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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
- ------------------- ----------------------------------------
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____
---
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
----------------------------------- --------------------------------
(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
-------- -------- -------- --------- -------- -------
$ 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
--------- --------- --------- ---------
$ 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
---------------------------- ---------------------------
(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
------- ------- ------- ------- ------- -------
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
------- ------- ------- ------- ------- -------
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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(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
------------------------- ---------------------------------
(Dollars in millions) 1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
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 - -
------- ------- ------- ------- ------- -------
$(34.2) $ 5.8 $(16.0) $ 14.2 $351.0 $124.9
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(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
----------------------------- -----------------------------
(Dollars in millions) 1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
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
----- ----- ------ ------ ------ ------
$54.2 $52.9 $ 58.8 $ 92.1 $ 88.6 $ 116.2
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CAPITAL EXPENDITURES:
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CONSOLIDATED COMBINED
----------------------------- -----------------------------
(Dollars in millions) 1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
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
----- ----- ------ ------ ------ ------
$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
------------------------------ ----------------------------
(Dollars in millions) 1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------------------------------
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
-------- -------- -------- -------- -------- --------
Total $1,360.2 $1,399.7 $1,487.7 $2,137.1 $2,334.5 $3,481.6
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(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
------------------- -------------------
(Dollars in millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
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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(1) Long-lived assets include property, plant and equipment, net of accumulated
depreciation.
ITEM 2. PROPERTIES
- ------ ----------
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
- -------------------------
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
- ------- ---------------------------------------------------
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
- ------ -----------------------------------------
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
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- --------------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------
(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
- ----------------------------------------------------------------------------------------------------------
(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)
- ----------------------------------------------------------------------------------------------------------------
(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
- ----------------------------------------------------------------------------------------------------------------------
(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
- ---------------------------------------------------------------------------------------------------------------------
(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