Back to GetFilings.com
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, 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 August 11, 2003: 200,895,628
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 June 30, 2003 and 2002 3
Consolidated Statements of Operations and Comprehensive Income,
six months ended June 30, 2003 and 2002 4
Consolidated Balance Sheets, June 30, 2003 and December 31, 2002 5
Consolidated Statements of Cash Flows, six months ended June 30, 2003 and 2002 7
Consolidated Statement of Shareholders' Deficit, six months ended June 30, 2003 8
Notes to Consolidated Financial Statements 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 28
ITEM 4. CONTROLS AND PROCEDURES 28
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 29
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS 29
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 29
PART I
ITEM 1. BORDEN CHEMICAL, INC. CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
BORDEN CHEMICAL, INC.
Three months ended June 30,
(In thousands, except per share data) 2003 2002
- ---------------------------------------------------------------------------------------------------
Net sales $ 370,763 $ 309,567
Cost of goods sold 298,014 236,390
----------- ------------
Gross margin 72,749 73,177
----------- ------------
Distribution expense 16,651 15,546
Marketing expense 10,886 11,108
General & administrative expense 22,098 22,551
Business realignment expense and impairments 125 5,401
Other operating expense 3,031 6,585
----------- ------------
Operating income 19,958 11,986
----------- ------------
Interest expense 11,499 12,180
Affiliated interest expense 129 349
Other non-operating expense (income) 535 (1,572)
----------- ------------
Income before income tax 7,795 1,029
Income tax benefit (12,355) (1,669)
----------- ------------
Net income $ 20,150 $ 2,698
=========== ============
Comprehensive Income $ 35,089 $ 419
=========== ============
Basic and Diluted Per Share Data
- ----------------------------------
Net income $ 0.10 $ 0.01
=========== ============
Average number of common shares outstanding
during the period - basic and dilutive 200,896 200,684
- ---------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
BORDEN CHEMICAL, INC.
Six months ended June 30,
(In thousands, except per share data) 2003 2002
- -------------------------------------------------------------------------------------------------
Net sales $ 720,051 $ 605,658
Cost of goods sold 581,468 458,861
-------------- --------------
Gross margin 138,583 146,797
-------------- --------------
Distribution expense 33,385 30,116
Marketing expense 21,159 21,542
General & administrative expense 51,789 49,480
Business realignment expense and impairments 1,421 10,060
Other operating expense 3,666 8,521
-------------- --------------
Operating income 27,163 27,078
-------------- --------------
Interest expense 22,839 23,967
Affiliated interest expense, net of affiliated interest
income of $ 0 and $455, respectively 323 616
Other non-operating expense (income) 1,002 (3,860)
-------------- --------------
Income before income tax and cumulative effect
of change in accounting principle 2,999 6,355
Income tax (benefit) expense (13,746) 5,544
-------------- --------------
Income before cumulative effect of change in accounting
principle 16,745 811
Cumulative effect of change in accounting principle - (29,825)
-------------- --------------
Net income (loss) $ 16,745 $ (29,014)
============== ==============
Comprehensive Income (Loss) $ 39,758 $ (33,864)
============== ==============
Basic and Diluted Per Share Data
-------------------------------------
Income before cumulative effect of change
in accounting principle $ 0.08 $ 0.00
Cumulative effect of change in accounting principle - (0.15)
-------------- --------------
Net income (loss) $ 0.08 $ (0.15)
============== ==============
Average number of common shares outstanding
during the period - basic and dilutive 200,900 200,009
- --------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
BORDEN CHEMICAL, INC.
(In thousands) (Unaudited)
June 30, December 31,
ASSETS 2003 2002
- ------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and equivalents $ 13,270 $ 14,740
Restricted cash 1,768 67,049
Accounts receivable (less allowance for doubtful
accounts of $12,990 in 2003 and $12,219 in 2002) 204,342 170,822
Accounts receivable from affiliates 455 5,840
Inventories:
Finished and in-process goods 47,398 45,178
Raw materials and supplies 39,765 41,079
Deferred income taxes 26,382 28,869
Other current assets 9,460 13,232
--------------- -----------------
342,840 386,809
--------------- -----------------
INVESTMENTS AND OTHER ASSETS
Deferred income taxes 143,557 118,368
Other assets 19,776 19,615
--------------- -----------------
163,333 137,983
--------------- -----------------
PROPERTY AND EQUIPMENT
Land 31,863 31,964
Buildings 101,630 98,313
Machinery and equipment 679,369 649,782
--------------- -----------------
812,862 780,059
Less accumulated depreciation (367,669) (340,321)
--------------- -----------------
445,193 439,738
GOODWILL 39,768 39,640
OTHER INTANGIBLE ASSETS 6,859 7,610
--------------- -----------------
TOTAL ASSETS $ 997,993 $1,011,780
=============== =================
- ------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
BORDEN CHEMICAL, INC.
(In thousands, except share data) (Unaudited)
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' DEFICIT 2003 2002
- ------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts and drafts payable $ 128,024 $ 113,549
Accounts payable to affiliates 200 2,580
Debt payable within one year 2,208 2,779
Loans payable to affiliates 33,298 84,680
Other current liabilities 84,129 97,932
-------------- ---------------
247,859 301,520
-------------- ---------------
OTHER LIABILITIES
Long-term debt 522,657 523,287
Non-pension post-employment benefit obligations 140,609 145,384
Other long-term liabilities 207,693 202,482
-------------- ---------------
870,959 871,153
-------------- ---------------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 10)
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 1,196,347 1,172,344
Receivable from parent (487,805) (463,516)
Deferred compensation (2,083) (2,679)
Accumulated other comprehensive income (142,624) (165,637)
Accumulated deficit (686,669) (703,414)
-------------- ---------------
(120,825) (160,893)
-------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 997,993 $ 1,011,780
============== ===============
- ------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN CHEMICAL, INC.
Six months ended June 30,
(In thousands) 2003 2002
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS (USED IN) OPERATING ACTIVITIES
Net income (loss) $ 16,745 $ (29,014)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Deferred tax benefit (23,532) (4,394)
Depreciation and amortization 22,906 24,118
Business realignment and impairments 1,421 10,060
Cumulative effect of change in accounting principle - 29,825
Other non-cash adjustments 1,796 (870)
Net change in assets and liabilities:
Accounts receivable (30,744) (10,811)
Inventories 2,859 8,433
Accounts and drafts payable 6,318 (15,327)
Income taxes 3,808 8,770
Other assets 13,637 6,379
Other liabilities (15,706) (28,363)
-------------- --------------
(492) (1,194)
-------------- --------------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES
Capital expenditures (15,621) (18,813)
Proceeds from sale of note receivable to an affiliate - 110,000
Proceeds from the sale of assets 2,231 7,854
-------------- --------------
(13,390) 99,041
-------------- --------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net short-term debt (repayments) borrowings (1,456) 1,326
Borrowings of long-term debt 255 -
Repayment of long-term debt - (563)
Affiliated (repayments/loans) borrowings/receipts (51,382) 19,870
Payment of note payable to unconsolidated subsidiary - (31,581)
Decrease (increase) in restricted cash 65,281 (80,378)
Net (repurchases) sales of common stock from/to management (286) 387
-------------- --------------
12,412 (90,939)
-------------- --------------
(Decrease) increase in cash and equivalents (1,470) 6,908
Cash and equivalents at beginning
of year 14,740 24,632
-------------- --------------
Cash and equivalents at end
of period $ 13,270 $ 31,540
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid:
Interest, net $ 22,493 $ 23,681
Income taxes, net 6,019 5,873
Non-cash activity:
Capital contribution by parent 8,501 6,959
Settlement of note payable to unconsolidated subsidiary - 2,600
- ---------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT AND COMPREHENSIVE INCOME
(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 income 16,745 16,745
Translation adjustments and other 23,013 23,013
---------
COMPREHENSIVE INCOME 39,758
---------
Repurchases of common stock from management (286) (286)
Interest accrued on notes from parent (net of tax $8,501) 15,788 (24,289) (8,501)
Capital contribution from parent 8,501 8,501
Compensation expense on restricted stock 596 596
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2003 $ 2,009 $ 1,196,347 $ (487,805) $ (2,083) $(142,624) $(686,669) $(120,825)
- -----------------------------------------------------------------------------------------------------------------------------------
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 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 Statement of Financial Accounting Standards
("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
reconciliation of reported and Pro Forma Net Loss and EPS under SFAS No. 148:
- ----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE, 30
- ----------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 20,150 $ 2,698 $ 16,745 $ (29,014)
Add: Stock-based employee compensation expense
included in reported net income, net of
related tax benefit 67 - 67 -
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 (56) (24) (56) (24)
-----------------------------------------------------------------
Pro Forma net income (loss) $ 20,161 $ 2,674 $ 16,756 $ (29,038)
=================================================================
Average shares outstanding - basic 200,896 200,684 200,900 200,009
Average shares outstanding -fully diluted 200,896 200,684 200,900 200,009
Per share as reported (basic and diluted) $ 0.10 $ 0.01 $ 0.08 $ (0.15)
Per share pro forma (basic and diluted) $ 0.10 $ 0.01 $ 0.08 $ (0.15)
- ----------------------------------------------------------------------------------------------------------------------
3. BUSINESS REALIGNMENT EXPENSE
In the first half of 2003, the Company recorded business realignment expense and
impairments of $1,421 consisting of business realignment expense of $1,270 and
non-cash asset impairment charges of $151.
Provided below is a rollforward of business realignment reserve activity for the
first six months of 2003:
- ---------------------------------------------------------------------------------------------------------------
RESERVES 2003 RESERVES
DECEMBER 31, (INCOME) 2003 JUNE 30,
2002 EXPENSE CHARGES 2003
- ---------------------------------------------------------------------------------------------------------------
Plant closure costs (1) $ 9,568 $ (843) $ (2,814) $ 5,911
Other severance and employee costs 3,996 2,113 (2,824) 3,285
--------- --------- ---------- ---------
$ 13,564 $ 1,270 $ (5,638) $ 9,196
- ---------------------------------------------------------------------------------------------------------------
(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 2003 of $1,270 consists of severance and other
employee costs of $2,113 for new headcount reduction programs, a net reduction
of reserves of $1,574 for a previously closed plant that was sold in the second
quarter, a gain on the sale of a previously closed plant of $568, environmental
remediation costs of $894 for previously closed plants in Brazil and other
previous plant closure costs, fixed asset write-offs and realignment program
costs of $405. Plant closure costs include a reduction in plant employee
severance reserves of $749, a gain on the sale of a previously closed plant of
$568 and demolition, environmental and other costs of $474.
In June 2003, the Company initiated a realignment program designed to reduce
operating expenses and increase organizational efficiency. Upon completion, the
program is expected to reduce total worldwide employment by eight percent, or
approximately 200 people. Severance costs related to this program of $1,716 were
included as part of business realignment expense and $2,470 in general and
administrative expenses in the second quarter of 2003. The Company anticipates
the program will be completed by mid-2004. The Company expects to continue to
incur costs during the second half of 2003 and 2004 related to this program.
The Company also recorded asset impairments of $151 related to its Colombian
operations in the first six months of 2003.
Provided below is a rollforward of business realignment reserve activity for
first six months of 2002:
- ---------------------------------------------------------------------------------------------------------------
RESERVES RESERVES
DECEMBER 31, 2002 2002 JUNE 30,
2001 EXPENSE CHARGES 2002
- ---------------------------------------------------------------------------------------------------------------
Plant closure costs (1) $ 14,067 $ 8,794 $ (8,084) $ 14,777
Other severance and employee costs 8,360 1,266 (2,867) 6,759
------------ ----------- ------------ -----------
$ 22,427 $ 10,060 $ (10,951) $ 21,536
- ---------------------------------------------------------------------------------------------------------------
(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 the first six months of 2002, the Company had net business realignment
expense of $10,060, which was comprised of $11,259 of plant closure costs,
primarily related to the closure of the melamine crystal business, and $1,266 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. Plant closure
costs include plant employee severance of $8,718 and demolition, environmental
and other costs of $2,541.
4. RESTRICTED CASH
Restricted cash at June 30, 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 three-year
asset based revolving credit facility dated September 23, 2002. The Company
completed this process in early 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 six months ended
June 30, 2002.
6. COMPREHENSIVE INCOME
Comprehensive income is computed as follows:
- ---------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE, 30
- ---------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) $ 20,150 $ 2,698 $ 16,745 $ (29,014)
Foreign currency translation adjustments 14,939 (2,564) 23,013 (5,419)
Derivative activity - 285 - 569
-----------------------------------------------------------------
$ 35,089 $ 419 $ 39,758 $ (33,864)
- ---------------------------------------------------------------------------------------------------------------
The foreign currency translation adjustments in 2003 relate primarily to
favorable exchange rates in Canada and Latin America. The 2002 foreign currency
translation adjustments relate primarily to the United Kingdom and Latin
America, partially offset by favorable exchange rates in Canada. The derivative
activity amounts represent reclassification into earnings of the original
cumulative effect of change in accounting principle related to the adoption of
SFAS No. 133.
7. SEGMENT DATA
The Company reports three operating segments, as well as Corporate and other and
Divested businesses. 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 specialty, 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 wage and benefit costs inflation, and insurance experience and rates.
The Divested businesses segment includes the Company's melamine crystal
business, which was closed on January 11, 2002 and subsequently sold in the
second quarter of 2003. 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) and depreciation
and amortization by reportable business segment for the Company for the three
months and six months ended June 30:
NET SALES
- ---------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- ---------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
North American Forest Products $ 201,012 $ 155,293 $ 379,735 $ 298,244
North American Performance Resins 93,401 86,432 188,937 172,911
International 76,350 65,017 151,373 128,326
Divested businesses - 2,825 6 6,177
---------- ---------- ---------- -----------
$ 370,763 $ 309,567 $ 720,051 $ 605,658
========== ========== ========== ===========
OPERATING INCOME (LOSS)
- ---------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- ---------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
North American Forest Products $ 19,867 $ 19,679 $ 33,147 $ 39,307
North American Performance Resins 10,621 8,962 18,894 18,461
International 3,511 4,298 8,668 8,725
Corporate and other (16,351) (19,783) (35,384) (34,520)
Divested businesses 2,310 (1,170) 1,838 (4,895)
---------- ---------- ---------- -----------
$ 19,958 $ 11,986 $ 27,163 $ 27,078
========== ========== ========== ===========
DEPRECIATION AND AMORTIZATION EXPENSE
- ---------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- ---------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
North American Forest Products $ 4,890 $ 4,815 $ 9,669 $ 9,591
North American Performance Resins 2,458 2,415 4,928 4,924
International 2,696 2,674 5,305 5,321
Corporate and other 1,499 2,113 3,004 4,282
---------- ---------- ---------- -----------
$ 11,543 $ 12,017 $ 22,906 $ 24,118
========== ========== ========== ===========
8. RELATED PARTY TRANSACTIONS
Financing and Investing Arrangements
- ------------------------------------
Borden Foods Holdings Corporation ("Foods"), an affiliate of the Company, loans
cash to the Company and HA-International, LLC ("HAI"), a consolidated joint
venture of the Company, under affiliate borrowing agreements. The loans are
evidenced by demand promissory notes with interest at variable rates per year.
These loans are recorded as loans payable to affiliates in the Consolidated
Balance Sheets. Foods had $33,298 and $84,680, at interest rates ranging from
1.3125% to 4.75%, loaned, in aggregate, to the Company and HAI at June 30, 2003
and December 31, 2002, respectively. The Company recorded affiliated interest
expense of $129 and $349 related to amounts loaned by affiliates for the three
months ended June 30, 2003 and 2002, respectively, and $323 and $1,071 related
to amounts loaned by affiliates for the six months ended June 30, 2003 and 2002,
respectively.
Administrative Service, Management and Consulting Arrangements
- -------------------------------------------------------------------
The Company provides administrative services to Foods under a revised agreement
effective for 2002 and beyond. Fees received for these services are offset
against the Company's general and administrative expenses and totaled $25 and
$60 for the six months ended June 30, 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 June
30, 2003 and December 31, 2002 is $84 and $1,375, respectively, 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. This decision resulted in immediate recognition by
Capital of incremental expenses and liabilities related primarily to severance
and rent obligations. These incremental expenses were the legal obligation of
and were funded by Capital. The Company's share of Capital's incremental
expenses was $5,500, and the Company recognized its share of these expenses as
an additional management fee from Capital in the second quarter of 2002. Since
the Company was not responsible for settling these liabilities, the charge was
recorded as a capital contribution to the Company by BHI.
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 first half of 2003, the Company had accrued $1,500 for
amounts due to KKR under this arrangement while in the first half of 2002 the
Capital management fee accrued was $4,500.
The Company provides certain administrative services for BWHLLC and other
affiliates under a service agreement dated January 1, 2003. During the first
half of 2003, the Company has charged BWHLLC $270 for such services, which was
offset against the Company's general and administrative expense.
9. 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 and its affiliates. 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.
10. 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.
The Company has accrued approximately $42,000 and $44,000 at June 30, 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 $38,000.
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. Various government agencies
continue to conduct formaldehyde health research and promulgate regulations
designed to control its use. In particular, results from several epidemiology
study updates are pending and the state of California is considering product
emission standards for panel products and Massachusetts is considering including
formaldehyde in a proposed toxics use reduction bill. The Company supports
appropriate scientific research and risk-based policy decision-making and is
working with industry groups to ensure that governmental regulations are based
on sound scientific information. The Company believes that it has programs and
processes in place to effectively manage the increased attention and provide
compliant and cost-effective resins systems to its customer base.
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 $8,800 and $10,000 in liabilities at
June 30, 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. The amounts include
asbestos liabilities, reflecting the fact that as a result of the bankruptcies
of many asbestos producers, plaintiff attorneys are increasing their focus on
peripheral defendants, including the Company. Nonetheless, 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 proceeding in the case with a cut-off currently scheduled for April
2004. The Company believes it has strong defenses to the Trust's allegations
and intends to defend the case vigorously.
OTHER - The Company's former 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 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. The Company entered into an
agreement with BCP Liquidating LLC, ("BCP Liquidating") the successor in
interest to the Partnership, extending to October 3, 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 $6,000 for services
provided and products sold by the Company to the Partnership in the ordinary
course of its operations and an additional $4,000 related to payments
erroneously made to BCP by the Company's customers due to incorrect remittance
information in the customer records. 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 and six months ended June 30:
NET SALES
- -----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- -----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------
North American Forest Products $ 201,012 $ 155,293 $ 379,735 $ 298,244
North American Performance Resins 93,401 86,432 188,937 172,911
International 76,350 65,017 151,373 128,326
Divested businesses - 2,825 6 6,177
---------- ----------- ---------- ------------
$ 370,763 $ 309,567 $ 720,051 $ 605,658
========== =========== ========== ============
OPERATING INCOME (LOSS)
- -----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- -----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------
North American Forest Products $ 19,867 $ 19,679 $ 33,147 $ 39,307
North American Performance Resins 10,621 8,962 18,894 18,461
International 3,511 4,298 8,668 8,725
Corporate and other (16,351) (19,783) (35,384) (34,520)
Divested businesses 2,310 (1,170) 1,838 (4,895)
---------- ----------- ---------- ------------
$ 19,958 $ 11,986 $ 27,163 $ 27,078
========== =========== ========== ============
DEPRECIATION AND AMORTIZATION EXPENSE
- -----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- -----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------
North American Forest Products $ 4,890 $ 4,815 $ 9,669 $ 9,591
North American Performance Resins 2,458 2,415 4,928 4,924
International 2,696 2,674 5,305 5,321
Corporate and other 1,499 2,113 3,004 4,282
---------- ----------- ---------- ------------
$ 11,543 $ 12,017 $ 22,906 $ 24,118
========== =========== ========== ============
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
- -----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- -----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------
North American Forest Products $ 24,757 $ 24,494 $ 42,816 $ 48,898
North American Performance Resins 13,079 11,377 23,822 23,385
International 6,207 6,972 13,973 14,046
Corporate and other (14,852) (17,670) (32,380) (30,238)
Divested businesses 2,310 (1,170) 1,838 (4,895)
Other non-operating (expense) income (1) (874) 995 (1,541) 2,820
---------- ---------- ----------- ------------
Total 30,627 24,998 48,528 54,016
========== ========== =========== ============
(1) See page 23 for a discussion of other non-operating (expense) income.
Included within EBITDA for the second quarter are the following expenses,
income, gains and losses related to business realignment activities undertaken
by the Company, as well as certain other charges.
- ------------------------------------------------------------------------------------------------------------
BUSINESS REALIGNMENT AND OTHER
INCOME (EXPENSE)
- ------------------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, 2003
- ----------------------------- PLANT
CLOSURE (1) SEVERANCE IMPAIRMENTS OTHER TOTAL
- ------------------------------------------------------------------------------------------------------------
North American Forest Products $ 661 $ 150 $ - $ (570)(2) $ 241
North American Performance Resins (116) (310) - - (426)
International (1,048) (157) (84) - (1,289)
Corporate and other (24) (1,522) - (1,900)(2) (3,446)
Divested businesses 2,325 - - (15)(3) 2,310
---------- --------- --------- --------- ----------
Total 1,798 $(1,839) $ (84) $ (2,485) $(2,610)
========== ========= ========= ========== =========
QUARTER MONTHS ENDED JUNE 30, 2002
- -------------------------------
North American Forest Products $ (572) $ - $ - $ - $ (572)
North American Performance Resins (289) (702) - - (991)
International (2,368) - - - (2,368)
Corporate and other - (562) - (5,500)(4) (6,062)
Divested businesses (908) - - (262)(3) (1,170)
---------- --------- --------- ---------- ---------
Total $ (4,137) $(1,264) $ - $ (5,762) $(11,163)
========== ========= ========= ========= =========
(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 sale of assets associated with a closed plant.
(2) Primarily represents severance expense incurred by the Company for
positions to be replaced.
(3) Represents expenses incurred related to the wind down of the Company's
melamine operations.
(4) Represents an additional management fee of $5,500 related to the wind
down of Borden Capital.
Included within EBITDA for the six months ended June 30 are the following
expenses, income, gains and losses related to business realignment activities
undertaken by the Company, as well as certain other charges.
BUSINESS REALIGNMENT AND OTHER
- --------------------------------------------------------------------------------------------------------------
INCOME (EXPENSE)
- --------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2003 PLANT
- --------------------------- CLOSURE (1) SEVERANCE IMPAIRMENTS OTHER TOTAL
- --------------------------------------------------------------------------------------------------------------
North American Forest Products $ 698 $ 66 $ - $ (570)(2) $ 194
North American Performance Resins (163) (310) - - (473)
International (1,690) (171) (151) - (2,012)
Corporate and other (146) (1,698) - (1,900)(2) (3,744)
Divested businesses 2,144 - - (306)(3) 1,838
---------- --------- --------- ---------- -----------
Total $ 843 $ (2,113) $ (151) $ (2,776) $ (4,197)
========== ========= ========= ========== ==========
SIX MONTHS ENDED JUNE 30, 2002
- ----------------------------------
North American Forest Products $ (860) $ 82 $ - $ - $ (778)
North American Performance Resins (635) (633) - - (1,268)
International (2,218) - - - (2,218)
Corporate and other - (715) - (5,500)(4) (6,215)
Divested businesses (5,081) - - 186 (3) (4,895)
---------- --------- --------- ---------- -----------
Total $(8,794) $ (1,266) $ - $ (5,314) $(15,374)
========== ========= ========= ========== ==========
(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 sale of assets associated with a closed plant.
(2) Primarily represents severance expense incurred by the Company for positions to be replaced.
(3) Represents expenses (income) recognized related to the wind down of the Company's melamine operations.
(4) Represents an additional management fee of $5,500 related to the wind down of Borden Capital.
RECONCILIATION OF EBITDA TO NET INCOME (LOSS)
- --------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- --------------------------------------------------------------------------------------------
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------
EBITDA $ 30,627 $ 24,998 $ 48,528 $ 54,016
Depreciation and amortization (11,543) (12,017) (22,906) (24,118)
Interest expense, net (11,289) (11,952) (22,623) (23,543)
Income tax benefit (expense) 12,355 1,669 13,746 (5,544)
Cumulative effect of change in
accounting principle - - - (29,825)
--------- ----------- ---------- ------------
Net income (loss) 20,150 2,698 16,745 (29,014)
========= =========== ========== ============
THREE MONTHS ENDED JUNE 30, 2003 VERSUS THREE MONTHS ENDED JUNE 30, 2002
NET SALES VARIANCE 2003 AS A PERCENTAGE INCREASE (DECREASE) FROM 2002
- ------------------------------------------------------------------------------------------------------------
VOLUME PRICE/MIX TRANSLATION TOTAL
- ------------------------------------------------------------------------------------------------------------
North American Forest Products (2.2)% 28.3% 3.3% 29.4%
North American Performance Resins (0.8)% 8.8% 0.1% 8.1%
International (6.9)% 22.4% 1.9% 17.4%
North American Forest Products
- ---------------------------------
North American Forest Products sales increased $45,719 or 29.4% in the second
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. Favorable currency exchange rates also
contributed to the improved sales due to a strengthened Canadian dollar.
Partially offsetting these increases was a mild decline in sales volume. The
decreased sales volume was due to a decline in demand for resins partially
offset by improved formaldehyde volumes.
EBITDA increased by $263 or 1.1% in the second quarter of 2003 versus the
comparable period last year. The increase was driven by improved margins in
2003 as higher raw material prices were able to be contractually passed through
to customers. Favorable exchange rates due to a strengthened Canadian dollar
also contributed to the improvement in EBITDA. Offsetting these improvements
was a decline in volume and increased processing, freight costs and severance
expense incurred related to a realignment plan initiated in June 2003 of $570.
The increase in processing costs was a result of higher energy, insurance and
employee benefit costs. The increase in freight costs was principally a result
of changes in mix of customers in formaldehyde sales.
North American Performance Resins
- ------------------------------------
North American Performance Resins sales increased $6,969 or 8.1% in the quarter
ended June 30, 2003 as compared to the quarter ended June 30, 2002. The
improvement in sales was primarily due to higher selling prices resulting from
the passing on of a portion of the raw material cost increases and improved mix
in oilfield products. Improved sales volumes in oilfield products, due to an
increase in natural gas exploration and drilling activity, were more than offset
by declining sales volumes in specialty resins and foundry products reflecting
weak market conditions in the automotive, electronics and laminated flooring
market segments.
EBITDA increased by $1,702 or 15.0% in the quarter ended June 30, 2003 as
compared to the prior year comparable period. The improvement was attributable
to decreased general and administrative expenses and processing costs. The
improvement in general and administrative expenses was due primarily to lower
headcount in 2003 than 2002 and the absence of bad debt costs incurred in 2002
due to customer bankruptcies. The impact of higher energy, insurance and
employee benefit costs on processing costs were more than offset by synergies
realized from the 2001 foundry acquisition. These EBITDA improvements were
partially offset by reduced margins and higher freight costs. The reduction in
margins was due to the Company's inability to pass through all the increase of
raw material prices to customers. The increase in freight costs was primarily
the result of increased costs incurred to meet customer requirements and fuel
surcharges in the oilfield product lines.
International
- -------------
International sales increased $11,333 or 17.4% in the second quarter of 2003
versus the comparable period for the prior year. Europe, Asia Pacific and Latin
America all contributed to the increase. Price increases, due to the pass
through of significantly higher raw material prices, in all three markets were
the primary reason for the improvement in net sales. Favorable currency
translation in Europe and Asia Pacific contributed to the net sales increase but
were largely offset by unfavorable currency translation in Latin America. A
decline in volumes occurred in all three markets, with Latin America having the
most significant losses due to a decline in the consumer adhesives market.
EBITDA from International businesses decreased $765 or 11.0% in the quarter
ended June 30, 2003 versus the comparable period last year. This decline is
primarily due to a reduction in volumes, mainly in Latin America. Also
contributing to the decline were unfavorable currency translation in Latin
America and reduced margins, primarily in Europe, as price increases that
occurred early in the second quarter were not able to be passed through to
customer due to the difficult market environment. These declines were partially
offset by improved general and administrative expenses due to a $2,345 favorable
settlement of a Brazilian foreign exchange claim in May 2003 and reduced
expenses relating to plants closed in prior years in Latin America.
Corporate and other
- ---------------------
Corporate and other expenses decreased $2,818 in the second quarter of 2003.
The improvement is primarily due to a $2,826 favorable settlement of a Brazilian
foreign exchange claim settled in 2003 related to a business previously sold by
the Company and a reduction in management fees from 2002 of $7,000, including
$5,500 related to the wind down of Borden Capital. The benefit of the Brazilian
foreign exchange claim settlement included in Corporate and other relates to
businesses previously sold by the Company. These improvements were partially
offset by severance expense incurred related to a realignment plan initiated in
June 2003 of $3,422, and increased pension and general insurance costs.
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 for 9 years as compared to expense anticipated
under the pre-amended retiree medical plan.
Divested businesses
- --------------------
Divested businesses represent the disposition of remaining inventory and other
assets of the melamine crystal business subsequent to its closure on January 11,
2002. The Company sold the melamine crystal business to a third party in the
second quarter of 2003. The Company recorded a gain on the sale of the business
and reversed reserves related to liabilities that the buyer assumed as part of
the sale agreement.
SIX MONTHS ENDED JUNE 30, 2003 VERSUS SIX MONTHS ENDED JUNE 30, 2002
NET SALES VARIANCE 2003 AS A PERCENTAGE INCREASE (DECREASE) FROM 2002
- ------------------------------------------------------------------------------------------------------------
VOLUME PRICE/MIX TRANSLATION TOTAL
- ------------------------------------------------------------------------------------------------------------
North American Forest Products 1.0% 23.7% 2.6% 27.3%
North American Performance Resins 1.8% 7.4% 0.1% 9.3%
International (1.7)% 22.5% (2.8)% 18.0%
North American Forest Products
- ---------------------------------
North American Forest Products sales increased $81,491 or 27.3% in the first
half of 2003 versus the comparable period last year. The primary 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 and quarterly price adjustments based on published cost indices for the
Company's primary raw materials. Additionally, favorable currency exchange
rates contributed to the improvement in sales as the Canadian dollar
strengthened versus last year. A modest increase in volumes in the first half
of the year due to improved market conditions in the general chemical sector
also contributed to the sales improvement.
EBITDA decreased by $6,082 or 12.4% in the first half of 2003 versus the
comparable period last year. The major drivers of the EBITDA decline were
increased processing costs and significantly higher raw material prices
resulting in lower margins. The increased processing costs were the result of
higher energy, benefit and insurance costs in the first half 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 cost increases and contract trigger points. These
declines were partially offset by a modest increase in sales volume.
North American Performance Resins
- ------------------------------------
North American Performance Resins sales increased $16,026 or 9.3% in the period
ended June 30, 2003 as compared to the prior year comparable period. Increased
volumes and improved mix in oilfield products was the major contributor to the
improvement in sales. This improvement reflected 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. The oilfield products
improvement was partially offset by a decline in volumes and an unfavorable
product mix in foundry and specialty resins. These declines were a result of
weakness in the automotive, felt bonding, laminated flooring and furniture
markets as well as competitive pricing pressures.
EBITDA increased by $437 or 1.9% in the period ended June 30, 2003 as compared
to the prior year comparable period. The improvement in EBITDA was due to
improved volumes, reduced general and administrative expenses and improved
processing costs. The reduction in general and administrative expenses was a
result of lower headcount in the first half of 2003 versus 2002. The
improvement in processing costs was due to synergies realized from the 2001
foundry acquisition partially offset by higher energy, benefit and insurance
costs. These improvements were substantially offset by higher raw material
prices in specialty and foundry resins and an increase in freight costs. The
increase in freight costs was primarily the result of increased costs incurred
to meet customer requirements and fuel surcharges in the oilfield product lines.
International
- -------------
International sales increased $23,047 or 18.0% in the first half of 2003 versus
the comparable period for the prior year. Europe, Asia Pacific and Latin
America all contributed to the sales increase. Europe reflected favorable
currency translation and strong price increases offset slightly by a decline in
volume due to the difficult market environment. Asia Pacific reflected
improvements in price and currency exchange rates and modest gains in volumes.
Latin America had strong price improvements, which were significantly offset by
unfavorable currency translation. For all three markets, the major reason for
the strong price improvements was the ability to pass through significantly
higher raw material prices.
EBITDA from International businesses decreased $73 or 0.5% in the period ended
June 30, 2003 versus the comparable period last year. The slight decline in
EBITDA reflected unfavorable currency translation in Brazil, slightly offset by
European and Asian Pacific favorable currency translation, and a reduction in
volumes, primarily in Europe. These reductions in EBITDA were almost entirely
offset by a $2,345 gain related to a favorable settlement of a Brazilian foreign
exchange claim and a $1,100 reserve reduction due to a revised estimates of a
potential liability related to an excess duty imposed on the importation of
inventory into Brazil.
Corporate and other
- ---------------------
Corporate and other expenses increased $2,142 in the first half of 2003. The
increase in expense resulted from significantly higher pension and insurance
benefit costs, additional legal reserves due to higher costs to defend
litigation, higher revised estimates for general insurance and $3,422 of
severance expense incurred related principally to a realignment plan initiated
in June 2003. These increased expenses were substantially offset by a $2,826
gain related to a favorable settlement of a Brazilian foreign exchange claim
that related to businesses previously sold by the Company and a $8,500 reduction
in management fees this year versus last year, including $5,500 related to the
wind down of Borden Capital.
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.
Divested businesses
- --------------------
Divested businesses represent the disposition of remaining inventory and other
assets of the melamine crystal business subsequent to its closure on January 11,
2002. The Company sold the melamine crystal business to a third party in the
second quarter of 2003. The Company recorded a gain on the sale of the business
and reversed reserves related to liabilities that the third party buyer assumed
as part of the sale agreement.
NON-OPERATING EXPENSES AND INCOME TAXES
- -------------------------------------------
Following is a comparison of non-operating expenses for the three months ended
June 30, 2003 and 2002:
- ------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
----------------------------
2003 2002
- ------------------------------------------------------------------------------
Interest expense $ 11,499 $ 12,180
Affiliated interest expense, net 129 349
Non affiliated interest income (339) (577)
Other non-operating expense (income) 874 (995)
---------- ------------
$ 12,163 $ 10,957
- ------------------------------------------------------------------------------
Non-operating expenses increased $1,206 to $12,163 for the quarter ended June
30, 2003 from $10,957 for the prior year's quarter. The increase is primarily
attributable to expenses incurred relating to foreign exchange losses of $523 on
the settlement of a long-term international inter-company loan and the absence
of a 2002 unrealized gain on an interest rate swap of $483 and the write-off of
the accumulated translation adjustment associated with a closed international
location.
Following is a comparison of non-operating expenses for the six months ended
June 30, 2003 and 2002:
- ------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
----------------------------
2003 2002
- ------------------------------------------------------------------------------
Interest expense $ 22,839 $ 23,967
Affiliated interest expense, net 323 616
Non affiliated interest income (539) (1,040)
Other non-operating expense (income) 1,541 (2,820)
---------- ------------
$ 24,164 $ 20,723
- ------------------------------------------------------------------------------
Non-operating expenses increased $3,441 to $24,164 for the six months ended June
30, 2003 from $20,723 for the prior year period. The increase is primarily due
to the absence of 2002 affiliated dividend income of $1,512, the absence of a
2002 unrealized gain on an interest rate swap of $999 and 2003 foreign exchange
losses of $523 on the settlement of a long-term international inter-company
loan. Additionally, the Company had a reduction in interest income in 2003 of
$501 due to lower interest rates and lower average cash balances.
Following is a comparison of income tax benefit related to continuing operations
for the three months ended June 30, 2003 and 2002:
- ------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
2003 2002
- ------------------------------------------------------------------------------
Income tax benefit $ (12,355) $ (1,669)
Effective tax rate N/M N/M
- ------------------------------------------------------------------------------
The 2003 effective tax rate for the second quarter reflects the elimination of
$17,500 of deferred tax liabilities associated with a divested business slightly
offset by foreign tax rate differentials and reserves established against
foreign losses that are not expected to be utilized.
The 2002 effective tax rate for the second quarter reflects the impact of
permanent items related to U.S. extra territorial income deductions and
SFAS No. 133 adjustments.
Following is a comparison of income tax (benefit) expense related to continuing
operations for the six months ended June 30, 2003 and 2002:
- ------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
2003 2002
- ------------------------------------------------------------------------------
Income tax (benefit) expense $ (13,746) $ 5,544
Effective tax rate N/M 87.2%
- ------------------------------------------------------------------------------
The 2003 effective tax rate reflects the elimination of $17,500 of deferred tax
liabilities associated with a divested business slightly offset by foreign tax
rate differentials and reserves established against foreign losses that are not
expected to be utilized.
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.
CASH FLOWS:
- ------------
Cash provided by (used in):
- ----------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
--------------------------------
2003 2002
- ----------------------------------------------------------------------------
Operating activities $ (492) $ (1,194)
Investing activities (13,390) 99,041
Financing activities 12,412 (90,939)
----------- -------------
Net change in cash and cash equivalents $ (1,470) $ 6,908
- ----------------------------------------------------------------------------
Operating Activities
- ---------------------
Operating activities used cash of $492 in the first six months of 2003 compared
to cash used of $1,194 in the first six months of 2002. The use of cash in 2003
is primarily due to an increase in trade receivables substantially offset by
cash provided from operations and increases in trade payables and inventory.
The increase in receivables is a result of improved sales volumes and increased
selling prices in the first half of 2003. The increase in trade payables is in
line with the increase in raw material costs in the first half of 2003. The
outflow of cash from operations in 2002 was attributable to a reduction in trade
payables and an increase in trade receivables. The reduction in trade payables
was due to the timing of payments and reduced payment terms with new raw
material suppliers. The increase in trade receivables was a result of timing of
collections.
Investing Activities
- ---------------------
Investing activities used cash of $13,390 in the six months ended June 30, 2003
versus providing cash of $99,041 in the first six months of the prior year.
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. Proceeds from this sale and the collection of a note
receivable related to the 2000 sale of certain rights to harvest shellfish, net
of capital expenditures, accounted for the primary inflow of cash in the prior
year.
Financing Activities
- ---------------------
Financing activity provided cash of $12,412 in the six months ended June 30,
2003 as compared to using cash of $90,939 in the first six months of the prior
year. During the first half of 2003 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 $65,281, most of which was used to pay down affiliated borrowings. During
the first half of 2002, the Company issued letters of credit under the
uncommitted letter of credit facility thereby restricting cash in the amount of
$80,378 and paid off a note to a former subsidiary that was unconsolidated in
the amount of $31,581. These uses of cash were partially offset by net
borrowings from affiliates totaling $19,870.
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 an 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. Maximum borrowing allowable under
the facility is calculated monthly and is based upon specified percentages of
eligible accounts receivable, inventory and fixed assets. 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 are no fixed charge coverage ratio
requirements. As of June 30, 2003, the maximum borrowing allowable under the
New Credit Facility was $154,000 of which $75,000 was unused and available. At
June 30, 2003, the Company had no fixed charge coverage ratio requirements.
Under an uncommitted letter of credit facility, the Company provided cash
collateral equivalent to 101% of letters of credit outstanding, or $1,768 at
June 30, 2003, which was classified as restricted cash on the Consolidated
Balance Sheet as of June 30, 2003. The Company has undertaken a process whereby
the letters of credit under this facility were cancelled and reissued under the
New Credit Facility. As the cash collateral became unrestricted, the Company
used the cash to repay borrowings from Foods. This process was completed in
July, the uncommitted letter of credit facility was cancelled, and the Company
no longer has restricted cash.
The Company and HA-International LLC, ("HAI"), a consolidated joint venture of
the Company, have, in the aggregate, borrowed $33,298 from Borden Foods Holdings
Corporation ("Foods"), an affiliate of the Company, at interest rates ranging
from 1.375% to 4.75% as of June 30, 2003. HAI is in the process of obtaining
its own credit facility with an external bank. In the interim, HAI borrows from
Foods at a variable rate. Of the total borrowings from Foods as of June 30,
2003, HAI had borrowed $6,000 and had $9,000 remaining available under its
agreement with Foods.
The Company has given notice that it plans to exercise on October 1, 2003 its
option to redeem, at par, the remaining $885 of County of Maricopa Industrial
Revenue Bonds.
The Company has updated its projections through 2008 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. 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 for a period of nine years 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 six months 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.
There remains considerable uncertainty in the global economy. Given this
uncertainty, the Company continues to explore opportunities to reduce capital
expenditures and reduce infrastructure costs to improve cash flows and
profitability and assure adequate liquidity. As part of these plans, the
Company announced a realignment plan in June 2003 from which it expects
annualized savings of approximately $20,000 when the program is fully
implemented in 2004. The Company expects to incur realignment costs during the
remainder of 2003 and 2004 as this program is implemented totaling approximately
$16,000. 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.
The Company expects to have enough liquidity to fund working capital
requirements and support capital expenditures over the three year term of the
New Credit Facility with cash received from operations and amounts available
under the New Credit Facility and from affiliates. However, there is no
assurance that borrowings from affiliates will be available in future periods.
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 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 has followed 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 9 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 adopted SFAS No. 149 on July 1, 2003, and the
adoption did not have an impact on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This
statement addresses the accounting for certain financial instruments that, under
previous guidance, could be accounted for as equity. SFAS No. 150 requires that
those instruments be classified as liabilities in the statement of financial
position. This statement is effective for financial instruments entered into or
modified after May 31, 2003, and is otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. Adoption of SFAS No. 150 on
July 1, 2003 did not have an impact on the Company's financial statements.
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, which may include words such as
"expects," "estimates," or "intends," 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: As of the end of the
period covered by this Quarterly Report on Form 10-Q, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
Disclosure Committee and the Company's management, including the President and
Chief Executive Officer and the Executive Vice President and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and
15d-15(e). Based on that evaluation, the President and Chief Executive Officer
and Executive Vice President and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective in timely alerting
them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
SEC filings.
(b) Changes in Internal Controls: No change in the Company's internal
control over financial reporting occurred during the Company's most recent
fiscal quarter that materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II
ITEM 1: LEGAL PROCEEDINGS
There have been no material developments during the second 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 and the Quarterly Report on
Form 10-Q/A for the period ended March 31, 2003.
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.
Management 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 outcomes of its pending legal proceedings are
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.
During second quarter certain modifications were made to the Indenture of Trust
relating to the $34,000,000 Parish of Ascension, State of Louisiana
Variable/Fixed Rate Demand Pollution Control Revenue Refunding Bonds - Series
1992. The modifications include changing the interest rate from a weekly to a
daily rate and reducing the notice period required to convert to a fixed rate
mode. There were no equity securities sold during the second quarter of 2003.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
There were no defaults on senior securities during the second quarter of 2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during second quarter of
2003.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K.
a. Exhibits
(10) (a) Severance Pay Agreement and Release between Edward G. Huller
and the Company dated June 6, 2003.
(b) Severance Pay Agreement and Release Between Andrew J. Miles and the
Company dated June 6, 2003.
(c) Severance Pay Agreement and Release Between John M. Kaestle and the
Company dated June 9, 2003.
(31) Certifications of Financial Statements and Internal Controls
(32) 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
A report on Form 8-K was filed on June 20, 2003 to announce a
realignment program.
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, 2003
---------------- /s/ William H. Carter
---------------------------
William H. Carter
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Exhibit 10(a)
SEVERANCE PAY AGREEMENT AND RELEASE OF ALL CLAIMS
This Transition & Severance Pay Agreement and Release of All Claims
("Agreement") is entered into on June 6, 2003 between Edward G. Huller
("Associate" or "You") and Borden Chemical, Inc. ("Company").
Until June 27, 2003 ("Termination Date"), you will be an active employee of the
Company and remain on the Company's payroll. Accordingly, you agree to perform
all job-related duties and functions that may be assigned to you from
time-to-time by the Company to ensure an orderly transition of your duties. The
foregoing does not change the at-will nature of your employment relationship
with the Company. If in the opinion of the Company this transition is
successfully completed before your Termination Date, the company may terminate
your employment at such time and you will receive the consideration contained in
this Agreement.
Considerations
--------------
SEVERANCE PAYMENTS
The Company agrees to pay you $281,030 as severance. This amount is equal to
fifty-two (52) weeks of your current base salary. Severance payments will be
made to you in bi-weekly installments, subject to all applicable legal
deductions and withholdings. Deductions for cash advances and other monies due
the Company will be made from these payments. The Company understands that you
are relying upon its representation that it has no ERISA or other type of
written plans that define minimum transition benefits.
The severance period for which these severance payments will be made will begin
June 28, 2003 and end on June 26, 2004 ("Severance Period").
MEDICAL & DENTAL INSURANCE
Pursuant to the Consolidated Omnibus Budget Reconciliation Act ("COBRA"), you
may continue to participate in the Company's medical and dental plans for up to
eighteen (18) months from the date of termination of your employment. During the
Severance Period you will be provided the opportunity to continue your medical
and dental coverage for yourself and your eligible Dependents at the same
monthly premium as if you were a full time associate. Please indicate your
election by placing your initials on the appropriate line below.
____ I want to extend my medical AND dental coverage
____ I want to extend my MEDICAL coverage ONLY
____ I want to extend my DENTAL coverage ONLY
____ I do NOT want to extend my medical or dental coverage
If you extend your medical and/or dental coverage:
During the Severance Period, the Company will deduct the cost of this coverage
from your severance payments. After the Severance Period, you will be invoiced
for this cost.
The Severance Period is considered to be part of the 18 month COBRA
eligibility.
Notification of your rights and obligations under COBRA, the cost of
participation and the applicable enrollment forms will be provided to you
separately from this Agreement.
VACATION
You will receive payment for all accrued, but unused vacation through your
termination date. After this date, you will not accrue or earn any additional
paid vacation.
OUTPLACEMENT SERVICE
The Company has arranged, at its own expense, up to twelve months of executive
outplacement support for you. Additional information on these services will be
provided to you in a separate attachment.
ALL OTHER COMPANY SPONSORED BENEFIT PLANS
Unless specified in this Agreement, you will cease participation in and/or
accruing benefits under Company sponsored benefit plans as of your Termination
Date.
Eligibility for Considerations. You understand that, to be eligible for any
--------------------------------
of the considerations under this Agreement, you must be actively employed and
working through the date on which the Company releases you from work. You may
not terminate before then or be unavailable for active work due to leave status
(disability, workers' compensation, or personal) on your termination date.
Should you be on such leave at your termination date, you will be covered by the
terms and conditions of that particular status for its duration and, thereafter,
ineligible for any severance payments or other payments under this Agreement.
Release of All Claims. In exchange for the monies and benefits given to
-------------------------
you under this Agreement, you give up the right to bring any claims against
Company that relate to your job or termination from your job. The claims that
you are giving up include, but are not limited to, claims under the Age
Discrimination in Employment Act, as amended ("ADEA"), Title VII of the Civil
Rights Act of 1964, as amended ("Title VII"), the Civil Rights Act of 1966, as
amended, the Civil Rights Act of 1991, the Americans with Disabilities Act
("ADA"), the Equal Pay Act, as amended, the Family and Medical Leave Act, the
National Labor Relations Act, as amended, the Fair Labor Standards Act, as
amended, the Worker Adjustment and Retraining Notification ("WARN") Act, the
Employee Retirement Income Security Act ("ERISA"), as amended, and all other
federal, state or local laws regarding rights or claims relating to employment
and common law, including but not limited to, any claim for breach of an oral,
implied or written employment contract; negligent or intentional
misrepresentations; wrongful discharge; defamation; negligent or intentional
infliction of emotional distress; and/or violation of public policy. By signing
this agreement, you are not giving up any rights or claims under the ADEA that
arise after you sign this Agreement.
Confidentiality. You understand and agree that this is a confidential
----------------
Agreement between you and the Company and the terms and conditions herein are
not to be revealed by you other than to your attorney, tax authorities and/or
financial advisors and your spouse (who may not communicate the terms and
conditions of the Agreement to any third parties), all except as required by
subpoena or other process of law. In addition, you also agree not to divulge
market, product or other Company confidential information.
Voluntary Execution. The Company is informing you, in writing, that you
--------------------
should consult an attorney before signing this Agreement. In addition, it is
agreed and understood that the severance arrangements made between you and the
Company are unique and apply only to your special circumstance and in no way can
be construed or interpreted as precedent setting to others.
Acknowledgment. You received a copy of this Agreement on June 6, 2003
---------------
representing the terms of severance from the Company. No deadline of less than
-
forty-five (45) days has been imposed upon you to sign this Agreement. If you
are signing this Agreement less than forty- five (45) days from your Termination
Date you understand that you do not have to do so. Changes to this Agreement do
not restart the running of the forty-five (45) day period.
Cancellation Period. You may revoke this Agreement at any time within seven (7)
- ------------------
days after signing it by providing written notice of cancellation by hand
delivery or registered mail addressed to: Judith A. Sonnett at Borden Chemical,
Inc. 180 E. Broad St., 29th Floor, Columbus, Ohio 43215. For the revocation to
be effective, written notice must be received by the company no later than the
close of business on the seventh day after you sign this Agreement. If you
cancel, the Company owes you nothing under this Agreement. This Agreement will
not become effective and enforceable until the seven (7) day cancellation
period ends.
Non-Compete Period. You agree to refrain from engaging in competitive
--------------------
activities for a period of twelve (12) months after separation of employment.
Competition is herein defined as employment as an employee, agent, consultant
and/or contractor of a direct competitor of Borden Chemical, Inc., in North
America who is a manufacturer and/or marketer of formaldehyde based resins and
coatings with application in the forest products industry. Products include, but
are not limited to, urea formaldehyde resins, phenol formaldehyde resins, and
formulated waxes. You also agree not to be employed by Dynea or Georgia
Pacific.
Availability. You agree to be available, as reasonably necessary, with no
expense to yourself, for legal proceedings, if any, pending or which may arise
with respect to events which occurred during your employment with the Company
and to assist the Company in those proceedings as reasonably requested.
Company Property. You agree to immediately return your Company provided
------------------
property that may be in your possession or control. You also agree to
immediately return all original and duplicate documents, files computer files
and records, policies and procedures and all other tangible things in your
possession that were created, collected or received by you while employed by the
Company.
Violation of Agreement. If you violate the terms of this Agreement,
------------------------
including, but not limited to, by filing a claim against Company, and this
--
Agreement is upheld against you, the Company may have claims against you.
Severability. If any part of this Agreement is found to be unenforceable,
------------
the other paragraphs will remain fully valid and enforceable.
Controlling Law/Jurisdiction. This Agreement will be interpreted, enforced
-----------------------------
and governed by and under the laws of Ohio, except to the extent preempted by
federal law.
Future Cooperation. You will cooperate fully and sign any and all
-------------------
additional documents that may be necessary to carry out the terms and intent of
----
this Agreement.
Conduct. You agree to conduct yourself in a manner that does not disparage
-------
the Company or is damaging to or otherwise contrary to the Company's best
interests.
Claims. You have not filed any claims, and no one has filed any claims on
------
your behalf against the Company. You will not file any claims, and no one will
file any claims on your behalf against the Company, with respect to the claims
that you have given up in this Agreement.
Entire Agreement. This Agreement is the entire agreement between you and
-----------------
the Company with respect to the subject matter of this Agreement. There are no
other written or oral agreements, understandings or arrangements except the ones
contained in this Agreement. The terms of this Agreement may not be changed in
any way except in writing, signed by you and the Company.
FULL UNDERSTANDING. By signing this Agreement, you acknowledge that you have
- -------------------
carefully read this Agreement; that you have had a reasonable time to consider
- --
the language and effect of this Agreement; that the Company has informed you, in
writing, consult with an attorney before signing this Agreement; that you know,
understand and agree with the contents of this Agreement; and that you are
signing this document voluntarily because you are satisfied with its terms and
conditions.
SIGNED:
- ---------------------------- Dated:
-------------
Craig O. Morrison
- ---------------------------- Dated:
-------------
Edward G. Huller
CANCELLATION NOTICE
To cancel this Agreement:
- - Sign below.
- - The Company must receive this Cancellation Notice within seven (7) days of the
date you signed the Agreement.
I hereby cancel this Agreement.
- ------------------- ----------------------------------------
Date Signature
Exhibit 10(b)
SEVERANCE PAY AGREEMENT AND RELEASE OF ALL CLAIMS
This Transition & Severance Pay Agreement and Release of All Claims
("Agreement") is entered into on June 6, 2003 between Andrew J. Miles
("Associate" or "You") and Borden Chemical, Inc. ("Company").
Until June 20, 2003 ("Termination Date"), you will be an active employee of the
Company and remain on the Company's payroll. Accordingly, you agree to perform
all job-related duties and functions that may be assigned to you from
time-to-time by the Company to ensure an orderly transition of your duties. The
foregoing does not change the at-will nature of your employment relationship
with the Company. If in the opinion of the Company this transition is
successfully completed before your Termination Date, the company may terminate
your employment at such time and you will receive the consideration contained in
this Agreement.
1. Considerations.
SEVERANCE PAYMENTS
The Company agrees to pay you $189,371 as severance. This amount is equal to
fifty-two (52) weeks of your current base salary. Severance payments will be
made to you in bi-weekly installments, subject to all applicable legal
deductions and withholdings. Deductions for cash advances and other monies due
the Company will be made from these payments. The Company understands that you
are relying upon its representation that it has no ERISA or other type of
written plans that define minimum transition benefits.
The severance period for which these severance payments will be made will begin
June 21, 2003 and end on June 19, 2004 ("Severance Period").
MEDICAL & DENTAL INSURANCE
Pursuant to the Consolidated Omnibus Budget Reconciliation Act ("COBRA"), you
may continue to participate in the Company's medical and dental plans for up to
eighteen (18) months from the date of termination of your employment. During the
Severance Period you will be provided the opportunity to continue your medical
and dental coverage for yourself and your eligible dependents at the same
monthly premium as if you were a full time associate. Please indicate your
election by placing your initials on the appropriate line below.
____ I want to extend my medical AND dental coverage
____ I want to extend my MEDICAL coverage ONLY
____ I want to extend my DENTAL coverage ONLY
____ I do NOT want to extend my medical or dental coverage
If you extend your medical and/or dental coverage:
- - During the Severance Period, the Company will deduct the cost of this
coverage from your severance payments. After the Severance Period, you will be
invoiced for this cost.
- - The Severance Period is considered to be part of the 18 month COBRA
eligibility.
Notification of your rights and obligations under COBRA, the cost of
participation and the applicable enrollment forms will be provided to you
separately from this Agreement.
VACATION
You will receive payment for all accrued, but unused vacation through your
termination date. After this date, you will not accrue or earn any additional
paid vacation
OUTPLACEMENT SERVICE
The Company has arranged, at its own expense, up to 12 months of outplacement
support for you. Additional information on these services will be provided to
you in a separate attachment.
ALL OTHER COMPANY SPONSORED BENEFIT PLANS
Unless specified in this Agreement, you will cease participation in and/or
accruing benefits under Company sponsored benefit plans as of your Termination
Date.
2. Eligibility for Considerations. You understand that, to be eligible for
--------------------------------
any of the considerations under this Agreement, you must be actively employed
and working through the date on which the Company releases you from work. You
may not terminate before then or be unavailable for active work due to leave
status (disability, workers' compensation, or personal) on your termination
date. Should you be on such leave at your termination date, you will be covered
by the terms and conditions of that particular status for its duration and,
thereafter, ineligible for any severance payments or other payments under this
Agreement.
3. Release of All Claims. In exchange for the monies and benefits given
- ------------------------
to you under this Agreement, you give up the right to bring any claims against
Company that relate to your job or termination from your job. The claims that
you are giving up include, but are not limited to, claims under the Age
Discrimination in Employment Act, as amended ("ADEA"), Title VII of the Civil
Rights Act of 1964, as amended ("Title VII"), the Civil Rights Act of 1966, as
amended, the Civil Rights Act of 1991, the Americans with Disabilities Act
("ADA"), the Equal Pay Act, as amended, the Family and Medical Leave Act, the
National Labor Relations Act, as amended, the Fair Labor Standards Act, as
amended, the Worker Adjustment and Retraining Notification ("WARN") Act, the
Employee Retirement Income Security Act ("ERISA"), as amended, and all other
federal, state or local laws regarding rights or claims relating to employment
and common law, including but not limited to, any claim for breach of an oral,
implied or written employment contract; negligent or intentional
misrepresentations; wrongful discharge; defamation; negligent or intentional
infliction of emotional distress; and/or violation of public policy. By signing
this agreement, you are not giving up any rights or claims under the ADEA that
arise after you sign this Agreement.
4. Confidentiality. You understand and agree that this is a confidential
---------------
Agreement between you and the Company and the terms and conditions herein are
not to be revealed by you other than to your attorney, tax authorities and/or
financial advisors and your spouse (who may not communicate the terms and
conditions of the Agreement to any third parties), all except as required by
subpoena or other process of law. In addition, you also agree not to divulge
market, product or other Company confidential information.
5. Voluntary Execution. The Company is informing you, in writing, that you
--------------------
should consult an attorney before signing this Agreement. In addition, it is
agreed and understood that the severance arrangements made between you and the
Company are unique and apply only to your special circumstance and in no way can
be construed or interpreted as precedent setting to others.
6. Acknowledgment. You received a copy of this Agreement on June 6, 2003
--------------
representing the terms of severance from the Company. No deadline of less than
forty-five (45) days has been imposed upon you to sign this Agreement. If you
are signing this Agreement less than forty- five (45) days from your Termination
Date you understand that you do not have to do so. Changes to this Agreement do
not restart the running of the forty-five (45) day period.
Cancellation Period. You may revoke this Agreement at any time within seven (7)
- ------------------
days after signing it by providing written notice of cancellation by hand
delivery or registered mail addressed to: Judith A. Sonnett at Borden Chemical,
Inc. 180 E. Broad St., 29th Floor, Columbus, Ohio 43215. For the revocation to
be effective, written notice must be received by the company no later than the
close of business on the seventh day after you sign this Agreement. If you
cancel, the Company owes you nothing under this Agreement. This Agreement will
not become effective and enforceable until the seven (7) day cancellation
period ends.
8. Availability. You agree to be available, as reasonably necessary, with no
------------
expense to yourself, for legal proceedings, if any, pending or which may arise
with respect to events which occurred during your employment with the Company
and to assist the Company in those proceedings as reasonably requested.
9. Company Property. You agree to immediately return your Company provided
-----------------
property that may be in your possession or control. You also agree to
immediately return all original and duplicate documents, files computer files
and records, policies and procedures and all other tangible things in your
possession that were created, collected or received by you while employed by the
Company.
10. Violation of Agreement. If you violate the terms of this Agreement,
------------------------
including, but not limited to, by filing a claim against Company, and this
Agreement is upheld against you, the Company may have claims against you.
11. Severability. If any part of this Agreement is found to be
------------
unenforceable, the other paragraphs will remain fully valid and enforceable.
-----
12. Controlling Law/Jurisdiction. This Agreement will be interpreted,
-----------------------------
enforced and governed by and under the laws of Ohio, except to the extent
preempted by federal law.
13. Future Cooperation. You will cooperate fully and sign any and all
-------------------
additional documents that may be necessary to carry out the terms and intent of
this Agreement.
14. Conduct. You agree to conduct yourself in a manner that does not
-------
disparage the Company or is damaging to or otherwise contrary to the Company's
best interests.
15. Claims. You have not filed any claims, and no one has filed any claims
------
on your behalf against the Company. You will not file any claims, and no one
will file any claims on your behalf against the Company, with respect to the
claims that you have given up in this Agreement.
16. Entire Agreement. This Agreement is the entire agreement between you and
----------------
the Company with respect to the subject matter of this Agreement. There are no
other written or oral agreements, understandings or arrangements except the ones
contained in this Agreement. The terms of this Agreement may not be changed in
any way except in writing, signed by you and the Company.
FULL UNDERSTANDING. By signing this Agreement, you acknowledge that you have
- -------------------
carefully read this Agreement; that you have had a reasonable time to consider
the language and effect of this Agreement; that the Company has informed you, in
writing, consult with an attorney before signing this Agreement; that you know,
understand and agree with the contents of this Agreement; and that you are
signing this document voluntarily because you are satisfied with its terms and
conditions.
SIGNED:
- ------------------------------- Dated:
-----------------
Craig O. Morrison
- ------------------------------- Dated:
-----------------
Andrew J. Miles
CANCELLATION NOTICE
To cancel this Agreement:
- - Sign below.
- - The Company must receive this Cancellation Notice within seven (7) days of the
date you signed the Agreement.
I hereby cancel this Agreement.
- ------------------ --------------------------------------
Date
Exhibit 10(c)
SEVERANCE PAY AGREEMENT AND RELEASE OF ALL CLAIMS
This Transition & Severance Pay Agreement and Release of All Claims
("Agreement") is entered into on June 9, 2003 between John M. Kaestle
("Associate" or "You") and Borden Chemical, Inc. ("Company").
Until June 20, 2003 ("Termination Date"), you will be an active employee of the
Company and remain on the Company's payroll. Accordingly, you agree to perform
all job-related duties and functions that may be assigned to you from
time-to-time by the Company to ensure an orderly transition of your duties. The
foregoing does not change the at-will nature of your employment relationship
with the Company. If in the opinion of the Company this transition is
successfully completed before your Termination Date, the company may terminate
your employment at such time and you will receive the consideration contained in
this Agreement.
1. Considerations.
--------------
SEVERANCE PAYMENTS
The Company agrees to pay you $452,358 as severance. This amount is equal to
eighty seven (87) weeks of your current base salary. Severance payments will be
made to you in bi-weekly installments, subject to all applicable legal
deductions and withholdings. Deductions for cash advances and other monies due
the Company will be made from these payments. The Company understands that you
are relying upon its representation that it has no ERISA or other type of
written plans that define minimum transition benefits.
The severance period for which these severance payments will be made will begin
June 21, 2003 and end on February 19, 2005 ("Severance Period").
MEDICAL & DENTAL INSURANCE
Pursuant to the Consolidated Omnibus Budget Reconciliation Act ("COBRA"), you
may continue to participate in the Company's medical and dental plans for up to
eighteen (18) months from the date of termination of your employment. During the
Severance Period you will be provided the opportunity to continue your medical
and dental coverage for yourself and your eligible dependents at the same
monthly premium as if you were a full time associate. Please indicate your
election by placing your initials on the appropriate line below.
__X_ I want to extend my medical AND dental coverage
____ I want to extend my MEDICAL coverage ONLY
____ I want to extend my DENTAL coverage ONLY
____ I do NOT want to extend my medical or dental coverage
If you extend your medical and/or dental coverage:
During the Severance Period, the Company will deduct the cost of this
coverage from your severance payments
The Severance Period and the 18 month COBRA eligibility period run
concurrent and will expire on the same date.
Notification of your rights and obligations under COBRA, the cost of
participation and the applicable enrollment forms will be provided to you
separately from this Agreement.
VACATION
You will receive payment for all accrued, but unused vacation through your
termination date. After this date you will not accrue or earn any additional
paid vacation. This verifies that the BCI vacation accrual is "earn as you go"
during the current year. This means you would have accrued 12.5 days of
vacation for 2003 through your separation date, plus you carried over 4 unused
days from 2002. This results in 16.5 days of vacation less the 10 days of
vacation taken in 2003, for a NET PAYMENT OF 6.5 DAYS to you.
OUTPLACEMENT SERVICE
The Company has arranged, at its own expense, up to twelve months of Signature
service outplacement support for you, with Lee Hecht Harrison in the Seattle
area. Additional information on these services will be provided to you in a
separate attachment.
ALL OTHER COMPANY SPONSORED BENEFIT PLANS
Unless specified in this Agreement, you will cease participation in and/or
accruing benefits under Company sponsored benefit plans as of your Termination
Date.
2. Eligibility for Considerations. You understand that, to be eligible for
--------------------------------
any of the considerations under this Agreement, you must be actively employed
and working through the date on which the Company releases you from work. You
may not terminate before then or be unavailable for active work due to leave
status (disability, workers' compensation, or personal) on your termination
date. Should you be on such leave at your termination date, you will be covered
by the terms and conditions of that particular status for its duration and,
thereafter, ineligible for any severance payments or other payments under this
Agreement.
3. Release of All Claims. In exchange for the monies and benefits given to
------------------------
you under this Agreement, you give up the right to bring any claims against
Company that relate to your job or termination from your job. The claims that
you are giving up include, but are not limited to, claims under the Age
Discrimination in Employment Act, as amended ("ADEA"), Title VII of the Civil
Rights Act of 1964, as amended ("Title VII"), the Civil Rights Act of 1966, as
amended, the Civil Rights Act of 1991, the Americans with Disabilities Act
("ADA"), the Equal Pay Act, as amended, the Family and Medical Leave Act, the
National Labor Relations Act, as amended, the Fair Labor Standards Act, as
amended, the Worker Adjustment and Retraining Notification ("WARN") Act, the
Employee Retirement Income Security Act ("ERISA"), as amended, and all other
federal, state or local laws regarding rights or claims relating to employment
and common law, including but not limited to, any claim for breach of an oral,
implied or written employment contract; negligent or intentional
misrepresentations; wrongful discharge; defamation; negligent or intentional
infliction of emotional distress; and/or violation of public policy. By signing
this agreement, you are not giving up any rights or claims under the ADEA that
arise after you sign this Agreement.
4. Confidentiality. You understand and agree that this is a confidential
---------------
Agreement between you and the Company and the terms and conditions herein are
not to be revealed by you other than to your attorney, tax authorities and/or
financial advisors and your spouse (who may not communicate the terms and
conditions of the Agreement to any third parties), all except as required by
subpoena or other process of law. In addition, you also agree not to divulge
market, product or other Company confidential information.
5. Voluntary Execution. The Company is informing you, in writing, that you
--------------------
should consult an attorney before signing this Agreement. In addition, it is
agreed and understood that the severance arrangements made between you and the
Company are unique and apply only to your special circumstance and in no way can
be construed or interpreted as precedent setting to others.
6. Acknowledgment. You received a copy of this Agreement on June 6, 2003
--------------
representing the terms of severance from the Company. No deadline of less than
forty-five (45) days has been imposed upon you to sign this Agreement. If you
are signing this Agreement less than forty- five (45) days from your Termination
Date you understand that you do not have to do so. Changes to this Agreement do
not restart the running of the forty-five (45) day period.
7. Cancellation Period. You may revoke this Agreement at any time within
--------------------
seven (7) days after signing it by providing written notice of cancellation by
hand delivery or registered mail addressed to: Judith A. Sonnett at Borden
Chemical, Inc. 180 E. Broad St., 29th Floor, Columbus, Ohio 43215. For the
revocation to be effective, written notice must be received by the company no
later than the close of business on the seventh day after you sign this
Agreement. If you cancel, the Company owes you nothing under this Agreement.
This Agreement will not become effective and enforceable until the seven (7) day
cancellation period ends.
8. Non-Compete Period. You agree to refrain from engaging in competitive
--------------------
activities for a period of twenty (20) months after separation of employment.
Competition is herein defined as employment as an employee, agent, consultant
and/or contractor of a direct competitor of Borden Chemical, Inc., in North
America who is a manufacturer and/or marketer of formaldehyde based resins and
coatings with application in the forest products industry. Products include, but
are not limited to, urea formaldehyde resins, phenol formaldehyde resins, and
formulated waxes. You also agree not to be employed by Dynea or Georgia
Pacific Resins for the non-compete period.
-
9. Availability. You agree to be available during the 20 month severance
------------
period, as reasonably necessary, with no expense to yourself, for legal
proceedings, if any, pending or which may arise with respect to events which
occurred during your employment with the Company and to assist the Company in
those proceedings as reasonably requested.
10. Company Property. You agree to immediately return your Company provided
-----------------
property that may be in your possession or control. You also agree to
immediately return all original and duplicate documents, files computer files
and records, policies and procedures and all other tangible things in your
possession that were created, collected or received by you while employed by the
Company.
11. Violation of Agreement. If you violate the terms of this Agreement,
------------------------
including, but not limited to, by filing a claim against Company, and this
Agreement is upheld against you, the Company may have claims against you.
12. Severability. If any part of this Agreement is found to be
------------
unenforceable, the other paragraphs will remain fully valid and enforceable.
-----
13. Controlling Law/Jurisdiction. This Agreement will be interpreted,
-----------------------------
enforced and governed by and under the laws of Washington, except to the extent
preempted by federal law.
14. Future Cooperation. You will cooperate fully and sign any and all
-------------------
additional documents that may be necessary to carry out the terms and intent of
this Agreement.
15. Conduct. You agree to conduct yourself in a manner that does not
-------
disparage the Company or is damaging to or otherwise contrary to the Company's
best interests.
16. Claims. You have not filed any claims, and no one has filed any claims
------
on your behalf against the Company. You will not file any claims, and no one
will file any claims on your behalf against the Company, with respect to the
claims that you have given up in this Agreement.
17. Director's and Officer's Liability Insurance Coverage. This verifies
---------------------------------------------------------
that during the period of time that you were an officer of BCI you were covered
by Director's and Officer's Liability Insurance.
18. Bellevue Club. Your Bellevue membership will continue to be covered at a
-------------
cost of $170.00 per month, by BCI, for the duration of your severance agreement.
19. Entire Agreement. This Agreement is the entire agreement between you and
----------------
the Company with respect to the subject matter of this Agreement. There are no
other written or oral agreements, understandings or arrangements except the ones
contained in this Agreement. The terms of this Agreement may not be changed in
any way except in writing, signed by you and the Company.
FULL UNDERSTANDING. By signing this Agreement, you acknowledge that you have
- -------------------
carefully read this Agreement; that you have had a reasonable time to consider
- --
the language and effect of this Agreement; that the Company has informed you, in
writing, consult with an attorney before signing this Agreement; that you know,
understand and agree with the contents of this Agreement; and that you are
signing this document voluntarily because you are satisfied with its terms and
conditions.
SIGNED:
- --------------------------- Dated:
-----------------------
Craig O. Morrison
- --------------------------- Dated:
-----------------------
John M. Kaestle
CANCELLATION NOTICE
To cancel this Agreement:
- - Sign below.
- - The Company must receive this Cancellation Notice within seven (7) days of the
date you signed the Agreement.
I hereby cancel this Agreement.
- ------------------------- ---------------------------------
Date John M. Kaestle
Exhibit (31)(a)
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, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary 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 report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this 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-15(e) and 15d-15(e) for BCI and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to BCI,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b. Evaluated the effectiveness of BCI's disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
c. Disclosed in this report any change in BCI's internal control over
financial reporting that occurred during BCI's most recent fiscal quarter
(BCI's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect,
BCI's internal control over financial reporting; and
5. BCI's other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to BCI's
auditors and the audit committee of BCI's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect BCI's ability to record,
process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in BCI's internal control over
financial reporting.
Date: August 13, 2003
----------------
/s/ Craig O. Morrison
---------------------------
Craig O. Morrison
Chief Executive Officer
Exhibit (31)(b)
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, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary 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 report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this 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-15(e) and 15d-15(e) for BCI and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to BCI, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
b. Evaluated the effectiveness of BCI's disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
c. Disclosed in this report any change in BCI's internal control over
financial reporting that occurred during BCI's most recent fiscal quarter
(BCI's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect,
BCI's internal control over financial reporting; and
5. BCI's other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to BCI's
auditors and the audit committee of BCI's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect BCI's ability to record,
process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in BCI's internal control over
financial reporting.
Date: August 13, 2003
----------------
/s/ William H. Carter
-------------------------
William H. Carter
Chief Financial Officer
Exhibit 32
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, 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
- ----------------------- -------------------------
Chief Executive Officer Chief Financial Officer
August 13, 2003 August 13, 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.