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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 March 31, 2003
----------------
Commission file number 1-71
----
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
-- --
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
Number of shares of common stock, $0.01 par value, outstanding as of the close
of business on May , 2003: __________
BORDEN CHEMICAL, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. BORDEN CHEMICAL, INC. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations and Comprehensive Income,
three months ended March 31, 2003 and 2002 3
Consolidated Balance Sheets, March 31, 2003 and December 31, 2002 5
Consolidated Statements of Cash Flows, three months ended March 31, 2003 and 2002 7
Consolidated Statement of Shareholders' Deficit, three months ended March 31, 2003 9
Notes to Consolidated Financial Statements 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 26
ITEM 4. CONTROLS AND PROCEDURES 26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 27
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS 27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 28
Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 30
PART I
ITEM 1. BORDEN CHEMICAL, INC. CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
BORDEN CHEMICAL, INC.
Three months ended March 31,
(In thousands, except per share data) 2003 2002
- ---------------------------------------------------------------------------------------------------------------
Net sales $ 349,288 $ 296,091
Cost of goods sold 283,454 222,471
--------------- -----------------
Gross margin 65,834 73,620
--------------- -----------------
Distribution expense 16,734 14,570
Marketing expense 10,273 10,434
General & administrative expense 29,691 26,930
Loss on sale of assets 229 -
Business realignment expense and impairments 1,296 4,659
Other operating expense 406 1,935
--------------- -----------------
Operating income 7,205 15,092
--------------- -----------------
Interest expense 11,340 11,787
Affiliated interest expense, net of affiliated interest
income of $0 and $455, respectively 194 267
Other non-operating expense (income) 467 (2,288)
--------------- -----------------
(Loss) income before income tax and cumulative effect
of change in accounting principle (4,796) 5,326
Income tax (benefit) expense (1,391) 7,213
--------------- -----------------
(Loss) before cumulative effect of change in accounting
principle (3,405) (1,887)
Cumulative effect of change in accounting principle - (29,825)
--------------- -----------------
Net (loss) $ (3,405) $ (31,712)
================ =================
Comprehensive Income (Loss) $ 4,669 $ (34,283)
================ =================
- ---------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED) (CONTINUED)
BORDEN CHEMICAL, INC.
Three months ended March 31,
(In thousands, except per share data) 2003 2002
- ---------------------------------------------------------------------------------------------------------------
Basic and Diluted Per Share Data
- -----------------------------------
(Loss) before cumulative effect of change
in accounting principle $ (0.02) $ (0.01)
Cumulative effect of change in accounting principle - (0.15)
----------------- -----------------
Net (loss) $ (0.02) $ (0.16)
================ =================
Average number of common shares outstanding
during the period - basic and dilutive 200,903 199,158
- ---------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN CHEMICAL, INC.
(In thousands)
March 31, December 31,
ASSETS 2003 2002
- ---------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and equivalents $ 15,599 $ 14,740
Restricted cash 14,848 67,049
Accounts receivable (less allowance for doubtful
accounts of $12,844 in 2003 and $12,219 in 2002) 196,786 170,822
Accounts receivable from affiliates 1,701 5,840
Inventories:
Finished and in-process goods 42,375 45,178
Raw materials and supplies 45,358 41,079
Deferred income taxes 25,950 28,869
Other current assets 12,320 13,232
------------------ --------------------
354,937 386,809
------------------ --------------------
INVESTMENTS AND OTHER ASSETS
Deferred income taxes 130,431 118,368
Other assets 19,521 19,615
------------------ --------------------
149,952 137,983
------------------ --------------------
PROPERTY AND EQUIPMENT
Land 31,610 31,964
Buildings 99,221 98,313
Machinery and equipment 658,299 649,782
------------------ --------------------
789,130 780,059
Less accumulated depreciation (351,569) (340,321)
------------------ --------------------
437,561 439,738
GOODWILL 39,698 39,640
OTHER INTANGIBLE ASSETS 7,235 7,610
------------------ --------------------
TOTAL ASSETS $ 989,383 $ 1,011,780
=================== ====================
- ---------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
BORDEN CHEMICAL, INC.
(In thousands, except share data)
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' (DEFICIT) 2003 2002
- ---------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts and drafts payable $ 131,880 $ 113,549
Accounts payable to affiliates 20 2,580
Debt payable within one year 12,024 2,779
Loans payable to affiliates 43,890 84,680
Other current liabilities 78,808 97,932
------------------- ---------------------
266,622 301,520
------------------- ---------------------
OTHER LIABILITIES
Long-term debt 523,322 523,287
Non-pension post-employment benefit obligations 143,360 145,384
Other long-term liabilities 212,291 202,482
------------------- ---------------------
878,973 871,153
------------------- ---------------------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 11)
SHAREHOLDERS' (DEFICIT)
Common stock - $0.01 par value: authorized 300,000,000 shares,
Issued 200,895,628 and 200,923,628 shares in 2003 and
2002, respectively 2,009 2,009
Paid in capital 1,184,202 1,172,344
Receivable from parent (475,660) (463,516)
Deferred compensation (2,381) (2,679)
Accumulated other comprehensive income (157,563) (165,637)
Accumulated deficit (706,819) (703,414)
------------------- ---------------------
(156,212) (160,893)
------------------- ---------------------
TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIT) $ 989,383 $ 1,011,780
=================== =====================
- ---------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN CHEMICAL, INC.
Three months ended March 31,
(In thousands) 2003 2002
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net (loss) $ (3,405) $ (31,712)
Adjustments to reconcile net loss to net cash from
(used in) operating activities:
Loss on the sale of assets 229 -
Deferred tax (benefit) (9,549) (1,237)
Depreciation and amortization 11,363 12,101
Deferred compensation expense 298 -
Business realignment and impairments 1,296 4,659
Unrealized (gain) loss on derivative mark-to-market 264 (516)
Cumulative effect of change in accounting principle - 29,825
Net change in assets and liabilities:
Trade receivables (30,445) (14,176)
Inventories (581) 14,386
Trade payables 14,197 (23,455)
Income taxes 3,466 10,174
Other assets 14,042 3,085
Other liabilities (13,503) (26,823)
------------------- ---------------------
(12,328) (23,689)
------------------- ---------------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (8,099) (9,805)
Proceeds from the sale of assets 916 3,002
Proceeds from sale of note receivable to an affiliate - 110,000
------------------- ---------------------
(7,183) 103,197
------------------- ---------------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net short-term debt borrowings (repayments) 9,245 (122)
Affiliated borrowings/receipts (repayments/loans) (40,790) (5,500)
Payment of note payable to unconsolidated subsidiary - (31,581)
Decrease (Increase) in restricted cash 52,201 (38,855)
Net (repurchases) sales of common stock from/to management (286) 153
------------------- ---------------------
20,370 (75,905)
------------------- ---------------------
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
BORDEN CHEMICAL, INC.
Three months ended March 31,
(In thousands) 2003 2002
- ---------------------------------------------------------------------------------------------------------------
Increase in cash and equivalents $ 859 $ 3,603
Cash and equivalents at beginning
of year 14,740 24,632
-------------- ----------------
Cash and equivalents at end
of period $ 15,599 $ 28,235
================= =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest, net $ 16,128 $ 15,861
Income taxes, net 4,692 2,269
Non-cash activity:
Capital contribution by parent 4,250 2,337
Settlement of note payable to unconsolidated subsidiary - 2,600
- ---------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) (UNAUDITED)
BORDEN CHEMICAL, INC.
(In thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Receivable Other
Common Paid-in from Deferred Comprehensive Accumulated
Stock Capital Parent Compensation Income Deficit Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $2,009 $1,172,344 $(463,516) $(2,679) $(165,637) $(703,414) $(160,893)
- -----------------------------------------------------------------------------------------------------------------------------------
Net (loss) (3,405) (3,405)
Translation adjustments and other 8,074 8,074
---------
COMPREHENSIVE INCOME 4,669
---------
Repurchases of common stock from management (286) (286)
Interest accrued on notes from parent (net of tax $4,250) 7,894 (12,144) (4,250)
Compensation expense on restricted stock 298 298
Capital contribution from parent 4,250 4,250
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2003 $2,009 $1,184,202 $(475,660) $(2,381) $(157,563) $(706,819) $(156,212)
- -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except share and 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. 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 immediate parent is Borden Holdings, Inc. ("BHI"), which is a
wholly owned subsidiary of BW Holdings, LLC ("BWHLLC"), an entity controlled by
KKR.
2. BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements (the "Financial
Statements") include the accounts of Borden Chemical, Inc. and its subsidiaries,
after elimination of intercompany accounts and transactions and 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. Certain
prior year amounts have been reclassified to conform with the 2003 presentation.
The Company accounts for stock-based compensation under APB 25 and has adopted
the disclosure-only provision of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") and SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment to SFAS No. 123". The
following table sets forth the required reconciliation of reported and Pro Forma
Net Loss and EPS under SFAS No. 148:
The Company accounts for stock-based compensation under APB 25 and has adopted
the disclosure-only provision of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") and SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment to SFAS No. 123". The
following table sets forth the required reconciliation of reported and Pro Forma
Net Loss and EPS under SFAS No. 148:
- ------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
- ------------------------------------------------------------------------------------------------------------------------
2003 2002
- ------------------------------------------------------------------------------------------------------------------------
Net (Loss) applicable to common stock $ (3,405) $ (31,712)
Add: Stock-based employee compensation expense
included in reported net income, net of related tax
benefit - -
Deduct: Total stock-based employee compensation
expense determined under fair value based method for all
awards granted since January 1, 1996, net of related tax
effects (33) -
-------------------------------------------------
Pro Forma Net Loss $ (3,438) $ (31,712)
=================================================
Average shares outstanding - basic and diluted 200,903 199,158
Per share as reported (basic and diluted) $ (0.02) $ (0.16)
Per share pro forma (basic and diluted) $ (0.02) $ (0.16)
- ------------------------------------------------------------------------------------------------------------------------
3. BUSINESS REALIGNMENT EXPENSE
In first quarter 2003, the Company recorded business realignment expense and
impairments of $1,296 consisting of business realignment expense of $1,229 and
non-cash asset impairment charges of $67.
Provided below is a rollforward of business realignment reserve activity for
first quarter 2003.
- --------------------------------------------------------------------------------------------------------------
RESERVES RESERVES
DECEMBER 31, 2003 2003 MARCH 31,
2002 EXPENSE CHARGES 2003
- --------------------------------------------------------------------------------------------------------------
Plant closure costs (1) $ 9,568 $ 955 $ 2,239 $ 8,284
Other severance and employee costs 3,996 274 1,793 2,477
------------- ------------ ----------- -----------
$ 13,564 $ 1,229 $ 4,032 $ 10,761
- --------------------------------------------------------------------------------------------------------------
(1) Plant closure costs include fixed asset write-offs, plant employee
severance and demolition, environmental and other related costs, offset by any
pre-tax gain on the sales of assets associated with a closed plant.
Business realignment expense in first quarter 2003 of $1,229 consists of $955 of
plant closure costs, relating to environmental remediation for previously closed
plants in Brazil ($450), additional costs related to the closure of the melamine
crystal business ($181) and other previous plant closures, fixed assets
write-offs and restructuring programs ($324), and $274 of severance and other
employee costs. Plant closure costs include plant employee severance of $6 and
demolition, environmental and other costs of $949.
Provided below is a rollforward of business realignment reserve activity for
first quarter 2002.
- --------------------------------------------------------------------------------------------------------------
RESERVES RESERVES
DECEMBER 31, 2002 2002 MARCH 31,
2001 EXPENSE CHARGES 2002
- --------------------------------------------------------------------------------------------------------------
Plant closure costs (1) $ 14,067 $ 4,657 $ 2,120 $ 16,604
Other severance and employee costs 8,360 2 1,526 6,836
-------------- ------------ ------------ -----------------
$ 22,427 $ 4,659 $ 3,646 $ 23,440
- --------------------------------------------------------------------------------------------------------------
(1) Plant closure costs include fixed asset write-offs, plant employee severance and demolition,
environmental and other related costs, offset by any pre-tax
gain on the sales of assets associated with a closed plant.
In first quarter 2002, the Company had net business realignment expense of
$4,659, which was comprised of $7,122 of plant closure costs, primarily related
to the closure of the melamine crystal business, and $2 of other severance and
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 $4,390 and demolition,
environmental and other costs of $2,732.
4. RESTRICTED CASH
Restricted cash at March 31, 2003 and December 31, 2002 represents cash
collateral related to the Company's uncommitted letter of credit facility. The
facility requires the Company to provide cash collateral equivalent to 101% of
the letters of credit outstanding. The Company is in the process of canceling
the letters of credit under this facility and reissuing them under a new
three-year asset based revolving credit facility dated September 23, 2002. The
Company expects this process to be completed by July 2003.
5. 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 of $29,825 which represents 100% of the
January 1, 2002 carrying amount related to its European reporting unit. This
impairment charge is reported as the cumulative effect of change in accounting
principle in the Consolidated Statements of Operations for the three months
ended March 31, 2002.
6. RESTRICTED STOCK
During the first quarter of 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. An additional 529,100 shares of restricted common
stock were granted to management during the remainder of the 2002 year. The
deferred compensation of $3,571 related to the restricted common shares granted
in 2002 is being amortized over the three-year vesting period.
7. COMPREHENSIVE INCOME
Comprehensive income is computed as follows:
- -------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
2003 2002
- -------------------------------------------------------------------------------
Net (loss) income $ (3,405) $ (31,712)
Foreign currency translation adjustments 8,074 (2,855)
Derivative activity - 284
--------------- ---------------
$ 4,669 $ (34,283)
- -------------------------------------------------------------------------------
The foreign currency translation adjustments in 2003 relate primarily to Canada
plus, to a lesser extent, favorable exchange rates in the United Kingdom and
Brazil. The foreign currency translation adjustments relate primarily to the
United Kingdom in 2002. The derivative activity amounts represent
reclassification into earnings of the original cumulative effect of change in
accounting principle.
8. SEGMENT DATA
The Company reports three operating segments, as well as Corporate and other and
Businesses sold or distributed. The operating segments are North American
Forest Products, North American Performance Resins and International. The North
American Forest Products segment product lines include formaldehyde and forest
product resins with the key business drivers being housing starts, furniture
demand, panel production capacity and chemical sector operating conditions. The
North American Performance Resins segment product lines include speciality,
oilfield, industrial, nonwoven, laminate and foundry resins and UV coatings with
the key business drivers being housing starts, auto builds, active gas drilling
rigs, fiber optic demand and the general industrial sector. The International
segment consists of operations in Latin America, Europe and Asia Pacific with
the principal countries being Brazil, the United Kingdom, Malaysia and
Australia. Product lines of the International segment include forest product
and performance resins with the key business drivers being export levels, panel
production capacity, housing starts, furniture demand and the local political
environment. Corporate and other represents general and administrative expenses
and certain expenses related to divested businesses. Key drivers of the expense
include inflation, benefit cost and insurance experience and rates. The
Businesses sold, distributed or closed segment includes the Company's melamine
crystal business, which was closed on January 11, 2002. Operating results
subsequent to the closure date represent revenue and related expenses from the
sale of inventory.
RESULTS OF OPERATIONS BY SEGMENT:
- -------------------------------------
Following is a comparison of net sales, operating income (loss), depreciation
and amortization and EBITDA by reportable business segment for the Company for
the three months ended March 31:
NET SALES
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
North American Forest Products $ 178,723 $ 142,951
North American Performance Resins 95,536 86,479
International 75,023 63,309
Businesses sold or distributed 6 3,352
------------ ---------------
$ 349,288 $ 296,091
============== ===============
OPERATING INCOME (LOSS)
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
North American Forest Products $ 13,280 $ 19,628
North American Performance Resins 8,273 9,499
International 5,157 4,427
Corporate and other (19,033) (14,737)
Businesses sold or distributed (472) (3,725)
------------ ---------------
$ 7,205 $ 15,092
============== ===============
DEPRECIATION AND AMORTIZATION EXPENSE
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
North American Forest Products $ 4,779 $ 4,776
North American Performance Resins 2,470 2,509
International 2,609 2,647
Corporate and other 1,505 2,169
Businesses sold or distributed - -
------------ ---------------
$ 11,363 $ 12,101
============== ===============
EBITDA information is presented with the Company's segment disclosures because
it is the basis for a primary measure used by the Company to evaluate its
operating results and is determined by adding depreciation and amortization to
Operating Income (Loss).
EBITDA
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
North American Forest Products $ 18,059 $ 24,404
North American Performance Resins 10,743 12,008
International 7,766 7,074
Corporate and other (17,528) (12,568)
Businesses sold or distributed (472) (3,725)
------------ ---------------
$ 18,568 $ 27,193
============== ===============
9. RELATED PARTY TRANSACTIONS
Financing and Investing Arrangements
- ---------------------------------------
Borden Foods Holdings Corporation ("Foods"), an affiliate of the Company, loans
cash to the Company, under an Affiliate Borrowing Agreement. The loans are
evidenced by a demand promissory note with interest at a variable rate per year.
These loans are recorded as loans payable to affiliates in the Consolidated
Balance Sheets. Foods had $43,890 at an interest rate of 1.4375% and $84,680 at
an interest rate of 1.3125% loaned to the Company at March 31, 2003 and December
31, 2002, respectively. The Company recorded affiliated interest expense of $194
and $722 related to amounts loaned by affiliates for the three months ended
March 31, 2003 and 2002, respectively.
In first quarter 2002, the Company settled in full its note payable (the "Note")
to BCPM 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 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. See Note 11
for further discussion of BCPM.
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.
Foods was a guarantor of the Company's debt until 2002. 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.
Administrative Service, Management and Consulting Arrangements
- -------------------------------------------------------------------
The Company provides administrative services to Foods under a revised agreement
effective for 2002 and beyond. The annual fee under this agreement is $50 for
2003 and $120 for 2002, respectively. Fees received for these services are
offset against the Company's general and administrative expenses and totaled $13
and $30 for each of the three months ended March 31, 2003 and 2002,
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 March 31, 2003 is $152 related to these costs.
Borden Capital, Inc. ("Capital") provided management, consulting and governance
to the Company, and the Company provided certain administrative services to
Capital during 2002. Capital charged the Company an annual fee of $9,000,
payable quarterly in arrears, which represented the net amount of Capital's fee
less the Company's fee for providing administrative services to Capital. During
2002, BHI made a decision to cease the operations of Capital by the end of the
first quarter of 2003. Commencing in 2003, certain management, consulting and
board services previously provided to the Company by Capital were assumed by the
Company, while other such services will continue to be provided to the Company
by KKR for an annual fee of $3,000. During the quarter ended March 31, 2003 the
Company paid KKR $750 under this arrangement while in the first quarter of 2002
the management fee due to Capital was $2,250.
The Company provides certain administrative services for its parent BHI. During
the first quarter of 2003, the Company billed BHI $119 for such services, which
was offset against the Company's general and administrative expense.
10. GUARANTEES AND INDEMNIFICATIONS
Standard Guarantees / Indemnifications
- -----------------------------------------
In the ordinary course of business, the Company enters into numerous agreements
that contain standard guarantees and indemnities whereby the Company indemnifies
another party for, among other things, breaches of representations and
warranties. Such guarantees or indemnifications are granted under various
agreements, including those governing (i) purchases and sales of assets or
businesses, (ii) leases of real property, (iii) licenses of intellectual
property and (iv) long-term supply agreements. The guarantees or
indemnifications issued are for the benefit of the (i) buyers in sale agreements
and sellers in purchase agreements, (ii) landlords in lease contracts, and (iii)
licensees in license agreements and (iv) customers in long-term supply
agreements.
In addition, these parties may also be indemnified against any third party claim
resulting from the transaction that is contemplated in the underlying agreement.
While some of these guarantees extend only for the duration of the underlying
agreement, many survive the expiration of the term of the agreement or extend
into perpetuity (unless subject to a legal statute of limitations). There are
no specific limitations on the maximum potential amount of future payments that
the Company could be required to make under these guarantees, nor is the Company
able to develop an estimate of the maximum potential amount of future payments
to be made under these guarantees as the triggering events are not subject to
predictability. With respect to certain of the aforementioned guarantees, the
Company has reimbursement agreements from its parent entity, or maintains
insurance coverage that mitigates any potential payments to be made.
In addition, the Company has agreed to indemnify KKR for any claims resulting
from its services to the Company. The indemnification does not expire and the
Company is not able to determine a maximum exposure under the agreement.
However, the Company does have an indemnification agreement from its parent for
any amounts that it must pay under the KKR indemnity relating to World Kitchen,
Inc., a former affiliate of the Company.
The Company has not entered into any significant agreement subsequent to January
1, 2003 that would require it, as a guarantor, to recognize a liability for the
fair value of obligations it has undertaken in issuing the guarantee.
Subsidiary Guarantees
- ----------------------
The Company guarantees the bank debt of one of its Brazilian subsidiaries up to
a maximum U.S. equivalent of US $6,700.
Warranties
- ----------
The Company does not make express warranties on its products, other than that
they comply with the Company's specifications, and therefore does not record a
warranty liability. Adjustments for product quality claims are not material and
in general are handled through routine procedures and charged against sales
revenues upon occurrence.
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 the Company's 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.
On October 22, 2002 the U.S. Bankruptcy Court for the District of Delaware
approved a Settlement Agreement among the Company, Borden Chemicals and Plastics
Operating Limited Partnership ("BCPOLP"), BCP Management, Inc. ("BCPM"), the
U.S. Environmental Protection Agency and the Louisiana Department of
Environmental Quality, whereby the Company agreed to perform certain of BCPOLP's
obligations with respect to environmental remediation at BCPOLP's Geismar,
Louisiana site.
The Company has accrued approximately $42,800 and $44,000 at March 31, 2003 and
December 31, 2002, respectively, for all 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 $39,000.
Because the Company's operations involve the use, handling, processing, storage,
transportation and disposal of hazardous materials, the Company is subject to
extensive environmental regulation at the Federal and State level and is exposed
to the risk of claims for environmental remediation or restoration as well as
claims of injury from direct exposure to such materials or products produced by
the Company and from indirect exposure when such materials or its products are
incorporated into other companies' products. In addition, the Company's former
ink, wallcoverings, film, phosphate mining and processing, thermoplastics, food,
dairy and other manufacturing operations, were also subject to environmental
regulations and posed similar risks for claims. There can be no assurance
that, as a result of former, current or future operations, there will not be
additional environmental remediation or restoration liabilities or claims of
personal injury by employees or members of the public due to exposure or alleged
exposure to such materials or to the Company's products.
LEGAL MATTERS - The Company has recorded $11,900 and $10,000 in liabilities at
March 31, 2003 and December 31, 2002, respectively, for legal defense and
settlement costs that they believe are probable and reasonably estimable.
Actual costs are not expected to exceed these amounts. In addition, there has
been increased publicity about asbestos liabilities faced by manufacturing
companies. As a result of the bankruptcies of many asbestos producers,
plaintiff attorneys are increasing their focus on peripheral defendants,
including the Company. The Company believes it has adequate reserves and
insurance and does not believe it has a material asbestos exposure.
In 1998, pursuant to a merger and recapitalization transaction sponsored by The
Blackstone Group ("Blackstone") and financed by Chase Manhattan Bank ("Chase"),
Borden Decorative Products Holdings, Inc. ("BDPH"), a wholly owned subsidiary of
the Company, was merged with an acquisition vehicle created by Blackstone, which
subsequently merged with Imperial Wallcoverings to create Imperial Home Decor
Group ("IHDG"). Blackstone provided $84,500 in equity and Chase provided
$295,000 in senior financing. Borden received approximately $314,400 in cash
and 11% of IHDG common stock for its interest in BDPH. On January 5, 2000, IHDG
filed for reorganization under Chapter 11 of the U. S. Bankruptcy Code. IHDG
emerged from bankruptcy in April 2001. The IHDG Litigation Trust (the "Trust")
was created pursuant to the plan of reorganization in the IHDG bankruptcy to
pursue preference and other avoidance claims on behalf of the unsecured
creditors of IHDG. In November 2001, the Trust filed a lawsuit against the
Company and certain of its affiliates seeking to have the IHDG recapitalization
transaction voided as a fraudulent conveyance and asking for a judgment to be
entered against the Company for $314,400 plus interest, costs and attorney fees.
Discovery is pending in the case with a cut-off currently scheduled for December
2003. The Company believes it has strong defenses to the Trust's allegations
and intends to defend the case vigorously.
OTHER - The Company's subsidiary, BCP Management, Inc. ("BCPM"), filed for
protection under Chapter 11 of the United States Bankruptcy Code, in the United
States Bankruptcy Court for the District of Delaware on March 22, 2002. BCPM
has served as the general partner of Borden Chemicals and Plastics Operating
Limited Partnership ("the Partnership") which was created in November 1987 and
operated as a commodity chemicals producer. On April 3, 2001 the Partnership
filed for protection under Chapter 11 of the United States Bankruptcy Code, in
the United States Bankruptcy Court for the District of Delaware. On February 5,
2003, the U.S. Bankruptcy Court approved a Joint Plan of Liquidation for the
Partnership and BCPM (the "Joint Plan") which provided for the transfer of the
remaining assets of both entities, including preference, avoidance and other
claims against third parties (including the Company) to separate liquidating
entities for liquidation and distribution to their creditors. The transfer of
the remaining assets of both entities to the liquidating agents was effective
March 13, 2003. The Company's ownership interest in BCPM has been extinguished
and no distributions from BCPM to the Company are anticipated. The Company
recorded charges totaling $30,000 for calendar years 2000 and 2001 to reduce the
value of the Company's investment in BCPM to zero. On April 3, 2003, the
Company entered into an agreement ("Tolling Agreement") with BCP Liquidating
LLC, ("BCP Liquidating") the successor in interest to the Partnership, extending
to June 2, 2003 the period within which BCP Liquidating may file preference
claims against the Company relating to payments made by the Partnership to the
Company within one year preceding the Partnership's bankruptcy filing. Payments
made by the Partnership to the Company in the year preceding bankruptcy total
approximately $10,000 for products sold and services provided by the Company to
the Partnership in the ordinary course of its operations. Based on its analysis
to date, the Company does not believe any significant amounts are recoverable as
preferences by BCP Liquidating. No assurance can be given that the above
described claims or other claims related to the bankruptcies of BCPM and the
Partnership will not be made against the Company.
In 1992, the State of Sao Paolo Tax Bureau issued an assessment against the
Company's primary Brazilian subsidiary claiming that excise taxes were owed on
certain intercompany loans made for centralized cash management purposes,
characterized by the Tax Bureau as intercompany sales. Since that time the
subsidiary and the Tax Bureau have held discussions and the subsidiary has filed
an administrative appeal seeking cancellation of the assessment. In December
2001, the Administrative Court upheld the assessment in the amount of $R40,600,
including tax, penalties, monetary correction and interest, or approximately
$11,000. In September 2002, the subsidiary filed a second appeal with the
highest level administrative court, again seeking cancellation of the
assessment. The Company believes it has a strong defense against the assessment
and will pursue the appeal vigorously; however, no assurance can be given that
the assessment will not be upheld.
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.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (AMOUNTS 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 11 and Note 3 to the Consolidated Financial Statements on
page 35 of the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 28, 2003.
RESULTS OF OPERATIONS BY SEGMENT:
- -------------------------------------
Following is a comparison of net sales, operating income (loss), depreciation
and amortization and EBITDA by reportable business segment for the Company for
the three months ended March 31:
NET SALES
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
North American Forest Products $ 178,723 $ 142,951
North American Performance Resins 95,536 86,479
International 75,023 63,309
Businesses sold or distributed 6 3,352
-------------- ---------------
$ 349,288 $ 296,091
============== ===============
OPERATING INCOME (LOSS)
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
North American Forest Products $ 13,280 $ 19,628
North American Performance Resins 8,273 9,499
International 5,157 4,427
Corporate and other (19,033) (14,737)
Businesses sold or distributed (472) (3,725)
-------------- ---------------
$ 7,205 $ 15,092
============== ===============
DEPRECIATION AND AMORTIZATION EXPENSE
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
North American Forest Products $ 4,779 $ 4,776
North American Performance Resins 2,470 2,509
International 2,609 2,647
Corporate and other 1,505 2,169
Businesses sold or distributed - -
-------------- ---------------
$ 11,363 $ 12,101
============== ===============
EBITDA information is presented with the Company's segment disclosures because
it is the basis for a primary measure used by the Company to evaluate its
operating results and is determined by adding depreciation and amortization to
Operating Income (Loss).
EBITDA
- -------------------------------------------------------
2003 2002
- -------------------------------------------------------
North American Forest Products. . $ 18,059 $ 24,404
North American Performance Resins 10,743 12,008
International . . . . . . . . . . 7,766 7,074
Corporate and other . . . . . . . (17,528) (12,568)
Businesses sold or distributed. . (472) (3,725)
$ 18,568 $ 27,193
--------- ---------
Included within EBITDA are the following expenses, income, gains and loses
related to business realignment activities undertaken under by the Company and
certain other significant charges.
SIGNIFICANT AND UNUSUAL ITEMS
IMPACTING EBITDA (1)
- ----------------------------------------------------------------------------------------------------------------------
(EXPENSE) INCOME
- ----------------------------------------------------------------------------------------------------------------------
PLANT
2003 CLOSURE (2) SEVERANCE IMPAIRMENTS TOTAL
- ----------------------------------------------------------------------------------------------------------------------
North American Forest Products $ 37 $ (84) $ $ (47)
North American Performance
Resins (47) (47)
International (642) (14) (67) (723)
Corporate and other (122) (176) (298)
Businesses sold or distributed (181) (181)
------------- ------------- ------------- --------------
Total $ (955) $ (274) $ (67) $ (1,296)
=============== ============== =============== ================
2002
- ----
North American Forest Products $ (288) $ 82 $ - $ (206)
North American Performance Resins (346) 69 (277)
International 150 150
Corporate and other (153) (153)
Businesses sold or distributed (4,173) (4,173)
------------- ------------- ------------- --------------
Total $ (4,657) $ (2) $ - $ (4,659)
=============== ============== =============== ================
(1) See pages 20 through 23 of the Management's Discussion and Analysis of Financial Condition and Results of Operations
for further information concerning these items.
(2) Plant closure costs include fixed asset write-offs, plant employee severance and demolition, environmental and other
related costs, offset by any pre-tax gain on the sale of assets associated with a closed plant.
THREE MONTHS ENDED MARCH 31, 2003 VERSUS THREE MONTHS ENDED MARCH 31, 2002
NET SALES VARIANCE 2003 AS A PERCENTAGE INCREASE (DECREASE) FROM 2002
- -------------------------------------------------------------------------------------------------------------
VOLUME PRICE/MIX TRANSLATION TOTAL
- -------------------------------------------------------------------------------------------------------------
North American Forest Products 4.4% 18.8% 1.8% 25.0%
North American Performance Resins 4.4% 6.1% 10.5%
International 3.5% 22.6% (7.6%) 18.5%
North American Forest Products
- ---------------------------------
North American Forest Products sales increased $35,772 or 25.0% in the first
quarter of 2003 versus the comparable period last year. The major component of
the increase was higher selling prices for resins and formaldehyde related to
the pass through of higher raw material prices under contracts that provide for
monthly or quarterly price adjustments based on published cost indices for the
Company's primary raw materials. In addition, an increase in sales volume of
formaldehyde driven by strong demand in the general chemical sector accounted
for 4.4% of the year on year sales increase. Favorable currency exchange rates
also contributed to the improved sales this year versus last year due to a
strengthened Canadian dollar.
EBITDA decreased by $6,345 or 26.0% in the first quarter of 2003 versus the
comparable period last year. This decrease was attributable to significantly
higher raw material costs combined with increased processing costs resulting
from higher energy, benefit and insurance costs in the first quarter of 2003
compared to 2002. While raw material price increases can contractually be
passed on to customers, in periods of rising prices there is normally a negative
lag effect in matching the timing of the cost increases and contract trigger
points. The impact of rising raw material prices and increased processing costs
more than offset the positive effect of the increase in volume.
North American Performance Resins
- ------------------------------------
North American Performance Resins sales increased $9,057 or 10.5% in the quarter
ended March 31, 2003 as compared to the quarter ended March 31, 2002. The major
contributor to this improvement was increased volumes and improved mix in
oilfield products. This reflects a higher percentage of premium products in the
sales mix as well as increased demand due to an increase in natural gas
exploration and drilling activity. Specialty resins also contributed to the
improved sales through improved mix and volume. The oilfield and specialty resin
volume improvements were partially offset by a decline in foundry resins volumes
reflecting weak market conditions in the automotive sector.
EBITDA decreased by $1,265 or 10.5% in the quarter ended March 31, 2003 as
compared to the prior year comparable period. This decrease was attributable to
higher raw material prices in the specialty resins products partially offset by
the improved volumes and mix in oilfield products. The impact of higher energy,
benefit and insurance costs on processing costs were offset by synergies
realized from the 2001 foundry acquisition.
International
- -------------
International sales increased $11,714 or 18.5% in the first quarter of 2003
versus the comparable period for the prior year. Europe, Latin America and Asia
Pacific all contributed to the increase with Europe reflecting strong price
increases and currency exchange gains partially offset by a volume decline due
to the continued difficult market environment. Latin America showed strong
price improvement and volume gains which were largely offset by currency
exchange losses, while Asia Pacific reflected improvement in price, volume and
currency exchange gains. For all three markets, the major reason for the strong
price improvement relates to the pass through of significantly higher raw
material prices.
EBITDA from International businesses increased $692 or 9.8% in the quarter ended
March 31, 2003 versus the comparable period last year. The increase is
primarily attributable to the strong improvement in gross margin in Latin
America resulting from pricing and volume growth and, a $1,100 reserve reduction
due to a revised estimate of the potential liability related to the importation
of inventory, partially offset by the exchange losses as well as the increased
environmental remediation costs related to previously closed plants in Latin
America in 2003 as compared to 2002. The 2002 significant and unusual items for
International consist of a gain on the sale of land in Europe largely offset by
additional expenses required for plant closings and severance in Europe. The
increased expense for plant closings was partially offset by foreign exchange
gains from Europe and strong performance by the forest products group in Latin
America, tempered by exchange losses.
Corporate and other
- ---------------------
Corporate and other expenses increased $4,960 to a loss of $17,528 in the first
quarter of 2003. The increase in expense is primarily attributable to
significantly higher pension, post-retirement and insurance benefit costs,
additional legal reserves due to higher than expected settlement costs and
higher revised estimates for general insurance. The increased costs were
partially offset by a reduction in management fees this year versus last year.
See Liquidity for a discussion of amendments the Company has made to its medical
benefit plan, effective September 1, 2003. As a result, the Company anticipates
that expenses related to post-retirement health benefits will be reduced by
approximately $10,000 per year in future periods as compared to expense
anticipated under the pre-amended retiree medical plan.
Business disposed of
- ----------------------
The Businesses disposed of represents the disposition of remaining inventory and
other assets of the melamine crystal business subsequent to its closure on
January 11, 2002, with the activity in first quarter 2003 being significantly
lower than 2002. As part of its ongoing business strategy the Company will
continue to review certain business realignment activities and engage in
discussions with third parties regarding possible acquisitions, joint ventures
and divestitures in order to manage and enhance its product portfolio and
further its strategic objectives. Success in identifying and completing such
activities and transactions could assist the Company in maintaining or improving
its competitive position as well as possibly improve its revenues, decrease
costs and improve profits.
NON-OPERATING EXPENSES AND INCOME TAXES
- -------------------------------------------
Following is a comparison of non-operating expenses for the three months ended
March 31, 2003 and 2002:
- -----------------------------------------------------------------------------------
Three months ended March 31,
----------------------------
2003 2002
- -----------------------------------------------------------------------------------
Interest expense $ 11,340 $ 11,787
Affiliated interest expense, net 194 267
Other non-operating expense (income) 467 (2,288)
-------------- ----------------
$ 12,001 $ 9,766
- -----------------------------------------------------------------------------------
Non-operating expenses increased $2,235 to $12,001 for the quarter ended March
31, 2003 from $9,766 for the prior year's quarter. The increase is primarily
attributable to lower affiliated dividend income of $1,512 this year versus last
year, derivative mark-to-market expense this year of $264 versus income last
year of $516, offset partially by a $520 decrease in interest expense and
affiliated interest expense due to lower borrowings and lower interest rates
this year.
Following is a comparison of income tax (benefit) expense related to continuing
operations for the three months ended March 31, 2003 and 2002:
- -----------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
2003 2002
- -----------------------------------------------------------------------------------
Income tax (benefit) expense $(1,391) $7,213
Effective tax rate 29% 135%
- -----------------------------------------------------------------------------------
The 2003 effective tax rate reflects higher effective tax rates in various
international jurisdictions.
The 2002 effective tax rate reflects a higher portion of income derived from
foreign operations and the effect of higher tax rates in foreign jurisdictions
as well as additional valuation allowances against foreign net operating loss
carryforwards.
CASH FLOWS:
- ------------
Cash provided by (used in):
- -----------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
2003 2002
- -----------------------------------------------------------------------------------
Operating activities $ (12,328) $ (23,689)
Investing activities (7,183) 103,197
Financing activities 20,370 (75,905)
---------------- ------------------
Net change in cash and cash equivalents $ 859 $ 3,603
- -----------------------------------------------------------------------------------
Operating Activities
- ---------------------
Operating activities used cash of $12,328 in the first quarter of 2003 versus
using cash of $23,689 in the first quarter of 2002. The use of cash in 2003 is
primarily attributable to the increase in trade receivables partially offset by
an increase in trade payables. The increase in receivables is in line with the
increased sales for the quarter while the increase in payables is due to the
significant increase in raw material costs experienced during the first quarter
of 2003. The use of cash in 2002 of $23,689 was attributable to a reduction in
payables due to the timing of payments and reduced payment terms with new raw
material suppliers. The increase in receivables was due to higher affiliate
balances and a slow down in collections and was offset by reduction in inventory
due to lower raw material costs.
Investing Activities
- ---------------------
Investing activities used cash of $7,183 in the March 31, 2003 quarter versus
providing cash of $103,197 in the comparable quarter of 2002. Capital
expenditures, net of proceeds from miscellaneous asset sales, accounts for the
outflow of cash and was the only investing activity in 2003. In 2002 the Company
sold a $110,000 note receivable from Consumer Adhesives to the Company's parent
for cash. This sale, net of capital expenditures, accounted for the inflow of
cash in the prior year quarter.
Financing Activities
- ---------------------
Financing activity provided cash of $20,370 in the 2003 quarter as compared to
using cash of $75,905 in the 2002 comparable quarter. During the 2003 quarter
the Company converted letters of credit from the uncommitted letter of credit
facility (see Liquidity and Capital Resources section) to the New Credit
Facility thereby releasing restricted cash of $52,201 which was used to pay down
affiliated borrowings. Also in 2003 short term borrowings were made primarily
by the United Kingdom subsidiary. In 2002, the Company issued letters of credit
under the uncommitted letter of credit facility thereby restricting cash in the
amount of $38,855 and paid off a note to BCPM, an unconsolidated subsidiary, in
the amount of $31,581 plus repaid affiliated borrowings of $5,500.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
The Company entered into a three-year asset based revolving credit facility on
September 23, 2002 (the "New Credit Facility") that provides for a maximum
borrowing of $175,000. The New Credit Facility replaced the prior $250,000
Credit Facility that expired on July 13, 2002 and will replace the uncommitted
letter of credit facility discussed below.
The New Credit Facility is secured with inventory and accounts receivable in the
United States, Canada and the United Kingdom and a portion of property and
equipment in Canada and the United Kingdom. The New Credit Facility contains
restrictions on dividends, limitations on borrowings from affiliates ($30,000
after all letters of credit are reissued under this facility), capital
expenditures ($65,000 in 2003) and payment of management fees ($5,000 per year
in 2003 and beyond) in addition to a minimum trailing twelve-month fixed charge
coverage ratio of 1.5 to 1.0 if aggregate availability is less than $25,000,
1.25 to 1.0 if aggregate availability is between $25,000 and $50,000 and 1.1 to
1.0 if aggregate availability is between $50,000 and $75,000. In addition, the
New Credit Facility provides that when aggregate availability exceeds $75,000
there is no fixed charge coverage ratio requirements. At March 31, 2003 the
Company was in compliance and expects to remain in compliance with all
covenants.
Under the uncommitted letter of credit facility, the Company provides cash
collateral equivalent to 101% of letters of credit outstanding, or $14,848 at
March 31, 2003. This amount was classified as restricted cash on the
Consolidated Balance Sheet as of March 31, 2003. The letters of credit under
this facility are in the process of being cancelled and reissued under the New
Credit Facility, a process the Company expects to complete by July of this year.
As the cash collateral becomes unrestricted, the Company has used the cash to
repay borrowings from Foods.
The Company has borrowed $43,890 from Foods at an interest rate of 1.4375% as of
March 31, 2003. When all letters of credit under the uncommitted letter of
credit facility have been cancelled, the New Credit Facility limits the
borrowings from affiliates to a maximum of $30,000. Currently, outstanding
letters of credit under the uncommitted letter of credit facility are deducted
from the maximum borrowing allowable to determine the borrowing availability
under the New Credit Facility. Maximum borrowing allowable is calculated
monthly and is based upon specified percentages of eligible accounts receivable,
inventory and fixed assets. As of March 31, 2003, the maximum borrowing
allowable under the New Credit Facility was $146,336 of which $64,190 was unused
and available.
In the fourth quarter of 2002, the Company purchased $7,368 of its outstanding
publicly held bonds for $4,510 plus fees. The Company and or affiliates of the
Company, including entities controlled by KKR, may in the future, depending on
market conditions, purchase additional senior unsecured notes of the Company in
the open market or by other means.
The Company has updated its projections of the minimum annual funding
requirements imposed by Federal laws and regulations with regard to the U.S.
benefit obligations of its defined benefit pension plans through 2008. The
assumptions utilized in updating its projections included an 8.0% annual rate of
return on assets for the years 2003 through 2008 and the continuation of current
law and plan provisions. The updated minimum annual funding requirements range
from $0 in 2003 to approximately $24,000 in 2006 with a total funding
requirement for the six years ended in 2008 of $88,000.
On April 23, 2003, the Company amended its medical benefit plan (as permitted by
its terms) such that, effective September 1, 2003, medical benefits will no
longer be provided to the Company's retirees and their dependents who are over
age 65. The Company has made an arrangement with a major benefits provider to
offer affected retirees and their dependents continued access to medical
coverage, including coverage for pre-existing conditions. The Company currently
intends to subsidize a portion of the cost of coverage for affected retirees and
dependents for an indefinite period of time to assist retirees' transition to
alternative medical coverage. The Company has reserved the right to continue,
terminate or reduce the subsidy provided to affected retirees and dependents in
the future.
As a result of these actions, the Company estimates that its liability related
to providing post-retirement medical benefits will be reduced by approximately
$75,000 and that cash outflows and expense will be decreased by approximately
$10,000 per year as compared to the costs and cash outlays anticipated under the
pre-amended retiree medical benefit plan.
The Company will adjust any applicable unrecognized prior service benefit for
the impact of the amendment and will amortize such adjustment over the estimated
remaining years of service until participants reach full eligibility.
During the first quarter of 2003 raw material price increases, rising utility
costs and increased benefit and general insurance costs continued to put
pressure on the Company's margins. While the Company was able to obtain some
selling price relief, in most segments the raw material price increases and
other cost increases outstripped the ability to increase sales prices.
The Company does believe that the economy will return to a more normal trend and
raw material prices will stabilize within the near to mid-term but there is no
assurance that this will happen. Given this uncertainty, the Company is
exploring opportunities to reduce capital expenditures and reduce infrastructure
costs to improve cash flows and profitability and assure adequate liquidity. In
addition, the Company is exploring options to reduce outstanding letters of
credit and by so doing, increase aggregate availability under the New Credit
Facility. The increase in availability will provide the Company with additional
borrowing capacity and potentially reduce or eliminate the fixed charge covenant
requirement.
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
has adopted SFAS No. 143 effective January 1, 2003 and implementation did not
have a significant impact on its results of operation or financial condition.
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 Correction". This
statement rescinds the aforementioned Statements and amends SFAS No. 13. The
provisions of this Statement related to SFAS No. 4 "Reporting Gains and Losses
from Extinguishment of Debt" are effective for fiscal years beginning after May
15, 2002 but early application is encouraged. The Company has adopted SFAS No.
145 and reported a gain of $2,741 in the fourth quarter of 2002 related to the
repurchase of its publicly held bonds.
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 will follow the guidelines set forth
in SFAS No. 146 for all new exit activities initiated after January 1, 2003.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to recognize a
liability, at the inception of the guarantee, for the fair value of obligations
it has undertaken in issuing the guarantee and also include more detailed
disclosures with respect to guarantees. FIN 45 is effective for guarantees
issued or modified after December 31, 2002. The disclosure requirements of FIN
45 are effective for financial statements for interim or annual periods ending
after December 15, 2002. The Company has adopted FIN 45 and included the
additional requirements with respect to guarantees in Note 10 to the
Consolidated Financial Statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation and amends the disclosure
requirements of SFAS No. 123. The transition provisions of this SFAS No. 148
are effective for fiscal years ending after December 15, 2002. The Company has
elected not to voluntarily change to the fair value based method of accounting
for stock-based compensation until a consensus is reached on the methodology.
The Company has included the additional disclosure requirements in Note 2 to the
Consolidated Financial Statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46") to expand upon and strengthen existing
accounting guidance that addresses when a company should include in its
financial statements, the assets, liabilities and activities of another entity.
FIN No. 46 requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003
and to older entities in the first fiscal year or interim period beginning after
June 15, 2003. The Company has no variable interest entities and therefore
the implementation of FIN 46 will not have an impact on its results of
operations and financial condition.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The clarification provisions of this statement require
that contracts with comparable characteristics be accounted for similarly. This
statement is effective for any new derivative instruments entered into after
June 30, 2003. 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.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes since December 31, 2002 in the Company's
market risk.
ITEM 4: CONTROLS AND PROCEDURES
(a) Evaluation of Disclosures Controls and Procedures: The Company's
President and Chief Executive Officer and Executive Vice President and Chief
Financial Officer, after evaluating the effectiveness of the Company's
disclosure controls and procedures (also defined in the Securities and Exchange
act of 1934 Rules 13a - 14(c) and 15-d - 14 (c)) as of a date ("Evaluation
Date") within 90 days before this filing date of this Quarterly Report on Form
10-Q, have concluded that, as of the Evaluation Date, the Company's disclosure
controls and procedures were effective and designed to ensure that material
information relating to the Company and its consolidated subsidiaries would be
made known to them by others within those entities.
(b) Changes in Internal Controls: There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of such evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
PART II
ITEM 1: LEGAL PROCEEDINGS
In connection with the bankruptcies of BCP Management, Inc. ("BCPM") and Borden
Chemicals and Plastics Operating Limited Partnership ("the Partnership"), the
Company, on April 3, 2003 entered into an agreement ("Tolling Agreement") with
BCP Liquidating LLC, ("BCP Liquidating") the successor in interest to the
Partnership, extending to June 2, 2003 the period within which BCP Liquidating
may file preference claims against the Company relating to payments made by the
Partnership to the Company within one year preceding the Partnership's
bankruptcy filing. Payments made by the Partnership to the Company in the year
preceding bankruptcy total approximately $10,000 for products sold and services
provided by the Company to the Partnership in the ordinary course of its
operations. Based on its analysis to date, the Company does not believe any
significant amounts are recoverable as preferences by BCP Liquidating. The
Tolling Agreement may be extended for additional periods, if necessary. No
assurance can be given that the above described claims or other claims related
to the bankruptcies of BCPM and the Partnership will not be made against the
Company. (See Note 11 to the Consolidated Financial Statements)
There have been no other material developments during the first quarter of 2003
in the ongoing legal proceedings that are discussed in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002.
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 coverage, that the ultimate outcome of its pending legal proceedings
are unlikely to have a materially adverse effect on the Company's financial
statements or operating results.
ITEM 2: CHANGE IN SECURITIES AND USE OF PROCEEDS
There were no changes in securities during the first quarter of 2003.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
There were no defaults on senior securities during the first quarter of 2003.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The shareholders of the Company voted by unanimous written consent on two items
on March 14, 2003:
1. the reelection of eleven directors
2. approval of the 1996 Stock Purchase and Option Plan for Key Employees of
Borden Chemical, Inc. and Subsidiaries, as amended.
The eleven directors reelected by unanimous vote are: Brian F. Carroll, William
H. Carter, Kevin M. Kelley, C. Robert Kidder, Henry R. Kravis, Craig O.
Morrison, Paul J. Norris, George R. Roberts, John K. Saer, Jr., William F.
Stoll, Jr., and Scott M. Stuart.
The 1996 Stock Purchase and Option Plan for Key Employees of Borden Chemical,
Inc. and Subsidiaries, as amended was also approved by unanimous vote.
ITEM 6: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. Exhibits
(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 filed during the first quarter of 2003.
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: May 14, 2003 By: /s/ William H. Carter
-----------------------
William H. Carter
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION OF FINANCIAL STATEMENTS AND INTERNAL CONTROLS
I, Craig O. Morrison, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Borden Chemical,
Inc. (BCI);
2. Based on my knowledge, the financial statements do not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition and results of operations and cash flows of BCI
as of, and for, the periods presented in this quarterly report;
4. BCI's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for BCI and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to BCI is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b. evaluated the effectiveness of BCI's disclosure controls and
procedures within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. BCI's other certifying officer and I have disclosed, based on our most
recent evaluation, to BCI's auditors and to the audit committee of BCI's board
of directors:
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the issuer's
ability to record, process, summarize and report financial
data and have identified for BCI's auditors any material weaknesses
in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the BCI's
internal controls; and
6. BCI's other certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Craig O. Morrison May 14, 2003
---------------------- Date
Craig O. Morrison
Chief Executive Officer
CERTIFICATION OF FINANCIAL STATEMENTS AND INTERNAL CONTROLS
I, William H. Carter, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Borden Chemical,
Inc. (BCI);
2. Based on my knowledge, the financial statements do not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition and results of operations and cash flows of BCI
as of, and for, the periods presented in this quarterly report;
4. BCI's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for BCI and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to BCI is made known to us by
others within those entities, particularly during the period in which
this quarterly report is being prepared;
b. evaluated the effectiveness of BCI's disclosure controls and
procedures within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. BCI's other certifying officer and I have disclosed, based on our most
recent evaluation, to BCI's auditors and to the audit committee of BCI's board
of directors:
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the issuer's
ability to record, process, summarize and report financial
data and have identified for BCI's auditors any material weaknesses
in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the BCI's internal
controls; and
6. BCI's other certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ William H. Carter May 14, 2003
-------------------- Date
William H. Carter
Chief Financial Officer
Exhibit 99
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 March 31, 2003 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 Officer Chief Financial Officer
May 14, 2003 May 14, 2003
A signed original of this written statement required by Section 906 has been
provided to Borden Chemical, Inc. and will be retained by Borden Chemical, Inc.
and furnished to the Securities and Exchange Commission or its staff upon
request.