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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, 2000 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
April 2, 2001: $0.
Number of shares of common stock, par value $0.01 per share, outstanding as of
the close of business on April 2, 2001: 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 83 through 85.
BORDEN, INC.
INTRODUCTION
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The following filing with the Securities and Exchange Commission ("SEC") by
Borden, Inc. ("the Company") presents three separate financial statements:
Borden, Inc. Consolidated Financial Statements, Borden, Inc. and Affiliates
Combined Financial Statements 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, Inc. ("Wise Holdings") and its subsidiaries
and (ii) the Company's former domestic and international foods business
("Foods") to Foods Holdings and its subsidiaries, as explained in Note 1 to the
Consolidated and Combined Financial Statements. The Company 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 continues to control
significant financial and managerial decisions with respect to Foods Holdings.
On October 30, 2000, Wise Holdings was sold by BWHLLC. For purposes of the
Combined Financial Statements, Wise Holdings is treated as if its net assets
were distributed out of the Combined Companies ("the Wise Distribution") on
October 30, 2000. As of October 30, 2000, Wise Holdings financial guarantees
ceased. Accordingly, in the Combined Financial Statements Wise is reflected as a
discontinued operation for all periods presented (See Note 6 to the Consolidated
and Combined Financial Statements) and separate financial statements of Wise
Holdings are no longer included in Part IV of this Registration Statement on
Form 10-K. In accordance with rule 3-10 of Regulation S-X, the financial
statements of Foods Holdings are included in Part IV of this Registration
Statement on Form 10-K because Foods Holdings is a guarantor of the Company's
credit facility and all of the Company's outstanding publicly held debt. The
financial statements for 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4 - Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . . . 11
PART II
Item 5 - Market for the Registrant's Common Stock and Related Stockholder Matters . . . . . . . . . . 11
Item 6 - Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . 13
Item 7A - Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . . . . . . . . . . 26
Item 8 - Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . . . . . . . 27
BORDEN, INC. ("BORDEN") CONSOLIDATED AND BORDEN, INC. AND AFFILIATES
COMBINED FINANCIAL STATEMENTS
Consolidated Statements of Operations, years ended December 31, 2000, 1999 and 1998. . . . . 27
Consolidated Balance Sheets, December 31, 2000 and 1999. . . . . . . . . . . . . . . . . . . 29
Consolidated Statements of Cash Flows, years ended December 31, 2000, 1999 and 1998. . . . . 31
Consolidated Statement of Shareholders' Equity, years ended December 31, 2000, 1999 and 1998 33
Combined Statements of Operations, years ended December 31, 2000, 1999 and 1998. . . . . . . 35
Combined Balance Sheets, December 31, 2000 and 1999. . . . . . . . . . . . . . . . . . . . . 36
Combined Statements of Cash Flows, years ended December 31, 2000, 1999 and 1998. . . . . . . 38
Combined Statement of Shareholders' Equity, years ended December 31, 2000, 1999 and 1998 . . 40
Notes to Consolidated and Combined Financial Statements. . . . . . . . . . . . . . . . . . . 42
Independent Auditors' Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . 71
PART III
Item 10 - Directors and Executive Officers of the Registrant. . . . . . . . . . . . . . . . . . . . . 71
Item 11 - Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
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 include 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. As a result of the Wise Distribution in 2000, Wise
Holdings financial guarantees ceased. However, management of the Company
continues to exercise significant financial and managerial control with respect
to Foods Holdings. Foods Holdings also continues to guarantee 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 businesses included in the
classification "businesses sold or distributed" for the segment data are the
printing inks business sold in 2000, the infrastructure management services
business distributed in 2000 to the Company's parent and the commercial and
industrial wallcoverings business sold in 1998 (see Note 4 to the Consolidated
and Combined Financial Statements).
As a result of the Wise Distribution and the March 13, 1998 sale of the
Company's Decorative Products business, these businesses are included in
discontinued operations. (See Note 6 to the Consolidated and Combined Financial
Statements.)
Also as part of the redesign of its operating structure, the Company has
acquired certain businesses and assets included as part of the Company's
Chemical business ("Chemical") and a business included in the Consumer Adhesives
business. In 1999, the Company also invested in WKI Holding Company, Inc.
("WKI"), an affiliate of the Company and controlled by KKR.
PRODUCTS
Chemical primarily includes formaldehyde, melamine, resins, coatings and other
specialty and industrial chemicals.
The Consumer Adhesives business manufactures and markets more than 200 products,
from school glues to home repair and woodworking products.
The Combined Companies includes the Company and its subsidiaries, together with
the Foods and Wise businesses. Foods is a leading producer and marketer
in North America of pasta, pasta sauce, bouillon, dry soups
and shelf stable meals. 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). 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 Unaligned businesses were sold in
December 1997, with the significant remaining businesses sold in early 1998 and
all Unaligned business sales completed in 1999. While part of the Combined
Companies, the Wise business manufactured 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 Chemical are sold throughout the United States primarily
by in-house sales forces to industrial users. Domestic products for the Consumer
Adhesives business are sold throughout the United States by in-house and
independent sales forces primarily to retailers and distributors. To the extent
practicable, international distribution techniques parallel those used in the
United States. However, raw materials, production considerations,
4
pricing competition, government policy toward industry and foreign investment,
and other factors may vary substantially from country to country.
The domestic Foods 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. While part of the Combined
Companies, Wise products were marketed similarly to Foods products.
COMPETITION
Chemical is the leading global producer of thermosetting resins for the forest
products industry and a leading producer of thermosetting resins for industrial
and foundry applications. These resins are used to bind or coat other materials
during the manufacturing process. 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. Specialty inks
(sold in 2000) and UV Coatings are produced for applications in a variety of
industries. Chemical manufactures and distributes its products worldwide with
the most significant markets being North America, Europe, Latin America, and the
Asia Pacific region and, generally, holds a leading market position in the areas
in which it competes. Chemical resins are provided to a wide variety of
customers for use in the manufacture of, among other products, structured
panels, medium density fiberboard, particle board, laminate veneers, insulation
binders, automotive brakes, and to coat cores and molds in the metal casting
process. The major competitors of Chemical are Ashland Chemical, Georgia
Pacific, Nordichem, and several regional domestic and international competitors.
Price, customer service and product performance are the primary areas in which
Chemical competes.
Foods is the third largest producer and marketer of pasta in the United States
and has the leading pasta brand in Canada. Foods also maintains the leading
position in the United States and Canada premium pasta sauce market, while
holding the fourth and first positions in the total United States and Canada
sauce markets, respectively. Foods also is a leader in both the United States
bouillon and dry soups markets. Other markets in which Foods competes includes
the United States retail meal solutions market and pasta in Italy. The pasta,
pasta sauces, bouillon, dry soups and shelf stable meals businesses are highly
competitive, with competition taking place primarily on the basis of price. The
primary competitors of pasta products are New World Pasta, American Italian
Pasta , and Barilla in the United States, and Nabisco Brands, Italpasta and
Unico in Canada. Primary pasta sauce competitors are Unilever, Campbell Soup
and ConAgra. Bouillon and dry soups competitors include Knorr, Lipton and
Hormel.
Prior to the Wise Distribution, Wise operated its salty snacks business in the
eastern United States, held the number two position in the market in which it
operated and was the largest regional snacks company in the 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%. 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 and urea. The
primary raw materials used by Consumer Adhesives 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 specified prices, for both
the Company and the Combined Companies.
5
CUSTOMERS
The Company and the Combined Companies do not depend on any single customer and
the businesses are not 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 2001 and 2013. No
individual patent is considered to be material.
RESEARCH AND DEVELOPMENT
Research and development expenditures were $23.1 million, $23.8 million and
$18.7 million in 2000, 1999 and 1998, respectively, for the Company and $41.8
million, $43.1 million and $37.3 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, 2000, the Company had approximately 3,800 employees. The
Combined Companies had approximately 5,400 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. 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. The businesses within the Company include a Chemical business and a
Consumer Adhesives business. The Combined Companies also include the Foods
business and the Wise business prior to the Wise Distribution. Prior to its
distribution to the Company's parent in February 2000, the infrastructure
management services business did not meet the quantitative thresholds of SFAS
131. It is included in the businesses sold or distributed classification. The
"Corporate and Other" category represents corporate functional departments.
During 1996 the Company sold options to BWHLLC on what was then all of the
common stock of the Consumer Adhesives business for 110% of the August 16, 1996
fair market value of the common stock. The options were issued at fair value
with a five-year expiration. The exercise price of the options for the Consumer
Adhesives business is $54.1 million. Management expects the 1996 options sold to
BWHLLC for Consumer Adhesives' common shares to be exercised in 2001. During
2000, additional common shares of the Consumer Adhesives business were issued to
and are held by the Company. The additional shares total 3.5 million, or
approximately 26%, of the total Consumer Adhesives common stock shares
outstanding at December 31, 2000.
In the consolidated and combined financial information that follows, the
Decorative Products business and Wise are shown as discontinued operations in
both the Depreciation and Amortization Expense chart and the Capital
Expenditures chart, prior to the sale of the Decorative Products business on
March 13, 1998 and the Wise Distribution, 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 businesses sold or distributed classification includes the
Commercial and industrial wallcoverings business
through the date of its sale on April 29, 1998, the
6
Company's printing inks business through the date of its sale on
November 22, 2000, and the infrastructure management services business prior to
its distribution to the Company's parent in February 2000.
Adjusted Operating EBITDA information (as defined below) is presented because it
is the primary measure used by the chief operating decision maker to evaluate
operating results.
OPERATING SEGMENTS:
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SALES TO UNAFFILIATED CUSTOMERS:
- -----------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
------------------------------- -------------------------------
(Dollars in millions) 2000 1999 1998 2000 1999 1998
- -----------------------------------------------------------------------------------------------------
Foods ongoing $ 570.7 $ 536.8 $ 586.3
Foods Unaligned - 11.1 119.8
Chemical $ 1,336.4 $ 1,223.6 $ 1,235.5 1,336.4 1,223.6 1,235.5
Consumer Adhesives 147.4 100.5 92.2 147.4 100.5 92.2
Businesses sold or distributed 40.2 50.6 85.0 40.2 50.6 85.0
--------- --------- --------- -------- -------- ---------
$ 1,524.0 $ 1,374.7 $ 1,412.7 $2,094.7 $1,922.6 $2,118.8
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TOTAL ASSETS AT YEAR END:
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CONSOLIDATED COMBINED
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(Dollars in millions) 2000 1999 2000 1999
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Foods ongoing $ 872.3 $ 924.8
Chemical $1,078.8 $ 984.9 1,078.8 984.9
Consumer Adhesives 164.5 58.1 164.5 58.1
Businesses sold or distributed - 38.0 - 38.0
Combining adjustment - - (207.0) (254.0)
Discontinued operations - - - 61.8
Corporate and other 290.3 646.4 279.2 579.4
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$1,533.6 $1,727.4 $2,187.8 $2,393.0
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7
ADJUSTED OPERATING EBITDA:
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CONSOLIDATED COMBINED
----------------------------- -------------------------------
(Dollars in millions) 2000 1999 1998 2000 1999 1998
- ------------------------------------------------------------------------------------------------------
Foods ongoing $ 2.9 $ 13.5 $ 11.4
Foods Unaligned - 1.6 (1.7)
Chemical $ 189.7 $ 213.9 $ 183.6 189.7 213.9 183.6
Consumer Adhesives 23.2 16.9 13.6 23.2 16.9 13.6
Corporate and other (22.3) (10.7) (9.5) (26.3) (11.8) (10.3)
Businesses sold or distributed (1) 0.7 (5.2) (2.2) 0.7 (5.2) (2.2)
------- -------- -------- ------ ------ --------
ADJUSTED OPERATING EBITDA (2) 191.3 214.9 185.5 190.2 228.9 194.4
Significant or unusual items (3) (64.6) (34.2) 5.8 (65.5) 14.9 354.2
Depreciation and amortization (4) (62.4) (54.2) (50.9) (103.7) (84.6) (79.9)
------- -------- -------- ------ ------ --------
OPERATING INCOME $ 64.3 $ 126.5 $ 140.4 $ 21.0 $ 159.2 $ 468.7
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(1) Includes the Company's infrastructure management services business and printing inks business
for all periods presented and the commercial and industrial wallcoverings business in 1998.
(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 page 8).
(3) Includes Significant or Unusual Items shown below and page 17 of Management's Discussion
and Analysis of Financial Condition and Results of Operations.
(4) The increase in consolidated depreciation and amortization is primarily the result of the 1999
Chemical acquisitions and the 2000 Consumer Adhesives acquisition. The combined increase also
reflects the depreciation associated with Foods 1999 enterprise-wide systems implementation
and plant improvements.
SIGNIFICANT OR UNUSUAL ITEMS AFFECTING COMPARABILITY OF OPERATING EBITDA: (1)
- --------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
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(Dollars in millions) 2000 1999 1998 2000 1999 1998
- --------------------------------------------------------------------------------------
Foods ongoing $ (0.9) $(23.3)
Foods Unaligned - $ 50.5 371.7
Chemical $(66.9) $(41.6) $ 5.8 (66.9) (41.6) 5.8
Consumer Adhesives (0.3) - - (0.3) - -
Corporate and other (2) 2.6 7.4 - 2.6 6.0 -
------- ------- ------ ------- ------ -------
$(64.6) $(34.2) $ 5.8 $(65.5) $ 14.9 $354.2
- --------------------------------------------------------------------------------------
(1) See page 17 of the Management's Discussion and Analysis of Financial Condition and Results of
Operations for further information concerning these items.
(2) In 1999, consolidated includes gains on the 1996 sale of Wise that are eliminated in combined.
8
DEPRECIATION AND AMORTIZATION EXPENSE:
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CONSOLIDATED COMBINED
---------------------------- ----------------------------
(Dollars in millions) 2000 1999 1998 2000 1999 1998
- --------------------------------------------------------------------------------------------------
Foods ongoing $ 41.3 $30.2 $ 28.1
Foods Unaligned - 0.2 0.9
Chemical $ 52.4 $45.7 $41.5 52.4 45.7 41.5
Consumer Adhesives 6.7 1.9 1.3 6.7 1.9 1.3
Businesses sold or distributed 0.8 4.2 6.1 0.8 4.2 6.1
Discontinued operations - - 2.0 6.7 7.5 8.7
Corporate and other 2.5 2.4 2.0 2.5 2.4 2.0
------ ----- ----- ------ ----- -----
$ 62.4 $54.2 $52.9 $110.4 $92.1 $ 88.6
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CAPITAL EXPENDITURES:
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CONSOLIDATED COMBINED
---------------------------- ----------------------------
(Dollars in millions) 2000 1999 1998 2000 1999 1998
- --------------------------------------------------------------------------------------------------
Foods ongoing $ 46.8 $58.1 $36.4
Foods Unaligned - 0.1 1.6
Chemical $ 98.7 $66.3 $39.6 98.7 66.3 39.6
Consumer Adhesives 5.3 2.1 4.6 5.3 2.1 4.6
Businesses sold or distributed 0.1 1.2 4.2 0.1 1.2 4.2
Discontinued operations - - 1.1 4.8 8.9 10.8
Corporate and other 0.4 5.2 3.0 0.4 5.2 3.0
------ ----- ----- ------ ----- -----
$104.5 $74.8 $52.5 $156.1 $141.9 $100.2
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GEOGRAPHIC AREAS:
- ------------------
SALES TO UNAFFILIATED CUSTOMERS: (3)
- -------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
-------------------------- -----------------------------
(Dollars in millions) 2000 1999 1998 2000 1999 1998
- -------------------------------------------------------------------------------------------------
United States $1,042.9 $ 924.6 $ 955.1 $1,480.9 $1,330.7 $1,434.1
Canada 166.0 150.4 141.9 272.9 253.4 241.4
Other International 315.1 299.7 315.7 340.9 338.5 443.3
-------- -------- --------- --------- --------- --------
Total $1,524.0 $1,374.7 $1,412.7 $ 2,094.7 $1,922.6 $2,118.8
- -------------------------------------------------------------------------------------------------
(3) For purposes of geographic area disclosures, sales are attributed to the
country in which individual business locations reside.
LONG-LIVED ASSETS: (1)
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CONSOLIDATED COMBINED
------------------- ---------------------
(Dollars in millions) 2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------
United States $369.6 $374.2 $525.5 $516.0
Canada 64.6 41.9 109.5 83.8
Other International 139.0 122.7 144.5 130.4
------ ------ ------ ------
Total $573.2 $538.8 $779.5 $730.2
- ---------------------------------------------------------------------------------------------------
(1) Long-lived assets include property, plant and equipment, net of accumulated
depreciation.
ITEM 2. PROPERTIES
- ------- ----------
As of December 31, 2000, the Company operated 29 domestic Chemical production
and manufacturing facilities in 18 states, the most significant being the
Chemical plant in Louisville, Kentucky. In addition, the Company operated 24
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foreign Chemical production and manufacturing facilities primarily in Canada,
South America, Europe, Australia and the Far East.
As of December 31, 2000, the Company operated one domestic facility in New York
and one foreign facility in Canada for producing and manufacturing household,
school and consumer glues.
As of December 31, 2000, the Foods business operated 4 domestic food
manufacturing facilities in 3 states and 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
$0.8 million in 2000, $2.7 million in 1999 and $2.8 million in 1998. The Company
estimates that it will spend $1.7 million for environmental control facilities
during 2001. The Combined Companies incurred environmental capital expenditures
of $0.8 million in 2000, $2.7 million in 1999 and $3.2 million in 1998. The
Combined Companies estimate $1.8 million will be spent in 2001 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 approximately 50 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 $16 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 responsible parties to participate has
been taken into account, based generally on the parties'
probable contribution 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
U.S. District Court in Baton Rouge, Louisiana, alleging personal injuries and
property damage in connection with a waste disposal site in Louisiana.
The Company is in negotiations with the New York Department of Environmental
Conservation relating to alleged air emission permit violations from 1990
through 1996 at the Company's Bainbridge, New York facility.
Borden Chemicals and Plastics Limited Partnership
- ------------------------------------------------------
In 1987 the Company's basic 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
10
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 is 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------- -----------------------------------------------------------
The Company's Annual Shareholder Meeting was held December 21, 2000. 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
----------------------------------
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 $61.6 million in dividends on common stock during
2000, $64.1 million in dividends on common stock during 1999 and $59.5 million
in dividends on common stock during 1998. The Company's ability to pay dividends
on its common stock is restricted by its credit agreement with certain banks.
See Notes 9 and 13 to the Consolidated and Combined Financial Statements.
11
ITEM 6. SELECTED FINANCIAL DATA
- -------- -------------------------
- -------------------------------------------------------------------------------------------------------------------
FIVE YEAR SELECTED FINANCIAL DATA
(All dollar and share amounts in millions, except per share data)
The following represents five year selected financial data for the Company and
the Combined Companies, restated for discontinued operations. See pages 8 and 16
for items impacting comparability between 2000, 1999 and 1998.
CONSOLIDATED FOR THE YEARS 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
SUMMARY OF EARNINGS
Net sales $ 1,524.0 $ 1,374.7 $ 1,412.7 $ 1,498.2 $ 2,339.6
(Loss) income from continuing operations (59.0) 55.3 23.6 17.2 44.7
(Loss) income applicable to common stock (39.7) (20.8) (11.1) 147.6 (333.1)
- -------------------------------------------------------------------------------------------------------------------
Basic and diluted (loss) income per common share
from continuing operations $ (0.30) $ 0.28 $ 0.12 $ 0.09 $ 0.23
Basic and diluted (loss) income per common share (0.20) (0.10) (0.06) 0.74 (1.67)
- -------------------------------------------------------------------------------------------------------------------
Dividends per share
Common share $ 0.31 $ 0.32 $ 0.30 $ 0.26 $ 0.08
Preferred series A 3.00 3.00 3.00 3.00 3.13
- -------------------------------------------------------------------------------------------------------------------
Average number of common shares
outstanding during the year 199.0 199.0 199.0 199.0 199.0
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL STATISTICS
Total Assets $ 1,533.6 $ 1,727.4 $ 2,004.7 $ 2,175.3 $ 2,490.0
Long-term debt 530.5 541.1 552.0 788.3 567.2
- -------------------------------------------------------------------------------------------------------------------
Operating EBITDA (1) $ 126.7 $ 180.7 $ 191.3 $ 138.4 $ 277.7
Adjusted Operating EBITDA (1) 191.3 214.9 185.5 154.4 215.7
- -------------------------------------------------------------------------------------------------------------------
COMBINED FOR THE YEARS 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
SUMMARY OF EARNINGS
Net sales $ 2,094.7 $ 1,922.6 $ 2,118.8 $ 3,249.9 $ 4,222.8
(Loss) income from continuing operations (28.6) 89.6 272.4 90.6 46.3
(Loss) income applicable to common stock (62.3) 7.1 94.6 131.1 5.1
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL STATISTICS
Total Assets $ 2,187.8 $ 2,393.0 $ 2,673.4 $ 2,954.6 $ 3,030.4
Long-term debt 535.8 544.1 554.6 794.9 581.8
- -------------------------------------------------------------------------------------------------------------------
Operating EBITDA (1) $ 124.7 $ 243.8 $ 548.6 $ 387.0 $ 326.2
Adjusted Operating EBITDA (1) 190.2 228.9 194.4 262.1 270.3
- -------------------------------------------------------------------------------------------------------------------
(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 composed of Operating EBITDA excluding the effects of Significant or Unusual Items as shown on
page 8 and page 17 of Management's Discussion and Analysis for the years 2000, 1999 and 1998. 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.
12
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:
NET SALES TO UNAFFILIATED CUSTOMERS:
- ---------------------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
--------------------------------- -----------------------------
(Dollars in millions) 2000 1999 1998 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Foods ongoing $ 570.7 $ 536.8 $ 586.3
Foods Unaligned - 11.1 119.8
Chemical $1,336.4 $1,223.6 $1,235.5 1,336.4 1,223.6 1,235.5
Consumer Adhesives 147.4 100.5 92.2 147.4 100.5 92.2
Businesses sold or distributed (1) 40.2 50.6 85.0 40.2 50.6 85.0
-------- --------- -------- ------- ------- --------
$1,524.0 $1,374.7 $1,412.7 $2,094.7 $1,922.6 $2,118.8
- ---------------------------------------------------------------------------------------------------------------
OPERATING INCOME:
- ----------------------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
------------------------------- -------------------------------
(Dollars in millions) 2000 1999 1998 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Adjusted Operating EBITDA
-------------------------
Foods ongoing $ 2.9 $ 13.5 $ 11.4
Foods Unaligned - 1.6 (1.7)
Chemical $ 189.7 $ 213.9 $183.6 189.7 213.9 183.6
Consumer Adhesives 23.2 16.9 13.6 23.2 16.9 13.6
Corporate and other (22.3) (10.7) (9.5) (26.3) (11.8) (10.3)
Businesses sold or distributed (1) 0.7 (5.2) (2.2) 0.7 (5.2) (2.2)
---------- --------- ------- ------- -------- -------
Total Adjusted Operating
EBITDA (2) 191.3 214.9 185.5 190.2 228.9 194.4
Significant or unusual items (3) (64.6) (34.2) 5.8 (65.5) 14.9 354.2
Depreciation and amortization (4) (62.4) (54.2) (50.9) (103.7) (84.6) (79.9)
---------- --------- ------- ------- -------- -------
OPERATING INCOME $ 64.3 $ 126.5 $140.4 $ 21.0 $ 159.2 $468.7
- ----------------------------------------------------------------------------------------------------------------
(1) See page 6 for the businesses 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 17 of Management's
Discussion and Analysis of Financial Condition and Results of Operations.
(4) The increase in consolidated depreciation and amortization in 2000 and 1999 resulted
primarily from Chemical and Consumer Adhesives acquisitions. Combined Companies' depreciation and
amortization changes reflect that described for consolidated as well as the depreciation associated
with Foods 1999 enterprise-wide systems implementation and plant improvements, partially offset by
reductions in depreciation expense due to the sale of Foods unaligned businesses in 2000, 1999 and
1998.
CONSOLIDATED SUMMARY
Net Sales
- ----------
Consolidated sales increased $149.3 million, or approximately 11%, to $1,524.0
million in 2000 from $1,374.7 million in 1999. The increase in sales is
attributed primarily to improved volumes in the Chemical business, increased
Chemical selling prices, the impact of Chemical 1999 and 2000 acquisitions and
the May 2000 Consumer Adhesives acquisition.
Adjusted Operating EBITDA
- ---------------------------
Adjusted operating EBITDA decreased $23.6 million, or approximately 11%, to
$191.3 million in 2000 from $214.9 million in 1999. The decrease is primarily
due to increases in raw material costs in the Chemical business, that more
13
than offset the impact of improved volumes, as well as the settlement and
incurrence of various corporate liabilities and expenses.
COMBINED SUMMARY
Net Sales
- ----------
Combined sales increased $172.1 million, or approximately 9%, to $2,094.7
million in 2000 from $1,922.6 million in 1999. The increase is primarily
attributed to increased Foods volumes due to new product introductions and the
factors described above for consolidated net sales.
Adjusted Operating EBITDA
- ---------------------------
Combined adjusted operating EBITDA decreased $38.7 million, or approximately
17%, to $190.2 million in 2000 from $228.9 million in 1999. In addition to the
consolidated factors described above, Foods' adjusted operating EBITDA from
ongoing operations decreased due primarily to the absence of 1999 favorable
litigation settlements and 2000 new product launch costs, partially offset by
improvements in sauce and a reduction in administrative expenses.
2000 VS. 1999
Chemical
- --------
Chemical sales of $1,336.4 million in 2000 were up $112.8 million, or
approximately 9%, from $1,223.6 million in 1999. The most significant items
that positively impacted 2000 sales were improved volumes of higher-priced
specialty products, higher selling prices for forest products resins, primarily
in North America, two acquisitions in the United States, and one acquisition in
Europe. The most significant items that negatively impacted sales were lower
selling prices for melamine products, unfavorable currency exchange rates, and
the exit from certain non-core businesses in the United States, Latin America
and the Philippines.
Overall volume, excluding the effect of acquisitions and strategic realignment
activities, was only 1.2% ahead of prior year, but still had a positive $70.6
million impact on 2000 sales. The positive impact was driven primarily by
substantial volume improvements in UV coatings and oilfield products, which have
significantly higher per unit selling prices (as measured in metric tons)
compared to all other products. Higher volumes of melamine crystal and melamine
based resins also had a positive impact on 2000 sales. The improvement in UV
coatings primarily reflects an increase in the Company's share of the market and
market growth in demand for optical fiber. Oilfield products volume benefited
from increased drilling activity, which reflects substantially higher natural
gas and oil prices. Melamine products volume reflects increased export sales of
melamine crystal, due to tightening global supply, and increased market share of
high-pressure laminates. North America forest products volume was essentially
flat compared to the prior year and reflects aggressive competitor pricing and a
downturn in housing starts throughout the second half of the year, particularly
in the fourth quarter that offset strong housing and construction activity in
the first half of the year.
In 2000, the Company acquired the formaldehyde and certain other assets from
BCP, which provided incremental 2000 sales of $21.3 million. The second quarter
1999 acquisition of Spurlock Industries, Inc. in the United States and the third
quarter 1999 acquisition of Blagden Chemicals, Ltd. in Europe contributed
incremental 2000 sales of $12.8 million and $22.8 million, respectively.
Overall higher selling prices in 2000 had a $32.7 million net positive impact on
sales. The increase reflects generally higher selling prices globally for
forest products resins and formaldehyde, partially offset by lower pricing for
melamine crystal and melamine based resins, as well as the impact of downward
pressure on selling prices due to very competitive market conditions across all
businesses. The generally higher selling prices for forest products resins and
formaldehyde reflect the partial pass-through of substantially higher raw
material costs. The lower pricing for melamine products reflects the global
market imbalance for melamine crystal that worsened throughout 1999 and has
persisted throughout most of 2000. A substantial portion of the Company's sales
volume, especially for North America forest products, is sold under contracts
that provide for monthly or quarterly selling price adjustments based on
published cost indices for the Company's primary raw materials (i.e. methanol,
phenol and urea). During the first quarter of 2000, the costs of these raw
materials were generally lower than prior year, therefore selling prices were
generally lower; however, the cost of all three primary raw materials escalated
significantly over the last three quarters, which resulted in upward adjustments
in selling prices.
14
Unfavorable currency exchange rates, primarily in the United Kingdom and
Ecuador, had an unfavorable impact on 2000 sales of approximately $28 million.
The unfavorable exchange rate for Ecuador reflects significant currency
devaluation throughout 1999 and through May 2000 when the local currency
exchange rate was fixed to the United States dollar.
The 1999 sale of the non-strategic United States molding compounds business and
closures or sales of non-strategic businesses in Latin America and the
Philippines caused 2000 sales to be approximately $23 million lower compared to
the prior year.
Adjusted operating EBITDA of $189.7 million in 2000 was $24.2 million, or
approximately 11%, lower than prior year adjusted operating EBITDA of $213.9
million. The decline reflects a very difficult business environment, especially
over the second half of the year. A slowing economy, escalating raw material
costs, intense competitor pricing activity, and unprecedented natural gas costs
in the latter part of the year all combined to have a significant negative
impact on 2000 operating results. Substantial margin erosion and generally
higher plant operating and distribution costs were partially offset by improved
volume of higher-priced specialty products, more favorable purchasing contracts
for certain raw materials and the impact of acquisitions. Profit margins in
North America forest products were significantly impacted by the inability to
fully recover rapidly escalating costs of methanol, phenol and urea. Effective
recovery of these rising costs was curtailed by delayed pricing adjustments
allowed under supply contracts and competitive pressures to keep prices down. A
substantial amount of North America forest products sales are based on supply
contracts that provide only monthly or quarterly pricing adjustments, which
cause price increases to lag raw material cost increases during times of rising
raw material costs. Profit margins for melamine crystal and melamine based
resins were also negatively impacted by both the high cost of urea and high
natural gas cost since the melamine crystal production process consumes
significant energy. Higher plant operating costs reflect higher energy costs,
while higher distribution costs reflect increased export sales of melamine
crystal and generally higher fuel costs.
Consumer Adhesives
- -------------------
Consumer Adhesives' net sales for the year were $147.4 million, an increase of
$46.9 million, or approximately 47%, compared to 1999 net sales for the same
period of $100.5 million. The increase is primarily attributable to the May
2000 acquisition of a Canadian based business as well as an approximate 15%
increase of base business volume.
Consumer Adhesives' adjusted operating EBITDA for the year was $23.2 million, a
$6.3 million, or approximately 37%, increase over 1999 EBITDA of $16.9 million.
The increase is primarily due to higher gross margin from the May acquisition of
the Canadian based business that exceeded increases in general and
administrative and marketing expenses also associated with the May acquisition.
Higher volumes in the base business were substantially offset by higher
marketing costs and raw material and distribution costs resulting primarily from
higher natural gas and oil costs. The increase in Consumer Adhesives marketing
expense was the primary reason for the increase in marketing expense on the
Consolidated Statement of Operations.
Corporate and Other
- ---------------------
Adjusted operating EBITDA decreased $11.6 million to a loss of $22.3 million in
2000 from a loss of $10.7 million in 1999. The higher net expense, classified as
general and administrative expenses, is primarily due to the incurrence and
settlement of various corporate liabilities and expenses of $15.0 million and a
$7.6 million charge for certain benefit plan settlements, partially offset by a
$10.5 million gain on the sale of certain rights to harvest shellfish (see Note
4 to the Consolidated and Combined Financial Statements).
Businesses Sold or Distributed
- ---------------------------------
The businesses sold or distributed classification represents the Company's
infrastructure management services business and printing inks business. The
change in net sales and adjusted operating EBITDA of $10.4 million and $5.9
million, respectively, primarily reflects the distribution of the infrastructure
management services business in February 2000.
Foods
- -----
Foods' sales for the year ended December 31, 2000 increased $22.8 million, or
approximately 4%, to $570.7 million from $547.9 million in 1999. Excluding
sales of $11.1 million from Foods Unaligned businesses sold in 1999, sales from
Foods' ongoing businesses increased $33.9 million, or approximately 6%. The
increase was led by the introduction of a new line of pasta-based
microwave meals called It's Pasta Anytime. In addition, Foods'
sales improved with growth in sauce volumes as new product
introductions and expanded distribution led to increased market
15
shares in the US and Canada. These improvements were partially offset by
declines in domestic pasta and bouillon sales.
Foods' adjusted operating EBITDA declined $12.2 million to $2.9 million in 2000
from $15.1 million in 1999. Excluding the impact of Foods Unaligned businesses
sold in 1999 and a $9.3 million gain on favorable settlements of litigation in
1999, ongoing adjusted operating EBITDA decreased $1.3 million. During 2000,
Foods incurred significant product launch costs related to It's Pasta Anytime
that more than offset gross profit generated by incremental sales. These costs
included advertising, slotting fees paid to retailers to gain shelf space, and
trade and consumer promotion expenditures. As a result of the launch-related
costs, It's Pasta Anytime's adjusted operating EBITDA declined from 1999 by
approximately $22 million. The investment in It's Pasta Anytime overshadowed
significant improvements in the sauce business and decreases in selling, general
and administrative costs. Sauce's adjusted operating EBITDA improved
approximately $10 million due primarily to higher volumes in domestic and
international markets and lower raw material costs. Lower selling, general and
administrative costs of approximately $11 million were primarily due to the
absence of 1999 implementation costs associated with enterprise-wide information
technology systems and a workforce reduction program implemented in 2000.
1999 vs. 1998
Chemical
- --------
Chemical sales in 1999 decreased $11.9 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 $30.3 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
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.
Consumer Adhesives
- -------------------
Consumer Adhesives' net sales increased $8.3 million or approximately 9%, to
$100.5 million from $92.2 million. The increase reflects higher volume and
improved mix.
16
Consumer Adhesives' adjusted operating EBITDA increased $3.3 million or
approximately 24% in 1999 to $16.9 million from $13.6 million. The increase
reflects higher volume, improved mix and productivity improvements.
Corporate and other
- ---------------------
Adjusted operating EBITDA declined $1.2 million, to a loss of $10.7 million in
1999 from a loss of $9.5 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 expenses related to settlement of various
corporate liabilities and administrative expenses.
Businesses sold or distributed
- ---------------------------------
The businesses sold or distributed classification includes the Company's
infrastructure management services business and printing inks business in 1999
and 1998 and the commercial and industrial wallcoverings business in 1998 only.
Net sales and adjusted operating EBITDA for the infrastructure management
services business and the printing inks business are consistent with prior year.
The commercial and industrial wallcoverings business 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's
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's 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 million. 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 reduced volumes
previously mentioned, contributed to the decline.
SIGNIFICANT OR UNUSUAL ITEMS EXCLUDED FROM ADJUSTED OPERATING EBITDA:
- -----------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
--------------------------------- -------------------------------
(Dollars in millions) 2000 1999 1998 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
(Loss) gain on disposal of businesses, net $ (0.9) $ 7.4 $ 8.3 $ 3.9 $ 56.5 $380.0
Business realignment, asset
write-offs and other charges (63.7) (41.6) (2.5) (69.4) (41.6) (25.8)
------- ------- ------- ------ ------- -------
$(64.6) $(34.2) $ 5.8 $(65.5) $ 14.9 $354.2
- ---------------------------------------------------------------------------------------------------------------------
Note: See also the Significant or Unusual Items on page 8.
2000
The Company's loss on disposal of businesses primarily relates to the sale of
the printing inks business partially offset by lower than expected costs related
to the sale of the commercial and industrial wallcoverings business. The
Combined Companies gain on disposal of businesses represents the Company's loss
offset by Foods' gains of $4.8 million due to lower than expected exit costs
related primarily to the 1998 Signature Flavors sale. (See also Note 4
to the Consolidated and Combined Financial Statements.)
17
The Company's business realignment, asset write-offs and other charges represent
costs of $38.4 million related to plant closures in the United States, Argentina
and the United Kingdom. Also included is $25.3 million to exit certain raw
material purchase contracts, which extended through 2002, in order to take
advantage of opportunities that have arisen to obtain more favorable pricing.
This charge is reflected in cost of sales in the Consolidated and Combined
Statements of Operations. The Combined Companies also incurred costs of $5.7
million related to a Foods corporate workforce reduction program.
1999
The Company's 1999 gain on disposal of businesses primarily relates to gains on
the sale of the commercial and industrial wallcoverings business due to lower
than expected exit costs. 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. (See also Note 4
to the Consolidated and Combined Financial Statements.)
The Company and Combined Companies' business realignment charges of $41.6
million 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 operations, resulting in a total
charge of $16.6 million.
1998
The Company's gain on disposal of businesses relates to the sale of a 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. (See also Note 4 to the Consolidated and
Combined Financial Statements.)
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.
NON-OPERATING EXPENSES AND INCOME TAX EXPENSE:
- ---------------------------------------------------
NON-OPERATING EXPENSES
- ----------------------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
-------------------------------- ----------------------------
(Dollars in millions) 2000 1999 1998 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Interest expense $ 62.7 $ 63.1 $ 64.4 $ 62.7 $ 63.2 $ 65.5
Affiliated interest expense 17.0 19.1 22.8 2.4 5.3 5.4
Interest income and other (17.8) (34.8) (30.9) (15.5) (33.6) (34.7)
Investment write-downs and other charges 68.0 3.0 26.7 68.0 3.0 26.7
------ ------ ------ ------ ------ ------
$129.9 $ 50.4 $ 83.0 $117.6 $ 37.9 $62.9
- ----------------------------------------------------------------------------------------------------------------
2000 vs. 1999
- ---------------
Consolidated non-operating expenses increased $79.5 million for the year ended
December 31, 2000 compared to the year ended December 31, 1999. The increase is
primarily attributable to increased investment write-downs from $3.0 million in
1999 to $48.0 million in 2000 (See Note 8 to the Consolidated and Combined
Financial Statements) and recording a liability of $20.0 million for potential
costs related to the financial decline of a limited partnership for which a
wholly owned subsidiary of the Company serves as general partner. (See Note 19
to the Consolidated and Combined Financial Statements) Other changes include a
reduction in interest income of approximately $15 million due to lower average
cash balances in 2000 compared to 1999 and reduced unrealized gains on an
interest rate swap of approximately $6 million, which terminated in September
2000. These decreases were partially offset by higher dividend income of
approximately $5 million from an affiliate and reduced affiliated interest
expense due to lower average loan balances outstanding in 2000 compared to 1999.
Combined non-operating expenses increased $79.7 million for the year ended
December 31, 2000 compared to the year ended December 31, 1999. The increase is
primarily attributable to the consolidated factors discussed above.
18
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 in 1998. The decrease is
primarily attributable to reduced investment write-downs. (See Note 8 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 $25.0 million for the year ended
December 31, 1999 to $37.9 million from $62.9 million. The decrease is primarily
attributable to the investment write-downs discussed above.
INCOME TAX EXPENSE
- ----------------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
----------------------------- ----------------------------
(Dollars in millions) 2000 1999 1998 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
Income tax (benefit) expense $(6.6) $ 20.8 $33.8 $(68.0) $ 31.7 $ 133.4
Effective tax rate 10% 27% 59% N/M 26% 33%
- ----------------------------------------------------------------------------------------------------------
2000 vs. 1999
- ---------------
The 2000 consolidated income tax benefit primarily reflects a settlement with
the Internal Revenue Service ("IRS") and the impact of usage limitations on
foreign tax credits. As a result of a settlement reached with the IRS in the
second quarter of 2000, the Company recorded net tax expense of $5 million
consisting of valuation reserves recorded on foreign tax credits of $30 million
that are no longer likely to be utilized, substantially offset by a $25 million
reduction of amounts established for tax issues related to the divestiture of
certain segments of the Company's business that are no longer considered
necessary. In addition, approximately $10 million of income tax expense was
recorded on foreign source income because related foreign tax credits are not
expected to be utilized within the expiration period. The 1999 consolidated
effective rate reflects a higher portion of net income derived from foreign
operations and the effect of lower tax rates in foreign jurisdictions.
The 2000 combined income tax benefit primarily includes the consolidated factors
discussed above, taxes provided for anticipated divestiture liabilities and
amounts related to the IRS settlement for the sale of Foods that are classified
as discontinued operations in consolidated are classified as income tax benefit
for combined. The classification of these amounts differ between consolidated
and combined because combined does not reflect the sale of Foods as a
discontinued operation. (See Note 6 to the Consolidated and Combined Financial
Statements.) The 1999 combined effective rate reflects differences applicable to
foreign divestitures.
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 taxes primarily
applicable to foreign divestitures.
CASH FLOWS:
- ------------
OPERATING
2000 vs. 1999
- ---------------
Consolidated operating activities provided cash of $23.3 million in 2000
compared to $71.7 million cash provided in 1999, a decline of $48.4 million.
Significant outflows compared to prior year included a decline in adjusted
operating EBITDA of $23.6 million (see page 12), a change in accounts
receivable and inventory cash flows of $40.4 million and
$11.8 million, respectively, primarily in the Chemical
business due to higher raw material costs passed through
to customers and included in inventory, a $25.3 million payment in 2000
to exit certain Chemical raw material supply contracts and lower interest income
of $15.3 million. These increased outflows were partially offset by a $14.1
million increase in trade payables primarily in the Chemical
business due to higher raw material costs, lower tax payments of
19
$26.9 million, a $3.6 million repayment received from CCPC Acquisition Corp.
for interest accrued on the loan that was repaid in 2000, a $3.7 million
payment received from Wise, upon its sale, related to its retirement benefit
plans, the absence of a 1999 payment of approximately $13.0 million to settle
certain long-term disability claims and the absence of 1999 settlement
payments of $6.4 million related to divested businesses.
Combined cash provided by operating activities of $34.0 million was $44.5
million less than the $78.5 million provided in 1999. In addition to the
consolidated factors discussed above, after eliminating the Wise receipts, the
Combined Companies had additional outflows due to further reductions in adjusted
operating EBITDA of $15.1 million and higher Foods' tax payments of $24.0
million. These additional combined outflows were offset by lower
Foods' inventory balances of $14.0 million primarily due to the use of tomatoes
Purchased in the fourth quarter of 1999, improved Foods' accounts receivable
Cash flows of $11.2 million due primarily to the absence of 1999 collection
issues associated with systems implementations, improvement in Wise operations
(classified as discontinued operations) of $9.6 million, and the absence of
1999 payments of $7.2 million related to the divestiture of Foods' Unaligned
businesses.
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 $33.2 million in 1998. The $111.7 million
improvement consisted primarily of an overall improvement in adjusted operating
EBITDA of $34.5 million (see page 12), improvements due to the timing of trade
payments of $38.2 million and lower tax payments of $67.5 million related to
gains on divested businesses. These improvements were 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.
INVESTING
2000 vs. 1999
- ---------------
Consolidated investing activities used $195.7 million cash in 2000 compared to
$229.5 million cash used in 1999, a decrease of $33.8 million. The decrease
primarily represents the absence of a 1999 $50.0 million investment in the form
of junior preferred stock in WKI and an $8.9 million collection of
outstanding debt in 2000 which eliminated the Company's investment in Wise
(See Note 18 to the Consolidated and Combined Financial Statements),
partially offset by increased capital expenditures of $29.7 million primarily
for Chemical plant expansions. Divestiture proceeds of $10.9 million in 2000,
primarily from the sale of Chemical's printing inks business, were ahead of 1999
proceeds of $7.6 million from the sale of Chemical's molding compounds business.
Acquisitions in 2000 of $118.1 million by Consumer Adhesives and Chemical (See
Note 4 to the Consolidated and Combined Financial Statements) were less than
1999 acquisitions of $119.6 million for Spurlock, Blagden and the resins
manufacturing plant in Minnesota.
Combined investing activities used $253.9 million cash in 2000 compared to 1999
cash used of $266.1 million, a $12.2 million decrease. In addition to the
consolidated factors described above, after eliminating the Wise collection of
$8.9 million, the decrease in combined investing activities reflects the absence
of $23.6 million of proceeds from the 1999 sale of Foods Unaligned businesses,
partially offset by reduced Foods' capital expenditures of $11.4 million due to
the absence of the 1999 enterprise-wide system implementation.
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
20
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.
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 return from (investment
in) affiliate 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 primarily the result of plant expansion
projects to increase capacity in the Chemical operations, and the implementation
of an enterprise-wide system and new product manufacturing line investments in
the Foods business for combined.
FINANCING
2000 vs. 1999
- ---------------
Consolidated financing activities generated cash of $5.0 million in 2000
compared to cash used of $319.1 million in 1999. The $324.1 million difference
is primarily due to 2000 affiliated borrowings and receipts of $86.7 million,
compared to 1999 net affiliated repayments and loans of $225.5 million (see
1999 vs. 1998). Affiliated activity in 2000 is comprised primarily of borrowings
from BWHLLC of $61.4 million and receipts from CCPC Acquisition Corp. of $56.2
million, partially offset by repayments to Foods of $31.0 million. In addition,
2000 included short-term debt borrowings of $33.3 million compared to 1999
repayments of $3.8 million. Partially offsetting these net improved inflows are
$17.6 million of increased net long-term debt repayments (primarily Industrial
Bonds) and the distribution of $10.3 million in cash temporarily held by the
infrastructure management services business for the benefit of its customers.
The $10.3 million distribution represents payroll related withholdings for which
the infrastructure management services business was liable when the business was
distributed to the Company's parent (See Note 18 to the Consolidated and
Combined Financial Statements).
Combined financing activities generated cash of $35.6 million in 2000 compared
to cash used in 1999 of $279.5 million. The $315.1 million difference primarily
includes the consolidated improvement above, excluding net affiliated inflow
differences between years related to Foods of $17.9 million, which is
eliminated, additional short-term debt borrowings of $6.3 million and additional
long-term debt borrowings of $3.0 million.
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 and 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 18 to the Consolidated and
Combined Financial Statements. 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 18 to the Consolidated and Combined Financial
Statements).
21
LIQUIDITY AND CAPITAL RESOURCES:
- -----------------------------------
As of December 31, 2000, the Company and the Combined Companies had $809.0
million in contractually committed lines of credit (the "Credit Agreement") of
which $714.0 million (net of $95.0 million in letters of credit) was available.
The cash held by the Company of $27.8 million and the Combined Companies of
$43.2 million as of December 31, 2000 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's and Combined Companies' planned 2001 capital expenditures are
approximately $92 million and $102 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, if
necessary, the available lines of credit.
The Company and Combined Companies expect to have enough liquidity to fund
working capital requirements, support capital expenditures and pay preferred
dividends during 2001 and in future years due to cash from operations and
amounts available under the Credit Agreement.
In the third quarter of 2000, the Company entered into a credit agreement with
WKI to provide up to $40.0 million of short-term financing. The original
maturity date of the agreement was December 31, 2000 and was extended into April
2001. At December 31, 2000, $6.1 million was outstanding under this
agreement.
As of December 31, 2000, the Company and the Combined Companies had $198.0
million and $214.4 million, respectively, in deferred tax assets that related to
foreign and alternative minimum tax credits as well as net operating
loss carryforwards. These credits and carryforwards, net of valuation allowances
of $101.7 million and $102.3 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 2000 and 1999, international operations accounted for approximately 32% and
29% 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
22
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 assets and liabilities are offset against gains or losses arising from
the transactions being hedged. (See Recently Issued Accounting Standards section
for new rules impacting the current accounting treatment.)
A summary of forward currency and option contracts outstanding as of December
31, 2000 and 1999, follows. All contracts summarized for 2000 and 1999 are
entered into by the Company and Combined Companies except the European Monetary
Unit which relates only to the Combined Companies. Fair values are determined
from quoted market prices at December 31, 2000 and 1999.
- --------------------------------------------------------------------------------------------------------------------------
2000 1999
----------------------------------------------- ------------------------------------------------
AVERAGE AVERAGE FORWARD FAIR VALUE AVERAGE AVERAGE FORWARD FAIR VALUE
DAYS CONTRACT POSITION 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
- -----------------------
Japanese Yen (1) - - - - 29 112.42 $ 3.7 $ 0.4
CURRENCY TO SELL
FOR U.S. DOLLARS
- -----------------------
Australian Dollars - - - - 11 0.65 0.5 -
British Pound 22 1.47 $88.9 $(1.8) 35 1.61 73.1 (0.3)
Canadian Dollars - - - - 56 1.46 0.3 -
European Monetary Unit 8 0.89 6.9 (0.4) 60 1.01 14.1 0.1
- -------------------------------------------------------------------------------------------------------------------------
(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.
INTEREST RATE RISK
The Company and Combined Companies have 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 and Combined Companies do not enter into
speculative swaps or other financial contracts. As of December 31, 2000 and
1999, an interest rate swap was outstanding with a notional value of $24.3
million. Although originally entered into as a hedge, an interest rate swap
having a notional amount of $200 million was determined to no longer meet the
criteria for hedge accounting and was marked to market until its termination on
September 1, 2000.
Fair values of the swaps are independently provided using estimated mid-market
levels. Under interest rate swaps, the Company and Combined Companies agree 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 and Combined Companies
paid 10.5% and received 6.3% in 2000 and paid 10.4% and received 5.2% on the
swaps in 1999. The remaining outstanding swap as of December 31, 2000 matures on
December 1, 2002. A 1% increase or decrease in market interest rates would
result in a $0.2 million increase or decrease, respectively, in the fair value
of the interest rate swap agreement at December 31, 2000. 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. The Company and Combined Companies
are exposed to credit related losses in the event of
23
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, 2000 and 1999 follows:
- -------------------------------------------------------------------------------------------------------------
2000 1999
---------------------------------- ----------------------------------
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 12/01/92 12/01/02 13.65% 6.7% $ (3.4) 13.65% 5.4% $ (4.4)
200.0 9/17/85 9/01/00 - - - 10.00% 5.2% (10.6)
- -------------------------------------------------------------------------------------------------------------
The interest rate on most debt agreements is fixed. 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, 2000 and 1999. All other debt fair values are determined from
quoted market interest rates at December 31, 2000 and 1999.
A summary of the Company's outstanding debt as of December 31, 2000 and 1999
follows:
- ---------------------------------------------------------------------------------------------------------------------
2000 1999 (1)
---------------------------------------------- -----------------------------------------------
Weighted Fair Weighted Fair
Debt Average Value Debt Average Value
Year (in millions) Interest Rate (in millions) (in millions) Interest Rate (in millions)
---- ---------------------------------------------- -----------------------------------------------
2001 $ 43.5 7.6% $ 43.5 $ 1.8 9.5% $ 1.8
2002 1.4 5.6% 1.4 3.3 8.1% 3.3
2003 - - - - - -
2004 - - - - - -
2005 - - - - - -
2006 and thereafter 529.1 8.5% 404.7 536.0 8.4% 451.1
---------- ---------- --------- ---------
$ 574.0 $ 449.6 $ 541.1 $ 456.2
- ---------------------------------------------------------------------------------------------------------------------
(1) December 31, 1999 amounts reflect outstanding debt for years shown.
A summary of the Combined Companies' outstanding debt as of December 31, 2000 and 1999 follows:
- ---------------------------------------------------------------------------------------------------------------------
2000 1999 (1)
---------------------------------------------- -----------------------------------------------
Weighted Fair Weighted Fair
Debt Average Value Debt Average Value
Year (in millions) Interest Rate (in millions) (in millions) Interest Rate (in millions)
---- ---------------------------------------------- -----------------------------------------------
2001 $ 44.1 7.5% $ 44.1 $ 2.1 7.9% $ 2.1
2002 2.0 4.8% 2.0 3.6 7.3% 3.7
2003 1.0 1.9% 0.9 0.7 0.2% 0.7
2004 1.0 1.9% 0.9 0.8 0.2% 0.8
2005 0.6 2.9% 0.6 - - -
2006 and thereafter 531.2 8.5% 406.8 536.9 8.4% 451.8
----------- --------- ---------- ----------
$ 579.9 $ 455.3 $ 544.1 $ 459.1
- ---------------------------------------------------------------------------------------------------------------------
(1) December 31, 1999 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, 2000, the Company and Combined Companies had $11.1
million and $16.0 million, respectively, invested primarily in time deposits
with average maturity periods of 28 days and 20 days, respectively, and average
rates of 5.2% and 5.4%, respectively. At December 31, 1999, $173.9 million and
$203.0 million for the Company and Combined Companies, respectively, was
invested primarily in commercial paper, time deposits and money market funds. At
December 31, 1999, the average maturity period of the commercial paper
investments was 25 days with an average interest rate of 6.2% for the Company
and Combined Companies. The average maturity periods of the time
deposits outstanding at December 31, 1999 were 47 days and 49 days
and the average rates were 5.8% and 5.5% for the Company and
24
Combined Companies, respectively. The average rate on the December 31, 1999
money market fund investments was 5.7% for the Company and Combined Companies.
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, 2000 and 1999.
The $6.1 million carrying value of the Company and Combined Companies' loan
receivable from WKI approximates fair value as management believes the loan
bears interest at a market interest rate. (See Note 18 to the Consolidated and
Combined Financial Statements.)
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 purchase contracts, with periodic price adjustment
provisions. The commodity risk also is moderated through use of customer
contracts with selling price provisions that are indexed to publicly available
indices for these commodity raw materials as discussed on pages 13 and 14. 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. There are
no active futures markets for major commodities used by the Combined Companies.
EQUITY PRICE RISK
Investments held by the Company and Combined Companies primarily consist of two
common stock equity interests received as partial consideration on the sale of
certain businesses and an investment in preferred stock of an affiliate. One of
the common stock investments represents approximately 33% of the outstanding
shares and is accounted for using the equity method. At December 31, 2000 and
1999, the unamortized excess of the Company's investment over its equity in the
underlying net assets was $16.1 and $16.5, respectively. The other two
investments are accounted for using the cost method.
The Company's and Combined Companies' investments also include certain other
partnership, subsidiary and joint venture interests.
The Company and Combined Companies review the carrying value of investments in
accordance with existing accounting guidance that requires investments to be
adjusted to fair value if the decline in value is considered to be "other than
temporary" based on certain criteria. The Company and Combined Companies
recorded investment write-downs of $48.0, $3.0 and $26.7 in 2000, 1999 and
1998, respectively.
A summary of investments as of December 31, 2000 and 1999 follows. Fair value is
based on the market stock price as of December 31, 2000 and 1999 for publicly
traded common stock. Fair value for other investments is based on other
similar financial instruments.
- ---------------------------------------------------------------------------------------------------------------
2000 1999
--------------------------------- ------------------------------
CARRYING FAIR CARRYING FAIR
DATE VALUE VALUE VALUE VALUE
DESCRIPTION ACQUIRED (IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
- --------------------- --------- -------------- -------------- ------------- --------------
Equity method securities 10/11/96 $45.0 $107.8 $47.0 $62.1
Cost method securities 11/01/99 $10.0 $ 10.0 $51.5 $51.5
- ---------------------------------------------------------------------------------------------------------------
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".
25
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. In June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
which is an amendment of SFAS No. 133. SFAS No. 138 addresses a limited number
of implementation issues resulting from the application of SFAS No. 133. The
Company and Combined Companies will implement SFAS No. 133 as of January 1,
2001. Adoption of this pronouncement will result in a pre-tax loss of $5.2
million and $5.6 million ($3.3 million and $3.5 million after-tax) for the
Company and Combined Companies, respectively, that will be recorded to
Shareholder's Equity in Other Comprehensive Income as a cumulative effect of a
change in accounting principle. Future results are not expected to be materially
impacted by the adoption of this pronouncement.
In July 2000, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 00-14, "Accounting for Certain Sales Incentives", which addresses the
recognition, measurement and income statement classification for sales
incentives offered to customers. Although this EITF is not effective until June
30, 2001, registrants who do not elect early adoption are subject to certain
disclosure requirements at December 31, 2000. Upon adoption, approximately $24
million and $104 million for the Company and Combined Companies, respectively,
in 2000, $14 million and $86 million in 1999, respectively, and $12 million and
$93 million in 1998, respectively, will be reclassified from marketing expense
to net sales. The Company's and Combined Companies' current policy of
recognizing a liability for sales incentives at the later of the date at which
the related revenue is recorded or the date at which the sales incentive is
offered, complies with the consensuses reached in this Issue.
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 financial
information about operating segments, results of operations by business unit,
liquidity, legal, environmental liabilities 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.
26
- -----------------------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -------- -----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
BORDEN, INC.
Year ended December 31,
(In millions, except per share data) 2000 1999 1998
- -----------------------------------------------------------------------------------------------
Net sales $ 1,524.0 $1,374.7 $1,412.7
Cost of goods sold 1,120.5 936.0 1,008.2
------------ --------- ---------
Gross margin 403.5 438.7 404.5
------------ --------- ---------
Distribution expense 75.9 70.5 64.0
Marketing expense 87.9 75.4 78.9
General & administrative expense 146.2 133.4 126.2
Loss (gain) on divestiture of businesses 0.9 (7.4) (8.3)
Net (gain) loss on sale of assets (10.1) (1.3) 0.8
Business realignment and asset write-offs 38.4 41.6 2.5
------------ --------- ---------
Operating income 64.3 126.5 140.4
------------ --------- ---------
Interest expense 62.7 63.1 64.4
Affiliated interest expense, net of affiliated
interest income of $0.3, $0.9 and $2.2, respectively 17.0 19.1 22.8
Interest income and other (17.8) (34.8) (30.9)
Investment write-downs and other charges 68.0 3.0 26.7
------------ --------- ---------
(Loss) income from continuing operations
before income tax (65.6) 76.1 57.4
Income tax (benefit) expense (6.6) 20.8 33.8
------------ --------- ---------
(Loss) income from continuing operations (59.0) 55.3 23.6
------------ --------- ---------
Discontinued operations:
(Loss) income from operations, net of tax - (0.4) 2.3
Gain (loss) on disposal, net of tax 93.0 (2.0) 36.7
------------ --------- ---------
Net income 34.0 52.9 62.6
Preferred stock dividends (73.7) (73.7) (73.7)
------------ --------- ---------
Net loss applicable to common stock $ (39.7) $ (20.8) $ (11.1)
============ ========= =========
27
- ---------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(CONTINUED)
BORDEN, INC.
Year ended December 31,
(In millions, except per share data) 2000 1999 1998
- ---------------------------------------------------------------------------------
Basic and Diluted Per Share Data
- ----------------------------------
(Loss) income from continuing operations $ (0.30) $ 0.28 $ 0.12
Discontinued operations:
Income from operations, net of tax - - 0.01
Gain (loss) on disposal, net of tax 0.47 (0.01) 0.18
--------- ------- -------
Net income 0.17 0.27 0.31
Preferred stock dividends (0.37) (0.37) (0.37)
--------- ------- -------
Net loss applicable to common stock $ (0.20) $(0.10) $(0.06)
========= ======= =======
Dividends per common share $ 0.31 $ 0.32 $ 0.30
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
28
- ---------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
BORDEN, INC.
(In millions)
December 31, December 31,
ASSETS 2000 1999
- ------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and equivalents $ 27.8 $ 195.2
Accounts receivable (less allowance for doubtful
accounts of $13.1 in 2000 and $11.8 in 1999) 248.4 215.0
Loan receivable from affiliate 6.1 56.2
Inventories:
Finished and in-process goods 68.7 62.8
Raw materials and supplies 58.6 50.4
Deferred income taxes 46.6 42.4
Other current assets 15.2 15.3
-------------- --------------
471.4 637.3
-------------- --------------
INVESTMENTS AND OTHER ASSETS
Investments 61.9 64.0
Investment in affiliate 10.0 51.5
Deferred income taxes 84.6 109.5
Prepaid pension assets 111.5 129.7
Other assets 41.2 36.3
Assets sold under contractual arrangement (net of
allowance of $62.6 in 1999) (See Note 18) - 48.2
-------------- --------------
309.2 439.2
-------------- --------------
PROPERTY AND EQUIPMENT
Land 28.0 25.6
Buildings 88.0 97.9
Machinery and equipment 778.3 739.1
-------------- --------------
894.3 862.6
Less accumulated depreciation (321.1) (323.8)
-------------- --------------
573.2 538.8
INTANGIBLES
Net of accumulated amortization of $25.1 in 2000
and $16.1 in 1999 179.8 112.1
-------------- --------------
TOTAL ASSETS $ 1,533.6 $ 1,727.4
============== ==============
- ---------------------------------------------------------------------------------------
See Notes to Consolidated and Combined Financial Statements
29
- ---------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
BORDEN, INC.
(In millions, except share data)
December 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
- ------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts and drafts payable $ 158.8 $ 137.4
Debt payable within one year 43.5 17.7
Income taxes payable 92.4 244.1
Loans payable with affiliates 283.1 246.6
Other current liabilities 191.0 178.6
-------------- --------------
768.8 824.4
-------------- --------------
OTHER LIABILITIES
Liabilities sold under contractual arrangement - 41.6
Long-term debt 530.5 541.1
Non-pension post-employment benefit obligations 156.0 176.1
Other long-term liabilities 64.0 80.0
-------------- --------------
750.5 838.8
-------------- --------------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 19)
SHAREHOLDERS' EQUITY
Preferred stock - Issued 24,574,751 shares 614.4 614.4
Common stock - $0.01 par value: authorized 300,000,000 shares,
Issued 198,974,994 shares 2.0 2.0
Paid in capital 353.3 355.7
Receivable from parent (414.9) (414.9)
Accumulated other comprehensive income (60.3) (52.5)
Accumulated deficit (480.2) (440.5)
-------------- --------------
14.3 64.2
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,533.6 $ 1,727.4
============== ==============
- ---------------------------------------------------------------------------------------------------
See Notes to Consolidated and Combined Financial Statements
30
- ---------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
BORDEN, INC.
Year ended December 31,
(In millions) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income $ 34.0 $ 52.9 $ 62.6
Adjustments to reconcile net income to net
cash from (used in) operating activities:
(Gain) loss on disposal of discontinued operations, net of tax (93.0) 2.0 (36.7)
Loss (gain) on divestiture of businesses 0.9 (7.4) (8.3)
Net (gain) loss on the sale of assets (10.1) (1.3) 0.8
Deferred tax provision 15.0 5.8 84.5
Depreciation and amortization 62.4 54.2 50.9
Business realignment and asset write-offs 38.4 41.6 2.5
Unrealized gain on interest rate swap (4.9) (10.8) (4.1)
Investment write-downs and other charges 68.0 3.0 26.7
Net change in assets and liabilities:
Trade receivables (36.5) 3.9 (0.9)
Inventories (12.2) (0.4) (5.8)
Trade payables 27.6 13.5 (17.8)
Income taxes (45.1) (30.8) (47.6)
Other assets 13.1 (6.3) 44.8
Other liabilities (34.3) (48.2) (108.6)
Net assets of discontinued operations - - 3.0
---------- -------- --------
23.3 71.7 46.0
---------- -------- --------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (104.5) (74.8) (52.5)
Proceeds from the divestiture of businesses 10.9 7.6 335.9
Purchase of businesses (118.1) (119.6) (14.4)
Proceeds from the sale of fixed assets 9.9 9.6 -
Purchase of affiliate's receivables, net of cash collected (0.5) - -
Return from (investment in) affiliate, net 6.6 (52.3) 67.6
---------- -------- --------
(195.7) (229.5) 336.6
---------- -------- --------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net short-term debt borrowings (repayments) 33.3 (3.8) 3.8
Borrowings of long-term debt 122.0 - -
Repayment of long-term debt (140.0) (0.6) (236.0)
Affiliated borrowings/receipts (repayments/loans) 86.7 (225.5) 411.8
Interest received from parent 48.6 48.9 60.4
Common stock dividends paid (61.6) (64.4) (60.4)
Preferred stock dividends paid (73.7) (73.7) (73.7)
Other distributions (10.3) - -
---------- -------- --------
5.0 (319.1) 105.9
---------- -------- --------
- ---------------------------------------------------------------------------------------------------
31
- ---------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
BORDEN, INC.
Year ended December 31,
(In millions) 2000 1999 1998
- -------------------------------------------------------------------------------------------------
(Decrease) increase in cash and equivalents $ (167.4) $(476.9) $488.5
Cash and equivalents at beginning
of year 195.2 672.1 183.6
---------- -------- -------
Cash and equivalents at end
of year $ 27.8 $ 195.2 $672.1
========== ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest, net $ 65.0 $ 55.1 $ 47.6
Taxes 19.2 46.1 21.2
Non-cash activity:
Distribution of note receivable from Company's parent
to cancel options - - 39.2
Investment retained in IHDG - - 3.0
Capital contribution by parent 44.3 26.4 42.9
Accrued dividends on investment in affiliate 6.5 1.5 -
Distribution of net assets of infrastructure management
services business to the Company's parent 6.0 - -
Reclassification of minimum pension liability adjustment
from/(to) shareholders' equity 1.8 1.5 (3.6)
- ---------------------------------------------------------------------------------------------------
See Notes to Consolidated and Combined Financial Statements
32
- ---------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
BORDEN, INC.
(In millions)
- ---------------------------------------------------------------------------------------------------------------------------------
Accumulated
Preferred Common Paid-in Receivable Other Accumulated
Stock Stock Capital from Comprehensive Deficit Total
Parent Income
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $614.4 $2.0 $384.0 $(464.1) $(48.0) $(408.6) $79.7
- ---------------------------------------------------------------------------------------------------------------------------------
Net income 62.6 62.6
Translation adjustments and other 0.6 0.6
Minimum pension liability (net of $2.0 tax) (3.6) (3.6)
--------
COMPREHENSIVE INCOME $ 59.6
--------
Preferred stock dividends (73.7) (73.7)
Common stock dividends (59.5) (59.5)
Interest accrued on notes from parent (net of $19.9 tax) 30.7 9.6 40.3
Capital contribution from parent 42.9 42.9
Cancel option on Decorative Products (39.2) 39.2 -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 614.4 $ 2.0 $358.9 $(415.3) $(51.0) $(419.7) $89.3
- ---------------------------------------------------------------------------------------------------------------------------------
Net income 52.9 52.9
Translation adjustments and other (3.0) (3.0)
Minimum pension liability (net of $0.8 tax) 1.5 1.5
--------
COMPREHENSIVE INCOME $ 51.4
--------
Preferred stock dividends (73.7) (73.7)
Common stock dividends (64.1) (64.1)
Interest accrued on notes from parent (net of $14.0 tax) 34.5 0.4 34.9
Capital contribution from parent 26.4 26.4
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 614.4 $ 2.0 $355.7 $(414.9) $(52.5) $(440.5) $64.2
- ---------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated and Combined Financial Statements
33
- ----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
BORDEN, INC.
(In millions)
- ----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Preferred Common Paid-in Receivable Other Accumulated
Stock Stock Capital from Comprehensive Deficit Total
Parent Income
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $614.4 $2.0 $355.7 $(414.9) $(52.5) $(440.5) $64.2
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 34.0 34.0
Translation adjustments (9.6) (9.6)
Minimum pension liability (net of $0.9 tax) 1.8 1.8
--------
COMPREHENSIVE INCOME $ 26.2
--------
Preferred stock dividends (73.7) (73.7)
Common stock dividends (61.6) (61.6)
Other distributions (16.3) (16.3)
Interest accrued on notes from parent (net of $17.4 tax) 31.2 31.2
Capital contribution from parent 44.3 44.3
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ 614.4 $ 2.0 $353.3 $(414.9) $(60.3) $(480.2) $14.3
- ---------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated and Combined Financial Statements
34
- ---------------------------------------------------------------------------------------------
COMBINED STATEMENTS OF OPERATIONS
BORDEN, INC. AND AFFILIATES
Year ended December 31,
(In millions) 2000 1999 1998
- ---------------------------------------------------------------------------------------------
Net sales $ 2,094.7 $1,922.6 $2,118.8
Cost of goods sold 1,408.6 1,202.3 1,405.8
------------ --------- ---------
Gross margin 686.1 720.3 713.0
------------ --------- ---------
Distribution expense 120.0 113.2 108.6
Marketing expense 302.8 274.1 290.4
General & administrative expense 210.7 188.8 205.0
Gain on divestiture of businesses (3.9) (56.5) (380.0)
Net (gain) loss on sale of assets (8.6) (0.1) 0.6
Business realignment and asset write-offs 44.1 41.6 19.7
------------ --------- ---------
Operating income 21.0 159.2 468.7
------------ --------- ---------
Interest expense 62.7 63.2 65.5
Affiliated interest expense 2.4 5.3 5.4
Interest income and other (15.5) (33.6) (34.7)
Investment write-downs and other charges 68.0 3.0 26.7
------------ --------- ---------
(Loss) income from continuing operations
before income tax (96.6) 121.3 405.8
Income tax (benefit) expense (68.0) 31.7 133.4
------------ --------- ---------
(Loss) income from continuing operations (28.6) 89.6 272.4
------------ --------- ---------
Discontinued operations:
Income from operations, net of tax 3.1 2.2 1.2
Gain (loss) on disposal, net of tax 37.0 (3.1) 36.7
------------ --------- ---------
Income before cumulative effect of change
in accounting principle 11.5 88.7 310.3
Cumulative effect of change in accounting principle - (2.8) -
------------ --------- ---------
Net income 11.5 85.9 310.3
Affiliate's share of income (0.1) (5.1) (142.0)
Preferred stock dividends (73.7) (73.7) (73.7)
------------ --------- ---------
Net (loss) income applicable to common stock $ (62.3) $ 7.1 $ 94.6
============ ========= =========
- ---------------------------------------------------------------------------------------------
See Notes to Consolidated and Combined Financial Statements
35
- ------------------------------------------------------------------------------------------------------
COMBINED BALANCE SHEETS
BORDEN, INC. AND AFFILIATES
(In millions)
December 31, December 31,
ASSETS 2000 1999
- ------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and equivalents $ 43.2 $ 227.5
Accounts receivable (less allowance for doubtful accounts of $13.9
in 2000 and $13.2 in 1999) 301.6 274.1
Loan receivable from affiliate 6.1 56.2
Inventories:
Finished and in-process goods 115.2 110.9
Raw materials and supplies 87.2 80.5
Deferred income taxes 66.7 58.5
Other current assets 20.6 20.2
Net assets of discontinued operations (See Note 6) - 61.8
-------------- --------------
640.6 889.7
-------------- --------------
INVESTMENTS AND OTHER ASSETS
Investments 61.9 64.0
Investment in affiliate 10.0 51.5
Deferred income taxes 84.6 81.7
Prepaid pension assets 122.5 140.8
Other assets 31.0 31.8
-------------- --------------
310.0 369.8
-------------- --------------
PROPERTY AND EQUIPMENT
Land 38.4 36.0
Buildings 163.6 171.2
Machinery and equipment 1,076.2 1,009.6
-------------- --------------
1,278.2 1,216.8
Less accumulated depreciation (498.7) (486.6)
-------------- --------------
779.5 730.2
INTANGIBLES
Net of accumulated amortization of $160.6 in 2000 and
$141.2 in 1999 457.7 403.3
-------------- --------------
TOTAL ASSETS $ 2,187.8 $ 2,393.0
============== ==============
- -----------------------------------------------------------------------------------------------------
See Notes to Consolidated and Combined Financial Statements
36
- ---------------------------------------------------------------------------
COMBINED BALANCE SHEETS
BORDEN, INC. AND AFFILIATES
(In millions)
December 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
- ---------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts and drafts payable $ 198.6 $ 184.3
Debt payable within one year 44.1 18.0
Income taxes payable 121.4 254.9
Loans with affiliates 79.2 14.5
Other current liabilities 233.5 244.9
-------------- --------------
676.8 716.6
-------------- --------------
OTHER LIABILITIES
Long-term debt 535.8 544.1
Non-pension post-employment
benefit obligations 166.8 183.8
Other long-term liabilities 81.8 85.7
-------------- --------------
784.4 813.6
-------------- --------------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 19)
SHAREHOLDERS' EQUITY
Preferred stock 614.4 614.4
Common stock 2.0 2.0
Paid in capital 623.9 664.4
Receivable from parent (414.9) (414.9)
Affiliate's interest in subsidiary 66.3 66.2
Accumulated other comprehensive income (95.5) (84.1)
(Accumulated deficit) retained earnings (69.6) 14.8
-------------- --------------
726.6 862.8
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,187.8 $ 2,393.0
============== ==============
- ---------------------------------------------------------------------------
See Notes to Consolidated and Combined Financial Statements
37
- ---------------------------------------------------------------------------------------------------
COMBINED STATEMENTS OF CASH FLOWS
BORDEN, INC. AND AFFILIATES
Year ended December 31,
(In millions) 2000 1999 1998
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income $ 11.5 $ 85.9 $ 310.3
Adjustments to reconcile net income to net
cash from (used in) operating activities:
(Gain) loss on disposal of discontinued operations, net of tax (37.0) 3.1 (36.7)
Gain on divestiture of businesses (3.9) (56.5) (380.0)
Net (gain) loss on the sale of assets (8.6) (0.1) 0.6
Deferred tax provision (9.9) 28.7 157.3
Depreciation and amortization 103.7 84.6 79.9
Business realignment and asset write-offs 44.1 41.6 25.8
Unrealized gain on interest rate swap (4.9) (10.8) (4.1)
Investment write-downs and other charges 68.0 3.0 26.7
Net change in assets and liabilities:
Trade receivables (33.9) (4.7) 49.2
Inventories (9.9) (12.1) 15.2
Trade payables 21.5 4.5 (33.7)
Income taxes (81.3) (18.9) (93.4)
Other assets 17.4 22.0 94.5
Other liabilities (48.3) (87.7) (250.3)
Net assets of discontinued operations 5.5 (4.1) 5.5
----------- -------- ---------
34.0 78.5 (33.2)
----------- -------- ---------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (156.1) (141.9) (100.2)
Proceeds from the divestiture of businesses 10.9 31.2 1,071.2
Purchase of businesses (118.1) (119.6) (14.4)
Proceeds from the sale of fixed assets 9.9 14.2 15.8
Purchase of affiliate's receivables, net of cash collected (0.5) - -
Equity investment in affiliate - (50.0) -
----------- -------- ---------
(253.9) (266.1) 972.4
----------- -------- ---------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net short-term debt borrowings (repayments) 32.9 (10.5) 6.4
Borrowings of long-term debt 125.0 - -
Repayment of long-term debt (140.0) (0.2) (236.7)
Affiliated borrowings/receipts (repayments/loans) 114.7 (179.6) 134.3
Distribution to affiliate - - (272.2)
Interest received from parent 48.6 48.9 60.4
Common stock dividends paid (61.6) (64.4) (60.4)
Preferred stock dividends paid (73.7) (73.7) (73.7)
Other distributions (10.3) - -
----------- -------- ---------
35.6 (279.5) (441.9)
----------- -------- ---------
- ---------------------------------------------------------------------------------------------------
38
- ------------------------------------------------------------------------------------------------------
COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)
BORDEN, INC. AND AFFILIATES
Year ended December 31,
(In millions) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and equivalents $ (184.3) $(467.1) $497.3
Cash and equivalents at beginning
of year 227.5 694.6 197.3
-------- ------ -------
Cash and equivalents at end
of year $ 43.2 $ 227.5 $694.6
======== ======= ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest, net $ 47.4 $ 40.8 $ 32.0
Taxes 17.9 21.5 89.0
Non-cash activity:
Distribution of note receivable from Company's parent
to cancel options - - 39.2
Investment retained in IHDG - - 3.0
Capital contribution by parent 46.7 26.4 42.9
Affiliate's share of income 0.1 5.1 142.0
Accrued dividends on investment in affiliate 6.5 1.5 -
Distribution of net assets of infrastructure management
services business to the Company's parent 6.0 - -
Distribution of net assets of Wise to BWHLLC 58.7 - -
Reclassification of minimum pension liability adjustment
from/(to) shareholders' equity 1.8 3.3 (5.4)
- ------------------------------------------------------------------------------------------------------
See Notes to Consolidated and Combined Financial Statements
39
- ----------------------------------------------------------------------------------------------------------------------------------
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
BORDEN, INC. AND AFFILIATES
(In millions)
- ----------------------------------------------------------------------------------------------------------------------------------
Accumulated Retained
Receivable Affiliate's Other Earnings
Preferred Common Paid-in from Interest in Comprehensive (Accumulated
Stock Stock Capital Parent Subsidiary Income Deficit) Total
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $614.4 $2.0 $666.5 $(464.1) $203.3 $(181.2) $ (86.9) $754.0
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 310.3 310.3
Translation adjustments and other (0.2) 97.4 97.2
Minimum pension liability (net of $3.0 tax) (5.4) (5.4)
--------
COMPREHENSIVE INCOME $402.1
--------
Preferred stock dividends (73.7) (73.7)
Common stock dividends (59.5) (59.5)
Interest accrued on notes from parent (net of $19.9 tax) 30.7 9.6 40.3
Cancel option on Decorative Products (39.2) 39.2 -
Capital contribution from parent 42.9 42.9
Affiliate's interest in subsidiary 12.3 (142.5) (142.0) (272.2)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $614.4 $2.0 $653.5 $(415.3) $ 60.8 $ (89.2) $ 7.7 $833.9
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 85.9 85.9
Translation adjustments and other 1.8 1.8
Minimum pension liability (net of $1.7 tax) 3.3 3.3
--------
COMPREHENSIVE INCOME $ 91.0
-------
Preferred stock dividends (73.7) (73.7)
Common stock dividends (64.1) (64.1)
Interest accrued on notes from parent (net of $14.0 tax) 34.5 0.4 34.9
Capital contribution from parent 26.4 26.4
Increase in foreign tax basis and other 14.1 0.3 14.4
Affiliate's interest in subsidiary 5.1 (5.1) -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $614.4 $2.0 $664.4 $(414.9) $ 66.2 $ (84.1) $ 14.8 $862.8
- ----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated and Combined Financial Statements
40
- ----------------------------------------------------------------------------------------------------------------------------------
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
BORDEN, INC. AND AFFILIATES
(In millions)
- ----------------------------------------------------------------------------------------------------------------------------------
Accumulated Retained
Receivable Affiliate's Other Earnings
Preferred Common Paid-in from Interest in Comprehensive (Accumulated
Stock Stock Capital Parent Subsidiary Income Deficit) Total
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $614.4 $2.0 $664.4 $(414.9) $66.2 $(84.1) $14.8 $862.8
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 11.5 11.5
Translation adjustments (13.2) (13.2)
Minimum pension liability (net of $0.9 tax) 1.8 1.8
-------
COMPREHENSIVE INCOME $ 0.1
-------
Preferred stock dividends (73.7) (73.7)
Common stock dividends (61.6) (61.6)
Other distributions (52.9) (22.1) (75.0)
Interest accrued on notes from parent (net of $17.4 tax) 31.2 31.2
Capital contribution from parent 46.7 46.7
Decrease in foreign tax basis and other (3.9) (3.9)
Affiliate's interest in subsidiary 0.1 (0.1) -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $614.4 $2.0 $ 623.9 $(414.9) $ 66.3 $ (95.5) $ (69.6) $726.6
- ----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated and Combined Financial Statements
41
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in millions except per share data)
1. BACKGROUND
As a result of a merger completed on March 14, 1995, Borden, Inc. (the
"Company", the "Registrant") is controlled by affiliates of Kohlberg Kravis
Roberts & Co. ("KKR"). The Company is a Registrant under the Securities and
Exchange Commission Rules and Regulations as a result of public debt outstanding
prior to the merger and therefore elected not to apply push-down accounting in
its consolidated financial statements.
At the time of the merger, the Company's principal lines of business included
international and domestic food operations ("Foods"), a salty snacks business
("Wise") as well as other businesses. Subsidiaries of BW Holdings, LLC
("BWHLLC", an affiliate of KKR), Wise Holdings, Inc. ("Wise Holdings") and
Borden Foods Holdings Corporation ("Foods Holdings"), purchased Wise and Foods
on July 2, 1996, and October 1, 1996, respectively. Since these sales, Wise and
Foods, as of their respective sales dates, are no longer legally part of the
Company on a consolidated basis. However, management of the Company continued to
exercise significant operating and financial control over Wise and Foods and
both Wise Holdings and Foods Holdings were guarantors of the Company's credit
facility and all of the Company's publicly held debt. Because of the
aforementioned control and guarantees, the Company has included, supplementally
in this filing, combined financial statements of Borden, Inc. and Affiliates
(the "Combined Companies") which present the financial condition and results of
operations and cash flows of the Company combined with the financial condition
and results of operations and cash flows of Wise and Foods. The Combined
Companies' financial statements do not reflect push-down accounting and
therefore present financial information on a basis consistent with that upon
which credit was originally extended to the Company.
On October 30, 2000, Wise Holdings was sold by BWHLLC (see Note 18). For
purposes of the Combined Financial Statements, Wise Holdings is treated as if
its net assets were distributed out of the Combined Companies ("the Wise
Distribution") on October 30, 2000. On October 30, 2000, Wise Holdings'
financial guarantees ceased. As a result of the Wise Distribution, Wise is
reflected as a discontinued operation in the Combined Financial Statements for
all periods presented.
2. NATURE OF OPERATIONS
The Company is engaged primarily in manufacturing, processing, purchasing and
distributing primarily forest products and industrial resins, formaldehyde,
melamine crystal and other specialty and industrial chemicals worldwide as well
as consumer glues and adhesives in North America. The Company also provided
infrastructure management services prior to the distribution of that business
in the first quarter of 2000 (see Note 4). Prior to its sale on March 13, 1998,
the Company engaged in a Decorative Products business, which is included in the
Company's discontinued operations, consistent with the Company's ownership.
In addition to the Company's businesses, the Combined Companies includes the
Foods business and the Wise business, prior to the Wise Distribution, which are
engaged primarily in manufacturing, processing and distributing food products.
Domestic products for the chemical business are sold throughout the United
States to industrial users. To the extent practicable, international
distribution techniques parallel those used in the United States and are
concentrated in Canada, Western Europe, Latin America and the Far East. The
Foods and Wise products included in the Combined Companies are marketed
primarily through food brokers and distributors in the United States.
Approximately 54% of the Company's and the Combined Companies' manufacturing and
processing facilities are located in the United States and the remainder are
located in foreign countries. The majority of the long-lived assets of the
Company and the Combined Companies are located in the United States.
Approximately 32% and 29% of the Company and Combined Companies' sales are
generated in foreign countries.
Information about the Company's operating and geographic segments is provided in
Item 1 on pages 6 to 9 and is an integral part of the Consolidated and Combined
Financial Statements.
42
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed by the Company, as summarized below,
are in conformity with generally accepted accounting principles. The Combined
Companies' policies are consistent with those of the Company.
PRINCIPLES OF CONSOLIDATION AND COMBINATION - The Consolidated Financial
Statements include the accounts of Borden, Inc. and its subsidiaries, after
elimination of intercompany accounts and transactions. The Combined Financial
Statements include the accounts of Borden, Inc., Foods and Wise (prior to the
Wise Distribution), after the elimination of intercompany accounts and
transactions. The Company's share of the net earnings of 20% to 50% owned
companies is included in income on an equity basis. The Company amortizes any
excess of cost over the underlying equity in net assets of an equity investment.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates included in the financial statements
include reserves for expenses related to business redesign, valuation allowances
for deferred tax assets, other tax liabilities and general insurance
liabilities. Other significant estimates include accruals for trade promotion,
litigation and environmental remediation. Actual results could differ from those
estimates.
CASH AND EQUIVALENTS - The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents. Included in the Company's cash equivalents are interest bearing
time deposits of $11.1 in 2000 and $103.3 in 1999. The Combined Companies' cash
equivalents included interest bearing time deposits of $16.0 in 2000 and $132.4
in 1999. The effect of exchange rate changes on cash is not material.
INVENTORIES - Inventories are stated at lower of cost or market. Cost is
determined using the average cost and first-in, first-out methods.
PROPERTY AND EQUIPMENT - Land, buildings, and machinery and equipment are
carried at cost. Depreciation is recorded on the straight-line basis by charges
to expense at rates based on estimated useful lives of properties (average rates
for buildings 4%; machinery and equipment 8%). Major renewals and betterments
are capitalized. Maintenance, repairs and minor renewals are expensed as
incurred. The Combined Companies have $3.0 of machinery and equipment recorded
under capital leases at December 31, 2000.
INTANGIBLES - The excess of purchase price over net tangible and identifiable
intangible assets of businesses acquired ("goodwill") is carried as intangibles
in the Consolidated and Combined Balance Sheets. It is the Company's and
Combined Companies' policy to carry goodwill arising prior to November 1, 1970,
at cost, while goodwill arising after that date is amortized on a straight-line
basis over not more than 40 years. Also included in intangibles are certain
trademarks, patents and other intangible assets used in the operations of the
businesses which amounted to $65.9 and $7.9 for the Company ($76.9 and $19.2 for
the Combined Companies) at December 31, 2000 and 1999, respectively. These
intangibles are amortized on a straight-line basis over the shorter of the legal
or useful life of the asset.
IMPAIRMENT - The Company and Combined Companies periodically evaluate the
recoverability of property, equipment, investments and intangibles by assessing
whether the carrying value can be recovered over its remaining useful life
through the expected future undiscounted operating cash flows of the underlying
business. Any impairment loss required is determined by comparing the carrying
value of the asset to operating cash flows on a discounted basis.
REVENUE RECOGNITION - Revenues are recognized when products are shipped and
title transfers to the buyer.
SHIPPING AND HANDLING - In September 2000, the Emerging Issues Task Force
("EITF") reached a consensus on Issue No. 00-10, "Accounting for Shipping and
Handling Fees and Costs," which addresses the income statement classification
for shipping and handling fees and costs. In order to conform with the
consensus, the Company and Combined Companies reclassified freight billed to
customers of $15.4, $14.5 and $13.0 for the years ended December 31, 2000, 1999
and 1998, respectively, from distribution expense to net sales.
43
Shipping costs are incurred to move the Company's and Combined Companies'
products from production and storage facilities to the customers. Handling
costs are incurred from the point the product is removed from inventory until it
is provided to the shipper and generally include costs to store, move and
prepare the products for shipment. The Company and Combined Companies incurred
shipping costs of $73.0 and $89.4, respectively, in 2000, $68.5 and $83.0 in
1999 and $62.1 and $77.8 in 1998. These costs are classified as distribution
expense in the Consolidated and Combined Statements of Operations. Due to the
nature of the Company's and Combined Companies' businesses, handling costs
incurred prior to shipment are not significant.
ADVERTISING AND PROMOTION EXPENSE - Production costs of future media advertising
are deferred until the advertising first occurs. All other advertising costs are
expensed when incurred. Promotional expenses are generally expensed ratably over
the year in relation to revenues or other performance measures.
FOREIGN CURRENCY TRANSLATIONS - Assets and liabilities of foreign affiliates,
other than those located in highly inflationary economies, are translated at the
exchange rates in effect at the balance sheet date, and the related translation
adjustments are reported as a component of shareholders' equity. Income and
expenses are translated at average exchange rates prevailing during the year.
The Company and the Combined Companies incurred realized and unrealized net
foreign exchange (gains) losses aggregating ($0.2) and ($0.0), respectively, in
2000, ($0.7) and ($2.5) in 1999 and ($0.3) and $1.5 in 1998.
INCOME TAXES - Income tax expense is based on reported results of operations
before income taxes. Deferred income taxes reflect the temporary difference
between amounts of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes. Deferred tax balances are
adjusted to reflect tax rates, based on current tax laws, that will be in effect
in the years in which temporary differences are expected to reverse. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company primarily uses two types of
derivatives: interest rate swaps (which effectively convert a portion of the
Company's variable rate obligations to fixed) and forward exchange contracts
(which reduce the Company's cash flow exposure to changes in foreign exchange
rates). Under interest rate swaps, the Company agrees with other parties to
exchange, at specific intervals, the difference between fixed rate and floating
rate interest amounts calculated by reference to an agreed notional principal
amount. Interest rate swaps that are in excess of outstanding obligations are
marked to market through other income and expense. The fair values of forward
exchange contracts that hedge firm third party commitments are deferred and
recognized as part of the underlying transactions as they occur, those that
hedge existing assets and liabilities are recognized in income currently, and
offset gains and losses of transactions being hedged.
EARNINGS PER SHARE - Basic and diluted net income attributable to common stock
is computed by dividing net income by the weighted average number of common
shares outstanding during the period. Options issued by subsidiaries that enable
the holder to obtain stock of the subsidiary were assumed to be exercised if
they were dilutive.
At December 31, 2000, there were 5.5 million options to purchase subsidiary
stock outstanding, of which 1.1 million were considered dilutive to Earnings Per
Share ("EPS"). At December 31, 1999, there were 6.2 million options to purchase
subsidiary stock outstanding, of which 5.0 million were considered dilutive to
EPS. At December 31, 1998, there were 5.6 million options to purchase subsidiary
stock outstanding, none of which were considered dilutive to EPS.
44
The Company's diluted EPS is calculated as follows:
- -----------------------------------------------------------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------
Net loss applicable to common shareholders $ (39.7) $ (20.8) $ (11.1)
Effect of dilutive options in subsidiary stock - (0.5) -
--------- --------- --------
Diluted EPS - Numerator $ (39.7) $ (21.3) $ (11.1)
========= ========= ========
Weighted average shares - Denominator 199.0 199.0 199.0
========= ========= ========
Diluted EPS $ (0.20) $ (0.11) $ (0.06)
========= ========= ========
- -----------------------------------------------------------------------------------------------------------
CONCENTRATIONS OF CREDIT RISK - Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally of temporary
cash investments and accounts receivable. The Company places its temporary cash
investments with high quality institutions and, by policy, limits the amount of
credit exposure to any one institution. Concentrations of credit risk with
respect to accounts receivable are limited, due to the large number of customers
comprising the Company's customer base and their dispersion across many
different industries and geographies. The Company generally does not require
collateral or other security to support customer receivables.
RECENTLY ISSUED ACCOUNTING STANDARDS -In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This standard requires all derivatives be measured at fair value
and recorded on a company's balance sheet as an asset or liability, depending
upon the company's underlying rights or obligations associated with the
derivative instrument. 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. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", which is an amendment of
SFAS No. 133. SFAS No. 138 addresses a limited number of implementation issues
resulting from the application of SFAS No. 133. The Company and Combined
Companies will implement SFAS No. 133 as of January 1, 2001. Adoption of this
pronouncement will result in a pre-tax loss of $5.2 and $5.6 ($3.3 and $3.5
after-tax) for the Company and Combined Companies, respectively, that will be
recorded to Shareholders' Equity in Other Comprehensive Income as a cumulative
effect of a change in accounting principle. Future results are not expected to
be materially impacted by the adoption of this pronouncement.
In July 2000, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 00-14, "Accounting for Certain Sales Incentives", which addresses the
recognition, measurement and income statement classification for sales
incentives offered to customers. Although this EITF is not effective until June
30, 2001, registrants who do not elect early adoption are subject to certain
disclosure requirements at December 31, 2000. Upon adoption, approximately $24
and $104 for the Company and Combined Companies, respectively, in 2000, $14 and
$86 in 1999 and $12 and $93 in 1998 will be reclassified from marketing expense
to net sales. The Company's and Combined Companies' current policy of
recognizing a liability for sales incentives at the later of the date at which
the related revenue is recorded or the date at which the sales incentive is
offered, complies with the consensuses reached in this Issue.
RECLASSIFICATION - Certain prior year amounts have been reclassified to conform
with the 2000 presentation.
4. BUSINESS ACQUISITIONS, DIVESTITURES, REALIGNMENT AND ASSET WRITE-OFFS
In 2000, management continued to review and adjust its structure to streamline
its operations in order to improve business financial results and maximize
returns to owners of the Company and Combined Companies. As a result of this
process, the Company continued to make acquisitions, committed to certain
business realignment activities and divested a business. The Wise Distribution
and subsequent sale were completed in 2000 because Wise was determined to not be
a long-term strategic fit. Management of the Company and Combined Companies is
expected to continue to review its operating structures and strategic options in
2001.
45
Acquisitions
- ------------
In 2000, the Company acquired the formaldehyde and certain other assets from
Borden Chemicals and Plastics Limited Partnership ("BCP"), an affiliate of the
Company, for $23.8, comprised of $14.1 cash and a $9.7 interest-bearing note due
in January 2001. The acquisition was accounted for using the purchase method of
accounting and, accordingly, its results of operations have been included from
the date of acquisition. The purchase price approximates the fair value of the
assets acquired.
In the fourth quarter of 2000, the Company acquired East Central Wax, Inc., a
manufacturer of wax emulsions for the wood products industry, for $2.8 in cash.
The acquisition was accounted for using the purchase method of accounting and,
accordingly, its results of operations have been included from the date of
acquisition. Based on a preliminary allocation, the excess of purchase price
over net tangible and intangible assets is approximately $1.9 million and will
be amortized over 40 years.
In May 2000, the Company acquired certain assets and liabilities of a Canadian
based business for $91.5 in cash. The business manufactures glue, glue sticks,
paints, tapes and craft/stationery products at its manufacturing facility in
Ontario, Canada. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the business' results of operations have been
included since the acquisition date. Based on a preliminary allocation, the
excess purchase price over net tangible and identifiable intangible assets is
approximately $16.3 and will be amortized over a period of 15 years.
In the fourth quarter of 1999, the Company purchased a resins manufacturing
plant in Minnesota for $7.5 in cash. The facility produces resins for use in the
manufacturing of wood and industrial products. The acquisition was accounted for
using the purchase method of accounting and, accordingly, its results of
operations have been included from the date of acquisition. The purchase price
approximates the fair value of the assets acquired.
Early in the third quarter of 1999, the Company completed the acquisition of
Blagden Chemicals, Ltd. ("Blagden") for $71.5 in cash. Blagden produces
formaldehyde and resins for forest products, foundry, and industrial
applications at three manufacturing facilities in the United Kingdom and a
fourth in the Netherlands. The acquisition was accounted for using the purchase
method of accounting and, accordingly, its results of operations have been
included from the date of acquisition. Goodwill of $31 will be amortized over 40
years.
In May 1999, the Company completed the acquisition of Spurlock Industries, Inc.
("Spurlock") for $40.6 in cash. Spurlock is a formaldehyde and resins producer
primarily for forest products applications with manufacturing facilities in
Virginia, Arkansas, and New York. The acquisition was accounted for using the
purchase method of accounting and, accordingly, its results of operations have
been included from the date of acquisition. Goodwill of $14 will be amortized
over a period of 40 years.
In February 1998, the Company acquired the resins and compounds division ("PMC")
of Sun Coast Industries, Inc. for $14.4 in cash. The acquisition of this
business further expanded the Company's growth in the melamine market. The
acquisition was accounted for using the purchase method and, accordingly, its
results of operations have been included from the date of acquisition. Goodwill
of $4.2 was recorded related to this acquisition and is being amortized over 40
years.
Divestitures
- ------------
In the fourth quarter of 2000, the Company sold its printing inks business for
$10.3 resulting in a pre-tax loss of $3.5 ($2.2 after-tax).
On October 30, 2000, the shares of Wise Holdings were sold by BWHLLC to
Palladium Equity Partners, LLC for $92.3 (see Note 1).
In the third and fourth quarters of 2000, the Combined Companies recorded gains
of $3.1 and $1.7, respectively, due to lower than anticipated exit costs
primarily associated with the 1998 divestiture of the Signature Flavors
business. This amount is recorded as gain on the divestiture of businesses in
the Combined Statements of Operations.
On February 25, 2000, the Company distributed 100% of its ownership in the
infrastructure management services business to its parent. The distribution was
treated as a dividend at the recorded net book value of approximately $16.
46
Subsequently, substantially all of the assets of the infrastructure management
services business were sold to a subsidiary of Interliant, Inc. in exchange for
$2.5 in cash and 1,041,179 shares of Interliant, Inc. stock.
The Company's realignment which began in 1996 included the 1998 sales of the
Decorative Products, commercial and industrial wallcovering, and Latin American
films businesses. In the fourth quarter of 1999, the Company recorded $7.4 of
additional pre-tax gain due to lower than expected exit costs related primarily
to the commercial and industrial wallcoverings sale. In addition to cash
proceeds, consideration received on the sale of the Decorative Products business
included a retained interest in the buyer (see Note 8). In October 1999, the
Company sold the molding compounds business, a division of Sun Coast Industries
acquired in 1998.
Foods substantially completed its divestiture of most of the KLIM operations and
the Signature Flavors businesses and the sale of two international Foods
operations in 1998. Certain proceeds for these businesses were received in 1999.
In 1999, Foods sold its China KLIM business for approximately $7.1, which
resulted in a pre-tax gain of approximately $10.8 ($3.5 after-tax). Also, in
1999, $37.8 of additional pre-tax gain was recorded due primarily to lower than
expected exit costs related to the 1998 KLIM sale. The remaining reserves
related to the KLIM sale are approximately $0.1 and $5.0 at December 31, 2000
and 1999, respectively.
In July 1999, Foods sold the chocolate milk business located in Denmark. The
sale generated proceeds of $6.7 which resulted in a pre-tax gain of $1.9 ($1.2
after-tax).
The following schedule summarizes the net cash proceeds, pre-tax and after-tax
gains and losses associated with business divestiture activities over the last
three years.
- ----------------------------------------------------------------------------------------------------
NET CASH PROCEEDS GAIN (LOSS)
------------------------ ----------------------
2000 1999 1998 2000 1999 1998
------- ------- ------ ------ ------ ------
CONTINUING OPERATIONS
Printing Inks $ 10.3 $(3.5)
Commercial & industrial
wallcoverings (1) $ 15.6 2.0 $ 5.5
Latin America Films 15.5 $ 8.3
Molding compounds business $ 7.6
Other 0.6 0.6 1.9
------ ------ ------ ----- ------ ------
TOTAL CONSOLIDATED PRE-TAX $ 10.9 $ 7.6 $ 31.1 $(0.9) $ 7.4 $ 8.3
------ ------ ------ ------ ------ ------
KLIM $ 16.9 $339.9 $ 48.6 $55.9
Signature Flavors 376.5 $ 4.8 304.5
Cracker Jack & Domestic Cheese 5.7
Other 6.7 18.9 0.5 5.6
------ ------ ------ ------ ------ ------
TOTAL COMBINED PRE-TAX $ 10.9 $ 31.2 $766.4 $ 3.9 $ 56.5 $380.0
====== ====== ====== ====== ====== ======
CONSOLIDATED AFTER-TAX (LOSS) GAIN $(0.5) $ 4.8 $ 6.0
====== ====== ======
COMBINED AFTER-TAX GAIN $ 2.4 $ 45.0 $270.5
====== ====== ======
DISCONTINUED OPERATIONS (SEE NOTE 6)
Decorative Products $304.8 $102.7
Dairy $ 0.9 8.9
Other (5.8)
------ ------ ------ ------ ------ ------
TOTAL COMBINED PRE-TAX - - 304.8 - (4.9) 111.6
------ ------ ------ ------ ------ ------
Borden Foods 1.8
------ ------ ------ ------ ------ ------
TOTAL CONSOLIDATED PRE-TAX $ - $ - $304.8 $ - $(3.1) $111.6
====== ====== ====== ====== ====== ======
COMBINED AFTER-TAX GAIN (LOSS) $ 37.0 $(3.1) $ 36.7
====== ====== ======
CONSOLIDATED AFTER-TAX GAIN (LOSS) $ 93.0 $(2.0) $ 36.7
====== ====== =======
- ---------------------------------------------------------------------------------------------------
(1) A loss on the sale of the business was accrued in a period prior to 1998.
47
Business Realignment and Asset Write-Offs
- ---------------------------------------------
In the fourth quarter of 2000, the Company recorded a charge of $24.5 related
primarily to the closure of two forest products plants in the United States and
the consolidation of administrative headquarters in the United Kingdom. These
closures are part of an ongoing program to reduce the Company's operating
expenses. The charge consists primarily of severance costs and asset
write-downs. This amount is classified as business realignment and asset
write-offs in the Consolidated and Combined Statements of Operations.
In the third quarter of 2000, the Combined Companies recorded a charge of $4.8
related to a Foods corporate workforce reduction program. The program was put in
place to take advantage of the efficiencies generated from the implementation of
enterprise-wide technology systems in 1999. In the fourth quarter, an additional
$0.9 was recorded related to this program. This amount is classified as
business realignment and asset write-offs in the Combined Statements of
Operations.
In the second quarter of 2000, the Company recorded a charge of $9.0 related
primarily to the closure of a United Kingdom formaldehyde and resins plant as a
result of the acquisition of Blagden Chemicals, Ltd. in 1999. The charge
primarily consists of severance costs. This amount is classified as business
realignment and asset write-offs in the Consolidated and Combined Statements of
Operations.
In June 2000, the Company sold certain rights to harvest shellfish for $10.5,
resulting in a pre-tax gain of $10.5 ($6.8 after-tax). This amount is recorded
as gain on the sale of assets in the Consolidated and Combined Statements of
Operations.
In the first quarter of 2000, the Company recorded $2.8 primarily of severance
and environmental remediation costs related to the closure of Chemical's resins
operations primarily in Argentina and California. In the third quarter, the
Company recorded an additional charge of $1.8 related primarily to additional
environmental remediation costs associated with the plant closure in Argentina.
These amounts are classified as business realignment and asset write-offs in the
Consolidated and Combined Statements of Operations.
In June 1999, the Company finalized a plan for the closure of the Chemical
resins operations in the Philippines. As part of this plan, long-lived assets
will be disposed of and were written down to net realizable value as of June 30,
1999 based upon estimated proceeds of $5.0. This resulted in a 1999 charge of
$13.0 which is classified as business realignment and asset write-offs on the
Consolidated and Combined Statement of Operations and as a reduction of
accumulated translation adjustments previously recorded on the balance sheet for
the Philippines.
In the third quarter of 1999, management approved a plan to close a Brazil
Chemical operation and Uruguay Chemical business. As a result, a charge of $3.6
was recorded which relates primarily to fixed assets and is recorded as business
realignment and asset write-offs on the Consolidated and Combined Statements of
Operations.
In 1999, management of the Company discontinued a plant expansion project. As a
result, the Company has written off $25.0 of engineering, equipment and other
costs which are classified as business realignment and asset write-offs in
the Consolidated and Combined Statements of Operations.
In September 1998, the Combined Companies approved the closure of a domestic
pasta plant in order to reduce manufacturing capacity. As a result, the Combined
Companies recorded, and classified as a business realignment and asset
write-offs, a $17.2 charge related to the closure of the plant and an additional
charge of $6.1 to cost of goods sold for the write-down of inventory. The plant
ceased operations in the fourth quarter of 1998.
In December 1997, the Company committed to exit a European Chemical operation
and accrued a business realignment charge on this business in 1997 of $16.0.
During 1998, the exit of this business was completed, and a pre-tax charge of
$2.5 was recorded in 1998 for additional expenses incurred to exit this
business, primarily severance.
5. AFFILIATE'S SHARE OF INCOME
In association with a limited partnership agreement between Foods and Foods'
parent, Borden Foods Holdings LLC, an affiliate of the Company's parent, the
affiliate was allocated income and gains on the sale of trademarks of $0.1, $5.1
48
and $142.0 in 2000, 1999 and 1998, respectively (see accompanying Combined
Statements of Operations). In addition, a $272.2 cash distribution of a portion
of the sale proceeds was made to the affiliate in 1998.
6. DISCONTINUED OPERATIONS
The Decorative Products operations were a separate segment of the Company and
Combined Companies and Wise was a separate segment of the Combined Companies as
defined by generally accepted accounting principles and have been reclassified
to discontinued operations in the statements of operations, balance sheets and
cash flows for all periods presented.
The summary of consolidated results below include the 1999 loss from
discontinued operations recorded by the Company's investee, accounted for under
the equity method, and the 1998 results of the Decorative Products business
(see Note 4).
- --------------------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------------------
Net sales $ - $ - $ 73.2
(Loss) income before income taxes - (0.6) 3.5
Income tax (benefit) expense - (0.2) 1.2
(Loss) income from discontinued
operations - (0.4) 2.3
- --------------------------------------------------------------------------------------------
As a result of the Wise Distribution, the combined results include in income
from discontinued operations the financial results of Wise for all periods
presented. The following table presents the consolidated results above in
addition to the results of Wise.
- -------------------------------------------------------------------------------------------
2000 1999 1998
- -------------------------------------------------------------------------------------------
Net sales $ 208.6 $ 229.0 $ 301.9
Income before income taxes 4.6 3.2 1.4
Income tax expense 1.5 1.0 0.2
Income from discontinued operations 3.1 2.2 1.2
- -------------------------------------------------------------------------------------------
For the comparative balance sheets presented, the net assets of Wise are
separately identified on the Combined Balance Sheets as net assets of
discontinued operations.
In addition to the amounts shown above, gains and losses (net of tax) recognized
on the sale of discontinued operations are included in the discontinued
operations of the Consolidated and Combined Financial Statements. As a result
of a settlement reached with the Internal Revenue Service in the second quarter
of 2000, amounts established for tax issues related to the divestiture of
certain segments of the Company's business are no longer considered necessary. A
portion of these amounts for the Company and Combined Companies was classified
as gain on the sale of discontinued operations in 2000, consistent with the
classification of these amounts when established (see also Item 7 relating to
Management's discussion on income tax expense). Included as gain on disposal of
discontinued operations for the Company and Combined Companies in 2000 for these
amounts are $93.0 and $37.0, respectively. Amounts differ between consolidated
and combined because Foods is not reflected as a sale of a discontinued
operation in combined.
The consolidated 1999 net of tax loss on disposal of discontinued operations of
$2.0 represents the loss of $3.7 recorded by the Company's investee,
accounted for under the equity method, offset by a favorable claim settlement
related to the 1997 divestiture of Dairy of $0.6, and a gain of $1.1 due to
lower than expected exit costs related to the 1996 sale of the Foods business.
The Combined Companies had a 1999 net of tax loss from discontinued operations
of $3.1. The losses differ from that of the Company because the $1.1 gain on
the sale of the Foods business is eliminated in the Combined Financial
Statements.
The consolidated and combined 1998 net of tax gain on disposal of discontinued
operations of $36.7 relates to the sale of Decorative Products.
49
7. COMPREHENSIVE INCOME
Comprehensive income included foreign currency translation adjustment
reclassifications as shown in the following table:
- --------------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
---------------------- -------------------------
2000 1999 1998 2000 1999 1998
- --------------------------------------------------------------------------------------------------------
Foreign currency translation adjustments $(9.6) $ 10.4 $ 0.6 $(13.2) $ 11.8 $(11.0)
Reclassification adjustments - (13.4) - - (10.0) 108.4
------ ------- ------ ------- ------- ------
$(9.6) $ (3.0) $ 0.6 $(13.2) $ 1.8 $ 97.4
====== ======= ====== ======= ======= ======
- --------------------------------------------------------------------------------------------------------
The reclassification adjustments in 1999 primarily represent the accumulated
translation adjustment included as part of the charge to close the Chemical
operations in the Philippines. The reclassification adjustment in 1998 reflects
the accumulated translation adjustment recognized on the sale of the Combined
Companies' KLIM business.
8. INVESTMENTS
Investments held by the Company and Combined Companies primarily consist of two
common stock equity interests received as partial consideration on the sale of
certain businesses and an investment in preferred stock of an affiliate. One of
the common stock investments represents approximately 33% of the outstanding
shares and is accounted for using the equity method. At December 31, 2000 and
1999, the unamortized excess of the Company's investment over its equity in the
underlying net assets was $16.1 and $16.5, respectively. The other two
investments are accounted for using the cost method.
The Company's and Combined Companies' investments also include certain other
partnership, subsidiary and joint venture interests.
The Company and Combined Companies review the carrying value of investments in
accordance with existing accounting guidance that requires investments to be
adjusted to fair value if the decline in value is considered to be "other than
temporary" based on certain criteria. The Company and Combined Companies
recorded investment write-downs of $48.0, $3.0 and $26.7 in 2000, 1999 and
1998, respectively.
50
9. DEBT, LEASE OBLIGATIONS AND RELATED COMMITMENTS
Debt outstanding at December 31, 2000 and 1999 is as follows:
- -----------------------------------------------------------------------------------------------------------------
2000 1999
------------------------- --------------------------
Due Within Due Within
Long-Term One Year Long-Term One Year
------------ ------------ ------------- ------------
9.2% Debentures due 2021 $ 117.1 $ 117.1
7.875% Debentures due 2023 250.0 250.0
Sinking fund debentures:
8-3/8% due 2016 78.5 78.5
9-1/4% due 2019 48.7 48.7
Industrial Revenue Bonds (at an average rate of
9.8% in 2000 and 8.5% in 1999) 36.2 $ 1.1 43.2 $ 10.3
Other (at an average rate of 9.5% in 2000 and 9.8% in
1999) 1.8 3.6 7.4
- ---------------------------------------------------------------------------------------------------------------
Total current maturities of long-term debt 2.9 17.7
Short-term debt (primarily foreign bank loans
at an average rate of 7.4%) 40.6
- ---------------------------------------------------------------------------------------------------------------
Total debt - Consolidated $ 530.5 $ 43.5 $ 541.1 $ 17.7
- ---------------------------------------------------------------------------------------------------------------
Other Foods debt (at an average rate of
3.6% in 2000 and 0.0% in 1999) 5.3 3.0
Foods short-term debt (primarily foreign bank
loans at an average rate of 2.9% in 2000 and
6.0% in 1999) 0.6 0.3
- --------------------------------------------------------------------------------------------------------------
Total debt - Combined $ 535.8 $ 44.1 $ 544.1 $ 18.0
- --------------------------------------------------------------------------------------------------------------
In the second quarter of 1998, the Company's and Combined Companies'
contractually committed lines of credit (the "Credit Agreement") was reduced due
to the sales of certain Foods Unaligned businesses in accordance with the terms
of the Credit Agreement. As a result, the $950.0 five year revolver (maturing
July 13, 2002) was reduced to $895.0, and the $50.0, 364-day convertible
revolver was canceled. In the fourth quarter of 2000, as a result of the Wise
Distribution, the Credit Agreement was reduced to $809.0 in accordance with the
terms of the Credit Agreement. As of December 31, 2000, the Company and Combined
Companies had contractually committed lines of credit of $809.0 which mature on
July 13, 2002. Current pricing under the LIBOR based borrowing option is LIBOR
plus 87.5 basis points. The commitment fee on the unused portion of the facility
is 37.5 basis points.
The Credit Agreement, as amended, contains covenants that significantly limit or
prohibit, among other things, the Company's and its subsidiaries' ability to
incur indebtedness, make prepayments of certain indebtedness, pay dividends,
engage in transactions with affiliates, create liens, make changes in its
businesses or control of the Company, sell assets, engage in mergers and
consolidations, and use proceeds from asset sales and certain debt and equity
issuances. In addition, the Credit Agreement requires that the Combined
Companies limit its capital expenditures to certain specified amounts and
maintain other financial ratios, including a minimum ratio of EBITDA (Earnings
Before Interest, Taxes, Depreciation and Amortization as adjusted by the Credit
Agreement) to interest expense and a maximum ratio of total debt to EBITDA.
At December 31, 2000 and 1999, there were no outstanding debt balances under the
Credit Agreement. Provisions under the Credit Agreement require Foods to
guarantee the Company's obligations under the Credit Agreement. The Company had
$714.0 (net of $95.0 in letters of credit) available for borrowing under its
Credit Agreement at December 31, 2000, and incurred commitment fees of $1.3 in
2000 and $0.8 in 1999.
51
Aggregate maturities of total debt and minimum annual rentals under operating
leases at December 31, 2000, for the Company and the Combined Companies are as
follows:
- ---------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
------------------------- -------------------------
MINIMUM MINIMUM
RENTALS UNDER RENTALS UNDER
DEBT OPERATING LEASES DEBT OPERATING LEASES
- ---------------------------------------------------------------------------------------------------
2001 $ 43.5 $ 19.6 $ 44.1 $ 21.8
2002 1.4 18.9 2.0 21.0
2003 - 17.2 1.0 19.0
2004 - 15.8 1.0 16.3
2005 - 15.1 0.6 15.5
2006 and thereafter 529.1 5.0 531.2 5.3
------ ------
$574.0 $579.9
- --------------------------------------------------------------------------------------------------
The Combined Companies' future minimum lease rentals under capital leases as of
December 31, 2000 are shown in the following table. No capital leases were in
place as of December 31, 1999.
- ----------------------------------------------------------------------
2000
- ----------------------------------------------------------------------
2001 $ 0.5
2002 0.5
2003 0.5
2004 0.5
2005 0.5
2006 and thereafter 3.3
-------------
5.8
Less amounts representing interest at 6.75% 2.8
-------------
Present value of future minimum capital lease payments 3.0
Less current portion of capital lease obligations 0.3
-------------
Long-term portion of capital lease obligations $ 2.7
- ---------------------------------------------------------------------
Consolidated rental expense amounted to $23.9, $22.2 and $17.3 in 2000, 1999 and
1998, respectively. Combined rental expense amounted to $25.2, $23.9 and $21.6
in 2000, 1999 and 1998, respectively.
10. INCOME TAXES
Comparative analysis of the Company's provision (benefit) for income taxes from
continuing operations follows:
- ---------------------------------------------------------------------------------------------
CURRENT DEFERRED
-------------------------- -------------------------
2000 1999 1998 2000 1999 1998
- ---------------------------------------------------------------------------------------------
Federal $ (19.7) $ (2.6) $(58.3) $ 12.4 $ 7.1 $75.2
State and Local (1.1) 1.5 1.6 (1.6) (0.3) 1.2
Foreign (0.8) 16.1 6.0 4.2 (1.0) 8.1
-------- ------- ------- ------- ------ -----
$ (21.6) $ 15.0 $(50.7) $ 15.0 $ 5.8 $84.5
- ---------------------------------------------------------------------------------------------
The Company's income tax expense (benefit) from discontinued operations'
operating results was $0.0, $(0.2) and $1.2 in 2000, 1999 and 1998,
respectively. The Company's income tax (benefit) expense related to the
loss/gain on disposal from discontinued operations was $(93.0), $(1.1) and $74.9
in 2000, 1999 and 1998, respectively.
52
The Combined Companies' provision (benefit) for income taxes from continuing
operations is as follows:
- ---------------------------------------------------------------------------------------------
CURRENT DEFERRED
------------------------ ------------------------
2000 1999 1998 2000 1999 1998
- ---------------------------------------------------------------------------------------------
Federal $(57.7) $(12.0) $(39.5) $(11.7) $22.7 $137.5
State and Local (2.1) 1.4 5.8 (2.2) 2.7 12.7
Foreign 1.7 13.6 9.8 4.0 3.3 7.1
------- ------- ------- ----- ----- ------
$(58.1) $ 3.0 $(23.9) $ (9.9) $28.7 $157.3
- --------------------------------------------------------------------------------------------
The Combined Companies' income tax (benefit) expense from discontinued
operations' operating results was $(1.5), $0.9 and $0.2 in 2000, 1999 and 1998,
respectively. The Combined Companies' income tax expense (benefit) related to
the loss/gain on disposal from discontinued operations was $(37.0), $(1.8) and
$74.9 in 2000, 1999 and 1998, respectively.
The income tax benefit from the cumulative effect of change in accounting
principle for the Combined Companies was $1.8 in 1999.
Reconciliations of the Company's and the Combined Companies' differences between
income taxes computed at Federal statutory tax rates and provisions for income
taxes are as follows:
- -------------------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
------------------------- ------------------------
2000 1999 1998 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------
Income taxes computed at
Federal statutory tax rate $(23.0) $26.6 $20.1 $(33.8) $ 42.5 $142.0
State tax provision, net of
Federal benefits (2.7) 1.2 2.3 (3.8) 3.1 12.5
Foreign tax differentials 2.2 0.2 (2.5) 2.7 1.2 1.6
Foreign source income subject
to U.S. taxation, net of
valuation allowance 13.1 (7.2) 8.8 13.1 (7.3) 8.8
Divestiture tax differentials - - - 7.9 (11.1) (35.7)
Losses and other expenses
not deductible for tax (1.2) - 2.1 3.1 2.9 5.1
Adjustment of prior estimates 5.0 - 3.0 (57.2) 0.4 (0.9)
------ ------ ------ ------- ------- -------
Provision for income taxes $(6.6) $20.8 $33.8 $(68.0) $ 31.7 $133.4
- -------------------------------------------------------------------------------------------------------------
The domestic and foreign components of the Company's and the Combined Companies'
income from continuing operations before income taxes are as follows:
- -------------------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
------------ --------
2000 1999 1998 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------
Domestic $(69.0) $33.3 $35.4 $(105.3) $ 76.7 $387.3
Foreign 3.4 42.8 22.0 8.7 44.6 18.5
----- ----- ----- ------ ------ -------
$(65.6) $76.1 $57.4 $ (96.6) $121.3 $405.8
- -------------------------------------------------------------------------------------------------------------
53
The tax effects of the Company's and the Combined Companies' significant
temporary differences, and loss and credit carryforwards, which comprise the
deferred tax assets and liabilities at December 31, 2000 and 1999 follow:
- -------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
----------------- -----------------
2000 1999 2000 1999
- -------------------------------------------------------------------------------------
ASSETS
Non-pension post-employment benefit
obligations $ 50.6 $ 58.0 $ 52.7 $ 60.5
Divestiture reserve 16.8 9.0 17.5 13.3
Accrued expenses and other expenses 86.5 65.1 91.7 73.0
Foreign accrued expenses, pensions and
other expenses 4.5 6.2 0.6 2.1
Loss and credit carryforwards 198.0 180.6 214.4 192.5
-------- ------- -------- -------
Gross deferred tax assets 356.4 318.9 376.9 341.4
Valuation allowance (101.7) (37.7) (102.3) (43.0)
-------- ------- -------- -------
254.7 281.2 274.6 298.4
LIABILITIES
Property, plant, equipment and intangibles 59.8 68.6 51.2 84.2
Foreign property, plant, equipment/other 16.9 21.4 22.3 28.1
Certain foreign intangibles (1.2) (4.3) 11.9 3.5
Pension liability 35.7 41.0 35.3 37.6
Deferred gain on sale of partnership interest 17.8 13.7 17.8 13.7
Other prepaids 0.7 0.5 2.0 2.7
-------- ------- -------- -------
Gross deferred tax liabilities 129.7 140.9 140.5 169.8
- -------------------------------------------------------------------------------------
Net asset $ 125.0 $140.3 $ 134.1 $128.6
- -------------------------------------------------------------------------------------
The Company's and Combined Companies' net change of $64.0 and $59.3,
respectively, in valuation allowance in 2000 is primarily related to foreign tax
credits generated in 1999 and 1998, no longer expected to be utilized by the
Company and Combined Companies as a result of a settlement resolving federal
examination issues for the years 1996 and 1997 as well as foreign tax credits
identified in 2000 that are no longer expected to be utilized.
The Company's net deferred tax asset at December 31, 2000 was $125.0. Of this
amount, $127.3 represents net domestic deferred tax assets related to future tax
benefits. Included in the domestic deferred tax asset is $27.2 of net operating
loss carryforward for U.S. federal tax purposes, which begin expiring in 2021.
Realization of the domestic net operating loss is dependent upon generation of
approximately $78 of future income before the expiration dates. Also included
within the domestic deferred tax asset is $61.5 of foreign tax credits with a
related valuation allowance of $(50.8). These foreign tax credits consist of
$59.7 of foreign tax credit carryover which was generated in 1998 and 1999 and
will begin expiring in 2004 and $1.8 of foreign tax credit which was generated
in 2000 and will begin expiring in 2006. Realization of the entire net domestic
deferred tax asset is dependent on generation of approximately $364 of future
taxable income.
The Combined Companies' net deferred tax asset at December 31, 2000 was $134.1.
Of this amount, $158.8 represents net domestic deferred tax assets related to
future tax benefits. Included in the domestic deferred tax asset is $37.2 of net
operating loss carryforward for U.S. federal tax purposes, which begin expiring
in 2021. Realization of the domestic net operating loss is dependent upon
generation of approximately $106 of future income before the expiration dates.
Also included within the domestic deferred tax asset is $67.3 of foreign tax
credits with a related valuation allowance of $(50.8). This amount consists of
$65.5 of foreign tax credit carryover which was generated in 1998 and 1999 and
will begin expiring in 2004 and $1.8 of foreign tax credit which was generated
in 2000 and will begin expiring in 2006. Realization of the entire net domestic
deferred tax asset is dependent on generation of approximately $454 of future
taxable income.
The Company has not recorded income taxes applicable to undistributed earnings
of foreign subsidiaries that are indefinitely reinvested in foreign operations.
Undistributed earnings permanently reinvested amounted to $134.1 at December 31,
2000.
54
11. PENSION AND RETIREMENT SAVINGS PLANS
Most U.S. employees of the Company and the Combined Companies are covered under
a non-contributory defined benefit plan ("the Borden, Inc. Plan"). The Borden,
Inc. Plan provides benefits for salaried employees based on eligible
compensation and years of credited service and for hourly employees based on
years of credited service. Certain employees in other countries are covered
under contributory and non-contributory defined benefit foreign plans.
Additionally, eligible salaried and hourly employees may contribute up to 5% of
their pay (7% for certain longer service salaried employees), which is currently
matched by the Company at a range of 50-75%. The Company has the option to match
up to 100% of this amount and in certain cases the Company may match up to 125%,
based on financial performance. Charges to operations for matching contributions
under the Company's retirement savings plans in 2000, 1999 and 1998 amounted to
$6.2, $5.9 and $5.3, respectively. Charges for matching contributions under the
Combined Companies retirement savings plans in 2000, 1999 and 1998 amounted to
$7.2, $7.1 and $6.7, respectively.
The Company's and the Combined Companies' funding of their pension plans equals
or exceeds the minimum funding requirements imposed by Federal and foreign laws
and regulations. Subsequent to the 1996 sales of Foods and Wise, the Company's
pension plan retained the liabilities related to the employees of these
businesses. The consolidated projected benefit obligation and plan assets
include the domestic obligation and assets for Foods in 2000, and for Foods and
Wise in 1999. In 1996, the Company recorded a receivable from Foods for its
actuarially determined liability which is adjusted annually for actuarially
determined expense and funding payments. The Wise liability was settled in
2000, as a result of the Wise Distribution (see Notes 1 and 4). As a
result of the settlement of this liability, in addition to other lump sum
settlements made during 2000, the Company and Combined Companies recorded a
settlement charge of $8.9 in 2000.
55
The assets and benefit obligations of the plans were as follows:
- --------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
---------------- ----------------
2000 1999 2000 1999
- --------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $332.3 $351.0 $353.2 $373.0
Service cost 4.7 5.0 5.2 5.4
Interest cost 23.5 22.2 24.8 23.3
Actuarial losses (gains) 8.8 (5.8) 7.8 (7.4)
Foreign currency exchange rate changes (0.4) 0.2 (1.3) 1.3
Benefits paid (46.6) (42.0) (48.4) (44.1)
Plan amendments (0.7) 2.0 (0.7) 2.0
Acquisitions 7.4 - 7.4 -
Settlements/curtailments (22.6) (0.3) (22.7) (0.3)
------ ------ ------ ------
$306.4 $332.3 $325.3 $353.2
------ ------ ------ ------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $381.0 $347.7 $406.1 $371.3
Actual return on plan assets 67.4 75.4 72.3 75.9
Foreign currency exchange rate changes (0.2) 0.2 (1.5) 1.6
Employer contribution 3.1 0.7 3.5 2.4
Benefits paid (46.6) (42.0) (48.4) (44.1)
Acquisitions 8.1 - 8.1 -
Settlements/curtailments (25.9) (1.0) (25.9) (1.0)
------ ------ ------ ------
Fair value of plan assets at end of year $386.9 $381.0 $414.2 $406.1
------ ------ ------ ------
Plan assets in excess of benefit obligation $ 80.5 $ 48.7 $ 88.9 $ 52.9
Unrecognized net actuarial loss 22.3 73.3 23.8 78.5
Unrecognized initial transition gain (0.1) (0.4) (0.1) (0.4)
Unrecognized prior service cost 4.7 6.1 4.7 6.1
------- ------- ------- -------
Prepaid pension asset $107.4 $127.7 $117.3 $137.1
- --------------------------------------------------------------------------------------
Amounts recognized in the balance sheets consist of:
- ---------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
----------------- ----------------
2000 1999 2000 1999
- ---------------------------------------------------------------------------------------
Prepaid benefit cost based on a September 30
measurement date $112.0 $129.9 $122.7 $140.9
Accrued benefit liability (5.3) (5.6) (6.1) (7.2)
Accumulated other comprehensive income 0.7 3.4 0.7 3.4
------- ------- ------- -------
$107.4 $127.7 $117.3 $137.1
- ---------------------------------------------------------------------------------------
Plan assets consist primarily of equity securities and corporate obligations.
56
Consolidated expense excludes the expenses related to the Foods and Wise
domestic pension plan. Following are the components of net pension expense
recognized by the Company and Combined Companies:
- ------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
----------------------- ------------------------
2000 1999 1998 2000 1999 1998
- ------------------------------------------------------------------------------------------------
Service cost $ 2.9 $ 3.1 $ 6.0 $ 5.2 $ 5.6 $ 9.3
Interest cost on projected benefit obligation 18.8 17.8 29.9 24.8 23.7 36.3
Expected return on assets (21.4) (22.2) (29.9) (28.5) (29.7) (37.0)
Amortization of prior service cost 0.5 0.7 (2.0) 0.7 0.9 (2.1)
Amortization of initial transition asset (0.3) (0.4) (2.1) (0.3) (0.4) (2.3)
Recognized actuarial loss 6.4 5.4 9.4 8.2 6.9 11.5
Settlement/curtailment loss 8.9 0.6 27.1 8.9 0.6 24.2
------ ----- ------ ------ ------ ------
Net pension expense $ 15.8 $ 5.0 $ 38.4 $ 19.0 $ 7.6 $ 39.9
- ------------------------------------------------------------------------------------------------
The weighted average rates used to determine net pension expense for both the
Company and the Combined Companies were as follows:
- ---------------------------------------------------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
Discount rate 7.7% 6.7% 7.4%
Rate of increase in future compensation levels 4.7% 4.2% 4.3%
Expected long-term rate of return on plan assets 8.7% 7.9% 8.4%
- ---------------------------------------------------------------------------------------------------------
In 1999, the Company and Combined Companies elected to update the mortality
table used to determine the projected benefit obligation and pension expense.
The impact of this change in assumption was an increase in the obligation at
December 31, 1999, of approximately $7.0 for the Company and Combined Companies
and an increase in expense for fiscal year 2000 of approximately $0.8 and $1.1
for the Company and Combined Companies, respectively.
The projected benefit obligation and fair value of plan assets for the Company's
pension plans with benefit obligations in excess of plan assets were $5.6 and
$0.0, respectively, as of December 31, 2000, and $11.6 and $4.5, respectively,
as of December 31, 1999.
The projected benefit obligation and fair value of plan assets for the Combined
Companies' pension plans with benefit obligations in excess of plan assets were
$6.1 and $0.0, respectively, as of December 31, 2000, and $12.0 and $4.5,
respectively, as of December 31, 1999.
Most employees not covered by the Company's plans are covered by collectively
bargained agreements, which are generally effective for five years. Under
Federal pension law, there would be continuing liability to these pension trusts
if the Company ceased all or most participation in any such trust, and under
certain other specified conditions. The Consolidated Financial Statements
include charges of $0.2, $1.3 and $1.0 in 2000, 1999 and 1998, respectively, for
payments to pension trusts on behalf of employees not covered by the Company's
plans. The Combined Financial Statements include charges of $0.3, $1.8 and $1.7
in 2000, 1999 and 1998, respectively.
12. NON-PENSION POSTRETIREMENT BENEFIT
The Company provides certain health and life insurance benefits for eligible
domestic and Canadian retirees and their dependents. The cost of postretirement
benefits is accrued during employees' working careers. Domestic participants who
are not eligible for Medicare are provided with the same medical benefits as
active employees, while those who are eligible for Medicare are provided with
supplemental benefits. Canadian participants are provided with supplemental
benefits to the national healthcare plan in Canada. The domestic postretirement
medical benefits are contributory; the Canadian medical benefits are
non-contributory. The domestic and Canadian postretirement life insurance
benefits are non-contributory. Benefits are funded on a pay-as-you-go basis.
57
- -----------------------------------------------------------------------------
CONSOLIDATED COMBINED
---------------- ----------------
2000 1999 2000 1999
- -----------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $103.4 $107.0 $118.3 $120.7
Interest cost 7.3 6.7 8.6 7.8
Contributions by plan participants 2.0 2.2 2.5 2.8
Actuarial losses 8.2 6.4 12.9 8.3
Benefits paid (11.8) (12.4) (14.2) (14.8)
Plan amendment (1.0) (6.5) (1.7) (6.5)
Divestitures - - (6.5) -
------ ------ ------- -------
Benefit obligation at end of year 108.1 103.4 119.9 118.3
Unrecognized net actuarial gain 23.8 35.5 21.2 35.6
Unrecognized prior service benefit 19.5 28.9 20.2 28.9
------ ------ ------- -------
Accrued postretirement
obligation at end of year $151.4 $167.8 $161.3 $182.8
- -----------------------------------------------------------------------------
A 7.7% and 7.8% weighted average discount rate was used in determining the
postretirement benefit obligation at December 31, 2000 and 1999, respectively.
For measurement purposes, health care costs are assumed to increase 5.8% for
pre-65 benefits and 9.3% in 2001 grading down gradually to a constant 5.8%
annual increase by the year 2008 for post-65 benefits. The comparable
assumptions for the prior year were 8.1% and 5.8% by the year 2004.
In 1999, the Company and Combined Companies elected to update the mortality
table used to determine the projected benefit obligation and related expense.
The impact of this change in assumption was an increase in the obligation at
December 31, 1999 of $3.5 for the Company and Combined Companies, and an
increase in the expense for fiscal year 2000 of $0.4 and $0.5 for the Company
and Combined Companies, respectively.
Following are the components of net postretirement benefit recognized for 2000,
1999 and 1998:
- ----------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
---------------------- ----------------------
2000 1999 1998 2000 1999 1998
- ----------------------------------------------------------------------------------------------
Service cost $ 0.1 $ 0.1
Interest cost on projected benefit obligation $ 7.3 $ 6.7 $ 9.2 8.6 $ 7.8 10.5
Amortization of prior service benefit (9.3) (8.7) (9.5) (9.3) (8.7) (9.5)
Immediate recognition of
initial obligation - 1.0 - - 2.2 -
Recognized actuarial gain (1.8) (2.7) (1.8) (2.2) (3.2) (2.1)
Settlement / curtailment gain (1.1) - (6.1) (1.1) - (6.6)
------ ------ ------ ------ ------ ------
Net postretirement benefit $(4.9) $(3.7) $(8.2) $(3.9) $(1.9) $(7.6)
- ----------------------------------------------------------------------------------------------
Assumed health care cost trend rates have a significant effect on the amounts
reported for health care plans. A one-percentage-point change in the assumed
health care cost trend rates would have the following effects:
- -----------------------------------------------------------------------------------------------------
1% increase 1% decrease
----------- -----------
Effect on total service cost and interest cost components $ 0.6 $ (0.6)
Effect on postretirement benefit obligation 7.5 (6.8)
- -----------------------------------------------------------------------------------------------------
13. SHAREHOLDERS' EQUITY
Preferred Stock
- ----------------
The Company has 24,574,751 shares of series A Cumulative Preferred Stock
("Preferred Stock") outstanding with a total of 100,000,000 shares authorized.
Each share has a liquidation preference of $25 and is entitled to cumulative
58
dividends at an annual rate of 12% payable quarterly in arrears. These shares
are redeemable, in whole or in part, at the Company's discretion. At December
31, 2000, the redemption price is 105% of the issuance price and declines
ratably in each year to par at June 26, 2005. At this time, the Company has no
plans to redeem these shares.
Common Stock
- -------------
The Company has 198,974,994 shares of $0.01 par value common stock issued and
outstanding and 300,000,000 shares authorized. Foods Holdings is capitalized
with 100 shares of $0.01 par value common stock.
Other Shareholders' Equity
- ----------------------------
At December 31, 2000, the Company held $404.9 of notes receivable from its
parent, which accrue interest at 12% per year, payable quarterly, and mature on
September 29, 2005. The notes were received from an affiliate of the Company's
parent as proceeds from the 1996 sales of Wise ($34.2) and Foods ($365.9) and
the issuance of options on the common stock of the Consumer Adhesives business
and Borden Decorative Products Holdings, Inc. ($44.0). Notes totaling $39.2 were
transferred to BWHLLC in 1998 in settlement of the early cancellation of the
Borden Decorative Products Holdings, Inc. option. At December 31, 2000, Other
Shareholders' Equity included accrued interest of $10.0 related to the notes
receivable from the Company's parent.
During 1996 the Company sold options to BWHLLC on what was then all of the
common stock of the Consumer Adhesives business for 110% of the August 16, 1996
fair market value of the common stock. The options were issued at fair value
with a five-year expiration. The exercise price of the options for the Consumer
Adhesives business is $54.1. Management expects the 1996 options sold to BWHLLC
for Consumer Adhesives' common shares to be exercised in 2001. During 2000,
additional common shares of the Consumer Adhesives business were issued to and
are held by the Company. The additional shares total 3.5 million, or
approximately 26%, of the total Consumer Adhesives common stock shares
outstanding at December 31, 2000.
At December 31, 2000 and 1999, the Combined Companies' equity includes $66.3 and
$66.2, respectively, of affiliate's interest in subsidiary, primarily
representing the 30% interest held by an affiliate of the Company's parent in a
consolidated subsidiary of Foods. See Note 5 for additional information.
The Company declared common stock cash dividends of $61.6, $64.1 and $59.5
during 2000, 1999 and 1998, respectively. The dividends were recorded as a
charge to paid-in capital to reflect a return of capital to the Company's
parent.
As described in Note 1, the net assets of Wise of $58.7 are treated as if they
were distributed out of the Combined Companies in 2000.
During 2000 the Company distributed 100% of its ownership in the
infrastructure management services business to the Company's parent. The
distribution was recorded at net book value of $16.3, including $8.6 owed by the
Company to the infrastructure management services business in accordance with a
tax sharing agreement. Subsequent to the distribution, substantially all of the
assets of the infrastructure management services business were sold to a
subsidiary of Interliant, Inc. (see Note 4). Subsequent to this sale, the
remaining assets of the infrastructure management services business, with a net
book value of approximately $0.3, were contributed back to the Company from the
Company's parent.
The Company's parent also contributed tax benefits to the Company of $44.0,
$26.4 and $42.9 during 2000, 1999 and 1998, respectively. The Company is
included in its parent's tax return and the deductible interest expense on the
parent's notes payable reduces the Company's tax liability. In addition, BWHLLC
made a capital contribution to Wise of $2.4 in 2000.
The Company recorded a minimum pension liability adjustment of $1.8, $1.5 and
$(3.6), for 2000, 1999 and 1998, respectively, ($1.8, $3.3 and $(5.4) for the
Combined Companies in 2000, 1999 and 1998, respectively) relating to underfunded
pension plans, which is reflected in accumulated other comprehensive income.
59
14. STOCK OPTION PLANS AND OTHER STOCK BASED COMPENSATION
Unit Appreciation Rights
- --------------------------
Effective January 1, 1996, key employees of the Company and Combined Companies
were offered units and unit appreciation rights ("UAR's") in their respective
holding companies. Additional UAR's have been granted in subsequent years under
these plans. In 2000, 24,071,241 UAR's were granted with a ten year life and a
vesting period of 4 years. The remaining UAR's vest over 5 years, and any
compensation expense incurred in conjunction with the UAR's will be charged to
the Company or the Combined Companies. For 2000, 1999 and 1998, the Company has
not recorded any compensation expense attributable to the UAR's. During 2000 and
1999, Foods recorded $0.1 and $0.9 of compensation expense related to their
UAR's. Foods had no compensation expense in 1998. There were 49,953,789 UAR's
outstanding at December 31, 2000, and 5,080,707 UAR's available for future
grants.
Stock Options
- --------------
Key subsidiaries of the Company and Combined Companies have issued stock options
under their individual Stock Purchase and Option Plans for Key Employees. Under
these plans, equity in the Chemical, Wise, Consumer Adhesives, infrastructure
management services, and Decorative Products business units was sold to key
management personnel. Fixed stock options were granted to purchase additional
shares at varying exercise prices between $5.00 and $11.50. In addition, each
company has granted fixed stock options to employees under their respective
broad-based option plans. The options were issued with exercise prices at or
above fair value, vest over five years and expire ten years from the date of the
grant. As of December 31, 2000 there are 5,488,750 options outstanding among the
companies and 1,350,813 options available for future grants.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Under the provisions of Accounting
Principles Board ("APB") 25, "Accounting for Stock Issued to Employees",
compensation expense of $0.1 and $1.5 were recorded in 2000 by the Company and
Combined Companies, respectively. The expense recorded by the Combined Companies
relates to the Wise Distribution. There was no compensation expense attributable
to these stock options in 1999. In 1998, compensation cost of $1.6 was related
to the sale of Decorative Products. Had compensation cost for the Company's
stock option plans been determined based on the fair value at the grant date
consistent with the provisions of SFAS No. 123, the Company's net income (loss)
and basic and diluted net income (loss) per share would have been the amounts
presented below:
- ----------------------------------------------------------------------------------------
2000 1999 1998
- ----------------------------------------------------------------------------------------
Net loss applicable to common stock- as reported $(39.7) $(20.8) $(11.1)
Net loss applicable to common stock - proforma (40.8) (22.1) (10.7)
Basic and diluted net income (loss) per share - as reported (0.20) (0.10) (0.06)
Basic and diluted net income (loss) per share - proforma (0.21) (0.11) (0.05)
- ---------------------------------------------------------------------------------------
Proforma net income applicable to common stock for the Combined Companies is a
loss of $(63.4) in 2000, $5.6 in 1999 and $95.0 in 1998.
To determine compensation cost according to SFAS No. 123, the fair value of each
Option grant is estimated on the date of grant using the Black-Scholes option
pricing model with a risk free weighted average interest rate of 6.48% and
expected lives ranging from one to five years.
60
Information regarding the management stock option plans for the Company and Wise
is as follows:
- ------------------------------------------------------------------------------------------------------------
2000 1999 1998
------------------- --------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------
Options outstanding, beginning of year 6,774,905 $ 5.88 5,624,155 $ 5.07 6,912,405 $ 5.18
Options exercised (616,500) 10.06 - - (1,306,250) 5.00
Options granted 328,000 11.09 1,728,750 8.22 1,203,000 5.00
Options relating to distributed business (564,655) 5.00 - - - -
Options forfeited (433,000) 5.22 (578,000) 5.00 (1,185,000) 5.92
--------- --------- ----------
Options outstanding end of year 5,488,750 5.87 6,774,905 5.88 5,624,155 5.07
- ------------------------------------------------------------------------------------------------------------
Options relating to distributed business represent options for the
infrastructure management services business which was distributed to the
Company's parent during 2000 (see Note 18). These options were subsequently
exercised upon the sale of the business. The outstanding options at December
31, 1999 and 1998 include outstanding options for Wise of 544,500 and 82,000,
respectively, with a weighted average exercise price of $10.00.
Options exercised in 2000 relate to the Wise Distribution. The options exercised
in 1998 related to the sale of the Decorative Products business.
The following table summarizes information about fixed-price stock options at
December 31, 2000:
- -----------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------- -------------------
Weighted Average Weighted
Range of Fair Value Number Weighted Average Weighted Average Number Exercise
Exercise Price At Grant Outstanding Remaining Life Exercise Price Exercisable Price
- -----------------------------------------------------------------------------------------------------------------
$5.00-7.50 $ 1.24 4,892,500 2 years $ 5.38 2,901,400 $ 5.13
$8.50-11.50 $ 2.56 596,250 4 years $ 9.82 107,900 $ 8.68
--------- ---------
$5.00-11.50 $ 1.39 5,488,750 3 years $ 5.87 3,009,300 $ 5.26
- -----------------------------------------------------------------------------------------------------------------
There were 2,484,493 options exercisable at December 31, 1999, with a weighted
average exercise price of $5.13. There were 1,538,531 options exercisable at
December 31, 1998, with a weighted average exercise price of $5.09.
15. DERIVATIVE FINANCIAL INSTRUMENTS
Interest Rate Swaps
- ---------------------
The Company enters into interest rate swaps to lower funding costs or to alter
interest rate exposures between fixed and floating rates on long-term debt.
Under interest rate swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between fixed rate and floating rate
interest amounts calculated by reference to an agreed notional principal amount.
The notional amount of interest rate swaps was $24.3 at December 31, 2000 and
$224.3 at December 31, 1999. The remaining swap has a maturity date of December
1, 2002. The net impact of interest rate swaps was an increase in the Company's
and the Combined Companies' interest expense of $6.7 in 2000, $11.6 in 1999 and
$10.7 in 1998. The year-end fair value of the interest rate swaps was a loss of
$3.4 in 2000 and $15.0 in 1999. See Note 3 "Recently Issued Accounting
Standards" for new standards that impact the current accounting treatment of
these and all derivative instruments.
The following table summarizes the weighted average interest rates for the swaps
used by the Company and Combined Companies. Variable rates change with market
conditions and may vary significantly in the future. A 1% increase or decrease
in market interest rates would result in a $0.2 increase or decrease,
respectively, in the fair value of the interest rate swap agreements.
61
- -------------------------------------------------
2000 1999 1998
- -------------------------------------------------
Pay fixed swaps
Average rate paid 10.5% 10.4% 10.4%
Average rate received 6.3% 5.2% 5.6%
- -------------------------------------------------
An interest rate swap, having a notional amount of $200.0, no longer met the
criteria for hedge accounting and was marked to market prior to termination on
September 1, 2000. On that date the Company recognized a gain of $4.9 in the
Consolidated and Combined Statements of Operations. Unrealized gains on this
instrument of $10.8 and $4.1 in 1999 and 1998, respectively, were included in
the Consolidated and Combined Statements of Operations and other long-term
liabilities. The Company does not hold or issue derivative financial instruments
for trading purposes.
Foreign Exchange and Option Contracts
- -----------------------------------------
International operations account for a significant portion of the Company's and
Combined Companies' revenue and operating income. It is the policy of the
Company and Combined Companies to reduce foreign currency cash flow exposure due
to exchange rate fluctuations by hedging anticipated and firmly committed
transactions wherever economically feasible (within the risk limits established
in the Company's policy). These contracts are part of a worldwide program to
minimize foreign currency exchange operating income and balance sheet exposure.
The Company and Combined Companies closely monitor foreign currency cash flow
transactions and enter into forward and option contracts to buy and sell foreign
currencies only to reduce foreign exchange exposure and protect the U.S. dollar
value of such transactions to the extent of the amount under contract.
In accordance with current accounting standards, gains and losses arising from
contracts that hedge future assets and liabilities are deferred until the
related transactions occur. Those arising from contracts that hedge existing
assets and liabilities (e.g., outstanding payables denominated in foreign
currency) are recorded in income and offset the gains and losses that occur as
exchange rates change. The cash flows from forward and option contracts
accounted for as hedges of identifiable transactions are classified consistent
with the cash flows from the transaction being hedged. See Note 3 "Recently
Issued Accounting Standards" for new standards that impact the current
accounting treatment of these and all derivative instruments.
At December 31, 2000 and 1999, the Company had $88.9 and $75.1, respectively, of
notional value of forward foreign currency exchange contracts outstanding. The
Combined Companies had $95.8 and $89.2 of notional value of forward foreign
exchange contracts outstanding at December 31, 2000 and 1999, respectively. At
December 31, 1999, the Company and Combined Companies had foreign currency
option contracts outstanding of $2.5. The unsecured contracts mature within 12
months and are principally with banks. The Company is exposed to credit loss in
the event of non-performance by the other parties to the contracts. The Company
evaluates the creditworthiness of the counterparties' financial condition and
does not expect default by the counterparties.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying or notional amounts and fair values of
the Company's financial instruments at December 31, 2000 and 1999. The fair
value of a financial instrument is the estimated amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. Fair values are determined from quoted market
prices where available or based on other similar financial instruments.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable and other accruals are considered reasonable estimates of their fair
values. The carrying value of the loans receivable from and payable to
affiliates approximates fair values as management believes the loans bear
interest at market interest rates.
62
The following table includes financial instrument carrying and fair values for
the Company.
- ------------------------------------------------------------------------------
2000 1999
-------------------- ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------- ---------- ------- -------
Nonderivatives
Assets
Investment securities $ 55.0 $ 117.8 $ 98.5 $113.6
Liabilities
Debt 574.0 449.6 558.8 473.9
Notional Fair Notional Fair
Amount Value Amount Value
------ ---------- -------- -------
Derivatives relating to:
Foreign currency contracts - gain $ 1.7 $ 0.2
Foreign currency contracts - loss $ 88.9 $ (1.8) 73.4 (0.3)
Option contracts - gain - - 2.5 0.2
Interest rate swaps - loss 24.3 (3.4) 224.3 (15.0)
- -------------------------------------------------------------------------
The following table includes financial instrument carrying and fair values for
the Combined Companies.
- ---------------------------------------------------------------------------------------
2000 1999
------------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------- ---------- ------- -------
Nonderivatives
Assets
Investment securities $ 55.0 $117.8 $ 98.5 $113.6
Liabilities
Debt 579.9 455.3 562.2 477.3
Notional Fair Notional Fair
Amount Value Amount Value
------- ---------- ------- -------
Derivatives relating to:
Foreign currency contracts - gain $ 15.8 $ 0.3
Foreign currency contracts - loss $95.8 $(2.2) 73.4 (0.3)
Option contracts - gain - - 2.5 0.2
Interest rate swaps - loss 24.3 (3.4) 224.3 (15.0)
- --------------------------------------------------------------------------------------
17. SUPPLEMENTAL INFORMATION
- ------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
-------------------- -----------------------
2000 1999 1998 2000 1999 1998
- ------------------------------------------------------------------------------------------
Depreciation $53.6 $50.5 $47.5 $ 84.5 $ 70.2 $ 66.2
Amortization 8.8 3.7 3.4 19.2 14.4 13.7
Advertising 2.2 2.1 2.9 23.7 16.3 13.0
Promotions 34.0 22.1 21.1 185.0 160.3 173.2
Research and Development 23.1 23.8 18.7 41.8 43.1 37.3
- ------------------------------------------------------------------------------------------
63
18. RELATED PARTY TRANSACTIONS
Foods and Wise
- ----------------
Wise and Foods were sold to affiliates of the Company during 1996. Because of
the Company's continuing control over Wise and Foods, their assets and
liabilities, at the date of sale, are classified as "sold under contractual
arrangements" in the Consolidated Financial Statements, as long as the
Company had a loan receivable from Wise or Foods. During the third quarter of
2000, Wise repaid its loan receivable to the Company. In 1998, Foods repaid
its term loan with the Company. These repayments ended the
Company's remaining financial interests in Wise and Foods and therefore,
transactions with Wise and Foods are subsequently reflected as unconsolidated
affiliated balances, not as investments. The Company's net investment
balance in Wise was $6.6 at December 31, 1999. See Note 1 for additional
information.
In October 2000, the shares of Wise Holdings were sold by BWHLLC to Palladium
Equity Partners, LLC in exchange for $92.3 in cash. (See Note 1.)
Wise repaid its $5.0 term loan to the Company in 1999. A Wise loan facility was
extended by the Company providing for borrowings up to $15.0 maturing December
31, 2000. Wise had borrowings of $6.5 outstanding under the facility at December
31, 1999, which were repaid in 2000. The loan facility was cancelled in October
2000.
The Loan Agreement with Foods provides a revolving loan feature. For the years
ended December 31, 2000 and 1999, the Foods revolving loan facility totaled
$10.0 and $50.0, respectively, and matured on December 31, 2000. The variable
interest rate is equal to the Company's cost of funds for 30 day LIBOR
borrowings plus 0.25%. Foods had no borrowings under this facility at December
31, 2000 or 1999.
Included in consolidated accounts payable at December 31, 2000 and 1999 are $0.7
and $2.1, respectively, as a net payable to Foods primarily related to interest
earned on funds invested overnight with the Company. Included in consolidated
other assets at December 31, 2000 and 1999 are $10.9 and $8.8, respectively, as
a receivable from Foods for its portion of the Combined Companies' pension
liability.
Foods and Wise invest cash overnight at an interest rate set by the Company,
which generally approximates money market rates. Foods had $206.9 and $234.6
invested at December 31, 2000 and 1999, respectively, which is included in loans
payable with affiliates. Wise had $1.2 invested at December 31, 1999, which is
classified in assets sold under contractual arrangements. Affiliated interest
income of $0.2, $0.8, and $0.6, net of amounts paid for overnight investments,
was accrued related to Wise during 2000, 1999 and 1998, respectively. The
Company recorded net affiliated interest expense of $14.9, $14.7, and $18.0
related to Foods during 2000, 1999, and 1998, respectively.
The Company provides administrative services to Foods and Wise. Fees received
for these services are offset against the Company's general and administrative
expenses, and totaled $2.4, $11.9, and $14.1 for the years ended December 31,
2000, 1999, and 1998, respectively. The amount of services provided were reduced
in 2000 with the distribution and sale of the infrastructure management services
business (see below).
The Company renders management, consulting and financial services to Foods and
Wise for an annual fee of $1.0 and $0.2, respectively, payable monthly in
arrears. Wise was charged a ten-month pro-rata share in 2000 representing the
period of time prior to the Wise Distribution.
As guarantors of the Company's debt, Foods and Wise receive an annual fee from
the Company of $1.1 and $0.2, respectively, paid annually.
The effects of transactions among Wise, Foods and the Company have been
eliminated in the Combined Financial Statements.
Other Related Parties
- -----------------------
In February 2000, the Company distributed 100% of its ownership in the
infrastructure management services business to the Company's parent. The
distribution was recorded at net book value of $16.3, including $8.6 owed by the
Company to the infrastructure management services business in accordance with a
tax sharing agreement. Subsequent to the distribution, substantially all of the
assets of the infrastructure management services business were sold to a
subsidiary of Interliant, Inc. in exchange for $2.5 in cash and
1,041,179 shares of Interliant, Inc. stock. In June 2000,
64
the remaining net assets of the infrastructure management services business,
with a net book value of approximately $0.3, were contributed back to
the Company from the Company's parent.
In June and September 2000, the Company purchased $50.0 and $40.0, respectively,
of accounts receivable from WKI, in return for certain fees. At December 31,
2000, $0.5 of the purchased receivables was outstanding, all of which was
collected in January 2001.
In the third quarter of 2000, the Company entered into a credit agreement with
WKI to provide up to $40.0 of short-term financing. Amounts outstanding under
this agreement bear interest at either (a) a variable rate based on the greatest
of the Prime Rate, the Federal Reserve Bank Three-Month CD Rate plus 1% or the
Federal Funds Effective Rate plus 0.5% plus (b) 3% or (c) the Eurodollar rate
plus 4%. The original maturity date of the agreement was December 31, 2000 and
was extended into April 2001. At December 31, 2000, $6.1 was outstanding
under this agreement.
At December 31, 1999, the Company had loaned $56.2 in the form of demand notes
to CCPC Acquisition Corp., to provide temporary financing to complete the
acquisition of EKCO Group, Inc. ("EKCO"). The loan included variable interest at
the monthly prime rate as quoted by The Wall Street Journal. In December 2000,
the loan was repaid. The Company received $60.6 representing principal and
accrued interest.
During 1998, CCPC Acquisition Corp., an affiliate of the Company's parent,
acquired a controlling interest in Corning Consumer Products Company ("CCPC")
from Corning Incorporated in a recapitalization transaction valued at
approximately $603. In connection with this transaction, the Company loaned
$346.0 to CCPC on a short-term basis at rates which approximated market
conditions. The Company recorded $1.2 of interest income related to this loan,
which is reflected in interest income and other in the 1998 Consolidated and
Combined Statements of Operations. CCPC repaid the loan in 1998. In 1999, CCPC
changed its name to WKI Holding Company, Inc.
In 1999, the Company made a $50.0 investment in WKI, an affiliate of the
Company, in the form of 16% cumulative junior preferred stock. See Note 8 for
additional information on investments.
The Company renders management, consulting and financial services to WKI for an
annual fee of $2.5. Amounts outstanding at December 31, 2000 and 1999 were $1.7
and $0.1, respectively. WKI also reimburses the Company for certain expenses
incurred on its behalf. Amounts outstanding for these expenses at December 31,
2000 were $0.5.
Affiliates of the Company and Combined Companies invest cash with the Company
and Combined Companies at rates that generally approximate market. BWHLLC's
invested cash with the Company and Combined Companies was $73.4 and $11.3 at
December 31, 2000 and 1999, respectively. At December 31, 1999, cash invested
with the Company and Combined Companies by the Company's parent was $0.7. At
December 31, 2000, Borden Foods Holdings LLC, Foods' parent, had $2.3 cash
invested with the Company and Combined Companies and an additional $3.0 invested
with the Combined Companies, and CCPC Acquisition Corp., WKI's parent and an
affiliate of the Company's parent, had $0.5 invested with the Company and
Combined Companies. The Company recorded $2.3, $5.2 and $5.4 of interest expense
on amounts invested by these unconsolidated affiliates during 2000, 1999 and
1998, respectively. Included in other current liabilities at December 31,
2000 and 1999, respectively, was $2.6 and $0.1 of affiliated interest payable
related to these unconsolidated affiliates. Affiliated interest expense
recorded by the Combined Companies is not significantly different for these
affiliates than that recorded by the Company.
KKR renders management, consulting and financial services to the Company and its
businesses for an annual fee of $10.0, payable quarterly in arrears.
As described in Note 4 and in Management's Discussion and Analysis, the Company
acquired certain assets from BCP. A wholly owned subsidiary of the Company
serves as the general partner of BCP. The purchase price of these assets is
considered to be at fair value as determined by an independent appraisal.
During 2000, 1999 and 1998, the Company purchased $102.5, $64.7 and $66.4 of
raw materials from BCP. In addition, the Company paid $25.3 in 2000 to BCP to
exit certain raw material purchase contracts.
65
19. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS - The Company and Combined Companies, like others in
similar businesses, are subject to extensive Federal, state and local
environmental laws and regulations. Although the Company's and Combined
Companies' environmental policies and practices are designed to ensure
compliance with these laws and regulations, future developments and increasingly
stringent regulation could require the Company and Combined Companies to make
additional unforeseen environmental expenditures.
Accruals for environmental matters are recorded when it is probable that a
liability has been incurred and the amount of the liability can be reasonably
estimated. Environmental accruals are routinely reviewed on an interim basis as
events and developments warrant and are subjected to a comprehensive review
annually during the fiscal fourth quarter. The Company and the Combined
Companies have each accrued approximately $26 (including those costs related to
legal proceedings) at December 31, 2000 and 1999, for probable environmental
remediation and restoration liabilities. This is management's best estimate of
these liabilities. Based on currently available information and analysis, the
Company believes that it is reasonably possible that costs associated with such
liabilities may exceed current reserves by amounts that may prove insignificant,
or by amounts, in the aggregate, of up to approximately $16.
LEGAL MATTERS - The Company and Combined Companies have recorded $4.1 in
liabilities at December 31, 2000, for legal costs in amounts that management
believes are probable and reasonably estimable. These liabilities at December
31, 1999, totaled $5.1 and $8.5 for the Company and Combined Companies,
respectively. Actual costs are not expected to exceed these amounts. The Company
may be held responsible for certain environmental liabilities incurred at BCP
facilities, which were previously owned by the Company. The Company believes,
based upon the information it currently possesses, and taking into account its
established reserves for estimated liability and its insurance coverage, that
the ultimate outcome of the foregoing proceedings and actions is unlikely to
have a material adverse effect on the Company's financial statements.
OTHER - A wholly owned subsidiary of the Company that serves as the general
partner of BCP, has certain fiduciary responsibilities to BCP. BCP was
created in November 1987, is a separate and distinct entity from the Company and
Combined Companies and is 99% owned by the public. In 2000, BCP's financial
Results included a loss from continuing operations of approximately $75. Adverse
business conditions and disappointing operating results have caused an increase
in borrowings under its credit facility. Based on currently available
information, the Company has recorded a liability of $20.0 for potential
liabilities related to the continued decline in BCP's financial condition. The
Company believes that it is reasonably possible, based on current information
and analysis, that costs associated with BCP may exceed the current liability by
amounts that may prove insignificant or by amounts, in the aggregate, of up to
approximately $17.
66
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents Quarterly Financial Data for the Company:
2000 QUARTERS FIRST SECOND THIRD FOURTH(1)
- ------------------------------------------------------------------------------------------------------------
Net sales (2) $356.5 $388.4 $403.2 $375.9
- ------------------------------------------------------------------------------------------------------------
Gross profit (3) 90.5 100.9 87.1 49.1
- ------------------------------------------------------------------------------------------------------------
Business realignment 2.8 9.0 1.8 24.8
Loss on divestiture of businesses - - - (0.9)
- ------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 12.3 12.4 (8.0) (75.7)
- ------------------------------------------------------------------------------------------------------------
Discontinued operations:
Gain on disposal, net of tax - 93.0 - -
- ------------------------------------------------------------------------------------------------------------
Net income (loss) 12.3 105.4 (8.0) (75.7)
- ------------------------------------------------------------------------------------------------------------
Preferred stock dividends 18.4 18.5 18.4 18.4
- ------------------------------------------------------------------------------------------------------------
Net (loss) income applicable to common stock (6.1) 86.9 (26.4) (94.1)
- ------------------------------------------------------------------------------------------------------------
Basic and diluted, per share of common stock:
Income (loss) from continuing operations 0.06 0.06 (0.04) (0.38)
Discontinued operations:
Gain on disposal, net of tax - 0.47 - -
Net (loss) income applicable to common stock (0.03) 0.44 (0.14) (0.47)
Dividends per common share 0.13 0.06 0.06 0.06
Dividends per preferred share 0.75 0.75 0.75 0.75
Average number of common shares outstanding 199.0 199.0 199.0 199.0
- ------------------------------------------------------------------------------------------------------------
1999 QUARTERS FIRST SECOND THIRD FOURTH (4)
- ------------------------------------------------------------------------------------------------------------
Net sales (2) $310.1 $347.6 $354.5 $362.5
- ------------------------------------------------------------------------------------------------------------
Gross profit (3) 83.1 99.9 95.0 90.2
- ------------------------------------------------------------------------------------------------------------
Business realignment and asset write-offs - 10.0 21.6 10.0
Gain on divestiture of business - - - 7.4
- ------------------------------------------------------------------------------------------------------------
Income from continuing operations 13.3 22.6 3.8 15.6
- ------------------------------------------------------------------------------------------------------------
Discontinued operations:
Loss from operations, net of tax - - - (0.4)
Gain (loss) on disposal, net of tax - 0.6 - (2.6)
- ------------------------------------------------------------------------------------------------------------
Net income 13.3 23.2 3.8 12.6
- ------------------------------------------------------------------------------------------------------------
Preferred stock dividends 18.4 18.5 18.4 18.4
- ------------------------------------------------------------------------------------------------------------
Net (loss) income applicable to common stock (5.1) 4.7 (14.6) (5.8)
- ------------------------------------------------------------------------------------------------------------
Basic and diluted, per share of common stock:
Income from continuing operations 0.07 0.12 0.02 0.07
Discontinued operations:
Gain (loss) on disposal, net of tax - - - (0.01)
Net (loss) income applicable to common stock (0.02) 0.03 (0.08) (0.03)
Dividends per common share 0.06 0.06 0.14 0.06
Dividends per preferred share 0.75 0.75 0.75 0.75
Average number of common shares outstanding 199.0 199.0 199.0 199.0
- -----------------------------------------------------------------------------------------------------------
(1) - As described in Note 4, the Company's fourth quarter 2000 results included costs of $24.5 related to
plant closures. The Company's fourth quarter 2000 results also include a $25.3 charge to exit certain
raw material purchase contracts which is recorded in cost of sales (see page 17). In the
fourth quarter of 2000, the Company recorded investment write-downs of $48.0 (see Note 8) and
recorded a liability of $20.0 related to a limited partnership for which a wholly owned subsidiary
serves as general partner (see Note 19).
(2) - Amounts are adjusted reflecting the fourth quarter 2000 adoption of EITF Issue No. 00-10, which
addresses the classification of amounts billed to customers for distribution costs. In accordance
with EITF Issue No. 00-10, certain amounts have been reclassified from distribution expense to net
sales.
(3) - Gross profit is defined as gross margin less distribution expense.
(4) - As described in Note 4, the Company's fourth quarter 1999 results include a $10.0 charge related to a
plant expansion project that was discontinued.
67
The following represents Quarterly Financial Data for the Combined Companies:
2000 QUARTERS FIRST SECOND THIRD FOURTH (1)
- ------------------------------------------------------------------------------------------------------------
Net sales (2) $498.8 $511.0 $542.1 $542.8
- ------------------------------------------------------------------------------------------------------------
Gross profit (3) 149.4 147.3 144.0 125.4
- ------------------------------------------------------------------------------------------------------------
Business realignment 2.8 9.0 6.6 25.7
Gain on divestiture of businesses - - 3.1 0.8
- ------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations (0.4) 68.6 (17.6) (79.2)
- ------------------------------------------------------------------------------------------------------------
Discontinued operations:
Income (loss) from operations, net of tax 0.4 1.5 1.8 (0.6)
Gain on disposal, net of tax - 37.0 - -
- ------------------------------------------------------------------------------------------------------------
Net income (loss) 0.1 107.2 (15.8) (80.0)
- ------------------------------------------------------------------------------------------------------------
Preferred stock dividends 18.4 18.5 18.4 18.4
- ------------------------------------------------------------------------------------------------------------
Net (loss) income applicable to common stock (18.2) 88.7 (34.2) (98.6)
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
1999 QUARTERS FIRST SECOND THIRD FOURTH (4)
- ------------------------------------------------------------------------------------------------------------
Net sales (2) $449.7 $463.7 $477.4 $531.8
- ------------------------------------------------------------------------------------------------------------
Gross profit (3) 143.3 147.4 150.6 165.8
- ------------------------------------------------------------------------------------------------------------
Business realignment and asset write-offs - 10.0 21.6 10.0
Gain on divestiture of businesses 4.4 10.4 32.7 9.0
- ------------------------------------------------------------------------------------------------------------
Income from continuing operations 12.6 15.0 18.9 43.1
- ------------------------------------------------------------------------------------------------------------
Discontinued operations:
(Loss) income from operations, net of tax (0.5) 0.6 0.9 1.2
Gain (loss) on disposal, net of tax - 0.6 - (3.7)
- ------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting principle (2.8) - - -
- ------------------------------------------------------------------------------------------------------------
Net income 12.2 16.2 19.8 37.7
- ------------------------------------------------------------------------------------------------------------
Preferred stock dividends 18.4 18.5 18.4 18.4
- ------------------------------------------------------------------------------------------------------------
Net (loss) income applicable to common stock (7.1) (1.7) 0.9 15.0
- ------------------------------------------------------------------------------------------------------------
(1) - As described in Note 4, the Company's and Combined Companies' fourth quarter 2000 results included
costs of $24.5 related to plant closures. The Company's and Combined Companies' fourth quarter 2000
results also include a $25.3 charge to exit certain raw material purchase contracts which is recorded
in cost of sales (see page 17). In the fourth quarter of 2000, the Company and Combined Companies
recorded investment write-downs of $48.0 (see Note 8) and recorded a liability of $20.0 related to a
limited partnership for which a wholly owned subsidiary serves as general partner (see Note 19).
(2) - Amounts are adjusted reflecting the fourth quarter 2000 adoption of EITF Issue No. 00-10, which
addresses the classification of amounts billed to customers for distribution costs. In accordance with
EITF Issue No. 00-10, certain amounts have been reclassified from distribution expense to net sales.
(3) - Gross profit is defined as gross margin less distribution expense.
(4) - As described in Note 4, the Company's and Combined Companies fourth quarter 1999 results include a
$10.0 charge related to a plant expansion project that was discontinued.
68
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Shareholders of Borden, Inc.
We have audited the accompanying consolidated balance sheets of Borden, Inc. (a
wholly owned subsidiary of Borden Holdings, Inc.) and subsidiaries as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Borden, Inc. and subsidiaries at
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
Columbus, Ohio
February 9, 2001
69
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Shareholders of Borden, Inc.
We have audited the accompanying combined balance sheets of Borden, Inc. and
Affiliates (which includes Borden, Inc. and subsidiaries, Borden Foods Holdings
Corporation and subsidiaries and Wise Holdings, Inc. and subsidiaries (prior
to distribution on October 30, 2000)) as of December 31, 2000 and 1999, and
the related combined statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the combined financial position of Borden, Inc. and Affiliates at
December 31, 2000 and 1999, and the combined results of their operations and
their combined cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.
DELOITTE & TOUCHE LLP
Columbus, Ohio
February 9, 2001
70
- ------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
- -------- --------------------------------------------------
ON ACCOUNTING AND FINANCIAL DISCLOSURE
------------------------------------------
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------- --------------------------------------------------------
Set forth below are the names and ages of the Directors and Executive Officers
of the Company as of March 13, 2001, and the positions and offices with the
Company held by each of them. Their terms of office extend to the next Annual
Meeting of the Board of Directors or until their earlier resignation or
replacement.
Served in
Age on Present
Dec. 31, Position
Name Position & Office 2000 Since
- ----------------------------------------------------------------------------------------------------------------
C.R. Kidder Chairman of the Board, Director
Chief Executive Officer and President 56 1995
H.R. Kravis Director 56 1995
A. Navab Director 35 1995
G.R. Roberts Director 57 1995
S.M. Stuart Director 41 1995
W.H. Carter Executive Vice President and
Chief Financial Officer 47 1995
K.M. Kelley Executive Vice President 43 1999
N.A. Reardon Executive Vice President 48 1997
W.F. Stoll, Jr. Executive Vice President and
General Counsel 52 1996
R.P. Starkman Senior Vice President and Treasurer 46 1995
71
C. Robert Kidder was elected a Director, Chairman of the Board and Chief
Executive Officer of the Company on January 10, 1995. He is also a director of
Electronic Data Systems Corporation and Morgan Stanley Dean Witter & Co. He is
a member of the Executive and Compensation Committees of the Borden Board.
Henry R. Kravis acted as Chairman of the Board of the Company from December 21,
1994, to January 10, 1995. He has been a member of KKR & Co., LLC since 1996,
was a General Partner of Kohlberg Kravis Roberts & Co. from its establishment
through 1995 and has been a General Partner of KKR Associates, L.P. since its
establishment. He is also a Director of Accuride Corporation, Amphenol
Corporation, The Boyds Collection, Ltd., Evenflo Company Inc., The Gillette
Company, IDEX Corporation, KinderCare Learning Centers, Inc., KSL Recreation
Corporation, Owens-Illinois, Inc., PRIMEDIA Inc., Regal Cinemas, Inc., Sotheby's
Holdings, Inc., and Spalding Holdings Corporation. He is a member of the
Executive Committee of the Borden Board. Messrs. Kravis and Roberts are first
cousins.
Alexander Navab became a member of KKR & Co., LLC in 2001, having been a
Director of Kohlberg Kravis Roberts & Co. since 1999. He began as an Executive
of Kohlberg Kravis Roberts & Co. in 1993. He is also a Director of CAIS
Internet, Inc., Intermedia Communications, Inc., KSL Recreation Corporation and
Regal Cinemas, Inc. He is Chairman of the Audit Committee and a member of the
Compensation Committee of the Borden Board.
George R. Roberts has been a member of KKR & Co., LLC since 1996, was a General
Partner of Kohlberg Kravis Roberts & Co. from its establishment through 1995,
and has been a General Partner of KKR Associates, L.P. since its establishment.
He is also a Director of Accuride Corporation, Amphenol Corporation, The Boyds
Collection, Ltd., DPL, Inc., Evenflo Company Inc., IDEX Corporation, KinderCare
Learning Centers, Inc., KSL Recreation Corporation, Owens-Illinois, Inc.,
PRIMEDIA Inc., Safeway, Inc., and Spalding Holdings Corporation. Messrs. Kravis
and Roberts are first cousins.
Scott M. Stuart has been a member of KKR & Co., LLC since 1996, was a General
Partner of Kohlberg Kravis Roberts & Co. and has been a General Partner of KKR
Associates, L.P. since January 1995. He began as an Executive with Kohlberg
Kravis Roberts & Co. in 1986. He is also a Director of AEP Industries, Inc.,
The Boyds Collection, Ltd., DPL, Inc., and KSL Recreation Corporation. He is
Chairman of the Compensation Committee and a member of the Audit and Executive
Committees of the Borden Board.
William H. Carter was elected Executive Vice President and Chief Financial
Officer effective April 3, 1995.
Kevin M. Kelley was elected Executive Vice President, Corporate Strategy and
Development effective April 5, 1999. Prior to that, since April 1996, he was
Managing Director of Ripplewood Holdings LLC. From January 1995 to April 1996
he was a Managing Director with Onex Investment Corporation.
Nancy A. Reardon was elected Senior Vice President, Human Resources and
Corporate Affairs effective March 3, 1997 and promoted to Executive Vice
President in December 2000. Prior to joining the Company, she was Senior Vice
President - Human Resources and Communications for Duracell International, Inc.
from 1991 through February 1997.
William F. Stoll, Jr. was elected Senior Vice President and General Counsel
effective July 1, 1996 and promoted to Executive Vice President in December
2000. Prior to joining the Company, he was a Vice President of Westinghouse
Electric Corporation since 1993, and served as its Deputy General Counsel from
1988 to 1996.
Ronald P. Starkman was elected Senior Vice President and Treasurer of the
Company effective November 20, 1995.
72
ITEM 11. EXECUTIVE COMPENSATION
- --------- -----------------------
The following table provides certain summary information concerning compensation
of the Company's Chief Executive Officer and the four other most highly
compensated Executive Officers as of December 31, 2000 (the "Named Executive
Officers") for the periods indicated.
- -------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------- AWARDS (4)
-------------------
NAME AND OTHER SECURITIES ALL OTHER
PRINCIPAL ANNUAL UNDERLYING COMPENSATION
POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS/LSAR (#) ($)
===================================================================================================================
C.R. Kidder 2000 1,194,063 0 (1)87,757 (5) 99,503
Chairman, President & 1999 1,171,500 1,054,350 (2)75,608 (5) 90,255
Chief Executive Officer 1998 1,100,000 547,470 (3)92,467 (5) 96,731
W.H. Carter 2000 462,538 200,000 0 (5) 31,878
Executive Vice President 1999 437,538 247,541 0 (5) 32,815
& Chief Financial Officer 1998 415,000 150,000 0 (5) 31,238
K.M. Kelley 2000 462,500 125,000 (6) 291,216 (5) 46,339
Executive Vice President 1999 334,327 185,625 (7)13,835 (5) 48,957
Strategy and Development
N.A. Reardon 2000 387,795 50,000 0 (5) 22,289
Executive Vice President 1999 365,295 206,575 0 (5) 18,754
Human Resources and 1998 345,250 107,973 0 (5) 17,747
Corporate Affairs
W.F. Stoll, Jr. 2000 387,425 90,000 0 (5) 22,260
Executive Vice President 1999 362,425 206,168 0 (5) 18,754
and General Counsel 1998 335,500 106,453 0 (5) 17,906
- -------------------------------------------------------------------------------------------------------------------
(1) Includes $60,000 pursuant to the Executive Perquisite Benefit Plan and $27,757 not paid to Mr. Kidder but allocable
to his personal use of company aircraft.
(2) Includes $60,000 pursuant to the Executive Perquisite Benefit Plan and $15,608 not paid to Mr. Kidder but allocable
to his personal use of company aircraft.
(3) Includes $60,000 pursuant to the Executive Perquisite Benefit Plan and $31,842 not paid to Mr. Kidder but allocable
to his personal use of company aircraft.
(4) All other compensation is identified and quantified in the table below for the current year.
(5) No Executive Officer of the Company owns any stock of Borden, Inc., or options to acquire stock in Borden, Inc.
For information on equity securities of Borden's parent or subsidiary entities owned by management, see Item 12.
(6) Includes $252,500 in forgiven principal and interest from a loan to Mr. Kelley.
(7) Tax gross-up payments on moving expenses.
73
- -------------------------------------------------------------------------------
MATCHING
CONTRIBUTIONS RELOCATION
YEAR (RSP AND ESP)(a) EXPENSE TOTAL
---- ---------------- ------- ------
C.R. Kidder 2000 $99,503 $0 $99,503
W.H. Carter 2000 31,878 0 31,878
K.M. Kelley 2000 24,305 22,034 46,339
N.A. Reardon 2000 22,289 0 22,289
W.F. Stoll, Jr. 2000 22,260 0 22,260
- -------------------------------------------------------------------------------
(a) RSP and ESP refer to the Company's Retirement Savings Plan and the
executive supplemental benefit plans.
The following table provides information on option/SAR exercises during 2000 by
the Named Executive Officers and the value of their unexercised options/SARS at
December 31, 2000.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
=============================================================================================================
# OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS/SARS AT MONEY OPTIONS/SARS AT FISCAL
SHARES FISCAL YEAR END (1) YEAR END ($)
ACQUIRED ON VALUE --------------------------- -----------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
=============================================================================================================
C.R. Kidder N/A N/A 0 12,225,730 0 0
W.H. Carter N/A N/A 0 5,791,370 0 0
K.M. Kelley N/A N/A 0 5,791,370 0 0
N.A. Reardon N/A N/A 0 4,222,220 0 0
W.F. Stoll, Jr. N/A N/A 0 4,222,220 0 0
============================================================================================================
(1) Represents unit appreciation rights in BW Holdings, LLC.
74
The following table provides information on option/SAR grants during 2000 to the
Named Executive Officers.
INDIVIDUAL GRANTS
=================
# OF SECURITIES % OF TOTAL GRANT DATE
UNDERLYING OPTIONS/SAR'S PRESENT VALUE ($)
OPTIONS/SAR'S GRANTED TO EXERCISE OR BASE EXPIRATION (2)
NAME GRANTED (#) EMPLOYEES IN PRICE ($/SHARE) DATE
(1) FISCAL YEAR
=====================================================================================================================
C.R. Kidder 4,834,350 20.08% 4.15 7/1/10 2,078,771
W.H. Carter 3,381,750 14.05% 4.15 7/1/10 1,454,153
K.M. Kelley 3,381,750 14.05% 4.15 7/1/10 1,454,153
N.A. Reardon 1,812,600 7.53% 4.15 7/1/10 779,418
W.F. Stoll, Jr. 1,812,600 7.53% 4.15 7/1/10 779,418
=====================================================================================================================
(1) Represents Unit Appreciation Rights in BW Holdings, LLC.
(2) The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model
with risk free interest rates of 6.11%, dividend rates of 2.9%, expected volatility of 0.1% and expected life of
four years.
75
The Long-Term Incentive Plans-Awards In Last Fiscal Year table has been
eliminated since the Registrant has no long-term incentive plan.
Retirement Benefits
- --------------------
The Borden Employees Retirement Income Plan ("ERIP") for salaried employees was
amended as of January 1, 1987, to provide benefit credits of 3% of earnings
which are less than the Social Security wage base for the year plus 6% of
earnings in excess of the wage base. Earnings include annual incentive awards
paid currently but exclude any long-term incentive awards. Benefits for service
through December 31, 1986, are based on the plan formula then in effect and have
been converted to opening balances under the plan. Both opening balances and
benefit credits receive interest credits at one-year Treasury bill rates until
the participant commences receiving benefit payments. For the year 2000, the
interest rate as determined in accordance with the plan language was 5.54%.
Benefits vest after completion of five years of employment for employees hired
on or after July 1, 1990.
The Company has supplemental plans which will provide those benefits which are
otherwise produced by application of the ERIP formula, but which, under Section
415 or Section 401 (a)(17) of the Internal Revenue Code, are not permitted to be
paid through a qualified plan and its related trust. The supplemental plan also
provides a pension benefit using the ERIP formula based on deferred incentive
compensation awards and certain other deferred compensation, which are not
considered as part of compensation under the ERIP.
The total projected annual benefits payable under the formulas of the ERIP at
age 65 without regard to the Section 415 or 401(a)(17) limits and recognizing
supplemental pensions as described above, are as follows for the Named Executive
Officers of the Company in 2000: C.R. Kidder - $183,747, W.H. Carter -
$125,843, N.A. Reardon - $45,133, K.M. Kelley - $120,399, and W.F. Stoll, Jr. -
$62,570.
In addition, certain Executive Officers receive Company matching contributions
on the first 7% of contributions to the Retirement Savings Plan. Company
matching contributions on employee contributions in excess of 5% are provided
under the supplemental plans. This benefit is not provided if the executive has
any other pension benefit guarantee.
Compensation of Directors
- ---------------------------
Each director who is not currently an employee of the Company receives an annual
retainer of $45,000. Directors who are also employees of the Company receive no
remuneration for serving as directors.
Directors who served prior to March 15, 1995 and who were not employees of the
Company are provided, upon attaining age 70, annual benefits through a funded
grantor trust equal to their final annual retainer if they served in at least
three plan years. Such benefits can continue for up to 15 years.
Employment, Termination and Change in Control Arrangements
- ----------------------------------------------------------------
The Company has a special arrangement with William F. Stoll, Jr., Executive V.P.
and General Counsel concerning retirement and termination. Under this
arrangement, with respect to retirement, the Company will calculate the benefit
Mr. Stoll would have received from his former employer, using predetermined
assumptions, and deduct from this amount the retirement benefits accrued under
the Borden Retirement Programs. Any shortfall in benefits will be paid by the
Company as a non-qualified benefit. Special provisions also apply in the event
of death or disability. Under this arrangement, with respect to termination, Mr.
Stoll is guaranteed enhanced severance equal to two times base salary and two
times incentive target if he is constructively terminated or terminated without
cause prior to July 1, 2001.
The Company has an employment arrangement with certain key managers, including
the Named Executive Officers, which provides payments upon the liquidation
of BW Holdings, LLC or upon a termination of employment without cause prior to
such a liquidation. Payments to the Named Executive Officers are: C.R. Kidder -
$1,718,880, W.H. Carter - $1,202,400, K.M. Kelley - $1,202,400, N.A. Reardon -
$644,480, and W.F. Stoll, Jr. - $644,480.
76
Compensation Committee Interlocks and Insider Participation
- ----------------------------------------------------------------
Messrs. Navab and Stuart are members of the Company's Compensation Committee.
Both are general partners of KKR Associates, L.P. See "Certain Relationships
and Related Transactions." Mr. Kidder, Chairman and Chief Executive Officer of
the Company, is also a member of the Compensation Committee.
77
- ------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
- --------- --------------------------------------------
OWNERS AND MANAGEMENT
-----------------------
The following table sets forth certain information regarding the beneficial
ownership of the Registrant's Common Stock and other equity securities issued by
affiliated entities, as of March 13, 2001, by (a) persons known to the
Registrant to be the beneficial owners of more than five percent of the
outstanding voting stock of the Registrant, (b) each director of the
Registrant, (c) each of the Named Executive Officers of the Registrant during
the 2000 fiscal year of the Registrant and (d) all directors and executive
officers of the Registrant as a group. Except as otherwise noted, the persons
named in the table below have sole voting and investment power with respect to
all securities shown as beneficially owned by them.
Name of Beneficial Ownership
Beneficial Owner of Equity Securities
- ------------------- ------------------------------
Shares/Units Percent
------------ -------
KKR Associates (1) 198,974,994 100.0
9 West 57th Street
New York, New York 10019
C. Robert Kidder 369,569 (2) *
Henry R. Kravis (1) -- *
George R. Roberts (1) -- *
Scott M. Stuart (1) -- *
Alexander Navab (1) -- *
William H. Carter 120,481 (2) *
Kevin M. Kelley 120,481 (2) *
Nancy A. Reardon 120,481 (2) *
William F. Stoll, Jr. 120,481 (2) *
All Directors and Executive Officers
as a group (2) 887,637 (2) *
* Beneficial ownership does not exceed 1.0% of the respective class of
securities.
(1) The Borden Common Stock shown as beneficially owned by KKR Associates is
directly held by Borden Holdings, Inc., a Delaware corporation which is
wholly owned by BW Holdings, LLC, a Delaware limited liability company,
the managing member of which is a limited partnership, of which KKR
Associates is the sole general partner and as to which it possesses
sole voting and investment power. KKR Associates is also the beneficial
owner of 632,000,000 units of BW Holdings, LLC. KKR Associates is a
limited partnership of which Messrs. Todd Fisher, Edward A. Gilhuly,
Perry Golkin, James H. Greene, Jr., Johannes Huth, Henry R. Kravis,
Robert I. MacDonnell, Michael W. Michelson, Alexander Navab, Paul E.
Raether, Neil Richardson, George R. Roberts, Scott M. Stuart and
Michael T. Tokarz are the general partners. Such persons may be deemed
to share beneficial ownership of the shares shown as owned by KKR
Associates. The foregoing persons disclaim beneficial ownership of any
such shares.
(2) Represents units in BW Holdings, LLC. No director or executive officer
owns directly any stock of the Registrant or options to acquire such
stock.
78
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------- --------------------------------------------------
All of the Company's common stock is owned by a holding company which is owned
by an affiliate of KKR Associates, a New York limited partnership of which
Messrs. Todd Fisher, Edward A. Gilhuly, Perry Golkin, James H. Greene, Jr.,
Johannes Huth, Henry R. Kravis, Robert I. MacDonnell, Michael W. Michelson,
Alexander Navab, Paul E. Raether, Neil Richardson, George R. Roberts, Scott M.
Stuart and Michael T. Tokarz are the general partners. KKR Associates has sole
voting and investment power with respect to such shares. Messrs. Kravis,
Roberts, Stuart and Navab are directors of the Company.
KKR renders management, consulting and financial services to the Company and its
businesses for an annual fee of $10 million, payable quarterly in arrears.
Messrs. Kravis, Roberts, Navab and Stuart are general partners of KKR.
The Company has made a loan to Mr. Carter, Executive Vice President and Chief
Financial Officer, in the amount of $375,000, of which $225,000 is secured with
a mortgage on his residence. The interest rate applicable to the loan is prime
less .25%. As of March 31, 2001, the full amount of the loan was outstanding,
plus accrued interest of $18,125.
Pursuant to his terms of employment, Mr. Kelley received a loan from the Company
in the amount of $675,000. The principal and accrued interest are payable upon
termination of employment, only if such termination occurs prior to April 4,
2002, and only to the extent of amounts not forgiven.
79
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------- ------------------------------------------------------------------
(a) List of documents filed as part of this report
------------------------------------------------------
1. Financial Statements
---------------------
All financial statements of the registrant are set forth under
Item 8 of this Report on Form 10-K.
2. Financial Statement Schedules
-------------------------------
Report of Independent Auditors (page 81)
For the three years ended December 31, 2000:
Schedule II - Valuation and Qualifying Accounts (page 82)
3. Exhibits (page 83)
80
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Shareholders of Borden, Inc.
We have audited the financial statements of Borden, Inc. and subsidiaries as of
December 31, 2000 and 1999, and for each of the three years in the period ended
December 31, 2000, and have issued our report thereon dated February 9, 2001;
such financial statements and report are included elsewhere in this Form 10-K.
Our audits also included the financial statement schedule of Borden, Inc. and
subsidiaries, listed in Item 14. This consolidated financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such consolidated
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Columbus, Ohio
February 9, 2001
81
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance Charged to Balance
December 31, 1997 Expense Write-offs December 31, 1998
------------------ ----------- ------------------- ------------------
Allowance for
doubtful accounts $ 9.4 $ 2.9 $ (1.9) $ 10.4
- ---------------------------------------------------------------------------------------------------------
Balance Charged to Balance
December 31, 1998 Expense Write-offs December 31, 1999
------------------ ----------- ------------------- ------------------
Allowance for
doubtful accounts $ 10.4 $ 3.3 $ (1.9) $ 11.8
- ---------------------------------------------------------------------------------------------------------
Balance Charged to Balance
December 31, 1999 Expense Write-offs December 31, 2000
------------------ ----------- ------------------- ------------------
Allowance for
doubtful accounts $ 11.8 $ 3.8 $ (2.5) $ 13.1
- ---------------------------------------------------------------------------------------------------------
82
3. Exhibits
--------
Management contracts, compensatory plans and arrangements are listed herein
at Exhibits (10)(v) through (10)(xv).
(3)(i) Restated Certificate of Incorporation dated March 14,
1995, and Certificate of Amendment of Restated
Certificate of Incorporation dated June 23, 1995,
both incorporated herein by reference from Exhibit (3)
to the June 30, 1995 Form 10-Q.
(ii) By-Laws incorporated herein by reference from Exhibit
(3)(ii) to the September 30, 1996, Form 10-Q.
(4)(i) Form of Indenture dated as of January 15, 1983, as
supplemented by the First Supplemental Indenture dated
as of March 31, 1986, and the Second Supplemental
Indenture, dated as of June 26, 1996, relating to the
$200,000,000 8-3/8% Sinking Fund Debentures due 2016,
incorporated herein by reference from Exhibits (4)(a)
and (b) to Amendment No. 1 to Registration Statement
on Form S-3, File No. 33-4381 and Exhibit (4)(iv) to
the June 30, 1996, Form 10-Q.
(ii) Form of Indenture dated as of December 15, 1987, as
supplemented by the First Supplemental Indenture dated
as of December 15, 1987, and the Second Supplemental
Indenture dated as of February 1, 1993, and the Third
Supplemental Indenture dated as of June 26, 1996,
incorporated herein by reference from Exhibits (4)(a)
through (d) to Registration Statement on Form S-3,
File No. 33-45770, and Exhibit (4)(iii) to the
June 30, 1996, Form 10-Q, relating to the following
Debentures and Notes:
(a) The $150,000,000 9-1/4% Sinking Fund Debentures
due 2019.
(b) The $200,000,000 9-1/5% Debentures due 2021.
(c) The $250,000,000 7-7/8% Debentures due 2023.
(iii) Form of Indenture relating to Senior Securities,
incorporated herein by reference from Exhibit 4.1 to
the Company's Registration Statement on Form S-3,
File No. 33-57577.
(iv) Form of Indenture relating to Subordinated Securities
incorporated herein by reference from Exhibit 4.2 to
the Company's Registration Statement on Form S-3,
File No. 33-57577.
(10)(i) Recapitalization Agreement, dated as of October 14,
1997, among BORDEN, INC., a New Jersey corporation,
BORDEN DECORATIVE PRODUCTS HOLDINGS, INC., a Delaware
corporation and an indirect wholly owned subsidiary
of Borden, and BDPI HOLDINGS CORPORATION, a Delaware
corporation incorporated herein by reference to
Exhibit (10)(i) to the 1997 Form 10-K Annual Report.
(ii) Credit Agreement dated as of December 15, 1994 amended
and restated as of July 14, 1997, incorporated herein
by reference to Exhibit (10)(ii) to the June 30, 1997,
Form 10-Q.
83
(iii) Stockholders Agreement, dated as of June 20, 1996, by
and among Borden, Inc. and J. Brendan Barba, Paul M.
Feeny, David MacFarland, Robert Cron, Kenneth J. Avia,
Melanie K. Barba, John Powers, Lauren Powers, Carolyn
Vegliante and Lawrence Noll, incorporated herein by
Reference to Exhibit 2 to Schedule 13D, dated
July 1, 1996. File No. 005-37385.
(iv) Governance Agreement, dated as of June 20, 1996,
between Borden, Inc. and AEP Industries Inc.,
incorporated herein by reference to Exhibit 5 to
Schedule 13D, dated July 1, 1996, File No. 005-37385.
(v) Amended and Restated 1996 Unit Incentive Plan for Key
Employees of Borden, Inc. and Associated Persons,
as of June 29, 1999, incorporated herein by reference
to Exhibit (10)(v) to the 1999 Form 10-K Annual
Report.
(vi) Amended and Restated 1996 Unit Incentive Plan for
Key Employees of Borden, Inc. and Associated Persons,
as of December 31, 2000.
(vii) 1994 Stock Option Plan incorporated by reference to
Exhibit (10)(v) to the 1993 Form 10-K Annual Report.
(viii) Executive Supplemental Pension Plan Amended and
Restated as of January, 1996 incorporated by
Reference to Exhibit (10)(xiii) to the 1998 Form
10-K Annual Report.
(ix) Advisory Directors Plan, incorporated herein by
reference from Exhibit (10)(viii) to the 1989
Form 10-K Annual Report.
(x) Advisory Directors Plan Trust Agreement,
incorporated herein by reference from Exhibit
(10)(ix) to the 1988 Form 10-K Annual Report.
(xi) Management Agreements
----------------------
(a) Employment Agreement with W. F. Stoll, Jr.,
dated June 6, 1996, incorporated by reference
to Exhibit (10)(vi) to the June 30, 1996 Form
10-Q.
(b) Summary of Terms of Employment for Kevin M.
Kelley, incorporated herein by reference to
Exhibit (10) to the June 30, 1999 Form 10-Q.
(xii) Executive Perquisite Benefits Plan dated January 1,
1996, incorporated by reference to Exhibit (10)(xxiv)
to the 1995 Form 10-K Annual Report.
(xiii) Consulting Agreement dated August 21, 1995,
incorporated herein by reference to Exhibit (10)
to the September 30, 1995 Form 10-Q.
(xiv) 1999 Management Incentive Plan for Borden Capital
Management Partners, incorporated herein by reference
To Exhibit (10)(xvi) to the 1999 Form 10-K Annual
Report.
84
(xv) 2000 Management Incentive Plan for Borden Capital
Management Partners.
(21) Subsidiaries of Registrant.
(23)(i) Accountants' Consent.
4. Financial Statement Schedules
-------------------------------
The following is the separate financial statements of Foods Holdings
filed in accordance with rule 3-10 of Regulation S-X. Foods Holdings is
a guarantor of the Company's credit facility and all of the Company's
outstanding publicly held debt.
(a) Reports on Form 8-K
----------------------
No reports on Form 8-K were filed by the Company during the fourth quarter of
2000.
85
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BORDEN, INC.
By /s/ Deborah K. Roche
---------------------
Deborah K. Roche, Vice President/General Auditor
and Controller
(Principal Accounting Officer)
Date: April 2, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated, on the date set forth above.
Signature Title
- --------- -----
/s/ C. Robert Kidder Chairman of the Board and
- ------------------------------
(C. Robert Kidder) Chief Executive Officer
/s/ Henry R. Kravis Director
- ------------------------------
(Henry R. Kravis)
/s/ George R. Roberts Director
- ------------------------------
(George R. Roberts)
86
EXHIBIT 21
BORDEN, INC., CONSOLIDATED
SUBSIDIARIES OF REGISTRANT AS OF DECEMBER 31, 2000
---------------------------------------------------------
The percentage of State or other
voting securities jurisdiction of
owned, or other incorporation
Subsidiaries of Registrant: basis of control or organization
- ----------------------------- ------------------ ---------------
BCP Management, Inc. 100 Delaware
BCP Finance Corporation 100 Delaware
BDS Two, Inc. 100 Delaware
BFI Ltd., L.P. 100 Delaware
Borden Chemical Holdings, Inc. 95.5 Delaware
Borden Chemical Canada, Inc. 100 Canada
Borden Chemical Investments, Inc. 100 Delaware
Borden Chemical, Inc. 100 Delaware
Borden Chemical International, Inc. 100 Delaware
Melamine Chemicals, Inc. 100 Delaware
Borden Chemical Foreign Sales Corp. V.I., Inc. 100 US V.I.
Borden Chemical Philippines, Inc. 98 Philippines
Borden Chemical Australia (Pty.) Ltd. 100 Australia
Borden/AEP Australia Superannuation (Pty) Limited 100 Australia
Borden Chemical Holdings (Panama), S.A. 100 Panama
Alba Quimica Industria e Comercio Ltda. 99 Brazil
Alba Amazonia S.A. Industrias Quimicas 99.9 Brazil
Alba Nordeste Industrias Quimica Ltda. 100 Brazil
Wenham Corp., S.A.(The) 100 Uruguay
Borden Chemical (M.) Sdn. Bhd. 100 Malaysia
Borden Chemical Resinas, Panama, S.R.L. 100 Panama
Quimica Borden Argentina S.A. 100 Argentina
Borden Chimie, S.A. 98 France
Borden International Holdings, Ltd. 100 UK
Borden Chemical GB, Ltd. 100 UK
Borden Chemical U.K. Limited 100 UK
Borden Bray, Ltd. 100 Ireland
Borden Chemical International Philippines, Inc. 98 Philippines
Compania Quimica Borden, S.A. 100 Panama
Quimica Borden Espana, S.A. 100 Spain
Borden Division de Consumo, S.A. 100 Spain
Compania Quimica Borden Ecuatoriana, S.A. 83.3 Ecuador
Gun Ei Borden International Resin Co. Ltd. 5 Japan
Italcolor S.A. 100 Uruguay
Elmer's Holdings, Inc. 98.5 Delaware
Elmer's Products, Inc. 100 Delaware
Elmer's International, Inc. 100 Delaware
Elmer's Products Canada, Inc. 100 Canada
Elmer's Investments, Inc. 100 Delaware
Ross Products, Inc. 100 Delaware
NOTE: The above subsidiaries have been included in Borden's Consolidated
Financial Statements on a consolidated or equity basis as appropriate. The names
of certain subsidiaries, active and inactive, included in the Consolidated
Financial Statements and of certain other subsidiaries not included therein are
omitted since when considered in the aggregate as a single subsidiary they do
not constitute a significant subsidiary.
87
EXHIBIT 21
BORDEN, INC.
The following entities are included in the combined businesses
as of December 31, 2000, but not included in the Registrant
The percentage of
voting securities
owned, or other State or other
basis of control jurisdiction of
by its immediate incorporation/
Affiliates of Registrant parent organization
- -------------------------- -------------- -------------
Borden Foods Holdings Corporation 100 Delaware
Borden Foods Corporation 100 Delaware
Aunt Millie's Sauces, Inc. 100 New York
Albadoro S.p.A. 100 Italy
Monder Aliment S.p.A. 100 Italy
BF Foods International Corp. 100 Delaware
Borden Company Limited, The 100 Ireland
Borden Foods Limited 100 Ireland
Borden Exports Limited 100 Ireland
Borden International (Europe) Ltd. 100 Delaware
BF Andina Ltda 100 Colombia
BFC (Alisa) SDAD LtdA. 100 Panama
BFC (Colombia) S.A. 100 Panama
BF (Colombia) LLC 100 Delaware
BFC One Corporation 100 Delaware
Borden Foods International Corp. 100 Delaware
Borden Foods Canada Corporation 100 Canada
Borden Foods World Trade Corporation 100 Ohio
Borden International, Inc. 100 Delaware
Borden International Foods (Asia-Pacific) Ltd. 100 Hong Kong
Borden Redevelopment Corp. 100 Missouri
International Gourmet Specialties Company 100 New Jersey
Prince Company, Inc., The 100 Massachusetts
88
Exhibit 10(vi)
AMENDED AND RESTATED
1996 UNIT INCENTIVE PLAN
FOR KEY EMPLOYEES OF
BORDEN, INC. AND ASSOCIATED PERSONS
AS OF DECEMBER, 2000
1. Purpose of Plan
-----------------
This Amended and Restated 1996 Unit Incentive Plan for Key Employees of Borden,
Inc. and Associated Persons (the "Plan") is designed:
(a) to promote the long term financial interests and growth of Borden,
Inc. (the "Corporation") and its Associated Persons by attracting
and retaining management personnel with the training, experience
and ability to enable them to make a substantial contribution
to the success of the Corporation's business;
(b) to motivate management personnel by means of growth-related
incentives to achieve long range goals; and
(c) to further the identity of interests of Participants with those
of the direct and indirect equityholders of the Corporation
through opportunities to participate in increased value of, or
distributions by, the Corporation and/or its Associated Persons.
2. Definitions
-----------
As used in the Plan, the following words shall have the following meanings:
(a) "Associated Person" shall mean any Subsidiary of BW Holdings,
-------------------
including, without limitation, the Corporation, or any Subsidiary
of the Corporation, and any other entity designated by the Board
of Directors, which may include, without limitation, a successor
to BW Holdings.
(b) "BW Holdings" shall mean BW Holdings, LLC, a Delaware limited
--------------
liability company.
(c) "BW Holdings Unit" shall mean a unit of limited liability company
-------------------
interest in BW Holdings.
(d) "Board of Directors" means the Board of Directors of the
-----------------------
Corporation.
(e) "Committee" means the Compensation Committee of the Board of
-----------
Directors.
(f) "Employee" means a person, including an officer, in the regular
----------
full-time employment of the Corporation or one of its Associated
Persons who, in the opinion of the Committee, is, or is expected
to be, primarily responsible for the management, growth or
protection of some part or all of the business of the Corporation
or its Associated Persons.
(g) "Equivalent Company" shall mean any Person so designated by the
--------------------
Committee that, at the relevant time, owns or operates, directly
or indirectly, substantially all of the business and assets
of BW Holdings and its Subsidiaries.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as
---------------
amended.
(i) "Fair Value" means such value of a BW Holdings Unit or similar
------------
ownership interest in an Equivalent Company as determined
in accordance with any applicable resolutions or regulations
of the Committee in effect at the relevant time and in
accordance with the provisions of a Grant Agreement.
(j) "Grant" means an award made to a Participant pursuant to the
-------
Plan and described in Paragraph 5, including, without
limitation, an award of a BW Holdings Unit Option, Unit
Appreciation Right, Purchase BW Holdings Unit or Other Unit-
Based Grant, or any combination of the foregoing.
89
(k) "Grant Agreement" means an agreement between the Corporation
------------------
and a Participant that sets forth the terms, conditions and
limitations applicable to a Grant.
(l) "Participant" means an Employee selected to participate in the
-------------
Plan by the Committee in its sole discretion and to whom one or
more Grants have been made and such Grants have not all been
forfeited or terminated under the Plan; provided, however, a
-------- -------
non-employee director of the Corporation or one of its
Associated Persons may not be a Participant.
(m) "Subsidiary" means any corporation, partnership or other entity
------------
in an unbroken chain of corporations, partnerships or other
entities beginning with BW Holdings if each of the corporations,
partnerships or other entities, or group of commonly controlled
corporations, partnerships or other entities other than the last
corporation, partnership or other entity in the unbroken chain
then owns 50% or more of the voting stock or other ownership
interests in one of the other corporations, partnerships or
other entities in such chain.
3. Administration of Plan
------------------------
(a) The Plan shall be administered by the Committee. The Committee may
adopt its own rules of procedure, and the action of a majority of
the Committee, taken at a meeting or taken without a meeting
by a writing signed by such majority, shall constitute action
by the Committee. The Committee shall have the power and authority
to administer, construe and interpret the Plan, to make rules for
carrying it out and to make changes in such rules. Any such
interpretations, rules and administration shall be consistent
with the basic purposes of the Plan.
(b) The Committee may delegate to the Chief Executive Officer and to
other senior officers of the Corporation its duties under the
Plan subject to such conditions and limitations as the Committee
shall prescribe, except that only the Committee may designate
and make Grants to Participants who are subject to Section 16 of
the Exchange Act at the time of such Grant.
(c) The Committee may employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Committee, the
Corporation, and the officers and directors of the Corporation
shall be entitled to rely upon the advice, opinions or valuations
of any such persons. All actions taken and all interpretations
and determinations made by the Committee in good faith shall be
final and binding upon all Participants, the Corporation
and all other interested persons. No member of the Committee
or the Board of Directors, or the board of directors or similar
management body of any Associated Person, and none of the
Corporation, BW Holdings, any Associated Person or any affiliate of
any thereof shall be liable (personally or otherwise) for
any action, determination or interpretation made in good faith
with respect to the Plan or the Grants, and all such persons
shall be fully protected by the Corporation with respect to any
such action, determination or interpretation.
4. Eligibility
-----------
The Committee may from time to time make Grants under the Plan to such Employees
and in such form having such terms, conditions and limitations as the Committee
may determine in its sole discretion. No Grants may be made under this Plan to
non-employee directors of Corporation or any of its Subsidiaries. Grants may be
granted singly, in combination or in tandem. The terms, conditions and
limitations of each Grant under the Plan shall be set forth in a Grant
Agreement, in a form approved by the Committee, consistent, however, with the
terms of the Plan; provided, however, such Grant Agreement shall contain
-------- -------
provisions dealing with the treatment of Grants in the event of the termination,
death or disability of a Participant, and may also include provisions concerning
the treatment of Grants in the event of a change of control.
5. Grants
------
From time to time, the Committee will determine the forms and amounts of Grants
for Participants. Such Grants may take the following forms in the Committee's
sole discretion:
90
(a) BW Holdings Unit Options - These are options to purchase BW
------------------------
Holdings Units. At the time of the Grant the Committee shall determine,
and shall have contained in the Grant Agreement or other Plan rules, the
option exercise period, the option exercise price, and such other
conditions or restrictions on the grant or exercise of the option as
the Committee deems appropriate, which may include the requirement
that the grant of options is predicated on the acquisition of Purchase
BW Holdings Units by the optionee.
(b) Unit Appreciation Rights - These are rights that entitle the
------------------------
holder to receive payments from time to time from the Corporation in
amounts and at times corresponding to the amounts and times when
distributions on the BW Holdings Units are made and/or in amounts
determined based on the relative values of a BW Holdings Unit at the
time of payment and at the time of Grant, as specified in a Grant
Agreement. Generally, Unit Appreciation Rights will provide
for payments by the Corporation when the aggregate
distributions on each BW Holdings Unit exceeds a trigger
price specified in the Grant Agreement. The Committee, in the Grant
Agreement or by the other Plan rules, may impose such conditions or
restrictions on the Unit Appreciation Rights, may provide for the
conversion of the Unit Appreciation Rights into BW Holdings Units,
or options to purchase BW Holdings Units or other ownership interests
in BW Holdings or any Associated Person, and may provide for such
other terms and conditions applicable to the Unit Appreciation Rights
as it deems appropriate. Unit Appreciation Rights may also be called
"UARs" in a Grant Agreement.
(c) Purchase BW Holdings Unit - Purchase BW Holdings Units are BW
-------------------------
Holdings Units offered to a Participant at such price as determined by
the Committee, the acquisition of which will make him eligible to
receive Grants under the Plan; provided, however, that the price of
--------- -------
such Purchase BW Holdings Units may not be less than 50% of the fair
market value (as determined by the Committee) of the BW Holdings Units
on the date such Purchase BW Holdings Units are offered.
(d) Other Unit-Based Grants - The Committee may make other Grants
------------------------
under the Plan pursuant to which BW Holdings Units (or similar ownership
interests of an Equivalent Company) are or may in the future be
acquired, or payments are or may in the future be made, in each case,
based on the performance or value of the Corporation and its Associated
Persons. The Committee, in the Grant Agreement or by other Plan rules,
may impose such conditions or restrictions on any such Grant as it deems
appropriate, consistent with the purposes of the Plan. Such Other Unit-
Based Grants may include, without limitation, appreciation rights
providing for payments to the Employee when a specified value of the
Units is achieved relative to a value specified at the time of the
Grant in the Grant Agreement.
6. Limitations and Conditions
----------------------------
(a) The number of BW Holdings Units available for Grants under this
Plan, and the number of such Units on which Grants under this Plan may
be based, shall be 1,157,057, but may be increased or decreased (but in
be event decreased to a number lower than the number of BW Holdings
Units theretofore granted or with respect to which Grants theretofore
Have been made under the Plan), by the Committee in its sole discretion.
Unless restricted by applicable law, the number of BW Holdings Units
related to Grants that are forfeited, terminated, cancelled or expire
shall immediately become available for Grants.
(b) No Grants shall be made under the Plan beyond ten years after the
effective date of the Plan, but the terms of Grants made on or
before the expiration thereof may extend beyond such expiration. At
the time a Grant is made or amended or the terms or conditions of a
Grant are changed, the Committee may provide for limitations or
conditions on such Grant.
(c) Nothing contained herein shall affect the right of the
Corporation to terminate any Participant's employment at any time or
for any reason.
(d) Deferrals of Grant payouts may be provided for, at the sole
discretion of the Committee, in the Grant Agreements.
91
(e) Except as otherwise prescribed by the Committee, the amounts of
the Grants for any employee of a Subsidiary, along with interest,
dividend and other expenses accrued on deferred Grants shall be
charged to the Participant's employer during the period for which the
Grant is made. If the Participant is employed by more than one
Subsidiary or by both the Corporation and a Subsidiary during the
period for which the Grant is made, the Participant's Grant and
related expenses will be allocated between the companies
employing the Participant in a manner prescribed by the Committee.
(f) Other than as specifically provided with regard to the death of a
Participant, no Grant or right to payment in respect thereof under
the Plan shall be subject in any manner to anticipation, alienation,
sale, transfer, assignment, pledge, encumbrance or charge, and any
attempt to do so shall be void. No Grant or right to payment in
respect thereof shall, prior to receipt thereof by the Participant, be
in any manner liable for or subject to the debts, contracts,
liabilities, engagements or torts of the Participant.
Notwithstanding the foregoing, the Committee may, in its discretion,
authorize all or a portion of the options or UARs to be granted to
an optionee to be on terms which permit transfer by such optionee
to (1) the spouse, children or grandchildren of the optionee
("Immediate Family Members"), (ii) a trust or trusts for the
exclusive benefit of such Immediate Family Members, or (iii) a
partnership or other entity in which such Immediate Family members are
the only partners, members or beneficiaries, provided that, (x)
-------- ----
the option agreement pursuant to which such options are granted
must be approved by the Committee, and must expressly provide for
transferability in a manner consistent with this Section, (y)
subsequent transfers of transferred options shall be prohibited
except transfers by will or by the applicable laws of this Plan.
Following transfer, any such options shall continue to be subject
to the same terms and conditions as were applicable immediately
prior to transfer.
(g) Participants shall not be, and shall not have any of the rights
or privileges of, members of BW Holdings or equity holders in any
Associated Person in respect of any BW Holdings Units or interests
in an Associated Person purchasable in connection with any Grant
unless and until such Participant is registered as the owner thereof
and, if applicable, certificates representing any such BW Holdings
Units or such other interests have been issued by BW Holdings or such
Associated Person to such Participants.
(h) No election as to benefits or exercise of BW Holdings Unit
Options, Unit Appreciation Rights or other rights may be made during a
Participant's Lifetime by anyone other than the Participant except
by a legal representative appointed for or by the Participant.
(i) Absent express provisions to the contrary, any grant under this
Plan shall not be deemed compensation for purposes of computing benefits
or contributions under any retirement plan of the Corporation or its
Subsidiaries and shall not affect any benefits under any other
benefit plan of any kind or subsequently in effect under which the
availability or amount of benefits is related to level of compensation.
This Plan is not a "Retirement Plan" or "Welfare Plan" under the
Employee Retirement Income Security Act of 1974, as amended.
(j) Unless the Committee determines otherwise, no benefit or promise
under the Plan shall be secured by any specific assets of the
Corporation or any of its Subsidiaries, nor shall any assets of the
Corporation or any of its Subsidiaries be designated as attributable
or allocated to the satisfaction of the Corporation's obligations under
the Plan.
7. Transfers and Leaves of Absence
-----------------------------------
For purposes of the Plan, unless the Committee determines otherwise: (a) a
transfer of a Participant's employment without an intervening period of
separation among the Corporation and any Associated Person shall not be deemed a
termination of employment, and (b) a Participant who is granted in writing a
leave of absence shall be deemed to have remained in the employ of the
Corporation during such leave of absence.
8. Adjustments
-----------
In the event that the Corporation (or any Equivalent Company) consummates a
Public Offering, or any similar event occurs, or there is a change in the
powers, designations, preferences and relative participating, optional or
other rights, if any, or the qualifications, limitations or
restrictions of the outstanding BW Holdings Units or equity
interests in an Equivalent Company or a reclassification,
92
recapitalization or merger, change of control, or similar
event affecting the Corporation, BW Holdings or an Equivalent Company, the
Committee may adjust appropriately the outstanding Grants as it deems to be
equitably required, including without limitation converting the Grants into
common equity of, or grants of options or other rights to purchase ownership
interests in, the Corporation or the Equivalent Company that consummates a
Public Offering on such terms as the Committee deems to be appropriate in its
sole discretion.
9. Merger, Consolidation, Exchange, Acquisition, Liquidation or Dissolution
-----------------------------------------------------------------------------
In its absolute discretion, and on such terms and conditions as it deems
appropriate, coincident with or after the grant of any BW Holdings Unit Option,
Unit Appreciation Right or any Other Unit-Based Grant, the Committee may provide
that such BW Holdings Unit Option, Unit Appreciation Right or Other Unit-Based
Grant cannot be exercised or triggered after the merger or consolidation of BW
Holdings or the Corporation into another corporation, the exchange of all or
substantially all of the assets of BW Holdings or the Corporation for the
securities of another corporation, the sale of all or substantially all the
assets of BW Holdings or the Corporation, the acquisition by another corporation
of 80% or more of BW Holdings' or the Corporation's then outstanding units or
shares of voting stock or the recapitalization, reclassification, liquidation or
dissolution of BW Holdings or the Corporation, and if the Committee so provides,
it shall, on such terms and conditions as it deems appropriate in its absolute
discretion, also provide, either by the terms of such BW Holdings Unit Option,
Unit Appreciation Right or Other Unit-Based Grant or by a resolution adopted
prior to the occurrence of such merger, consolidation, exchange, acquisition,
recapitalization, reclassification, liquidation or dissolution, that, for some
period of time prior to such event, such BW Holdings Unit Option, Unit
Appreciation Right or Other Unit-Based Grant shall be exercisable or able to be
triggered as to all units or shares subject thereto, notwithstanding anything to
the contrary herein (but subject to the provisions of Paragraph 6(b)) and that,
upon the occurrence of such event, such BW Holdings Unit Option, Unit
Appreciation Right or Other Unit-Based Grant shall terminate and be of no
further force or effect; provided, however, that the Committee may also provide,
-------- -------
in its absolute discretion, that even if the BW Holdings Unit Option, Unit
Appreciation Right or Other Unit-Based Grant shall remain exercisable or able to
be triggered after any such event, from and after such event, any such BW
Holdings Unit Option, Unit Appreciation Right or Other Unit-Based Grant shall be
exercisable or able to be triggered only for the kind and amount of securities
and/or other property, or the cash equivalent thereof, receivable as a result of
such event by the holder of Unit Appreciation Rights immediately prior to such
event or a number of units or shares of stock for which such BW Holdings Unit
Option or Other Unit-Based Grant could have been exercised immediately prior to
such event.
10. Amendment and Termination
---------------------------
The Committee shall have the authority to make such amendments to any terms and
conditions applicable to outstanding Grants as are consistent with this Plan
provided that, except for adjustments under Paragraph 8 or 9 hereof, no such
action shall modify such Grant in a manner adverse to the Participant without
the Participant's consent except as such modification is provided for or
contemplated in the terms of the Grant.
The Board of Directors may amend, suspend or terminate the Plan except that no
such action, other than an action under Paragraph 8 or 9 hereof, may be taken
which would decrease the exercise price or trigger price of outstanding BW
Holdings Unit Options or Unit Appreciation Rights, change the requirements
relating to the Committee or extend the term of the Plan.
11. Foreign Options and Rights
-----------------------------
The Committee may make Grants to Employees who are subject to the laws of
nations other than the United States, which Grants may have terms and conditions
that differ from the terms thereof as provided elsewhere in the Plan for the
purpose of complying with foreign laws.
12. Withholding Taxes
------------------
The Corporation shall have the right to deduct from any cash payment made under
the Plan any federal, state or local income or other taxes required by law to be
withheld with respect to such payment. It shall be a condition to the
obligation of the Corporation to deliver BW Holdings Units upon exercise of a BW
93
Holdings Unit Option or exercise or settlement of any Other Unit-Based Grant
that the Participant pay to the Corporation such amount as may be requested by
the Corporation for the purpose of satisfying any liability for such withholding
taxes. Any Grant Agreement may (but is not required to) provide that the
Participant may elect, in accordance with any conditions set forth in such Grant
Agreement, to satisfy a portion or all of such withholding taxes in the form of
a reduced payment by the Corporation (including by reducing the number of BW
Holdings Units to be received upon exercise of a BW Holdings Unit Option).
13. Effective Date and Termination Dates
----------------------------------------
The Plan shall be effective on and as of the date of its approval by the
stockholders of the Corporation and no further grants shall be made under the
plan after ten years from such date.
94
BORDEN CAPITAL
MANAGEMENT PARTNERS
2000 INCENTIVE PLAN
OVERVIEW
95
TABLE OF CONTENTS
PERFORMANCE HAS ITS REWARDS. . . . . . . . . . . . . . 97
SUMMARY OF HOW THE INCENTIVE PLAN WORKS. . . . . . . . 98
PLAN PARTICIPATION . . . . . . . . . . . . . . . . . . 99
Who's Eligible . . . . . . . . . . . . . . . . . . . . 99
Target Award . . . . . . . . . . . . . . . . . . . . . 99
ESTABLISHING PERFORMANCE TARGETS . . . . . . . . . . . 99
Financial Target . . . . . . . . . . . . . . . . . . . 100
Operating EBITDA . . . . . . . . . . . . . . . . . . . 100
Performance Objectives . . . . . . . . . . . . . . . . 101
Company Objectives . . . . . . . . . . . . . . . . . . 101
Individual Performance Objectives. . . . . . . . . . . 101
DETERMINING THE INCENTIVE AWARD. . . . . . . . . . . . 102
Determine BWHLLC's Operating EBITDA. . . . . . . . . . 102
Determine BCMP's Overall Performance Rating Against
Objectives and Total Award Pool . . . . . . . . . . 102
The Incentive Award Table. . . . . . . . . . . . . . . 102
Determine Your Individual Performance Rating and Award 104
LEAVING THE PLAN . . . . . . . . . . . . . . . . . . . 104
If You Leave the Borden Family of Companies. . . . . . 104
If you Retire, Die or Become Disabled. . . . . . . . . 104
If You Transfer. . . . . . . . . . . . . . . . . . . . 104
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . 105
FOCUS ON PERFORMANCE . . . . . . . . . . . . . . . . . 105
96
PERFORMANCE HAS ITS REWARDS
The Incentive Plan provides a form of compensation that is driven by individual
and company performance, and in the process supports BCMP's values. Awards from
the Incentive Plan will be paid in addition to your regular salary increases and
in no way affect your annual salary review at midyear.
Strong teamwork is rewarded in special ways by the Incentive Plan. The Plan is
designed to reward team players who add value to BCMP over the years to come.
The 2000 Incentive Plan bases its rewards in part on the financial measure
called EBITDA - Earnings Before Interest, Taxes, Depreciation and Amortization.
EBITDA is a powerful financial tool for letting us know how we're doing in
managing the business for profitable growth. The other important factors in the
incentive plan are BCMP performance against overall goals and your performance
against individual performance objectives.
This document explains the basics of the Borden Capital Management Partners
Incentive Plan. Please read it carefully so you'll understand how the Plan ties
your compensation to your performance.
97
SUMMARY OF HOW THE INCENTIVE PLAN WORKS
- -------------------------------------------------------------------------------------------------------
YOU PARTICIPATE IN THE PLAN - You meet the eligibility criteria.
- Your target award is established.
WE WORK HARD THROUGHOUT THE YEAR TO - We strive to achieve and exceed the goals we set for
INCREASE EBITDA. ourselves and the company.
THE YEAR ENDS AND THE BOOKS CLOSE. - BWHLLC's EBITDA is compared to the EBITDA
Target.
- Using a rating system, the company and you will be
rated on performance against objectives.
- Ratings increase when we achieve our super goals or
perform at an extraordinary level.
- You will receive an award early the following year as
long as EBITDA results are above minimum target
and your performance meets certain minimum
requirements.
YOU MAY RECEIVE AN AWARD FROM THE PLAN. - The amount awarded depends on numerous factors,
including the year's EBITDA achievement and
performance ratings for the company and you.*
- -------------------------------------------------------------------------------------------------------
*All awards payable from the Incentive Plan are subject to the approval and
discretion of the CEO and the Borden, Inc. Board of Directors.
98
PLAN PARTICIPATION
WHO'S ELIGIBLE
All associates employed by Borden Capital Management Partners beginning on
January 1, 2000, or hired during the year prior to October 1, 2000, will be
eligible to participate in the Incentive Plan. There is no eligibility waiting
period.
TARGET AWARD
The Incentive Plan is designed to generate a certain level of additional income
for you when the annual EBITDA Target and performance objectives are met. That
amount is called your TARGET AWARD. The Target Award depends on your band
within the BCMP organizational chart shown below.
BAND INCENTIVE TARGET %
- ---------------------------------------------------------------------------
Band G Partners 60%+
Band F Principals 40 - 60%
Band E Engagement Managers 20 - 40%
Band D Consultants 15 - 25%
Band C Analysts 10%
Band B Administrators 5 - 10%
Band A Administrative Assistants 5%
When BCMP and individual associates accomplish and exceed objectives, the
Incentive Plan awards combined with base salary will deliver total cash
compensation that is above competitive markets.
ESTABLISHING PERFORMANCE TARGETS
The Incentive Plan rewards us based on how well we have accomplished the
established performance targets. Our targets are aggressive but they are also
realistic. Accomplishing set objectives defines for us a job well done. But
before we know how well we are doing, we have to define what we are trying to
accomplish. Each year, we will formally establish the financial target and
performance objectives at two levels within the organization, against which we
will judge our achievements.
- ----------------------------------------
FINANCIAL TARGET PERFORMANCE OBJECTIVES
- ---------------- ----------------------
BW Holdings, LLC - Company
Operating EBITDA - Individual
- ----------------------------------------
99
FINANCIAL TARGET
OPERATING EBITDA
The financial measure chosen for BCMP's 2000 Incentive Plan is EBITDA, or
Earnings Before Interest, Taxes, Depreciation and Amortization.
You are probably all familiar with this fundamental measure of profitability.
Our focus is on the BWHLLC operating EBITDA - essentially the aggregate cash
earnings achieved by each member of the Borden Family of Companies in running
its day-to-day operations (including businesses in the process of divestment).
BCMP influences these results through partnering on strategic and other
projects, governance, and functional counseling and support.
The EBITDA is measured at BWHLLC to include Wise, CCPC and Borden Foods as well
as the other operating companies. BCMP's own financial performance includes the
small ownership portions of AEP and BCP. Operating EBITDA also reflects the
expenses incurred by BCMP, and thus the degree to which we can control those
costs and partly offset them with income, e.g., from successful tail management.
The operating EBITDA measure, however, excludes both restructuring charges and
one-time gains or losses on acquisitions or divestitures (but success in either
area can benefit the rating of BCMP performance objectives). If we make a
significant acquisition or divestiture, the financial target will be revised,
e.g., when CCPC was acquired in April 1998, the BWHLLC EBITDA target was
revised.
While BCMP uses BWHLLC's operating EBITDA for incentive purposes, most of the
Borden Family Companies use Economic Value Added, or EVA as the measure for
incentive.
For BCMP, EVA doesn't work well because of three factors: acquisitions and
divestitures; the complex financial and legal structure of our organization; and
tax considerations.
The BCMP Partners and Borden Board of Directors have agreed that operating
EBITDA is the best measure of how well we are achieving day-to-day and long-term
objectives that align with the underlying goal of increasing the value and
financial health of BWHLLC for its investors. That measure in turn will drive
potential awards under the Incentive Plan.
The 2000 EBITDA Target has been set at $406,600 million, with a positive and
negative swing (explained later) of $81,320 million. This creates an overall
range from $325,280 million ($406,600 - $81,320) to $487,920 million ($406,600 +
$81,320).
100
PERFORMANCE OBJECTIVES
Besides EBITDA, your individual Incentive Award is also based on setting and
meeting performance objectives at two different levels - company and individual.
Measurements for each of the performance objectives are established plus super
goals as appropriate. SUPER GOALS are aggressive milestones or outstanding
performance levels that result in extraordinary positive impact on the
department or organization. Setting super goals is a way to "aim high" in hopes
of exceeding our normal expectations. The purpose of setting super goals is to
articulate as clearly as possible a "home run". Not every objective will have a
defined super goal.
COMPANY OBJECTIVES
To help meet the overall EBITDA Target, the Partners will articulate certain
business objectives and super goals with more potential organizational impact
than others. While associates are accountable for achieving all objectives, high
impact objectives should receive the most focus. As with financial objectives,
performance objectives may be revised due to changing business needs.
INDIVIDUAL PERFORMANCE OBJECTIVES
Each year, you will be asked to develop a list of your individual performance
objectives for the coming year. The defined objectives should support the
objectives of the company.
You will also set super goals for yourself. These are measurements for specific
objectives that are considered extraordinary for your level.
- --------------------------------------------------------------------------------
Tips on how to write "aligned objectives"
- - Align objectives to BCMP objectives whenever possible.
- - Determine how objectives could support a part of a BCMP objective.
- - If an individual associate's job design is such that a direct link to BCMP
objectives is difficult, negotiate goals that move the organization
forward, e.g., improve quality and customer service, implement
efficiencies, and/or simplify processes.
- --------------------------------------------------------------------------------
A planning template has been provided to all associates to assist you in writing
up your individual performance objectives and super goals. You will coordinate
your list with your manager, who will help ensure that your objectives are
appropriately aggressive, yet attainable - and, of course, in line with the
goals of the company.
101
DETERMINING THE INCENTIVE AWARD
There are three steps to arrive at your individual Incentive Award.
Step 1. Determine BWHLLC's operating EBITDA.
Step 2. Determine BCMP's overall performance rating against objectives and
total award pool.
Step 3. Determine your individual performance rating and award.
STEP 1. DETERMINE BWHLLC'S OPERATING EBITDA
This leads us to a total Incentive Award to be shared by all BCMP associates.
Actual 2000 EBITDA performance will be compared to the 2000 financial
performance range ($325,280 million to $487,920 million). Financial performance
must exceed $325,280 million in order for incentive payments to be made. Target
Incentive Awards will be paid if the EBITDA target of $406,600 million is
achieved.
STEP 2. DETERMINE BCMP'S OVERALL PERFORMANCE RATING AGAINST
OBJECTIVES AND TOTAL AWARD POOL
At the end of each year, the Board of Directors will assess BCMP's performance
against objectives and assign an overall rating using the following scale:
PERFORMANCE RATINGS
- ---------------------------------------------------------------------------------------------------------------
1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
MEETS NO - MEETS 50% OF - MEETS - MEETS - MEETS
OBJECTIVES OBJECTIVES OBJECTIVES OBJECTIVES OBJECTIVES
& 50% OF & ALL SUPER
SUPER GOALS GOALS
- ---------------------------------------------------------------------------------------------------------------
The combination of BWHLLC's operating EBITDA and BCMP's overall performance
rating against objectives is then compared to the Incentive Award Table
described below to determine BCMP's total award pool.
THE INCENTIVE AWARD TABLE
Using the table on the next page, we locate the combination of the EBITDA and
the performance rating. The percentage we find represents the amount of the
Target Award that will become the Incentive Award pool for the year.
The left-most column on the table reflects BWHLLC's operating EBITDA Target plus
and minus the swing, which is divided into fifths that differentiate the rows up
and down.
Each $16.3 million ($81.3 / 5) increase or decrease in actual 2000 EBITDA over
or under the EBITDA Target moves you one row higher or lower on the table, and
the Incentive Award will increase or decrease as shown. If actual EBITDA
performance falls between two rows, the incentive award will be determined using
a proportional increase or decrease.
If EBITDA exceeds the high end of the range, Incentive Awards continue to rise
following the established pattern. Below the bottom of the range, however, no
Incentive Awards are paid.
102
PERCENTAGE OF TARGET
- ----------------------------------------------------------------------
BWHLLC
- ------
EBITDA
- ------
487.9M 0% 50% 100% 150% 200% 250% 300% 350% 400%
-- --- ---- ---- ---- ---- ---- ---- ----
0% 50% 100% 140% 180% 200% 250% 300% 350%
-- --- ---- ---- ---- ---- ---- ---- ----
0% 50% 100% 130% 160% 170% 200% 250% 300%
-- --- ---- ---- ---- ---- ---- ---- ----
0% 50% 100% 120% 140% 150% 160% 200% 250%
-- --- ---- ---- ---- ---- ---- ---- ----
0% 50% 100% 110% 120% 130% 140% 150% 200%
-- --- ---- ---- ---- ---- ---- ---- ----
TARGET
------
406.6M 0% 40% 80% 90% 100% 110% 120% 130% 150%
-- --- ---- ---- ---- ---- ---- ---- ----
0% 35% 70% 80% 90% 100% 110% 120% 138%
-- --- ---- ---- ---- ---- ---- ---- ----
0% 30% 60% 70% 80% 90% 100% 110% 126%
-- --- ---- ---- ---- ---- ---- ---- ----
0% 25% 50% 60% 70% 80% 90% 100% 114%
-- --- ---- ---- ---- ---- ---- ---- ----
0% 20% 40% 50% 60% 70% 80% 90% 102%
-- --- ---- ---- ---- ---- ---- ---- ----
$325.3M 0% 15% 30% 40% 50% 60% 70% 80% 90%
-- --- ---- ---- ---- ---- ---- ---- ----
- ----------------------------------------------------------------------
- -------------------------------------------------------------------------------
1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
MEETS NO - MEETS 50% - MEETS - MEETS - MEETS
OBJECTIVES OF OBJECTIVES OBJECTIVES OBJECTIVES & OBJECTIVES &
50% of ALL SUPER
SUPER GOALS GOALS
- -------------------------------------------------------------------------------
PERFORMANCE RATINGS
- -------------------------------------------------------------------------------
EXAMPLE: DETERMINING BCMP'S TOTAL INCENTIVE AWARD
Let's look at a few examples to see how to apply the Incentive Award Table.
EXAMPLE A: Assume that BWHLLC's 2000 EBITDA Target of $406.6 million is met
exactly. The company is then evaluated based on its objectives and receives a
3.0 rating. Using the chart, the total award from the Incentive Plan would be
100% of the Target Award.
EXAMPLE B: Now let's say that BWHLLC exceeds the EBITDA Target by achieving
$439.2 million in 2000. Remember that the swing has been set at $81.3 million,
creating plus or minus increments of $16.3 million. Again using the table, the
$32.6 million EBITDA achievement over Target ($439.2 - $406.6) elevates the
award exactly two rows above the Target EBITDA. The company's 3.0 rating would
result in a total award of 140% of the Target Award.
103
STEP 3. DETERMINE YOUR INDIVIDUAL PERFORMANCE RATING AND AWARD
After the end of the year, you should provide a self-assessment of your
performance against objectives to your manager. Your manager will consider this
input in reaching an overall performance rating for you. Achieving super goals
or exceptional performance may substantially raise performance ratings. Rating
performance is not an exact science; the process does require judgment.
Your overall performance rating will be compared to the Incentive Award table to
determine your individual incentive award. Remember that the overall financial
performance continues to determine which row of the table is used. The total of
individual awards may not exceed the total BCMP award pool created by the
combination of BWHLLC financial performance and BCMP's overall performance
against objectives.
It's recognized that managers may be inconsistent in their ratings and planned
objectives may not always be aligned. BCMP partners will review individual
associate ratings across departments prior to submission to the Board of
Directors to ensure consistency and relative fairness.
EXAMPLE: DETERMINING YOUR INDIVIDUAL AWARD
Assume that as an Analyst with a base salary of $40,000 with a 10% target, your
Target Award is $4,000. Using Example A, Target EBITDA is met, and BCMP
receives a 3.0 rating to receive 100% of the Target Award. Your individual
rating is 4.0, so your Incentive Target Award is $4,800 (120% of your Target
Award from the table).
Using Example B, BWHLLC financial performance exceeds EBITDA Target with a BCMP
performance against objectives rating of 3.0 which generates a pool of 140% of
target. Your individual rating is 4.0 and by using the chart your award is 160%
or $6,400 total payments may not exceed the available pool.
LEAVING THE PLAN
IF YOU LEAVE THE BORDEN FAMILY OF COMPANIES
The Incentive Plan is designed to award associates who are contributing to the
success of BW Holdings, LLC. You must be actively employed within the Borden
Family of Companies on December 31 to be eligible for an award earned during
that year. If your employment ends for reason other than transfer to another
Borden Family Company or retirement, death or disability, you will no longer be
eligible for Incentive Awards.
IF YOU RETIRE, DIE OR BECOME DISABLED
If you retire at or after age 55 with at least 10 years of service, die or
become disabled, you (or your beneficiary) will receive a cash payment equal to
your Incentive Award for the year pro-rated for the number of months you worked.
This payment will be made after the end of the year in which your employment
ends.
IF YOU TRANSFER
If you transfer to another company within the Borden Family and are actively
employed at the end of the year, you will receive a cash payment equal to your
Incentive Award for the year prorated for the number of months you worked at
BCMP.
104
TAXES
Payments from the Incentive Plan are treated as regular income. The company
will withhold regular income tax and the payment will appear on your Form W-2.
You may want to speak to your tax advisor regarding the tax implications of the
Incentive Plan.
FOCUS ON PERFORMANCE
With the Incentive Plan, all BCMP associates have a mechanism in place that can
truly reward a job well done. What you need to do every day - for yourself and
the company - is to focus on increasing EBITDA and achieving your individual
performance objectives.
Keep in mind, the Incentive Plan does NOT replace your regular salary review and
recommended increases; it is a means to turn a solid performance on the job into
a cash bonus in addition to those increases. The evaluation of your performance
against your individual performance objectives is an important process not only
for the Incentive Plan, but also as part of your July competency evaluation and
base salary review.
If you have any questions about the Incentive Plan, please speak to your Human
Resources representative.
ALL INCENTIVE PLAN PAYMENTS ARE SUBJECT TO DISCRETION. Notwithstanding the
attainment of financial results or part or all of performance objectives, all
awards under the Incentive Plan are subject to the approval of the CEO and the
Borden, Inc. Board of Directors.
The company expects and intends to continue this Plan indefinitely but reserves
the right to end or amend it at any time.
This document is intended to summarize the Incentive Plan for eligible
associates of Borden Capital Management Partners, and it does not attempt to
cover every detail. For complete details, please refer to the official Plan
Document which governs the Plan. To obtain a copy of the Plan Document, contact
your Human Resources representative. Every attempt has been made to ensure that
all information presented here is accurate, however, if there are any
discrepancies between this document and the official Plan Document, the official
Plan Document will govern.
105
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-57577 of Borden, Inc. on Form S-3 of our reports for each of Borden, Inc.,
Borden, Inc. and Affiliates, and Borden Foods Holdings Corporation each dated
February 9, 2001, appearing in this Annual Report on Form 10-K of Borden, Inc.
for the year ended December 31, 2000.
DELOITTE & TOUCHE LLP
Columbus, Ohio
March 30, 2001
106
BORDEN FOODS HOLDINGS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2000 AND 1999
AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2000
BFH1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
And Shareholder of Borden Foods Holdings Corporation
We have audited the accompanying consolidated balance sheets of Borden Foods
Holdings Corporation and subsidiaries (a wholly owned subsidiary of Borden Foods
Holdings, LLC) as of December 31, 2000 and 1999, and the related consolidated
statements of operations, shareholder's equity and cash flows for each of the
three years in the period ended December 31, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Borden Foods Holdings Corporation
and subsidiaries at December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.
DELOITTE & TOUCHE LLP
Columbus, Ohio
February 9, 2001
BFH2
- -----------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
BORDEN FOODS HOLDINGS CORPORATION
(In thousands, except per share and share amounts) Year ended December 31,
2000 1999 1998
- -----------------------------------------------------------------------------------------------
Net sales $ 570,659 $547,934 $ 706,088
Cost of goods sold 284,671 264,012 393,062
---------- --------- ----------
Gross margin 285,988 283,922 313,026
---------- --------- ----------
Distribution expense 44,030 42,650 44,947
Marketing expense 214,935 198,693 211,430
General & administrative expense 67,656 51,959 69,185
Gain on divestiture of businesses (4,848) (46,938) (243,845)
Business realignment expense 5,737 - 9,003
---------- --------- ----------
Operating income (loss) (41,522) 37,558 222,306
---------- --------- ----------
Interest expense 233 486 2,475
Interest income (16,496) (15,820) (20,293)
Other (income) expense, net - (332) 2,013
---------- --------- ----------
Income (loss) before income taxes and cumulative
effect of accounting change (25,259) 53,224 238,111
Income tax expense 5,529 11,050 54,175
---------- --------- ----------
Income (loss) before cumulative effect of accounting change (30,788) 42,174 183,936
Cumulative effect of accounting change, net of tax - (2,806) -
---------- --------- ----------
Net income (loss) (30,788) 39,368 183,936
Affiliate's share of income (66) (5,098) (142,033)
---------- --------- ----------
Net income (loss) applicable to common shares $ (30,854) $ 34,270 $ 41,903
========== ========= ==========
Per Share Data
- --------------
Basic and diluted earnings (loss) per common share
before cumulative effect of accounting change $(308,540) $370,760 $ 419,030
Cumulative effect of accounting change per common share - (28,060) -
---------- --------- ----------
Net basic and diluted earnings (loss) per common share $(308,540) $342,700 $ 419,030
========== ========= ==========
Average number of common shares outstanding
during the year 100 100 100
- -----------------------------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements.
BFH3
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
BORDEN FOODS HOLDINGS CORPORATION
(In thousands)
December 31,
ASSETS 2000 1999
- --------------------------------------------------------------------------------
CURRENT ASSETS
Cash and equivalents $ 222,374 $ 266,825
Accounts receivable (less allowance for doubtful
accounts of $787 and $1,317, respectively) 51,126 55,201
Inventories:
Finished and in-process goods 46,531 48,066
Raw materials and supplies 28,608 30,089
Deferred income taxes 9,584 15,383
Other current assets 8,243 11,793
--------- ---------
366,466 427,357
OTHER ASSETS 7,461 10,819
PROPERTY AND EQUIPMENT
Land 9,586 9,542
Buildings 43,362 41,790
Machinery and equipment 224,937 189,652
--------- ---------
277,885 240,984
Less accumulated depreciation (88,062) (64,462)
--------- ---------
189,823 176,522
INTANGIBLES, NET
Goodwill 10,692 11,006
Trademarks and other intangibles 105,464 108,496
--------- ---------
116,156 119,502
--------- ---------
TOTAL ASSETS $ 679,906 $ 734,200
========= =========
See accompanying Notes to the Consolidated Financial Statements.
BFH4
- ----------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
BORDEN FOODS HOLDINGS CORPORATION
(In thousands, except per share and share amounts)
December 31,
LIABILITIES AND SHAREHOLDER'S EQUITY 2000 1999
- ----------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts and drafts payable $ 39,823 $ 46,858
Accrued customer allowances 12,093 17,781
Income taxes payable 8,000 11,640
Current maturities of long-term debt 369 346
Current obligations under capital lease 252 -
Loans due to affiliates 3,029 2,513
Other current liabilities 27,817 46,845
-------- --------
91,383 125,983
OTHER LIABILITIES
Long-term debt 2,529 3,033
Long-term obligations under capital lease 2,770 -
Deferred income taxes 6,203 34,585
Other long-term liabilities 56,609 36,314
-------- --------
68,111 73,932
COMMITMENTS AND CONTINGENCIES (SEE NOTE 16)
SHAREHOLDER'S EQUITY
Common stock - $0.01 par value; 100 shares
authorized, issued, and outstanding - -
Paid in capital 423,104 405,817
Shareholder's investment in affiliates 66,338 66,272
Retained earnings 34,470 65,324
Accumulated translation adjustments (3,500) (3,128)
-------- --------
520,412 534,285
-------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $679,906 $734,200
======== ========
- -------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements.
BFH5
- -----------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
BORDEN FOODS HOLDINGS CORPORATION
(In thousands) Year ended December 31,
2000 1999 1998
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income (loss) $ (30,788) $ 39,368 $ 183,936
Adjustments to reconcile net income (loss) to
net cash from (used in) operating activities:
Depreciation 27,599 17,614 13,422
Amortization 3,606 3,754 3,887
Deferred tax (benefit) expense (5,295) 19,387 11,301
Gain on divestiture of businesses (4,848) (46,938) (243,845)
Business realignment expense 5,737 - 9,003
Net change in assets and liabilities:
Trade receivables 4,075 (7,862) 49,564
Inventories 3,016 (14,111) 21,394
Trade payables (7,035) (8,989) (16,600)
Accrued customer allowances (5,688) (1,819) (11,006)
Current tax payable (3,640) 6,183 (24,912)
Other current assets and liabilities (11,991) (17,602) (70,653)
Other long-term assets and liabilities 22,444 11,734 (6,927)
Other, net 4,859 (180) 7,248
----------- --------- ----------
2,051 539 (74,188)
----------- --------- ----------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES
Capital expenditures (46,781) (58,190) (37,952)
Proceeds from the sale of fixed assets 161 4,466 15,852
Proceeds from the divestiture of businesses - 23,571 733,226
----------- --------- ----------
(46,620) (30,153) 711,126
----------- --------- ----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net short-term debt payments (346) (6,178) (15,263)
Proceeds (repayment) of loans due to affiliates 516 2,513 (27,914)
Repayment of long-term debt due to affiliates - - (47,616)
Repayment of long-term debt (16) - (2,572)
Repayment of capital lease obligations (36) - -
Distribution to affiliate - - (272,205)
----------- --------- ----------
118 (3,665) (365,570)
----------- --------- ----------
(DECREASE) INCREASE IN CASH AND EQUIVALENTS (44,451) (33,279) 271,368
CASH AND EQUIVALENTS AT BEGINNING
OF YEAR 266,825 300,104 28,736
----------- --------- ----------
CASH AND EQUIVALENTS AT END
OF YEAR $ 222,374 $266,825 $ 300,104
=========== ========= ==========
See accompanying Notes to the Consolidated Financial Statements.
BFH6
- ---------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
BORDEN FOODS HOLDINGS CORPORATION
(In thousands) For the year ended December 31,
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest $ 172 $ 493 $ 3,619
Income taxes, net of refunds (1,268) (25,264) 67,614
- ---------------------------------------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements.
BFH7
- -----------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
BORDEN FOODS HOLDINGS CORPORATION
(In thousands)
----------------------------------------------------------------------
Shareholder's Retained Accumulated
Paid in Investment Earnings Translation
Capital in Affiliates (Deficit) Adjustments Total
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 401,057 $ 203,297 $ (10,849) $ (43,639) $ 549,866
- -----------------------------------------------------------------------------------------------------------------
Net income 183,936 183,936
Foreign currency translation adjustments (4,409) (4,409)
Reclassification adjustment 39,942 39,942
--------------
COMPREHENSIVE INCOME $ 219,469
==============
Reallocation of consideration to BFC
from Investment LP 12,301 (12,301) -
Affiliate's share of income 142,033 (142,033) -
Distribution to affiliate (272,205) (272,205)
Decrease in tax basis related to adjustment
of purchase price allocation (24,314) (24,314)
Contribution from affiliate 1,944 1,944
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 390,988 $ 60,824 $ 31,054 $ (8,106) $ 474,760
- -----------------------------------------------------------------------------------------------------------------
Net income 39,368 39,368
Foreign currency translation adjustments 4,696 4,696
Reclassification adjustment 282 282
---------------
COMPREHENSIVE INCOME $ 44,346
===============
Affiliate's share of income 5,098 (5,098) -
Increase in tax basis related to adjustment
of purchase price allocation and other 14,829 350 15,179
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 405,817 $ 66,272 $ 65,324 $ (3,128) $ 534,285
- -----------------------------------------------------------------------------------------------------------------
Net loss (30,788) (30,788)
Foreign currency translation adjustments (372) (372)
---------------
COMPREHENSIVE INCOME $ (31,160)
===============
Affiliate's share of income 66 (66) -
Increase in tax basis related to adjustment
of purchase price allocation 17,287 17,287
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $ 423,104 $ 66,338 $ 34,470 $ (3,500) $ 520,412
- -----------------------------------------------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements.
BFH8
BORDEN FOODS HOLDINGS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
1. BACKGROUND AND BASIS OF PRESENTATION
In 1994, Borden, Inc. ("Borden") entered into an agreement providing for the
acquisition ("Acquisition") of all of Borden's outstanding common stock by
affiliates of Kohlberg Kravis Roberts & Co. ("KKR"). The Acquisition was
completed on March 14, 1995. Borden, a public registrant as a result of public
debt that was outstanding prior to the Acquisition, elected not to apply push
down accounting in its consolidated financial statements and, as such, Borden's
consolidated and combined financial statements are reported on Borden's
historical cost basis. The accompanying consolidated financial statements have
been prepared on a purchase accounting basis from the date of KKR's acquisition
of Borden, and include the accounts of all majority-owned subsidiaries including
Borden Foods Corporation ("BFC") and BFC Investments, LP (the "Investment LP").
All significant intercompany transactions have been eliminated.
In 1996, Borden, in a taxable transaction, sold certain food businesses and
certain trademarks to Borden Foods Holdings Corporation ("Foods Holdings" or the
"Company"). The purchase price was based on a third party valuation. There was
no change in the book basis of assets and liabilities because the sale was
between related parties and Borden's principal stockholders will continue to
control the Company. Within the terms of the sale, Foods Holdings has fully and
unconditionally guaranteed obligations under Borden's Credit Agreement and all
of Borden's publicly held debt on a pari passu basis (see Note 9). As a result
of this financial guarantee and in accordance with Regulation S-X rule 3-10,
Borden is required to include in its filings with the Securities and Exchange
Commission separate financial statements for Foods Holdings as if it were a
registrant.
Foods Holdings, a wholly owned subsidiary of Borden Foods Holdings, LLC ("LLC"),
owns approximately 98% of BFC; the remaining interest in BFC is owned directly
by the LLC. In connection with the formation of Foods Holdings, the LLC
transferred notes to Foods Holdings in exchange for 100 shares of common stock.
Foods Holdings used the notes to acquire a 98% interest in BFC. LLC directly
contributed cash to BFC in exchange for the remaining 2% interest in BFC.
In a series of transactions in 1996 and 1997, BFC purchased a majority interest
in Investment LP and LLC acquired the remaining minority interest in Investment
LP. At such time, Investment LP transferred certain consideration to Borden in
exchange for Foods' trademarks. The portion of BFC and Investment LP directly
owned by LLC is recorded in Shareholder's Investment in Affiliates.
2. NATURE OF OPERATIONS
The Company is a leading producer and marketer of a variety of food products
worldwide, including pasta, pasta sauce, bouillon, dry soups and shelf stable
meals. At December 31, 2000, the Company's operations included 8 production
facilities, 4 of which are located in the United States. The remaining
facilities are located in Canada and Italy.
BFH9
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Significant estimates in
the accompanying financial statements are the accruals for trade and consumer
promotions, reserves for expenses on businesses sold, allocation of tax basis
between Investment LP and the Company, litigation, general insurance
liabilities, and employee benefit plan liabilities. Actual results could differ
from those estimates.
REVENUE RECOGNITION - Net sales are recognized when products are shipped and
title transfers to customers. Reserves for estimated returns, allowances,
consumer discounts and trade discounts are established when revenues are
recognized.
SHIPPING AND HANDLING - Shipping costs are incurred to physically move the
Company's products from the production or storage facility to the customer.
Handling costs are incurred from the point the products are removed from
inventory until they are provided to the shipper and generally include costs to
store, move and prepare the products for shipment. The Company incurred
shipping costs of $16,414, $14,492 and $15,713 in 2000, 1999 and 1998,
respectively. Due to the nature of the Company's operations, handling costs
incurred prior to shipment are not significant. These costs are classified as
distribution expense in the Consolidated Statement of Operations.
ADVERTISING AND PROMOTION COSTS - Production costs of future media advertising
are expensed on the first air-date or print release date of the advertising.
All other advertising costs are charged to marketing expense as incurred.
Advertising costs were $21,497, $14,156 and $10,130 in 2000, 1999 and 1998,
respectively. Promotion costs are generally expensed when the related products
are shipped. Promotion costs with written contracts are expensed over the life
of the contract in accordance with performance measures. Promotion expense was
$151,023, $142,829 and $152,037 in 2000, 1999 and 1998, respectively.
RESEARCH AND DEVELOPMENT COSTS - Significant funds are committed to the research
and development of new, innovative products that are expected to contribute to
operating profits in future years. All costs associated with research and
development are charged to expense as incurred. Research and development costs
were $18,725, $19,235 and $18,643 in 2000, 1999 and 1998, respectively.
CASH AND EQUIVALENTS - Cash and equivalents consist of highly liquid investments
purchased with an original maturity of three months or less. Included in cash
equivalents are overnight investments with Borden (see Note 7).
INVENTORIES - Inventories are stated at the lower of cost or market with cost
being determined using the average cost and first-in, first-out methods.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost and, where
appropriate, include capitalized interest during construction. Depreciation is
recorded on the straight-line basis over useful lives ranging from 3 to 10 years
for machinery and equipment and 30 years for buildings and improvements. Major
renewals and betterments are capitalized. Maintenance, repairs and minor
renewals are expensed when incurred.
BFH10
INTANGIBLES - The excess of purchase price over the value of net tangible assets
of businesses acquired is carried as intangibles in the consolidated balance
sheets. Goodwill is amortized on a straight-line basis over not more than 40
years, while trademarks and patents are amortized on a straight-line basis over
the shorter of their legal or useful lives. Accumulated amortization of
intangibles was $21,230 and $17,624 at December 31, 2000 and 1999, respectively.
IMPAIRMENT - The Company periodically evaluates the recoverability of property,
equipment and intangibles by assessing whether the net book value of the assets
can be recovered through expected future cash flows (undiscounted and before
interest) of the underlying business. The amount of impairment loss is measured
as the difference between the net book value of the assets and the estimated
fair value of the related assets.
INCOME TAXES - Income taxes are accounted for using the liability method in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109
"Accounting for Income Taxes". Deferred income taxes are recorded to recognize
the future effects of temporary differences which arise between financial
statement assets and liabilities and their bases for income tax reporting
purposes. Taxes related to foreign operations have been provided for in
accordance with SFAS No. 109.
FOREIGN CURRENCY TRANSLATIONS - The local currency is the functional currency
for international subsidiaries and, as such, assets and liabilities are
translated at the exchange rates in effect at the balance sheet date. Income
and expenses are translated at average exchange rates prevailing during the
year. Translation adjustments resulting from changes in exchange rates are
reported as a separate component of shareholder's equity. The Company realized
net foreign exchange losses of $197 and $1,773 in 2000 and 1998, respectively,
and a net foreign exchange gain of $1,820 in 1999.
RECLASSIFICATION ADJUSTMENTS WITHIN COMPREHENSIVE INCOME - Adjustments shall be
made to reflect comprehensive income items that are included in net income
during the current period. The reclassification adjustments represent the
accumulated translation adjustment recognized on the sale of Denmark Foods in
1999 and on the sale of KLIM and Belgium Foods businesses in 1998.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company uses foreign exchange forward
contracts to reduce its exposure to market risks from changes in foreign
exchange rates. In accordance with current accounting standards, gains and
losses arising from forward contracts that hedge future transactions are
deferred until the related transactions occur. Those arising from forward
contracts that hedge existing transactions (i.e., outstanding payables
denominated in foreign currency), are recorded currently in income and offset
the gains and losses that occur as exchange rates change. The Company does not
hold or issue derivatives for speculative trading purposes.
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of temporary
cash investments, marketable securities, and accounts receivable. The Company
places its temporary cash investments with Borden and its affiliates.
Concentrations of credit risk with respect to accounts receivable are limited,
due to the large number of customers comprising the Company's customer base and
their dispersion across many different industries and geographies. The Company
generally does not require collateral or other security to support customer
receivables.
UNITS AND UNIT APPRECIATION RIGHTS ("UAR") - The Financial Accounting Standards
Board ("FASB") issued SFAS No. 123, "Accounting for Stock-Based Compensation,"
which was adopted for disclosure only. As permitted by SFAS No. 123, the
Company will continue to apply its current accounting policy of the intrinsic
value method under Accounting Principles Board Opinion No. 25 and will include
the additional disclosures required by SFAS No. 123.
BFH11
PER SHARE INFORMATION - Basic and diluted earnings or loss per common share is
computed by dividing net income or loss by the weighted average number of common
shares outstanding during the year.
RECENTLY ISSUED ACCOUNTING STATEMENTS - In 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measures
those instruments at fair value. If certain conditions are met, a derivative
may be specifically designated as a hedge. The accounting for change in fair
value of a derivative depends on the intended use of the derivative and the
resulting designation. If the derivative is designated as a fair value hedge,
the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized in earnings. If the derivative
is designated as a cash flow hedge, the effective portions of changes in the
fair value of the derivative are recorded as an adjustment in Shareholder's
Equity through comprehensive income and are recognized in the income statement
when the hedged item affects earnings. In 1999, FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." This statement deferred the
effective date of SFAS No. 133 to the Company's fiscal quarters and fiscal years
beginning January 1, 2001. The Company adopted SFAS No. 133 effective January
1, 2001 and recorded a pre-tax transition adjustment of $380 in other expense
for marking foreign exchange forward contracts to fair value (see Note 14). The
Company elected not to apply hedge accounting to these contracts because they
are marked to market through earnings at the same time that the exposed assets
and liabilities are remeasured through earnings.
In 1998, the American Institute of Certified Public Accountants issued Statement
of Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidance on the capitalization of
costs incurred for computer software developed or obtained for internal use.
The Company adopted SOP 98-1 on a prospective basis as of January 1, 1999, with
an estimated impact of approximately $1,325 in costs being capitalized in 1999
that would have been expensed prior to adoption.
Also in 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities."
SOP 98-5 requires the costs of opening a new facility, introducing a new product
or service, conducting business in a new market, or similar start-up activities
be expensed as incurred. Amounts previously capitalized are to be expensed and
reported as a cumulative effect of a change in accounting principle in the year
of adoption. Accordingly, the Company adopted SOP 98-5 in 1999 and reported a
charge of $2,806 (net of tax benefit of $1,794) to write-off amounts previously
capitalized.
In 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition", which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. The Company adopted SAB No. 101 as of December 31, 2000 with
no significant impact on the consolidated financial statements.
In 2000, the Emerging Issues Task Force ("EITF") reached a consensus on Issue
No. 00-14, "Accounting for Certain Sales Incentives", which addresses the
recognition, measurement and income statement classification for sales
incentives offered to customers. Although this EITF is not effective until June
30, 2001, registrants who do not elect to adopt early are subject to the
disclosure requirements as of December 31, 2000. Upon adoption, certain
promotion costs of $79,976, $72,449 and $80,546 for the years ended 2000, 1999
and 1998, respectively, will be reclassified from marketing expense to net
sales. The Company will continue recognizing a liability for sales incentives
at the later of the date at which the related revenue is recorded or the date at
which the sales incentive is offered in compliance with the consensus reached on
this Issue.
BFH12
RECLASSIFICATION - Certain prior year amounts have been reclassified to conform
to the 2000 presentation.
4. BUSINESS REALIGNMENT
Restructuring of Aligned Businesses
- --------------------------------------
Prior to 1998, the Company recorded pre-tax charges, primarily for severance,
pension settlements and other employee related benefits, for the closure of
certain pasta plants. In 1998, the loss was decreased by $2,646, as net
proceeds from the sale of facilities were greater than previously estimated.
The sale of these facilities, as well as the machinery and equipment, generated
proceeds of $2,424 and $15,892 in 1999 and 1998, respectively.
In 1998, the Company announced the closing of the Tolleson, Arizona pasta plant
due to the consolidation of production into other pasta facilities and recorded
pre-tax charges of $16,300. These charges included (a) $8,195 non-cash charge
to write down the facility to its net realizable value, (b) $6,118 fair market
value adjustment of an inventory purchase commitment (recorded in cost of goods
sold), and (c) $1,987 for severance, pension settlements and other employee
related benefits. No reserve amounts remained in other current liabilities as
December 31, 1999.
In 2000, the Company recorded charges of $5,737 to implement a workforce
reduction plan. The workforce reduction plan was put into place to take
advantage of the efficiencies generated from the implementation of
enterprise-wide information technology systems in 1999 and work process
redesign. The plan is expected to reduce ongoing general and administrative
expenses and plant overhead costs. As of December 31, 2000, reserves of $3,737
primarily for severance remained in other current liabilities.
Divested Unaligned Businesses
- -------------------------------
Prior to 1998, the Company announced its intention to sell certain businesses,
which were not considered to be aligned with its grain-based meal solution
strategy. Among the unaligned businesses were the milk powder, sweetened
condensed milk, reconstituted lemon juice, candy popcorn and processed cheese
businesses.
On December 31, 1997, the Company completed the sale of the domestic Cracker
Jack candy popcorn business to Recot, Inc., a subsidiary of Frito-Lay which is a
Texas based unit of PepsiCo, Inc., and the domestic FunCheese business to
Mid-America Dairymen, Inc., a dairy marketing co-op headquartered in Missouri.
On January 24, 1998, the Company completed the sale of the Signature Flavor
business to Eagle Family Foods, Inc. a newly formed entity managed by GE
Investments and Warburg, Pincus & Co. LLC. Signature Flavor grocery brands
included Eagle Brand, Cremora, ReaLemon, Kava, and None Such.
On February 12, 1998, the Company completed the sale of the KLIM business,
including the KLIM milk powder business in Latin America and Asia, the non-dairy
coffee creamer operations in South Africa and the ice cream business in Puerto
Rico, to Nestle, S.A. An estimated after tax loss from the sale was recorded in
1997. In 1999, the Company received additional proceeds of $9,476 for working
capital settlements on the sale of KLIM, of which $8,400 was included in other
receivables as of December 31, 1998.
On May 22, 1998, the Company completed the sale of Borden Foods Puerto Rico,
Inc., a Puerto Rican foods distributor. The Company also completed the sale of
Belgium Foods to Meroso Invest N.V. on November 13, 1998.
BFH13
On April 30, 1999, the Company sold the milk powder business located in China to
Royal Numico. The Company had previously elected to exit the milk powder
business and sold significant KLIM operations, excluding China, to Nestle, S.A.
in 1998. At that time, the Company established divestiture reserves of $4,289
for costs to close operations in China, and recorded $12,794 to write-down
assets to estimated net realizable value. As a result of the sale, certain
remaining liabilities for closure costs of $3,112 were no longer required.
On July 14, 1999, the Company completed the sale of the chocolate milk business
located in Denmark.
The proceeds, gains and taxes related to the divestitures in 2000, 1999 and 1998
were as follows:
- -----------------------------------------------------------------------------
DIVESTED BUSINESS PROCEEDS PRE-TAX GAIN (LOSS)
- ----------------- -------- ------------------
1999 1998 2000 1999 1998
--------------------------------------------------
Cracker Jack & FunCheese $ 7,385
Signature Flavor $376,500 $ 4,278 209,447
KLIM $ 9,767 339,882 570 $34,549 32,700
China 7,112 10,838
Borden Foods Puerto Rico 8,844 (683)
Belgium Foods 8,000 (5,004)
Denmark Foods 6,692 1,551
--------------------------------------------------
TOTAL $ 23,571 $733,226 $ 4,848 $46,938 $243,845
--------- ---------
TAX EXPENSE (9,906) (7,831) (55,247)
----------------------------
AFTER TAX GAIN (LOSS) $(5,058) $39,107 $188,598
============================
- -----------------------------------------------------------------------------
In 2000, additional income taxes were provided for anticipated liabilities on
divestitures related to open tax years.
The unaligned businesses generated a combined operating income of $1,896 from
net sales of $11,067 in 1999 and a combined operating loss of $323 from net
sales of $119,802 in 1998.
During 1998, the Company established reserves of $134,811 for work-force
reductions, closure of facilities, selling and legal fees, contract
terminations, transition services and other costs related to the divestiture of
unaligned businesses. Of this amount, $19,317 related to non-cash charges
associated with remaining assets to be sold.
In 1999, the Company reduced current liabilities by $37,159, which included
$3,112 related to closing operations in China, for the resolution of divestiture
related severance and lower than expected exit costs. The Company also reduced
current liabilities by $4,848 in 2000 due to lower than expected exit costs.
BFH14
Activities related to divestiture reserves during 2000 and 1999, which were
recorded as other current liabilities and other long-term liabilities, were as
follows:
- --------------------------------------------------------------------------------------------
Business & Selling,
Work-Force Contractual Legal &
Reductions(1) Obligations(2) Other(3) TOTAL
----------------------------------------------------------
Balance at December 31, 1998 $7,110 $35,071 $19,711 $61,892
Utilized (3,529) (4,608) (5,638) (13,775)
Other(4) (2,230) (22,193) (12,736) (37,159)
----------------------------------------------------------
Balance at December 31, 1999 $1,351 $8,270 $1,337 $10,958
Utilized (1,351) (2,199) (663) (4,213)
Other(4) - (4,217) (631) (4,848)
----------------------------------------------------------
Balance at December 31, 2000 $ - $1,854 $ 43 $1,897
==========================================================
- --------------------------------------------------------------------------------------------
(1) Includes severance and other employee related benefits.
(2) Includes charges related to the termination of leases, distributor
arrangements, and other contractual agreements.
(3) Includes selling and legal fees, facility closings, and other miscellaneous
costs.
(4) Changes in estimates.
- --------------------------------------------------------------------------------------------
5. AFFILIATE'S SHARE OF INCOME
In accordance with Investment LP's limited partnership agreement with the
Company and LLC, the first allocation of a trademark gain is to the Company's
priority return, which is a return of 10% per annum, cumulative and compounded
annually on the Company's net capital contributions. The allocation of the
remaining gain, computed on a tax basis, is 10% to the Company and 90% to LLC.
After giving effect to all special allocations specified by the partnership
agreement, net income or loss shall be allocated to the partners in proportion
to their respective percentage interests.
LLC was allocated an affiliate's share of income (see accompanying consolidated
statements of operations) of $66, $5,098 and $142,033 in 2000, 1999 and 1998,
respectively. In 1998, a $272,205 distribution of a portion of the sale
proceeds from the divestitures of the candy popcorn, domestic processed cheese,
Signature Flavor Belgium Foods and KLIM businesses was made to LLC.
6. CHANGE IN ACCOUNTING ESTIMATE
The Company reduced accruals corresponding to trade spending by approximately
$5,700 during 1998. These accruals had been provided in earlier years for
anticipated customer settlements in the ordinary course of business. Due to a
concerted effort to improve the management of trade spending, the settlements
were significantly lower than management had previously estimated. The income
recognized for the change in estimates is included in marketing expense.
BFH15
7. RELATED PARTIES
Borden and a subsidiary of Borden provide certain administrative services to the
Company at negotiated fees. These services include processing of payroll,
active and retiree group insurance claims, securing insurance coverage for
catastrophic claims, and information systems support. The Company reimburses
the Borden subsidiary for payments for general disbursements and post-employment
benefit claims. The amount owed by the Company for reimbursement of payments,
services and other costs was $211 and $789 at December 31, 2000 and 1999,
respectively.
During the first quarter of 2000, the subsidiary of Borden was sold to a third
party. The third party continues to provide services that include processing of
payroll, active and retiree group insurance claims, and securing insurance
coverage for catastrophic claims. Subsequent to the sale of the subsidiary,
fees for these services were no longer considered affiliate charges.
Also, as eligible U.S. employees are provided employee pension benefits under
the Borden domestic pension plan and can participate in the Borden retirement
savings plan, the Company provides Borden with contributions for these benefits,
certain of which are determined by Borden's actuary (see Note 12). In 2000,
Borden charged the Company $4,039 for retiree postretirement benefits associated
with certain sold or closed plants.
The following summarizes the affiliate charges and reimbursements in 2000, 1999
and 1998:
- --------------------------------------------------------
Year ended December 31,
-------------------------
2000 1999 1998
------- ------- ------
Employee benefits $8,086 $2,803 $3,365
Group and general insurance 626 4,732 4,688
Administrative services 3,983 12,151 12,984
------- ------- ------
$12,695 $19,686 $21,037
======= ======= =======
- --------------------------------------------------------
The Company performs certain administrative services on behalf of other Borden
affiliates. These services include customer service, purchasing and quality
assurance. The Company charged these affiliates $732, $765, and $1,122 for such
services in 2000, 1999 and 1998, respectively. The receivable for these
services was $146 and $972 at December 31, 2000 and 1999, respectively.
The Company invests cash with Borden. The Company's investment balance was
$206,963 and $234,550 at December 31, 2000 and 1999, respectively. The funds
are invested overnight earning a rate set by Borden that generally approximates
money market rates. The Company earned interest income of $15,001, $14,753 and
$19,423 on these funds during 2000, 1999 and 1998, respectively. Amounts
receivable for interest were $789 and $1,861 at December 31, 2000 and 1999,
respectively.
Borden continues to provide executive, financial and strategic management to the
Company for which it charges an annual fee of $1,000.
BFH16
8. DEBT
Debt outstanding at December 31, 2000 and 1999 consisted of the following:
- --------------------------------------------------------------------------------------------
2000 1999
----------------------- ---------------------
Due Due
Long- within Long- within
term one year term one year
--------- ------------- ---------- ----------
Loans due to affiliates (see Note 9) $3,029 $ 2,513
Foreign bank loans at 3% $ 195 35 $ 263 346
Industrial Revenue Bonds (non-interest bearing) 2,334 334 2,770
--------- ------------- ---------- ----------
Total debt $ 2,529 $3,398 $ 3,033 $ 2,859
========= ============= ========== ==========
- --------------------------------------------------------------------------------------------
Maturities of debt for the next five years and thereafter are as follows:
- --------------------------------------------------------------------------------------------
2001 $3,398
2002 375
2003 715
2004 719
2005 388
Thereafter 332
-------
$5,927
=======
- --------------------------------------------------------------------------------------------
9. AFFILIATED CREDIT FACILITIES
In 1999, the Company borrowed funds from LLC for use in operations. At December
31, 2000 and 1999, loans payable to LLC were $3,029 and $2,513 carrying a
variable interest rate of approximately 7.25% and 5.70%, respectively. Interest
payable to LLC was $328 and $112 as of December 31, 2000 and 1999,
respectively.
The Company had entered into consecutive loan agreements to borrow funds up to
$10,000 in 2000 and $50,000 in 1999 from Borden with a maturity date of December
31, 2000. Borrowings with three days notice and outstanding at least 30 days
incurred interest at Borden's cost of funds for 30 day LIBOR plus 0.25%. Same
day borrowings incurred interest at the prime rate. There was no outstanding
balance under the loan facility as of December 31, 2000 and 1999. The Company
did not extend the loan agreement beyond December 31, 2000. A nominal
commitment fee based on a variable rate tied to Borden's leverage was charged on
the unused portion of the loan facility.
The Company has fully and unconditionally guaranteed obligations under Borden's
Credit Agreement and all of Borden's publicly held debt on a pari passu basis.
Borden's Credit Agreement provides a line of credit up to $809,000 under a
five-year revolver maturing July 13, 2002. Borden's outstanding credit facility
and public borrowings amounted to approximately $530,530 and $547,745 at
December 31, 2000 and 1999, respectively.
In connection with this guarantee, the Company charges Borden an annual fee of
$1,050. As an affiliated guarantor, the Company's liability shall not exceed the
greater of its outstanding affiliated borrowings or 95% of its adjusted net
assets while Borden or any other obligated parties have obligations outstanding.
BFH17
The Credit Agreement, as amended, contains covenants that significantly limit or
prohibit, among other things, Borden and its affiliated guarantors and its
subsidiaries' ability to incur indebtedness, make prepayments of certain
indebtedness, pay dividends, engage in transactions with affiliates, create
liens, make changes in its business or control of the Company, sell assets,
engage in mergers and consolidations, and use proceeds from asset sales and
certain debt and equity issuances. In addition, the Credit Agreement requires
that Borden and its affiliate guarantors limit its capital expenditures to
certain specified amounts and maintain other financial ratios, including a
minimum ratio of adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation
and Amortization) to interest expense and a maximum ratio of total debt to
EBITDA.
10. LEASES
The Company leases under operating lease agreements certain buildings, forklifts
and vehicles, and subleases office space from Borden. In 2000, the Company
entered into a capital lease for certain manufacturing equipment through 2005,
with an option to renew for five more years. The Company has agreed to provide
payments based on unit production until the equipment costs are fully recovered.
Upon expiration or termination of this agreement for any cause other than for
special reasons, the Company shall pay for any unrecovered costs of equipment at
such time.
The future minimum lease payments under capital and operating leases for the
years ending December 31 are as follows:
- -----------------------------------------------------------------------------------------------------
Operating Leases
Capital Lease Affiliated Non-Affiliated
--------------- ------------ ----------------
2001 $ 475 $ 1,456 $ 803
2002 475 1,456 653
2003 475 1,185 582
2004 475 - 479
2005 475 - 382
Thereafter 3,432 - 310
--------------- ------------ ----------------
Total minimum operating
lease payments $ 5,807 $ 4,097 $ 3,209
============ ================
Less amounts representing
interest at 6.75% 2,785
---------------
Present value of future minimum
capital lease payments 3,022
Less current obligations under
capital lease 252
---------------
Long-term obligations under
capital lease $ 2,770
===============
- -----------------------------------------------------------------------------------------------------
Total rental expense for operating leases was $2,869, $4,214 and $4,232 for
2000, 1999 and 1998, respectively, which includes $1,573, $1,987 and $1,747 for
affiliated leases.
BFH18
11. INCOME TAXES
In 1996, Borden, in a taxable transaction, sold certain food businesses and
certain trademarks to the Company. There was no change in the book basis of the
assets and liabilities because the sale was between related parties and Borden's
principal stockholders will continue to control the Company. Since inception,
certain adjustments have been made to the initial capitalization and tax basis.
In 1998, the initial capitalization and tax basis was reallocated from BFC to
Investment LP, both consolidated subsidiaries, resulting in additional domestic
tax basis. The Company recognized additional basis in 1999 upon the legal
conveyance of Canadian Foods assets from a subsidiary of Borden. In 2000,
Borden's 1996/1997 IRS audit settlement resulted in additional tax basis for the
Company. However, the additional domestic tax basis resulted in an increase in
deferred tax assets and Shareholder's Equity of $7,802 for the three years ended
December 31, 2000 in accordance with Emerging Issues Task Force 94-10,
"Accounting by a Company for the Income Tax Effects of Transactions among or
with Its Shareholders under FASB Statement No. 109".
Income tax provision for the years ended December 31, 2000, 1999 and 1998,
consisted of the following:
- ----------------------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
Current:
Federal $ 9,735 $ (7,567) $ 32,675
State and local (1,250) (193) 6,167
Foreign 2,339 (577) 4,032
--------- ----------- ----------
10,824 (8,337) 42,874
--------- ----------- ----------
Deferred:
Federal $ (5,077) 13,445 10,361
State and local (315) 3,468 1,740
Foreign 97 2,474 (800)
--------- ----------- ----------
(5,295) 19,387 11,301
--------- ----------- ----------
$ 5,529 $ 11,050 $ 54,175
========= =========== ==========
- ----------------------------------------------------------------------------------------------
The domestic and foreign components of income (loss) before income taxes were as
follows:
- ----------------------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
Domestic $(30,605) $ 51,455 $ 241,604
Foreign 5,346 1,769 (3,493)
--------- ----------- ----------
Total $(25,259) $ 53,224 $ 238,111
========= =========== ==========
- ----------------------------------------------------------------------------------------------
BFH19
The following table reconciles the maximum statutory U.S. Federal income tax
rate multiplied by income (loss) before taxes to the recorded income tax
expense:
- --------------------------------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
U.S. Federal income tax expense (benefit) $ (8,841) $ 18,628 $ 83,339
State income tax expense (benefit), net of Federal (1,010) 2,129 5,140
Divestiture tax differential 8,015 (10,474) (39,304)
Foreign rate differentials 351 1,278 4,454
Other 7,014 (511) 546
------- --------- --------
Income tax expense $ 5,529 $ 11,050 $ 54,175
======== ========= ========
- --------------------------------------------------------------------------------------------------------
In 2000, additional income taxes were provided for changes in estimated
liabilities on divestitures related to open tax years and resulting from the
settlement of the 1996/1997 IRS audit. These amounts are included in
divestiture tax differential and other in the above reconciliation.
The Company had $22,209 and $8,954 recorded as other long-term liabilities for
income tax liabilities not expected to be settled within one year at December
31, 2000 and 1999, respectively.
Temporary differences, associated with the Company's assets and liabilities, are
shown in the table below. Deferred income tax assets and liabilities have been
recorded at December 31, 2000 and 1999 as follows:
- ----------------------------------------------------------------------------------------
2000 1999
---- ----
ASSETS:
Non-pension post-employment $ 2,742 $ 2,996
Coupon accrual 1,991 1,885
Divestiture reserves 740 4,347
Trademarks and other intangibles 582 -
Net operating losses - domestic 9,252 -
Net operating losses - foreign 599 4,427
Foreign tax credits 5,795 5,145
Other 2,991 7,162
-------- --------
Gross deferred tax assets 24,692 25,962
Valuation allowance (599) (4,427)
-------- --------
24,093 21,535
LIABILITIES:
Property and equipment 17,557 22,149
Trademarks and other intangibles - 16,608
Other 3,155 1,980
-------- --------
20,712 40,737
-------- --------
NET ASSET (LIABILITY) $ 3,381 $ (19,202)
======== ========
- ----------------------------------------------------------------------------------------
The Company recorded valuation allowances of $599 and $4,427 at December 31,
2000 and 1999, respectively, for the foreign net operating losses, which
expire through 2003, due to uncertainty as to whether the deferred
BFH20
tax asset is realizable. The decrease from 1999 is due to the utilization and
expiration of operating loss carryforwards relating to operations in Italy and
Ireland. The foreign tax credits expire in 2003.
12. PENSION AND OTHER BENEFIT PLANS
Most employees of the Company participate in foreign and domestic pension plans.
For most salaried employees, benefits under these plans generally are based on
compensation and credited service. For most hourly employees, benefits under
these plans are based on specified amounts per year of credited service.
Pension benefits to eligible U.S. employees are provided under the Borden
domestic pension plan to which the Company contributes. This amount is
considered to be an amount due to affiliate since Borden retains the legal
obligation for these benefits. Amounts payable by the Company for its portion
of the net pension liability were $10,862 and $8,776 as of December 31, 2000 and
1999, respectively, which were recorded in other long-term liabilities.
The Company provides certain health and life insurance benefits for eligible
domestic and Canadian retirees and their dependents. The costs of these
benefits are accrued as a form of deferred compensation earned during the period
that employees render service. Benefits are funded on a pay-as-you-go basis.
Domestic participants who are not eligible for Medicare are provided with the
same medical benefits as active employees, while those who are eligible for
Medicare are provided with supplemental benefits. Canadian participants are
provided with supplemental benefits to the national healthcare plan in Canada.
The domestic postretirement medical benefits are contributory for retirements
after 1983. The postretirement life insurance benefit is noncontributory.
The Company also provides certain post-employment benefits, primarily medical
and life insurance benefits for long-term disabled employees, to qualified
former or inactive employees. The cost of benefits provided to former or
inactive employees after employment, but before retirement, are accrued when it
is probable that a benefit will be provided. The amounts of such charges are
not considered significant.
BFH21
A reconciliation of the changes in Borden's domestic pension plan and in the
Company's Canadian and domestic postretirement plans' benefit obligations and
fair value of assets over the two-year period ended December 31, 2000, and
statements of the funded status as of December 31, 2000 and 1999 were as
follows:
- ---------------------------------------------------------------------------------------------------------
BORDEN
PENSION BENEFIT OTHER BENEFITS
----------------- ----------------
CHANGE IN BENEFIT OBLIGATION 2000 1999 2000 1999
----------- ----------- --------- ---------
Benefit obligation at beginning of year $320,663 $338,984 $8,551 $7,303
Service cost 4,123 4,317 41 15
Interest cost 22,886 21,433 856 685
Plan participants' contributions - - 334 409
Actuarial loss (gain) 7,241 (4,753) 362 1,238
Benefits paid (43,398) (41,291) (1,675) (2,174)
Acquisitions 7,395 - - -
Divestitures (22,356) - - -
Amendments and other (710) 1,973 3,329 1,075
----------------------- --------------------
Benefit obligation at end of year $295,844 $320,663 $11,798 $8,551
----------------------- --------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $376,460 $342,706 - -
Actual returns on plan assets 66,580 75,045 - -
Employer contributions - - $1,341 $1,765
Plan participants' contributions - - 334 409
Benefits paid (43,398) (41,291) (1,675) (2,174)
Acquisitions 8,056 - - -
Divestitures (25,856) - - -
----------------------- --------------------
Fair value of plan assets at end of year $381,842 $376,460 $0 $0
----------------------- --------------------
FUNDED STATUS
Funded status at end of year $85,998 $55,797 $(11,798) $(8,551)
Unrecognized net actuarial (gain) loss (71,773) (41,553) 1,368 1,021
Unrecognized prior service cost 4,135 5,314 (661) -
----------------------- --------------------
Prepaid (accrued) benefit cost at end of year $18,360 $19,558 $(11,091) $(7,530)
==================================================
- ---------------------------------------------------------------------------------------------------------
The Borden domestic pension plan had an actuarial loss in 2000 due to early
settlements of the discounted liability and a change in actuarial assumptions
relating to future lump sum settlements.
BFH22
The assumptions used in the measurement of the benefit obligations of Borden for
the domestic pension plan and of the Company for the Canadian and domestic
postretirement plans were as follows:
- -------------------------------------------------------------------------------------------------------------------
BORDEN
PENSION BENEFIT OTHER BENEFITS
----------------- ---------------
WEIGHTED AVERAGE ASSUMPTIONS AS
OF DECEMBER 31, 2000 1999 2000 1999
----------- ----------- --------- ----------
Discount rate 7.75% 7.75% 7.75% (6.75% Cdn) 7.75% (6.75% Cdn)
Expected rate of return on plan assets 8.75% 8.75% NA NA
Rate of compensation increase 4.75% 4.75% 4.75% (3.75% Cdn) 4.75% (3.75% Cdn)
- -------------------------------------------------------------------------------------------------------------------
For measurement purposes, health care costs are assumed to increase 5.75% for
pre-65 benefits and increase 9.25% in 2001 grading down gradually to a constant
level 5.75% annual increase for post-65 benefits by 2008.
The components of net periodic benefit costs for the Borden domestic pension
plan and the Company's Canadian and domestic postretirement plans provided for
the years ended December 31, 2000, 1999 and 1998 were as follows:
- --------------------------------------------------------------------------------------------------------------
BORDEN
PENSION BENEFIT OTHER BENEFITS
--------------- --------------
COMPONENTS OF NET PERIODIC BENEFIT COST 2000 1999 1998 2000 1999 1998
-------- --------- --------- ------- --------- -------
Service cost $4,123 $4,317 $5,623 $ 50 $ 15 $ 15
Interest cost 22,886 21,433 24,269 878 685 744
Expected return on plan assets (26,267) (27,309) (26,693) - - -
Amortization of prior service cost 455 391 281 - - -
Recognized net actuarial loss (gain) - - - 16 - 43
Settlement / Curtailment loss (gain) 14 - (1,419) - - (147)
Other - - - - 1,160 -
----------------------------- ---------------------------
Net periodic benefit cost $1,211 $(1,168) $2,061 $ 944 $1,860 $ 655
============================= ===========================
- --------------------------------------------------------------------------------------------------------------
Amounts charged to the Company for participation in the Borden domestic pension
plan are actuarially determined and were $2,177, $1,243 and $855 (including a
curtailment gain of $905 due to the divestiture of the Signature Flavor
business) for the years ended December 31, 2000, 1999 and 1998, respectively.
BFH23
Assumed health care cost trend rates have a significant effect on the amounts
reported for health care plans. A 1% change in the assumed health care cost
trend rates would have the following effects:
- --------------------------------------------------------------------------------------------------------
1% INCREASE 1% DECREASE
-------------- ------------
Effect on total service cost and interest cost components of
net periodic health care benefit $ 42 $ (38)
Effect on the health care component of the accumulated
benefit obligation 691 (623)
- --------------------------------------------------------------------------------------------------------
Certain employees of the Company participate in a Canadian pension plan. A
reconciliation of the changes in the Canadian pension plan's benefit obligations
and fair value of assets over the two-year period ended December 31, 2000, and
statements of the funded status as of December 31, 2000 and 1999 were as
follows:
- --------------------------------------------------------------------------------------------
CANADIAN
PENSION BENEFIT
-----------------
CHANGE IN BENEFIT OBLIGATION 2000 1999
---------- --------
Benefit obligation at beginning of year $20,530 $20,980
Service cost 370 327
Interest cost 1,263 976
Actuarial gain (1,036) (1,608)
Benefits paid (1,753) (1,275)
Amendments - 58
Adjustment for change in exchange rates (915) 1,072
-----------------------
Benefit obligation at end of year $18,459 $20,530
-----------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $25,088 $23,526
Actual returns on plan assets 4,923 539
Benefits paid (1,753) (1,275)
Employer contributions 322 1,095
Adjustment for change in exchange rates (1,251) 1,203
-----------------------
Fair value of plan assets at end of year $27,329 $25,088
-----------------------
FUNDED STATUS
Funded status at end of year $8,870 $4,558
Unrecognized net actuarial (gain) loss (2,214) 1,870
Unrecognized prior service cost 50 5
-----------------------
Prepaid benefit cost at end of year $6,706 $6,433
=======================
- --------------------------------------------------------------------------------------------
BFH24
The assumptions used in the measurement of the Company's benefit obligation for
the Canadian pension plan were as follows:
- -------------------------------------------------------------------------------------------
CANADIAN
PENSION BENEFIT
----------------
WEIGHTED AVERAGE ASSUMPTIONS AS OF
DECEMBER 31, 2000 1999
----------- ---------
Discount rate 6.75% 6.75%
Expected rate of return on plan assets 7.75% 7.75%
Rate of compensation increase 3.75% 3.75%
- -------------------------------------------------------------------------------------------
The components of net periodic benefit costs for the Company's Canadian pension
plan for the years ended December 31, 2000, 1999 and 1998 were as follows:
- -----------------------------------------------------------------------------------------------------
CANADIAN
PENSION BENEFIT
-----------------
COMPONENTS OF NET PERIODIC BENEFIT 2000 1999 1998
---------- --------- --------
Service cost $ 370 $ 437 $ 369
Interest cost 1,263 1,302 1,090
Expected return on plan assets (1,899) (1,918) (1,676)
Amortization of prior service cost 6 6 1
---------- ---------- ---------
Net periodic benefit $ (260) $ (173) $ (216)
=======================================
- -----------------------------------------------------------------------------------------------------
Certain employees of the Company participate in other international pension
plans. These other international pension plans have not been included in the
notes to the consolidated financial statements as they are not significant.
Most employees not covered by one of the above plans are covered by collectively
bargained agreements, which are generally effective for five years. Under
federal pension law, there would be continuing liability to these pension trusts
if Borden or the Company ceased all or most participation in such trusts, and
under certain other specified conditions. Charges to the Company for payments
to pension trusts on behalf of employees not covered by Borden plans were not
considered significant.
The Company has certain other benefit and severance plans that are accrued when
payment is probable that a benefit will be provided and amounts can be
reasonably estimated.
13. RETIREMENT SAVINGS PLAN
Eligible salaried and hourly non-bargaining U.S. employees of the Company
may contribute to a Borden sponsored retirement savings plan. The
Company provides a 50% matching contribution up to 5% of an
BFH25
employee's pay (7% for certain longer service salaried employees). Amounts
incurred by the Company for matching contributions were $1,063, $1,125 and
$1,522 for the years ended December 31, 2000, 1999 and 1998, respectively.
14. FINANCIAL INSTRUMENTS
Due to its foreign operations, the Company is exposed to foreign exchange risk
on transactions, which are denominated in a currency other than the operating
unit's functional currency. To reduce this exposure, the Company closely
monitors its foreign currency cash flow transactions and enters into foreign
exchange forward contracts, whenever economically feasible, to buy and sell
foreign currencies to protect the U.S. dollar value of such transactions, to the
extent of the amount under contract.
The unsecured forward contracts mature within 12 months and are executed, by an
affiliate, with banks. The Company is exposed to credit loss in the event of
non-performance by the other parties to the contracts. The Company evaluates
the creditworthiness of the counterparties' financial condition and does not
expect default by the counterparties.
The following table presents the notional amount and fair value, based on dealer
quotes, of the Company's outstanding foreign exchange forward contracts at
December 31, 2000 and 1999. The fair value of a these forward contracts is the
amount at which the financial instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
The carrying amounts of cash and cash equivalents, accounts receivable and
payable, accrued liabilities and debt are considered reasonable estimates of
their fair values.
- -----------------------------------------------------------------------------------------------------
2000 1999
-------------------- ----------------------
Notional Fair Notional Fair
Amount Value Amount Value
---------- --------- ---------- --------
DERIVATIVES RELATING TO:
Foreign currency contracts - gains $14,136 $ 94
Foreign currency contracts - losses $ 6,892 $ (380)
---------- --------- ---------- --------
$ 6,892 $ (380) $14,136 $ 94
========== ========= ========== ========
- -----------------------------------------------------------------------------------------------------
As discussed in Note 9, the Company guarantees obligations under Borden's Credit
Agreement and all of Borden's outstanding publicly held debt on a pari passu
basis. Management does not expect these guarantees to have a significant
adverse effect on the financial position of the Company. Fair value was not
assigned to these guarantees due to the complexity of the arrangements and the
absence of the expected funding and market for these financial instruments.
BFH26
15. UNIT INCENTIVE PLAN
A Unit Incentive Plan ("Incentive Plan") was formed to provide for the granting
of options, unit appreciation rights ("UAR's"), units and other unit-based
equity interests in LLC to key employees of the Company and associated persons
at the discretion of the Board of Directors of the Company.
LLC sold 1,080,000 Class A units to certain management employees of the Company
under the Incentive Plan. The Class A units are generally restricted as to
transfer and allow for LLC, at its discretion, to repurchase the units upon
certain conditions, including termination of the unitholders' employment, prior
to full vesting after five years. Since the initial offering, LLC has sold an
additional 20,000 Class A units and has repurchased 812,000 Class A units from
management. Class A units outstanding at December 31, 2000 and 1999 were
288,000 and 323,000, respectively.
In 1999, LLC sold 389,125 Class C units to certain management employees of the
Company. The Class C units are generally restricted as to transfer and allow
for LLC, at its discretion, to repurchase the units upon certain conditions,
including termination of the unitholders' employment, prior to full vesting
after five years. LLC has subsequently repurchased 16,000 Class C units from
management. Class C units outstanding at December 31, 2000 and 1999 were
373,125 and 386,000, respectively.
In 2000, LLC sold 99,492 Class D units to certain management employees of the
Company. The Class D units are generally restricted as to transfer and allow
for LLC, at its discretion, to repurchase the units upon certain conditions,
including termination of the unitholders' employment, prior to full vesting
after five years. LLC has subsequently repurchased 2,942 Class D units from
management in 2001.
Under the Incentive Plan, the Company issued UAR's to the unitholders. The UAR
entitles the unitholder to receive an amount in cash equal to the excess of the
market price (as defined in the UAR agreement) of the Class A, Class C, or Class
D unit over the exercise price of the UAR. The UAR's vest ratably over five
years and expire upon certain events, including termination of the unitholders'
employment, but in no case to exceed ten years. Four UAR's were issued for each
Class A unit purchased (one UAR with an exercise price of $10 per unit and three
UAR's with an exercise price of $20 per unit), for each Class C unit purchased
(four UAR's with an exercise price of $8 per unit) and for each Class D unit
purchased (four UAR's with an exercise price of $8.50 per unit). During 1998,
the exercise prices for Class A units were revalued to $5.85 and $15.85,
respectively.
The Company issued 375,220 and 104,500 UAR's with an exercise price of $10.50
and $8.50, respectively, to non-unit holders in 2000, and issued 592,000 UAR's
with an exercise price of $8.00 to non-unit holders in 1999. Each UAR entitles
the recipient to receive an amount in cash equal to the excess of the market
price (as defined in the UAR agreement) over the exercise price. The UAR's vest
ratably over five years and expire upon certain events, including termination of
the recipient's employment, but in no case to exceed ten years. Non-unitholders
had 375,220 (at $10.50), 89,000 (at $8.50) and 475,000 (at $8.00) UAR's
outstanding at December 31, 2000.
The weighted-average remaining contractual life of the outstanding UAR's is
approximately 7.25 years as of December 31, 2000. UAR's awarded to Class A
unitholders will expire on January 1, 2006. UAR's awarded to Class C
unitholders and non-unitholders in 1999 will expire on October 1, 2008. UAR's
awarded to Class D unitholders and non-unitholders in 2000 will expire on
December 1, 2009. The remaining UAR's awarded in 2000 will expire on June 1,
2010.
BFH27
Compensation expense is accrued in other long-term liabilities and shall be
adjusted in subsequent periods up to the measurement date for changes, increase
or decreases, in the market price of the UAR's. Compensation expense was $93
and $867 for the years ended December 31, 2000 and 1999. Since the exercise
price exceeded the underlying value of the UAR's, no compensation expense was
recorded in relation to the issuance of UAR's in 1998.
As the UAR's are settled in cash, the change in value of the UAR's is accounted
for under the liability method as prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25). Due to
the cash nature of the award, treatment under SFAS No. 123, "Accounting for
Stock Based Compensation," would be synonymous with APB No. 25 and accordingly,
no fair market value disclosures are applicable.
16. COMMITMENTS AND CONTINGENCIES
Legal Matters
- --------------
In 1995, a Fresno, California jury returned a verdict against the Company for
wrongful termination of a tomato packing agreement. In granting the award for
lost profits to Helm Tomatoes, Inc., the jury found that while the business had
a legal right to terminate the agreement, it was estopped from doing this by an
oral representation made by a former employee. The Company had previously
established a reserve in other current liabilities of $14,500 for the verdict,
interest and legal costs. In 1999, the Company and Helm Tomatoes, Inc. reached
agreement to settle the claim with payments from the Company of $3,300 in May
1999 and $3,400 in May 2000. A gain of $7,500, derived from the difference
between the initial reserve less the settlement and legal fees, was recorded in
general and administrative expense during 1999.
The Company is involved in certain other legal proceedings arising through the
normal course of business. Management is of the opinion that the final outcomes
of such proceedings should not have a significant impact on the Company's
results of operations or financial position.
Inventory Commitments and Risks
- ----------------------------------
The Company has entered into a long-term supply agreement through 2004, subject
to renewal thereafter, for diced tomatoes and tomato concentrates. The supply
agreement requires the Company to purchase, at prices determined by formulas,
100% of its requirements for diced tomatoes and a specified minimum of tomato
concentrate per crop year. Based on the pricing formula, the minimum purchase
commitment for tomato concentrate is approximately $5,400 per crop year.
Raw materials, such as semolina and tomatoes, account for a high percentage of
the Company's total production costs. The Company purchases a major portion of
these raw materials under market sensitive supply contracts, and therefore the
Company's operating results are subject to short term fluctuations in these raw
material market prices. Because of the highly competitive and price sensitive
nature of the markets in which the Company operates, the ability to pass these
raw material price increases through to the customer is limited and often
depends upon the Company's competitors raising their prices as well.
BFH28