage from a Borden sponsored plan to a third party
non-affiliated plan.
The following table summarizes the costs to Wise:
- -------------------------------------------------------
1999 1998 1997
----------------------
Employee benefits $2,198 $1,878 $2,103
Group and general insurance 2,182 2,319 4,193
Information services 478 352 309
Corporate staff departments and
overhead 697 1,452 1,763
----------------------
$5,555 $6,001 $8,368
- -------------------------------------------------------
Wise also invests excess cash with Borden in one-day investments that totaled
$1,150 and $1,700 at December 31, 1999 and 1998, respectively. Interest income
from Borden for these one-day investments totaled $55, $169 and $148 for the
years ended December 31, 1999, 1998 and 1997, respectively.
13. COMMON STOCK AND STOCK OPTIONS
As part of the Incorporation, Wise issued one hundred shares of common stock,
representing 100% of its common stock, to BWHLLC in exchange for $34.2 million
in Borden Holdings' Notes (the "Notes"). Simultaneously with the Incorporation,
the Notes were transferred to Borden in exchange for the net assets of Borden's
salty snack business constituting the Wise operations.
In 1996, Wise Foods, a subsidiary of Wise, issued a total of 6,971,000 shares of
common stock with a par value of $.01 per share. Out of the total shares issued,
131,000 shares were issued to key members of management at $5 per share, along
with the grant of options to purchase additional 262,000 shares of common stock
at an exercise price of $10 per share. In 1997, Wise Foods issued an additional
19,000 shares at $5 per share which provided for 38,000 options under similar
arrangements. The options expire 10 years from the date of grant and vest
ratably over 5 years. The options are generally not transferable and
exercisability of the options will accelerate upon a change of control. In 1998,
Wise Foods repurchased 109,000 shares, which canceled 218,000 options. In 1999,
Wise sold 86,800 shares of common stock at $10 per share to management providing
for 434,000 options. In addition, 28,500 options were issued to management under
a broad based stock option plan. The remainder of Wise Foods' issued and
outstanding shares were held by Wise, its parent.
WH21
Information regarding Wise Foods' Option Plan is summarized below:
- --------------------------------------------------------
WEIGHTED
STOCK AVERAGE
OPTIONS PRICE
----------------------------
----------------------------
Outstanding at 12/31/96 262,000 $ 10
----------------------------
Granted 38,000 $ 10
Exercised
Canceled
----------------------------
Outstanding at 12/31/97 300,000 $ 10
----------------------------
Granted
Exercised
Canceled 218,000 $ 10
----------------------------
Outstanding at 12/31/98 82,000 $ 10
----------------------------
Granted 462,500 $ 10
Exercised
Canceled
----------------------------
Outstanding at 12/31/99 544,500 $ 10
----------------------------
Exercisable at 12/31/99 42,800 $ 10
- --------------------------------------------------------
The fixed-price stock options at December 31, 1999 and 1998 have weighted
average exercise prices of $10, fair value at date of grant of $2.58 and $.01
per option share respectively and a weighted average remaining life of 9.5
years. Had compensation cost for the Company's stock option plan been determined
based on the fair value at the grant date consistent with the provisions of SFAS
No. 123, the impact on the Company's net income would be $239 ($3.41 per share)
for 1999. The impact on prior years was less than $1 and without impact to
reported earnings per share.
14. SUPPLEMENTAL INCOME STATEMENT INFORMATION
- -------------------------------------------------------------
1999 1998 1997
-------------------------
Advertising and promotion expenses $23,099 $23,071 $22,468
Research and development expenses 737 1,705 1,787
Depreciation 6,304 5,561 6,085
Amortization 470 470 470
- -------------------------------------------------------------
15. BUSINESS REALIGNMENT
In December 1998, management approved a business realignment plan that resulted
in the merger of the Marketing Department and Sales Department. The plan
included the release of certain executives and supporting personnel from Sales
and Marketing (total of eleven employees) and the closing of a research
facility. A pre-tax charge to income was accrued in 1998 for $1,900
($16.28 per share), which includes employee termination benefits of $1,317,
net asset writedowns of $533, and miscellaneous charges of $50.
All amounts accrued under this realignment have been paid or written off as of
December 31, 1999.
WH22
In December 1999, management approved a separate business realignment plan which
Included relocating administrative offices and releasing certain finanical and
information systems positions due to efficiencies gained from an ERP
implementation. A pretax charge of $720 ($6.17 per share) was accrued in 1999
for terminated leases of $534 and employee termination benefits of $186.
16. BUSINESS ACQUISITIONS AND DIVESTITURE
ACQUISITIONS:
On July 31, 1997, for a purchase price of $1,915, Wise acquired certain assets
(accounted for under the purchase method) of Quality Foods of North Carolina, an
independent distributor of Wise products and other snack food products
throughout North and South Carolina. Wise will continue to use the acquired
assets for the purpose of distribution of snack foods.
During 1998, Wise acquired the assets of independent distributors in Virginia
And Georgia for a purchase price of $335. Wise will continue to use these assets
for the purpose of distribution of snack foods in these areas.
During 1999, Wise acquired the assets of an independent distributor in Maryland
for a purchase price of $81 and additional assets of independent distributors in
Virginia for $105. Wise will continue to use the acquired assets for the purpose
of distribution of snack foods.
DIVESTITURE:
On May 11, 1998, Wise sold a subsidiary, Caribbean Snacks, Inc., for $2,107
resulting in a pretax loss of $438. Subsequent to the divestiture, Wise has
continued to sell to Caribbean Snacks as a third-party distributor. The
following table provides the impact on net sales as a result of the divestiture.
Sales to Caribbean Snacks as a third-party distributor were $2,728 and $1,919
during 1999 and 1998, respectively, and have been included in the Wise caption
below.
- ----------------------------------------------------------
1999 1998 1997
----------------------------
Net Sales:
Wise $229,008 $228,739 $242,176
Less: Caribbean Snacks, Inc. - 5,728 17,738
----------------------------
229,008 223,011 224,438
- ----------------------------------------------------------
[ARTICLE] 5
[MULTIPLIER] 1000000
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1999
[PERIOD-START] JAN-01-1999
[PERIOD-END] DEC-31-1999
[CASH] 195
[SECURITIES] 0
[RECEIVABLES] 215
[ALLOWANCES] 12
[INVENTORY] 113
[CURRENT-ASSETS] 637
[PP&E] 863
[DEPRECIATION] 324
[TOTAL-ASSETS] 1727
[CURRENT-LIABILITIES] 824
[BONDS] 541
[PREFERRED-MANDATORY] 0
[PREFERRED] 614
[COMMON] 2
[OTHER-SE] (552)
[TOTAL-LIABILITY-AND-EQUITY] 1727
[SALES] 1360
[TOTAL-REVENUES] 1360
[CGS] 936
[TOTAL-COSTS] 936
[OTHER-EXPENSES] 298
[LOSS-PROVISION] 3
[INTEREST-EXPENSE] 63
[INCOME-PRETAX] 76
[INCOME-TAX] 21
[INCOME-CONTINUING] 55
[DISCONTINUED] (2)
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 53
[EPS-BASIC] (.10)
[EPS-DILUTED] (.11)