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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
- -- EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2002
---------------
Commission file number I-71
----
BORDEN CHEMICAL, INC.
New Jersey 13-0511250
----------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
180 East Broad Street, Columbus, OH 43215
-----------------------------------------------
(Address of principal executive offices)
(614) 225-4000
--------------------
(Registrant's telephone number, including area code)
Not Applicable
---------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant(1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of shares of common stock, $0.01 par value, outstanding as of the close
of business on August 13, 2002: 201,003,883
BORDEN CHEMICAL, INC.
INTRODUCTION
This Quarterly Report on Form 10-Q includes the Condensed Consolidated Financial
Statements of Borden Chemical, Inc. ("the Company"). The Company is controlled
by BW Holdings, LLC. ("BWHLLC").
On July 13, 2002, the Company's credit facility expired. Under the terms of the
guarantee agreement between Borden Foods Holding Corporation ("Foods") and the
Company, Foods was automatically released from its obligation as a guarantor of
the Company's outstanding publicly held debt upon Foods being released from its
obligation as a guarantor under the Company's credit facility. Accordingly,
Foods' Condensed Consolidated Financial Statements are no longer included in
Part II of the Company's quarterly financial filings with the Securities and
Exchange Commission.
BORDEN CHEMICAL, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. BORDEN CHEMICAL, INC. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations and Comprehensive Income,
three months ended June 30, 2002 and 2001 . . . . . . . . . . . . . . . . . . 4
six months ended June 30, 2002 and 2001 . . . . . . . . . . . . . . . . . . . 6
Condensed Consolidated Balance Sheets, June 30, 2002 and December 31, 2001 . . . . . . . . . 8
Condensed Consolidated Statements of Cash Flows, six months ended June 30, 2002 and 2001 . . 10
Condensed Consolidated Statement of Shareholders' Deficit, six months ended June 30, 2002. . 12
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
BORDEN CHEMICAL, INC.
- ---------------------------------------------------------------------------------------------------
Three months ended June 30,
(In thousands, except per share data) 2002 2001
- ---------------------------------------------------------------------------------------------------
Net sales. . . . . . . . . . . . . . . . . . . . . . . . $ 309,567 $ 377,836
Cost of goods sold . . . . . . . . . . . . . . . . . . . 236,390 297,679
------------ ------------
Gross margin . . . . . . . . . . . . . . . . . . . . . . 73,177 80,157
------------ ------------
Distribution expense . . . . . . . . . . . . . . . . . . 15,546 16,750
Marketing expense. . . . . . . . . . . . . . . . . . . . 11,108 11,043
General & administrative expense . . . . . . . . . . . . 22,551 42,436
Loss (gain) on sale of assets. . . . . . . . . . . . . . 128 (834)
Business realignment expense . . . . . . . . . . . . . . 5,401 13,956
Other operating expense. . . . . . . . . . . . . . . . . 6,457 3,853
------------ ------------
Operating income (loss). . . . . . . . . . . . . . . . . 11,986 (7,047)
Interest expense . . . . . . . . . . . . . . . . . . . . 12,180 13,388
Affiliated interest expense, net of affiliated interest
income of $0 and $679, respectively . . . . . . . . 349 3,563
Other non-operating (income) loss. . . . . . . . . . . . (1,572) 491
Impairment of equity investment. . . . . . . . . . . . . - 10,000
------------ ------------
Income (loss) from continuing operations
before income tax . . . . . . . . . . . . . . . . . 1,029 (34,489)
Income tax benefit . . . . . . . . . . . . . . . . . . . (1,669) (7,021)
------------ ------------
Income (loss) from continuing operations . . . . . . . . 2,698 (27,468)
------------ ------------
Discontinued operations:
Income from operations, net of tax. . . . . . . . . - 5,739
------------ ------------
Net income (loss). . . . . . . . . . . . . . . . . . . . 2,698 (21,729)
Preferred stock dividends. . . . . . . . . . . . . . . . - (18,431)
------------ ------------
Net income (loss) applicable to common stock . . . . . . $ 2,698 $ (40,160)
============ =============
Comprehensive income . . . . . . . . . . . . . . . . . . $ 419 $ (20,780)
============ =============
- ---------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED) (CONTINUED)
BORDEN CHEMICAL, INC.
- -----------------------------------------------------------------------------------------
Three months ended June 30,
(In thousands, except per share data) 2002 2001
- -----------------------------------------------------------------------------------------
Basic and Diluted Per Share Data
- ------------------------------------
Income (loss) from continuing operations. . . $ 0.01 $ (0.14)
Discontinued operations:
Income from operations, net of tax . . . - 0.03
----------- -----------
Net income (loss) . . . . . . . . . . . . . . 0.01 (0.11)
Preferred stock dividends . . . . . . . . . . - (0.09)
----------- -----------
Net income (loss) applicable to common stock. $ 0.01 $ (0.20)
=========== ===========
Dividends per common share. . . . . . . . . . $ - $ -
Dividends per preferred share . . . . . . . . $ - $ 0.75
Average number of common shares outstanding
during the period -basic . . . . . . . . 199,361 198,975
Average number of common shares outstanding
during the period -dilutive. . . . . . . 202,123 198,975
- -----------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
BORDEN CHEMICAL, INC.
- -------------------------------------------------------------------------------------------------
Six months ended June 30,
(In thousands, except per share data) 2002 2001
- -------------------------------------------------------------------------------------------------
Net sales. . . . . . . . . . . . . . . . . . . . . . . . $ 605,658 $ 738,933
Cost of goods sold . . . . . . . . . . . . . . . . . . . 458,861 583,980
------------- -------------
Gross margin . . . . . . . . . . . . . . . . . . . . . . 146,797 154,953
------------- -------------
Distribution expense . . . . . . . . . . . . . . . . . . 30,116 33,585
Marketing expense. . . . . . . . . . . . . . . . . . . . 21,542 20,934
General & administrative expense . . . . . . . . . . . . 49,480 69,032
Loss (gain) on sale of assets. . . . . . . . . . . . . . 129 (3,422)
Business realignment expense . . . . . . . . . . . . . . 10,060 9,900
Other operating expense. . . . . . . . . . . . . . . . . 8,392 7,655
------------- -------------
Operating income . . . . . . . . . . . . . . . . . . . . 27,078 17,269
Interest expense . . . . . . . . . . . . . . . . . . . . 23,967 26,472
Affiliated interest expense, net of affiliated interest
income of $455 and $1,062, respectively . . . . . . 616 8,618
Other non-operating income . . . . . . . . . . . . . . . (3,860) (622)
Impairment of equity investment. . . . . . . . . . . . . - 10,000
------------- -------------
Income (loss) from continuing operations
before income tax . . . . . . . . . . . . . . . . . 6,355 (27,199)
Income tax expense (benefit) . . . . . . . . . . . . . . 5,544 (106)
------------- -------------
Income (loss) from continuing operations . . . . . . . . 811 (27,093)
------------- -------------
Discontinued operations:
Income from operations, net of tax. . . . . . . . . - 6,209
------------- -------------
Income (loss) before cumulative effect of change in
accounting principle . . . . . . . . . . . . . . . . . . 811 (20,884)
Cumulative effect of change in accounting principle. . . (29,825) -
------------- -------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . (29,014) (20,884)
Preferred stock dividends. . . . . . . . . . . . . . . . - (36,862)
------------- -------------
Net loss applicable to common stock. . . . . . . . . . . $ (29,014) $ (57,746)
============== =============
Comprehensive income . . . . . . . . . . . . . . . . . . $ (33,864) $ (34,180)
============== =============
- -------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED) (CONTINUED)
BORDEN CHEMICAL, INC.
- ----------------------------------------------------------------------------------------------
Six months ended June 30,
(In thousands, except per share data) 2002 2001
- ----------------------------------------------------------------------------------------------
Basic and Diluted Per Share Data
- -------------------------------------
Income (loss) from continuing operations . . . . . . $ - $ (0.14)
Discontinued operations:
Income from operations, net of tax. . . . . . . - 0.03
---------- ----------
Income (loss) before cumulative effect of change in
accounting principle . . . . . . . . . . . . . . . . - (0.11)
Cumulative effect of change in accounting principle. (0.15) -
----------- ----------
Net loss . . . . . . . . . . . . . . . . . . . . . . (0.15) (0.11)
Preferred stock dividends. . . . . . . . . . . . . . - (0.18)
----------- ----------
Net loss applicable to common stock. . . . . . . . . $ (0.15) $ (0.29)
============ ===========
Dividends per common share . . . . . . . . . . . . . $ - $ 0.06
Dividends per preferred share. . . . . . . . . . . . $ - $ 1.50
Average number of common shares outstanding
during the period - basic . . . . . . . . . . . 199,253 198,975
Average number of common shares outstanding
during the period - dilutive. . . . . . . . . . 200,831 198,975
- ----------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
- ----------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN CHEMICAL, INC.
(In thousands)
June 30, December 31,
ASSETS 2002 2001
- ----------------------------------------------------------------------------------
CURRENT ASSETS
Cash and equivalents. . . . . . . . . . . . . . . $ 31,540 $ 24,632
Accounts receivable (less allowance for doubtful
accounts of $16,481 in 2002 and $16,659 in 2001) 171,832 164,137
Accounts receivable from affiliates . . . . . . . 2,596 7,077
Inventories:
Finished and in-process goods . . . . . . . . . . 43,108 54,184
Raw materials and supplies. . . . . . . . . . . 39,472 38,050
Deferred income taxes . . . . . . . . . . . . . . 66,601 63,486
Other current assets. . . . . . . . . . . . . . . 6,949 9,231
----------- -----------
362,098 360,797
----------- -----------
INVESTMENTS AND OTHER ASSETS
Restricted cash . . . . . . . . . . . . . . . . . 81,262 884
Investment in affiliate . . . . . . . . . . . . . - 110,000
Deferred income taxes . . . . . . . . . . . . . . 92,115 89,674
Other assets. . . . . . . . . . . . . . . . . . . 18,495 23,720
----------- -----------
191,872 224,278
----------- -----------
PROPERTY AND EQUIPMENT
Land. . . . . . . . . . . . . . . . . . . . . . . 31,383 30,124
Buildings . . . . . . . . . . . . . . . . . . . . 96,368 98,309
Machinery and equipment . . . . . . . . . . . . . 663,065 652,076
----------- -----------
790,816 780,509
Less accumulated depreciation . . . . . . . . . . (336,553) (322,952)
----------- -----------
454,263 457,557
GOODWILL. . . . . . . . . . . . . . . . . . . . . . 41,013 71,399
OTHER INTANGIBLE ASSETS . . . . . . . . . . . . . . 8,522 9,247
----------- -----------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . $1,057,768 $ 1,123,278
=========== ==========
- ----------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
- ----------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
BORDEN CHEMICAL, INC.
(In thousands, except share data)
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' DEFICIT 2002 2001
- ----------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts and drafts payable . . . . . . . . . . . . . . . . . . $ 107,404 $ 124,690
Accounts payable to affiliates. . . . . . . . . . . . . . . . . 3,291 750
Debt payable within one year. . . . . . . . . . . . . . . . . . 4,404 3,078
Loans payable to affiliates . . . . . . . . . . . . . . . . . . 92,085 78,550
Note payable to unconsolidated subsidiary . . . . . . . . . . . - 34,181
Other current liabilities . . . . . . . . . . . . . . . . . . . 106,141 106,958
---------- ----------
313,325 348,207
---------- ----------
OTHER LIABILITIES
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . 531,934 532,497
Non-pension post-employment benefit obligations . . . . . . . . 147,773 150,916
Other long-term liabilities . . . . . . . . . . . . . . . . . . 188,328 188,963
---------- ----------
868,035 872,376
---------- ----------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 11)
SHAREHOLDERS' DEFICIT
Common stock - $0.01 par value: authorized 300,000,000 shares,
Issued 201,003,883 and 199,121,749 shares in 2002 and
2001, respectively. . . . . . . . . . . . . . . . . . . . . . 2,010 1,990
Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . 1,117,686 1,106,789
Receivable from parent. . . . . . . . . . . . . . . . . . . . . (404,817) (404,817)
Deferred compensation . . . . . . . . . . . . . . . . . . . . . (3,340) -
Accumulated other comprehensive income. . . . . . . . . . . . . (139,286) (134,436)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . (695,845) (666,831)
---------- ----------
(123,592) (97,305)
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT . . . . . . . . . . . $1,057,768 $ 1,123,278
=========== ===========
- ----------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN CHEMICAL, INC.
Six months ended June 30,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . . $ (29,014) $ (20,884)
Adjustments to reconcile net loss to cash from (used in)
operating activities:
Loss (gain) on the sale of assets. . . . . . . . . . . . 129 (3,422)
Deferred tax benefit . . . . . . . . . . . . . . . . . . (4,394) (21,956)
Depreciation and amortization. . . . . . . . . . . . . . 24,118 28,353
Business realignment expense. . . . . . . . . . . . . 10,060 9,900
Unrealized (gain) loss on interest rate swap . . . . . . (999) 1,001
Impairment in equity investment. . . . . . . . . . . . . - 10,000
Equity method investment expense . . . . . . . . . . . . - 1,117
Cumulative effect of change in accounting principle. . . 29,825 -
Net change in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . (10,811) (18,936)
Inventories. . . . . . . . . . . . . . . . . . . . . . . 8,433 400
Accounts and drafts payable. . . . . . . . . . . . . . . (15,327) 6,706
Income taxes . . . . . . . . . . . . . . . . . . . . . . 8,770 53,128
Other assets . . . . . . . . . . . . . . . . . . . . . . 6,379 27,937
Other liabilities. . . . . . . . . . . . . . . . . . . . (28,363) (20,665)
Cash used by discontinued operations . . . . . . . . . . - (19,771)
---------- ---------
(1,194) 32,908
---------- ---------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures . . . . . . . . . . . . . . . . . . (18,813) (26,167)
Proceeds from sale of note receivable to an affiliate. . 110,000 -
Proceeds from sale of assets . . . . . . . . . . . . . . 7,854 16,376
Collection of affiliate's receivables. . . . . . . . . . - 500
---------- ---------
99,041 (9,291)
---------- ---------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net short-term debt borrowings (repayments). . . . . . . 1,326 (31,909)
(Repayments) borrowings of long-term debt. . . . . . . . (563) 55,704
Affiliated borrowings/receipts (repayments/loans), net . 19,870 (14,914)
Payment of note payable to unconsolidated subsidiary . . (31,581) -
Increase in restricted cash. . . . . . . . . . . . . . . (80,378) -
Interest received from parent. . . . . . . . . . . . . . - 24,200
Common stock dividends paid. . . . . . . . . . . . . . . - (24,200)
Preferred stock dividends paid . . . . . . . . . . . . . - (36,862)
Sale of common stock to management, net of repurchases . 387 -
---------- ---------
(90,939) (27,981)
---------- ---------
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
BORDEN CHEMICAL, INC.
Six months ended June 30,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents. . . . . . . . . . 6,908 (4,364)
Cash and equivalents at beginning
of period. . . . . . . . . . . . . . . . . . . . . . . . . . . 24,632 26,934
----------- ----------
Cash and equivalents at end
of period. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,540 $ 22,570
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (received):
Interest, net. . . . . . . . . . . . . . . . . . . . . . . . . $ 23,681 $ 34,785
Income taxes, net. . . . . . . . . . . . . . . . . . . . . . . 5,873 (34,050)
Non-cash activity:
Capital contribution by parent . . . . . . . . . . . . . 6,959 13,030
Settlement of note payable to unconsolidated subsidiary. 2,600 -
- --------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT (UNAUDITED)
BORDEN CHEMICAL, INC.
(In thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Paid-in Receivable Deferred Other Accumulated
Stock Capital from Compensation Comprehensive Deficit Total
Parent Income
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 1,990 $ 1,106,789 $ (404,817) $ - $ (134,436) $ (666,831) $ (97,305)
- -----------------------------------------------------------------------------------------------------------------------------------
Net loss . . . . . . . . . . . . . . . . . . . (29,014) (29,014)
Translation adjustments and other. . . . . . . (5,419) (5,419)
Derivative activity (net of $312 tax). . . . . 569 569
----------
COMPREHENSIVE INCOME . . . . . . . . . . . . . (33,864)
----------
Shares sold to management, net of repurchases. 4 383 387
Restricted stock issued to management. . . . . 16 3,555 (3,571) -
Compensation expense on restricted stock . . . 231 231
Other capital contributions from parent. . . . 6,959 6,959
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2002 . . . . . . . . . . . . $ 2,010 $ 1,117,686 $ (404,817) $ (3,340) $ (139,286) $ (695,845) $(123,592)
- -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts and as otherwise indicated)
1. BACKGROUND
On March 14, 1995, affiliates of Kohlberg, Kravis Roberts & Co. ("KKR") acquired
control of the Company. In late 1995, the Company began the process of
redesigning its operating structure in order to maximize value for its owners
and divested businesses that did not fit into its long-term strategic plan.
After divestiture of the Consumer Adhesives business segment in 2001, the
Company's sole remaining business is the Chemical business, which is engaged
primarily in manufacturing, processing, purchasing and distributing forest
products and industrial resins, formaldehyde, coatings and other specialty and
industrial chemicals worldwide. The Company's parent is Borden Holdings, Inc.
("BHI"), which is a wholly owned subsidiary of BWHLLC.
2. BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements (the
"Financial Statements") include the accounts of Borden Chemical, Inc. and its
subsidiaries, after elimination of intercompany accounts and transactions. Note
3 discusses changes from previously filed Financial Statements due to a change
in the reporting entity that occurred in the first quarter of 2002.
The accompanying Financial Statements contain all adjustments, which in the
opinion of management are necessary for a fair presentation of the results for
the interim periods. Results for the interim periods are not necessarily
indicative of results for the full year.
Operating segment information is provided in Item 2 (Management's Discussion and
Analysis of Financial Condition and Results of Operations) and is an integral
part of the Financial Statements.
Certain prior year amounts have been reclassified to conform with the 2002
presentation.
3. CHANGE IN REPORTING ENTITY
BCP Management, Inc. ("BCPM"), a wholly owned subsidiary of the Company, serves
as the general partner of Borden Chemicals and Plastics Limited Partnership
("BCP") and Borden Chemical and Plastics Operating Limited Partnership
("BCPOLP"). BCP is the sole limited partner of BCPOLP. As general partner, BCPM
has certain fiduciary responsibilities to BCP and BCPOLP. BCP and BCPOLP were
created in November 1987, as separate and distinct entities from the Company and
BCP is 99% owned by the public. On April 3, 2001, BCPOLP and its subsidiary,
BCP Finance Corporation, filed voluntary petitions for protection under Chapter
11 of the United States Bankruptcy Code. On March 22, 2002, BCPM also filed a
voluntary petition for protection under Chapter 11 of the Bankruptcy Code. On
August 1, 2002, BCPM and BCPOLP filed a proposed Joint Plan of Liquidation with
the U.S Bankruptcy Court for the District of Delaware which, if confirmed by
Bankruptcy Court, would result in the liquidation of BCPM and BCPOLP and the
distribution of the resulting cash proceeds (net of administrative claims and
expenses) to their respective creditors in accordance with the plan.
As a result of the bankruptcy, the Company's rights as the shareholder of BCPM
and the authority of the Board of Directors of BCPM with respect to BCPM's
operations have been significantly restricted. Consequently, the Company no
longer includes BCPM in its Financial Statements but rather accounts for BCPM
under the equity method of accounting for all periods presented. There is no
impact on previously reported amounts of net income as a result of the
deconsolidation. The impact on the Condensed Consolidated Balance Sheets of the
deconsolidation is to reduce both total assets and liabilities by $38,469 and
$40,348 at June 30, 2002 and December 31, 2001, respectively. The Company's
equity-method investment in BCPM has been written-down to $0.
4. BUSINESS REALIGNMENT EXPENSE
In the first half of 2002, the Company recorded net business realignment expense
of $10,060, $5,401 in second quarter and $4,659 in first quarter.
Provided below is a summary of business realignment reserve activity for first
two quarters 2002:
- -----------------------------------------------------------------------------------------------------------
RESERVES RESERVES
DECEMBER 31, 2002 2002 JUNE 30,
2001 EXPENSE CHARGES 2002
- ---------------------------------------------------------------------------------------------------------
Plant closure costs (including employee
costs)
$ 14,389 $ 8,794 $ (8,084) $ 15,099
Corporate severance and other employee
costs . 8,360 1,266 (2,867) 6,759
--------- -------- -------- -------
$ 22,749 $ 10,060 $ (10,951) $ 21,858
- -----------------------------------------------------------------------------------------------------------
Business realignment expense in 2002 of $10,060 consists of $11,259 of plant
closure costs, primarily related to the closure of the melamine crystal business
facilities, and $1,266 of severance and other employee costs, partially offset
by a pre-tax gain on the sale of land associated with a previously closed plant
of $2,465 ($1,602 after-tax). Plant closure costs include plant employee
severance of $8,718 and demolition, environmental and other costs of $2,541.
Business realignment expense in 2001 of $9,900 consisted of $16,595 of plant
closure costs and a $3,812 charge for severance costs related to a corporate
workforce reduction program. These costs were partially offset by a pre-tax
gain on the sale of land associated with a previously closed plant of $10,507
($6,514 after-tax).
5. RESTRICTED CASH
Restricted cash at June 30, 2002 and December 31, 2001 represents cash
collateral related to the Company's uncommitted letter of credit facility. The
$85,000 facility requires the Company to provide cash collateral equivalent to
101% of the letters of credit outstanding. The amount of letters of credit and
cash collateral outstanding under this facility at August 13, 2002 were $80,707
and $81,514, respectively.
6. GOODWILL AND INTANGIBLE ASSETS
As of January 1, 2002, the Company adopted SFAS No. 142 "Goodwill and Other
Intangible Assets". Consequently, subsequent to January 1, 2002, goodwill and
identifiable intangible assets with indefinite useful lives are no longer
amortized and identifiable assets with finite useful lives are amortized over
their respective useful lives.
Also, in conjunction with adopting SFAS No. 142, the Company assessed its
intangible assets and tested the carrying amount of goodwill for impairment.
The intangible asset assessment was conducted to determine whether any
intangibles had indefinite useful lives. The Company determined that all of its
intangible assets had finite useful lives, and that no adjustment of current
useful lives was necessary. As a result of its goodwill impairment test, the
Company recorded an impairment charge related to its European reporting unit,
which is discussed in more detail below.
As required, SFAS No. 142 was adopted on a prospective basis; therefore, prior
periods have not been restated.
The following table provides a comparison of 2002 to 2001 as if the new
accounting principle were applied to the prior year period:
- ----------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
2002 2001
Reported net loss $ (29,014) $ (20,884)
Add back goodwill amortization - 1,623
--------- ---------
Adjusted net loss (29,014) (19,261)
Add back cumulative effect of change in
accounting principle 29,825 -
--------- ---------
Adjusted income (loss) before cumulative effect
in change in accounting principle $ 811 $ (19,261)
========= =========
Basic and diluted per share data:
Reported net loss $ (0.15) $ (0.11)
Add back goodwill amortization - .01
--------- ---------
Adjusted net loss (0.15) (0.10)
--------- ---------
Add back cumulative effect of change in
accounting principle 0.15 -
--------- ---------
Adjusted income (loss) before cumulative effect
of change in accounting principle $ - $ (0.10)
========= =========
- ----------------------------------------------------------------------------------------------------------
The changes in the carrying amount of goodwill for the six months ended June 30,
2002 are as follows:
- ---------------------------------------------------------------------------------
Goodwill balance at December 31, 2001 $ 71,399
Less goodwill impairment recognized upon adoption of SFAS No. 142 (29,825)
Foreign currency translation (561)
---------
Goodwill balance at June 30, 2002 $ 41,013
=========
- ---------------------------------------------------------------------------------
Intangible assets, which will continue to be amortized, consist of the
following:
- ------------------------------------------------------------------------------------------------------------
At June 30, 2002 At December 31, 2001
---------------------- ----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------------- -------------- ------------- ------------
Intangible assets:
Customer list and contracts $ 6,559 $ 3,270 $ 6,559 $ 2,824
Formulas and technology 6,524 4,036 6,524 3,730
Unrecognized prior service cost 2,657 - 2,657 -
Other 744 656 744 683
---------- --------- -------- ---------
$ 16,484 $ 7,962 $ 16,484 $ 7,237
========== ========= ======== =========
- ------------------------------------------------------------------------------------------------------------
Aggregate intangible amortization expense for the three months ended June 30,
2002 and 2001 was $292 and $337, respectively and $725 and $673 for the six
months ended June 30, 2002 and 2001, respectively.
Estimated annual intangible amortization expense for 2002 through 2006 is as
follows:
2002 $ 1,672
2003 1,657
2004 1,657
2005 1,648
2006 1,123
The Company's recorded goodwill of $71,399 as of December 31, 2001 had been
recorded in conjunction with numerous business acquisitions. As mentioned
above, in accordance with the implementation of SFAS No. 142, the Company tested
goodwill for impairment as of January 1, 2002. As required by the new
accounting principle, to perform the goodwill impairment test the Company
identified the appropriate reporting units, assigned assets and liabilities
(including goodwill) to the reporting units, determined estimated fair values of
the reporting units, and assessed whether the estimated fair value of each
reporting unit was more or less than the carrying amount of the assets and
liabilities assigned to the units. As a result of this test, the fair value of
each reporting unit exceeded the carrying amount of assets and liabilities
assigned, except for the Company's European reporting unit. Based on the excess
of the carrying value over the estimated fair value of its European reporting
unit, the Company recorded a goodwill impairment charge of $29,825 which
represents 100% of January 1, 2002 carrying amount. There was no tax benefit
recognized in conjunction with the impairment charge. This impairment charge is
reported as the cumulative effect of change in accounting principle in the
Condensed Consolidated Statements of Operations and the goodwill amount at June
30, 2002 has been reduced by this amount.
To determine estimated fair values of the Company's reporting units, the Company
engaged mergers and acquisition professionals employed by Borden Capital, Inc.
("Capital"), an affiliate of the Company. The valuations were performed using a
standard methodology based largely on comparable company analysis. Comparable
company analysis ascribes a value to an entity by comparing certain operating
metrics of the entity to those of a set of comparable companies in the same
industry. Using this method, market multiples and ratios based on operating,
financial and stock market performance are compared across different companies
and to the entity being valued. The Company employed a comparable analysis
technique commonly used in the investment banking and private equity industries
to estimate the values of its reporting units - the EBITDA (earnings before
interest, taxes, depreciation and amortization) multiple technique. Under this
technique, estimated values are the result of an EBITDA multiple derived from
this process applied to an appropriate historical EBITDA amount.
7. RESTRICTED COMMON STOCK
In the first quarter 2002, the Company granted 1,058,201 shares of restricted
common stock to management under the Amended and Restated 1996 Stock Purchase
and Option Plan. In the second quarter, the Company granted an additional
529,100 shares of restricted stock to management. The total deferred
compensation of $3,571 related to the restricted common shares is being
amortized over the three-year vesting period.
8. DISCONTINUED OPERATIONS
In third quarter 2001, the Company sold its Consumer Adhesives business segment
to an affiliate. Consequently, the financial results of Consumer Adhesives are
reported as discontinued operations in the Condensed Consolidated Statements of
Operations and Cash Flows for the three and six months ended June 30, 2001.
Provided below are the major components of the amount reported as income from
discontinued operations in 2001:
- ---------------------------------------------------------------------------------
JUNE 30, 2001
THREE MONTHS SIX MONTHS
ENDED ENDED
- ---------------------------------------------------------------------------------
Net sales $ 47,021 $ 71,411
Income before income taxes 9,030 9,453
Income tax expense 3,291 3,244
--------------- ---------------
Income from discontinued operations $ 5,739 $ 6,209
- ---------------------------------------------------------------------------------
9. COMPREHENSIVE INCOME
Comprehensive income is computed as follows:
- --------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
2002 2001
- --------------------------------------------------------------------------------------
Net income (loss) $ 2,698 $ (21,729)
Foreign currency translation adjustments (2,564) (476)
Reclassification adjustments - 984
Derivative activity 285 441
------------ -------------
$ 419 $ (20,780)
- --------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------------
2002 2001
Net loss $ (29,014) $ (20,884)
Foreign currency translation adjustments (5,419) (12,646)
Reclassification adjustments - 984
Cumulative effect of change in
accounting principle - (3,293)
Derivative activity 569 1,659
------------ -------------
$ (33,864) $ (34,180)
- ---------------------------------------------------------------------------------------
The foreign currency translation adjustments in 2002 and 2001 relate primarily
to the United Kingdom and Latin America, partially offset by favorable exchange
rates in Canada. The cumulative effect of change in accounting principle in 2001
relates to the adoption of SFAS No. 133 as of the beginning of 2001. The
derivative activity amounts represent reclassification into earnings of the
original cumulative effect of change in accounting principle.
10. RELATED PARTY TRANSACTIONS
Financing and Investing Arrangements
- ---------------------------------------
Certain affiliates of the Company invest cash with the Company at rates that
generally approximate market rates. These investments are recorded as loans
payable to affiliates in the Condensed Consolidated Balance Sheets. Borden
Foods Holding Corporation ("Foods"), an affiliate of the Company, had $92,085
and $78,550 invested at June 30, 2002 and December 31, 2001, respectively. The
Company recorded affiliated interest expense of $349 and $4,242 related to
amounts invested by affiliates for the three months ended June 30, 2002 and
2001, respectively, and $1,071 and $9,680 for the six months ended June 30, 2002
and 2001, respectively.
In first quarter 2002, the Company settled in full its note payable to BCPM (the
"Note") in the form of cash payments of $31,581 and $2,600 of certain set-offs
asserted by the Company against amounts due under the Note. BCPM acknowledged
the validity and enforceability of certain set-offs asserted against amounts due
under the Note by the Company; the Company waived the right to assert certain
other set-offs against amounts due under the Note; and BCPM and the Company
exchanged mutual releases with respect to the Note. A committee comprised
solely of independent directors of BCPM, represented and advised by separate and
independent counsel, reviewed and agreed to the above provisions.
As disclosed in Notes 4 and 14 of the Company's 2001 Annual Report on Form 10-K,
the Company expressed that it intended to cancel a $404,817 note receivable
(plus accrued interest) from BHI, which has been accounted for as a reduction
from equity. As of June 30, 2002, the Company has not made a decision regarding
the cancellation of this note receivable. Historically, BHI funded the interest
due on the note through common dividends received from the Company. Quarterly
interest has not been paid, nor an associated dividend declared, since October
15, 2001 and no further interest and dividend payments are expected in 2002.
At December 31, 2001, the Company had a $110,000 preferred stock investment in
Consumer Adhesives, an affiliate of the Company. The preferred stock was
redeemed on March 1, 2002 for a $110,000 note receivable from Consumer
Adhesives. On March 12, 2002, the note receivable was sold to the Company's
parent for cash of $110,000 plus accrued interest of $455.
As a guarantor of the Company's debt, Foods received an annual fee from the
Company of $1,100. Under the terms of the guarantee agreement between Foods and
the Company, Foods was automatically released from the obligation to guarantee
the payment of the Company's outstanding publicly held debt upon Foods being
released from the obligation to guarantee the payment of amounts due under the
Company's $250,000 Credit Agreement that expired on July 13, 2002. The guarantee
was filed as Exhibits 4(i)-4(iv) in the Company's June 30, 1996 Quarterly Report
on Form 10-Q.
Administrative Service, Management and Consulting Arrangements
- -------------------------------------------------------------------
The Company provides administrative services to Foods under a revised agreement
effective for 2002. The total fee for this agreement is $120 in 2002. Fees
received for these services are offset against the Company's general and
administrative expenses and totaled $30 and $250 for the three months ended June
30, 2002 and 2001, respectively, and $60 and $500 for the six months ended June
30, 2002 and 2001, respectively. In addition, the Company pays certain costs on
behalf of Foods and is reimbursed by Foods for 100% of these costs. Included in
accounts receivable from affiliates at June 30, 2002 and December 31, 2001 is
$480 and $257, respectively, related to these costs.
Capital provides management, consulting and governance to the Company, and the
Company provides certain administrative services to Capital. The Company's fee
was $9,000 per annum payable quarterly in arrears, which represented Capital's
gross fee less the Company's fee for providing administrative services to
Capital. At June 30, 2002, $2,250 was included in accounts payable to affiliates
for amounts due to Capital under this arrangement. In second quarter 2002, based
on various economic and other developments, the Company's parent made a decision
to wind down Capital's operations by the end of 2002. This decision resulted in
immediate recognition by Capital of incremental expenses and liabilities related
primarily to severance and rent obligations. These incremental expenses are the
legal obligation of Capital and will be funded by Capital. The Company's share
of Capital's incremental expenses is $5,500 for 2002 and the Company has
recognized its share of these expenses as an additional management fee from
Capital. Since the Company is not responsible for settling these liabilities,
the charge has also been recorded as a capital contribution to the Company.
The Company pays certain costs on Capital's behalf and is reimbursed by Capital
for 100% of these costs. Included in accounts receivable from affiliates at
June 30, 2002 is $772 of these costs.
Other Transactions and Arrangements
- --------------------------------------
Prior to the sale of Consumer Adhesives to an affiliate of the Company, Consumer
Adhesives and the Company were parties to a tax sharing agreement. Under this
agreement, Consumer Adhesives paid income taxes to the Company as if Consumer
Adhesives filed stand-alone federal and state income tax returns. At June 30,
2002 and December 31, 2001, the Company had an outstanding receivable from
Consumer Adhesives of $326 and $6,661, respectively, for unpaid federal and
state income tax.
11. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS - The Company, like others in similar businesses, is
subject to extensive Federal, state and local environmental laws and
regulations. Although environmental policies and practices are designed to
ensure compliance with these laws and regulations, future developments and
increasingly stringent regulation could require the Company to make additional
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 subject to a comprehensive review annually during the fourth quarter. In
addition, under an Environmental Indemnity Agreement between the Company and
BCP, the Company has agreed, subject to certain conditions and limitations, to
indemnify BCP from certain environmental liabilities arising from or relating to
occurrences on or prior to November 30, 1987 which are incurred on or prior to
November 30, 2002 at BCP facilities which were previously owned by the Company
and share on an equitable basis liabilities incurred on or before November 30,
2002 arising from or relating to facts or circumstances existing and
requirements in effect both prior to and after November 30, 1987. The Company
has accrued approximately $46,104 and $43,423 at June 30, 2002 and December 31,
2001, respectively, for probable environmental remediation and restoration
liabilities. Of these amounts, $6,079 and $2,400 at June 30, 2002 and December
31, 2001, respectively, relate to environmental and restoration liabilities that
are included in the Company's business realignment reserve (see Note 4). 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 $32,000.
LEGAL MATTERS - The Company has recorded $2,228 and $2,794 in liabilities at
June 30, 2002 and December 31, 2001, respectively, for legal costs that they
believe are probable and reasonably estimable. Actual costs are not expected to
exceed these amounts. 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 - BCPM serves as general partner of BCP and BCPOLP. BCP is the sole
limited partner of BCPOLP. As general partner, BCPM has certain fiduciary
responsibilities to BCP and BCPOLP. BCP and BCPOLP were created in November
1987 as separate and distinct entities from the Company, and BCP is 99% owned by
the public. On April 3, 2001, BCPOLP and its subsidiary, BCP Finance
Corporation, filed voluntary petitions for protection under chapter 11 of the
United States Bankruptcy Code, Title 11 of the United States Codes, in the
United States Bankruptcy Court of the District of Delaware. On March 22, 2002,
BCPM also filed a voluntary petition for protection under Chapter 11 of the
Bankruptcy Code. On August 1, 2002, BCPM and BCPOLP filed a proposed Joint Plan
of Liquidation with the U.S Bankruptcy Court for the District of Delaware which,
if confirmed by Bankruptcy Court, would result in the liquidation of BCPM and
BCPOLP and the distribution of the resulting cash proceeds (net of
administrative claims and expenses) to their respective creditors in accordance
with the plan. See Note 3 regarding the deconsolidation of BCPM.
Part 1. FINANCIAL INFORMATION
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (dollars in thousands)
CRITICAL ACCOUNTING POLICIES
- ------------------------------
For a discussion of the Company's critical accounting policies, refer to
Management's Discussion and Analysis of Financial Condition and Results of
Operations on page 12 of the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 29, 2002.
RESULTS OF OPERATIONS BY SEGMENT:
- -------------------------------------
Following is a comparison of net sales and Adjusted Operating EBITDA by
reportable business segment for the Company.
- -------------------------------------------------------------------------------------------------------
PERIOD ENDED JUNE 30,
3 MONTHS 6 MONTHS
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------
NET SALES:
Chemical $ 306,742 $ 371,481 $ 599,481 $ 725,995
Business disposed of (1) 2,825 6,355 6,177 12,938
---------- ----------- ---------- ----------
$ 309,567 $ 377,836 $ 605,658 $ 738,933
========== ========== ========== ==========
ADJUSTED OPERATING EBITDA:
Chemical $ 46,774 $ 49,571 $ 90,593 $ 96,343
Corporate and other (17,108) (28,479) (29,523) (40,989)
Business disposed of (1) (262) 143 186 168
---------- ----------- ---------- ----------
TOTAL ADJUSTED OPERATING EBITDA (2) 29,404 21,235 61,256 55,522
Significant or unusual items (3) (5,401) (13,956) (10,060) (9,900)
Depreciation and amortization (12,017) (14,326) (24,118) (28,353)
---------- ----------- ---------- ----------
OPERATING INCOME $ 11,986 $ (7,047) $ 27,078 $ 17,269
========== ========== ========== ==========
- -------------------------------------------------------------------------------------------------------
(1) In fourth quarter 2001, the Company announced that it had decided to offer for sale
its melamine crystal business and that it would attempt to complete the sale by the end of the
year. However, as of the end of 2001, no sale had been negotiated and in January 2002 the
Company closed its melamine crystal business.
(2) Adjusted Operating EBITDA represents net income (loss) excluding discontinued
operations, non-operating income and expenses, interest, taxes, depreciation, amortization and
Significant and Unusual items (see below).
(3) Significant and Unusual items represent business realignment expenses. Business
realignment expense in 2002 of $10,060 consists of $11,259 of plant closure costs, primarily
related to the closure of the melamine crystal business facilities, and $1,266 of severance
and other employee costs, partially offset by a pre-tax gain on the sale of land associated
with a previously closed plant of $2,465 ($1,602 after-tax). Plant closure costs include
plant employee severance of $8,718 and demolition, environmental and other costs of $2,541.
Business realignment expense in 2001 of $9,900 consisted of $16,595 of plant closure costs and
a $3,812 charge for severance costs related to a corporate workforce reduction program. These
costs were partially offset by a pre-tax gain on the sale of land associated with a previously
closed plant of $10,507 ($6,514 after-tax).
THREE MONTHS ENDED JUNE 30, 2002 VERSUS THREE MONTHS ENDED JUNE 30, 2001
Chemical
- --------
Net sales dollars and Adjusted Operating EBITDA in second quarter 2002 were
behind prior year by $64,739 and $2,797, respectively, representing declines of
17% and 6%, respectively. The primary components of the sales decline were
lower selling prices resulting from the pass through of contract based raw
material price declines, unfavorable product mix, unfavorable currency exchange
rates and the sale of a business in Latin America in 2001. The decline in
Adjusted Operating EBITDA was due to unfavorable product mix offset partially by
a favorable spread between selling price declines and raw material cost declines
and lower plant processing costs.
Lower selling prices reduced 2002 sales by approximately $41,000. The lower
selling prices reflect lower raw material costs, as a substantial portion of the
Company's sales volumes, especially for North American 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).
Unfavorable volume mix negatively impacted 2002 sales by approximately $18,000.
The unfavorable mix resulted from lower volumes of higher priced oilfield and UV
coatings products. The volume decline in oilfield products is due to reduced
drilling activity in second quarter 2002 compared to second quarter 2001
reflecting lower natural gas and oil prices. The UV coatings products volume
decline is the result of significantly lower demand for optical fiber in the
second quarter 2002 compared to the second quarter of 2001. Offsetting these
declines were increased volumes in forest products and specialty resins. Higher
forest product resins volume reflects strong housing starts in second quarter
2002 compared to second quarter 2001, in spite of generally weak economic
conditions, while improved specialty resins volume reflects improved auto builds
and favorable product mix.
Unfavorable exchange rates, primarily in Latin America, had an unfavorable
impact on sales of approximately $4,000.
As mentioned above, Adjusted Operating EBITDA in second quarter 2002 of $46,774
was 6% lower than prior year. A positive spread between selling price and raw
material cost declines, lower plant processing costs and increased volumes in
North American formaldehyde and forest products were more than offset by the
negative effect of the sales volume mix change due to lower volumes of oilfield
and UV coatings products. The positive spread between selling prices and raw
material cost declines reflects the lag time in selling price adjustments during
times of declining raw material costs. The lower plant processing costs reflect
lower energy costs and cost reduction initiatives.
Corporate and other
- ---------------------
Adjusted Operating EBITDA, which is composed primarily of general and
administrative expenses and income and expenses related to divested businesses,
improved $11,371 to a net expense of $17,108 in second quarter 2002 from a net
expense of $28,479 in second quarter 2001. The improvement is primarily due to
the absence of 2001 settlement and curtailment charges of $16,300, partially
offset by the increased non-cash management, consulting and governance fee (also
see Note 10 to the Condensed Consolidated Financial Statements).
Business disposed of
- ----------------------
The Company shut down its melamine crystal business facilities on January 11,
2002. Operating results for second quarter 2002 represent revenues and related
expenses primarily from the sale of inventory subsequent to the closure date.
SIX MONTHS ENDED JUNE 30, 2002 VERSUS SIX MONTHS ENDED JUNE 30, 2001
Chemical
- --------
Net sales dollars and Adjusted Operating EBITDA in 2002 were behind prior year
by $126,514 and $5,750, respectively, representing declines of 17% and 6%,
respectively. The primary components of the sales decline were lower selling
prices resulting from the pass through of contract based raw material price
declines, unfavorable product mix, unfavorable currency exchange rates and the
sale of a Latin American business in 2001. The decline in Adjusted Operating
EBITDA was due to unfavorable product mix and a higher bad debt expense, offset
partially by a favorable spread between selling price declines and raw material
cost declines and lower plant processing costs.
Lower selling prices reduced 2002 sales by approximately $85,000. The lower
selling prices reflect lower raw material costs, as a substantial portion of the
Company's sales volumes, especially for North American 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).
Unfavorable volume mix negatively impacted 2002 sales by approximately $26,000.
The unfavorable mix resulted from lower volumes of higher priced oilfield and UV
coatings products. The volume decline in oilfield products is due to reduced
drilling activity in 2002 compared to 2001 reflecting lower natural gas and oil
prices. The UV coatings products volume decline is the result of significantly
lower demand for optical fiber in 2002 compared to 2001. Offsetting these
declines were increased volumes in forest products, specialty and foundry
resins. Higher forest product resins volume reflects strong housing starts in
2002 compared to 2001, in spite of generally weak economic conditions. The
improvement in specialty resins sales reflects improved auto builds and
favorable product mix. Higher foundry resins volume reflects higher auto builds
and incremental volume from a merger formed in second quarter 2001.
Unfavorable exchange rates, primarily in Latin America, had an unfavorable
impact on sales of approximately $11,000.
As mentioned above, Adjusted Operating EBITDA in 2002 of $90,593 was 6% lower
than prior year. A positive spread between selling price and raw material cost
declines, lower plant processing costs and increased volumes in North American
formaldehyde and forest products were more than offset by the negative effect of
the sales volume mix change due to lower volumes of oilfield and UV coatings
products, higher bad debt expense and unfavorable foreign currency exchange
rates. The positive spread between selling prices and raw material cost declines
reflects the lag time in selling price adjustments during times of declining raw
material costs. The lower plant processing costs reflect lower energy costs and
cost reduction initiatives. Higher bad debt expense reflects higher losses
incurred in the first quarter due to the generally weak economic environment.
Corporate and Other
- ---------------------
Adjusted Operating EBITDA, which consists primarily of general and
administrative expenses and income and expenses related to divested businesses,
improved $11,466 to a net expense of $29,523 in 2002 from a net expense of
$40,989 in 2001. The improvement is primarily due to the absence of 2001
settlement and curtailment charges of $16,300, partially offset by the increased
non-cash management, consulting and governance fee (also see Note 10 to the
Condensed Consolidated Financial Statements)
..
Business disposed of
- ----------------------
The company shut down its melamine crystal business facilities on January 11,
2002. Operating results for the first six months of 2002 represent revenues and
related expenses primarily from the sale of inventory subsequent to the closure
date.
NON-OPERATING EXPENSES AND INCOME TAXES
- -------------------------------------------
Following is a comparison of non-operating expenses for the three months ended
June 30, 2002 and 2001:
- --------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
2002 2001
- --------------------------------------------------------------------------------
Interest expense $ 12,180 $ 13,388
Affiliated interest expense, net 349 3,563
Other non-operating (income) expense (1,572) 491
Impairment of equity investment - 10,000
---------- ----------
$ 10,957 $ 27,442
- --------------------------------------------------------------------------------
Non-operating expenses declined $16,485 from $27,442 for the three months ended
June 30, 2001 to $10,957 for the three months ended June 30, 2002. The decline
is primarily due to the absence of a $10,000 charge recorded for estimated costs
related to the financial decline of a limited partnership for which a wholly
owned subsidiary of the company served as general partner (also see Note 3 to
the Condensed Consolidated Financial Statements), a reduction in net affiliated
interest expense and interest expense of $3,214 and $1,208, respectively and
unrealized gains on an interest swap of $483 in 2002 compared to unrealized
losses of $513 in 2001.
Following is a comparison of non-operating expenses for the six months ended
June 30, 2002 and 2001:
- -----------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
---------------------------
2002 2001
- -----------------------------------------------------------------------------
Interest expense $ 23,967 $ 26,472
Affiliated interest expense, net 616 8,618
Other non-operating income (3,860) (622)
Impairment of equity investment - 10,000
---------- -----------
$ 20,723 $ 44,468
- -----------------------------------------------------------------------------
Non-operating expenses declined $23,745 from $44,468 for the six months ended
June 30, 2001 to $20,723 for the six months ended June 30, 2002. The decline is
primarily due to the absence of a $10,000 charge recorded for estimated costs
related to the financial decline of a limited partnership for which a wholly
owned subsidiary of the company served as general partner (also see Note 3 to
the Condensed Consolidated Financial Statements), a reduction in net affiliated
interest expense and interest expense of $8,002 and $2,505, respectively,
unrealized gains on an interest swap of $999 in 2002 compared to unrealized
losses of $1,001 in 2001, and a $1,037 reduction of interest income due to lower
interest rates in 2002. Additionally, affiliated dividend income of $1,512 was
recognized in first quarter 2002.
Following is a comparison of income tax expense related to continuing operations
for the three months and six months ended June 30, 2002 and 2001:
- ---------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
2002 2001
- ---------------------------------------------------------------------------------
Income tax benefit $ (1,669) $ (7,021)
Effective tax rate N/M 20.4%
- ---------------------------------------------------------------------------------
The 2002 effective tax rate reflects the impact of permanent items related to
extra territorial income deductions and FAS 133 adjustments.
The 2001 effective tax rates reflect a decline in estimated full year 2001
earnings before taxes relative to the first quarter full year 2001 earnings
before tax estimate. Quarterly income tax expense and rates are based on
annualized estimates as required by generally accepted accounting principles.
- ---------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
2002 2001
- ---------------------------------------------------------------------------------
Income tax expense (benefit) $ 5,544 $ (106)
Effective tax rate 87.2% N/M
- ---------------------------------------------------------------------------------
The 2002 effective tax rate reflects the inability to utilize foreign tax
credits associated with repatriated earnings and an increase in the valuation
reserve for foreign net operating losses.
The 2001 effective tax rate reflects the impact of earnings related to the
sale of a foreign business that are not expected to be permanently reinvested in
foreign locations and the inability to utilize the foreign tax credits
associated with those earnings due to the usage limitations.
CASH FLOWS
- -----------
Operating Activities
- ---------------------
Operating activities used cash of $1,194 in the six months ended June 30, 2002
compared to cash provided of $32,908 in the first six months of 2001. The
$34,102 decline is primarily due to 2002 cash taxes paid of $5,873 compared to
2001 cash taxes received of $34,050, an increased outflow in accounts payable of
$22,033 primarily due to timing of payments and reduced payment terms with new
raw material suppliers, increased cash restructuring payments of $6,293 and a
decline in Adjusted Operating EBITDA of $10,566, excluding a $16,300 settlement
and curtailment charge in 2001. Partially offsetting these increases in cash
usage is the absence of cash used by discontinued operations of $19,771, a
reduction in net interest payments of $11,104, improved cash inflows from
accounts receivable of $8,125 due to improved collection efforts and improved
inventory flows of $8,033 due to lower raw material costs.
Investing Activities
- ---------------------
Investing activities provided cash of $99,041 in the six months ended June 30,
2002 compared to $9,291 cash used in the six months ended June 30, 2001. The
$108,332 improvement is primarily due to cash proceeds from the sale of a note
receivable from Consumer Adhesives, an affiliate of the Company, to the
Company's parent for $110,000 (see Note 10 to the Condensed Consolidated
Financial Statements), a $7,354 reduction in capital expenditures, proceeds of
$7,854 primarily from collection of a note receivable related to the 2000 sale
of certain rights to harvest shellfish and the 2002 sale of land associated with
a closed plant. These amounts were partially offset by the absence of 2001
proceeds of $16,376 from the sale of land associated with a closed plant and the
sale of a portion of a common stock equity investment held by the Company.
Financing Activities
- ---------------------
Financing activities used cash of $90,939 in the six months ended June 30, 2002
compared to $27,981 in the first six months of 2001. The $62,958 increase in
cash used is primarily due to an increase in restricted cash of $80,378 (see
page 25), the payment of a note payable to BCPM (the "Note") of $31,581 and
repayments of long-term debt of $563 in 2002 compared to 2001 borrowings of
$55,704. The increases in cash used were partially offset by the absence of
$36,862 preferred stock dividend payments due to the contribution of the
$614,369 preferred stock to the Company by the Company's parent in 2001, net
short-term debt borrowings of $1,326 compared to 2001 repayments of $31,909, and
affiliate borrowings of $19,870 in 2002 compared to affiliate repayments of
$14,914 in 2001.
The Company's Note to BCPM has been settled in full with cash payments of
$31,581 and $2,600 of certain set-offs asserted by the Company against amounts
due under the Note. In connection with the payment of the Note, BCPM
acknowledged the validity and enforceability of certain set-offs asserted
against amounts due under the Note by the Company; the Company waived the right
to assert certain other set-offs against amounts due under the Note; and BCPM
and the Company exchanged mutual releases with respect to the Note. A committee
comprised solely of independent directors of BCPM, represented and advised by
separate and independent counsel, reviewed and agreed to the above provisions.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
The Company is in the process of negotiating a new credit facility. The
facility is expected to be finalized by the end of August. In the meantime, the
Company has the ability to meet their working capital requirements by borrowing
from affiliates, if necessary. The new facility will replace the uncommitted
letter of credit facility discussed below.
During first quarter 2002, the Company finalized an uncommitted letter of credit
facility totaling $45,000, and in second quarter 2002, the facility was
increased to $85,000. The Company is required to provide cash collateral
equivalent to 101% of the letters of credit outstanding under this facility.
The fees under this facility are 1/2% per annum of the amount of the letters of
credit outstanding. In addition, a 1/8% per annum issuance fee is in effect for
all new letters of credit not transferred from the existing $250,000 Credit
Agreement. At June 30, 2002, the Company had provided cash collateral of
$81,262, classified as restricted cash on the Condensed Consolidated Balance
Sheet, related to this facility.
Under the terms of the guarantee agreement between Foods and the Company, Foods
was automatically released from the obligation to guarantee the payment of the
Company's outstanding publicly held debt upon Foods being released from the
obligation to guarantee the payment of amounts due under the Company's $250,000
Credit Agreement that expired on July 13, 2002.
The Company and or affiliates of the Company, including entities controlled by
KKR, may in the future purchase, depending on market conditions, senior
unsecured notes previously issued by the Company in the open market or by other
means.
RECENT ACCOUNTING PRONOUNCEMENTS
- ----------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations," which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. Under this Statement, an asset retirement
obligation is recognized at its fair value in the period in which it is
incurred. Asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset and a related amortization expense is recognized in
future periods. This Statement is effective for the Company for financial
statements issued for fiscal years beginning after January 1, 2003. The Company
is in the process of determining the impact of adopting this Statement.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This Statement rescinds the aforementioned Statements and amends SFAS No. 13 to
eliminate inconsistencies between the required accounting for sale-leaseback
transactions and certain lease modifications that are similar to sale-leaseback
transactions. This Statement also amends various authoritative pronouncements
to clarify, correct technically or describe applicability under changed
conditions. The provisions of this Statement related to SFAS No. 4 are
effective for fiscal years beginning after May 15, 2002. The provisions of this
Statement related to SFAS No. 13 are effective for transactions occurring after
May 15, 2002. The remaining provisions of this Statement are effective for
financial statements issued on or after May 15, 2002. Early application is
encouraged for all provisions of this Statement. The Company does not expect
the adoption of this Statement to have a material impact on its financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement nullifies Emerging Issue Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." The principle difference between this Statement and EITF
94-3 relates to the requirements for recognition of the liability for costs
associated with exit or disposal activities. Specifically, the liability for a
cost associated with an exit or disposal activity is no longer recognized at the
commitment date. Instead, the liability is recognized when the liability is
incurred as defined by FASB Concept Statement No. 6, Elements of Financial
Statements. The provisions of this Statement are effective for exit or disposal
activities initiated after December 31, 2002, with early application encouraged.
Retroactive application of this Statement is prohibited. Any exit and disposal
activities initiated under EITF 94-3 shall continue to be accounted for under
the provisions of this EITF. The Company is in the process of determining the
impact of adopting this Statement.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
- --------------------------------------------
The Company and its officers may, from time to time, make written or oral
statements regarding the future performance of the Company, including statements
contained in the Company's filing with the Securities and Exchange Commission.
Investors should be aware that these statements are based on currently available
financial, economic, and competitive data and on current business plans. Such
statements are inherently uncertain and investors should recognize that events
could cause the Company's actual results to differ materially from those
projected in forward-looking statements made by or on behalf of the Company.
Such risks and uncertainties are primarily in the areas of results of operations
by business unit, liquidity, legal and environmental liabilities.
PART II
Item 1: LEGAL PROCEEDINGS
There have been no material developments during the second quarter of 2002 in
the ongoing legal proceedings that are discussed in the Company's Annual Report
on Form 10-K for the year ended December 31, 2001.
The Company is involved in other litigation throughout the United States, which
is considered to be in the ordinary course of the Company's business.
The Company believes, based on the information it presently possesses, and
taking into account its established reserves for estimated liability and its
insurance coverages, that the ultimate outcome of the foregoing proceedings is
unlikely to have a materially adverse effect on the Company's financial position
or operating results.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 9, 2002 the Company sold 111,111 shares of common stock to Joseph P.
Bevilaqua, Vice President -Corporate Strategy and Development, at a price of
$2.25 per share pursuant to a private offering under section 4(2) of the
Securities Act of 1933, as amended. The Company has also granted common stock
options and 529,100 shares of restricted common stock to Mr. Bevilaqua under the
Company's Amended and Restated 1996 Stock Purchase and Option Plan.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the second
quarter of 2002.
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
(10) Amendment dated May 30, 2002 to Consulting Agreement
with Kohlberg,Kravis Roberts & Co., L.P dated August 21, 1995
(99) Certificate Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
b. Reports on Form 8-K
There were no reports on Form 8-K issued during the second
quarter of 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BORDEN CHEMICAL, INC.
Date: August 13, 2002 By: /s/ William H. Carter
--------------- William H. Carter
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
KOHLBERG KRAVIS ROBERTS & Co.
New York - Menlo Park - London
August 21, 1995, as amended
May 30, 2002
Borden Chemical, Inc.
180 East Broad Street
Columbus, Ohio 43215
Dear Sirs:
This letter amends our letter agreement dated August 21, 1995 and serves to
confirm our retention by Borden Chemical, Inc. (the "Company") to provide
management, consulting and financial services to the Company and to its
divisions, subsidiaries and affiliates (collectively, "Borden"), as follows:
1. The Company has retained us, and we hereby agree to accept such
retention, to provide to Borden, when and if called upon, certain management,
consulting and financial services of the type customarily performed by us. The
Company agrees to pay us an annual fee of ten million dollars ($10,000,000.00)
through December 31, 2002 and thereafter an annual fee of five million dollars
($5,000,000.00), in each case payable in quarterly installments in arrears at
the end of each calendar quarter.
2. We may also invoice the Company for additional fees in connection with
acquisition or divestiture transactions or in the event that we, or any of our
affiliates, perform services for Borden above and beyond those called for by
this agreement.
3. In addition to any fees that may be payable to us under this agreement,
the Company also agrees to reimburse us and our affiliates, from time to time
upon request, for all reasonable out-of-pocket expenses incurred, including
unreimbursed expenses incurred to the date hereof, in connection with this
retention, including travel expenses and expenses of our counsel.
4. The Company agrees to indemnify and hold us, our affiliates (including,
without limitation, affiliated investment entities) and their and our respective
partners, executives, officers, directors, employees, agents and controlling
persons (each such person, including us, being an "Indemnified Party") harmless
from and against (i) any and all losses, claims, damages and liabilities
(including, without limitation, losses, claims, damages and liabilities arising
from or in connection with legal actions brought by or on behalf of the holders
or future holders of the outstanding securities of Borden or creditors or future
creditors of Borden), joint, several or otherwise, to which such Indemnified
Party may become subject under any applicable federal or state law, or
otherwise, related to or arising out of any activity contemplated by this
agreement or our retention pursuant to, and our or our affiliates' performance
of the services contemplated by, this agreement and (ii) any and all losses,
claims, damages and liabilities, joint, several or otherwise, related to or
arising out of any action or omission or alleged action or omission related to
WKJ Holding Company, Inc., CCPC Acquisition Corp., CCPC Holding Company, Inc.,
BCP Management, Inc., Borden Chemicals and Plastics Operating Limited
Partnership, Borden Chemicals and Plastics Limited Partnership or any of their
respective direct or indirect subsidiaries or the securities or obligations of
any such entities; provided that any natural person seeking indemnity or to be
held harmless for any losses, claims, damages or liabilities related to or
arising out of any action or omission or alleged action or omission as a member
of the board of directors of WKI Holding Company, Inc. or Borden Chemical, Inc.
shall only be entitled to be indemnified or held harmless to the extent of any
deductibles, amounts in excess of coverage or exclusions from or exceptions to
coverage under any applicable directors and officers liability insurance. The
Company will further, subject to the proviso to the immediately preceding
sentence, reimburse any Indemnified Party for all expenses (including counsel
fees and disbursements) upon request as they are incurred in connection with the
investigation of, preparation for or defense of any pending or threatened claim
or any action or proceeding arising from any of the foregoing, whether or not
such Indemnified Party is a party and whether or not such claim, action or
proceeding is initiated or brought by the Company; provided, however, that you
will not be liable under the foregoing indemnification provision (and amounts
previously paid that are determined not required to be paid by the Company
pursuant to the terms of this Paragraph shall be repaid promptly) to the extent
that any loss, claim, damage, liability or expense is found in a final judgment
by a court to have resulted from our willful misconduct, bad faith or gross
negligence. You also agree that no Indemnified Party shall have any liability
(whether direct or indirect, in contract or tort or otherwise) to Borden related
to or arising out of our retention pursuant to, or our affiliates' performance
of the services contemplated by, this agreement except to the extent that any
loss, claim, damage, liability or expense is found in a final, non-appealable
judgment by a court to have resulted from our willful misconduct, bad faith or
gross negligence.
You also agree that, without our prior written consent, you will not
settle, compromise or consent to the entry of any judgment in any pending or
threatened claim, action or proceeding to which an Indemnified Party is an
actual or potential party and in respect of which indemnification could be
sought under the indemnification provision in the immediately
preceding paragraph, unless such settlement, compromise or consent includes an
unconditional release of each Indemnified Party from all liability arising out
of such claim, action or proceeding.
Promptly after receipt by an Indemnified Party of notice of any suit,
action, proceeding or investigation with respect to which an Indemnified Party
may be entitled to indemnification hereunder, such Indemnified Party will notify
the Company in writing of the assertion of such claim or the commencement of
such suit, action, proceeding or investigation, but the failure so to notify the
Company shall not relieve the Company from any liability which it may have
hereunder, except to the extent that such failure has materially prejudiced the
Company. If the Company so elects within a reasonable time after receipt of such
notice, the Company may participate at its own expense in the defense of such
suit, action, proceeding or investigation. Each Indemnified Party may employ
separate counsel to represent it or defend it in any such suit, action,
proceeding or investigation in which it may become involved or is named as a
defendant and, in such event, the reasonable fees and expense of such counsel
shall be borne by the Company; provided, however, that the Company will not be
--------- -------
required in connection with any such suit, action, proceeding or investigation,
or separate but substantially similar actions arising out of the same general
allegations or circumstances, to pay the fees and disbursements of more than one
separate counsel (other than local counsel) for all Indemnified Parties in any
single action or proceeding. Whether or not the Company participates in the
defense of any claim, both the Company and we shall cooperate in the defense
thereof and shall furnish such records, information and testimony, and attend
such conferences, discovery proceedings, hearings, trials and appeals, as may be
reasonably requested in connection therewith.
If the indemnification provided for in clause (i) of the first sentence of
this Section 4 is finally judicially determined by a court of competent
jurisdiction to be unavailable to an Indemnified Party, or insufficient to hold
any Indemnified Party harmless, in respect of any losses, claims, damages or
liabilities (other than any losses, claims, damages or liabilities found in a
final judgment by a court to have resulted from our willful misconduct, bad
faith or gross negligence), then the Company, on the one hand, in lieu of
indemnifying such Indemnified Party, and we, on the other hand, will contribute
to the amount paid or payable by such Indemnified Party as a result of such
losses, claims, damages or liabilities (i) in such proportion as is appropriate
to reflect the relative benefits received, or sought to be received, by Borden
on the one hand and us, solely in our capacity as an advisor under this
agreement, on the other hand in connection with the transactions to which such
indemnification, contribution or reimbursement is sought, or (ii) if (but only
if) the allocation provided by clause (i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) but also the relative fault of Borden on the
one hand and us on the other, as well as any other relevant equitable
considerations; provided, however, that in no event shall our aggregate
--------- -------
contribution hereunder exceed the amount of fees actually received by us in
respect of the transaction at issue pursuant to this agreement. The amount paid
or payable by a party as a result of the losses, claims, damages and liabilities
referred to above will be deemed to include any legal or other fees or expenses
reasonably incurred in defending any action or claim. The Company and we agree
that it would not be just and equitable if contribution pursuant to this
paragraph were determined by pro rata allocation or by any other method which
does not take into account the equitable considerations referred to in this
paragraph. The indemnity, contribution and expense reimbursement obligations the
Company has under this letter shall be in addition to any liability the Company
or Borden may have, and notwithstanding any other provision of this letter,
shall survive the termination of this agreement.
5. Any advice or opinions provided by us may not be disclosed or referred to
publicly or to
any third party (other than Borden's legal, tax, financial or other advisors),
except in accordance with our
prior written consent.
6. We shall act as an independent contractor, with duties solely to
Borden. The provisions hereof shall inure to the benefit of and shall be binding
upon the parties hereto and their respective successors and assigns. Nothing in
this agreement, expressed or implied, is intended to confer on any person other
than the parties hereto or their respective successors and assigns, and, to the
extent expressly set forth herein, the Indemnified Parties, any rights or
remedies under or by reason of this agreement. Without limiting the generality
of the foregoing, the parties acknowledge that nothing in this agreement,
expressed or implied, is intended to confer on any present or future holders of
any securities of the Company or its subsidiaries or -affiliates, or any present
or future creditor of the Company or its subsidiaries or affiliates, any rights
or remedies under or by reason of this agreement or any performance hereunder.
7. This agreement shall be governed by and construed in accordance with the
laws of New York without regard to principles of conflicts of law.
8. The terms of this agreement are effective as of January 1, 1995. This
agreement shall continue in effect from year to year unless amended or
terminated by mutual consent.
9. Each party hereto represents and warrants that the execution and delivery
of this agreement by such party has been duly authorized by all necessary action
of such party.
10. If any term or provision of this agreement or the application thereof
shall, in any jurisdiction and to any extent, be invalid and unenforceable, such
term or provision shall be ineffective, as to such jurisdiction, solely to the
extent of such invalidity or unenforceability without rendering invalid or
unenforceable any remaining terms or provisions hereof or affecting the validity
or enforceability of such term or provision in any other jurisdiction. To the
extent permitted by applicable law, the parties hereto waive any provision of
law that renders any term or provision of this agreement invalid or
unenforceable in any respect.
11. Each of Borden and us waives all right to trial by jury in any action,
proceeding or counterclaim (whether based upon contract, tort or otherwise)
related to or arising out of our retention pursuant to, or our performance of
the services contemplated by this agreement.
12. It is expressly understood that the foregoing paragraphs 2-5, 10 and 11
in their entirety, survive any termination of this agreement.
If the foregoing sets forth the understanding between us, please so
indicate on the enclosed signed copy of this letter in the space provided
therefor and return it to us, whereupon this letter shall constitute a binding
agreement among us.
Very truly yours,
Kohlberg Kravis Roberts & Co. L.P.
By: /s/ Scott M. Stuart
----------------------
Title: Authorized Signatory
AGREED TO AND ACCEPTED
/s/ C. Robert Kidder
--- ------------------
Title:
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Borden Chemical, Inc. (the
"Company") on Form 10-Q for the period ended June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1) The Report fully complies with the requirements of Section 13(a) or 15
(d) of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Craig O. Morrison /s/ William H. Carter
Craig O. Morrison William H. Carter
Chief Executive Office Chief Financial Officer
Date: August 13, 2002 Date: August 13, 2002