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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2003

Commission file number 1-71

BORDEN CHEMICAL, INC.

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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Number of shares of common stock, $0.01 par value, outstanding as of the close of business on November 10, 2003: 200,895,628

 

BORDEN CHEMICAL, INC.

INDEX

 

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share amounts and as otherwise indicated)

1. Background

On March 14, 1995, affiliates of Kohlberg, Kravis Roberts & Co. ("KKR") acquired control of Borden Chemical, Inc. (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 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.

2. Basis of Presentation

The accompanying unaudited Consolidated Financial Statements include the accounts of the Company 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 Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and has adopted the disclosure-only provision of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" 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:

At September 30, 2003, 1,492 options to purchase common shares of the Company were outstanding and considered dilutive. The impact of the dilutive options was insignificant and is included in the rounded average shares outstanding - diluted number in the table above.

3. Business Realignment (Income) Expense

Three Months Ended September 30, 2003

In the third quarter of 2003, the Company recorded business realignment income and impairments of $8,806 consisting of plant closure costs of $542, other severance and employee costs of $2,318, a gain on the sale of land associated with a previously closed plant of $11,692 and non-cash asset impairment charges of $26.

Plant Closure and Other Severance and Employee Costs

Provided below is a rollforward of the business realignment reserve for the three months ended September 30, 2003:

Plant closure costs in the third quarter of 2003 of $542 consist of environmental remediation costs of $68 for previously closed plants in Brazil and $474 of other previous plant closure costs, fixed asset write-offs and realignment program costs.

Gain on the Sale of Assets

In the third quarter of 2003, the Company sold land associated with a previously closed plant in the United Kingdom resulting in a gain of $11,692. The gain on this sale was recorded as business realignment income because the expenses related to the initial plant closure were recorded as business realignment expense in previous years.

Asset Impairments

The Company also recorded asset impairments of $26 related to its French and Colombian operations in the three months ended September 30, 2003.

Nine Months Ended September 30, 2003

In the first nine months of 2003, the Company recorded business realignment income and impairments of $7,385 consisting plant closure costs of $267, other severance and employee costs of $4,431, a gain on the sale of land associated with previously closed plants of $12,260 and non-cash asset impairment charges of $177.

Plant Closure and Other Severance and Employee Costs

Provided below is a rollforward of the business realignment reserve for the first nine months of 2003:

Plant closure cost in 2003 of $267 consist of environmental remediation costs of $962 for previously closed plants in Brazil and $879 of other plant closure costs, fixed asset write-offs and realignment program costs. Partially offsetting these costs was a net reduction of reserves of $1,574 for a previously closed plant that was sold in the second quarter of 2003.

Gain on the Sale of Assets

In 2003, the Company sold land associated with a previously closed plant in the United Kingdom and its melamine plant that was previously closed and recorded gains of $12,260. The gains related to these sales were recorded as business realignment income because the expenses related to the initial plant closures were recorded as a business realignment expense in previous years.

Asset Impairment

The Company also recorded asset impairments of $177 related to its French and Colombian operations in the first nine months of 2003.

2003 Realignment Program

In June 2003, the Company initiated a realignment program designed to reduce operating expenses and increase organizational efficiency. To achieve these goals, the Company is reducing headcount, streamlining processes, consolidating manufacturing processes and reducing general and administrative expenses. The Company is combining jobs where practicable and has eliminated over 100 positions to date related to this program. For the three and nine months ended September 30, 2003, severance costs relating to the position eliminations of $1,180 and $3,214, respectively, were included as part of business realignment expense. In addition, for the three and nine months ended September 30, 2003, severance costs of $75 and $2,545, respectively, were included as part of general and administrative expens es, for positions to be replaced. The Company is implementing self-directed work teams in its manufacturing facilities. As a result of consolidating manufacturing processes, manufacturing shifts have been reduced at the Company's North Bay, Ontario plant, and the Company's facility in France is being converted into a distribution center, as the manufacturing is being moved to the United Kingdom. To reduce future general and administrative expenses, the Company has reduced contract work, consolidated and eliminated positions and streamlined the administration of medical benefits and other post-retirement benefits. Additionally, the Company is implementing consistent administrative practices throughout the organization. The Company anticipates the program will be completed by mid-2004. The Company expects to continue to incur costs during the fourth quarter of 2003 and in 2004 related to this program.

Provided below is a rollforward of the business realignment reserve activity related to the June 2003 realignment program for the three months ended September 30, 2003:

Provided below is a rollforward of the business realignment reserves activity related to the June 2003 realignment program for the nine months ended September 30, 2003:

Three Months Ended September 30, 2002

Plant Closure and Other Severance and Employee Costs

Provided below is a rollforward of business realignment activity for the three months ended September 30, 2002:

Plant closure costs of $1,236 included plant employee severance of $1,706, partially offset by a reduction of demolition, environmental and other reserves of $470.

Nine Months Ended September 30, 2002

In the nine months ended September 30, 2002, the Company recorded business realignment expense of $12,142 consisting of plant closure costs of $12,495, other severance and employee costs of $2,112 and a gain on the sale of land associated with a previously closed plant of $2,465.

Plant Closure and Other Severance and Employee Costs

Provided below is a rollforward of business realignment reserve activity for first nine months of 2002:

Plant closure costs of $12,142 consists of $12,495, primarily related to the closure of the melamine crystal business facility, included plant employee severance of $10,424 and demolition, environmental and other costs of $2,071.

Gain on the Sale of Assets

In the first quarter of 2002, the Company sold land associated with a closed plant in Spain resulting in a gain of $2,465.

4.    Restricted Cash

Restricted cash at December 31, 2002 represents cash collateral related to the Company’s uncommitted letter of credit facility. The facility required the Company to provide cash collateral equivalent to 101% of the letters of credit outstanding. In early July 2003, the Company cancelled all the letters of credit under the uncommitted facility and reissued them under the Company's credit facility, thereby terminating the uncommitted facility.

5.    Goodwill and Intangible Assets

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 nine months ended September 30, 2002. < /DIV>

		Three Months ended September 30,						Nine Months ended September, 30
		2003			2002			2003			2002
Net income (loss)		$	11,053		$	3,234		$	27,798		$	(25,780	)
Foreign currency translation adjustments			403			(13,911	)		23,416			(19,330	)
Derivative activity			-			(31	)		-			538
		$	11,456		$	(10,708	)	$	51,214		$	(44,572	)

	13

	14

		Three Months ended September 30,						Nine Months ended September 30,
		2003			2002			2003			2002
Adjusted EBITDA		$	37,617		$	31,928		$	92,300		$	98,498
Depreciation and amortization			(11,770	)		(11,682	)		(34,676	)		(35,800	)
Adjustments to EBITDA (described below)			8,576			(2,577	)		3,962			(17,951	)
Interest expense			(11,275	)		(11,955	)		(34,114	)		(35,922	)
Affiliated interest expense			(133	)		(435	)		(456	)		(1,051	)
Other non-operating income (expense)			513			1,467			(489	)		5,327
Income before income tax and cumulative effect of change in accounting principle		$	23,528		$	6,746		$	26,527		$	13,101

	15

	16

	17

	18

	19

	20

	21

	22

Net Sales Variance by Operating Segment		2003 As a Percentage Increase (Decrease) from 2002
		Volume			Price/Mix			Translation			Total
North American Forest Products			(6.0)	%		14.1	%		3.8	%		11.9	%
North American Performance Resins			(2.4)	%		2.5	%		0.1	%		0.2	%
International			(4.0)	%		11.9	%		8.3	%		16.2	%

	23

	24

Net Sales Variance		2003 As a Percentage Increase (Decrease) from 2002
		Volume			Price/Mix			Translation			Total
North American Forest Products			(1.6)	%		20.3	%		3.0	%		21.7	%
North American Performance Resins			0.4	%		5.7	%		0.1	%		6.2	%
International			(2.5)	%		18.8	%		1.0	%		17.3	%

	25

Adjusted EBITDA decreased $780, or 3.2%, in the first nine months of 2003 versus the comparable period of 2002. The modest decline in Adjusted EBITDA was a result of a reduction in volumes in Latin America and Europe and unfavorable currency translation in Brazil, slightly offset by favorable currency translation in Europe and Asia Pacific. These reductions in Adjusted EBITDA were substantially offset by a $2,345 gain related to the favorable settlement of a Brazilian foreign exchange claim and a $1,100 reserve reduction due to a revised estimate of a potential liability related to an excess duty imposed on the importation of inventory in Brazil.

Corporate and other

Corporate and other expenses increased $1,309 in the first nine months of 2003 as compared to the same period of 2002. The increase in 2003 expense resulted from higher pension and benefit costs, additional legal costs and higher revised estimates for insurance. These increased expenses were substantially offset by a reduction in post-retirement health benefit expenses of $6,500 (see below for discussion of the post-retirement medical benefit plan amendment) and management fees. Further offsetting the increased expenses was 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 $2,355 gain recognized on the sale of the Company's airplane.

See Liquidity for a discussion of amendments that the Company announced in May 2003 related to its medical benefit plan. 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 activity in 2003 and 2002 represents 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 of $568.

	26

Adjustments to EBITDA

The following items are not included in the Adjusted EBITDA results reviewed by the Company's chief decision maker:

Three Months Ended September 30, 2003		Plant Closure			Severance			Impairments/ Other			Total
North American Forest Products		$	(141	)	$	(606	)	$	-		$	(747	)
North American Performance Resins			121			(97	)		-			24
International			(635	)		(403	)		11,666			10,628
Corporate and other			-			(1,212	)		(221	)		(1,433	)
Divested businesses			113			-			(9	)		104
Total		$	(542	)	$	(2,318	)	$	11,436		$	8,576
Three Months Ended September 30, 2002
North American Forest Products		$	146		$	(185	)	$	-		$	(39	)
North American Performance Resins			(1,222	)		89			-			(1,133	)
International			1,115			-			-			1,115
Corporate and other			-			(750	)		-			(750	)
Divested businesses			(1,275	)		-			(495	)		(1,770	)
Total		$	(1,236	)	$	(846	)	$	(495	)	$	(2,577	)

In the third quarter of 2003, plant closure expense of $542 consist of environmental remediation costs of $68 for previously closed plants in Brazil and $474 of other previous plant closure costs, fixed asset write-offs and realignment program costs. Severance costs of $2,318 were primarily for headcount reduction programs. Other expenses primarily represent the gain of $11,692 realized on the sale of land associated with a previously closed plant in the United Kingdom.

In the third quarter of 2002, plant closure costs relate primarily to severance for plant employees. Other expenses relate to expenses incurred related to the closure of the Company's melamine operations.

	27

Nine Months Ended September 30, 2003		Plant Closure			Severance			Impairments/ Other			Total
North American Forest Products		$	557		$	(540	)	$	(520	)	$	(503	)
North American Performance Resins			(42	)		(407	)		-			(449	)
International			(2,325	)		(574	)		11,515			8,616
Corporate and other			(146	)		(2,910	)		(2,588	)		(5,644	)
Divested businesses			1,689			-			253			1,942
Total		$	(267	)	$	(4,431	)	$	8,660		$	3,962
Nine Months Ended September 30, 2002
North American Forest Products		$	(714	)	$	(103	)	$	-		$	(817	)
North American Performance Resins			(1,857	)		(544	)		-			(2,401	)
International			(3,568	)		-			2,465			(1,103	)
Corporate and other			-			(1,465	)		(5,500	)		(6,965	)
Divested businesses			(6,356	)		-			(309	)		(6,665	)
Total		$	(12,495	)	$	(2,112	)	$	(3,344	)	$	(17,951	)

For the nine months ended September 30, 2003, plant closure costs primarily consist of environmental remediation costs of $962 for previously closed plants in Brazil and $879 of other previous plant closure costs, fixed asset write-offs and realignment program costs, partially offset by a net reduction of reserves of $1,574 for the previously closed melamine plant that was sold in the second quarter of 2003. Severance costs were primarily for headcount reduction programs. Other expenses primarily represent gains of $12,260 on the sale of land associated with a previously closed plant in the United Kingdom and the melamine plant that was previously closed, offset by severance expense included in general and administrative expense relating to positions to be replaced.

For the nine months ended September 30, 2002, plant closure costs consist of plant employee severance of $10,424 and demolition, environmental and other costs of $2,071. Other expenses primarily represent additional management fees related to the wind down of Borden Capital, Inc. (see Note 8 to the Condensed Consolidated Financial Statements), partially offset by a $2,465 gain recognized on the sale of land associated with a previously closed plant in Spain.

	28

Non-operating expenses and income taxes

Following is a comparison of non-operating expenses for the three months ended September 30, 2003 and 2002:

		Three months ended September 30,
		2003			2002
Interest expense		$	11,275		$	11,955
Affiliated interest expense, net			133			435
Other non-operating income			(513	)		(1,467	)
		$	10,895		$	10,923

Non-operating expenses decreased $28 to $10,895 for the quarter ended September 30, 2003 from $10,923 for the prior year's quarter. The decrease is primarily due to reduction in interest and net affiliated interest expense due to lower average borrowings and lower interest rates in 2003, offset partially by a reduction in miscellaneous non-operating income related to interest rate swaps and other non-affiliated interest income.

Following is a comparison of non-operating expenses for the nine months ended September 30, 2003 and 2002:

		Nine months ended September 30,
		2003			2002
Interest expense		$	34,114		$	35,922
Affiliated interest expense, net			456			1,051
Other non-operating expense (income)			489			(5,327	)
		$	35,059		$	31,646

Non-operating expenses increased $3,413 to $35,059 for the nine months ended September 30, 2003 from $31,646 for the prior year's 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 $1,605 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 $1,137 due to lower interest rates and lower average cash balances. These increases in non-operating expenses were partially offset by lower interest and net affiliated interest expense of $1,808 and $595, respectively, in 2003 due to lower average borrowings and lower interest rates.

Following is a comparison of income tax expense related to continuing operations for the three months ended September 30, 2003 and 2002:

		Three months ended September 30,
		2003			2002
Income tax expense		$	12,475		$	3,512
Effective tax rate			53.0	%		52.1	%

The 2003 effective tax rate reflects additional income tax expense of $4,453 related to deemed dividend income related to loans from foreign subsidiaries. This additional income tax expense resulted in no cash tax payments, as existing tax attributes were utilized by the Company.

The 2002 consolidated tax rate reflects a valuation allowance in the amount of $16,672 recorded against the benefit of certain deferred interest expense deductions, which are subject to usage limitations by the Internal Revenue Service, that are no longer likely to be utilized. This expense is offset by the reduction of a $20,000 reserve for U.S. Federal income tax audits reflecting preliminary settlement of certain matters for the years 1998 and 1999 that were resolved in 2002.

	29

Following is a comparison of income tax (benefit) expense related to continuing operations for the nine months ended September 30, 2003 and 2002:

		Nine months ended September 30,
		2003			2002
Income tax (benefit) expense		$	(1,271	)	$	9,056
Effective tax rate			N/M			69.1	%

The 2003 effective tax rate reflects the elimination of $18,200 of deferred tax liabilities associated with divested businesses slightly offset by foreign tax rate differentials and valuation reserves established against foreign losses that are not expected to be utilized. The effective tax rate also reflects additional income tax expense of $6,100 related to deemed dividend income from loans from foreign subsidiaries. This additional income tax expense resulted in no cash tax payments, as existing tax attributes were utilized by the Company.

The 2002 consolidated tax rate reflects a valuation allowance in the amount of $16,672 recorded against the benefit of certain deferred interest expense deductions, which are subject to usage limitations by the Internal Revenue Service, that are no longer likely to be utilized. This expense is offset by the reduction of a $20,000 reserve for the U.S. Federal income tax audits reflecting preliminary settlement of certain matters for the years 1998 and 1999 that were resolved in 2002.

Cash Flows:

Cash provided by (used in):

		Nine months ended September 30,
		2003			2002
Operating activities		$	6,095		$	(5,750	)
Investing activities			(11,262	)		93,801
Financing activities			17,402			(82,479	)
Net change in cash and cash equivalents		$	12,235		$	5,572

Operating Activities

Operating activities provided cash of $6,095 for the nine months ended September 30, 2003 compared to using cash of $5,750 for the same period of 2002. The improvement in operating cash flows was primary due to the favorable timing of payment of trade payables, a reduction in cash realignment payments and lower inventory levels. Partially offsetting these improved cash flows were higher cash tax payments in 2003.

Investing Activities

Investing activities used cash of $11,262 in the nine months ended September 30, 2003 versus providing cash of $93,801 in the first nine months of the prior year. Capital expenditures of $24,684, net of proceeds from the sale of previously closed plants and other miscellaneous assets of $13,422, accounted for the net outflow of cash and were the only investing activities 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 activities provided cash of $17,402 in the nine months ended September 30, 2003 as compared to using cash of $82,479 in the first nine months of the prior year. Early in the third quarter, the Company completed the process of converting letters of credit from the uncommitted letter of credit facility to the Credit Facility (see Liquidity and Capital Resources section) thereby releasing restricted cash of $67,049, most of which was used to repay loans from affiliates of $51,560. During the first nine months of 2002, the Company issued letters of credit under the uncommitted letter of credit facility thereby restricting cash in the amount of $78,134 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 the net borrowings from affiliates of $29,825.

	30

Liquidity and Capital Resources

The Company entered into a three-year asset based revolving credit facility on September 23, 2002 (the "Credit Facility") that provides for a maximum borrowing of $175,000. The Credit Facility replaced the prior $250,000 credit facility that expired on July 13, 2002 and replaced an uncommitted letter of credit facility discussed below.

The Credit Facility is secured with inventory and accounts receivable in the United States, Canada and the United Kingdom, a portion of property and equipment in Canada and the United Kingdom and the stock of certain subsidiaries. Maximum borrowing allowable under the Credit Facility is calculated monthly and is based upon specified percentages of eligible accounts receivable, inventory and fixed assets. The Credit Facility contains restrictions on dividends, limitations on borrowings from affiliates of $30,000, 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 Credit Facility provides that when aggregate availability exceeds $75,000 there are no fixed charge coverage ratio requirements. As of September 30, 2003, the maximum borrowing allowable under the Credit Facility was $141,600 of which $62,800 was unused and available. At September 30, 2003, the Company met the fixed charge coverage ratio requirement of 1.1.

Under an uncommitted letter of credit facility, the Company provided cash collateral equivalent to 101% of letters of credit outstanding which was classified as restricted cash on the Consolidated Balance Sheet as of December 31, 2002. In early July 2003, the Company had cancelled all the letters of credit under this facility and reissued them under the Credit Facility.

The Company and HA-International LLC, ("HAI"), a consolidated joint venture of the Company, have, in the aggregate, borrowed $33,120 from Borden Foods Holdings Corporation ("Foods"), an affiliate of the Company, at interest rates ranging from 1.1875% to 4.75% as of September 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 September 30, 2003, HAI had borrowed $5,500 and had $9,500 remaining available under its agreement with Foods.

On October 1, 2003, the Company exercised its option to redeem, at par, the remaining $885 of County of Maricopa Industrial Revenue Bonds. In October 2003, the Company converted the $34,000 Parish of Ascension IRB bonds to a fixed interest rate, and by doing so, eliminated the requirement to maintain a backup letter of credit in this amount. The elimination of the letter of credit increased availability under the Credit Facility. The increase in availability will provide the Company with additional borrowing capacity and potentially reduce or eliminate the fixed charge covenant requirement depending on aggregate availability.

Based on current projections of the minimum annual funding requirements imposed by Federal laws and regulations with regard to the U.S. benefit obligations of its defined benefit pension plans, the updated minimum annual funding requirements range from $0 in 2003 to approximately $24,700 in 2006 with a total funding requirement for the five years ended in 2007 of $79,500. The assumptions utilized in updating its projections included an 8.0% annual rate of return on assets for the years 2003 through 2007 and the continuation of current law and plan provisions.

On April 23, 2003, the Company amended its medical benefit plan (as permitted by its terms) such that, effective September 1, 2003, medical benefits are no longer 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 and prescription drug 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 through December 2004 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. This subsidy will be reviewed for periods after December 2004. As a result of these actions, the Company estimates that its liability related to providing post-retirement medical benefits will be reduced by approximately $80,000 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 adjusted any applicable unrecognized prior service benefit for the impact of the amendment and is amortizing the adjustment over the estimated remaining years of service until participants reach full eligibility.

	31

In June 2003 the Company announced a realignment plan from which it expects annualized savings of approximately $20,000 when the program is fully implemented in 2004.

During the first nine 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 and other costs increases combined with competitive pricing pressures outstripped the Company's ability to increase sales prices. While raw material prices began to stabilize in the third quarter and the Company has benefited from the timing lag between payment on raw materials and passing through of cost decreases to customers, the Company believes that competitive pricing pressures and increased energy, benefit and insurance cost levels will continue in the foreseeable future. These market dynamics wi ll continue to require the Company to focus on productivity improvements to improve margins.

The Company expects to have adequate liquidity to fund working capital requirements and support capital expenditures over the three year term of the Credit Facility with cash received from operations and amounts available under the Credit Facility and from affiliates. However, there is no assurance that borrowings from affiliates will be available in future periods.

Other Matters

The Company’s operations are subject to the usual hazards associated with chemical manufacturing and the related storage and transportation of feedstocks, products and wastes, including combustion, inclement weather and natural disasters, mechanical failure, unscheduled downtime, transportation interruptions, remediation, chemical spills, discharges or releases of toxic or hazardous substances or gases and other environmental risks. The hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. The Company has pro-active programs and processes and other safeguards to minimize the risk of an incident and to ensure the sa fe continuous operation of its facilities. In addition, the Company maintains property, business interruption and casualty insurance that it believes is in accordance with customary industry practices, but is not fully insured against all potential hazards incident to its business.

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. Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be estimated. Although environmental policies and practices are designed to ensure compliance with Federal and state laws and environmental regulations, future developments and increasingly stringent regulation could require the Company to make additional unforeseen environmental expenditures. In addition, the Company's former operations, including its ink, wallcoverings, film, phosphate mining and processing, thermoplastics, food and dairy operations pose additional uncertainties for claims relating to the Company’s period of ownership. There can be no assurance that, as a result of former, current or future operations, there will not be some future impact on the Company relating to new regulations or for additional environmental remediation or restoration liabilities.

For example, various government agencies continue to conduct formaldehyde health research and evaluate the need for additional regulations. In particular, results from several epidemiology study updates are pending and a few states are considering new regulatory initiatives designed to further control its use. The Company supports appropriate scientific research and risk-based policy decision-making and is working with industry groups to ensure that governmental assessments and regulations are based on sound scientific information. The Company believes that it has credible stewardship programs and processes in place to effectively manage the increased attention and provide compliant and cost-effective resins systems to its customer base.

The Company has historically been involved in product liability litigation, including class action lawsuits, claiming liability for death, injury or property damage caused by products manufactured by the Company or with Company-provided components. These, and any future lawsuits, could result in damage awards against the Company, which in turn could encourage additional litigation. There has been increased publicity about asbestos liabilities faced by manufacturing companies and, as a result of the bankruptcies of many producers of asbestos-containing products, plaintiff attorneys are increasing their focus on peripheral defendants, including the Company. The Company does not believe it has a material asbestos exposure, as it never sold products containing asbestos material to the public.

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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 eff ective January 1, 2003. Implementation of SFAS No. 143 did not have a significant impact on the Company's 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 provisi ons 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 December 15, 2003. The Company has no variable interest entities and therefore the implementation of FI N 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.

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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 a material 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 "believes," "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.

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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 Financ ial 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.

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Part II

Item 1: Legal Proceedings

There have been no material developments during the third quarter of 2003 in the ongoing legal proceedings that are discussed in the Commitments and Contingencies footnote to the Consolidated Financial Statements and in the Legal Proceedings sections of the Company's Annual Report on Form 10-K for the year ended December 31, 2002 or in the Quarterly Reports on Form 10-Q/A and 10-Q for the periods ended March 31, 2003 and June 30, 2003 respectively.

 

HA-International, LLC, a consolidated joint venture of the Company, received a grand jury subpoena dated November 5, 2003 from the U.S. Department of Justice Antitrust Division relating to a Foundry Resins Grand Jury Investigation. A response is due December 16, 2003.

 

The Company is also involved in various product liability, commercial, employment and environmental legal proceedings which are not discussed in its periodic filings and which are considered to be in the ordinary course of the Company’s business.

The Company believes, based upon the information it currently possesses, and taking into account its established reserves for estimated liability and its insurance coverage, as well as the other factors discussed in environmental matters, that the ultimate outcomes of its pending environmental and other legal proceedings may have a material adverse effect on the results of operations and liquidity or the consolidated financial condition of the Company within a given reporting period.

Item 2. Changes in Securities and Use of Proceeds.

None

Item 3. Defaults Upon Senior Securities.

None

Item 4. Submission of Matters to a Vote of Security Holders.

None

Item 6. Exhibits and Report on Form 8-K.

a.	Exhibits
	(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 October 9, 2003 with a Limited Reoffering Circular related to a reoffering of certain of the Company's bonds.

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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: November 14, 2003		/s/ William H. Carter
			William H. Carter
			Executive Vice President and
			Chief Financial Officer
			(Principal Financial Officer)

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