ITEM 1. BUSINESS - -------- --------
Current Description Summary - -----------------------------
The Company, Borden Chemical, Inc. (formerly Borden, Inc.) was incorporated on April 24, 1899. After the third quarter 2001 sale of the Consumer Adhesives business ("Consumer Adhesives") to an affiliate, the Company's sole remaining business is the Chemical business. The Chemical business is engaged primarily in manufacturing, processing, purchasing and distributing forest products and industrial resins, formaldehyde, coatings and other specialty and industrial chemicals worldwide. The Company's executive and administrative offices are located in Columbus, Ohio. Chemical production facilities are located throughout the United States and in many foreign countries.
In fourth quarter 2001, the Company merged with its subsidiaries, Borden Chemical Holdings, Inc. and Borden Chemical, Inc., executed certain financial transactions with its parent and changed its name to Borden Chemical, Inc. (the "Corporate Reorganization") reflecting the fact that the only remaining business of the Company is the Chemical business. The Corporate Reorganization simplified the legal structure, strengthened the capital structure and reduced overhead costs of the Company. As part of the Corporate Reorganization, certain functions were downsized, eliminated or transferred to a separate legal entity, Borden Capital, Inc. ("Capital"), also owned by the Company's parent. Subsequent to the Corporate Reorganization, Capital provides certain management, consulting and board services for the Company as well as for other entities owned by Kohlberg, Kravis, Roberts & Co. (KKR) and will charge fees to the Company and the other entities for these services.
Historical Perspective - -----------------------
On March 14, 1995, affiliates of KKR acquired control of the Company. In late 1995, the Company began the process of redesigning its operating structure in order to maximize value for its owners and determined that certain businesses did not fit into its long-term strategic plan. At the end of 1995, the Company consisted of the following business segments: Chemical, Food, Other Consumer Products, Decorative Products, Dairy and businesses held for sale. A group of centralized corporate departments located in Columbus, Ohio provided certain governance and other administrative services to all the Company's operating business units and businesses held for sale. Following is a brief description of each of the Company's business segments and the individual business units that were included in each segment at the end of 1995:
Chemical - businesses included forest products and industrial resins, formaldehyde, coatings and other specialty and industrial chemicals. This segment consisted of the "Chemical" business unit.
Food - businesses included pasta and pasta sauces, processed cheese, non-dairy creamer, sweetened condensed milk, reconstituted lemon and lime juices, bouillon, confections, dehydrated soups and whole milk powder. This segment consisted of the "Foods" business unit.
Other Consumer Products - businesses included bakery products, salty snacks and consumer adhesives and glues. This segment consisted of the "Wilhelm Weber, GmbH" (bakery products), "Wise" (salty snacks) and "Consumer Adhesives" (consumer adhesives and glues) business units.
Decorative Products - businesses included residential wallcoverings, flexible vinyl films and sheeting heat transfer paper. This segment consisted of the "Decorative Products" business unit.
Dairy - businesses included homogenized milk, ice cream, sherbet, yogurt, cottage cheese, frozen novelties, low-fat dairy products, milk-based products for foodservice trade and fruit drinks. This segment consisted of the "BMG Dairies" business unit.
Businesses held for sale - businesses included the packaging and plastic films business and various other operations.
Acquisition and Divestiture History - --------------------------------------
Since the 1995 acquisition, KKR and management of the Company has continued to review and realign its structure and to streamline its operations to maximize operating results and value creation. To this end the Company has made various acquisitions and divestitures and has also undertaken numerous plant closing and other business realignment initiatives primarily related to the Chemical business (discussed below). Following is a summary by year of the Company's acquisition and divestiture activity since 1995:
In 1996, the Company sold Wise (a component of the Other Consumer Products segment) to Wise Holdings and sold Foods (the entire Foods segment) to Foods Holdings. Wise Holdings and Foods Holdings are subsidiaries of BWHLLC. As a result of these sales, Wise and Foods ceased to be legally part of the Company. However, management of the Company continued to exercise significant financial and managerial control over both Wise Holdings and Foods Holdings. In addition, both Wise Holdings and Foods Holdings remained guarantors of the Company's obligations under both its credit facility and public debt. Also in 1996, the Company sold Wilhelm Weber, GmbH (a component of the Other Consumer Products segment) and the packaging and plastic films business (business held for sale) to unrelated third parties.
In 1997, the Company sold the BMG Dairies (the entire Dairy segment) to an unrelated third party. Also that year the Company acquired Melamine Chemicals, Inc. (Chemical segment), a major producer of melamine crystal, for which a substantial amount of production was to be used internally to produce forest products and industrial resins.
In 1998, the Company sold Decorative Products (the entire Decorative Products segment) to an unrelated third party. Also that year the Company acquired a melamine resins and compounds business (a component of the Chemical segment) from Sun Coast Industries, Inc.
In 1999, the Company acquired Blagden Chemicals, LTD. in the United Kingdom and Spurlock Industries, Inc. in the U.S. (both Chemical segment). Blagden produces formaldehyde, forest products and industrial resins. Spurlock produces formaldehyde and forest products resins.
In 2000, the Company acquired the formaldehyde and certain other assets from Borden Chemicals and Plastics Limited Partnership, an affiliate of the Company, and East Central Wax, a wax emulsions producer for the forest products business (both Chemical segment). In 2000, the Company also acquired certain assets and liabilities of a Canadian based business that produces various consumer adhesive and glue products (included in the Consumer Adhesives segment prior to its sale).
In August 2001, options, sold to BWHLLC in 1996, to purchase 74% of the common shares of Consumer Adhesives were exercised. At the same time, a company controlled by BWHLLC purchased the remaining 26% of Consumer Adhesives common shares (collectively the "Consumer Adhesives Sale"). At December 31, 2001 the Company still held a $110.0 million investment in Consumer Adhesives preferred stock. On March 1, 2002, the Consumer Adhesives preferred stock was redeemed for a $110.0 million note receivable from Consumer Adhesives. On March 12, 2002, the note receivable was sold to the Company's parent for $110.0 million in cash plus accrued interest, which the Company used to pay down its outstanding affiliated debt. Consequently, Consumer Adhesives is reported as a discontinued operation in the Company's financial statements for all periods presented.
Chemical Realignment and Corporate Reorganization - -----------------------------------------------------
In addition to acquisitions and divestitures discussed above, the Company has undertaken numerous plant closing and other business realignment initiatives primarily related to the Chemical business. These initiatives were designed to improve the effectiveness and efficiency of the Chemical business and to focus the Company's resources on its core strengths. Such business realignment charges have consisted primarily of employee severance, plant closure and environmental remediation costs and asset write-offs. The Company has also recently completed a reorganization of its corporate headquarters function and its capital structure. Following is a brief overview by year of business realignment activities since 1995 as well as the Company's recent Corporate Reorganization:
In 1997 and 1998, the Company recorded $18.5 million of business realignment charges related to the cost to close a European Chemical plant.
In 1999, the Company recorded $41.6 million of business realignment charges related to the closure of Chemical plants in Brazil, Uruguay and the Philippines and to discontinue a domestic Chemical plant construction project.
In 2000, the Company recorded $38.1 million of business realignment charges related to the closure of two forest products plants in the U.S., a formaldehyde and resins plant in the U.K. as a result of the Blagden acquisition, and a formaldehyde and resins plant in Argentina.
In 2001, the Company recorded $126.4 million of business realignment charges related primarily to the closures of its melamine crystal plant and two additional forest products plants in the U.S., realignment of its North American workforce organization, reorganization of its corporate headquarters and to discontinue a plant construction project. The largest component of the 2001 charge is a $98.2 million impairment of melamine crystal fixed assets, spare parts and goodwill that
was the result of the Company's strategic decision late in 2001 to sell or close this plant and to enter into a long-term contractual arrangement with a major supplier for a substantial portion of the Company's future melamine crystal needs.
In 2001, the Company also completed a significant capital restructuring, which consisted primarily of a capital contribution of $614.4 million of preferred stock held by the Company's parent. The significant impact of this transaction was to eliminate future required annual preferred dividend payments of $73.7 million. Also as part of the capital restructuring, the Company's parent made a cash capital contribution and purchased certain financial assets from the Company for cash in amounts that approximated fair value. The cash contribution and the cash received from sale of assets allowed the Company to substantially repay its affiliated debt as of December 31, 2001.
In March 2002, the Company further paid down its affiliated debt with proceeds received from sale, to its parent, of its remaining financial investment in Consumer Adhesives. In addition, to further simplify its capital structure, during 2002 the Company intends to cancel a $404.8 million note receivable from its parent which has been accounted for as a reduction from equity.
PRODUCTS The Company's products include primarily forest products and industrial resins, formaldehyde, coatings and other specialty and industrial chemicals.
MARKETING AND DISTRIBUTION Domestic products are sold throughout the United States primarily by in-house sales forces to industrial users. To the extent practicable, international distribution techniques parallel those used in the United States. However, raw materials, production considerations, pricing competition, government policy toward industry and foreign investment, and other factors may vary substantially from country to country.
COMPETITION The Company is the leading global producer of thermosetting resins for the forest products industry and a leading producer of thermosetting resins for industrial and foundry applications. These resins are used to bind or coat other materials during the manufacturing process. The Company is also the world's largest producer of formaldehyde. Much of the formaldehyde is consumed internally to produce thermosetting resins, with the remainder sold to third parties. UV Coatings are produced for fiber optics coating applications. The Company manufactures and distributes its products worldwide with the most significant markets being North America, Western Europe, Latin America, Australia, and Malaysia and, generally, holds a leading market position in the areas in which it competes. Resins are provided to a wide variety of customers for use in the manufacture of, among other products, structured panels, medium density fiberboard, particle board, laminate veneers, insulation binders, automotive brakes, and to coat cores and molds in the metal casting process. The major competitors are Ashland Specialty Chemical Company, Georgia Pacific Corporation, Dynea, and several regional domestic and international competitors. Price, customer service and product performance are the primary areas in which the Company competes.
MANUFACTURING AND RAW MATERIALS The primary raw materials used by the Company are methanol, phenol and urea. Raw materials are generally available from numerous sources in sufficient quantities but are subject to price fluctuations that cannot always be passed on to customers.
The Company uses long-term purchase agreements for its primary and other raw materials in certain circumstances to assure availability of adequate supplies at specified prices.
In connection with the shutdown of its melamine crystal plant, the Company has entered into a long-term contractual arrangement with the leading global melamine crystal producer to supply a minimum of 70% of the Company's worldwide melamine crystal requirements. The melamine crystal to be purchased under the agreement will be sourced from several supplier production sites and the temporary or permanent loss of any individual site would not likely have a material adverse impact on the Company's ability to satisfy its melamine crystal needs.
CUSTOMERS The Company does not depend on any single customer and business is not limited to any particular group of customers, the loss of which would have a material adverse effect on the business. The primary customers consist of manufacturers, and business is generally not seasonal.
PATENTS AND TRADEMARKS The Company owns various patents, trademark registrations and patent and trademark applications around the world which are held for use or currently used in its operations. A majority of the patents relate to the development of new products and processes for manufacturing and use thereof and will expire at various times between 2002 and 2013. No individual patent is considered to be material.
RESEARCH AND DEVELOPMENT Research and development expenditures were $22.7 million, $22.2 million and $22.7 million in 2001, 2000 and 1999, respectively. Development and marketing of new products are carried out at the business unit level and integrated with quality control for existing product lines.
WORKING CAPITAL Working capital is generally funded through operations and borrowings from affiliates and under the Company's credit facility.
EMPLOYEES At December 31, 2001, the Company had approximately 2,800 employees. Relationships with union and non-union employees are generally good.
FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS The Company presents its segment information in accordance with Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information". The Company's operating segments are defined as those business units for which operating results are regularly reported internally to evaluate performance and allocate resources. The Company's North American business units are substantially defined according to the primary markets in which the Company's customers operate, while its international business units are defined geographically. The Company believes its operating segments have similar economic characteristics as well as a high degree of similarity between manufacturing processes, chemical properties of its end products, product distribution methods and the ways that the Company's customers use its products in their manufacturing processes. Consequently, the Company's operating segments meet the aggregation criteria of SFAS No. 131 and the Company presents one reportable operating segment and reports its corporate and other functions separately.
Prior year information has been reclassified to include the corporate and other costs previously reported within the Chemical segment as part of the Corporate and Other classification.
In the consolidated financial information that follows, the businesses sold or distributed classification includes the Company's printing inks business through the date of its sale in 2000 and the infrastructure management services business prior to its distribution to the Company's parent in 2000.
Adjusted Operating EBITDA information is presented with the Company's segment disclosures because it is a primary measure used by the Company to evaluate operating results. See footnote (1) on page 11 for definition of Adjusted Operating EBITDA.
OPERATING SEGMENTS: - --------------------
(3)See page 15 of the Management's Discussion and Analysis of Financial Condition and Results of Operations for further information concerning these items.
GEOGRAPHIC INFORMATION: - ------------------------
ITEM 2.
ITEM 2. PROPERTIES - ---------------------
As of December 31, 2001, the Company operated 28 domestic production and manufacturing facilities in 16 states, the most significant being a plant in Louisville, Kentucky. In addition, the Company operated 21 foreign production and manufacturing facilities primarily in Canada, South America, Europe, Australia and Malaysia.
The Company's manufacturing and processing facilities are generally well maintained and effectively utilized. Substantially all facilities are owned.
The Company is actively engaged in complying with environmental protection laws, as well as various federal, state and foreign statutes and regulations relating to manufacturing, processing and distributing its many products. In connection with this, the Company incurred capital expenditures of $1.2 million in 2001, $0.8 million in 2000 and $2.4 million in 1999. The Company estimates $2.7 million will be spent in 2002 for environmental control facilities.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - ----------------------------
Environmental Proceedings - --------------------------
The Company has been notified that it is or may be a potentially responsible party with respect to the cleanup of approximately 50 waste sites in proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or similar state environmental laws. The Company's ultimate liability will depend on many factors including its volumetric share of waste, the financial viability of other responsible parties, the remediation methods and technology used, the amount of time necessary to accomplish remediation and the availability of insurance coverage. While the Company cannot predict with certainty the total cost of such cleanup, the Company has recorded liabilities of approximately $41 million and $20 million at December 31, 2001 and 2000, respectively, for environmental remediation costs for these and other sites in amounts that it believes are probable and reasonably estimable. Based on currently available information and analysis, the Company believes that it is reasonably possible that costs associated with such sites may exceed current reserves by amounts ranging from insignificant to, in the aggregate, approximately $30 million. This estimate of the range of reasonably possible additional costs is less certain than the estimates upon which reserves are based, and in order to establish the upper limit of such range, assumptions least favorable to the Company among the range of reasonably possible outcomes were used. In estimating both its current reserves for environmental remediation and the possible range of additional costs, the Company has not assumed that it will bear the entire cost of remediation of every site to the exclusion of other known potentially
responsible parties who may be jointly and severally liable. The ability of other potentially responsible parties to participate has been taken into account, based generally on the parties' probable contribution on a per site basis.
Private actions against the Company and numerous other defendants are pending in U.S. District Court in Baton Rouge, Louisiana, alleging personal injuries and property damage in connection with a waste disposal site in Louisiana.
Affiliate Bankruptcy Proceedings - ----------------------------------
BCP Management, Inc. ("BCPM"), a wholly owned subsidiary of the Company that serves as the general partner of Borden Chemicals and Plastic Limited Partnership ("BCP"), has certain fiduciary responsibilities to BCP and its operating subsidiary, Borden Chemical and Plastics Operating Limited Partnership ("BCPOLP"). BCP and BCPOLP were created in November 1987, as separate and distinct entities from the Company and BCP is 99% owned by the public. On April 3, 2001, BCPOLP and its subsidiary, BCP Finance Corporation, filed voluntary petitions for protection under Chapter 11 of the United States Bankruptcy Code, Title 11 of the United States Code, in the United States Bankruptcy Court for the District of Delaware. On March 22, 2002, BCPM also filed a voluntary petition for protection under Chapter 11 of the Bankruptcy Code in United States Bankruptcy Court for the District of Delaware. In addition to a $20.0 million liability recorded in the fourth quarter of 2000, $10.0 million was accrued by the Company in the second quarter of 2001 for potential BCPOLP liabilities.
Imperial Home Decor Group - -----------------------------
In 1998, pursuant to a merger and recapitalization transaction sponsored by The Blackstone Group ("Blackstone") and financed by Chase Manhattan Bank ("Chase"), Borden Decorative Products Holdings, Inc. ("BDPH"), a wholly owned subsidiary of the Company, was merged with an acquisition vehicle created by Blackstone, which subsequently merged with Imperial Wallcoverings to create Imperial Home Decor Group ("IHDG"). Blackstone provided $84.5 million in equity and Chase provided $295 million in senior financing. Borden received approximately $314 million in cash and 11% of IHDG common stock for its interest in BDPH. On January 5, 2000, IHDG filed for reorganization under Chapter 11 of the U. S. Bankruptcy Code. IHDG emerged from bankruptcy in April 2001.The IHDG Litigation Trust (the "Trust") was created pursuant to the plan of reorganization in the IHDG bankruptcy to pursue preference and other avoidance claims on behalf of the unsecured creditors of IHDG. In November 2001, the Trust filed a law suit against the Company and certain of its affiliates seeking to have the IHDG recapitalization transaction avoided as a fraudulent conveyance and asking for a judgment to be entered against the Company for $314.4 million, plus interest, costs and attorney fees. The Company believes it has strong defenses to the Trust' s allegations and intends to defend the case vigorously.
Other Legal Proceedings - -------------------------
The Company is involved in other litigation throughout the United States, which is considered to be in the ordinary course of business.
Anticipated Impact - -------------------
Management believes, based upon the information it currently possesses, and taking into account its established reserves for estimated liability, that the ultimate outcome of the foregoing environmental and legal proceedings and actions is unlikely to have a material adverse effect on the financial statements of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - -------- -----------------------------------------------------------
The Company's sole shareholder took action by written consent November 16, 2001 approving the amendment of the Company's Restated Certificate of Incorporation to change its name.
The Company's Annual Shareholder Meeting for the election of directors was held November 20, 2001. The five existing directors were reelected and seven new directors were elected, each by unanimous vote of 198,974,994 shares of the Company's common stock outstanding.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY - -------------------------------------------------------- AND RELATED STOCKHOLDER MATTERS - ----------------------------------
The Company's authorized common stock consists of 300,000,000 shares with a par value of $0.01 per share, 199,121,749 as of December 31, 2001, of which are issued and outstanding and of which 99.9% are controlled by affiliates of KKR with the remainder held by management. No shares of such common stock trade on any exchange. The Company declared dividends on common stock of $36.4 million, $61.6 million and $64.1 million in 2001, 2000 and 1999, respectively. The Company's ability to pay dividends on its common stock is restricted by its Credit Agreement with certain banks (see Notes 10 and 14 to the Consolidated Financial Statements).
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - -------- ------------------------- - -------------------------------------------------------------------------------- FIVE YEAR SELECTED FINANCIAL DATA (All dollar and share amounts in millions, except per share data)
The following represents five year selected financial data for the Company, restated for the discontinued operations of Consumer Adhesives. See pages 8 and 15 for items impacting comparability between 2001, 2000 and 1999.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL - -------- ------------------------------------------------------ CONDITION AND RESULTS OF OPERATIONS ---------------------------------------
CRITICAL ACCOUNTING POLICIES: - ------------------------------- The Company's significant accounting policies are more fully described in Note 3 to the Consolidated Financial Statements. As disclosed in Note 3 to the Consolidated Financial Statements, preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts of assets, liabilities, revenues and expenses reported in the financial statements and accompanying notes. Estimating and predicting future events requires the exercise of judgment and cannot be done with absolute certainty; consequently, there can be no assurance that actual results will not differ significantly from estimated results.
The most significant accounting estimates reflected in the Company's Consolidated Financial Statements include estimates supporting recognition of asset impairments, business realignment liabilities, environmental remediation liabilities, deferred income tax assets and liabilities and related valuation allowances, and pension and post-retirement assets and liabilities. The Company bases its estimates and assumptions on historical experience and business trends, current and expected economic conditions, and various other relevant criteria that the Company believes to be appropriate and reasonable under the circumstances.
RESULTS OF OPERATIONS BY SEGMENT: - ------------------------------------ Following is a comparison of net sales and Adjusted Operating EBITDA by reportable business segment for the Company:
2001 VS. 2000
Chemical - --------
Sales in 2001 increased $35.7 million, or approximately 3%, to $1,372.1 million for the year ended December 31, 2001 compared to $1,336.4 million for the same period in 2000. The improvement is due primarily to generally higher selling prices, two acquisitions in the U.S. in the second half of 2000 and an acquisition at the beginning of the second quarter of 2001. The most significant items that negatively impacted sales were an overall volume decline and unfavorable currency exchange rates for all international business units.
Higher average selling prices had an approximate $109 million positive impact on 2001 sales. The higher average selling prices reflect significantly higher raw material costs during the first half of the year. A substantial portion of the Company's sales volumes, especially for North American forest products, is sold under contracts that provide for monthly or quarterly selling price adjustments based on published cost indices for the Company's primary raw materials (i.e., methanol, phenol and urea).
Lower overall sales volume in 2001 reflects generally weaker economic conditions in North America as well as international regions in which the Company operates. Excluding the effect of acquisitions and divestitures, sales volume was down in all business units, except oilfield products. The overall lower sales volume had an approximate $77 million negative impact on sales versus the prior year. The increase in oilfield products volume is due to increased drilling activity reflecting significantly higher natural gas and oil prices in the first quarter of the year. Lower sales volume in forest products resins reflects difficult market conditions and aggressive competitor pricing in 2001. Lower volume in foundry and industrial resins reflects declines in auto production and generally weaker industrial construction and electronics market conditions. Lower UV coatings volume was negatively impacted by the slowing of the U.S. economy in the second half of the year.
The acquisition of the formaldehyde plant and certain other assets of Borden Chemicals and Plastic Limited Partnership ("BCP") in third quarter 2000, the acquisition of East Central Wax in fourth quarter 2000 and the acquisition of a foundry resin business at the beginning of second quarter 2001 provided incremental 2001 sales of approximately $48 million.
Unfavorable currency exchange rates for all international operations had a total unfavorable impact on 2001 sales of approximately $40 million, with the most significant impacts coming from Latin America, Canada and the United Kingdom.
Adjusted Operating EBITDA of $204.1 million for the year ended December 31, 2001 was $16.6 million, or approximately 8%, lower than prior year adjusted operating EBITDA of $220.7 million. The main reasons for the decline are the overall lower sales volume discussed above and significantly higher energy costs, partially offset by margin improvement, EBITDA contributed by the acquisitions discussed above and reduced general and administrative expenses. Improved margins in the last three quarters of 2001 are a result of the downward trend in major raw material costs versus the prior year.
Corporate and Other - ---------------------
Adjusted Operating EBITDA, which is composed primarily of general and administrative expenses and income and expenses related to previously sold businesses of the Company, declined $14.7 million from a loss of $53.3 million in 2000 to a loss of $68.0 million in 2001. The decline reflects settlement and curtailment charges of $16.3 million in 2001 related to the sale of Foods and the absence of a 2000 gain of $10.5 million on the sale of certain rights to harvest shellfish, which were partially offset by the absence of 2000 pension settlement and curtailment charges of $8.9 million related to the sale of Wise and a 2001 gain of $4.4 million on the sale of a common stock equity investment held by the Company.
Businesses Sold or Distributed - -------------------------------
The businesses sold or distributed classification represents the Company's infrastructure management services business and printing inks business. The distribution of the infrastructure management services business occurred in first quarter 2000 and the sale of the printing inks business occurred in fourth quarter 2000.
2000 VS. 1999
Chemical - --------
Sales of $1,336.4 million in 2000 increased $112.8 million, or approximately 9%, from $1,223.6 million in 1999. The most significant items that positively impacted 2000 sales were improved volumes of higher-priced specialty products, higher selling prices for forest products resins, primarily in North America, two acquisitions in the United States, and one acquisition in Europe. The most significant items that negatively impacted sales were lower selling prices for melamine products, unfavorable currency exchange rates, and the exit from certain non-core businesses in the United States, Latin America and the Philippines.
Overall volume, excluding the effect of acquisitions and strategic realignment activities, was only 1.2% ahead of prior year, but still had an approximate $71 million positive impact on 2000 sales. The positive impact was driven primarily by substantial volume improvements in UV coatings and oilfield products, which had significantly higher per unit selling prices (as measured in metric tons) compared to all other products. Higher volumes of melamine crystal and melamine based resins
also had a positive impact on 2000 sales. The improvement in UV coatings primarily reflects an increase in the Company's share of the market and market growth in demand for optical fiber. Oilfield products volume benefited from increased drilling activity, which reflects substantially higher natural gas and oil prices. Melamine products volume reflects increased export sales of melamine crystal, due to tightening global supply, and increased market share of high-pressure laminates. North America forest products volume was essentially flat compared to the prior year and reflects aggressive competitor pricing and a downturn in housing starts throughout the second half of the year, particularly in the fourth quarter that offset strong housing and construction activity in the first half of the year.
In 2000, the Company acquired the formaldehyde and certain other assets from BCP. In second quarter 1999 the Company acquired Spurlock Industries, Inc. in the United States and in third quarter 1999 acquired Blagden Chemicals, Ltd. in Europe. These acquisitions contributed incremental 2000 sales of approximately $57 million.
Overall higher selling prices in 2000 had an approximate $33 million net positive impact on sales. The increase reflects generally higher selling prices globally for forest products resins and formaldehyde, partially offset by lower pricing for melamine crystal and melamine based resins, as well as the impact of downward pressure on selling prices due to very competitive market conditions across all businesses. The generally higher selling prices for forest products resins and formaldehyde reflect the partial pass-through of substantially higher raw material costs. The lower pricing for melamine products reflects the global market imbalance for melamine crystal that worsened throughout 1999 and has persisted throughout most of 2000. A substantial portion of the Company's sales volume, especially for North America forest products, is sold under contracts that provide for monthly or quarterly selling price adjustments based on published cost indices for the Company's primary raw materials (i.e,. methanol, phenol and urea). During the first quarter of 2000, the costs of these raw materials were generally lower than prior year, therefore selling prices were generally lower; however, the cost of all three primary raw materials escalated significantly over the last three quarters, which resulted in upward adjustments in selling prices.
Unfavorable currency exchange rates, primarily in the United Kingdom, had an unfavorable impact on 2000 sales of approximately $28 million. The unfavorable exchange rate for Ecuador reflects significant currency devaluation throughout 1999 and through May 2000 when the local currency exchange rate was fixed to the United States dollar.
The 1999 sale of the non-strategic United States molding compounds business and closures or sales of non-strategic businesses in Latin America and the Philippines caused 2000 sales to be approximately $23 million lower compared to the prior year.
Adjusted Operating EBITDA of $220.7 million in 2000 was $23.0 million, or approximately 9%, lower than prior year Adjusted Operating EBITDA of $243.7 million. The decline reflects a very difficult business environment, especially over the second half of the year. A slowing economy, escalating raw material costs, intense competitor pricing activity, and unprecedented natural gas costs in the latter part of the year all combined to have a significant negative impact on 2000 operating results. Substantial margin erosion and generally higher plant operating and distribution costs were partially offset by improved volume of higher-priced specialty products, more favorable purchasing contracts for certain raw materials and the impact of acquisitions. Profit margins in North America forest products were significantly impacted by the inability to fully recover rapidly escalating costs of methanol, phenol and urea. Effective recovery of these rising costs was curtailed by delayed pricing adjustments allowed under supply contracts and competitive pressures to keep prices down. A substantial amount of North America forest products sales are based on supply contracts that provide only monthly or quarterly pricing adjustments, which cause price increases to lag raw material cost increases during times of rising raw material costs. Profit margins for melamine crystal and melamine based resins were also negatively impacted by both the high cost of urea and high natural gas cost since the melamine crystal production process consumes significant energy. Higher plant operating costs reflect higher energy costs, while higher distribution costs reflect increased export sales of melamine crystal and generally higher fuel costs.
Corporate and Other - ---------------------
Adjusted Operating EBITDA, which consists primarily of general and administrative expenses and income and expense related to previously sold businesses of the Company, declined $12.8 million to a loss of $53.3 million in 2000 from a loss of $40.5 million in 1999. The decline is primarily due to the incurrence and settlement of various corporate liabilities and expenses of $15.0 million and a $7.6 million charge for certain benefit plan settlements, partially offset by a $10.5 million gain on the sale of certain rights to harvest shellfish.
Businesses Sold or Distributed - ---------------------------------
The businesses sold or distributed classification represents the Company's infrastructure management services business and printing inks business. The distribution of the infrastructure management services business occurred in first quarter 2000 and sale of the printing inks business occurred in fourth quarter 2000.
Loss on disposal of businesses primarily relates to the sale of a Chemical business in Ecuador.
Business realignment, impairments and other consists of business realignment costs of $25.3 million, impairment charges of $101.1 million and other charges of $19.0 million. The business realignment costs include plant closure costs of $12.7 million and severance and other employee costs of $12.6 million. Included in plant closure costs are pre-tax gains of $13.5 million ($8.3 million after tax) from the sale of land and other assets associated with closed plants. The impairment charges reflect the write-down of the melamine crystal fixed assets, spare parts and goodwill of $98.2 million and the cost to cancel construction of a new plant of $2.9 million. Additionally, the Company recorded a $19.0 million charge that reflects management's estimate of probable environmental remediation costs that the Company has incurred related to fourth quarter 2001 activity for a previously owned business.
Loss on disposal of businesses primarily relates to the sale of the printing inks business partially offset by lower than expected costs related to the sale of the commercial and industrial wallcoverings business.
Business realignment, impairments and other represents costs of $38.1 million related to plant closures in the United States, Argentina and the United Kingdom. Also included is $25.3 million to exit certain raw material purchase contracts, which extended through 2002, in order to take advantage of opportunities that have arisen to obtain more favorable pricing.
Gain on disposal of businesses primarily relates to gains on the sale of the commercial and industrial wallcoverings business due to lower than expected exit costs.
Business realignment, impairments and other of $41.6 million includes the cost to cancel a plant expansion project, consisting of the write-off of engineering, equipment and other costs of $25.0 million. In addition, certain Chemical operations in the Philippines, Brazil, and Uruguay were closed as part of an effort to consolidate operations, resulting in a total charge of $16.6 million.
NON-OPERATING EXPENSES AND INCOME TAX EXPENSE: - ---------------------------------------------------
2001 vs. 2000 - --------------- Non-operating expenses decreased $36.4 million for the year ended December 31, 2001 compared to the year ended December 31, 2000. The decrease is primarily due to a $31.0 million reduction in investment and other asset write-downs from 2000 and a $10.0 million reduction from 2000 of charges recorded for the financial decline of a limited partnership for which a wholly owned subsidiary of the Company serves as general partner (see Note 20 to the Consolidated Financial Statements). Other decreases include a reduction in interest expense and affiliated interest expense of $6.7 million and $4.9 million, respectively, and an increase in affiliated interest income of $1.2 million. These declines were partially offset by a $9.4 million reduction in interest income due to lower average cash balances in 2001 compared to 2000, the absence of unrealized gains on an interest rate swap that matured in September 2000 of $6.7 million and reduced affiliated dividend income of $2.8 million.
2000 vs. 1999 - --------------- Non-operating expenses increased $80.4 million for the year ended December 31, 2000 compared to the year ended December 31, 1999. The increase is primarily attributable to increased investment write-downs from $3.0 million in 1999 to $48.0 million in 2000 (see Note 9 to the Consolidated Financial Statements) and recording a liability of $20.0 million for potential costs related to the financial decline of a limited partnership for which a wholly owned subsidiary of the Company serves as general partner (see Note 20 to the Consolidated Financial Statements). Other changes include a reduction in interest income of approximately $15 million due to lower average cash balances in 2000 compared to 1999 and reduced unrealized gains on an interest rate swap of approximately $6 million, which terminated in September 2000. These decreases were partially offset by higher dividend income of approximately $5 million from an affiliate and reduced affiliated interest expense due to lower average loan balances outstanding in 2000 compared to 1999.
- ---- The 2001 effective tax rate reflects the impact of earnings related to the expected sale of a foreign business that are not expected to be permanently reinvested in foreign locations and the inability to utilize the foreign tax credits associated with those earnings due to usage limitations. In addition, the rate reflects the write-down of the fixed assets and related non-deductible goodwill of a melamine plant due to its indefinite shut-down.
- ---- The 2000 income tax benefit primarily reflects a settlement with the Internal Revenue Service ("IRS") and the impact of usage limitations on foreign tax credits. As a result of a settlement reached with the IRS in the second quarter of 2000, the Company recorded net tax expense of $5 million consisting of valuation reserves recorded on foreign tax credits of $30 million that are no longer likely to be utilized, substantially offset by a $25 million reduction of amounts established for tax issues related to the divestiture of certain segments of the Company's business that are no longer considered necessary. In addition, approximately $10 million of income tax expense was recorded on foreign source income because related foreign tax credits are not expected to be utilized within the expiration period.
- ---- The 1999 consolidated effective rate reflects a higher portion of net income derived from foreign operations and the effect of lower tax rates in foreign jurisdictions.
CASH FLOWS: - ------------ OPERATING
2001 vs. 2000 - --------------- Operating activities provided cash of $95.3 million in 2001 compared to $22.9 million of cash provided in 2000, an improvement of $72.4 million. The most significant components of this improvement are cash taxes received of $36.2 million in 2001 compared to cash taxes paid of $19.2 million in 2000, increased cash flows in accounts receivable of $59.4 million due to improved collection efforts and collection of higher raw material costs passed through to customers in the first half of the year, the absence of a 2000 payment of $25.3 million to exit certain raw material supply contracts and improved cash flows in inventory of $27.2 million due to lower raw material costs and a $12.3 million cash receipt from Foods to assume the liability for claims under certain employee benefit plans. Partially offsetting these improvements were a $49.3 million increase in outflows in trade payables due to reduced payment terms with new raw material suppliers and lower raw material costs, a reduction in adjusted operating EBITDA of $32.0 million, increased cash restructuring payments in 2001 of $15.9 million, increased net interest paid of $6.3 million and the absence of 2000 cash receipts from CCPC Acquisition Corp. and Wise (see below).
2000 vs. 1999 - --------------- Operating activities provided cash of $22.9 million in 2000 compared to $71.8 million cash provided in 1999, a decline of $48.9 million. Significant outflows compared to prior year included a decline in adjusted operating EBITDA of $29.9 million, a decrease in accounts receivable and inventory cash flows of $32.2 million and $15.4 million, respectively, due to higher raw material costs passed through to customers and included in inventory, a $25.3 million payment in 2000 to exit certain raw material supply contracts and increased interest paid of $7.1 million. These increased outflows were partially offset by a $16.7 million increase in trade payables due to higher raw material costs, lower tax payments of $26.9 million, a $3.6 million repayment received from CCPC Acquisition Corp. for interest accrued on the loan that was repaid in 2000, a $3.7 million payment received from Wise, upon its sale, related to its retirement benefit plans, the absence of a 1999 payment of approximately $13.0 million to settle certain long-term disability claims and the absence of 1999 settlement payments of $6.4 million related to divested businesses.
INVESTING
2001 vs. 2000 - --------------- Investing activities provided cash of $211.1 million in 2001 compared to cash used of $195.7 million in 2000. The $406.8 million improvement is primarily due to increased proceeds from the sale of assets of $151.0 million, the absence of 2000 acquisitions for $118.1 million, increased proceeds from the divestiture of businesses of $86.1 million and reduced capital expenditures of $57.2 million. The increased proceeds from the sale of assets were due to the sale of loans receivable from affiliates for their fair value of $75.8 million, the sale of a common stock equity investment held by the Company for the market value of $64.1 million and the sale of land and other assets associated with closed plants of $14 million. The loans to affiliates and $55.2 million of the common stock equity investment held by the Company were sold to the Company's parent. The absence of acquisitions made by Consumer Adhesives and Chemical in 2000 improved cash flows by $118.1 million in 2001. Divestiture proceeds of $97.0 million, primarily from the sale of Consumer Adhesives, were ahead of 2000 proceeds of $10.9 million, primarily from the sale of the printing inks business. Further contributing to the improvement was a reduction in capital expenditures of $57.2 million primarily due to reduced plant expansion projects. 2000 vs. 1999 - --------------- Investing activities used $195.7 million cash in 2000 compared to $229.5 million cash used in 1999, a decrease of $33.8 million. The decrease primarily represents the absence of a 1999 $50.0 million investment in junior preferred stock of WKI and an $8.9 million collection of outstanding debt in 2000 which eliminated the Company's financial interest in Wise, partially offset by increased capital expenditures of $29.7 million primarily for plant expansions. Divestiture proceeds of $10.9 million in 2000, primarily from the sale of the printing inks business, were ahead of 1999 proceeds of $7.6 million from the sale of the molding compounds business. Acquisitions in 2000 of $118.1 million consist of a Consumer Adhesives business and the BCP and East Central Wax businesses (see Note 5 to the Consolidated Financial Statements) while 1999 acquisitions of $119.6 million consist of Spurlock, Blagden and the resins manufacturing plant in Minnesota.
FINANCING ACTIVITIES
2001 vs. 2000 - --------------- Financing activities used cash of $307.6 million in 2001 compared to cash provided of $5.0 million in 2000. The $312.6 million increase in cash used is primarily due to net repayments of affiliate loans of $212.5 million in 2001 compared to net borrowings of $86.7 million in 2000, 2001 net short-term debt repayments of $41.8 million compared to 2000 net short-term debt borrowings of $33.3 million and a reduction in 2001 long-term debt borrowings of $64.6 million. Affiliate activity in 2001 is comprised primarily of repayments to Foods of $125.0 million and BWHLLC of $73.4 million and additional loans to WKI of $19.0 million. These increased uses were partially offset by reduced long-term debt repayments of $86.0 million, lower 2001 common stock dividends paid of $13.0 million, the absence of a $10.3 million distribution to the Company's parent made in 2000 (see below) and a 2001 cash capital contribution from the Company's parent of $17.0 million.
2000 vs. 1999 - --------------- Financing activities generated cash of $5.0 million in 2000 compared to cash used of $319.0 million in 1999. The $324.0 million difference is primarily due to 2000 affiliated borrowings and receipts of $86.7 million, compared to 1999 net affiliated repayments and loans of $225.5 million. Affiliated activity in 2000 is comprised primarily of borrowings from BWHLLC of $61.4 million and receipts from CCPC Acquisition Corp., an affiliate of the Company's parent, of $56.2 million, partially offset by repayments to Foods of $31.0 million. The 1999 affiliated activity includes repayments to BWHLLC and Foods of $169.3 million and a short-term loan to CCPC Acquisition Corp. In addition, 2000 included short-term debt borrowings of $33.3 million compared to 1999 repayments of $3.7 million. Partially offsetting these net improved inflows are $17.6 million of increased net long-term debt repayments (primarily Industrial Bonds) and the distribution of $10.3 million in cash temporarily held by the infrastructure management services business for the benefit of its customers. The $10.3 million distribution represents payroll related withholdings for which the infrastructure management services business was liable when the business was distributed to the Company's parent (see Note 19 to the Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES: - ----------------------------------- The Corporate Reorganization was undertaken to simplify the legal structure and strengthen the capital structure of the Company and to reduce overhead costs (see Note 4 to the Consolidated Financial Statements).
As part of the Corporate Reorganization, in the fourth quarter 2001, the Company sold a common stock equity investment, notes receivable from Consumer Adhesives and a loan receivable from WKI to its parent (see Note 4 to the Consolidated Financial Statements). On March 1, 2002, the Company's investment in Consumer Adhesives preferred stock was redeemed for a $110.0 million note receivable from Consumer Adhesives. On March 12, 2002, the note receivable was sold to the Company's parent for cash of $110.0 million plus accrued interest. Proceeds from these sales were used to repay affiliated debt.
In fourth quarter 2001, the Company's parent contributed $614.4 million of outstanding Series A Cumulative Preferred Stock ("Preferred Stock") plus accumulated dividends of $6.6 million to the Company as a capital contribution. Prior to this, the Company had 24,574,751 shares of Preferred Stock outstanding with a total of 100,000,000 shares authorized. Each share had a liquidation preference of $25 and was entitled to cumulative dividends at an annual rate of 12% payable quarterly in arrears. The significant impact of this transaction was to eliminate required future annual preferred dividend payments of $73.7 million.
In third quarter 2001, the Company's $809.0 million Credit Agreement was reduced to $250.0 million. Of the reduction, $95.8 million was in accordance with the Credit Agreement due to the sale of substantially all of the Foods' operations. The remaining reduction was made at the election of the Company. As of December 31, 2001, the Company had $161.0 million (net of $89.0 million in letters of credit) available under the Credit Agreement. At December 31, 2001, the Company also had $0.9 million outstanding under a separate cash collateralized letter of credit agreement. The cash held by the Company of $25.7 million, less the $0.9 cash collateral, as of December 31, 2001 and the cash available under the credit agreement may be used for acquisitions and to fund working capital needs and capital expenditures. This credit agreement expires on July 13, 2002. The Company intends to either replace the existing facility with a new credit facility or to continue to rely on borrowings from affiliates to meet future working capital requirements.
During first quarter 2002, the Company finalized an uncommitted letter of credit facility totaling $45.0 million, and is currently in the process of negotiating an increase. The company is required to provide cash collateral equivalent to 101% of the letters of credit outstanding under this facility. The fees under the facility are 1/2% per annum on the amount of letters of credit outstanding. In addition, a 1/8% per annum issuance fee is in effect for all new letters of credit not transferred from the existing $250.0 million Credit Agreement.
Additional credit agreements are executed by the Company's international locations. As of December 31, 2001, these locations had credit facilities totaling $10.7 million. Of this amount $8.7 million (net of a $1.5 million term loan and $0.5 million of other draws on the line of credit) was available to fund working capital needs and capital expenditures.
As part of the common control exercised over the Company, procedures are established to enter into borrowings between affiliates at market interest rates.
The Company's planned 2002 capital expenditures are approximately $45.5 million and includes plans to continue to increase plant production capacity as necessary. Capital expenditures will be financed through operations and, if necessary, available lines of credit or borrowings from affiliates.
The Company expects to have enough liquidity to fund working capital requirements and support capital expenditures during 2002 and in future years due to cash from operations and amounts available under the credit agreement and from affiliates.
In third quarter 2000, the Company entered into a $40.0 million credit facility with WKI maturing December 31, 2000. This facility was extended through a series of amendments through April 16, 2001. Effective April 12, 2001, this facility was amended and restated extending the maturity date to March 31, 2004. The facility was further amended effective July 2, 2001 to increase the amount available to $50.0 million. In accordance with the terms of the restated and amended agreement, the facility was reduced to $25.0 million on August 16, 2001 with the perfection of certain pledged collateral. The Company received a second priority lien on that same collateral. On September 25, 2001, the Company extended an additional $3.0 million unsecured credit facility to WKI maturing October 25, 2001. That facility was increased to $13.0 million effective October 26, 2001 maturing on December 28, 2001. No borrowings occurred under those unsecured facilities and the facility was transferred to the Company's parent in conjunction with the Corporate Reorganization.
As of December 31, 2001, the Company had $190.4 million, net of allowances of $110.4 million, in deferred tax assets that relate to foreign and alternative minimum tax credits as well as net operating loss carryforwards. These credits and carryforwards are expected to reduce future tax liabilities.
RISK MANAGEMENT: - -----------------
The Company enters into various financial instruments, primarily to hedge interest rate risk and foreign currency exchange risk. The Company also enters into raw materials purchasing contracts and contracts with customers to mitigate commodity price risks.
FOREIGN EXCHANGE RISK
In 2001 and 2000, international operations accounted for approximately 34% of the Company's sales. As a result, there is exposure to foreign exchange risk on transactions that are denominated in a currency other than the business unit's functional currency. Such transactions include foreign currency denominated imports and exports of raw materials and finished goods (both intercompany and third party), and loan payments (both intercompany and third party). In all cases, the functional currency is the unit's local currency.
It is the Company's policy to reduce foreign currency cash flow exposure due to exchange rate fluctuations by hedging firmly committed foreign currency transactions wherever economically feasible. The use of forward and option contracts protects cash flows against unfavorable movements in exchange rates, to the extent of the amount under contract. The Company does not hedge foreign currency exposure in a manner that would entirely eliminate the effect of changes in foreign currency exchange rates on net income and cash flow. The Company does not speculate in foreign currency and does not hedge foreign currency translation or foreign currency net assets and liabilities. The counterparties to the forward contracts are financial institutions with investment grade credit ratings.
Foreign exchange risk is also mitigated because the Company operates in many foreign countries, reducing the concentration of risk in any one currency. In addition, foreign operations have limited imports and exports, reducing the potential impact of foreign currency exchange rate fluctuations. With other factors being equal, such as the performance of individual foreign economies, an average 10% foreign exchange increase or decrease in any one country would not materially impact operating results or cash flow. Although considered unlikely, an average 10% foreign exchange increase or decrease in all countries may materially impact operating results of the Company.
In accordance with current accounting standards, the Company recognizes gains and losses arising from contracts on a quarterly basis through the Statement of Operations.
A summary of forward currency and option contracts outstanding as of December 31, 2001 and 2000 follows. Fair values are determined from quoted market prices at December 31, 2001 and 2000.
INTEREST RATE RISK
The Company has utilized interest rate swaps to lower funding costs or to alter interest rate exposures between fixed and floating rates on long-term debt. The Company does not enter into speculative swaps or other financial contracts. As of December 31, 2001 and 2000, one interest rate swap was outstanding with a notional value of $24.3 million.
Fair values of the swaps are independently provided using estimated mid-market levels. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between the fixed rate and floating rate interest amounts calculated by reference to the agreed notional principal amount. On average, the Company paid 13.7% and received 4.5% in 2001 and paid 10.5% and received 6.3% on the swaps in 2000. The remaining outstanding swap as of December 31, 2001 and 2000 matures on December 1, 2002. A 1% increase or decrease in market interest rates would result in a $0.2 million increase or decrease, respectively, in the fair value of the interest rate swap agreements at December 31, 2001 and 2000. The Company is exposed to credit related losses in the event of nonperformance by the counterparty to the swap, although no such losses are expected as the counterparty is a financial institution having an investment grade credit rating.
A summary of the Company's interest rate swap as of December 31, 2001 and 2000 follows:
The interest rate on most debt agreements is fixed. A 10% increase or decrease in the interest rate of the variable debt agreements would have an immaterial effect on the Company's net income. The fair value of publicly held debt is based on the price at which the bonds are trading at December 31, 2001 and 2000. All other debt fair values are determined from quoted market interest rates at December 31, 2001 and 2000.
A summary of the Company's outstanding debt as of December 31, 2001 and 2000 follows:
The Company does not use derivative financial instruments in investment portfolios. Cash equivalent investments are placed with instruments that meet credit quality standards. These standards are established within the Company's investment policies, which also limit the exposure to any one issue. At December 31, 2001, the Company had $6.9 million invested primarily in marketable securities with average maturity periods of 43 days and average rates of 6.4%. At December 31, 2000, the Company had $11.1 million invested primarily in time deposits with average maturity periods of 28 days and average rates of 5.2%. Due to the short maturity of the Company's cash equivalents, the carrying value on these investments approximates fair value and the interest rate risk is not significant. A 10% increase or decrease in interest returns on invested cash would have an immaterial effect on the Company's net income and cash flow at December 31, 2001 and 2000.
COMMODITY RISK
The Company is exposed to price risks associated with raw materials purchases, most significantly with methanol, phenol and urea. For these commodity raw materials, the Company has purchase contracts, with periodic price adjustment provisions. The commodity risk also is moderated through use of customer contracts with selling price provisions that are indexed to publicly available indices for these commodity raw materials as discussed on pages 13 and 14. Any commodity futures that the Company may enter into are approved by the Board of Directors.
The Company has entered into a long-term contractual arrangement with the leading global melamine crystal producer to supply a minimum of 70% of the Company's worldwide melamine crystal requirements. The melamine crystal to be purchased under the agreement will be sourced from numerous supplier production sites and the temporary or permanent loss of any individual site would not likely have a material adverse impact on the Company's ability to satisfy its melamine crystal needs.
In fourth quarter 2000, the Company entered into fixed rate, fixed quantity contracts to secure a portion of future natural gas usage at certain facilities. The contracts were entered into to partially hedge the Company's risk associated with natural gas price fluctuations in peak usage months. Contracts covered the period from October 2000 through March 2003. Gas purchases under theses contracts totaled $0.9 million in 2001, with $1.1 million of future commitments at December 31, 2001. These contracts covered between 75% and 85% of 2001 natural gas usage during the periods of the contracts at those facilities.
Due to a sharp increase in natural gas prices in 2000, the Company expanded its natural gas hedging activities in June 2001 to hedge a portion of natural gas purchases for all of North America. The Company entered into futures contracts for the months of June 2001 through March 2002. The contracts are settled for cash each month based on the closing market price on the last day the contract trades on the New York Mercantile Exchange. Approximately 24% of the Company's 2001 North American natural gas usage from June through December was hedged through futures contracts. Commitments settled under these contracts in 2001 totaled $1.7 million, with $0.5 million of future commitments at December 31, 2001.
Gains and losses on commodity futures contracts are recognized each month as gas is used. Future commitments are marked to market on a quarterly basis. In 2001, the Company realized losses totaling $0.6 million at the expiration of its natural gas futures contracts. The Company also recorded a loss of $0.5 million for the difference between the fair value and carrying value of future natural gas commitments at December 31, 2001.
EQUITY PRICE RISK
At December 31, 2001, the Company held a preferred stock investment of $110.0 million in Consumer Adhesives. Subsequently, on March 1, 2002, the Consumer Adhesives preferred stock was redeemed for a $110.0 million note receivable from Consumer Adhesives. On March 12, 2002, the note receivable was sold to the Company's parent for cash of $110.0 million plus accrued interest. During 2001, a common stock equity investment of the Company was sold for $64.1 million. Of the $64.1 million, sales to third-party investors totaling $8.9 million were made in 2001 resulting in a pre-tax gain of $3.8 million ($2.8 million after-tax). The remaining $55.2 million of the sale was made to the Company's parent as part of the Corporate Reorganization (see Note 4 to the Consolidated Financial Statements). In addition, the remaining $10.0 million investment in preferred stock of WKI was written-off during the year and transferred to the Company's parent at its fair value.
At December 31, 2000, investments held by the Company consisted of a common stock equity investment sold in 2001 (as described above) and an investment in preferred stock of an affiliate that was written off in 2001 (as described above). The common stock investment represented approximately 33% of the outstanding shares and was accounted for using the equity method.
The Company reviews the carrying value of investments in accordance with existing accounting guidance that requires investments to be adjusted to fair value if the decline in value is considered to be "other than temporary" based on certain criteria. The Company recorded investment write downs of $10.0, $48.0 and $3.0 in 2001, 2000 and 1999, respectively.
A summary of investments as of December 31, 2001 and 2000 follows. Fair value is based on the market stock price as of December 31, 2001 and 2000 for publicly traded common stock. Fair value for other investments is based on other similar financial instruments.
Readers are cautioned that forward-looking statements contained under the heading of "Risk Management" should be read in conjunction with the disclosure under the heading: "Forward-Looking and Cautionary Statements".
RECENTLY ISSUED ACCOUNTING STANDARDS - ---------------------------------------
In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets" which addresses accounting and reporting for acquired goodwill and other intangibles. The most significant changes made by SFAS No. 142 are: (1) goodwill and intangible assets with indefinite lives will no longer be amortized; (2) goodwill and intangible assets with indefinite lives must be tested for impairment at least annually; and (3) the amortization period for intangible assets with finite lives will no longer be limited to forty years. The Company will adopt SFAS No. 142 effective January 1, 2002, as required. At that time, annual amortization of existing goodwill will cease on the unamortized portion associated with previous acquisitions. As required, a transitional impairment test is required for existing goodwill as of the date of adoption of this Standard. This test must be completed within the first year. Any impairment loss resulting from applying the goodwill impairment test will be reported as a cumulative effect of a change in accounting principle. Goodwill recorded after adoption of this Standard is to be tested for impairment at least annually and any resulting impairment is not considered part of the change in accounting principle. The Company is in the process of evaluating goodwill and may be required to write off amounts under the transitional assessment provisions of SFAS No. 142.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Under this Statement, an asset retirement obligation is recognized at its fair value in the period in which it is incurred. Asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and a related amortization expense is recognized in future periods. This Statement is effective for the Company for financial statements issued for fiscal years beginning after January 1, 2003. The Company is in the process of determining the impact of adopting this Statement.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial accounting and reporting for the impairment of long-lived assets. This Statement supercedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and establishes a single accounting model which requires long-lived assets be tested for impairment whenever events or change in circumstances indicate that their carrying value may not be recoverable. Under the requirements of SFAS No. 144, discontinued operations are measured at the lower of their carrying value or fair value less cost to sell and future operating losses are no longer recognized before they occur. SFAS No. 144 broadens the presentation of discontinued operations in the income statement to include a component of an entity (rather than a segment of a business). A component of an entity must be clearly distinguished, operationally, and for financial reporting purposes, from the rest of the entity. The Company will adopt this Standard prospectively effective January 1, 2002.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS - --------------------------------------------
The Company and its officers may, from time to time, make written or oral statements regarding the future performance of the Company, including statements contained in the filings with the Securities and Exchange Commission. Investors should be aware that these statements are based on currently available financial, economic and competitive data and on current business plans. Such statements are inherently uncertain and investors should recognize that events could cause the Company's actual results to differ materially from those projected in forward-looking statements made by or on behalf of the Company. Such risks and uncertainties are primarily in the areas of financial information about operating segments, results of operations by business unit, liquidity, legal, environmental liabilities and risk management.
ITEM 7A:
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - --------- ----------------------------------------------------------------
Refer to the "Risk Management" section included in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation.
See Notes to Consolidated Financial Statements
See Notes to Consolidated Financial Statements
See Notes to Consolidated Financial Statements
See Notes to Consolidated Financial Statements
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
1. BACKGROUND
Current Description Summary - -----------------------------
The Company, Borden Chemical, Inc. (formerly Borden, Inc.) was incorporated on April 24, 1899. After the sale of the Consumer Adhesives business segment in 2001 to an affiliate, the sole remaining business of the Company is the Chemical business, which is engaged primarily in manufacturing, processing, purchasing and distributing forest products and industrial resins, formaldehyde, coating and other specialty and industrial chemicals worldwide. The Company's executive and administrative offices are located in Columbus, Ohio. Chemical production facilities are located throughout the United States and in many foreign countries.
On March 14, 1995, affiliates of Kohlberg Kravis Roberts & Co. ("KKR") acquired control of the Company. In late 1995, the Company began the process of redesigning its operating structure in order to maximize value for its owners and determined that certain businesses did not fit into its long-term strategic plan. At the end of 1995, the Company consisted of the following business segments: Chemical, Food, Other Consumer Products, Decorative Products, Dairy and businesses held for sale. A group of centralized corporate departments located in Columbus, Ohio provided certain governance and other administrative services to all the Company's operating business units and businesses held for sale. As of the end of 2000, all business segments had been divested except the Chemical and Consumer Adhesives segments. In 2001 the Consumer Adhesives segment was divested (see below), leaving the Chemical as the Company's sole remaining business.
In the fourth quarter of 2001, the Company merged with its subsidiaries Borden Chemical Holdings, Inc. ("BCHI") and Borden Chemical, Inc. (BCI), executed certain financial transactions with its parent and changed its name to Borden Chemical, Inc. (the "Corporate Reorganization") reflecting the fact that the only remaining business of the Company is the Chemical business (see Note 4). The Corporate Reorganization was undertaken to simplify the legal structure and strengthen the capital structure of the Company and to reduce overhead costs. As part of the Corporate Reorganization, certain functions were downsized, eliminated or transferred to a separate legal entity, Borden Capital, Inc. ("Capital"), also owned by the Company's parent. Subsequent to the Corporate Reorganization, Capital provides certain management, consulting and board services to the Company as well as other entities owned by KKR and will charge fees to the Company and the other entities for these services.
On August 13, 2001, options sold to BW Holdings, LLC ("BWHLLC"), an affiliate of the Company's parent, in 1996 to purchase 74% of the common shares of Consumer Adhesives were exercised for $54.1. Also, on August 13, 2001, a company controlled by BWHLLC purchased the remaining 26% of Consumer Adhesives' common shares for $40.0 (collectively "the Consumer Adhesives Sale"). In addition to the cash proceeds received, the Company retained continuing investments in Consumer Adhesives in the form of notes receivable and preferred stock. Prior to the Consumer Adhesives Sale, these investments were eliminated in the Consolidated Financial Statements. The notes receivable from Consumer Adhesives were sold to the Company's parent on November 19, 2001 for $57.7 (see Note 4). The carrying value of the preferred stock was $110.0 at December 31, 2001. The preferred stock was redeemed on March 1, 2002 for a $110.0 note receivable from Consumer Adhesives. On March 12, 2002, the note receivable was sold to the Company's parent for cash of $110.0 plus accrued interest. As a result of the Consumer Adhesives Sale and subsequent sale of the preferred stock, Consumer Adhesives is reflected as a discontinued operation in the Consolidated Financial Statements for all periods presented. A pre-tax gain of $132.2 ($94.8 after-tax) was recognized in Paid-in-Capital due to the affiliated nature of the transaction.
2. NATURE OF OPERATIONS
The Company is engaged primarily in manufacturing, processing, purchasing and distributing forest products and industrial resins, formaldehyde, coatings and other specialty and industrial chemicals worldwide. Prior to the Consumer Adhesives Sale, the Company also manufactured, processed, purchased and distributed consumer glues and adhesives in North America (see Note 1).
Domestic products are sold by in-house sales forces throughout the United States to industrial users. To the extent practicable, international distribution techniques parallel those used in the United States and are concentrated in Canada, Western Europe, Latin America, Australia and Malaysia.
At December 31, 2001, 28 of a total 49 manufacturing and processing facilities are located in the United States and in 2001 approximately 66% of the Company's sales were generated in the United States.
Information about the Company's operating and geographic segments is provided in Item 1 on pages 7 to 9 and is an integral part of the Consolidated Financial Statements.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed by the Company, as summarized below, are in conformity with generally accepted accounting principles.
PRINCIPLES OF CONSOLIDATION - The Consolidated Financial Statements include the accounts of Borden Chemical, Inc. and its subsidiaries, after elimination of intercompany accounts and transactions. The Company's share of the net earnings of 20% to 50% owned companies is included in income on an equity basis. The Company amortizes any excess of cost over the underlying equity in net assets of an equity investment.
USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. The most significant estimates reflected in the financial statements include asset impairments, business realignment liabilities, environmental remediation liabilities, deferred tax assets and liabilities and related valuation allowances, and pension and post-retirement assets and liabilities. Other estimates include valuation allowances for accounts receivable and inventories and general insurance liabilities. Actual results could differ from these estimated amounts.
CASH AND EQUIVALENTS - The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Included in the Company's cash equivalents are interest bearing time deposits of $6.9 in 2001 and $11.1 in 2000. At December 31, 2001, $0.9 of the Company's cash was restricted as collateral under a letter of credit facility. The effect of exchange rate changes on cash is not material.
INVENTORIES - Inventories are stated at lower of cost or market. Cost is determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT - Land, buildings, and machinery and equipment are carried at cost. Depreciation is recorded on the straight-line basis by charges to expense at rates based on estimated useful lives of properties (average rates for buildings 4%; machinery and equipment 8%). Major renewals and betterments are capitalized. Maintenance, repairs and minor renewals are expensed as incurred.
INTANGIBLES - The excess of purchase price over net tangible and identifiable intangible assets of businesses acquired ("goodwill") is carried as intangibles in the Consolidated Balance Sheet. It is the Company's policy to carry goodwill arising prior to November 1, 1970, at cost, while goodwill arising after that date is amortized on a straight-line basis over not more than 40 years. Also included in intangibles are certain trademarks, patents and other intangible assets used in the operations of the businesses that amounted to $9.3 and $6.6 at December 31, 2001 and 2000, respectively. These intangibles are amortized on a straight-line basis over the shorter of the legal or useful life of the asset. The Company will adopt Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets," as of January 1, 2002 (see Recently Issued Accounting Pronouncements on page 35).
IMPAIRMENT - The Company periodically evaluates the recoverability of property, equipment, investments and intangibles by assessing whether the carrying value can be recovered over its remaining useful life through the expected future undiscounted operating cash flows of the underlying business. Any impairment loss required is determined by comparing the carrying value of the asset to operating cash flows on a discounted basis. Impairments will be assessed under SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," as of January 1, 2002 (see Recently Issued Accounting Pronouncements on page 35).
REVENUE RECOGNITION - Revenues are recognized when products are shipped and title transfers to the buyer.
SHIPPING AND HANDLING - The Company records freight billed to customers in net sales. Shipping costs are incurred to move the Company's products from production and storage facilities to the customers. Handling costs are incurred
from the point the product is removed from inventory until it is provided to the shipper and generally include costs to store, move and prepare the products for shipment. The Company incurred shipping costs of $63.9 in 2001, $63.8 in 2000 and $61.9 and in 1999. These costs are classified as distribution expense in the Consolidated Statements of Operations. Due to the nature of the Company's business, handling costs incurred prior to shipment are not significant.
FOREIGN CURRENCY TRANSLATIONS - Assets and liabilities of foreign affiliates are translated at the exchange rates in effect at the balance sheet date, and income and expenses are translated at average exchange rates prevailing during the year. The effect of translation is accounted for as an adjustment to shareholders' equity.
The Company incurred realized and unrealized net foreign exchange losses (gains) aggregating $0.9 in 2001, ($0.2) in 2000 and ($0.7) in 1999.
INCOME TAXES - Income tax expense is based on reported results of operations before income taxes. Deferred income taxes represent the tax effect of temporary differences between amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. Deferred tax balances are adjusted to reflect tax rates, based on current tax laws, that will be in effect in the years in which temporary differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company primarily uses three types of derivatives: interest rate swaps (which effectively convert a portion of the Company's variable rate obligations to fixed), forward exchange contracts (which reduce the Company's cash flow exposure to changes in foreign exchange rates) and natural gas futures (which reduce the Company's cash flow exposure to changes in natural gas prices). The Company does not hold or issue derivative financial instruments for trading purposes. The Company has not elected hedge accounting for any derivatives; consequently, all derivatives are measured at fair value and recorded on the balance sheet as an asset or liability, depending upon the Company's underlying rights or obligations.
EARNINGS PER SHARE - Basic and diluted net income attributable to common stock is computed by dividing net income by the weighted average number of common shares outstanding during the period. At December 31, 2001, 1.0 million warrants and 6.9 million options to purchase common shares of the company were outstanding and not considered dilutive. Prior to 2001, options issued by subsidiaries that enabled the holder to obtain stock of the subsidiary were assumed to be exercised if they were dilutive. As of December 31 2001, as a result of the Consumer Adhesives Sale (see Note 1) and the Corporate Reorganization (see Note 4), there were no options to purchase subsidiary stock outstanding. At December 31, 2000, there were 5.5 million options to purchase subsidiary stock outstanding, of which 1.1 million were considered dilutive to EPS. At December 31, 1999, there were 6.2 million options to purchase subsidiary stock outstanding, of which 5.0 million were considered dilutive to EPS.
The Company's diluted EPS is calculated as follows:
CONCENTRATIONS OF CREDIT RISK - Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and accounts receivable. The Company places its temporary cash investments with high quality institutions and, by policy, limits the amount of credit exposure to any one institution. Concentrations of credit risk with respect to accounts receivable are limited, due to the large number of customers comprising the Company's customer base and their dispersion across many different industries and geographies. The Company generally does not require collateral or other security to support customer receivables.
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 142 addresses the accounting for goodwill and other intangible assets after an acquisition. The most significant changes made by SFAS No. 142 are: 1) goodwill and intangible assets with indefinite lives will no longer be amortized; 2) goodwill and intangible assets with indefinite lives must be tested for impairment at least annually; and 3) the amortization period for intangible assets with finite lives will no longer be limited to forty years. The Company will adopt SFAS No. 142 effective January 1, 2002, as required. At that time, annual amortization of existing goodwill will cease on the unamortized portion associated with previous acquisitions. As required, a transitional impairment test is required for existing goodwill as of the date of adoption of this Standard. This test must be completed within the first year. Any impairment loss resulting from applying the goodwill impairment test will be reported as a cumulative effect of a change in accounting principle.
The Company is in the process of evaluating the carrying value of goodwill and may be required to write-off amounts under the transitional assessment provisions of SFAS No. 142.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Under this Statement, an asset retirement obligation is recognized at its fair value in the period in which it is incurred. Asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and, as such, a related amortization expense is recognized in future periods. This Statement is effective for financial statements issued for fiscal years beginning after January 1, 2003. The Company is in the process of determining the impact of adopting this Statement.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial accounting and reporting for the impairment of long-lived assets. This statement supercedes SFAS No. 121 and establishs a single accounting model which requires long-lived assets be tested for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Under the requirements of SFAS No. 144, discontinued operations are measured at the lower of their carrying value or fair value less cost to sell and future operating losses are no longer recognized before they occur. SFAS No. 144 broadens the presentation of discontinued operations in the income statement to include a component of an entity (rather than a segment of a business). A component of an entity must be clearly distinguished, operationally, and for financial reporting purposes, from the rest of the entity. The Company will adopt this Standard prospectively effective January 1, 2002.
RECLASSIFICATION - Certain prior year amounts have been reclassified to conform with the 2001 presentation.
4. CORPORATE REORGANIZATION
In fourth quarter 2001, the Company merged with its subsidiaries BCHI and BCI, executed certain financial transactions with its parent and changed its name to Borden Chemical, Inc. reflecting the fact that the only remaining business of the Company is the Chemical business. The Corporate Reorganization was undertaken to simplify the legal structure and strengthen the capital structure of the Company and to reduce overhead costs. As part of the Corporate Reorganization, certain functions were downsized, eliminated or transferred to a separate legal entity, Capital, also owned by the Company's parent. Subsequent to the Corporate Reorganization, Capital provides certain management, consulting and board services to the Company as well as other entities owned by KKR and will charge fees to the Company and the other entities for these services.
The Company's parent contributed all of the outstanding Series A Cumulative Preferred Stock ("Preferred Stock") plus accumulated dividends of $6.6 to the Company as a capital contribution. Prior to this, the Company had 24,574,751 shares of Preferred Stock outstanding with a total of 100,000,000 shares authorized. Each share had a liquidation preference of $25 and was entitled to cumulative dividends at an annual rate of 12% payable quarterly in arrears. The significant impact of this transaction was to eliminate required annual future preferred dividend payments of $73.7.
As part of the Corporate Reorganization, the Company recorded severance costs of $1.5 for workforce reductions and additional costs of $2.0 related to the Corporate Reorganization. These amounts are classified as business realignment, impairments and other in the Consolidated Statements of Operations.
In conjunction with the Corporate Reorganization in the fourth quarter, the Company sold certain assets to its parent for cash. The Company sold a common stock equity investment for $55.2 resulting in a pre-tax gain of $15.8 ($10.2 after-tax) that is recorded as an increase to Paid-in-Capital due to the affiliated nature of the transaction. Notes receivable from Consumer
Adhesives were sold for $57.7, and a loan receivable from WKI Holding Company, Inc. ("WKI") (see Note 19) of $25.1 was sold for its fair value of $18.1. Prior to the sale, the Company recorded a $7.0 charge which is included in investment writedowns and other charges to reflect the decline in fair value of the WKI loan receivable. On March 12, 2001, the Company used the proceeds of $110.0, from the sale to the Company's parent of its remaining investment in Consumer Adhesives, to further repay its affiliated debt. All assets sales were sold at the fair value at the date of sale.
To further simplify its capital structure, during 2002 the Company intends to cancel a $404.8 note receivable (plus accrued interest) from its parent, which has been accounted for as a reduction from equity. Historically, the Company's parent funded the interest due on the note through common dividends received from the Company. Quarterly interest has not been paid, nor an associated dividend declared, since October 15, 2001 and no further interest or dividend payments are expected in 2002.
The Company paid Capital $8.7 to assume certain liabilities, the fair value at the date of sale, net of certain assets transferred, including accounts receivable from WKI of $3.6. These liabilities were for accrued compensation, certain employee benefit obligations and accrued liabilities associated with the transferred employees and functions.
Beginning in 1996, key subsidiaries of the Company issued stock options under their individual Stock Purchase and Option Plans for Key Employees. The options held by Chemical employees became options of the Company effective with the Corporate Reorganization (see Note 15). In addition, the Company settled the minority interest liability related to the ownership of shares in BCHI by management of BCHI by exchanging shares of the Company's stock and common stock warrants for the BCHI shares held by management. This resulted in an increase to Paid-in-Capital for $1.2, the book value of the liability which approximates fair value.
Capital began providing management, consulting and board services to the Company after the Corporate Reorganization. The Company provides certain administrative services to Capital. The Company is charged an annual fee of $9.0, payable quarterly in arrears, for the net cost of the services.
5. BUSINESS ACQUISITIONS
All of the Company's acquisitions described below have been accounted for using the purchase method of accounting. Accordingly, results of operations of the acquired entities have been included from the date of acquisition and any excess of purchase price over the sum of amounts assigned to identified assets and liabilities has been recorded as goodwill.
In 2001, the Company and Delta-HA, Inc. merged their North American foundry resins and coatings businesses. In conjunction with the merger the Company recognized an accrual of approximately $7.0 to restructure operations of the acquired entity, minority interest liability of $4.5 to recognize the 25% minority ownership, and recorded goodwill of approximately $9.0.
In 2000, the Company acquired the formaldehyde and certain other assets from Borden Chemicals and Plastics Limited Partnership ("BCP"), an affiliate of the Company, for $23.8 and acquired East Central Wax, Inc., a manufacturer of wax emulsions for the wood products industry, for $2.8. Both acquisitions were for cash. No goodwill was recorded with the BCP acquisition and $1.9 was recorded with the East Central Wax acquisition.
In 2000, the Company also acquired certain assets and liabilities of a Canadian based Consumer Adhesives business for $91.5 in cash. The business manufactured glue, glue sticks, paints, tapes and craft/stationery products at its manufacturing facility in Ontario, Canada. Goodwill recorded with the acquisition was $16.3. This business was sold in conjunction with the 2001 Consumer Adhesives Sale (see Note 7).
In 1999, the Company acquired Blagden Chemicals, Ltd. ("Blagden") for $71.5, Spurlock Industries, Inc. ("Spurlock") for $40.6, and a resins manufacturing plant in Minnesota for $7.5. Blagden produces formaldehyde and resins for forest products, foundry, and industrial applications at three manufacturing facilities in the United Kingdom and a fourth in the Netherlands. Spurlock is a formaldehyde and resins producer primarily for forest products applications with manufacturing facilities in Virginia, Arkansas and New York. Goodwill of $31.0 and $14.0 was recorded with the Blagden and Spurlock acquisitions, respectively.
6. DIVESTITURES, BUSINESS REALIGNMENT AND ASSET IMPAIRMENTS
In 2001, management continued to review and adjust its structure to streamline its operations in order to improve business financial results and maximize returns to owners of the Company. As a result of this process, the Company committed to certain business realignment activities, divested businesses and reorganized its corporate structure (see Note 4). Management of the Company expects to continue to review its operating structure and strategic options in 2002.
Divestitures - ------------
The following schedule summarizes the net cash proceeds, pre-tax and after-tax gains and losses associated with business divestiture activities over the last three years.
In 2001, the Company divested its Consumer Adhesives business (see Notes 1 and 7) and its chemical operation in Ecuador. Proceeds from the Consumer Adhesives Sale were $94.1, net of $2.4 cash sold with the business, resulting in a pre-tax gain of $132.2 ($94.8 after-tax) which was recorded in Paid-in-Capital due to the affiliated nature of the transaction. Proceeds from the sale of the Ecuador chemical business were $5.3, resulting in a pre-tax loss of $2.3 ($2.8 after-tax).
In 2000, the Company sold its chemical printing inks business for $10.3, resulting in a pre-tax loss of $3.5 ($2.2 after-tax), and distributed 100% of its ownership in its infrastructure management services business to its parent, which was treated as a dividend at the recorded net book value of approximately $16.
In 1999, the Company recorded $7.4 of additional pre-tax gain, due to lower than expected exit costs related primarily to the previous sale of its commercial and industrial wallcoverings business which was sold prior to 1999. The Company also sold the molding compounds business that was acquired in 1998 with a melamine resins business, which was accounted for as part of the acquisition of the melamine resins business acquired from Sun Coast Industries.
Business Realignment, Impairments and Other - -----------------------------------------------
During 2001, the Company recorded business realignment, impairments and other expense of $145.4, consisting of business realignment expense of $25.3, non-cash asset impairment charges of $101.1 and other charges of $19.0 related to environmental remediation costs related to a previously owned business.
Provided below is a summary of business realignment reserve activity for 2001:
Business realignment expense in 2001 of $25.3 consists of $12.7 of plant closure costs and $12.6 of severance and other employee costs. Plant closure costs include fixed asset write-offs of $11.5, plant employee severance of $4.1, and demolition, environmental and other costs of $7.6, offset by a pre-tax gain on the sale of land associated with a closed plant of $10.5 ($6.5 after-tax).
In fourth quarter 2001, the Company announced that it had decided to offer for sale its wholly-owned subsidiary, Melamine Chemicals, Inc. ("MCI"), which manufactured melamine crystal at a plant in Louisiana. For economic and strategic purposes, the Company has entered into a long-term contractual arrangement, which took effect January 1, 2002, with a major supplier for a substantial portion of its future melamine crystal needs. As of the end of the year no sale had been negotiated and in January 2002, the plant was shut-down indefinitely. Under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company recorded a 2001 expense of $98.2 for impairment of melamine fixed assets, spare parts and goodwill of $62.5, $3.0 and $32.7, respectively. The Company expects to incur additional employee and environmental costs in the first quarter 2002. Also in fourth quarter 2001, the Company discontinued construction of a new plant and recorded a charge of $2.9 of engineering, construction and other costs to reflect estimated net recoverable value of the land and building.
Additionally, in the fourth quarter 2001, the Company recorded a $19.0 charge that reflects management's estimate of probable environmental remediation costs that the Company has incurred related to fourth quarter 2001 activity for a previously owned business.
Following are discussions of business realignment charges recorded in 2000 and 1999:
In fourth quarter 2000, the Company recorded a charge of $24.5 related primarily to the closure of two forest products plants in the United States and the consolidation of its administrative headquarters in the United Kingdom. The charge consists primarily of severance costs and asset write-downs.
In third quarter 2000, the Company recorded an additional charge of $1.8 related to additional environmental remediation costs associated with a plant closure in Argentina. In second quarter 2000, the Company recorded a charge of $9.0 related primarily to the closure of a United Kingdom formaldehyde and resins plant. The charge primarily consists of severance costs.
In first quarter 2000, the Company recorded $2.8 primarily for severance and environmental remediation costs related to the closure of resins operations in Argentina and California.
In third quarter 1999, management approved a plan to close a Brazil Chemical operation and Uruguay Chemical business. As a result, a charge of $3.6 was recorded which relates primarily to write off of fixed assets .
In second quarter 1999, the Company finalized a plan for the closure of the Chemical resins operations in the Philippines. As part of this plan, long-lived assets to be disposed of were written down to net realizable value, resulting in a business realignment charge of $13.0. Also in second quarter 1999, the Company discontinued a plant expansion project. As a result, the Company wrote-off $25.0 of engineering, equipment and other costs.
7. DISCONTINUED OPERATIONS
The summary of discontinued operations below includes Consumer Adhesives' results through the date of the Consumer Adhesives Sale and the 1999 loss from discontinued operations recorded by an investee accounted for under the equity method:
In addition to the amounts shown above, gains and losses (net of tax) recognized on the sale of discontinued operations are included separately in the Consolidated Statements of Operations (see also Note 6).
As a result of a settlement reached with the Internal Revenue Service in the second quarter of 2000, amounts established for tax issues related to the prior divestiture of certain segments of the Company's business were no longer considered necessary. A portion of these amounts was classified as gain on the sale of discontinued operations in 2000, consistent with the classification of these amounts when established (see also Item 7 relating to Management's discussion on income tax expense). Included as gain on disposal of discontinued operations in 2000 for these amounts is $93.0.
Included in the 1999 net of tax loss on disposal of discontinued operations is $2.0 which represents the loss of $3.7 recorded by the Company's investee, accounted for under the equity method, offset by a favorable claim settlement related to a 1997 divestiture of $0.6, and a gain of $1.1 due to lower than expected exit costs related to a 1996 divestiture.
8. OTHER COMPREHENSIVE INCOME
Other Comprehensive income includes the following items:
The 2001 reclassification adjustment reflects the accumulated translation adjustment recognized on the sale of the Company's operations in Ecuador. The reclassification adjustments in 1999 primarily represent the accumulated translation adjustment included as part of the charge to close the Chemical operations in the Philippines.
The cumulative effect of change in accounting principle represents the impact of the adoption of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," on January 1, 2001. The Company recorded a pre-tax initial transition adjustment to Other Comprehensive Income of $5.2 ($3.3 net of tax) of which $3.9 ($2.6 net of tax) was reclassified into earnings for the year ended December 31, 2001.
9. INVESTMENTS AND INVESTMENTS IN AFFILIATES Investment in affiliates at December 31, 2001 represents the Company's investment in Consumer Adhesives preferred stock. In March 2002, the preferred stock was redeemed for a note receivable, which was then sold to the Company's parent, along with accrued interest, at fair value (see Note 4). The investment in Consumer Adhesives preferred stock eliminated in consolidation at December 31, 2000.
Investments at December 31, 2000 represent a common stock equity investment that was sold in 2001 for $64.1. Of the total proceeds, $8.9 was received from sales to third parties and $55.2 was received from the Company's parent as part of the Corporate Reorganization (see Note 4).
Investment in affiliates at December 31, 2000 represents the Company's investment in WKI preferred stock which was written off in 2001.
The Company continuously reviews the carrying value of investments in accordance with existing accounting guidance that requires investments to be adjusted to fair value if the decline in value is considered to be "other than temporary" based on certain criteria. The Company recorded investment write-downs of $10.0, $48.0 and $3.0 in 2001, 2000 and 1999, respectively.
10. DEBT, LEASE OBLIGATIONS, UNCONDITIONAL PURCHASE OBLIGATIONS AND RELATED COMMITMENTS
Debt outstanding at December 31, 2001 and 2000 is as follows:
In fourth quarter 2000, the Credit Agreement was reduced from $895.0 to $809.0 in accordance with the terms of the Credit Agreement. In the third quarter of 2001, the Credit Agreement was further reduced to $250.0. Of the reduction, $95.8 was in accordance with the terms of the Credit Agreement due to the sale of substantially all of foods business (Foods) assets. The remaining reduction was made at the election of the Company. As of December 31, 2001, the Company had a contractually committed line of credit of $250.0 which expires on July 13, 2002. Current pricing under the LIBOR based borrowing option is LIBOR plus 25 basis points. The commitment fee on the unused portion of the facility is 10 basis points.
The Credit Agreement, as amended, contains covenants that significantly limit or prohibit, among other things, the Company's and its subsidiaries' ability to incur indebtedness, make prepayments of certain indebtedness, pay dividends, engage in transactions with affiliates, create liens, make changes in its business or control of the Company, sell assets, engage in mergers and consolidations, and use proceeds from asset sales and certain debt and equity issuances. In addition, the credit facility requires that capital expenditures be limited to certain specified amounts and that certain financial ratios be maintained, including a minimum ratio of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization as adjusted by the Credit Agreement) to interest expense and a maximum ratio of total debt to EBITDA.
At December 31, 2001 and 2000, there were no borrowings outstanding under the Credit Agreement and $89.9 and $95.0 in letters of credit, as of December 31, 2001 and 2000, respectively. Provisions under the Credit Agreement require Foods to guarantee the Company's obligations under the Credit Agreement. The Company had $161.0 available for borrowing under its Credit Agreement at December 31, 2001, and incurred commitment fees of $1.5 in 2001 and $1.3 in 2000.
During first quarter 2002, the Company finalized an uncommitted letter of credit facility totaling $45.0, and is currently in the process of negotiating an increase. The Company is required to provide cash collateral equivalent to 101% of the letters of credit outstanding under this facility. The fees under the facility are 1/2% per annum on the amount of letters of credit outstanding. In addition, a 1/8% per annum issuance fee is in effect for all new letters of credit not transferred from the existing $250.0 Credit Agreement. Given that the facility is an uncommitted agreement, no financial covenants or expiration date exist, thus either party can give notice of cancellation at any time.
Additional credit agreements are executed for the Company's international locations. As of December 31, 2001, these locations had credit facilities totaling $10.7. Of this amount $8.7 (net of $1.5 in a term loan and $0.5 in other draws on the line of credit) was available for borrowing under these credit agreements. The Company's international units incurred no commitment fees in 2001.
Purchase Obligations - --------------------- In fourth quarter 2000, the Company entered into fixed rate, fixed quantity contracts to secure a portion of future natural gas usage at certain facilities. The contracts were entered into to partially hedge the Company's risk associated with natural gas price fluctuations in peak usage months. Contracts covered the period from October 2000 through March 2003. Gas purchases under these contracts totaled $0.9 million in 2001, with $1.1 million of future commitments at December 31, 2001. These contracts covered between 75% and 85% of 2001 natural gas usage during the periods of the contracts at those facilities.
Due to a sharp increase in natural gas prices in 2000, the Company expanded its natural gas hedging activities in June 2001 to hedge a portion of natural gas purchases for all of North America. The Company entered into futures contracts for the months of June 2001 through March 2002. The contracts are settled for cash each month based on the closing market price on the last day the contract trades on the New York Mercantile Exchange. Approximately 24% of the Company's 2001 North American natural gas usage from June through December was hedged through futures contracts. Commitments under these contracts in 2001 totaled $1.7 million, with $0.5 million of future commitments at December 31, 2001.
Aggregate maturities of total debt, minimum annual rentals under operating leases and unconditional purchase obligations for natural gas at December 31, 2001, for the Company is as follows:
Rental expense amounted to $19.6, $22.9 and $21.5 in 2001, 2000 and 1999, respectively.
11. INCOME TAXES Comparative analysis of the Company's income tax expense (benefit) related to continuing operations follows:
The Company's income tax expense related to discontinued operations was $5.6, $5.8 and $6.0 in 2001, 2000 and 1999, respectively. The Company's income tax expense from the gain on disposal of discontinued operations was $37.4 in 2001, which is reflected as a reduction to Paid-in-Capital due to the affiliated nature of the transaction (see Note 1). The Company's income tax (benefit) expense related to the gain (loss) on disposal from discontinued operations was $(93.0) and $(1.1) in 2000 and 1999, respectively.
A reconciliation of the Company's difference between income taxes related to continuing operations computed at Federal statutory tax rates and provisions for income taxes is as follows:
The tax effects of the Company's significant temporary differences, and loss and credit carryforwards, which comprise the deferred tax assets and liabilities at December 31, 2001 and 2000 follow:
The Company's net deferred tax asset at December 31, 2001 was $153.2. Of this amount, $152.1 represents net domestic deferred tax assets related to future tax benefits. Included in the domestic deferred tax asset is $21.0 of net operating loss carryforward for U.S. federal tax purposes, which will begin to expire in 2021. Realization of the domestic net operating loss is dependent upon generation of approximately $60.0 of future income before the expiration dates. Also included within the domestic deferred tax asset is $59.7 of foreign tax credits with a related valuation allowance of $49.6. These foreign tax credits consist entirely of foreign tax credit carryover which was generated in 1998 and 1999 and will begin expiring in 2004. Realization of the entire net domestic deferred tax asset is dependent on generation of approximately $435 of future taxable income.
The Company has not recorded income taxes applicable to undistributed earnings of foreign subsidiaries that are indefinitely reinvested in foreign operations. Undistributed earnings permanently reinvested amounted to $130.8 at December 31, 2001.
12. PENSION AND RETIREMENT SAVINGS PLANS
Most U.S. employees of the Company are covered under a non-contributory defined benefit plan ("the Pension Plan"). The Pension Plan provides benefits for salaried employees based on eligible compensation and years of credited service and for hourly employees based on years of credited service.
Certain employees in other countries are covered under contributory and non-contributory defined benefit foreign plans. Additionally, eligible salaried and hourly employees may contribute up to 5% of their pay (7% for certain longer service salaried employees), which is currently matched by the Company at 100%. The Company has the option to match up to 125% of this amount based on financial performance. Charges to operations for matching contributions under the Company's retirement savings plans in 2001, 2000 and 1999 amounted to $5.3, $6.2 and $5.9, respectively.
The Company's funding of the pension plan equals or exceeds the minimum funding requirements imposed by Federal and foreign laws and regulations.
Subsequent to the Consumer Adhesives sale in 2001 and the sales of the food business (Foods) and the salty snacks business (Wise) in 1996 (see Note 1), the Company's pension plan retained the liabilities related to the employees of these businesses. The projected benefit obligation and plan assets include the domestic obligation and assets for the Consumer Adhesives business in 2001 and 2000 and for Foods in 2000. The Company recorded receivables from these businesses for their actuarially determined liabilities adjusted annually for actuarially determined expense and funding payments. The receivable from the Consumer Adhesives business is included in other assets at December 31, 2001. The receivables from Foods and Wise were collected in 2001 and 2000, respectively, upon the sales of these businesses from the affiliated group and the resultant settlement of significant portions of these liabilities. Consequently, the Company recorded settlement and curtailment charges of $10.7 relating to this settlement of plan liabilities for Foods in 2001 and an additional $5.6 settlement for other lump sum payments made by the plan during 2001. In 2000 a settlement charge of $8.9 was recorded relating to the settlement of the liability for Wise, as well as other lump sum settlements made during 2000.
The assets and benefit obligations of the plans were as follows:
Amounts recognized in the balance sheets, after reclassification of the prepaid pension asset to reflect a minimum pension liability adjustment, consist of:
Plan assets consist primarily of equity securities and corporate obligations.
The Company's pension expense excludes the expense related to the Foods and Wise following the dates they were sold by the Company. Consumer Adhesives' expense is insignificant for all periods presented. Following are the components of net pension expense recognized by the Company:
The weighted average rates used to determine net pension expense for the Company were as follows:
The projected benefit obligation and fair value of plan assets for the Company's pension plans with benefit obligations in excess of plan assets were $288.2 and $260.5, respectively, as of December 31, 2001 and $5.6 and $0.0, respectively, as of December 31, 2000.
Most employees not covered by the Company's plans are covered by collectively bargained agreements, which are generally effective for five years. Under Federal pension law, there would be continuing liability to these pension trusts if the Company ceased all or most participation in any such trust, and under certain other specified conditions. The Statements of Operations include charges of $0.4, $0.2 and $1.3 in 2001, 2000 and 1999, respectively, for payments to pension trusts on behalf of employees not covered by the Company's plans.
13. NON-PENSION POSTRETIREMENT BENEFIT
The Company provides certain health and life insurance benefits for eligible domestic and Canadian retirees and their dependents. The cost of postretirement benefits is accrued during employees' working careers. Domestic participants who are not eligible for Medicare are provided with the same medical benefits as active employees, while those who are eligible for Medicare are provided with supplemental benefits. Canadian participants are provided with supplemental benefits to the national healthcare plan in Canada. The domestic postretirement medical benefits are contributory; the Canadian medical benefits are non-contributory. The domestic and Canadian postretirement life insurance benefits are non-contributory. Benefits are funded on a pay-as-you-go basis.
The Company assumed the remaining domestic post-retirement benefit liability of $8.1 from Foods in December 2001.
Also included in the Consolidated Balance Sheets at December 31, 2001 and 2000 are other post-employment benefit obligations of $6.9 and $2.3, respectively.
A 7.25% and 7.74% weighted average discount rate was used in determining the postretirement benefit obligation at December 31, 2001 and 2000, respectively. For measurement purposes, health care costs are assumed to increase 5.25% for pre-65 benefits and 8.75% for post-65 benefits in 2002 grading down gradually to a constant 5.25% annual increase by the year 2008 for post-65 benefits. The comparable assumptions for the prior year were 9.25% and 5.75% by the year 2008.
Following are the components of net postretirement benefit recognized for 2001, 2000 and 1999:
Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage-point change in the assumed health care cost trend rates would have the following effects:
14. SHAREHOLDERS'(DEFICIT)EQUITY
Preferred Stock - ---------------- On November 19, 2001, the Company's parent contributed all of the outstanding Preferred Stock plus accumulated dividends of $6.6 to the Company as a capital contribution. (See Note 4 for additional information).
Common Stock and Warrants and Options on Common Stock - ------------------------------------------------------------- The Company has 199,121,749 shares of $0.01 par value common stock issued and outstanding and 300,000,000 shares authorized. This includes 146,755 shares held by management of the Company, which were issued as a result of the Corporate Reorganization. In addition, management received warrants to purchase 1,039,864 shares of common stock. The warrants have a strike price of $2.78, the fair value at the date of grant, and a twenty-year life.
Other Shareholders' Equity - ---------------------------- The Company declared common stock cash dividends of $36.4, $61.6 and $64.1 during 2001, 2000 and 1999, respectively. The dividends were recorded as a charge to paid-in capital to reflect a return of capital to the Company's parent.
At December 31, 2001, the Company held $404.8 of notes receivable from its parent, which accrue interest at 12% per year, payable quarterly, and mature on September 29, 2005. The notes were received from an affiliate of the Company's parent as proceeds from the 1996 sales of Wise and Foods and from the issuance of options on the common stock of the Consumer Adhesives business and of Borden Decorative Products Holdings, Inc., the latter of which was cancelled in 1998 upon the sale of that business. Interest due on the notes of $10.1 at December 31, 2001 will not be paid and, to further simplify the Company's capital structure, during 2002 the Company intends to cancel this note receivable from its parent (see Note 4).
During 1996 the Company sold an option to BWHLLC to purchase what was then all of the common stock of the Consumer Adhesives business for $54.1, which was 110% of the August 16, 1996 fair market value of the common stock. The option was issued at fair value with a five-year expiration. During 2000, the Company made a capital contribution to the Consumer Adhesives business in exchange for additional shares of stock. On August 13, 2001, the option was exercised and an affiliate of the Company purchased the remaining 26% of Consumer Adhesives' common shares issued in 2000, for $40.0. A deferred pre-tax gain of $132.2 ($94.8 after-tax) related to this transaction is included in Paid-in-Capital (see Note 1).
The Corporate Reorganization resulted in the issuance of shares of common stock of the Company and warrants to purchase common stock to certain management members, in exchange for the shares they held in BCHI. This resulted in an increase to Paid-in-Capital for $1.2, the book value of the minority interest liability that represented their previous interest in BCHI.
In addition to the contribution of the Preferred Stock and accumulated dividends discussed above, the Company's parent contributed $17.0 of cash as a capital contribution in conjunction with the Corporate Reorganization. The Company's parent also contributed tax benefits to the Company of $21.0, $44.0 and $26.4 during 2001, 2000 and 1999, respectively. The Company is included in its parent's tax return and the deductible interest expense on the parent's notes payable reduces the Company's tax liability.
During 2000, the Company distributed 100% of its ownership in the infrastructure management services business to the Company's parent. The distribution was recorded at net book value of $16.3, including $8.6 owed by the Company to the infrastructure management services business in accordance with a tax sharing agreement. Subsequent to the distribution, substantially all of the assets of the infrastructure management services business were sold to a subsidiary of Interliant, Inc. Subsequent to this sale, the remaining assets of the infrastructure management services business, with a net book value of approximately $0.3, were contributed back to the Company from the Company's parent.
The Company recorded a net of tax minimum pension liability adjustment of $66.6, $1.8 and $1.5 for 2001, 2000 and 1999, respectively, relating to underfunded pension plans, which is reflected in accumulated other comprehensive income.
15. STOCK OPTION PLANS AND OTHER STOCK BASED COMPENSATION
Unit Appreciation Rights - -------------------------- Certain employees of the Company hold unit appreciation rights ("UAR's") granted by the Company in BWHLLC. The UAR's have a ten year life with vesting periods ranging from 4 to 5 years. The UAR's are accounted for under the liability method as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and any compensation expense incurred in conjunction with the UAR's will be reflected in the Statements of Operations for the Company. For 2001, 2000 and 1999, the Company has not recorded any compensation expense attributable to the UAR's. There were 45,832,312 UAR's outstanding at December 31, 2001 and no UAR's available for future grants.
Stock Options - -------------- As a result of the Corporate Reorganization, the Consumer Adhesives Sale and distribution of the infrastructure management services business, there are no options on subsidiary stock outstanding as of December 31, 2001. Beginning in 1996, key subsidiaries of the Company issued stock options under their individual Stock Purchase and Option Plans for Key Employees. Under these plans, equity in the Chemical, Consumer Adhesives and infrastructure management services business units was sold to key management personnel. Fixed stock options were granted to purchase additional shares at varying exercise prices between $5.00 and $11.50. In addition, each company granted fixed stock options to employees under their respective broad-based option plans. The options were issued with exercise prices at or above fair value, with vesting over five year and ten year lives.
The options granted to Chemical employees became options of the Company effective with the Corporate Reorganization. The conversion of subsidiary shares and options provided subsidiary management with equivalent intrinsic value at the new measurement date. Accordingly, no compensation expense was recorded. The strike prices of the options have a range of $4.13 to $5.00, which exceeds estimated fair value. As of December 31, 2001 there are 6,871,380 options outstanding on the Company's common stock and no options available for future grants.
The liability for options relating to the Consumer Adhesives business was sold with this business and the liability for options relating to the infrastructure management services business was included in the distribution of this business. The options related to the infrastructure management services business were subsequently exercised upon the sale of that business by the Company's parent.
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Under the provisions of APB No. 25, compensation expense recorded by the Company was $0.1 for 2000. No compensation expense under APB No. 25 was recorded in 2001 nor 1999. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date consistent with the provisions of SFAS No. 123, the Company's net loss and basic and diluted net loss per share would have been the amounts presented below:
The Corporate Reorganization resulted in a new measurement date for these options for purposes of measuring compensation expense. To determine compensation cost according to SFAS No. 123, the fair value of each option was estimated as of the measurement date using the Black-Scholes option-pricing model with a risk free weighted average interest rate of 4.37% and expected lives of five years.
Information regarding the management stock option plans for the Company is as follows:
The option conversion relates to the increase in options as a result of the Corporate Reorganization (see Note 4). Options relating to distributed business represents options for the infrastructure management services business which was distributed to the Company's parent during 2000 (see Note 19).
At December 31, 2001 there were 5,213,104 options exercisable, with a range of exercise prices of $4.13 to $5.00, a weighted average exercise price of $4.26 and a weighted average remaining life of 5 years. At December 31, 2000, there were 2,528,400 options exercisable with a weighted average exercise price of $5.15. At December 31, 1999, there were 1,882,900 options exercisable with a weighted average exercise price of $5.00.
16. DERIVATIVE FINANCIAL INSTRUMENTS
The effect on the Company's other comprehensive income from adoption of SFAS No. 133 as of January 1, 2001 was a charge of $5.3 ($3.3 net of tax), as discussed further in Note 8. As of December 31, 2001, the Company had derivative liabilities of $3.3 classified as other current liabilities.
Interest Rate Swaps - --------------------- The Company enters into interest rate swaps to alter interest rate exposures between fixed and floating rates on long-term debt. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts calculated by reference to an agreed notional principal amount. The notional amount of interest rate swaps was $24.3 at December 31, 2001 and 2000. The remaining swap has a maturity date of December 1, 2002. The net impact of interest rate swaps was an increase in the Company's interest expense of $2.2 in 2001, $6.7 in 2000 and $11.6 in 1999. The year-end fair value of the interest rate swaps was a loss of $2.7 in 2001 and $3.4 in 2000.
The following table summarizes the weighted average interest rates for the swaps used by the Company. Variable rates change with market conditions and may vary significantly in the future. A 1% increase or decrease in market interest rates would result in a $0.2 increase or decrease, respectively, in the fair value of the interest rate swap agreements.
An interest rate swap, having a notional amount of $200.0, no longer met the criteria for hedge accounting and was marked to market prior to termination on September 1, 2000. On that date the Company recognized a gain of $4.9 in the Consolidated Statement of Operations (see Note 3). Unrealized gains on this instrument of $10.8 in 1999 were included in the Consolidated Statement of Operations and other long-term liabilities.
Foreign Exchange - ----------------- International operations account for a significant portion of the Company's revenue and operating income. It is the policy of the Company to reduce foreign currency cash flow exposure due to exchange rate fluctuations by hedging anticipated and firmly committed transactions wherever economically feasible (within the risk limits established in the Company's policy). These contracts are part of a worldwide program to minimize foreign currency exchange operating income and balance sheet exposure.
The Company closely monitors foreign currency cash flow transactions and enters into forward and option contracts to buy and sell foreign currencies only to reduce foreign exchange exposure and protect the U.S. dollar value of such transactions to the extent of the amount under contract.
In accordance with current accounting standards, gains and losses arising from contracts are recognized on a quarterly basis through the Statement of Operations (see Note 3). The Company does not hold or issue derivative financial instruments for trading purposes.
At December 31, 2001 and 2000, the Company had $51.0 and $88.9, respectively, of notional value of forward foreign currency exchange contracts outstanding. The unsecured contracts mature within 12 months and are principally with banks. The Company is exposed to credit loss in the event of non-performance by the other parties to the contracts. The Company evaluates the credit worthiness of the counterparties' financial condition and does not expect default by the counterparties.
Option and Commodity Future Contracts - ----------------------------------------- The Company is exposed to price fluctuations associated with raw materials purchases, most significantly with methanol, phenol and urea. For these commodity raw materials, the Company has purchase contracts, with periodic price adjustment provisions. The Company also adds selling price provisions that are indexed to publicly available indices on customer contracts for these commodity raw materials. The Board of Directors approves of all commodity futures.
In the fourth quarter of 2000, the Company entered into fixed rate, fixed quantity contracts to secure a portion of future natural gas usage at certain of the Company's facilities. The contracts were entered into to partially hedge the Company's risk associated with natural gas price fluctuations in peak usage months through March 2003. Gas purchases under these contracts totaled $0.9 million in 2001, with $1.1 million of future commitments at December 31, 2001.
Due to a sharp increase in natural gas prices in 2000, the Company expanded its natural gas hedging activities in June 2001 to hedge a portion of natural gas purchases for all of North America. The Company entered into futures contracts for the months of June 2001 through March 2002 to purchase natural gas. The contracts are settled for cash each month based on the closing market price on the last day the contract trades on the New York Mercantile Exchange. Commitments settled under these contracts totaled $1.7, with $0.5 of future commitments at December 31, 2001.
Gains and losses on commodity futures contracts are recognized each month as gas is used. Future commitments are marked to market on a quarterly basis. In 2001, the Company realized losses totaling $0.6 million at the expiration of its natural gas futures contracts. The Company also recorded a loss of $0.5 million for the difference between the fair value and carrying value of future natural gas commitments at December 31, 2001.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying or notional amounts and fair values of the Company's financial instruments at December 31, 2001 and 2000. The fair value of a financial instrument is the estimated amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair values are determined from quoted market prices where available or based on other similar financial instruments.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other accruals are considered reasonable estimates of their fair values. The carrying value of the loans receivable from and payable to affiliates approximates fair values as management believes the loans bear interest at market interest rates.
The following table includes financial instrument carrying and fair values for the Company.
18. SUPPLEMENTAL INFORMATION
19. RELATED PARTY TRANSACTIONS
Corporate Reorganization Transactions - --------------------------------------- The Corporate Reorganization included certain financial transactions between the Company and its parent (see Note 4).
Financing and Investing Arrangements - --------------------------------------- In the third quarter 2000 the Company entered into a $40 credit facility with WKI maturing on December 31, 2000. This facility was extended through a series of amendments through April 16, 2001. Effective April 12, 2001 this facility was amended and restated extending the maturity date to March 31, 2004. The facility was further amended effective July 2, 2001 to increase the amount available to $50. In accordance with the terms of the restated and amended agreement, the facility was reduced to $25 on August 16, 2001 with the perfection of certain pledged collateral. The Company received a second priority lien on that same collateral. On September 25, 2001 the Company extended an additional $3 unsecured credit facility to WKI maturing October 25, 2001. That facility was increased to $13 effective October 26, 2001 maturing on December 28, 2001. No borrowings occurred under the unsecured facilities and the facility was transferred to the Company's parent in conjunction with the Corporate Reorganization (see Note 4).
Affiliates of the Company invest cash with the Company at rates that generally approximate market. These investments are recorded in loans payable with affiliates. Foods had $78.6 and $206.9 invested at December 31, 2001 and 2000, respectively. BWHLLC's cash invested with the Company was $73.4 at December 31, 2000. At December 31, 2000, Borden Foods Holdings LLC, Foods' parent, had $2.3 cash invested with the Company and CCPC Acquisition Corp, WKI's parent and an affiliate of the Company's parent, had $0.5 invested with the Company. The Company recorded affiliated interest expense of $12.4, $17.3 and $20.0 related to amounts invested by affiliates during 2001, 2000 and 1999, respectively.
At December 31, 2000, $0.5 of receivables purchased from WKI were outstanding, all of which were collected in January 2001.
As a guarantor of the Company's debt, Foods receives an annual fee from the Company of $1.1.
Administrative Service, Management and Consulting Arrangements - ------------------------------------------------------------------- The Company provides administrative services to Foods and provided services to Wise prior to its sale by BWHLLC. Fees received for these services are offset against the Company's general and administrative expenses, and totaled $3.0, $2.4 and $11.9 for the years ended December 31, 2001, 2000 and 1999, respectively. The amount of services provided was reduced in 2000 with the distribution and sale of the infrastructure management services business (see below).
The Company also renders management, consulting and financial services to Foods for an annual fee of $1.0 payable quarterly in arrears.
Prior to the Corporate Reorganization, the Company rendered management, consulting and financial services to WKI for an annual fee of $2.5. The related receivable at December 31, 2000 was $1.7. WKI also reimbursed the Company for certain expenses incurred on its behalf. The related receivable for these expenses at December 31, 2000 was $0.5.
As a result of the Corporate Reorganization, Capital provides management, consulting and board services to the Company, and the Company provides certain administrative services to Capital. Capital charges the Company an annual fee of $9.0, payable quarterly in arrears, which represents the net amount of Capital's services less the Company's cost of providing administrative services to Capital. At December 31, 2001, $0.8 was included in accounts payable for one month of the annual fee due to Capital under this arrangement.
Prior to the Corporate Reorganization, KKR rendered management, consulting and board services to the Company for an annual fee of $10.0, payable quarterly in arrears. The 2001 fee through the date of the Corporate Reorganization was $9.2. At December 31, 2001, $1.7 is included in accounts payable to Capital for the two months of fourth quarter 2001 fees prior to the Corporate Reorganization. Effective with the Corporate Reorganization, the Company is no longer charged directly for any KKR fees.
The Company incurs certain costs on Capital's behalf and is reimbursed by Capital for 100% of these costs. Included in accounts receivable at December 31, 2001 is a $0.6 receivable for these expenses.
Other Transactions and Arrangements - -------------------------------------- Prior to Consumer Adhesives Sale (see Note 1), the Company and Consumer Adhesives were parties to a tax sharing agreement. Under this agreement, Consumer Adhesives paid income taxes to the Company as if Consumer Adhesives filed stand-alone federal and state income tax returns. At December 31, 2001, the Company had an outstanding receivable from Consumer Adhesives of $6.7 million for unpaid federal and state income taxes .
Included in other assets at December 31, 2000 is $10.9 as a receivable from Foods for its portion of the pension liability. During 2001, the Company received payments of $11.8 from Foods for its portion of the Company's net pension liability. In the fourth quarter of 2001, the Company received $12.3 from Foods to assume the liability for payment of claims made under essentially all of Foods' employee benefit plans. As of December 31, 2001, the Company owed $0.1 to Foods for reimbursement of payments made on its behalf.
As described in Note 5 and in Management's Discussion and Analysis, the Company acquired certain assets from BCP in 2000. A wholly owned subsidiary of the Company serves as the general partner of BCP. The purchase price of these assets is considered to be at fair value as determined by an independent appraisal. During 2001, 2000 and 1999, the Company purchased $11.0, $102.5 and $64.7 of raw materials from BCP. In addition, the Company paid $25.3 in 2000 to BCP to exit certain raw material purchase contracts.
In February 2000, the Company distributed 100% of its ownership in the infrastructure management services business to the Company's parent. The distribution was recorded at net book value of $16.3, including $8.6 owed by the Company to the infrastructure management services business in accordance with a tax sharing agreement. Subsequent to the distribution, substantially all of the assets of the infrastructure management services business were sold to a subsidiary of Interliant, Inc. in exchange for $2.5 in cash and 1,041,179 shares of Interliant, Inc. stock. In June 2000, the remaining net assets of the infrastructure management services business, with a net book value of approximately $0.3, were contributed back to the Company from the Company's parent.
20. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS - The Company like others in similar businesses, is subject to extensive Federal, state and local environmental laws and regulations. Although environmental policies and practices are designed to ensure compliance with these laws and regulations, future developments and increasingly stringent regulation could require the Company to make additional unforeseen environmental expenditures. Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Environmental accruals are routinely reviewed on an interim basis as events and developments warrant and
are subjected to a comprehensive review annually during the fiscal fourth quarter. In addition, under an Environmental Indemnity Agreement (EIA) between the Company and BCP, the Company has agreed, subject to certain conditions and limitations, to indemnify BCP from certain environmental liabilities incurred at BCP facilities, which were previously owned by the Company, on or before November 30, 1987 and share on an equitable basis those arising from facts or circumstances existing and requirements in effect both prior to and after such date. The Company has accrued approximately $41 and $20 at December 31, 2001 and 2000, respectively, for all probable environmental remediation, indemnification and restoration liabilities. This is management's best estimate of these liabilities. Based on currently available information and analysis, the Company believes that it is reasonably possible that costs associated with such liabilities may exceed current reserves by amounts that may prove insignificant, or by amounts, in the aggregate, of up to approximately $30.
LEGAL MATTERS - The Company has recorded $2.8 and $4.1 in liabilities at December 31, 2001 and 2000 respectively, for legal costs in amounts that management believes are probable and reasonably estimable. Actual costs are not expected to exceed these amounts. The Company believes, based upon the information it currently possesses, and taking into account its established reserves for estimated liability and its insurance coverage, that the ultimate outcome of the foregoing proceedings and actions is unlikely to have a material adverse effect on the Company's financial statements.
In 1998, pursuant to a merger and recapitalization transaction sponsored by the Blackstone Group ("Blackstone") and financed by Chase Manhattan Bank ("Chase"), Borden Decorative Products Holdings, Inc. ("BDPH"), a wholly owned subsidiary of the Company, was merged with an acquisition vehicle created by Blackstone, which subsequently merged with Imperial Wallcoverings to create Imperial Home Decor Group ("IHDG"). Blackstone provided $84.5 million in equity and Chase provided $295 million in senior financing. Borden received approximately $314 million in cash and 11% of IHDG common stock for its interest in BDPH. On January 5, 2000, IHDG filed for reorganization under chapter 11 of the U. S. Bankruptcy Code. IHDG emerged from bankruptcy in April 2001. The IHDG Litigation Trust ("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 law suit against the Company and certain of its affiliates seeking to have the IHDG recapitalization transaction avoided as a fraudulent conveyance and asking for a judgment to be entered against the Company for $314.4 million, plus interest, costs and attorney fees. The Company believes it has strong defenses to the Trust's allegations and intends to defend the case vigorously.
OTHER - BCP Management, Inc. ("BCPM"), a wholly owned subsidiary of the Company that serves as the general partner of Borden Chemicals and Plastics Limited Partnership ("BCP"), has certain fiduciary responsibilities to BCP and its operating subsidiary, Borden Chemical and Plastics Operating Limited Partnership ("BCPOLP"). BCP and BCPOLP were created in November 1987, as separate and distinct entities from the Company and BCP is 99% owned by the public. On April 3, 2001, BCPOLP and its subsidiary, BCP Finance Corporation, filed voluntary petitions for protection under Chapter 11 of the United States Bankruptcy Code, Title 11 of the United States Code, in the United States Bankruptcy Court for the District of Delaware. On March 22, 2002, BCPM also filed a voluntary petition for protection under Chapter 11 of the Bankruptcy Code in United States Bankruptcy Court for the District of Delaware. In addition to a $20.0 liability recorded in the fourth quarter of 2000, $10.0 was accrued by the Company in the second quarter of 2001 for potential BCPOLP liabilities.
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents Quarterly Financial Data for the Company:
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Borden Chemical, Inc.
We have audited the accompanying consolidated balance sheets of Borden Chemical, Inc. (formerly Borden, Inc.) (a subsidiary of Borden Holdings, Inc.) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' (deficit) equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Borden Chemical, Inc. and subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Columbus, Ohio
February 22, 2002, except for the fourth paragraph of Note 4 and the fourth paragraph of Note 20, both as to which the date is March 22, 2002.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS - -------- -------------------------------------------------- ON ACCOUNTING AND FINANCIAL DISCLOSURE ------------------------------------------
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - --------- -------------------------------------------------------- Set forth below are the names and ages of the Directors and Executive Officers of the Company as of March 1, 2002, and the positions and offices with the Company currently held by each of them. Their terms of office extend to the next Annual Meeting of the Board of Directors or until their successors are elected.
Served in Age on Present Dec. 31, Position Name Position & Office 2001 Since ---------- ----------------------------- --------- ----- C.R. Kidder Chairman of the Board, Director, Chief Executive Officer 57 1995 H.R. Kravis Director 57 1995 J.K. Saer Director 45 2001 G.R. Roberts Director 58 1995 S.M. Stuart Director 42 1995 B.F. Carroll Director 30 2001 P.J. Norris Director 54 2001 K.M. Kelley Director 43 2001 N.A. Reardon Director 49 2001 W.H. Carter Director, Executive Vice President, and Chief Financial Officer 48 1995 W.F. Stoll, Jr.Director, Executive Vice President and General Counsel 53 1996 T.J. Zappala Executive Vice President 44 2001 J.M. Kaestle Executive Vice President 46 2001
C. Robert Kidder was elected a Director, Chairman of the Board and Chief Executive Officer of the Company on January 10, 1995. Since November 24, 2001 he has been employed as President of Borden Capital, Inc. He is also a director of WKI Holding Company, Inc., Electronic Data Systems Corporation and Morgan Stanley. He is a member of the Executive and Compensation Committees of the Board.
Henry R. Kravis acted as Chairman of the Board of the Company from December 21, 1994, to January 10, 1995. He has been a member of KKR & Co., LLC since 1996, was a General Partner of Kohlberg Kravis Roberts & Co. from its establishment through 1995 and has been a General Partner of KKR Associates, L.P. since its establishment. He is also a Director of Accuride Corporation, Alliance Imaging, Inc., Amphenol Corporation, The Boyds Collection, Ltd., Evenflo Company Inc., The Gillette Company, IDEX Corporation, KinderCare Learning Centers, Inc. KSL Recreation Corporation, PRIMEDIA Inc., Regal Cinemas, Inc., Sotheby's Holdings, Inc., Spalding Holdings Corporation, and Willis Group Holdings Limited. He is a member of the Executive Committee of the Board. Messrs. Kravis and Roberts are first cousins.
John K. Saer was elected a director of the Company November 20, 2001. He has been a director with Kohlberg Kravis Roberts & Co. since January 2001. Prior to that, from 1996 to December 2000 he was Chief Financial Officer of KSL Recreation Corp. He is a member of the Executive and Compensation Committees and Chairman of the Audit Committee of the Board.
George R. Roberts has been a member of KKR & Co., LLC since 1996, was a General Partner of Kohlberg Kravis Roberts & Co. from its establishment through 1995, and has been a General Partner of KKR Associates, L.P. since its establishment. He is also a Director of Accuride Corporation, Amphenol Corporation, The Boyds Collection, Ltd., DPL, Inc., Evenflo Company Inc., IDEX Corporation, KinderCare Learning Centers, Inc., KSL Recreation Corporation, Owens-Illinois, Inc., PRIMEDIA Inc., Safeway, Inc., and Spalding Holdings Corporation. Messrs. Kravis and Roberts are first cousins.
Scott M. Stuart has been a member of KKR & Co., LLC since 1996. He began his employment with Kohlberg Kravis Roberts & Co. as an Executive in 1986. He is also a Director of AEP Industries, Inc., The Boyds Collection, Ltd., DPL, Inc. and WKI Holding Company, Inc. He is a member of the Executive Committee of the Board.
Brian F. Carroll was elected a Director of the Company November 20, 2001. He has been an executive with Kohlberg Kravis Roberts & Co., since July 1999, and before that, from March 1995 to July 1997. He is also a director of Spalding Holdings Corporation and WKI Holding Company, Inc. He is Chairman of the Compensation Committee and a member of the Audit Committee of the Board.
Paul J. Norris was elected a director of the Company November 20, 2001. He was elected President and Chief Executive Officer of W.R. Grace & Co. in November 1998 and became Chairman in January 1999. Prior to joining W.R. Grace & Co., he was Senior Vice President of Allied Signal Incorporated and served as President of its specialty chemicals business from 1997 to November 1998. He is a member of the Audit and Executive Committees of the Board.
Kevin M. Kelley served as Executive Vice President, Corporate Strategy and Development from April 5, 1999 to November 24, 2001. Since November 24, 2001 he has been employed as Executive Vice President and Treasurer of Borden Capital, Inc. He was elected a director of the Company November 20, 2001. From April 1996 to March 1999, he was Managing Director of Ripplewood Holdings LLC. He is also a director of WKI Holding Company, Inc. and AEP Industries, Inc. He is a member of the Executive Committee of the Board.
Nancy A. Reardon served as Senior Vice President, Human Resources and Corporate Affairs from March 3, 1997 to December 2000 and Executive Vice President from December 2000 to November 24, 2001. Since November 24, 2001 she has been employed as Executive Vice President of Borden Capital, Inc. Ms. Reardon was elected a director of the Company November 20, 2001. She was Senior Vice President - Human Resources and Communications for Duracell International, Inc. from 1991 through February 1997. She is also a director of WKI Holding Company, Inc. She is a member of the Compensation Committee of the Board.
William H. Carter was elected Executive Vice President and Chief Financial Officer effective April 3, 1995 and a director November 20, 2001. He is also a director of BCP Management, Inc. (the General Partner of Borden Chemicals and Plastics Limited Partnership) and WKI Holding Company, Inc.
William F. Stoll, Jr. was elected Senior Vice President and General Counsel effective July 1, 1996 and promoted to Executive Vice President in December 2000. He was elected a director of the Company November 20, 2001. Prior to joining the Company in 1996 he was a Vice President of Westinghouse Electric Corporation, and served as its Deputy General Counsel from 1988 to 1996. He is also a director of BCP Management, Inc. (the General Partner of Borden Chemicals and Plastics Limited Partnership) and AEP Industries, Inc.
Timothy J. Zappala was elected an Executive Vice President of the Company November 24, 2001. He joined Borden Chemical, Inc. in May 1998 as Vice President and General Manager - Melamine Resins and Derivatives business unit. In July 1999 he was elected Executive Vice President- Foundry & Industrial Products (which later combined with the Melamine crystal and resins and UV Coatings and Inks businesses to become the Performance Resins Group). Prior to joining the Borden Chemical, Inc., he was Vice President & General Manager of the Polymers Division of Hampshire Chemical Corp, a subsidiary of Dow Chemical Company, from 1996 to May 1998.
John M. Kaestle was elected an Executive Vice President of the Company November 24, 2001. He joined Borden Chemical, Inc. in March 2001 as Executive Vice President - Forest Products Group. Prior to joining Borden Chemical, Inc., he served as Vice President Containerboard Sales and Logistics, and Chief Financial Officer, Containerboard Packaging and Recycling Division of Weyerhauser Company, from 1981 to 2001.
The Long-Term Incentive Plans-Awards In Last Fiscal Year table is not included since the Registrant has no long-term incentive plan.
Retirement Benefits - -------------------- The Borden Employees Retirement Income Plan ("ERIP") for salaried employees was amended as of January 1, 1987, to provide benefit credits of 3% of earnings which are less than the Social Security wage base for the year plus 6% of earnings in excess of the wage base. Earnings include annual incentive awards paid currently but exclude any long-term incentive awards. Benefits for service through December 31, 1986, are based on the plan formula then in effect and have been converted to opening balances under the plan. Both opening balances and benefit credits receive interest credits at one-year Treasury bill rates until the participant commences receiving benefit payments. For the year 2001, the interest rate as determined in accordance with the plan language was 6.11%. Benefits vest after completion of five years of employment for employees hired on or after July 1, 1990.
The Company has supplemental plans which will provide those benefits which are otherwise produced by application of the ERIP formula, but which, under Section 415 or Section 401 (a)(17) of the Internal Revenue Code, are not permitted to be paid through a qualified plan and its related trust. The supplemental plan also provides a pension benefit using the ERIP formula based on deferred incentive compensation awards and certain other deferred compensation, which are not considered as part of compensation under the ERIP. The total projected annual benefits payable under the formulas of the ERIP at age 65 without regard to the Section 415 or 401(a)(17) limits and recognizing supplemental pensions as described above, are as follows for the Named Executive Officers of the Company in 2001: W. H. Carter - $129,406, C. R. Kidder - $183,995, N. A. Reardon - $45,787, K.M. Kelley - $124,901, M.E. Ducey - $90,042, W.F. Stoll - $63,874 (not including the special employment contract benefit described below) and J.M. Kaestle - $37,117.
The Company has a special retirement arrangement with Mr. Stoll, Executive Vice President and General Counsel. Under this arrangement, the Company will calculate the benefit Mr. Stoll would have received from his former employer, using predetermined assumptions, and deduct from this amount the retirement benefits accrued under the Borden Retirement Programs. Any shortfall in benefits will be paid by the Company as a non-qualified benefit. Special provisions also apply in the event of death or disability.
In addition, certain Executive Officers receive Company matching contributions on the first 7% of contributions to the Retirement Savings Plan. Company matching contributions on employee contributions in excess of 5% are provided under the supplemental plans. This benefit is not provided if the executive has any other pension benefit guarantee.
Compensation of Directors - --------------------------- In 2001, each director who was not an employee of the Company receive an annual retainer of $45,000. Directors who were also employees of the Company were not entitled to remuneration for serving as directors. No additional compensation was provided for committee participation or special assignments.
Directors who served prior to March 15, 1995 and who were not employees of the Company are provided, upon attaining age 70, annual benefits through a funded grantor trust equal to their final annual retainer if they served in at least three plan years. Such benefits can continue for up to 15 years .
Employment, Termination and Change in Control Arrangements - ---------------------------------------------------------------- Mr. Ducey has an arrangement with the Company that provides for continuation of his annual salary for two years following his termination date of March 31, 2002. The agreement also provides for payment of incentive compensation earned in 2001, unused vacation, a perquisite allowance and an amount for relocation, and provides specific detail on the continuation or termination of other benefits. The Company will repurchase Mr. Ducey's equity ownership based upon a value calculated at the end of February. The agreement also contains a non-compete provision.
The Company has arrangements with Mr. Stoll and Mr. Carter providing for enhanced severance upon termination of employment.
Compensation Committee Interlocks and Insider Participation - ---------------------------------------------------------------- Messrs. Carroll and Saer are members of the Company's Compensation Committee. Both are employees of Kohlberg Kravis Roberts & Co. See "Certain Relationships and Related Transactions." Mr. Kidder, Chairman and Chief Executive Officer of the Company, is also a member of the Compensation Committee.
ITEM 11. EXECUTIVE COMPENSATION - --------- -----------------------
The options/SAR Grants in last fiscal year table has been omitted since no options were granted in 2001.
The following table provides certain summary information concerning compensation of the Company's Chief Executive Officer and the four other most highly compensated Executive Officers as of December 31, 2001 (the "Named Executive Officers") for the periods indicated.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL - --------- -------------------------------------------- OWNERS AND MANAGEMENT -----------------------
The following table sets forth certain information regarding the beneficial ownership of the Registrant's Common Stock and other equity securities issued by affiliated entities, as of March 1, 2002, by (a) persons known to the Registrant to be the beneficial owners of more than five percent of the outstanding voting stock of the Registrant, (b) each director of the Registrant, (c) each of the Named Executive Officers of the Registrant during the 2001 fiscal year of the Registrant and (d) all directors and executive officers of the Registrant as a group. Except as otherwise noted, the persons named in the table below have sole voting and investment power with respect to all securities shown as beneficially owned by them.
Name of Beneficial Ownership Beneficial Owner of Equity Securities - ------------------- ------------------------------ Shares/Units Percent ------------ -------
KKR Associates (1) 198,974,994 98.75 9 West 57th Street New York, New York 10019 C. Robert Kidder 369,569(2) * Henry R. Kravis(1) -- * George R. Roberts(1) -- * Scott M. Stuart(1) -- * Brian F. Carroll -0- * John K. Saer -0- * Paul J. Norris -0- * Michael E. Ducey 1,032,300(3) William H. Carter 120,481(2) * Kevin M. Kelley 120,481(2) * Nancy A. Reardon 120,481(2) * William F. Stoll, Jr. 120,481(2) * John M. Kaestle -0- All Directors and Executive Officers as a group(4) (4) *
*Beneficial ownership does not exceed 1.0% of the respective class of securities
(1) The Registrant's Common Stock shown as beneficially owned by KKR Associates is directly held by Borden Holdings, Inc., a Delaware corporation which is wholly owned by BW Holdings, LLC, a Delaware limited liability company, the managing member of which is a limited partnership, of which KKR Associates is the sole general partner and as to which it possesses sole voting and investment power. KKR Associates is also the beneficial owner of 632,000,000 units of BW Holdings, LLC. KKR Associates is a limited partnership of which Messrs. Edward A. Gilhuly, Perry Golkin, James H. Greene, Jr., Henry R. Kravis, Robert I. MacDonnell, Michael W. Michelson, Paul E. Raether, George R. Roberts, Scott M. Stuart and Michael T. Tokarz are the general partners. Such persons may be deemed to share beneficial ownership of the shares shown as owned by KKR Associates. The foregoing persons disclaim beneficial ownership of any such shares. (2) Represents units in BW Holdings, LLC. (3) As of March 1, Mr. Ducey beneficially owned 31,500 shares of common stock of the Registrant, and 1,000,800 shares subject to currently exercisable stock options and warrants. (4) Equity securities beneficially owned by all directors and executive officers as a group consist of: 851,493 units of BW Holdings, LLC., 35,000 shares of the Registrant, and 1,100,880 shares of the Registrant subject to currently exercisable options and warrants.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - --------- --------------------------------------------------
All of the Company's common stock is owned by a holding company which is owned by an affiliate of KKR Associates, a New York limited partnership of which Messrs. Edward A. Gilhuly, Perry Golkin, James H. Greene, Jr., Henry R. Kravis, Robert I. MacDonnell, Michael W. Michelson, Paul E. Raether, George R. Roberts, Scott M. Stuart and Michael T. Tokarz are the general partners. KKR Associates has sole voting and investment power with respect to such shares. Messrs. Kravis, Roberts and Stuart are directors of the Company.
Through November 24, 2001, KKR rendered management, consulting and financial services to the Company and its businesses for $9.2 million, payable quarterly in arrears. Messrs. Kravis, Roberts, and Stuart are general partners of KKR.
In 2000, the Company made a loan to Mr. Carter, Executive Vice President and Chief Financial Officer, in the amount of $375,000, of which $225,000 is secured with a mortgage on his residence. The interest rate applicable to the loan is prime less .25%. As of December 31, 2001, the full amount of the loan was outstanding, plus accrued interest of $35,232.
Pursuant to his terms of employment in 1999, Mr. Kelley received a loan from the Company in the amount of $675,000. The principal and accrued interest are payable upon termination of employment, only if such termination occurs prior to April 4, 2002, and only to the extent of amounts not forgiven. As of December 31, 2001, two-thirds of the loan had been forgiven.
The Company entered into an agreement effective Nov. 24, 2001 with Borden Capital, Inc., a subsidiary of the Company's parent, for the provision of management services by Capital to the Company and for the provision of administrative services by the Company to Capital. The cost of these services is a net expense to the Company of $9 million payable quarterly in arrears. Messrs. Kidder, Kelley and Ms. Reardon, directors of the Company, are officers of Capital.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - --------- -------------------------------------------------------------------
(a) List of documents filed as part of this report ----------------------------------------------
1. Financial Statements ---------------------
All financial statements of the registrant are set forth under Item 8