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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

BORDEN CHEMICAL, INC.

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

NONE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in any amendment to this Form 10-K.  x.

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

Aggregate market value in thousands of the voting stock held by nonaffiliates of the Registrant based upon the average bid and asked prices of such stock on March 18, 2005: $0.

Number of shares of common stock, par value $0.01 per share, outstanding as of the close of business on March 18, 2005: 96,905,936

DOCUMENTS INCORPORATED BY REFERENCE

The Exhibit Index is Located herein at sequential pages 101 through 103.

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BORDEN CHEMICAL, INC.

INDEX

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Part I

ITEM 1. BUSINESS

(Dollars in thousands except per share data)

Description of Business

Borden Chemical, Inc. (which may be referred to as “we,” “us,” “our,” “BCI” or the “Company”) is a leading global integrated producer of thermoset-based resins and adhesives for the global forest products and industrial markets. In addition, we are the world’s largest producer by volume of formaldehyde, an important and versatile building block chemical used in a wide variety of applications. We are the largest North American producer by volume of thermoset-based resins used in the production of engineered wood products, including structural wood panels, beams and non-structural panels, furniture, decorative flooring, door and window assemblies and wallboards. We are also a leading producer of resin-coated proppant systems in North America, which are used in oilfield and natural gas production, and, through HA-International, LLC, or HAI, of foundry resins, which are used in the production of cores and molds for metal castings. We have a strong presence in the production of specialty resins used in the industrial, automotive and electronics markets. Our materials are designed to deliver superior binding and bonding performance to manufacturers of thousands of common, everyday products that enhance modern living. Our strong position in North America is complemented by our significant operations in Latin America and Europe. The Company was incorporated on April 24, 1899.

Our strategically located network of facilities provides us with logistical benefits, which minimize delivery expense due to our proximity to our customers. Our customers operate in diverse end-markets, such as new home construction, repair and remodeling, furniture, automotive, oil and gas, chemicals, electronics, communications and agriculture. The diversity of our customer base helps to insulate us from a downturn in any one sector of the economy. Our customer contracts generally allow us to pass raw material price increases on to our customers, which leads to stable gross margins.

Our Strategy

Our key business strategies are:

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Our business consists of three reportable segments: Forest Products, Performance Resins and International. See Note 18 to the Consolidated Financial Statements.

Historical Perspective

On July 6, 2004, Apollo announced that it had signed a definitive agreement to acquire the Company. Previously, on May 7, 2004, the Company filed a registration statement with the U.S. Securities and Exchange Commission for a proposed initial public offering (“IPO”) of its common stock. This IPO was suspended and the registration statement withdrawn on August 31, 2004.

On August 12, 2004, BHI Investment, LLC, an affiliate of Apollo, acquired all of the outstanding capital stock of Borden Holdings, Inc. (“BHI”), the Company’s parent at that time, for total consideration of approximately $1.2 billion, including assumption of debt. In conjunction with this transaction, all of the outstanding capital stock of the Company held by management was redeemed and non-vested restricted stock was cancelled. In addition, the Company redeemed approximately 102,069 shares from BHI for cash totaling $294,918.

Immediately following the acquisition of BHI, BHI Investment, LLC reorganized the existing corporate structure of the Company so that the Company became directly owned by BHI Acquisition Corporation (“BHI Acquisition”), a subsidiary of BHI Investment, LLC. Following the acquisition of BHI by Apollo, the Company reorganized its foreign subsidiaries.

The acquisition of BHI, and the payment of transaction fees and expenses, was financed with the net proceeds of a $475 million second-priority senior secured private debt offering (the “Second Priority Notes”) by two newly formed, wholly owned subsidiaries of the Company and certain equity contributions to BHI Acquisition from Apollo. With a portion of the proceeds, we redeemed our 9.25% debentures on August 12, 2004 for total cash of $49,249. Included in the total cash paid was $47,295 for the principal of the debentures, $1,069 of accrued interest and an early redemption premium of $885. See Note 9.

Collectively, the transactions described above are referred to as the “Apollo Transaction.”

The Second Priority Notes are guaranteed by the Company and certain of its domestic subsidiaries (the “Guarantors”). The Second Priority Notes and the related guarantees are senior obligations secured by a second-priority lien (subject to certain exceptions and permitted liens) on certain of the Guarantors’ existing and future domestic assets, including the stock of the Company’s Canadian subsidiary.

As a result of the suspended IPO and the subsequent acquisition by Apollo, we incurred expenses of $55,586 in 2004. These amounts included charges for investment banking, accounting and legal fees, fees paid to Apollo, payments for cancellation of restricted stock, exercises of stock options and management bonuses pertaining to the activity. Of this amount, compensation costs of $14,264 are included within Transaction related compensation costs, and the remainder is included within Transaction related costs.

Prior to the Apollo Transaction, the Company was controlled by an affiliate of Kohlberg Kravis Roberts & Co. (“KKR”) since 1995. The Company’s immediate parent, BHI, was a wholly owned subsidiary of BW Holdings, LLC (“BWHLLC”), an entity controlled by KKR.

Acquisitions and Divestitures

On October 6, 2004, we entered into an agreement to purchase all outstanding shares of capital stock of Bakelite Aktiengesellschaft (“Bakelite”) for a net purchase price ranging from approximately €175 million to €200 million, subject to certain adjustments. Completion of the purchase is subject to regulatory and other customary closing conditions including European Commission merger clearance. The Company and Bakelite will continue to operate independently until those conditions are satisfied and the closing occurs.

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Following is a summary of acquisitions and divestitures we made in the past five years.

In the fourth quarter of 2003, we acquired Fentak Pty Ltd. (“Fentak”) in Australia and Malaysia, a producer of specialty chemical products for engineered wood, laminating and paper impregnation markets. We also acquired the business and technology assets of Southeastern Adhesives Company (“SEACO”), a domestic producer of specialty adhesives.

In 2001, through a series of transactions with affiliates, we sold Consumer Adhesives for total proceeds of $94,120 (the “Consumer Adhesives Sale”). We retained continuing investments in Consumer Adhesives in the form of preferred stock and notes receivable. We sold the notes receivable to BHI in the fourth quarter of 2001 for their carrying value of $57,691. The preferred stock, with a carrying value of $110,000, was redeemed during the first quarter of 2002 for a $110,000 note receivable from Consumer Adhesives, which we subsequently sold to BHI for face value plus accrued interest and used the proceeds to repay affiliated debt.

Also in 2001, we merged our North American foundry resins and coatings businesses with similar businesses of Delta-HA, Inc. to form HA-International, LLC (“HAI”), in which we have a 70% interest.

In 2000, the Company acquired the formaldehyde and certain other assets from Borden Chemicals and Plastics Operating Limited Partnership, which was an affiliate of the Company, and acquired East Central Wax, a wax emulsions producer for the forest products business.

Products

The product lines included in our Forest Products operating segment are formaldehyde and forest product resins. The product lines in our Performance Resins operating segment are oilfield, foundry and specialty resins. The products of our International operating segment are formaldehyde, forest product and performance resins and consumer products.

Forest Products

Forest Products Resins. We are the leading producer of forest products thermoset-based resins in North America. Our thermoset-based resin systems are used by our customers to bind wood particles and bond wood segments to provide strength and durability to oriented strand board (“OSB”), particleboard, medium density fiberboard (“MDF”) and plywood. The primary end-markets for our forest products resins are new home construction, furniture and repair and remodeling.

We provide a comprehensive range of resin systems to the world’s leading producers of engineered wood products. Our resins and adhesives, together with our wax sizing agents and other complementary products, are used to produce the following products: OSB, plywood and other construction panel systems; laminated beams, joists and trusses for structural applications; millwork, cabinetry and window and door assemblies; and particleboard and MDF for furniture, flooring and other applications. Used in combination with wood from plantation-grown trees, our resins help provide economical alternatives to traditional solid wood products that consume old-growth timber, while delivering products that achieve superior performance. Depending on the application and customer requirements, our resins are produced by mixing formaldehyde with other chemicals, including urea, phenol, melamine and resorcinol. The result is a completed thermoset resin system.

A key component of our success in the engineered wood market is our total systems approach to meeting customer needs. This approach involves first using our global technology and experience in order to deliver the right resin for the customer’s application and production process and then providing in-plant technical support and service.

Formaldehyde. We are the world’s largest producer of formaldehyde by volume and the largest provider of formaldehyde to end-users in North America. We manufacture more than five billion pounds of formaldehyde solution each year, of which approximately half is consumed internally for resin production and the other half is sold to external customers. Formaldehyde is a versatile building block chemical used in thousands of diverse end-use applications such as resin systems for forest

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products and industrial bonding, household products, including shampoo, cosmetics, disinfectants and fabric softeners, and specialty fabrics, paper products, fertilizers and animal feeds.

We manufacture synthetic formaldehyde by reacting methanol with a silver or metal oxide catalyst. Formaldehyde is sold in a water-based solution and also is blended with other materials for specific customer applications.

Performance Resins

Specialty Resins. We are a major supplier of high performance specialty resins used in the binding and bonding of a diverse range of materials, primarily in the construction, automotive, electronics and steel industries. Typical end-use product applications include electronics for circuit boards, adhesives for brake linings and other friction products, flame-resistant composites for trains and planes, acoustical insulation for automobiles and glass matting for roofing shingles and thermal insulation.

Our manufacturing complex in Louisville, Kentucky is one of the world’s largest sites producing specialty resins. We have additional manufacturing capacity for these materials dispersed throughout our international network of plants.

Foundry Resins. Through HAI, we are the leading producer by volume of foundry resins in North America. We pioneered the development of thermoset-based resins as binders for sand cores and molds used in metal castings over 40 years ago and continue to serve the North American market with a broad distribution network and significant production capability. Our foundry resin manufacturing capabilities include the largest foundry resin plant in the United States, which is located in Louisville, Kentucky. Our foundry resin systems are used by major automotive and industrial companies in the production of engine blocks, transmissions, brake and drive train components and various other casting products.

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Our foundry resins business provides PF resin systems, specialty coatings and ancillary products used to produce finished metal castings.

Oilfield Products. We are a leading producer of resin-coated proppant systems in North America. Our innovative flow back control technology allows oil and gas service providers to improve yields and extract oil and gas from deeper and more complex geological formations.

Maximizing flow capacity is critical for oil and gas production around the world, both on land and off-shore. We supply the leading service providers in the oil and gas field industry with products that increase the yields of working wells. Our extensive line of PF resin systems, resin-coated sand and resin-coated ceramic proppants are used in the hydraulic fracturing process to create and maintain pathways from the well bore to the oil or gas-bearing formation. This process enhances the recovery of hydrocarbons and can extend the well’s life.

Marketing and Distribution

Products are sold to industrial users in the U.S. primarily through our sales force. To the extent practicable, our international distribution techniques parallel those used in the U.S. However, raw materials, production considerations, pricing competition, government policy toward industry and foreign investment and other factors may vary substantially from country to country.

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Competition

We compete with a variety of companies in each of our product lines. However, we believe that no single company competes with us across all of our existing product lines. The following chart sets forth our principal competitors by segment:

Manufacturing and Raw Materials

The primary raw materials used in our manufacturing processes, for all of our operating segments, are methanol, phenol and urea. Raw materials are available from numerous sources in sufficient quantities but are subject to price fluctuations that cannot always be passed on to customers. We use long-term purchase agreements for our primary and certain other raw materials in certain circumstances to assure availability of adequate supplies at specified prices. These agreements generally do not have minimum purchase requirements.

The following table illustrates the average annual price from 1995 to 2004 for methanol, phenol and urea:

Customers

Our business does not depend on any single customer nor are any of our operating segments limited to a particular group of customers, the loss of which would have a material adverse effect on the operating segment. In 2004, our largest customer accounted for approximately 5% of our net sales, and our top ten customers accounted for approximately 24% of our net sales. Our primary customers consist of manufacturers, and the demand for our products is generally not seasonal.

Patents and Trademarks

We own various patents, trademark registrations, patent and trademark applications and technology licenses in our operating segments around the world which are held for use or currently used in our operations. We own two material trademarks, Borden® and Elsie®. We use Borden® in our operations and license both trademarks to third parties for use on non-chemical products. A majority of our patents relate to the development of new products and processes for manufacturing and use thereof and will expire at various times between 2005 and 2023. Other than the Borden® and Elsie® trademarks, no individual patent or trademark is considered to be material; however, our overall portfolio of patents and trademarks are valuable assets.

Environmental Regulations

Our operations involve the use, handling, processing, storage, transportation and disposal of hazardous materials and are subject to extensive environmental regulation at the Federal, state and international level and are exposed to the risk of claims for environmental remediation or restoration. In addition, our production facilities require operating permits that are subject to renewal or modification. Violations of environmental laws or permits may result in restrictions being imposed on operating activities, substantial fines, penalties, damages or other costs, any of which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Accruals for environmental matters are recorded in accordance with the guidelines of AICPA Statement of Position 96-1, “Environmental Remediation Liabilities,” when it is probable that a liability has been incurred and the amount of the

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liability can be estimated. Although environmental policies and practices are designed to ensure compliance with international, Federal and state laws and environmental regulations, future developments and increasingly stringent regulation could require us to make additional unforeseen environmental expenditures. In addition, our former operations, including our ink, wallcoverings, film, phosphate mining and processing, thermoplastics, food and dairy operations, pose additional uncertainties for claims relating to our 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 us relating to new regulations or additional environmental remediation or restoration liabilities.

We are actively engaged in complying with environmental protection laws, including various Federal, state and foreign statutes and regulations relating to manufacturing, processing and distributing our many products. We anticipate incurring future costs for capital improvements and general compliance under environmental laws, including costs to acquire, maintain and repair pollution control equipment. We incurred related capital expenditures of $4,529 in 2004, $5,234 in 2003 and $3,641 in 2002. We estimate that approximately $5,300 will be spent for capital expenditures in 2005 for environmental controls at our facilities. This estimate is based on current regulations and other requirements, but it is possible that material capital expenditures in addition to those currently anticipated could be required if regulations or other requirements change.

Research and Development

Our research and development and technical services expenditures were $19,744, $17,998 and $19,879 in 2004, 2003 and 2002, respectively. Development and marketing of new products are carried out by our operating segments and are integrated with quality control for existing product lines. In addition, we have an agreement with a not-for-profit research center to assist in certain research projects and new product development initiatives.

Employees

At December 31, 2004, we had approximately 2,400 employees. Relationships with our union and non-union employees are generally good.

Where You Can Find More Information

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports are available to the public through our internet website at www.bordenchem.com/home.asp under “About Us”, from the Securities and Exchange Commission at its website www.sec.gov or free of charge from Investor Relations at our administrative offices in Columbus, Ohio.

ITEM 2. PROPERTIES

As of December 31, 2004, we operated 27 domestic production, manufacturing and distribution facilities in 16 states, the most significant of which is a plant in Louisville, Kentucky. In addition, we operated 22 foreign production, manufacturing and distribution facilities primarily in Canada, Brazil, the United Kingdom, Australia, Malaysia and China. Our production and manufacturing facilities are generally well maintained and effectively utilized. We believe our production and manufacturing facilities are adequate to operate our business.

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Our executive and administrative offices, production, manufacturing and distribution facilities at December 31, 2004 are shown in the following table:

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ITEM 3. LEGAL PROCEEDINGS

Environmental Proceedings

We have been notified that the Company is or may be responsible for environmental remediation at 31 sites in the U.S. Five of these sites, located in four states, involve active proceedings brought under state or Federal environmental laws: Geismar, Louisiana; Fairlawn, New Jersey; Fremont, California; Lakeland, Florida and Newark, California. The most significant of these sites is the site formerly owned by the Company in Geismar, Louisiana. While we cannot predict with certainty the total cost of such cleanups, we have recorded liabilities of approximately $22,800 and $23,400 at December 31, 2004 and 2003, respectively, for environmental remediation costs related to these five sites.

For the remaining 26 sites, we have been notified that the Company is or may be a potentially responsible party (“PRP”) in active proceedings in 16 states brought under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) or similar state “superfund” laws. While we cannot predict with certainty the total cost of such cleanup, we have recorded liabilities of approximately $7,900 and $7,600 at December 31, 2004 and 2003, respectively, for environmental remediation costs related to these 26 sites. The Company generally does not bear a significant level of responsibility for these sites and has little control over the costs and timing of cash flows. At 16 of the 26 sites, our share is less than 1%. At the remaining ten sites, the Company has a share of up to 8.8% of the total liability. The Company’s ultimate liability will depend on many factors including: its volumetric share of waste, the financial viability of other PRPs, the remediation methods and technology used, the amount of time necessary to accomplish remediation and the availability of insurance coverage. Our insurance provides very limited, if any, coverage for environmental matters.

In addition to the 31 sites referenced above, we are conducting voluntary remediation at 24 other locations. We have recorded liabilities of approximately $7,500 and $7,600 at December 31, 2004 and 2003, respectively, for remediation and restoration liabilities at these locations. See Note 11 to the Consolidated Financial Statements.

Imperial Home Décor Group

In 1998, pursuant to a merger and recapitalization transaction sponsored by The Blackstone Group (“Blackstone”) and financing arranged by Chase Manhattan Bank, Borden Decorative Products Holdings, Inc. (“BDPH”), a wholly owned subsidiary of the Company, was acquired by Blackstone and subsequently merged with Imperial Wallcoverings to create Imperial Home Décor Group (“IHDG”). Blackstone provided $84,500 in equity, a syndicate of banks funded $198,000 of senior secured financing and $125,000 of senior subordinated notes were privately placed. We received approximately $309,000 in cash and 11% of IHDG common stock for our interest in BDPH at the closing of the merger. On January 5, 2000, IHDG filed for reorganization under Chapter 11 of the U. S. Bankruptcy Code. 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. An effort to resolve this matter through non-binding mediation was unsuccessful in resolving the case, and the parties are moving forward with discovery in preparation for trial.

We have accrued approximately $3,600 for defense costs related to this matter at December 31, 2004. We have not recorded a liability for any potential losses because a loss is not considered probable based on current information. We believe that we have strong defenses to the Trust’s allegations, and we intend to defend the case vigorously. While it is reasonably possible that the resolution of this matter may result in a loss due to the many variables involved, management is not able to estimate the range of possible outcomes at this time.

Brazilian Excise Tax Administrative Appeal

In 1992, the State of Sao Paulo Tax Bureau issued an assessment against our 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, we have held discussions with the Tax Bureau, and our subsidiary has filed an administrative appeal seeking cancellation of the assessment. In December 2001, the Administrative Court upheld the assessment, valued at $60.8 million Brazilian Reais, or approximately US$22,900 at December 31, 2004, an amount which includes tax, penalties, monetary correction and interest. In September 2002, our subsidiary filed a second appeal with the highest-level administrative court, again seeking cancellation of the assessment on the grounds that it was unlawfully issued. Argument was made to the court in September 2004, and we are awaiting the court’s ruling. We believe we have 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. At this time, we do not believe a loss is probable; therefore, only related legal fees have been accrued. Reasonably possible losses resulting from the resolution of this matter range from zero to $22,900.

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HAI Grand Jury Investigation

HAI, a joint venture in which the Company has a 70% interest, 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. HAI has provided documentation in response to the subpoena. As is frequently the case when such investigations are in progress, various antitrust lawsuits have been filed against the Company alleging that the Company and HAI, along with various other entities, engaged in a price fixing conspiracy. These cases have been consolidated in federal court in Ohio. At this time, we do not believe a loss is probable; therefore, only related legal fees have been accrued. We do not have sufficient information to determine a range of possible outcomes for this matter at this time.

CTA Acoustics

From the third quarter of 2003 to first quarter 2004, six lawsuits were filed against us in the 27^th Judicial District, Laurel County Circuit Court, in Kentucky, arising from an explosion at a customer’s plant where seven plant workers were killed and over 40 other workers were injured. The lawsuits primarily seek recovery for wrongful death, emotional and personal injury, loss of consortium, property damage and indemnity. We expect that a number of these suits will be consolidated. The litigation also includes claims by our customer against its insurer and the Company and a claim against a third party that performed services for the Company in connection with sales to the customer. We are pursuing a claim for indemnity against our customer, based on language in our contract with the customer, and a claim against a third party that performed services for us in connection with the sales to the customer. We have insurance coverage which will address any payments and legal fees in excess of the $5,000 deductible, which was previously accrued.

Other Legal Proceedings

The Company is involved in various product liability, commercial and employment litigation, personal injury, property damage and other legal proceedings which are considered to be in the ordinary course of business. In large part, as a result of the bankruptcies of many asbestos producers, plaintiffs’ attorneys are increasing their focus on peripheral defendants, including the Company, and asserting that even products that contained a small amount of asbestos caused injury. Plaintiffs are also focusing on alleged harm caused by other products we have made or used, including those containing silica and vinyl chloride monomer. We believe we have adequate reserves and insurance to cover currently pending and foreseeable future claims.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of 2004, no matters were submitted to a vote of our security holder.

Part II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a) There is no established public trading market for our common stock.

(b) As of March 1, 2005, 96,905,936 common shares were held by our parent, BHI Acquisition Corp.

(c) We declared no dividends on common stock in 2004, 2003 or 2002. Our ability to pay dividends on our common stock is restricted by our Loan and Security Agreement with certain banks (see the discussion in Note 9 to the Consolidated Financial Statements and under Liquidity and Capital Resources in the Management’s Discussion and Analysis of Financial Condition and Results of Operations).

(d) There are no compensation plans that authorize the issuance of our stock to employees or non-employees.

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ITEM 6. SELECTED FINANCIAL DATA

Five Year Selected Consolidated Financial Data

The following summarizes our selected financial data for the past five years. See pages 14 through 33 for items impacting comparability between 2004, 2003 and 2002.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands)

Forward-Looking and Cautionary Statements

As management of the Company, we may, from time to time, make written or oral statements regarding the future performance of the Company, including statements contained in this report and our other reports filed with the Securities and Exchange Commission. Investors should be aware that these statements, which may include words such as “believe,” “expect,” “anticipate,” “estimate” or “intend,” are based on our 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 our actual results to differ materially from those projected in forward-looking statements made by us 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 and industry and economic conditions.

Apollo Transaction

On July 6, 2004, Apollo Management L.P., referred to herein as Apollo, announced that it had signed a definitive agreement to acquire BCI. Previously, on May 7, 2004, BCI filed a registration statement with the U.S. Securities and Exchange Commission, the SEC, for a proposed initial public offering, or IPO, of BCI’s common stock. This IPO was suspended and the registration statement withdrawn on August 31, 2004.

On August 12, 2004, BHI Investment, LLC, an affiliate of Apollo, acquired all of the outstanding capital stock of our parent, Borden Holdings, Inc., which we call BHI, for total consideration of approximately $1.2 billion, including debt assumed. In addition, all of the outstanding capital stock of BCI held by management was redeemed or otherwise cancelled.

Immediately following the acquisition, BHI Investment, LLC reorganized our existing corporate structure so that BCI became directly owned by BHI Acquisition Corporation, which we call BHI Acquisition, a subsidiary of BHI Investment, LLC. Immediately following the acquisition of BHI, we also reorganized the ownership of BCI’s foreign subsidiaries.

Collectively, these transactions described above are referred to as the Apollo Transaction.

The acquisition of BHI, and the payment of transaction fees and expenses, was financed by the net proceeds of a $475 million second-priority senior secured private debt offering, which we refer to as the Second Priority Notes, issued by two newly formed, wholly owned subsidiaries of BCI, and with certain equity contributions to BHI Acquisition from Apollo and management. With a portion of the proceeds, we redeemed our 9.25% debentures on August 12, 2004 for total cash of $49,249. Included in the total cash paid was $47,295 for the principal of the debentures, $1,069 of accrued interest and an early redemption premium of $885.

The Second Priority Notes are guaranteed by the Company and certain of its domestic subsidiaries, which we refer to collectively as the Guarantors. The Second Priority Notes and the related guarantees are senior obligations of BCI secured by a second-priority lien (subject to certain exceptions and permitted liens) on certain of the Guarantors’ existing and future domestic assets, including the stock of BCI’s Canadian subsidiary.

We elected to keep our accounting records on the Company’s historical basis of accounting under the public debt exemption permitted by the SEC.

Overview

We are a leading global integrated producer of thermoset-based resins and adhesives for the global forest products and industrial markets. In addition, we are the world’s largest producer by volume of formaldehyde, an important and versatile building block chemical used in a variety of applications. We are the largest North American producer by volume of thermoset-based resins used in the production of engineered wood products, including structural wood panels, beams and non- structural panels, furniture, door and window assemblies and wallboards. We are also the largest North American producer by volume of resin-coated proppant systems, which are used in oilfield and natural gas production, and (through HAI) of foundry resins, which are used in the production of cores and molds for metal castings. We have a strong presence in the production of specialty resins used in the industrial, automotive and electronics markets.

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Our business is managed as three operating segments: Forest Products, Performance Resins and International. Our results also include general corporate and administrative expenses disclosed as “Corporate and Other” and activities related to our melamine crystal business, which we refer to as Melamine, which was shut down in 2002 and is disclosed as “Divested Business.” These are also presented to provide a complete picture of our results.

Forest Products includes the forest product resins and formaldehyde product lines produced in North America. The key business drivers for Forest Products are housing starts, furniture demand, panel production capacity and chemical intermediates sector operating conditions.

Performance Resins includes the specialty resins, foundry resins and oilfield product lines produced in North America. Performance Resins’ key business drivers are housing starts, auto builds, active gas drilling rigs and the general industrial sector performance.

International includes production operations in Europe, Latin America and Asia Pacific. Principal countries of operation are the U.K., Brazil, Australia and Malaysia. Product lines include formaldehyde, forest product and performance resins and consumer products. The key business drivers for International are export levels, panel production capacity, housing starts, furniture demand and the local political and general economic environments.

Corporate and Other represents general and administrative expenses and income and expenses related to assets and liabilities retained from legacy businesses.

Industry Conditions

As is true for many industries, our results are impacted by the effect on our customers of economic upturns or downturns, as well as the impact on our own costs to produce, sell and deliver our products. Our customers use most of our products in their production processes; therefore, factors impacting their industries could significantly affect our results.

In 2004, the continuing strong U.S. housing market positively impacted us. According to Resource Information Systems, Inc. (“RISI”), housing starts were up approximately 5% in 2004 compared to 2003, driving a 6% increase in structural panel consumption. Oriented strand board, or OSB, consumption was up 5% in 2004 compared to 2003, while plywood consumption was up 7%. The shift in our sales mix from plywood to OSB also benefited us, as OSB, on a per square foot basis, uses approximately twice the amount of our resins as plywood.

U.S. consumption of particleboard, a major end-use for our urea-formaldehyde, or UF, resins, was up 3% in 2004 due primarily to the strong housing and remodeling markets, as well as due to an increase in furniture production in 2004 of 5% compared to 2003, according to RISI. Medium density fiberboard, or MDF, the other major end-use for our UF resins, continued its strong growth in 2004 with an increase of 18% from 2003. Primarily the strong laminate flooring markets, used in both new homes and remodeling, drove this increase. Current forecasts for 2005 by RISI are predicting that particleboard and MDF consumption will increase at slower rates in 2005 than in 2004 due to the predicted slowdown in the record-setting new housing market.

Continued higher natural gas prices, while hurting us from a processing cost perspective, increased the demand for our oilfield proppants used in the gas drilling industry. The number of North American gas drilling rigs in active production at the end of 2004 were 11% higher than at the end of 2003, helping to drive a 25% increase in sales in our oilfield products. We believe continued elevated natural gas prices and the need to replenish depleted reserves should continue to drive strong demand for these products in 2005.

Raw Material Costs

Raw material costs make up approximately 80% of our product costs. The primary raw materials that we use are methanol, phenol and urea. During the past four years, the price of these materials has been volatile. In 2004, for example, the average prices of methanol, phenol and urea increased by 7%, 48% and 19% respectively. To help mitigate this volatility, we have purchase and sale contracts with many of our vendors and customers with periodic price adjustment mechanisms. Due to differences in timing of the pricing mechanism trigger points between our sales and purchase contracts there is often a “lead-lag” impact during which margins are negatively impacted for the short term in periods of rising raw material prices and positively impacted in periods of falling raw material prices. In addition, the pass through of raw material price changes can result in significant variances in sales comparisons from year to year. In 2004, we had a favorable impact as raw material price increases throughout 2003 and 2004 were passed through to customers, having a significant impact on 2004 sales versus 2003.

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Regulatory Environment

Various government agencies are conducting formaldehyde health research and evaluating the need for additional regulations. Although formaldehyde has been heavily regulated for several years, further regulation of formaldehyde could follow over time. In 2004, the International Agency for Research on Cancer (“IARC”) reclassified formaldehyde as “carcinogenic to humans,” a higher classification than previous IARC evaluations based principally on a study linking formaldehyde exposure to nasopharyngeal cancer, a rare form of cancer in humans. IARC also concluded that there was strong but not sufficient evidence for a finding of a causal association between leukemia and occupational exposure to formaldehyde, although IARC could not identify a mechanism for leukemia induction. We believe that our production facilities will be able to comply with any likely regulatory impact without any material impact on the business.

We support appropriate scientific research and risk-based policy decision-making, and we are working with industry groups, including the Formaldehyde Council, Inc., to ensure that governmental assessments and regulations are based on sound scientific information. We believe that we have credible stewardship programs and processes in place to provide compliant and cost-effective resin systems to our customers.

In addition, in October 2003, the European Union published the Registration, Evaluation and Authorisation of Chemicals proposal (“REACH”), which would require manufacturers, importers and consumers of certain chemicals to register such chemicals and evaluate their potential impacts on human health and the environment. Based on the results of the evaluation, a newly created regulatory body would then determine if the chemical should be further tested, regulated, restricted or banned from use. If REACH is enacted in its current form, it is possible that significant market restrictions could be imposed on the current and future uses of chemicals sold by us in the European Union.

Competitive Environment

The chemical industry has been historically competitive, and we expect this competitive environment to continue in the foreseeable future. We compete with companies of varying size, financial strength and availability of resources. Price, customer service and product performance are the primary areas in which we compete.

Other Factors Impacting Our Results

Other pressures on our profit margins include rising utility costs and increasing benefit, general insurance and legal costs. We are taking a number of steps to control these costs. In addition, we are continuing to analyze our business structure, consolidating plants and functions where we can realize significant cost savings and productivity gains. These consolidations have resulted in asset impairment charges and severance costs, which are more specifically discussed in the following sections and in Note 4 to Consolidated Financial Statements. Future consolidations or productivity initiatives may include additional asset impairment charges and severance costs.

We believe that these factors will continue in the foreseeable future. These market dynamics will require us to continue to focus on productivity improvements and risk mitigation strategies to enhance and protect our margins. In the Risk Management section of our report, you will see how we are taking other steps to manage factors impacting our margins through hedges of natural gas and foreign exchange exposures.

Overview of Results

Our consolidated net sales were $1,686,021 in 2004 versus $1,434,813 in 2003, an increase of $251,208, or 17.5%. The pass through of raw material price increases and favorable product mix in Forest Products and Performance Resins contributed to the increase. Nets sales also benefited from volume increases in Forest Products, Performance Resins, Latin America and Europe. Favorable currency translation, in all foreign countries that we operate in, also contributed to the increase. Fentak, a 2003 acquisition, contributed $7,717 of incremental sales in 2004.

We reported a net loss of $179,668 for 2004 versus net income of $22,976 for 2003. The primary driver of the loss for 2004 was income tax expense of $146,337, which primarily consisted of a noncash charge of approximately $87,000 to increase valuation reserves related to certain deferred tax assets, as well as an additional provision of approximately $63,000 for taxes associated with the unrepatriated earnings of our foreign subsidiaries. These charges were made primarily in response to changes in circumstances in connection with the Apollo Transaction. Also contributing to the net loss were Transaction related costs of $55,586, of which $14,264 of compensation costs is included in Transaction related compensation costs, and higher interest expense of $18,045 in 2004 primarily related to the Second Priority Notes (see Liquidity and Capital Resources) issued in connection with the Apollo Transaction. Legal accruals related to legacy legal proceedings of approximately $10,300 also contributed to the net loss in 2004. Partially offsetting these increased expenses were our ability to recover the higher costs of key raw materials, improved volumes in our higher margin products, cost savings related to the 2003 realignment program and amendments to the other post-employment benefits (“OPEB”) medical plan in 2003 and 2004.

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Our consolidated net sales increased $186,928, or 15.0%, in 2003 versus 2002. This increase was primarily a result of the pass through of raw material cost increases. In addition, sales benefited from favorable currency translation in Canada, Latin America and Australia and increased demand for oilfield products and formaldehyde. Slightly offsetting these increases were declines in Forest Products’ resins volumes in products servicing the furniture markets due to continued production declines in the North American furniture market and customer inventory reductions.

We reported net income of $22,976 for fiscal year 2003 versus a net loss of $36,583 for fiscal year 2002. Of the $59,559 improvement, income from operations increased $32,834 reflecting decreased general and administrative, business realignment, impairment and management fee expenses. In addition, in 2002, we recognized a $29,825 charge taken for goodwill impairments upon the adoption of new accounting rules, which is reflected in the Cumulative effect of change in accounting principle in our 2002 Consolidated Statement of Operations.

Critical Accounting Policies:

In preparing our financial statements in conformity with generally accepted accounting principles, we have to make estimates and assumptions about future events that affect the amounts of reported assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities in the financial statements and accompanying notes. Some of these accounting policies require the application of significant judgment by management in the selection of appropriate assumptions for determining these estimates. By their nature, these judgments are subject to an inherent degree of uncertainty; therefore, we cannot assure you that actual results will not differ significantly from estimated results. We base these judgments on our historical experience, advice from experienced consultants, forecasts and other available information, as appropriate. Our significant accounting policies are more fully described in Note 2 to the Consolidated Financial Statements.

Our most critical accounting policies, which reflect significant management estimates and judgment in determining reported amounts in the Consolidated Financial Statements and the related Notes, are as follows:

Environmental remediation and restoration liabilities

Accruals for environmental matters are recorded when we believe it is probable that a liability has been incurred and we can reasonably estimate the amount of the liability. Our accruals are established following the guidelines of Statement of Position 96-1, “Environmental Remediation Liabilities.” We have accrued approximately $38,200 and $38,600 at December 31, 2004 and 2003, respectively, for all probable environmental remediation and restoration liabilities, which is our best estimate of these liabilities. Based on currently available information and analysis, we believe that it is reasonably possible that the costs associated with such liabilities may fall within a range of $25,000 to $77,000. This estimate of the range of reasonably possible costs is less certain than the estimates upon which reserves are based, and in order to establish the upper limit of this range, we used assumptions that are less favorable to the Company among the range of reasonably possible outcomes, but we did not assume we would bear full responsibility for all sites, to the exclusion of other potentially responsible parties (“PRPs”).

Factors influencing the possible range of costs for environmental remediation include:

Income tax assets and liabilities

Deferred income taxes represent the tax effect of temporary differences between amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes. Deferred tax assets are reduced by a valuation allowance when, in our opinion, it is more likely than not that some portion or all of the deferred tax assets will not be realized. In 2004, primarily in response to changes in circumstances in connection with the Apollo Transaction, we recorded a charge of approximately $87,000 to increase the valuation reserves related to our net domestic deferred tax asset and an additional provision of approximately $63,000 for taxes associated with the unrepatriated earnings of our foreign subsidiaries. We believe our reserves established for probable tax liabilities are appropriate at December 31, 2004. See Note 17 to the Consolidated Financial Statements for additional information.

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In estimating accruals necessary for tax exposures, including estimating the outcome of audits by governing tax authorities, we apply the guidance of Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting for Contingencies,” as well as SFAS No. 109, “Accounting for Income Taxes.” These estimates require significant judgment and, in the case of audits by tax authorities, may often involve negotiated settlements.

Factors influencing the final determination of tax liabilities include:

Pension assets and liabilities

The amounts recognized in our financial statements related to pension benefit obligations are determined from actuarial valuations. Inherent in these valuations are certain assumptions including:

The most significant of these estimates is the expected long-term rate of return on pension plan assets. The actual return of our domestic pension plan assets in 2004 was approximately 11%. Future returns on plan assets are subject to the strength of the financial markets, which we cannot predict with any accuracy.

These assumptions are updated annually. Actual results that differ from our assumptions are accumulated and amortized over future periods; therefore, these variances affect our expenses and obligations recorded in future periods. Future pension expense and required contributions will also depend on future investment performance, changes in future discount rates and various other factors related to the population of participants in our pension plans.

Results of Operations by Segment:

Following is a comparison of Net sales and Segment EBITDA. Segment EBITDA is determined by taking net income before depreciation and amortization, interest expense, other non-operating expenses or income, income taxes and other adjustments (which include costs included in operating income associated with the Apollo Transaction, business realignment activities, certain costs primarily related to legacy businesses, dispositions and pension settlement charges, if any). Segment EBITDA is presented by segment and for Corporate and Other and Divested Business for the years ended December 31, 2004, 2003 and 2002. Segment EBITDA is the measure used by our management team in the evaluation of our operating results and in determining allocations of capital resources among the business segments. This is also the profitability measure we use to set management and executive incentive compensation.

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Reconciliation of Segment EBITDA to Net (Loss) Income:

2004 vs. 2003

Forest Products

Forest Products’ net sales of $896,089 in 2004 were an increase of $140,322, or 18.6%, compared to 2003. Favorable pricing and mix and improved volumes primarily drove the increase in sales. Strong pricing for our phenolic-based, or PF, resins and UF resins was primarily due to the pass through of raw material price increases. We also experienced favorable product mix in our formaldehyde and performance adhesives products. The improved volumes, across all of our products, were due to increased end-use consumption resulting from the continued strong housing market and increased demand for flooring on the resin side and higher demand in the general chemical sector for formaldehyde. Sales also benefited from favorable currency translation as the Canadian dollar strengthened versus the U.S. dollar.

Segment EBITDA for Forest Products increased $18,811, or 20.3%, in 2004 versus the prior year. The increase was primarily due to higher volumes and favorable currency translation. Our margins improved despite unprecedented prices for methanol and phenol. The improvement is due to the positive impact of the 2003 realignment program, purchasing productivity and other productivity initiatives, which more than offset the unfavorable lag in passing along raw material price increases.

Performance Resins

Performance Resins’ net sales in 2004 of $426,546 were an increase of $62,199 or 17.1%, over 2003. Improved volumes and increased selling prices were the main drivers of the increase. Improved volumes for our oilfield products and foundry, non-woven and industrial resins were partially offset by volume declines for our UV coatings products. Volumes for oilfield products increased due to increased drilling activity in East and South Texas, Canada and Russia. Improved volumes in foundry resins were due to continued general recovery in the non-automotive casting segments. Non-woven resins volumes increased due to strong demand in the glass mat market, and industrial resins’ volumes increased due to strong demand from customers in the friction and felt bonding markets. The decline in UV coatings products volumes was due to continued depressed demand for fiber optic cable. Selling price increases for our foundry resins, oilfield products, industrial resins and electronics also contributed to the sales increase and were slightly offset by selling price declines for our laminates and melamine derivative, or LMD, products.

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Segment EBITDA for Performance Resins increased $2,844, or 6.1%, in 2004 versus last year, driven by volume increases in oilfield, foundry, electronics and industrial resins and margin improvements in our oilfield products. These positive factors were partially offset by margin declines in our UV coatings, foundry resins and industrial resins. Also offsetting the positive factors were volume declines in LMD products, increased processing costs for oilfield products and increased selling, general and administrative related to increased investments in new product development and geographic expansion.

International

International net sales of $363,386 increased $48,693, or 15.5%, in 2004 versus last year. Improved volumes in Latin America and Europe were partially offset by price pressures and adverse mix, primarily in Europe. Volume improvements in Latin America were due to increased demand driven by increased exports of wood products. European volume increases were driven by increased demand for formaldehyde and performance resins. The 2003 Fentak acquisition contributed sales of $5,746 to the International segment in 2004. In addition, sales benefited from favorable currency translation across all three international regions.

Segment EBITDA for International decreased $1,167, or 3.6%, in 2004 versus the prior year. Improved volumes in Europe and Latin America, favorable currency translation across all three areas and improved processing costs in Europe were more than offset by the impact of costs associated with a mechanical failure at a Brazilian formaldehyde plant and margin reductions due to pricing pressures. We believe the majority of the impact of the mechanical failure is covered by insurance.

Corporate and Other

Our Corporate and Other expenses decreased $6,217 in 2004 compared to 2003. Net costs related to specific legal and environmental cases were approximately $2,100 lower in 2004, while general insurance costs declined about $2,200 due to 2003 reserve increases for specific cases and revised estimates. In addition, benefit-related costs decreased approximately $2,000. The amendment we made to our OPEB medical benefit plan in 2003 reduced expenses by approximately an additional $2,800 in 2004 compared to 2003. Additionally, our rent costs declined approximately $1,100 in 2004. Offsetting these improvements were the absence of gains reported in 2003 of $2,826 related to a Brazilian foreign exchange claim and $2,355 related to the sale of our airplane.

2003 vs. 2002

Forest Products

Our Forest Products’ net sales increased $121,148, or 19.1%, in 2003 compared to 2002. Higher selling prices resulting from the pass through of raw material price increases was the primary reason for the increase. Favorable currency translation also contributed to the sales improvement as the Canadian dollar strengthened versus the U. S. dollar throughout 2003. These improvements were partially offset by a slight decline in volumes. Softer market conditions in the North American furniture sector during the year led to a decrease in demand for MDF and particleboard which are made with our UF resins. Volume for UF resins was also impacted by increased competitive pressures. This decline in UF resin volumes was largely offset by improved formaldehyde volumes due to demand from the general chemical sector and increased volumes in the PF resins driven by the strong housing market and demand for plywood and OSB, which are made with PF resins.

Segment EBITDA for Forest Products decreased $370, or 0.4%, in 2003 compared to 2002, primarily due to increased processing and freight costs and the volume decline. Our processing costs increased because of higher energy and insurance costs in 2003. The mix of our formaldehyde product sales changed during 2003, resulting in increased freight costs. Freight costs per pound vary depending on whether product is shipped via pipeline, rail or tanker. These negative factors were largely offset by margin improvements, driven primarily by resins product formulation initiatives and purchasing productivity.

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Performance Resins

Our Performance Resins’ net sales increased $23,556, or 6.9%, in 2003 compared to 2002, primarily due to overall higher selling prices and increased volumes. Higher selling prices, primarily in specialty resins and oilfield products, were a result of the pass through of raw material price increases and an improved mix of oilfield products. Improvements in volumes, primarily for oilfield products, also contributed to the increase in sales. The improvement in our oilfield products’ volumes resulted from increased demand due to an expansion in natural gas exploration and drilling activity in 2003. Volume declines in our foundry and specialty resins products reflected continuing weak market conditions in the automotive, felt bonding, laminated flooring and furniture markets, as well as competitive pressures.

Segment EBITDA for Performance Resins increased $1,534, or 3.4%, in 2003 compared to 2002. This improvement is primarily due to improved volumes and reduced selling, general and administrative expenses. Improved oilfield volumes, although partially offset by volume declines in foundry and specialty resins, positively impacted Segment EBITDA. Reduced general and administrative expenses were a result of workforce reductions, open positions and a reduction in bad debt expense in 2003 versus 2002, when we experienced several customer bankruptcies. These improvements were partially offset by higher distribution and processing costs. Distribution costs increased because of fuel surcharges and higher freight costs due to shipping oilfield products over a wider geographic area. Higher processing costs were a result of increased energy, equipment repair and insurance costs and higher costs associated with the production of oilfield products.

International

Our International net sales for 2003 increased by $50,152, or 19.0%, compared to 2002, with our Latin American, Asia Pacific and European businesses all contributing to the sales increase. Latin American sales increased by $15,802 due to favorable currency translation and strong price improvements, slightly offset by a decline in volumes due to adverse market conditions, competitive pressures and market share losses in the consumer products market. Asia Pacific’s $17,000 increase in sales reflected favorable currency translation and improvements in pricing and volumes. Europe’s sales increase of $17,350 was due to strong price improvements, partially offset by unfavorable currency translation and a reduction in volumes due to the difficult market environment. For all three markets, the pricing improvements were a result of the pass through of raw material price increases.

International Segment EBITDA increased $3,620, or 12.6%, in 2003 compared to 2002. This improvement was essentially related to a $2,345 gain from 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. Also contributing to the improvement were productivity improvements in Europe and favorable currency translation in Asia Pacific and Latin America. These improvements were substantially offset by unfavorable product mix and reduced volumes in Latin America and Europe and increased processing costs in Latin America and Asia Pacific due to increased energy and equipment repair costs.

Corporate and Other

Our Corporate and Other expenses decreased $1,236 in 2003 compared to 2002. Contributing to this net decline in expenses were the following factors: we amended our OPEB medical benefit plan during 2003, resulting in a reduction in plan expenses of approximately $11,500; we settled a Brazilian foreign exchange claim relating to a sold business for a gain of $2,826 and we recognized a $2,355 gain on the sale of the Company’s airplane. In addition, salary and benefit costs were lower in 2003 due to a reduction in workforce. Offsetting these reductions in expense were increased insurance and legal costs of approximately $13,100, and the absence of a 2002 adjustment that reduced our allowance for doubtful accounts.

Divested Business

Amounts reported as Divested Business in both years represents the disposition of remaining inventory and other assets of Melamine, which was closed in early 2002. We sold this business to a third party in the second quarter of 2003.

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Adjustments To Segment EBITDA

We rely primarily on Segment EBITDA in the evaluation of operating results and the allocation of capital resources. The following tables detail items not included in Segment EBITDA for purposes of this evaluation of our operating segments. We monitor these activities separately from our operating results. These (expense) income items primarily relate to costs incurred associated with the Apollo Transaction (see Note 1 to the Consolidated Financial Statements) and to our realignment programs.

As part of our ongoing realignment program designed to improve productivity and reduce our costs, we recorded plant closure costs totaling $3,468 in 2004. These costs include environmental remediation costs of $1,399 and $812 for sites previously closed in Brazil and Europe, respectively, additional costs of $1,296 for the conversion of our French manufacturing facility into a distribution center, offset by other income of $39 related to adjustments of reserves at various other sites.

Our severance costs of $377 relate to the 2003 realignment program.

The asset impairment of $2,024 relates to production assets that were written-down due to changes in our manufacturing footprint.

Other expenses of $25,281 not included in Segment EBITDA in 2004 related primarily to compensation costs of $14,264 incurred in connection with the Apollo Transaction and legal accruals of approximately $10,300 related primarily to legacy-related legal proceedings. These costs are included in Transaction related compensation costs and General & administrative expense, respectively.

We recorded 2003 plant closure costs of $6,988 consisting of plant employee severance of approximately $3,900, asset write-downs related to the closure and consolidation of plants of approximately $3,200, environmental remediation costs relating to plant closures in Brazil of approximately $800 and other costs of approximately $700. These costs were partially offset by a net reduction of reserves of approximately $1,600 no longer required for Melamine due to its sale in the second quarter of 2003.

We also recorded severance costs of $6,837 in 2003 related principally to administrative workforce reduction programs, primarily for the 2003 realignment program.

The impairment charges we recorded in 2003 relate to a reduction in our estimate of net realizable value for a facility held for sale, the impairment of goodwill related to our Malaysian operations resulting from our year-end analysis of goodwill and the recognition of fixed asset impairments at several international manufacturing facilities.

Other income not reflected in 2003 Segment EBITDA primarily represent gains of $12,260 on the sale of a former plant site in the U.K. and on the sale of Melamine, both of which were closed as part of our realignment programs. These gains were partially offset by a $5,929 charge related to legal settlements reached with BCPM Liquidating LLC and BCP Liquidating LLC in connection with the settlement of claims related to the bankruptcies of a former subsidiary and its investee and severance expense included in General & administrative expense relating to positions to be replaced as part of the June 2003 realignment program.

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Plant closure costs recorded in 2002 as part of our realignment programs totaled $12,584 and consisted of plant employee severance of $2,721 and demolition, environmental and other costs relating to plant closure and consolidations of $9,863, including the closure of Melamine.

Our 2002 severance costs of $3,265 related primarily to administrative workforce reduction programs.

The impairment charges we recorded in 2002 pertain to a reduction in net realizable value for a facility held for sale and to fixed assets at several international manufacturing facilities.

Other expenses not reflected in 2002 Segment EBITDA primarily represent a pension settlement charge of $13,600 triggered by lump sum settlements paid to participants. In addition, we recorded additional management fees of $5,500 related to the wind-down of Capital. These expenses were partially offset by a $2,465 gain recognized on the sale of land associated with a closed plant in Spain.

Non-Operating Expenses and Income Tax Expense:

Non-operating expense

Our total non-operating expenses increased $58,683 in 2004 as compared to 2003. Non-affiliated interest expense increased $18,045 over 2003 due to higher average debt balances resulting from our issuance of the Second Priority Notes in August of 2004 as part of the Apollo Transaction (see Liquidity and Capital Resources). Interest expense in 2004 also reflects the write-off of approximately $1,100 of deferred costs relating to our credit facility, which was amended and restated effective with the Apollo Transaction, and the write-off of deferred costs of approximately $570 relating to the 9.25% debentures that we redeemed, also in conjunction with the Apollo Transaction. We incurred non-operating expenses totaling $41,322 for Transaction related costs during 2004. Included in Other non-operating expense was a loss on the settlement of an interest rate swap of $610, a charge of $885 incurred due to the early redemption of our 9.25% debentures and a charge of $568 incurred due to the early termination of our credit facility. These charges were offset by a $2,076 gain on the mark to market of a deal contingent forward held by us (see Risk Management).

In 2003, our interest and net affiliated interest expense decreased $2,021 versus 2002 due to lower debt balances and lower interest rates. Other non-operating expenses increased $7,518. We incurred a $1,367 loss on the settlement of an intercompany loan resulting from foreign currency translation. In addition, interest income declined by $1,409 in 2003 due to lower interest rates and lower average cash balances. The remainder of the variance is primarily related to gains realized in 2002 on interest rate swaps and debt buybacks (see below).

In 2002, we recognized a gain of $2,741 on the repurchase of debt in the open market and recorded a gain on an interest rate swap of $1,722.

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Income tax expense (benefit)

Our 2004 consolidated tax rate reflects a valuation allowance in the amount of $86,541 recorded against our deferred tax assets as our management determined that it is more likely than not that these deferred tax assets will not be fully utilized in the future. The increase in our valuation allowance from prior year is due primarily to a change in circumstances in connection with the Apollo Transaction. In 2004, we also made a determination that the unrepatriated earnings from our foreign subsidiaries were no longer permanently reinvested. As such, our 2004 consolidated tax rate reflects an additional provision of $62,514 for taxes associated with the unrepatriated earnings of our foreign subsidiaries. In addition, the 2004 consolidated tax rate reflects income tax expense of $14,018, which primarily pertains to Apollo Transaction costs, which are not deductible for income tax purposes. These amounts are partially offset by a net tax benefit of $10,948 relating to certain state and Internal Revenue Service (“IRS”) settlements, as well as changes in prior estimates.

Our 2003 consolidated rate reflects a benefit of $19,936 from the sale of the stock of Melamine in 2003. The tax basis of the stock exceeded the tax basis of the assets and we could not recognize this additional basis until the stock sale was completed in 2003. This benefit is a capital loss carryforward that can only be used against capital gains; therefore, we established a valuation reserve for the full amount of this benefit. Other 2003 activities reflected in the 2003 consolidated rate include a reduction of a valuation reserve in the amount of $14,534 related to tax assets we believe we are more likely than not to realize. Our 2003 tax rate also reflects the elimination of $1,624 of deferred tax liabilities associated with the BCP Management, Inc. (“BCPM”) bankruptcy. In addition, we reduced reserves for prior years’ Canadian and U.S. tax audits by $3,997 as a result of preliminary settlements of certain matters in the fourth quarter of 2003. The effective rate also reflects additional income tax expense of $9,324 on foreign dividend income and on deemed dividend income related to loans and guarantees from foreign subsidiaries.

Our 2002 consolidated tax rate reflects a valuation allowance recorded against the deferred benefit of interest expense deductions in the amount of $16,672 that are no longer more likely than not to be used due to limitations imposed by the IRS. During 2002, we reached preliminary settlement with the IRS regarding tax years 1998 and 1999. The outcome of this settlement was favorable to us, and as a result, we were able to reduce our accruals related to these years by $20,000.

Tax Legislation

In 2004, the American Jobs Creation Act of 2004 was signed into law. This Act effectively phases out benefits from the utilization of foreign sales corporations, reduces the number of foreign tax credit limitation categories, creates a temporary incentive for U.S. companies to repatriate foreign earnings at a significantly reduced effective U.S. tax rate and domestically provides a number of revenue enhancing and reducing provisions in the taxation of corporations. Our management does not anticipate a material impact from this legislation for the 2004 tax year.

Cash Flows:

Operating Activities

Our 2004 operating activities provided cash of $24,565. This includes cash generated by operations of $17,282 and by net trading capital, consisting of accounts receivable, inventory and accounts and drafts payable, of $41,910. Our positive cash flow in net trading capital resulted from improvement in the timing of payments of our accounts payable. These positive cash flows were partially offset by cash outflows related to income taxes of approximately $15,100, payments related primarily to legacy-related legal and environmental matters of approximately $13,400, realignment expenditures of $11,400 and payments for legal settlements with BCPM Liquidating LLC and BCP Liquidating LLC of $7,050.

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Our 2003 operating activities provided cash of $31,940. This includes cash generated by operations of $82,781 and by net trading capital of $10,006. Our positive cash flow in net trading capital resulted from our continued focus on working capital management during 2003. We focused on reducing days outstanding for accounts receivable, increasing inventory turns and improving the timing of payments of our accounts payable. These positive cash flows were partially offset by tax payments of $19,368 due primarily to international taxes and realignment expenditures of $11,801.

Our 2002 operating activities provided cash of $11,296 in 2002. Cash generated from earnings of approximately $77,000 was substantially offset by interest payments of $46,928, net trading capital outflows of $18,347 and taxes paid of $978.

Investing Activities

Our 2004 net investing activities used cash of $26,007. We used cash of $39,757 for capital expenditures primarily for plant expansions and other improvements. We received cash of $12,061 related to the sale of assets, primarily from the collection of a note receivable for the 2003 sale of land associated with a closed plant in the U.K. and the 2004 sales of previously closed plants. Proceeds from the sale of venture interest of $2,124 were from the sale of 5% of our interest in HA-International LLC, which we call HAI, to Delta-HA (see Note 3 to the Consolidated Financial Statements).

Our 2003 net investing activities used cash of $42,314. We spent $41,820 for capital expenditures, primarily for plant expansions and improvements. We also spent $14,691 making two acquisitions in 2003: Fentak and the business and technology assets of SEACO. We realized proceeds of $14,197 from the sale of land associated with a closed plant in the U.K. and other miscellaneous assets.

Our 2002 cash inflow for investing activities of $81,464 primarily related to the sale of a note receivable from Consumer Adhesives of $110,000 to BHI and to other assets sales to unrelated parties for $10,237. Our 2002 capital expenditures totaled $38,773 and related primarily to plant expansions and improvements.

Financing Activities

Our financing activities in 2004 provided cash of $92,165. Net cash generated by financing activities was primarily due to the issuance of debt related to the Apollo Transaction. Approximately $296,000 was used to redeem common shares of the Company from BHI and BCI management. In addition, we paid fees totaling $22,965 related to the debt issuance and credit facility amendment.

Our 2003 financing activities provided cash of $21,710. Capital contributions from affiliates of $9,300 and net external borrowings primarily related to the Fentak acquisition accounted for the cash inflow. Early in the third quarter of 2003, we completed the process of converting letters of credit from our uncommitted letter of credit (“LOC”) facility to our Credit Facility (see Liquidity and Capital Resources) resulting in the release of restricted cash of $67,049, most of which was used to repay borrowings from affiliates; thus these net transactions had little impact on total financing cash generated.

Our 2002 financing activities used cash of $101,716. The 2002 activities included an increase in restricted cash of $66,165 relating to our establishment of a temporary uncommitted LOC facility, a repayment of a $31,581 note due to a former subsidiary and net repayments of borrowings of $3,379.

Liquidity and Capital Resources:

Our primary source of liquidity is cash flow generated from operations. We also have availability under our asset-based revolving line of credit in our senior secured credit facility (see below), subject to certain conditions. Our primary liquidity requirements are for debt service, working capital requirements, contractual obligations and capital expenditures.

We are a highly leveraged company. Our liquidity requirements are significant, primarily due to our debt service requirements. At December 31, 2004, we had $967,404 principal amount of outstanding indebtedness, of which $150,000 constituted floating rate notes and $817,404 constituted fixed rate indebtedness. We had no amounts borrowed under our senior secured credit facility at December 31, 2004. In 2004 and 2003, our annual debt service payment obligations were approximately $58,300 and $48,200, respectively.

In conjunction with the Apollo Transaction, we formed two wholly owned finance subsidiaries that borrowed a total of $475 million through a private debt offering. Of the debt, $325 million is second-priority senior secured notes due 2014, referred

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to herein as the Fixed Rate Notes, which bear an interest rate of 9%. The remaining $150 million of debt is second-priority senior secured floating rate notes due 2010, which we call the Floating Rate Notes. In February 2005, we filed a registration statement with the SEC to consummate an exchange offer on the Fixed Rate and Floating Rate Notes.

Interest on the Floating Rate Notes is paid each January 15, April 15, July 15 and October 15. Interest on the Floating Rate Notes accrues at an annual rate, reset quarterly, equal to LIBOR plus 475 basis points. At December 31, 2004, the interest rate on the Floating Rate Notes was 6.82%. The Floating Rate Notes mature July 15, 2010. The Floating Rate Notes may be redeemed at any time on or after July 15, 2006. In addition, up to 35% of the aggregate principal amount of the Floating Rate Notes may be redeemed prior to July 15, 2006 with cash proceeds from certain equity offerings. Prior to July 15, 2009, the Floating Rate Notes may be redeemed at a price equal to 100% of the principal amount plus accrued interest plus the “make- whole” premium as defined in the indenture for the notes. The Floating Rate Notes may also be redeemed upon certain changes in tax laws or upon a change in control. The specific pricing and terms of redemption are described in the indenture for the notes. There is no sinking fund for the Floating Rate Notes.

Interest on the Fixed Rate Notes will be paid each January 15 and July 15. The Fixed Rate Notes mature July 15, 2014. These notes may be redeemed at any time on or after July 15, 2009. In addition, up to 35% of the aggregate principal amount of the Fixed Rate Notes may be redeemed prior to July 15, 2007 with cash proceeds from certain equity offerings. Prior to July 15, 2009, the Fixed Rate Notes may be redeemed at a price equal to 100% of the principal amount plus accrued interest plus the “make-whole” premium as defined in the indenture for the notes. The Fixed Rate Notes may also be redeemed upon certain changes in tax laws or upon a change in control. The specific pricing and terms of redemption are described in the indenture for the notes. There is no sinking fund for the Fixed Rate Notes.

We entered into a three-year asset based revolving credit facility in the third quarter of 2002, which we refer to herein as our Credit Facility, under which we can borrow in aggregate up to $175,000. We amended this Credit Facility, which we refer to as our Amended Credit Facility, on August 12, 2004 as part of the Apollo Transaction. The Amended Credit Facility provides for loans and letters of credit in a total principal amount of up to $175,000 and will mature in five years. The Amended Credit Facility includes a $57,000 revolving credit subfacility for our Canadian subsidiary, a $30,000 revolving credit subfacility for our U.K. subsidiary and a letter of credit subfacility of at least $100,000.

Our Amended Credit Facility is secured with inventory and accounts receivable in the U.S., Canada and the U.K., a portion of property and equipment in Canada and the U.K. and the stock of certain subsidiaries. At December 31, 2004, the net book value of the collateral securing the Amended Credit Facility, excluding the stock of subsidiaries, was approximately $266,000. The maximum borrowing allowable under our Amended Credit Facility is calculated monthly (quarterly, if availability is greater than $100,000) and is based upon specific percentages of eligible accounts receivable, inventory, fixed assets and cash. This Amended Credit Facility contains restrictions on dividends, capital expenditures ($37,500 from August 12, 2004 to December 31, 2004; $75,000 in 2005) and payment of management fees ($3,000 per year or 2% of EBITDA, as defined in the agreement). It also includes a minimum trailing twelve-month fixed charge coverage ratio of 1.1 to 1.0, if aggregate availability is less than $50,000. The trailing twelve-month fixed charge coverage ratio requirement does not apply when aggregate availability exceeds $50,000. At December 31, 2004, our maximum borrowing allowable under the Amended Credit Facility was approximately $174,700 of which about $127,800, after outstanding LOCs and other draws, was unused and available. As a result, we have no fixed charge coverage ratio requirements at year-end 2004.

The $34,000 Ascension Parish Industrial Revenue Bonds, or IRBs, are related to the acquisition, construction and installation of air and water pollution control facilities that are no longer owned by the Company. The tax-exempt status of the IRBs is based upon there being no change in the use of the facilities, as defined by the Internal Revenue Code. The Company continues to monitor the use of the facilities by the current owner. If a change in use were to occur, the Company could be required to take remedial action, including redeeming all of the bonds.

We redeemed our 9.25% debentures on August 12, 2004, with interest paid through September 12, 2004. The total cash outflow associated with the redemption was $49,249. Included in the total cash paid was $47,295 for the principal of the debentures, $1,069 of accrued interest and an early redemption premium of $885.

We also had a borrowing arrangement with BWHLLC, a former affiliate, evidenced by a demand promissory note bearing interest at a variable rate, which terminated upon the completion of the Apollo Transaction. In 2003, we, along with HAI, had similar arrangements with Borden Foods Holdings Corporation, a former affiliate. The loans were reported as Loans payable to affiliates on the Consolidated Balance Sheets and totaled $18,260 at December 31, 2003. Of the total loans outstanding, HAI owed $6,000 at December 31, 2003. Net affiliated interest expense totaled $138, $558 and $1,402 for the years ended December 31, 2004, 2003 and 2002 respectively.

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HAI replaced its loan agreement with Foods on January 28, 2004, when they entered into a three-year asset based revolving credit facility, which provides for a maximum borrowing of $15,000, as amended on October 29, 2004 (the “HAI Facility”). Maximum borrowing allowable under this facility is based upon specific percentages of eligible accounts receivable and inventory and is secured with the inventory, accounts receivable and property and equipment of HAI. At December 31, 2004, the net book value of the collateral securing the HAI Facility was approximately $33,600. The HAI Facility restricts HAI on the payment of dividends, affiliate transactions, additional debt, minimum availability ($2,000) and capital expenditures ($2,000 in 2005). In addition, HAI must maintain a minimum trailing twelve-month debt coverage ratio of 1.5 to 1.0 and a monthly debt to tangible capital ratio of less than 2.5 to 1.0. At December 31, 2004, maximum borrowing allowable under the HAI Facility was approximately $13,800, of which about $11,800 was unused and available, after the minimum availability requirement.

Our Australian subsidiary entered into a five-year secured credit facility in the fourth quarter of 2003 (the “Australian Facility”), which provides for a maximum borrowing of AUD$19,900, or approximately $15,500. The Australian Facility provided the funding for our Fentak acquisition (See Note 3 to the Consolidated Financial Statements for additional information on the acquisition), and it is secured by liens against substantially all of the assets of the Australian business including the stock of Australian subsidiaries. At December 31, 2004, the net book value of the collateral securing the Australian Facility was approximately $29,700. In addition, the stock of Australia is pledged as collateral for borrowings under the Australian Facility. This facility includes a fixed rate component used for the acquisition, as well as a revolver and LOC facility. This facility restricts the Australian subsidiaries on the payment of dividends, the sale of assets and additional borrowings by the Australian businesses outside of this facility. This facility also contains financial covenants applying to the Australian subsidiaries including current ratio, interest coverage, debt service coverage and leverage. The fixed portion of the Australian Facility requires minimum quarterly principal reductions totaling AUD$450 (approximately $350). The revolving facility component requires semi-annual principal reductions based on a portion of excess cash as defined in the agreement. At December 31, 2004, the maximum borrowing allowable under the Australian Facility was AUD$18,100 (approximately $14,100), of which about AUD$3,600 (approximately $2,800), after outstanding LOCs and other draws, was unused and available.

We have additional international credit facilities that provide availability to these businesses totaling approximately $26,100. Of this amount, approximately $12,200 (net of $3,935 of borrowings, $4,600 of LOCs and other guarantees and $5,400 of other draws) was available to fund working capital needs and capital expenditures. These credit facilities have various expiration dates ranging from 2006 through 2008. While these facilities are primarily unsecured, portions of the lines are secured by equipment. At December 31, 2004, the net book value of collateral securing a portion of these facilities was approximately $750. Our U.S. business guarantees up to $6,700 of the debt of one of our Brazilian subsidiaries, included in these facilities.

As discussed in Note 3 to the Consolidated Financial Statements, on October 6, 2004, we entered into an agreement to acquire Bakelite Aktiengesellschaft (“Bakelite”). We intend to finance this acquisition through a combination of new debt securities and cash. We believe we will continue to have adequate cash available from operations and our Amended Credit Facility subsequent to the completion of this acquisition despite the additional debt to be incurred.

In the fourth quarter of 2003, we exercised our option to redeem, at par, the remaining $885 of County of Maricopa Industrial Revenue Bonds (“IRBs”). Also in the fourth quarter of 2003, we converted our remaining IRB issue, the $34,000 Parish of Ascension IRB, to a fixed interest rate, and, by doing so, we were able to eliminate the requirement to maintain a backup letter of credit for approximately $34,500.

Effective December 1, 2003, we entered into a $34,000 interest rate swap agreement structured for the Parish of Ascension IRBs. Under this agreement, we received a fixed rate of 10% and paid a variable rate equal to the 6-month LIBOR plus 630 basis points. At December 31, 2003, this equated to a rate of 7.6%. This swap agreement was terminated in the third quarter of 2004 for a fee of $610.

Previous buybacks of our senior unsecured notes allow us to fulfill our sinking fund requirements through 2013 for our 8.375% debentures. In the future, we, or our affiliates, including entities controlled by Apollo, may purchase our senior unsecured notes in the open market or by other means, depending on market conditions.

In June 2003, we announced a realignment plan from which we expect annualized savings of approximately $20,000 when the program is fully implemented in 2005. We are taking the following measures to achieve these goals: reducing our workforce, streamlining our processes in manufacturing as well as administration, consolidating manufacturing processes and targeting reductions of general and administrative expenses. We are combining jobs where practical. As a result of consolidating

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manufacturing processes, we closed our North Bay, Ontario plant as of the end of 2003 and shifted the manufacturing to another facility. We are executing a similar consolidation in Europe. Our facility in France has been converted into a distribution center, and the manufacturing transitioned to the U.K. To further decrease targeted general and administrative expenses, we have reduced contract work, consolidated and eliminated positions and streamlined the administration of medical benefits and other post-retirement benefits. We anticipate completing this program in 2005. We expect to incur additional costs in 2005 related to this program. (See Note 4 to the Consolidated Financial Statements for additional information on our realignment programs).

We plan to spend approximately $45,000 in 2005 for capital expenditures, including plans to continue increasing plant production capacity as necessary to meet demand. We plan to fund capital expenditures through operations and, if necessary, through available lines of credit.

The following table summarizes our contractual cash obligations at December 31, 2004 and the effect we expect these obligations to have on our future cash requirements. Our contractual cash obligations consist of legal commitments at December 31, 2004, requiring us to make fixed or determinable cash payments, regardless of the contractual requirements of the vendor to provide future goods or services. This table does not include information on our recurring purchases of materials for use in production, as our raw materials purchase contracts do not meet this definition because they do not require fixed or minimum quantities. Contracts with cancellation clauses are not included, unless such cancellation would result in major disruption to our business. For example, we have contracts for information technology support that are cancelable, but this support is essential to the operation of our business and administrative functions; therefore, amounts payable under these contracts are included.

We have updated our projected pension plan contributions as reported in our Form 10-K dated December 31, 2003. Our current projections for future contributions range from approximately $7,300 in 2005 to approximately $28,600 in 2006, with a total funding requirement for the five years ended in 2009 of $74,900. The assumptions used by our actuaries in calculating these projections included an 8.0% annual return on assets for the years 2005 – 2009 and the continuation of current law and plan provisions.

Our projected future plan benefit payments for our postretirement plans range from approximately $1,500 in 2009 to approximately $3,200 in 2005, with total benefit payments for the five years ended in 2009 of approximately $9,700.

As disclosed in Note 17 to the Consolidated Financial Statements, we wrote-off our net deferred domestic income tax asset in 2004. We do not anticipate this will have a negative impact on our cash flow in future years. We estimate we will pay cash taxes totaling approximately $20,000 in 2005 for state, local and international liabilities.

We expect other environmental expenditures for 2005 – 2009 to total approximately $19,500, with approximately $29,700 paid over the next 25 years beginning in 2010.

Effective September 1, 2003, we amended our OPEB medical benefit plan to eliminate medical benefits for our retirees and their dependents who are over age 65. We have arranged 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. We

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subsidized a portion of the cost of coverage for affected retirees and their dependents through December 2004 to assist our retirees’ transition to alternative medical coverage and reserved the right to continue, terminate or reduce the subsidy provided to our affected retirees and their dependents for periods after December 2004. We elected to reduce the subsidy provided effective January 1, 2005 and eliminate the remaining subsidy effective January 1, 2006, except in certain cases where contractual obligations exist. As a result of these actions, our liability related to providing OPEB medical benefits was reduced by approximately $96,000. Our primary benefit from these amendments was a reduction of future annual cash outlays related to OPEB benefits by approximately $11,600 annually, as compared to the cash outlays we anticipated under the pre-amended retiree medical benefit plan.

We expect to have adequate liquidity to fund working capital requirements, contractual obligations and capital expenditures over the remainder of the five year term of our Amended Credit Facility with cash received from operations, amounts available under the Amended Credit Facility and amounts available under our subsidiaries’ separate credit facilities.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Covenant Compliance

Adjusted EBITDA is used to determine compliance with the debt incurrence covenant contained in the indenture governing the Floating and Fixed Rate Notes. Because we are highly leveraged, our compliance with these covenants is important for the investors in the Company’s debt. Therefore, Adjusted EBITDA is a key metric for these investors.

Adjusted EBITDA is defined as Net income adjusted to exclude depreciation and amortization, interest expense, non-operating income and expenses, unusual items and certain pro forma adjustments permitted in calculating covenant compliance under the indentures governing the notes and our Amended Credit Facility. We believe that the inclusion of supplemental adjustments to net income applied in presenting Adjusted EBITDA are appropriate to provide additional information to investors to demonstrate compliance with our financing covenants.

As of December 31, 2004, we were in compliance with all material covenants contained in our indenture governing the notes.

Reconciliation of Adjusted EBITDA to Net (Loss) Income