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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
COMMISSION FILE NO. 1-9699
BORDEN CHEMICALS AND PLASTICS
LIMITED PARTNERSHIP
DELAWARE 31-1269627
(STATE OF ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
HIGHWAY 73, GEISMAR, LOUISIANA 70734 504-673-6121
(ADDRESS OF PRINCIPAL EXECUTIVE (REGISTRANT'S TELEPHONE NUMBER)
OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
Depositary Units Representing Common Units New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein. [X]
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Aggregate market value in thousands of the Common Units held by non-
affiliates of the Registrant based upon the average sale price of such Units on
February 10, 1995 is $766,255.
Number of Common Units outstanding as of the close of business on February
10, 1995: 36,750,000.
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The Exhibit Index is located herein at sequential page 33.
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PART I
Item 1. Business
General
Borden Chemicals and Plastics Limited Partnership (the "Registrant" or
"Partnership"), a Delaware limited partnership, was formed in 1987 when the
Partnership, through Borden Chemicals and Plastics Operating Limited
Partnership, its subsidiary operating partnership (the "Operating
Partnership"), acquired the basic chemicals and polyvinyl chloride ("PVC")
resins operations of Borden, Inc. ("Borden") located at Geismar, Louisiana and
Illiopolis, Illinois. Any reference to business and transactions of the
Partnership included in this Form 10-K Annual Report includes, where
applicable, business and transactions of the Operating Partnership.
The three principal product groups manufactured at the Partnership's
facilities are (i) PVC Polymers Products, which consist of PVC resins and
feedstocks (such as vinyl chloride monomer ("VCM") and acetylene), (ii)
Methanol and Derivatives, which consist of methanol and formaldehyde, and (iii)
Nitrogen Products, which consist of ammonia and urea. During 1994, PVC Polymers
Products, Methanol and Derivatives and Nitrogen Products accounted for 53%, 36%
and 11%, respectively, of the Partnership's revenues.
The Partnership and Borden have entered into agreements which require Borden,
subject to the terms and conditions contained in the agreements, to purchase
from the Partnership at least 85% of Borden's requirements for PVC resins,
methanol, ammonia and urea and to utilize certain percentages of the
Partnership's capacity to process formaldehyde and urea-formaldehyde
concentrate. The Partnership believes that the pricing formulae set forth in
such agreements have in the past produced aggregate prices and processing
charges for the covered products that over time have approximated the aggregate
prices and processing charges that Borden would have been able to obtain from
unaffiliated suppliers, considering the magnitude of Borden's purchases, the
long-term nature of such agreements and other factors. The Partnership believes
that this will continue to be the case in the future. There may be conditions
prevailing in the market at various times, however, under which the prices and
processing charges under these agreements could be higher or lower than those
obtainable from unaffiliated third parties. Sales to Borden represented 22% of
total Partnership revenues in 1994. For a discussion of the recent change of
control of Borden see "Recent Developments".
In August 1994, the Partnership announced that the Operating Partnership had
entered into an agreement with Occidental Chemical Corporation ("OxyChem") to
acquire a PVC resin production facility located in Addis, Louisiana (the "Addis
Facility") and certain related assets (together with the Addis Facility, the
"Addis Assets"). Upon completion of such acquisition, the Partnership's stated
annual capacity for the production of PVC resin is expected to increase by over
50% to 1.33 billion pounds and the Partnership will be the fifth largest
producer of PVC resins in the United States. The acquisition is subject to
certain conditions, including approval by the U.S. Federal Trade Commission and
the financing of the acquisition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Proposed Acquisition and Financing".
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The Partnership's production complex at Geismar, Louisiana, and a plant at
Illiopolis, Illinois, produce products for the following applications:
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PRODUCTS LOCATION PRINCIPAL APPLICATIONS
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<C> <C> <S>
PVC POLYMERS PRODUCTS
PVC Geismar Water distribution pipe, residential
Illiopolis siding, wall-coverings, vinyl flooring
VCM Geismar Raw material for the Partnership's PVC
operations
Acetylene Geismar Raw material for the Partnership's VCM
operations
METHANOL AND DERIVATIVES
Methanol Geismar Formaldehyde, methyl tertiary butyl
ether ("MTBE"), adhesives and fibers or
raw materials for the Partnership's
formaldehyde operations
Formaldehyde Geismar Pressed wood products, adhesives, fibers
NITROGEN PRODUCTS
Ammonia Geismar Fertilizers, fibers, plastics,
explosives
Urea Geismar Fertilizers, animal feeds, adhesives,
plastics
</TABLE>
Upon consummation of the acquisition of the Addis Assets, the Partnership's
production facilities will also include the Addis Facility. Principal
applications for PVC resins produced at the Addis Facility include calendared
products for blister packaging, rigid pipe, and injection molded plastic water
pipe fittings.
PVC Polymers Products
PVC Resins. PVC is the second largest volume plastic material produced in the
world. The Partnership produces general purpose and specialty purpose PVC
resins at two plants--one located at the Geismar complex and another at
Illiopolis--with stated annual capacities of 500 million and 380 million pounds
of PVC resins, respectively. The PVC resin plants operated at approximately
107% of combined capacity in 1994. Although there have been year-to-year
fluctuations in product mix, the Partnership has over time concentrated on the
higher margin grades of PVC resin and reduced its dependence on commodity pipe
grade PVC resins, which have historically experienced lower margins.
The PVC resin industry has experienced strong demand for two years. Producer
inventories have been reduced to minimal levels, while plants are operating at
maximum capacities. As a result, published prices for PVC resins have increased
from an average of $0.320 per pound during the fourth quarter of 1993 to an
average of $0.422 per pound during the fourth quarter of 1994.
During 1994, approximately 12% of the Partnership's total production of PVC
resins was sold to Borden for use in its downstream vinyl conversion
operations. The balance was purchased by many small customers, none of which
accounted for more than 8% of total sales dollars. Unless there is a shortage
of PVC resin capacity, demand for PVC resins generally tends to be seasonal
with higher demand during spring months and lower demand during winter months.
Production Process. PVC resins are produced by the polymerization of VCM, a
raw material produced by the Partnership. The production by the Partnership of
certain specialty grades of PVC resins also involves the use of certain
quantities (approximately 8.0 million pounds annually) of vinyl acetate
monomer, a raw material not produced by the Partnership. The Partnership
purchases quantities of vinyl acetate monomer
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from Borden (which in turn purchases such raw material in bulk from third
parties) or from unrelated third parties. Purchases from Borden have been and
will be at prices that do not exceed the market price of vinyl acetate monomer.
All the VCM used by the Partnership's Geismar and Illiopolis PVC resin plants
is obtained from the Partnership's two Geismar VCM plants discussed below.
During 1994, substantially all of the production of such VCM plants was
consumed by the Partnership's PVC resins plants at Geismar and Illiopolis. The
Geismar PVC resin plant obtains VCM from the Partnership's adjacent VCM plants
in the Geismar complex and the Illiopolis PVC resin plant obtains VCM from the
Partnership's Geismar plant via rail. The VCM requirement at the Addis Facility
is currently supplied by OxyChem which has arranged for physical delivery to
the Addis Facility by pipeline via exchange, but may also be supplied by rail
car from OxyChem's plant in Deer Park, Texas or from OxyChem's joint venture
facility (OxyMar) in Corpus Christi, Texas.
VCM is principally used in the production of PVC resins. The Partnership
produces VCM by two processes: an ethylene process and an acetylene process.
The finished product of both of those processes is essentially identical but
the production costs vary depending on the cost of raw materials and energy.
The ability to produce VCM by either process allows the Partnership the
flexibility of favoring the process that results in the lower cost at any
particular time. The Partnership is currently operating at full capacity;
consequently, the Partnership is producing VCM by both processes.
Ethylene-Based VCM. Ethylene-based VCM ("VCM-E") is produced by the
Partnership at a 630 million pound stated annual capacity plant at the Geismar
complex. The plant operated at approximately 103% of capacity during 1994.
During 1994, substantially all of the production of the VCM-E plant was
consumed by the Partnership's PVC resin plants at the Geismar complex and
Illiopolis.
Ethylene and chlorine constitute the principal feedstocks used in the
production of VCM-E. Both feedstocks are purchased by the Geismar plant from
outside sources.
Acetylene-Based VCM. Acetylene-based VCM ("VCM-A") is produced at a 320
million pound stated annual capacity plant at the Geismar complex. The plant
operated at approximately 88% of capacity during 1994. During 1994, all of the
VCM-A produced at the Geismar complex was consumed by the PVC resin plants at
Geismar and Illiopolis.
The Geismar complex contains the only VCM-A plant in the United States. The
integration of the
VCM-A plant with the other plants on site provides stability, cost and
efficiency benefits to the plants located at the Geismar complex. Although
ethylene has generally been regarded as a lower cost feedstock for the
production of VCM, the VCM-A plant reduces the overall processing costs of the
Geismar complex because the acetylene plant produces as a by-product acetylene
off-gas, which is used as a feedstock in the production of methanol. In
addition, hydrochloric acid, a feedstock used in the production of VCM-A, is
produced as a by-product by the adjacent VCM-E plant. Furthermore, certain
industrial plants located near the Geismar complex have excess supplies of
hydrochloric acid that the Partnership is generally able to purchase at
relatively low cost.
In addition to hydrochloric acid, acetylene is a primary feedstock used in
the production of VCM-A.
Acetylene. Acetylene is primarily used as a feedstock for VCM-A and for other
chemical intermediates. The Partnership has a 50% interest in a 200 million
pound stated annual capacity acetylene plant at the Geismar complex, with the
remaining 50% interest held by BASF Corporation ("BASF"). The plant was
operated at approximately 96% of capacity during 1994, with all production
being consumed by either the Partnership or BASF.
During 1994, approximately 64% of the production of the acetylene plant was
used internally as a principal feedstock of the Geismar VCM-A plant. BASF
accounted for approximately 36% of the plant's 1994 production, less than its
full 50% share of production. Acetylene not required by BASF is available to
the Partnership at cost. It is anticipated that excess acetylene will be
available at cost to the Partnership through at least 1995.
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The principal feedstocks used in the production of acetylene are natural gas
and oxygen. Oxygen is obtained from certain air separation units and related
air compression systems, which are jointly owned by the Operating Partnership,
BASF and Air Liquide America Corporation pursuant to joint venture
arrangements. For a description of the Partnership's arrangements for the
purchase of natural gas, see "Raw Materials".
As long as a subsidiary of Borden is the general partner of the Partnership,
the plant will be operated and managed by employees of such general partner
pursuant to an operating agreement with BASF. The agreement provides that, if a
Borden subsidiary ceases to be the general partner, BASF will have the
exclusive right to become the operator of the plant and the personnel necessary
to operate the plant with be encouraged to accept employment with BASF. The
Partnership's interest in the acetylene plant and the air separation systems is
subject to certain rights of first refusal and limitations on transfer. In
addition, the Partnership and the third parties who hold the other interests in
such assets have mutual rights under certain circumstances, to require the
other party to purchase its interests.
Methanol and Derivatives
Methanol. Methanol is used primarily as a feedstock in the production of
other chemicals. Such chemicals include formaldehyde, which is used in the
manufacture of wood building products and adhesives, and MTBE, which is used as
a gasoline additive. Methanol is produced at a 300 million gallon stated annual
capacity plant at the Geismar complex. The plant operated at approximately 102%
of capacity during 1994.
Market conditions for methanol have improved significantly due to limited
growth in the supply of methanol and industry consolidation during the past
several years as well as strong demand for MTBE and formaldehyde. Since the
second quarter of 1993, production outages in the United States and Europe have
tightened the supply of methanol. The Partnership and many of its competitors
have taken steps to expand their methanol capacity through various plant and
process improvements, and certain competitors have also announced plans to
increase their methanol capacity through plant expansion. By the end of 1995,
the Partnership anticipates completing an expansion of its methanol plant that
it expects will increase annual stated methanol capacity by 30 million gallons.
In 1994, approximately 45% of methanol production was sold to third parties
(other than Borden). Borden accounted for approximately 32% of such production
for its downstream formaldehyde production. Approximately 19% of production was
used internally in the production of formaldehyde and the remaining
approximately 4% was used primarily to satisfy tolling and exchange
arrangements. No customer (other than Borden) accounted for more than 16% of
total methanol sales dollars in 1994.
The primary raw material feedstock used in the production of methanol is
natural gas. The efficiency of the Geismar methanol plant has been enhanced by
using the by-product of the Geismar acetylene plant, acetylene off-gas, as a
partial substitute feedstock for purchased natural gas. Natural gas represented
approximately 69% of the Partnership's total cost of producing methanol during
1994.
Formaldehyde. Formaldehyde is a chemical intermediate used primarily in the
production of plywood and other pressed wood products. The Partnership produces
50%-concentration formaldehyde (which is 50% formaldehyde and 50% water) at
three units in the Geismar complex. The formaldehyde plants have stated annual
capacities of 270 million, 190 million and 180 million pounds per year,
respectively, for the 50%-concentration formaldehyde. During 1994, the three
plants operated at approximately 99% of combined capacity. The smaller plant is
also capable of producing urea-formaldehyde concentrate for the fertilizer
industry. If operated for production of urea-formaldehyde, the smaller plant's
stated annual capacity would be 125 million pounds.
Formaldehyde demand is generally influenced by the construction industry and
housing starts. Total United States production capacity of 50%-concentration
formaldehyde is approximately 7.4 billion pounds,
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with the formaldehyde units at the Geismar complex representing 640 million
pounds (approximately 9%) of such total.
During 1994, approximately 42% of formaldehyde production was sold to Borden
and approximately 4% was utilized by the Partnership in the production of urea-
formaldehyde concentrate for the fertilizer industry. The remaining 54% was
purchased by an unaffiliated third party pursuant to a ten-year supply contract
signed in 1989. The contract requires the Partnership to supply in the future
up to 78% of its annual capacity to the third party to the extent necessary to
satisfy that party's formaldehyde requirements.
The principal feedstock used in the production of formaldehyde is methanol.
The Geismar formaldehyde plants obtain all of such feedstock from the adjacent
methanol plant.
Acetic Acid--The plant has been idle since March 1989 and will remain idle
until market conditions justify restarting it. The net book value of the plant
has been written off.
Nitrogen Products
Ammonia. Ammonia is a commodity chemical which is used primarily for
fertilizer applications and as an intermediate for other agricultural chemicals
such as pesticides and herbicides. Approximately 85% of domestic ammonia
production is consumed directly or indirectly in fertilizer applications. The
Partnership produces ammonia at a 400,000 ton stated annual capacity plant
located at the Geismar complex. The plant operated at approximately 96% of
capacity during 1994.
In the latter half of 1993 and continuing throughout 1994, the worldwide
supply of ammonia experienced a series of disruptions and reductions due to
plant shutdowns, operating problems and interruptions in the supply of natural
gas, the primary feedstock in the production of ammonia. At the same time,
demand for ammonia, particularly in Asia (China, India and Pakistan), increased
for both industrial and fertilizer applications. These factors combined to
cause occasional shortages of ammonia in the United States, which is a net
importer of nitrogen products, and increasing selling prices for ammonia.
Demand for ammonia is seasonal, with prices tending to be higher in the
spring and fall months than during the remainder of the year. In addition,
fertilizer demand is sharply affected by swings in crop acreage.
During 1994, approximately 64% of ammonia production was sold to third
parties (other than Borden), approximately 34% of production was used by the
Partnership's adjacent urea plant, and approximately 2% of total production was
sold to Borden. During 1994, five customers accounted for approximately 71% of
total sales dollars with no customer accounting for more than 19% of total
sales dollars.
The principal feedstock used in the production of ammonia is natural gas. Two
by-products of the production of ammonia are carbon dioxide and low pressure
steam. The ammonia plant supplies the carbon dioxide to the urea and methanol
plants and the steam to the plant-wide supply grid.
Urea. Urea is a commodity chemical which is used primarily in fertilizer
applications. Approximately 80% of domestic production of urea is consumed in
fertilizer applications. Urea's high nitrogen content (46%) makes it an
effective and popular dry nitrogen fertilizer. In addition, urea is used in the
production of animal feed and pesticides. Outside the agricultural chemical
industry, urea is used largely in the production of urea-formaldehyde resins
used in the wood building products industry.
The Partnership produces urea at a 250,000 ton stated annual capacity plant
at the Geismar complex. In 1993 the Partnership converted the plant to produce
granular urea, a widely accepted form of urea product. The plant operated at
approximately 91% of capacity in 1994.
Because of the importance of the agricultural chemical industry as a market
for urea, demand is affected sharply by swings in crop acreage. In addition,
like ammonia, demand for urea is seasonal, with prices tending to be higher in
the spring and fall months than during the remainder of the year. Worldwide
urea production has expanded rapidly over the past 20 years, particularly in
countries with abundant supplies of low cost
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natural gas. Like ammonia, urea demand has suffered during recent years from
reduced United States fertilizer demand. It has also been affected even more
severely than ammonia by imports from third world countries because storage and
shipping of urea are easier and less costly than in the case of ammonia.
Competition from imports has moderated recently as the declining value of the
United States dollar has made United States markets less attractive.
Urea prices remained stable in 1994 due to many of the same factors which
influenced the price of ammonia. However, unlike ammonia, the supply of urea
has increased during this time period as several new world scale plants came on
stream. This factor has kept urea prices at relatively stable levels in spite
of the increasing demand.
During 1994, approximately 62% of the Partnership's urea was sold to third
parties, approximately 36% to Borden, and the remaining approximately 2% was
used internally by the Partnership in the production of urea-formaldehyde
concentrate.
The principal feedstocks used in the production of urea are ammonia and
carbon dioxide, which the Partnership obtains from its adjacent ammonia plant.
Raw Materials
The principal purchased raw material used in the Partnership's operations is
natural gas. In 1994, the Partnership purchased over 60 billion cubic feet of
natural gas for feedstock and as an energy source. Currently, the Partnership
is one of the largest industrial purchasers of natural gas in the state of
Louisiana. Natural gas is supplied by pipeline to the Geismar complex by six
major natural gas pipelines. In 1994, natural gas represented 37%, 63% and 69%
of total production costs for acetylene, ammonia and methanol, respectively,
and 31% of the Partnership's total production costs. The Partnership purchases
the majority of its natural gas under long-term, market sensitive supply
contracts. The cost of purchasing natural gas is, in general, greater in winter
months, reflecting increased demand for natural gas by consumers and industry
during such months. Although the Partnership has diversified its suppliers and
does not currently anticipate any difficulty in obtaining adequate natural gas
supplies, there can be no assurance that the Partnership will in the future be
able to purchase adequate supplies of natural gas at acceptable price levels.
The Partnership purchases other raw materials in its operations, principally,
ethylene and chlorine. Ethylene is currently supplied by pipeline to the
Geismar complex by three suppliers. Chlorine is supplied by railcar to the
Geismar complex by various suppliers. The major raw material for the Illiopolis
PVC plant, VCM, is supplied by railcar from the Geismar complex. In addition,
in connection with the production of certain specialty grades of PVC resins,
the Partnership purchases certain quantities of vinyl acetate monomer. See "PVC
Polymers Products--PVC Resins". The Partnership anticipates purchasing its VCM
requirements for the Addis Facility under the VCM Supply Agreement to be
entered into between the Operating Partnership and OxyChem at the closing of
the acquisition of the Addis Facility. The Partnership does not believe that
the loss of any present supplier would have a material adverse effect on the
production of any particular product because of numerous, competitive alternate
suppliers.
Because raw materials have accounted for a high percentage of the
Partnership's total production costs, and are expected to continue to represent
a high percentage of such costs for the Partnership, the Partnership's ability
to pass on increases in costs of these raw material feedstocks will have a
significant impact on operating results. The ability to pass on increases in
feedstock and fuel costs is, to a large extent, dependent on market conditions.
Because of the large volume of purchases of natural gas, any increase in the
price of natural gas or a shortage in its availability could materially
adversely affect the Partnership's income and cash flow and its ability to make
distributions and service its debt obligations.
Insurance
The Partnership maintains property, business interruption and casualty
insurance which it believes is in accordance with customary industry practices,
but it is not fully insured against all potential hazards incident
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to its business. The Partnership also maintains pollution legal liability
insurance coverage. However, because of the complex nature of environmental
insurance coverage and the rapidly developing case law concerning such
coverage, no assurance can be given concerning the extent to which its
pollution legal liability insurance, or any other insurance that the
Partnership has, may cover environmental claims against the Partnership.
Insurance, however, generally does not cover penalties or the costs of
obtaining permits. See "Legal Proceedings".
The Partnership's insurance is currently included in Borden's master
insurance program although it may be separate from such master insurance
program in the future if BCP Management, Inc. ("BCPM"), the general partner of
the Partnership (the "General Partner") so determines. The Partnership believes
that the terms and premiums for the insurance obtained through Borden's program
are no less favorable than those generally available through an independent
program. All costs of the insurance program, including but not limited to
premiums, service fees, deductible losses, and uninsured loss amounts, are
direct operating expenses of the Partnership and are payable by the
Partnership. At the closing of the acquisition, the Addis Facility will be
included in the Partnership's insurance program.
Marketing
The Partnership's PVC resin sales are conducted through a professional staff
of approximately nine trained personnel geographically located in nine
territories, supported by a regional sales office located in Northbrook,
Illinois. In addition to the regional sales managers, there are three product
sales managers performing marketing functions. All are employees of Borden or
the General Partner. Following the acquisition of the Addis Facility, all sales
and marketing of PVC resins produced at the Addis Facility will be consolidated
with the Partnership's existing marketing organization.
The Partnership's other products are similarly marketed through a
professional field sales organization of three employees and two additional
marketing managers under the management of the director of non-PVC resins sales
and marketing located at Geismar. The professionals involved in this sales
function are geographically positioned in three locations covering the United
States.
The Partnership's activity is based on customer contact on a regular basis to
secure and maintain long-term supply relationships. A substantial portion of
the Partnership's sales is made under contracts with annual negotiations
relating to specific conditions of sale.
Purchase and Processing Agreements
In connection with the formation of the Partnership in 1987, Borden entered
into certain Purchase Agreements and Processing Agreements with the Operating
Partnership covering the following products: PVC resins, methanol, ammonia,
urea, formaldehyde and urea-formaldehyde concentrate. The Purchase and
Processing Agreements expire in November, 2002, subject to termination by
Borden under certain circumstances where BCPM ceases to be the general partner
of the Partnership.
The Purchase Agreements require Borden to purchase from the Partnership and
the Partnership to supply to Borden, subject to certain monthly quantity
limits, at least 85% (and at the option of Borden up to 100%) of the quantities
of PVC resins, methanol, ammonia and urea required by Borden for use in its
plants in the continental United States. Under the Purchase Agreements, the
price for PVC resins, ammonia, urea and methanol will generally be an amount
equal to the monthly weighted average price per unit that the Partnership
charges its lowest-priced major customer (other than Borden). If the
Partnership does not make any sales to any major customers other than Borden,
then the price to Borden will be the lowest prevailing price in the relevant
geographic area. The Purchase Agreements also provide that the Partnership is
required to meet competitive third-party offers or let Borden purchase the
lower-priced product from such third parties in lieu of purchases under the
Purchase Agreements.
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The Processing Agreements for formaldehyde and urea-formaldehyde concentrate
essentially require Borden to utilize the processing capacity of the
formaldehyde plants so that the formaldehyde plants operate at no less than 90%
of capacity, after taking into account the purchases of formaldehyde by an
unaffiliated third party under a long-term requirements contract. Although such
third party's current requirements for formaldehyde exceed 200 million pounds
per year, in the event that such third party's annual requirements are less
than such amount, Borden has the option of reducing or terminating its
obligation to utilize such processing capacity. Under the Processing
Agreements, Borden is required to pay the Partnership a fee for each pound of
formaldehyde and urea-formaldehyde concentrate processed equal to the
Partnership's processing costs plus a per pound charge. The per-pound charge is
subject to increase or decrease based on changes in the Consumer Price Index
from October 1987. The Processing Agreements also require the Partnership to
meet competitive third party offers covering formaldehyde unless meeting such
offer would impose a significant economic penalty on the Partnership, in which
case Borden will be permitted to accept such offer and reduce its obligations
under the Processing Agreements by a corresponding amount.
The Partnership believes that the pricing formulae set forth in the Purchase
and Processing Agreements have in the past provided aggregate prices and
processing charges for the covered products that over time have approximated
the aggregate prices and processing charges that Borden would have been able to
obtain from unaffiliated suppliers, considering the magnitude of Borden's
purchases, the long-term nature of such agreements and other factors. The
Partnership believes that this will continue to be the case in the future.
There may be conditions prevailing in the market at various times, however,
under which the prices and processing charges set under the Purchase and
Processing Agreements could be higher or lower than those obtainable from
unaffiliated third parties.
The Partnership is free to sell or otherwise dispose of, as it deems
appropriate, any quantities of PVC resins, ammonia, urea, methanol or
formaldehyde which Borden is not required to purchase. In addition, the
Purchase and Processing Agreements do not cover acetylene, VCM or industrial
gases, which are either consumed internally by the Partnership or have not been
historically purchased by Borden.
Because the foregoing Purchase and Processing Agreements are requirements
contracts, sales of products thereunder are dependent on Borden's requirements
for such products. Such requirements could be affected by a variety of factors,
including a sale or other disposition by Borden of all or certain or its
manufacturing plants to unaffiliated purchasers (in which event such agreements
shall not apply to any such purchaser unless otherwise agreed to by such
purchaser). In the event that, whether as a result of the change of control of
Borden or otherwise, Borden were to sell or otherwise dispose of all or certain
of its plants or otherwise reorient its businesses, Borden's requirements for
products sold or processed by the Partnership under the Purchase and Processing
Agreements could be diminished or eliminated. The Partnership anticipates that
if Borden were to sell all or certain of its chemical manufacturing facilities,
a purchaser may be interested in negotiating the continuation of all or certain
of the Purchase and Processing Agreements.
Competition
The business in which the Partnership operates is highly competitive. The
Partnership competes with major chemical manufacturers and diversified
companies, a number of which have revenues and capital resources exceeding
those of the Partnership. Because of the commodity nature of the Partnership's
products, the Partnership is not in a position to protect its position by
product differentiation and is not able to pass on cost increases to its
customers to the extent its competitors do not pass on such costs. In addition
to price, other significant factors in the marketing of the products are
delivery, quality and, in the case of PVC resins, technical service. The
Partnership believes that the overall efficiency, integration and optimization
of product mix of the facilities at Geismar and Illiopolis make the Partnership
well positioned to compete in the markets it serves. The acquisition of the
Addis Facility should enable the Partnership to further optimize its product
mix.
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Borden has agreed that, so long as BCPM is the general partner of the
Partnership, Borden will not engage in the manufacture or sale in the United
States of methanol, ammonia, urea, acetylene, VCM or PVC resins. However, if
BCPM (i) is removed as general partner under circumstances where cause exists
or (ii) withdraws as general partner under circumstances where such withdrawal
violates the Partnership Agreement, Borden shall not engage in such manufacture
or sale for a period of two years from the date of such removal or withdrawal.
If Borden were to sell any of its manufacturing facilities to an unaffiliated
purchaser that is not a successor to Borden, the purchasers of such facilities
would be free to compete with the Partnership.
Trademarks
The Partnership entered into a Use of Name and Trademark License Agreement
("Use of Name and Trademark License Agreement") with Borden pursuant to which
the Partnership is permitted to use in its name the Borden name and logo. The
Use of Name and Trademark License Agreement and the right to use the Borden
name and logo shall terminate in the event that BCPM ceases to be the General
Partner.
Environmental and Safety Regulations
General. The Partnership's operations are subject to federal, state and local
environmental, health and safety laws and regulations, including laws relating
to air quality, hazardous and solid wastes, chemical management, and water
quality. The Partnership has expended substantial resources, both financial and
managerial, to comply with environmental regulations and permitting
requirements, and anticipates that it will continue to do so in the future.
Although the Partnership believes that its operations generally are in material
compliance with these requirements, there can be no assurance that significant
costs, civil and criminal penalties, and liabilities will not be incurred. The
Partnership holds various environmental permits for operations at each of its
plants. In the event a governmental agency were to deny a permit application or
permit renewal, or revoke or substantially modify an existing permit, such
agency action could have a material adverse effect on the Partnership's ability
to continue the affected plant operations. Plant expansions are subject to
securing necessary environmental permits. Environmental laws and regulations
have changed substantially and rapidly in recent years, and the Partnership
anticipates continuing changes. The trend in environmental regulation is to
place more restrictions and limitations on activities that may affect the
environment, such as emissions of pollutants and the generation and disposal of
wastes. Increasingly strict environmental regulations have resulted in
increased operating costs for the Partnership, and it is possible that the
costs of compliance with environmental, health and safety laws and regulations
will continue to increase. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Environmental Expenditures".
The Partnership maintains an environmental and industrial safety and health
compliance program and conducts internal regulatory audits at its Geismar and
Illiopolis plants. The Partnership's plants have had a history of involvement
in regulatory, enforcement and variance proceedings in connection with safety,
health and environmental matters. Risks of substantial costs and liabilities
are inherent in certain plant operations and certain products found at and
produced by the plants, as they are with other enterprises engaged in the
chemical business, and there can be no assurance that significant costs and
liabilities will not be incurred.
Air Quality. The Geismar and Illiopolis plants emit air contaminants and are
subject to the requirements of the federal Clean Air Act (the "Clean Air Act")
and comparable state statutes. Many of the existing requirements under these
laws are embodied in permits issued to the plants by state environmental
agencies. The Partnership believes that the Geismar and Illiopolis plants
generally are in material compliance with these requirements.
The 1990 Amendments to the Clean Air Act (the "1990 Clean Air Act
Amendments") substantially revised and expanded the air pollution control
requirements throughout the United States. As discussed below, certain of these
new or revised requirements may impact the Geismar and Illiopolis plants.
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The 1990 Clean Air Act Amendments require more stringent controls on volatile
organic compounds ("VOC") emissions in ozone non-attainment areas and also
require, subject to certain exceptions, the control of nitrogen oxide ("NOx")
emissions in such areas. The Geismar plant is located in a "non-attainment
area" for ozone under the 1990 Clean Air Act Amendments. Additional capital
expenditures may be required at the Geismar plant in order to upgrade existing
pollution control equipment and/or install additional control equipment to
comply with the new more stringent regulations for VOC and NOx.
The 1990 Clean Air Act Amendments and state laws and regulations also require
certain sources to control emissions of hazardous air pollutants, including
vinyl chloride. In particular, the Environmental Protection Agency ("EPA")
promulgated a rule in April 1994, which may require the modification of the
existing emission control equipment at the Geismar facility. Capital
expenditures may be necessary to comply with these control standards.
The 1990 Clean Air Act Amendments further require "enhanced monitoring" of
the emissions from certain pieces of equipment. Although monitoring systems are
already in place at the Geismar and Illiopolis plants, capital expenditures may
be necessary to upgrade the systems to comply with the "enhanced monitoring"
requirement.
Based on the information currently available to the Partnership, the
Partnership does not believe that the capital expenditures that may be required
at the Geismar and Illiopolis plants to comply with the 1990 Clear Air Act
Amendments and corresponding state regulations will be material. However,
because all the regulatory requirements under the 1990 Clean Air Act Amendments
are not yet final, and the Partnership is continuing to evaluate the impact of
such amendments on it, there can be no assurance that the actual costs will not
exceed the Partnership's estimates.
The Department of Justice ("DOJ"), at the request of the EPA, has brought an
enforcement proceeding against the Partnership and BCPM for alleged violation
of the Clean Air Act, and other environmental statutes, at the Geismar
facility. See "Legal Proceedings".
OSHA and Community Right to Know. The Geismar and Illiopolis plants are
subject to the requirements of the federal Occupational Safety and Health Act
("OSHA") and comparable state statutes. The Partnership believes that the
Geismar and Illiopolis plants generally are in material compliance with OSHA
requirements, including general industry standards, vinyl chloride exposure
requirements, recordkeeping requirements and chemical process safety standards.
It is possible that changes in safety and health regulations, or a finding of
noncompliance with current regulations, could result in additional capital
expenditures or operating expenses for the Geismar and Illiopolis plants.
The OSHA hazard communication standard and the EPA community right-to-know
regulations under the Emergency Planning and Community Right-to-Know Act
("EPCRA") require the Partnership to organize information about the hazardous
materials in the plants and to communicate that information to employees and
certain governmental authorities. The Partnership has prepared a detailed
hazard communication program and will continue this program as a part of its
industrial safety and health compliance program. The Partnership believes that
it generally is in material compliance with EPCRA.
The Partnership is currently subject to a proceeding for alleged violations
at the Illiopolis facility of release reporting requirements under EPCRA. This
proceeding is discussed under "Legal Proceedings".
Solid and Hazardous Waste. The Geismar and Illiopolis plants generate
hazardous and nonhazardous solid waste and are subject to the requirements of
the Resource Conservation and Recovery Act ("RCRA") and comparable state
statutes. The Partnership believes that the Geismar and Illiopolis plants
generally are in material compliance with RCRA. However, see "Legal
Proceedings".
A primary trigger for RCRA requirements is the designation of a substance as
a "hazardous waste". It is anticipated that additional substances will in the
future be designated as "hazardous waste", which would likely result in
additional capital expenditures or operating expenses.
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<PAGE>
The Geismar complex is operating under RCRA interim status and has filed a
permanent RCRA permit application for its valorization of chlorinated residuals
("VCR") unit and related tanks. However, the Partnership does not believe that
the Geismar facility must obtain a RCRA permit and is challenging the
applicability of the RCRA permit requirements to it. The Partnership's
challenge to those permit requirements, the potential permitting costs, civil
penalties and corrective action costs that it may incur if that challenge is
unsuccessful, are discussed under "Legal Proceedings".
The DOJ, at the request of the EPA, has brought an enforcement proceeding
against the Partnership and BCPM for alleged violations of RCRA, and other
environmental statutes, at the Geismar facility. See "Legal Proceedings".
Superfund. CERCLA, also known as the "Superfund" law, imposes liability,
without regard to fault or the legality of the original conduct, on certain
classes of persons that are considered to have contributed to the release of a
"hazardous substance" into the environment. These persons include the owner or
operator of the disposal site or sites where the release occurred and the
companies that disposed, or arranged for the disposal of, the hazardous
substances found at the site. Persons who are or were responsible for releases
of hazardous substances under CERCLA may be subject to joint and several
liability for the costs of cleaning up the hazardous substances and for damages
to natural resources. In the ordinary course of the Partnership's operations,
substances are generated that fall within the CERCLA definition of "hazardous
substance". If such wastes have been disposed of at sites which are targeted
for cleanup by federal or state regulatory authorities, the Partnership may be
among those responsible under CERCLA or analogous state laws for all or part of
the costs of such cleanup. The Geismar and Illiopolis plants have in the past
and are expected to continue to generate hazardous substances and dispose of
such hazardous substances at various offsite disposal sites.
The DOJ, at the request of the EPA, has brought an enforcement proceeding
against the Partnership and BCPM for alleged violation of CERCLA's reporting
requirements, and other environmental requirements, at the Geismar facility.
See "Legal Proceedings".
Toxic Substances Control Act. The Partnership is subject to the Toxic
Substances Control Act ("TSCA"), which regulates the development, manufacture,
processing, distribution, importation, use, and disposal of thousands of
chemicals. Among other requirements, TSCA provides that a chemical cannot be
manufactured, processed, imported or distributed in the United States until it
has been included on the TSCA Chemical Inventory. Other important TSCA
requirements govern recordkeeping and reporting. The Partnership believes that
it generally is in material compliance with TSCA. Violations of TSCA can result
in significant penalties.
Water Quality. The Geismar and Illiopolis plants maintain wastewater
discharge permits for their facilities pursuant to the Federal Water Pollution
Control Act of 1972 and comparable state laws. See "Legal Proceedings" for a
discussion of the Partnership's challenge to a wastewater permit for the
Geismar facility. The Partnership believes that the Geismar and Illiopolis
plants generally are in material compliance with the Federal Water Pollution
Control Act of 1972 and comparable state laws. In cases where there are
excursions from the permit requirements, the Geismar and Illiopolis plants take
action to achieve compliance, work in cooperation with the appropriate agency
to achieve compliance or in good faith pursue their procedural rights in the
permitting process.
The EPA has issued effluent regulations specifying amounts of pollutants
allowable in direct discharges and in discharges to publicly owned treatment
works. The Geismar and Illiopolis plants manufacture or use as raw materials a
number of chemicals subject to additional regulation. Both federal and state
authorities continue to develop legislation and regulations to control the
discharge of certain toxic water pollutants. Passage of such legislation or
regulations could necessitate additional capital expenditures to reduce
discharges of these substances into the environment either during routine or
episodic events.
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<PAGE>
It is common for chemical plants from time to time to encounter areas of
groundwater contamination during the ordinary course of business. Typically,
some of these contamination events are historical and cannot be documented as
to the causal circumstances. While some contamination events have been
identified at the Partnership's plants, it is the Partnership's policy, where
possible and appropriate, to address and resolve these contamination events. At
the Geismar complex, Borden and the Partnership have complied with the
Settlement Agreement with the state of Louisiana for groundwater remediation.
See "Legal Proceedings" for further discussion.
Present and Future Environmental Capital Expenditures. Although it is the
Partnership's policy to comply with all applicable environmental, health and
safety laws and regulations, in many instances the implementing regulations
have not been finalized. Even where regulations or standards have been adopted,
they are subject to varying and conflicting interpretations and implementation.
In many cases, compliance with environmental regulations or standards can only
be achieved by capital expenditures, some of which may be significant. Capital
expenditures for environmental control facilities were approximately $1.7
million in 1994. To the extent estimates are available, capital expenditures
for environmental control facilities are expected to total approximately $4.0
million in 1995 (although such estimate could vary substantially depending on
the outcome of the various proceedings and matters discussed herein, and no
assurance can be given that greater expenditures on the part of the Partnership
will not be required as to matters not covered by the environmental indemnity
from Borden, the "Environmental Indemnity Agreement").
Product Liability and Regulation. The United States Food and Drug
Administration ("FDA") is proposing new regulations providing for the safe use
of vinyl chloride polymers in food-contact articles. According to the FDA, such
regulations are required because VCM, a component of vinyl chloride polymer has
been shown to be a carcinogen. However, the FDA concludes in its proposal that
there is a reasonable certainty of no harm from the exposure to the small
amounts of VCM that may result from the use of vinyl chloride polymers in food
packaging which complies with the FDA's proposed regulations. Thus, the FDA
proposal would continue to allow substantially all presently allowable uses,
including all products currently made using products produced by the
Partnership. While the FDA has tentatively concluded that such action will not
have a significant effect on the human environment, it is considering whether
to develop a full environmental impact statement to consider the potential
effect on the environment of the disposal of these food-contact articles. The
EPA has authority with respect to the safe use of vinyl chloride polymer pipe
in municipal water systems and has not imposed any restrictions on its use. It
is possible, however, that the FDA, the EPA, or other federal and state
agencies may seek to impose additional restrictions on the use or disposal of
vinyl chloride polymer. Moreover, while Borden has agreed to indemnify the
Partnership in respect of liabilities arising from products (including but not
limited to vinyl chloride polymer) shipped prior to the Transfer Date, the
Partnership will be responsible for any subsequent product liabilities. As a
result of the Partnership's manufacture, distribution and use of different
chemicals, the Partnership may be subject to various lawsuits and claims, such
as product liability and toxic tort claims, which arise in the ordinary course
of business and which seek compensation for physical injury, pain and
suffering, costs of medical monitoring, property damage, and other alleged
harms. New or different types of claims arising from the Partnership's various
chemical operations may be made in the future.
Export of Partially Depleted Mercuric Chloride Catalyst. During the early
1990's, the Partnership shipped partially depleted mercuric chloride catalyst
to Thor Chemicals S.A. (PTY) Limited ("Thor")'s facility in Cato Ridge, South
Africa for recovery of mercury. In 1993 the Louisiana Department of
Environmental Quality ("LDEQ") determined that the partially depleted catalyst
was not a hazardous waste, although LDEQ reversed this position in 1994. The
Partnership disagrees with this reversal. See "Legal Proceedings".
Recovery of mercury at Thor's facility was discontinued in March 1994 when
the Department of Health in South Africa refused to renew a temporary license
that had been granted to Thor. At such time, there were approximately 2,600
drums of partially depleted catalyst at the facility which had been shipped by
the
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<PAGE>
Company to Thor. In addition, in the spring of 1994 there were approximately
7,400 drums of other materials at the Thor facility which the Partnership had
not sent there.
In December 1994, the South African Ministry of Environment Affairs and
Tourism announced its intent to appoint a Commission of Inquiry to investigate
the available technology to process and/or dispose of mercury containing
catalyst and mercury containing sludge at the Thor facility. The Partnership
did not send mercury containing sludge to the Thor facility. The exact scope of
such Commission's inquiry and authority is uncertain, although the Partnership
believes that the inquiry may include consideration of the origin of the
catalyst and sludge remaining at the facility. The Government of South Africa
has not made any allegations or asserted any claims against the Partnership.
The contract between the Operating Partnership and Thor provides that title
to, risk of loss, and all other incidents of ownership of the partially
depleted catalyst would pass from the Operating Partnership to Thor when the
catalyst reached South Africa. The Partnership does not believe that it is
liable for disposing of the approximately 2,600 drums of partially depleted
catalyst remaining at the Thor facility. Nonetheless, in the event that the
Partnership should be required to dispose of the approximately 2,600 drums at
the facility shipped by the Partnership, the Partnership estimates that such
cost would not be in excess of $4 million.
With regard to the environmental condition of the Thor facility, the
Partnership has not been notified by the Government of South Africa that the
Partnership would be liable for any contamination or other conditions at that
facility, although it is impossible to determine what, if any, allegations any
party may make in connection with the Thor facility in the future. It is
unclear under current South African environmental law as to whether any such
allegations, if made, would be sustained against the Partnership. The
Partnership would vigorously defend against any such allegations.
Employees
Neither the Partnership nor the Operating Partnership have any directors,
officers or employees and the Partnership and the Operating Partnership rely on
the management and employees of BCPM, the sole general partner of both the
Partnership and the Operating Partnership (and on employees of Borden providing
support to or performing services for BCPM). On December 31, 1994, BCPM's
employees (together with Borden's employees solely or substantially dedicated
to providing support to or performing services for BCPM) numbered approximately
730 individuals.
Cash Distributions
The Partnership distributes 100% of its Available Cash as of the end of each
quarter on or about 45 days after the end of such quarter to Unitholders of
record as of the applicable record date and to the General Partner. "Available
Cash" means generally, with respect to any quarter, the sum of all cash
receipts of the Partnership plus net reductions to reserves established in
prior quarters, less cash disbursements and net additions to reserves in such
quarter. The General Partner has broad discretion in establishing reserves, and
its decisions regarding reserves could have a significant impact on the amount
of Available Cash. The timing and amounts of additions and reductions to
reserves may impact the amount of incentive distributions payable to the
General Partner. As a result, distributions to Unitholders may over time be
reduced from levels which would have been distributed if the General Partner
were not able to control the timing of additions and reductions to reserves.
Distributions by the Partnership of Available Cash are generally made 98% to
the Unitholders and 2% to the General Partner, subject to the payment of an
incentive distribution to the General Partner to the extent that a target level
of cash distributions to the Unitholders is achieved for any quarter. The
Amended and Restated Agreement of Limited Partnership of the Partnership (the
"Partnership Agreement") provides that, after an amount equal to $0.3647 per
Unit (the "Target Distribution") has been distributed for any quarter to
Unitholders, the General Partner will receive 20% of any then remaining
Available Cash for such
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<PAGE>
quarter as an incentive distribution (in addition to its 2% regular
distribution). Unitholders would share in the balance of such Available Cash
pro rata. The Target Distribution is subject to adjustment under certain
circumstances.
Recent Developments
Proposed Financings. Concurrent with, and conditioned upon, the closing of
the acquisition of the Addis Assets, the Partnership intends to offer up to 4.0
million additional Units (excluding an over-allotment option for 600,000
additional Units). The net proceeds of this offering will be used to fund a
portion of the purchase price of the Addis Assets.
Concurrent with, and conditioned upon, the closing of both the acquisition of
the Addis Assets and the Units offering, the Operating Partnership intends to
offer up to $175.0 million principal amount of senior unsecured notes (the
"Senior Notes"). The net proceeds from this offering will be used to prepay the
currently outstanding $150.0 million principal amount of existing notes (the
"Notes"). The remaining net proceeds will be used to fund a portion of the
purchase price of the Addis Assets. Depending on prevailing market conditions
and other factors, the Operating Partnership may offer Senior Notes in an
aggregate principal amount greater or lesser than $175.0 million. In the event
that the net proceeds of the Units offering and Senior Notes offering available
for payment of the purchase price of the Addis Assets are less than such
purchase price or the Senior Notes offering is postponed or not consummated,
short-term borrowings, cash on hand or a combination thereof will be used to
fund the portion of the purchase price of the acquisition not funded by the
Units offering. In the event that the acquisition of the Addis Assets or the
Senior Notes offering is not consummated, the Operating Partnership may, but
has not determined that it will, refinance the Notes through a public offering
or private placement of new notes. The Units offering and Senior Notes offering
will only be made by means of separate prospectuses.
Prepayment of the Notes. Under the terms of the Note Agreement under which
the Notes were issued, the Operating Partnership was not permitted to
voluntarily prepay the Notes. In connection with the issuance of such Notes,
Borden had entered into an undertaking which provided that in the event of a
change of control of Borden, the Noteholders may elect to require Borden to
purchase the Notes for a price equal to the outstanding principal of and
accrued interest on the Notes, together with a change of control premium. On
December 15, 1994, the Operating Partnership, Borden and the Noteholders
entered into a Prepayment Terms Agreement ("Prepayment Terms Agreement") under
which, among other things, (A) Borden agreed to pay the Noteholders the change
of control premium (pursuant to such agreement, Borden paid the Noteholders the
change of control premium on December 21, 1994 in an amount equal to
$12,463,548), (B) the Noteholders agreed to terminate their right to require
Borden to purchase the Notes upon a change of control of Borden, and (C) the
Operating Partnership was provided with the right to prepay, and Borden was
provided with the right to purchase, the Notes for a price equal to the
outstanding principal of and accrued interest on the Notes, together with a
premium payable under certain circumstances. Concurrently with the execution
and delivery of the Prepayment Terms Agreement, the Operating Partnership and
Borden entered into a Notes Prepayment Agreement ("Notes Prepayment Agreement")
under which the Operating Partnership agreed, among other things, that in the
event that it exercised its right under the Prepayment Terms Agreement to
prepay the Notes, the Operating Partnership would pay Borden an additional
premium. In the event that the Operating Partnership prepaid the Notes on
February 17, 1995, the premiums payable by it under the Prepayment Terms
Agreement and the Notes Prepayment Agreement would, in the aggregate, be
approximately $4.3 million.
Change of Control of Borden. In September, 1994, (i) Whitehall Associates,
L.P. ("Whitehall") and Borden Acquisition Corp. (the "Purchaser"), both
affiliates of Kohlberg Kravis Roberts & Co., L.P. ("KKR"), and Borden entered
into an Agreement and Plan of Merger (as amended, the "Merger Agreement")
providing for the merger (the "Merger") of the Purchaser with and into Borden
and (ii) Whitehall, the Purchaser and Borden entered into a Conditional
Purchase/Stock Option Agreement providing for the issuance by Borden of an
option to affiliates of KKR to acquire additional shares of Borden common
stock.
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<PAGE>
Pursuant to the Merger Agreement, the Purchaser commenced an exchange offer
in November, 1994 to acquire shares of Borden common stock. Following the
consummation of the exchange offer in December, 1994, the Purchaser exercised
the option and acquired from Borden additional shares of Borden common stock.
By December 30, 1994, Whitehall and KKR Partners II, L.P., an affiliate of KKR
(collectively, the "Common Stock Partnerships"), had acquired and held
approximately 69% of the issued and outstanding shares of Borden common stock.
A special meeting of shareholders of Borden has been scheduled for March 14,
1995 to vote on the Merger. The Merger requires the affirmative vote of not
less than 66 2/3% of the issued and outstanding shares of Borden common stock.
The Common Stock Partnerships have indicated that they intend to vote the
shares of Borden common stock held by them in favor of approval of the Merger.
Accordingly, the affirmative vote of any other shareholders will not be
required in order to approve the Merger.
After giving effect to the Merger, the Common Stock Partnerships will
collectively own all the issued and outstanding shares of common stock of
Borden.
Termination of Put Rights. In connection with the original offerings of the
Units, Borden had provided Unitholders with certain rights ("Put Rights") to
require Borden to purchase the Units under certain circumstances relating to a
change of control of Borden. Such Put Rights by their terms would cease to be
outstanding if certain preferred share purchase rights ("Preferred Share
Purchase Rights") provided by Borden to holders of Borden common stock ceased
to be outstanding by reason of redemption or otherwise (unless the Board of
Directors of Borden determined to continue the Put Rights). In connection with
the transactions contemplated in the Merger Agreement, the Preferred Share
Purchase Rights were redeemed by Borden (without determination by the Board of
Directors of Borden to continue the Put Rights). Accordingly, the Put Rights
have terminated and cease to be outstanding.
Reorganization of Borden's Corporate Structure. In November, 1994, Borden
announced the reorganization of its corporate structure into three operating
sectors: Worldwide Packaging and Industrial Products (the "PIP Division"),
Consumer Packaged Products and Dairy Products. BCPM is operationally part of
the PIP Division, as are most of the Borden employees that provide support to
or perform services for BCPM.
Borden has advised the Partnership that the reorganization is part of its
efforts to improve its competitiveness through greater efficiency and cost
savings. The reorganization may also facilitate the sale or other disposition
of Borden's businesses or portions of such businesses. The reorganization has
resulted in the elimination of various administrative staff positions at Borden
and the reassignment of various corporate staff employees to the operating
sectors. Borden has advised the Partnership that it is likely to continue to
seek greater efficiencies and cost savings through the selective elimination of
administrative staff positions, reassignment of staff personnel to the
operating sectors and other means. Borden also continued through 1994 and is
likely to continue its program of selective divestment of assets and
businesses.
Prior to the announcement of the Merger, Borden's management had presented a
plan to its Board of Directors aimed at improving Borden's financial
performance. The plan recommended the sale of certain of Borden's businesses,
including the sale of Borden's wallcoverings and packaging resources unit
within the PIP Division. The sale of the wallcoverings and packaging resources
unit would have included a sale of Borden's manufacturing plants that use PVC
resins purchased from the Partnership.
Borden has advised the Partnership that it does not have any current plans to
divest any major business within the PIP Division or any major chemicals
production facility, including the wallcoverings and packaging resources
business. However, Borden has advised the Partnership that Borden will continue
to evaluate its strategic and financial alternatives (which may include a
divestiture of all or any portion of the assets or businesses within the PIP
Division, including the wallcoverings and packaging resources business).
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Subject to certain exceptions, Borden has agreed not to sell its interests in
BCPM prior to November 30, 2002 without approval by Unitholders holding more
than 50% of the Units held by persons other than Borden and its affiliates.
Item 2. Properties
Construction of the Geismar complex began over thirty years ago. Acetylene,
methanol and VCM-A plants were completed in the early 1960s; and ammonia and
urea plants were added during the period 1965 to 1967. A VCM-E plant and a
formaldehyde plant were added in the mid 1970s, a second formaldehyde plant was
brought on stream in 1986, and a third formaldehyde plant was brought on stream
in 1991. In 1983 Borden completed construction of a PVC resin plant at the
Geismar complex. The PVC resin facility at Illiopolis became operational in
1962.
The Geismar complex is located on approximately 490 acres in Ascension
Parish, Louisiana, adjacent to the Mississippi River between Baton Rouge and
New Orleans. The Illiopolis PVC resin facility is located on approximately 45
acres in central Illinois between Springfield and Decatur. The Addis Facility
is located on approximately 40 acres of a 220 acre site adjacent to the
Mississippi River, approximately 20 miles from the Geismar complex.
The following table sets forth the approximate annual capacity with respect
to each of the principal manufacturing plants at the Geismar, Louisiana complex
and the PVC plant at Illiopolis, Illinois, all of which are owned by the
Partnership except as noted.
<TABLE>
<CAPTION>
ANNUAL STATED
PLANTS CAPACITY**
------ -----------------
<S> <C>
Geismar:
PVC Polymers Products
PVC Resins............................................. 500,000,000 lbs.
Acetylene-based VCM.................................... 320,000,000 lbs.
Ethylene-based VCM..................................... 630,000,000 lbs.
Acetylene*............................................. 200,000,000 lbs.
Methanol and Derivatives
Methanol............................................... 300,000,000 gals.
Formaldehyde I......................................... 270,000,000 lbs.
Formaldehyde II........................................ 180,000,000 lbs.
Formaldehyde III....................................... 190,000,000 lbs.
Nitrogen Products
Ammonia................................................ 400,000 tons
Urea................................................... 250,000 tons
Illiopolis:
PVC Resins............................................... 380,000,000 lbs.
</TABLE>
The operation of the foregoing plants near full capacity or above is an
objective of the Partnership because of the significant integration among such
plants and the reduced operating costs per unit of output at full operation.
The Partnership believes that the facilities are currently in good condition,
efficient and highly integrated and are generally in material compliance with
applicable existing environmental laws and regulations.
- --------
*50% owned by the Partnership.
**Assumes normal operating conditions, including down-time and maintenance.
Utilities
The Geismar complex operates three high thermal efficiency co-generation
units providing the site with low cost electricity, steam and high temperature
reformer combustion air. Each unit is composed of a natural gas burning
turbine/generator unit combined with a steam producing heat recovery system
(i.e., the "co-generation" of electricity and steam).
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<PAGE>
The co-generation units are designed to provide 100% of the electricity, a
significant portion of the steam, and a portion of the reformer combustion air
requirements of the Geismar complex at full production levels. These units have
electrical outputs of 20, 35 and 35 megawatts. The electricity supplied by the
units through a substation owned by Monochem, Inc. ("Monochem"), a corporation
of which the Partnership owns 50% of the capital stock, usually exceeds the
requirement of the Geismar complex with the excess production being sold to
Gulf States Utilities at its "avoided cost" rate. The Partnership's interest in
Monochem is subject to certain rights of first refusal and limitations to
transfer.
Water requirements at the Geismar complex are obtained through Monochem from
the Mississippi River. At Illiopolis, a municipal water company supplies the
facility with its water requirements. Because the Illiopolis facility
represents a significant portion of the demand for water supply from the
municipal water company, the Partnership manages the operations of the water
company on a cost-reimbursed basis.
Item 3. Legal Proceedings
Louisiana Groundwater Remediation Settlement Agreement
In 1985, LDEQ and Borden entered into a settlement agreement (the "Settlement
Agreement") that called for the implementation of a long term groundwater and
soil remediation program at the Geismar complex to address contaminants,
including ethylene dichloride ("EDC"). Also during this time frame, Borden
commenced closure of various units identified to have been contributors to the
EDC contamination underlying the Geismar complex. Borden and the Partnership
have implemented the Settlement Agreement, and have worked in cooperation with
the LDEQ to remediate the groundwater and soil contamination. The Settlement
Agreement contemplated, among other things, that Borden would install a series
of groundwater monitoring and recovery wells, and recovery trench systems. The
Partnership believes that it already has sufficiently identified the extent of
the groundwater plume. Nevertheless, the Partnership intends to drill and test
some additional groundwater wells for the purpose of addressing issues raised
by LDEQ concerning whether the extent of the groundwater contamination has been
identified. Borden has paid substantially all of the costs to date of the
Settlement Agreement. It is unknown how long the remediation program will
continue or whether the LDEQ will require the Partnership to incur costs to
take further remedial measures in response to data generated by the planned
additional groundwater wells. If the LDEQ requires the Partnership to take
further remedial measures, the Partnership anticipates that a portion of such
costs would be covered by an Environmental Indemnity Agreement. The extent to
which any costs for further remedial measures required by LDEQ will be covered
by the Environmental Indemnity Agreement will depend, in large part, on whether
such remedial measures respond to facts or circumstances that existed and
requirements in effect prior to November 30, 1987, the date of the initial sale
by Borden of the Geismar and Illiopolis plants to the Partnership.
Federal Environmental Enforcement Proceeding
On October 27, 1994, the U.S. DOJ acting at the request of the EPA filed an
action against the Operating Partnership, the Partnership, and the General
Partner in the United States District Court for the Middle District of
Louisiana ("Geismar enforcement proceeding"). The complaint seeks civil
penalties for alleged violations of RCRA, CERCLA and the Clean Air Act at the
Geismar facility, as well as corrective action at that facility. Prior to the
filing of the complaint, the Partnership and DOJ had engaged in settlement
discussions. Moreover, the Partnership and the DOJ are currently engaged in
settlement discussions.
The federal government's primary allegations for which it seeks penalties
include claims that (i) the Partnership's export to South Africa of a partially
depleted mercuric chloride catalyst for recycling violated RCRA; (ii) the
Partnership should have applied for a RCRA permit for operation of its
valorization of chlorinated residuals ("VCR") unit and related tanks before
August 1991; and (iii) the Partnership should have applied for a RCRA permit
for the north trench sump at the Geismar complex because such sump
18
<PAGE>
allegedly contains hazardous waste. The government's allegations include other
claims related to these and other alleged RCRA violations, as well as claims of
alleged violations of immediate release reporting requirements under CERCLA and
requirements governing particulate matter emissions under the Clean Air Act.
The Partnership plans to vigorously defend all of the above allegations.
During the early 1990's, the Partnership sent partially depleted mercuric
chloride catalyst to a facility in South Africa for recovery of the mercury.
See "Business--Environmental and Safety Regulations--Export of Partially
Depleted Mercuric Chloride Catalyst". In 1993, LDEQ had determined that the
catalyst was not a hazardous waste. However, because of a belief by the EPA
that the partially depleted catalyst could be a hazardous waste and a reversal
of LDEQ's 1993 determination, and pending the outcome of the Geismar
enforcement proceeding, the Partnership has ceased exporting the partially
depleted mercuric chloride catalyst for recycling and is currently handling it
as if it were a hazardous waste. Accordingly, even if a court should determine
that the partially depleted catalyst was a hazardous waste when it was
exported, the Partnership does not anticipate that it would incur material
additional expenditures to continue to manage the partially depleted catalyst
as a hazardous waste.
In 1991, as a protective filing, the Partnership applied for a hazardous
waste permit for the VCR unit and related tanks. In January 1994, in response
to a petition from the Partnership to LDEQ for a determination that the VCR
unit does not require a RCRA permit, LDEQ determined that the VCR unit is
subject to RCRA. The Partnership continues to maintain that the VCR unit is not
subject to RCRA and has filed appeals of LDEQ's determination in Louisiana
State Courts.
In May 1994, the Partnership filed a Complaint for Declaratory Judgment in
the U.S. District Court in Baton Rouge seeking a determination that (i) the
partially depleted mercuric chloride catalyst was not a hazardous waste when it
was exported for recycling, (ii) the materials entering the VCR unit and
related tanks are not hazardous waste and (iii) the north trench sump does not
require a RCRA permit.
If the Partnership is unsuccessful in prosecuting its Declaratory Judgment
Action, or in defending itself against the Geismar enforcement proceeding, it
could be subject to three types of costs: (i) penalties, (ii) corrective
action, and (iii) costs needed to obtain a RCRA permit.
As to penalties, although the maximum statutory penalties that would apply in
a successful enforcement action by the United States would be in excess of
$150.0 million, the Partnership believes that, assuming the Partnership is
unsuccessful and based on information currently available to it and an analysis
of relevant case law and administrative decisions, the more likely amount of
any liability for civil penalties would not exceed several million dollars.
If the Partnership is unsuccessful in either the Declaratory Judgement Action
or the Geismar enforcement proceedings, it may also be subject to costs for
corrective action. The federal government also can require corrective action
for a facility subject to RCRA permit requirements. Corrective action could
require the Partnership to conduct investigatory and remedial activities at the
Geismar complex concurrently with the groundwater monitoring and remedial
program that the Partnership is currently conducting under the Settlement
Agreement with LDEQ. The DOJ has advised the Partnership that it intends to
seek facility-wide corrective action to address the contamination at the
Geismar complex. EPA has indicated that it intends to evaluate the adequacy of
the existing groundwater remediation project performed under the Settlement
Agreement with LDEQ, and to determine the potential for other areas of
contamination on or near the Geismar complex. The cost of any corrective action
could be material, depending on the scope of such corrective action. However,
the actual cost of a facility-wide corrective action cannot be identified until
the EPA provides substantially more information to the Partnership.
If the Partnership is unsuccessful in either proceeding concerning its
challenge to the applicability of the RCRA permit requirements to the VCR unit
and related tanks, or the north trench sump, it will have to incur additional
permitting costs.
19
<PAGE>
The Partnership estimates that its costs to complete the permitting process
for the VCR unit and related tanks would be approximately $1.0 million. The
Partnership believes that the costs for amending its pending RCRA permit
application to include the north trench sump would not be material.
Because of the complex nature of environmental insurance coverage and the
rapidly developing case law concerning such coverage, no assurance can be given
concerning the extent to which insurance may cover environmental claims against
the Partnership. However, insurance generally does not cover penalties or the
costs of obtaining permits.
Emergency Planning and Community Right-to-Know Act Proceeding
In February 1993, an EPA Administrative Law Judge held that the Illiopolis
facility had violated CERCLA and the Emergency Planning and Community Right to
Know Act ("EPCRA") by failing to report certain relief valve releases, which
occurred between February 1987 and July 1989, that the Partnership believes are
exempt from CERCLA and EPCRA reporting. The Partnership's petition for
reconsideration was denied, a penalty hearing will be scheduled, and further
appeals are possible. Management does not believe that any ultimate penalty
arising from this proceeding would have a material adverse effect on the
Partnership. The proposed penalty in EPA's administrative complaint initiating
this proceeding in 1991 was $1.0 million.
Borden Environmental Indemnity
Under the Environmental Indemnity Agreement, subject to certain conditions,
Borden has agreed to indemnify the Partnership in respect of environmental
liabilities arising from facts or circumstances that existed and requirements
in effect prior to November 30, 1987, the date of the initial sale of the
Geismar and Illiopolis plants to the Partnership (the "Transfer Date"). The
Partnership is responsible for environmental liabilities arising from facts or
circumstances that existed and requirements in effect on or after the Transfer
Date. With respect to certain environmental liabilities that may arise from
facts or circumstances that existed and requirements in effect both prior to
and after the Transfer Date, Borden and the Partnership will share liabilities
on an equitable basis considering all of the facts and circumstances including,
but not limited to, the relative contribution of each to the matter and the
amount of time each has operated the asset in question (to the extent
relevant). No claims can be made under the Environmental Indemnity Agreement
after November 30, 2002, and no claim can, with certain exceptions, be made
with respect to the first $500,000 of liabilities which Borden would otherwise
be responsible for thereunder in any year, but such excluded amounts shall not
exceed $3.5 million in the aggregate. Excluded amounts under the Environmental
Indemnity Agreement have aggregated approximately $2.2 million through December
31, 1994.
If the United States is successful in requiring the Partnership to perform
corrective action at the Geismar facility or the LDEQ requires the Partnership
to take further remedial measures in connection with the Settlement Agreement,
the Partnership anticipates that a portion of its corrective action costs would
be covered by the Environmental Indemnity Agreement. The extent to which any
penalties or permit costs that the Partnership may incur as a result of pending
environmental proceedings will be subject to the Environmental Indemnity
Agreement will depend, in large part, on whether such penalties or costs are
attributable to facts or circumstances that existed and requirements in effect
prior to the Transfer Date.
Federal Wastewater Permit
The Geismar facility has a permit for each of its two wastewater outfalls.
The Partnership is challenging conditions in one of those permits. As a result
of the government's delay in responding to this challenge, the challenged
permit is expiring and the Partnership is applying for a new permit. Depending
on the result of that permit application, the Partnership's current permit
challenge may be irrelevant.
20
<PAGE>
Other Legal Proceedings
The Partnership manufactures, distributes and uses many different chemicals
in its business. As a result of its chemical operations, the Partnership is
subject to various lawsuits and claims, such as product liability and toxic
tort claims, arising in the ordinary course of business and which seek
compensation for physical injury, pain and suffering, costs of medical
monitoring, property damage, and other alleged harm. New or different claims
arising from the Partnership's various chemical operations may be made in the
future.
In addition, the Partnership is subject to various other legal proceedings
and claims which arise in the ordinary course of business. The management of
the Partnership believes, based upon the information it presently possesses,
that the realistic range of liability of these other matters, taking into
account its insurance coverage, including its risk retention program and the
Environmental Indemnity Agreement with Borden, would not have a material
adverse affect on the financial position and results of operations of the
Partnership.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of 1994 to a vote of
security holders, through the solicitation of proxies or otherwise.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Upon the payment on February 12, 1993 of the 1992 fourth quarter
distribution, and effective December 31, 1992, (1) Borden's obligations under
certain agreements to ensure minimum quarterly distributions on the Preference
Units and the Enhanced Common Units were extinguished, (2) the Support Period,
during which the Preference Units and the Enhanced Common Units were entitled
to minimum quarterly distributions (or arrears in respect thereof), expired and
(3) all differences between the Preference Units and Enhanced Common Units
ceased and all Units became (and now constitute) a single class of Common Units
(the "Common Units" or the "Units").
The high and low sales prices on the New York Stock Exchange for the Common
Units on February 10, 1995 were $21 1/8 and $20 5/8, respectively. As of
February 10, 1995, there were approximately 6,150 holders of record of Common
Units.
There are currently outstanding 36,750,000 Units. After giving effect to the
proposed offering of additional Units (assuming the underwriters' over-
allotment option to acquire 600,000 Units is not exercised), there will be
outstanding 40,750,000 Units.
The following tables set forth the 1994 and 1993 quarterly Common Unit data:
<TABLE>
<CAPTION>
1994 QUARTERS
-------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
<S> <C> <C> <C> <C>
Cash distribution declared: $ .21 $ .65 $ 1.02 $ 1.64
Market price range:
High...................................... 13 1/4 15 1/8 25 7/8 26 3/8
Low....................................... 9 7/8 10 7/8 13 1/4 19 1/4
</TABLE>
The high and low prices for the Common Units during the first quarter of 1995
(through February 10) were $25 1/2 and $20 1/2, respectively.
<TABLE>
<CAPTION>
1993 QUARTERS
-------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
<S> <C> <C> <C> <C>
Cash distribution declared: $ .30 $ .18 $ .12 $ .18
Market price range:
High...................................... 17 1/8 16 1/8 12 1/8 11 1/4
Low....................................... 13 5/8 10 3/4 8 7/8 8 1/4
</TABLE>
21
<PAGE>
Item 6. Selected Financial Data
The following table sets forth selected historical financial information for
the Partnership for each of the five years ended December 31, 1994.
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C> <C>
Net revenues.................. $657,752 $433,297 $401,803 $410,005 $420,631
Net (loss) income............. 146,405 (1,435) 27,085 51,553 45,296
Net (loss) income per Unit.... 3.94 (.04) .73 1.39 1.22
Cash distribution declared per
Unit......................... 3.52 .78 1.59 1.98 1.95
Total assets.................. 542,904 444,304 466,729 507,042 544,204
Long-term debt................ 120,000 150,000 150,000 150,000 150,000
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW AND OUTLOOK
The Partnership's revenues are derived from three principal product groups:
(i) PVC Polymers Products, which consist of PVC resins, VCM, the principal
feedstock for PVC resins, and acetylene, (ii) Methanol and Derivatives and
(iii) Nitrogen Products, which consist of ammonia and urea.
The markets for and profitability of the Partnership's products have been,
and are likely to continue to be, cyclical. Periods of high demand, high
capacity utilization and increasing operating margins tend to result in new
plant investment and increased production until supply exceeds demand, followed
by periods of declining prices and declining capacity utilization until the
cycle is repeated. In addition, markets for the Partnership's products are
affected by general economic conditions and a downturn in the economy could
have a material adverse affect on the Partnership, including its ability to
make distributions to Unitholders and service its debt obligations. The demand
for the Partnership's PVC products is primarily dependent on the construction
and automotive industries. Methanol demand is also dependent on the
construction industry, as well as the demand for MTBE. Demand for the
Partnership's Nitrogen Products is dependent primarily on the agricultural
industry.
The principal raw material feedstock for the Partnership's products is
natural gas, the price of which has been volatile in recent years. The other
principal feedstocks are ethylene and chlorine. Prices for these raw materials
may change significantly from year to year. In particular, the price of
chlorine increased dramatically from 1992 to 1993.
The Partnership is currently experiencing strong demand for its PVC Polymers
Products, particularly for its rigid and general purpose resins. Increased
activity in the construction industry has resulted in increased demand for
rigid grade resin for end use in pipe and siding production. The automotive
industry requirements have resulted in increased demand for general purpose
resins. These industries, however, could be negatively impacted by adverse
changes in general economic conditions, causing reduced demand for the
Partnership's PVC resins. Further, PVC resin sales prices, which are
approaching historically high levels, could decline if a downturn in the
economy causes reduced demand for PVC resins, thus creating excess industry
capacity. If economic conditions continue their favorable trends, the
Partnership anticipates that PVC resin demand will continue to meet or exceed
industry production.
During 1994, due to strength in the construction industry, the Partnership
experienced strong demand for methanol and formaldehyde in downstream
applications, such as adhesives for plywood and other pressed wood products.
Methanol demand has also been affected by the use of MTBE to comply with
certain requirements of the Clean Air Act. The Partnership expects continued
strong demand for methanol products in 1995, subject to the extent of
implementation and enforcement of the Clean Air Act and the substitution of
other products for MTBE. Published methanol prices increased from an average of
$0.47 per gallon during
22
<PAGE>
the fourth quarter of 1993 to an average of $1.45 per gallon during the fourth
quarter of 1994. The Partnership believes that its methanol sales prices are
likely to decrease through 1995 from current historically high levels but that
its sales prices during 1995 are likely to remain at relatively high levels
compared with sales prices in the past several years.
In Nitrogen Products, ammonia selling prices increased significantly during
1994 due primarily to a tighter worldwide supply resulting from restricted
production in the former Soviet Union. The decline in non-U.S. production has
significantly increased the price of ammonia imported into the U.S., which is a
net importer of ammonia, and has allowed domestically produced ammonia to rise
significantly in price. In the second half of 1994, urea prices recovered from
depressed levels in 1993 and early 1994 when competition from lower cost
imports forced domestic prices lower. Increased urea purchases overseas,
primarily by India and China, caused global and domestic prices to strengthen.
The Partnership expects the foregoing factors to continue in 1995 and,
accordingly, expects selling prices and volumes for its Nitrogen Products to
remain strong in 1995. However, changes in the market outside of its control
could adversely affect this outlook. The countries comprising the former Soviet
Union control a large portion of worldwide ammonia production capacity. The
unstable economies of these countries could force an increase from their
current production levels in order to receive foreign currency, causing an
increase in product available for import into the U.S. and resulting in
downward pressure on selling prices. In addition, there can be no assurance
that urea purchases by foreign countries will continue at current levels.
The cost of ethylene, the primary feedstock for PVC, has recently been
rising. The Partnership believes that its PVC operations have lower exposure to
ethylene price increases than many other manufacturers, because the Partnership
is able to produce a portion of its PVC raw material, VCM, from acetylene
instead of ethylene. Acetylene-based VCM manufacturing accounts for
approximately one-third of the Partnership's total VCM production. The primary
raw material for acetylene, as well as for methanol and ammonia, is natural
gas, thus the costs of these products are affected by changes in natural gas
prices which, in 1994, declined 10% from 1993 levels. Natural gas is also the
principal raw material for methanol. Chlorine is a feedstock for PVC resins and
unit costs have varied significantly on a historical basis, as demonstrated in
1991 when chlorine had a negative value in the market due to an extreme over-
supply situation. Recently, chlorine prices decreased from approximately $170
per ton in the first half of 1994 to approximately $145 per ton in December
1994.
Raw materials costs account for a high percentage of the Partnership's total
production costs. The Partnership purchases a major portion of its major raw
materials--natural gas, ethylene and chlorine--under market sensitive supply
contracts. Generally, prices under these contracts are adjusted on a monthly
basis and, although the Partnership generally does not purchase raw materials
at spot prices, its operating results are nevertheless subject to short-term
fluctuations in raw material market prices. These raw materials are commodities
and fluctuate in price due to general economic conditions, seasonal factors and
the supply/demand balance at any point in time. Natural gas prices vary
primarily due to seasonal changes in residential demand for heating purposes.
Ethylene is a derivative of the petroleum refining industry, with ethylene
prices tending to follow supply and demand factors of ethylene's derivative
products. Chlorine and its by-product caustic soda, a neutralizing agent in
numerous manufacturing processes, are both derivatives of brine. Prices for
each of these co-products are driven by supply and demand for each of the
products themselves, as well as the supply and demand for the co-product such
that either product can influence the price of the other. Unit costs for raw
materials can vary significantly within short periods. For example, during the
1992 to 1994 period, monthly prices of natural gas varied from $1.24 per
million BTU to $2.57 per million BTU primarily due to seasonal variations in
demand, monthly prices of ethylene varied from $0.15 per pound to $0.265 per
pound primarily due to variations in petroleum prices, and chlorine varied from
negative values in early 1992, resulting from an extreme oversupply of chlorine
due to a significant increase in demand for caustic soda, to a high of $170 per
ton in the first half of 1994. These fluctuations limit the ability to
accurately forecast future raw material costs.
23
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the dollar amount of revenues and the
percentage of total revenues for each of the principal product groups of the
Partnership (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
PVC Polymers Products.............. $347,122 53% $261,342 60% $247,209 61%
Methanol and Derivatives........... 236,032 36 119,779 28 100,002 25
Nitrogen Products.................. 74,598 11 52,176 12 54,592 14
-------- ---- -------- ---- -------- ----
Total Revenues................... $657,752 100% $433,297 100% $401,803 100%
======== ==== ======== ==== ======== ====
</TABLE>
Following are indices of relative average selling prices per unit of product
sold per period for the three principal product groups and relative average raw
material costs per unit purchased per period for the principal raw materials
(using 1985 as base year with index values of 100). The price indices in the
table reflect changes in the mix and volume of individual products sold as well
as changes in selling prices.
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Average Price Received per Unit Sold:
PVC Polymers Products....................................... 124 106 99
Methanol and Derivatives.................................... 166 94 88
Nitrogen Products........................................... 120 85 82
Average Raw Material Costs per Unit Purchased:
Natural Gas................................................. 79 88 74
Ethylene.................................................... 137 115 116
Chlorine.................................................... 116 83 7
</TABLE>
1994 COMPARED TO 1993
Total Revenues
Total revenues for 1994 increased $224.5 million or 51.8% to $657.8 million
from $433.3 million in 1993. This increase was the result of an $85.8 million
increase in PVC Polymers Products revenues, a $116.3 million increase in
Methanol and Derivatives revenues and a $22.4 million increase in Nitrogen
Products revenues.
Total revenues for PVC Polymers Products increased 32.8% as a result of a 17%
increase in selling prices and a 14% increase in sales volumes. These increases
were due to increased demand for PVC resins resulting from strength in the
construction and automotive industries, as well as other industries.
Total revenues for Methanol and Derivatives increased 97.1% as a result of a
76% increase in selling prices and a 12% increase in sales volumes. These
increases were due to the worldwide tightness in the methanol market resulting
from limited growth in methanol supply and industry consolidations in recent
years and increased demand for methanol and formaldehyde in downstream
applications such as MTBE and adhesives.
Total revenues for Nitrogen Products increased 43.0% as a result of a 40%
increase in selling prices and a 2% increase in sales volumes. Ammonia selling
prices increased significantly fueled primarily by strong domestic demand and
the worldwide tightness in the ammonia market. Urea volumes and selling prices
showed modest improvements.
Cost of Goods Sold
Total cost of goods sold increased 12.2% to $446.2 million in 1994 from
$397.8 million in 1993. The increase was a result of the increased volumes
discussed above and an aggregate raw material cost increase of approximately 4%
comprised of significant unit cost increases for chlorine and ethylene offset
by reduced natural gas costs. Expressed as a percentage of total revenues, cost
of good sold decreased to 68% of total revenues in 1994 from 92% in 1993,
resulting in greatly improved gross margins and net income for the Partnership.
24
<PAGE>
Gross margins for PVC Polymers Products increased 182% as a result of the
improved selling prices and volumes discussed above, offset by substantially
higher chlorine and ethylene costs.
Gross margins for Methanol and Derivatives increased 552% as a result of the
increased volumes and significantly higher selling prices discussed above,
combined with reduced natural gas costs.
Gross margins for Nitrogen Products improved from a slightly negative
position in 1993 to a profitable position in 1994 on the strength of the
ammonia selling price increases and reduced natural gas costs discussed above.
Incentive Distribution to General Partner
An incentive distribution to the General Partner of $20.6 million was
generated in 1994 as a result of the second, third and fourth quarter cash
distributions to Unitholders of $0.65, $1.02 and $1.64 per Unit, respectively,
exceeding the Target Distribution. The quarterly distributions generated in
1993 did not exceed the Target Distribution, resulting in no incentive
distribution to the General Partner.
Other (Income) and Expense, Including Minority Interest
The net expense for 1994 was $7.1 million compared to $1.6 million in 1993.
This increase was primarily due to a $4.0 million provision established in the
third quarter 1994 for potential expenses related to environmental matters. See
"Legal Proceedings" and Note 7 to the Financial Statements. The increase was
also partially due to the increase in the minority interest in consolidated
subsidiary due to the subsidiary's improved operating performance.
Net Income (Loss)
Net income was $146.4 million compared to a net loss of $1.4 million in 1993.
As discussed above, the primary reasons for the improved operating performance
were significant selling price increases in all product lines and volume
improvements in PVC resins and methanol, partially offset by increased raw
material costs.
1993 COMPARED TO 1992
Total Revenues
Total revenues for 1993 increased $31.5 million or 7.8% to $433.3 million in
1993 from $401.8 million in 1992. This increase was the net result of a $14.1
million increase in revenues from PVC Polymers Products, a $19.8 million
increase in Methanol and Derivatives revenues and a $2.4 million decrease in
Nitrogen Products revenues.
Total revenues for PVC Polymers Products increased 5.7% as a result of an 8%
increase in selling prices offset in part by a 2% decrease in sales volumes.
PVC producers, including the Partnership, increased PVC selling prices in 1993
in an attempt to pass on some of the increased costs associated with chlorine.
Total revenues for Methanol and Derivatives increased 19.8% as a result of an
8% increase in selling prices and an 11% increase in sales volumes. The
increased volume was achieved through production capacity increases that came
on-stream in 1993 that allowed the Partnership to meet increased winter demand
for MTBE, as well as increased general industry demand.
Total revenues for Nitrogen Products decreased 4.4% as a result of a 4%
increase in selling prices offset by an 8% decrease in sales volumes. Generally
weak market conditions led to reduced volumes for ammonia and urea, offset
partially by slightly higher ammonia selling prices from low 1992 levels.
25
<PAGE>
Cost of Goods Sold
Total cost of goods sold increased 17.7% to $397.8 million in 1993 from
$338.0 million in 1992. The increase resulted almost entirely from an aggregate
raw material cost increase of approximately 32% comprised of substantially
higher unit costs for natural gas and a dramatic unit cost increase for
chlorine, with ethylene costs remaining comparable to 1992. As a percentage of
total revenues, cost of goods sold increased to 92% of revenues in 1993 from
84% in 1992, resulting in reduced gross margins and a net loss for the
Partnership.
Gross margins for PVC Polymers Products decreased 54% as a result of the
significant increase in chlorine costs resulting primarily from a significant
decrease in demand for caustic soda which, as described above under "Overview
and Outlook", is a co-product of chlorine. Consequently, chlorine supplies were
significantly reduced, resulting in the increase in chlorine costs. This
increase in chlorine costs could not be fully recovered in product pricing due
to strong industry-wide competition.
Gross margins for Methanol and Derivatives decreased 7.7% from 1992. While
sales volumes and selling prices improved, it was not sufficient to offset
substantially higher natural gas costs.
Gross margins for Nitrogen Products declined to a moderate loss in 1993 from
near break-even in 1992. The increased ammonia selling price did not offset the
negative impact of reduced volumes and higher raw material costs.
Incentive Distribution to General Partner
No incentive distribution to the General Partner was generated in 1993 as no
quarterly cash distribution to Unitholders exceeded the Target Distribution. In
1992, incentive distributions to the General Partner aggregating $2.1 million
were generated in the first and second quarters, but no incentive distributions
were generated in the third or fourth quarter.
Other (Income) Expense, net
Other (income) and expense increased to $1.6 million in 1993 from $0.1
million in 1992 resulting from decreased interest income earned on reduced cash
balances during 1993 and from the amortization of the transition obligation
related to the 1993 adoption of SFAS No. 106 "Employers' Accounting for Post-
retirement Benefits Other Than Pensions."
Net Income (Loss)
The Partnership incurred a net loss of $1.4 million in 1993 compared to net
income of $27.1 million in 1992. As discussed above, the primary reason for the
net loss in 1993 was increased raw material costs, including a dramatic
increase in unit costs for chlorine and substantially higher unit costs for
natural gas, partially offset by slightly higher selling prices in all three
principal product groups of the Partnership.
INFLATION
Both inflation and deflation can cause fluctuations in annual earnings of the
Partnership. Inflation and deflation can cause variations in the costs of raw
materials and in the demand for, and prices of, commodity chemicals. Margins
can fluctuate because costs of raw materials and selling prices of commodity
chemicals may not increase or decrease at the same rates or in the same
direction during the same periods.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operations. Cash provided by operations increased to $164.2
million for 1994, as compared to $38.5 million for 1993. The increase was
primarily attributable to an increase in net income and increased accruals for
the incentive distribution payable and other liabilities. Operating cash flows
were
26
<PAGE>
negatively affected by an increase of $54.4 million in receivables. Cash
provided by operations for the year ended December 31, 1993 decreased to $38.5
million, as compared to $63.9 million for the prior year. The decrease was
primarily attributable to a decrease in net income, an increase in receivables
and an increase in inventories, partially offset by an increase in payables.
Cash Flows from Investing Activities. Capital expenditures for 1994 totaled
$22.6 million, $6.8 million of which related to completion of the urea
granulation and expansion project and other discretionary capital projects and
$15.8 million of which related to non-discretionary projects, and environmental
and safety related projects. Non-discretionary capital expenditures vary from
year to year with normal equipment renovation requirements.
Capital expenditures for 1993 totaled $15.0 million. This amount included
$5.9 million for the expansion of facilities (such as the new urea granulation
and expansion project) and for other discretionary capital improvements. Non-
discretionary capital expenditures totaled $9.1 million for 1993, which amount
included a large number of relatively small projects. During 1993, capital
expenditures were primarily related to the urea granulation and expansion
project, the ethylene-based VCM plant environmental project, and waste
treatment upgrades.
Cash Flows from Financing Activities. The Partnership makes quarterly
distributions to Unitholders and the General Partner of 100% of its Available
Cash. Available Cash means generally, with respect to any quarter, the sum of
all cash receipts of the Partnership plus net reductions to reserves
established in prior quarters, less all of its cash disbursements and net
additions to reserves in such quarter. The General Partner may establish
reserves to provide for the proper conduct of the Partnership's business, to
stabilize distributions of cash to Unitholders and the General Partner and as
necessary to comply with the terms of any agreement or obligation of the
Partnership.
Cash distributions of $76.6 million were made during 1994 compared to $33.8
million in 1993. During the quarters of 1994, the Partnership generated,
respectively, $0.21, $0.65, $1.02 and $1.64 of Available Cash per Unit which
amounts were distributed in the following quarters. See "Market for the
Registrant's Common Equity and Related Stockholder Matters". Cash distributions
with respect to interim periods are not necessarily indicative of cash
distributions with respect to a full year. Moreover, due to the cyclical nature
of the Partnership's business, past cash distributions are not necessarily
indicative of future cash distributions.
As discussed under Item 1 "Business" herein, there are various seasonality
factors affecting results of operations and, therefore, cash distributions. In
addition, the amount of Available Cash constituting Cash from Operations for
any period does not necessarily correlate directly with net income for such
period because various items and transactions affect net income and Available
Cash constituting Cash from Operations differently. For example, depreciation
reduces net income but does not affect Available Cash constituting Cash from
Operations, while changes in working capital items (including receivables,
inventories, accounts payable and other items) generally do not affect net
income but do affect such Available Cash. Moreover, as provided for in the
Partnership Agreements with respect to the Partnership and the Operating
Partnership, certain reserves may be established which affect Available Cash
constituting Cash from Operations but do not affect cash balances in financial
statements. Such reserves have generally been used to set cash aside for
interest payments, capital expenditures and other accrued items.
Proposed Acquisition and Financing
As described in "Business--General", the Operating Partnership entered into
an agreement to purchase the Addis Assets for $104.3 million, subject to
certain customary post closing adjustments.
Concurrent with, and conditioned upon, the closing of the acquisition, the
Partnership intends to offer up to 4.0 million additional Units (excluding an
over-allotment option for 600,000 additional Units). The net proceeds of this
offering will be used to fund a portion of the purchase price of the Addis
Assets.
27
<PAGE>
Concurrent with, and conditioned upon, the closing of both the acquisition
and the Units offering, the Operating Partnership intends to offer up to $175.0
million principal amount of Senior Notes. The net proceeds from this offering
will be used to prepay the currently outstanding $150.0 million principal
amount of the Notes. The remaining net proceeds will be used to fund a portion
of the purchase price of the Addis Assets. Depending on prevailing market
conditions and other factors, the Operating Partnership may offer Senior Notes
in an aggregate principal amount greater or lesser than $175.0 million. In the
event that the net proceeds of the Units offering and Senior Notes offering
available for payment of the purchase price of the Addis Assets are less than
such purchase price or the Senior Notes offering is postponed or not
consummated, short-term borrowings, cash on hand or a combination thereof will
be used to fund the portion of the purchase price of the acquisition not funded
by the Units offering. In the event that the acquisition of the Addis Assets or
the Senior Notes offering is not consummated, the Operating Partnership may,
but has not determined that it will, refinance the Notes through a public
offering or private placement of new notes. The Units offering and the Senior
Notes offering will only be made by means of separate prospectuses.
Liquidity
The Partnership expects to satisfy its cash requirements, including the
requirements of the Addis Facility, through internally generated cash and
borrowings. The Operating Partnership has a short-term unsecured working
capital facility of up to $20.0 million under a revolving credit agreement to
support working capital requirements. Borrowings under the working capital
facility bear interest at rates fixed at the time of each borrowing. There were
no significant borrowings under the working capital facility at any time during
1994, 1993 or 1992. The Partnership intends, in connection with the acquisition
of the Addis Facility, to either expand its existing working capital facility
by approximately $20.0 million or implement an additional working capital
facility in the amount of approximately $20.0 million.
Beginning in November 1995, the $150.0 million principal amount of Notes is
mandatorily redeemable in principal amounts of $30.0 million per year for the
years 1995 through 1999. The Partnership intends to use the net proceeds from
the sale of the Senior Notes to prepay the Notes.
Capital Expenditures
The Partnership currently believes that the level of annual base capital
expenditures over the next several years will be in the range of $20 to $25
million per year. Total capital expenditures for 1994 are approximately $22.6
million. Total capital expenditures for 1995 are anticipated to be
approximately $42 to $46 million, $20 to $25 million of which will be used for
annual base capital expenditures and the balance of which will be used
primarily for an approved 30 million gallon methanol expansion and a proposed
expansion of the Addis Facility. Future capital expenditures would vary
substantially if the Partnership is required to undertake corrective action or
incur other environmental compliance costs in connection with the proceedings
discussed under Item 3 "Legal Proceedings". No assurance can be given that
greater capital expenditures will not be required.
Environmental Expenditures
Annual environmental capital expenditures for 1992 to 1994 ranged from $1.3
to $4.7 million. Environmental capital expenditures for 1994 were approximately
$1.7 million. These amounts did not vary significantly from amounts budgeted by
the Partnership. The 1995 budget for environmental capital expenditures is
approximately $4.0 million, and is included in the total capital expenditures
budget of $42 to $46 million discussed above. No assurance can be given that
greater capital environmental expenditures will not be required. See
"Business--Environmental and Safety Regulations" and "Legal Proceedings".
Annual non-capital environmental expenditures for 1992 to 1994 ranged from
$18.7 to $22.6 million. These amounts did not vary significantly from amounts
budgeted by the Partnership. In connection with potential environmental
matters, an additional provision of $4.0 million was reflected in the operating
results
28
<PAGE>
in 1994 (see Item 3 "Legal Proceedings"). The 1995 budget for non-capital
environmental expenditures is approximately $18 million. The Partnership's
actual level of spending would vary substantially if the Partnership is
required to undertake corrective action or incur other environmental compliance
costs in connection with the proceedings discussed under Item 3 "Legal
Proceedings". No assurance can be given that greater non-capital environmental
expenditures will not be required. See "Business--Environmental and Safety
Regulations" and "Legal Proceedings".
Item 8. Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
SEQUENTIAL
INDEX TO FINANCIAL STATEMENTS PAGE
----------------------------- ----------
<S> <C>
Report of Independent Accountants................................ 38
Consolidated Statements of Operations for the years ended
December 31, 1994, 1993 and 1992................................ 39
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1993 and 1992................................ 40
Consolidated Balance Sheets as of December 31, 1994 and 1993..... 41
Consolidated Statements of Changes in Partners' Capital for the
years ended December 31, 1994, 1993 and 1992.................... 42
Notes to Consolidated Financial Statements....................... 43-47
</TABLE>
Selected Quarterly Financial Data (Unaudited)
(in thousands except per Unit data)
<TABLE>
<CAPTION>
1994 QUARTERS
-------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues........................... $118,981 $149,671 $169,481 $219,619
Gross Profits...................... 12,076 37,934 61,998 99,628
Net Income......................... 3,628 25,264 40,646 76,867
Net Income per Unit................ 0.10 0.68 1.09 2.07
<CAPTION>
1993 QUARTERS
-------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues........................... $ 90,604 $105,971 $111,001 $125,721
Gross Profits...................... 8,615 4,335 7,739 14,837
Net Income (Loss).................. 266 (4,855) (1,471) 4,625
Net Income (Loss) per Unit......... 0.01 (0.13) (0.04) 0.12
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No Form 8-K was issued by the Partnership for the two most recent years ended
December 31, 1994 reporting a change in or disagreement with accountants.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Partnership is a limited partnership (of which BCPM is the sole general
partner) and has no directors, officers or employees. The Operating Partnership
is a limited partnership (of which BCPM is the sole general partner and the
Partnership is the sole limited partner) and has no directors, officers or
employees. The directors, officers and employees of the General Partner
(together with employees of Borden providing support to or performing services
for BCPM) perform management and non-supervisory functions for the Partnership
and the Operating Partnership.
29
<PAGE>
Management Organization--Joseph M. Saggese is Chairman, President and Chief
Executive Officer of BCPM. He is also an Executive Vice President of Borden and
President of the PIP Division. John L. Russ III and Wayne P. Leonard, who
report directly to Mr. Saggese, are responsible for Partnership marketing and
manufacturing operations, respectively.
Independent Committee--BCPM is required to maintain an Independent Committee
of its Board of Directors, which is composed of three directors, each of whom
is neither an officer, employee or director of Borden nor an officer or
employee of BCPM. Certain actions require special approval ("Special Approval")
from the Independent Committee. Such actions include an expansion of the scope
of business of the Partnership or the Operating Partnership. The members of the
Independent Committee are Edward H. Jennings, George W. Koch and Daniel M.
Galbreath.
As sole stockholder of BCPM, Borden elects directors of BCPM on an annual
basis. Set forth below is certain information concerning the directors and
executive officers of BCPM.
<TABLE>
<CAPTION>
SERVED IN
AGE ON PRESENT
POSITION AND OFFICE DEC. 31, POSITION
NAME WITH GENERAL PARTNER 1994 SINCE
---- -------------------- -------- ---------
<C> <S> <C> <C>
Joseph M. Saggese Director, Chairman, President
and
Chief Executive Officer 63 1990
Daniel M. Galbreath Director 66 1987
Edward H. Jennings Director 57 1989
*David A. Kelly Director, Treasurer and Princi-
pal
Financial Officer 56 1987
George W. Koch Director 68 1987
Joan V. Stapleton Director and Vice President--
Strategy 49 1987
Ronald B. Wiles Director 56 1990
Wayne P. Leonard Vice President--Operations 53 1987
John L. Russ III Vice President--
Sales and Marketing 54 1987
James O. Stevning Controller and Principal Ac-
counting
Officer 35 1994
**Lawrence L. Dieker Vice President, Secretary, and
General Counsel 56 1987
</TABLE>
- --------
* Mr. Kelly was elected a director effective March 1, 1994.
** Mr. Dieker was elected Vice President and General Counsel effective January
25, 1995.
Joseph M. Saggese has been Chairman of the Board of Directors, President and
Chief Executive Officer of BCPM since July 1990. He is also Executive Vice
President of Borden, a position he has held since 1990, and is and has been
since 1990 President of the PIP Division and its predecessor divisions
(collectively with the PIP Division the "Chemicals Division"). From January
1989 to August 1990 he served as Senior Group Vice President of the Chemicals
Division. He served as a Senior Vice President of the Chemicals Division from
October 1985 to January 1989.
Daniel M. Galbreath is a director of BCPM. He is Chairman of the Board and
CEO of The Galbreath Company, a position he has held since 1979. The Galbreath
Company is a national full-service real estate business. Mr. Galbreath is also
a director of Churchill Downs, Incorporated, the owner and operator of
thoroughbred racetracks.
30
<PAGE>
Edward H. Jennings is a director of BCPM. He is also a professor and
President Emeritus of The Ohio State University. He served as president of The
Ohio State University from 1981 to 1990. Mr. Jennings is also a director of
Super Foods, Inc., a wholesale grocer, Lancaster Colony, Inc., a manufacturer
and marketer of food, automotive and glass products, and Hymedia, Inc., a
medical products company.
David A. Kelly is a director, Treasurer and Principal Financial Officer of
BCPM. He is also Vice President and Treasurer of Borden, a position he has held
since 1980.
George W. Koch is a director of BCPM. He is Of Counsel in the law firm of
Kirkpatrick & Lockhart since January 1992. Prior to that he was a partner of
Kirkpatrick & Lockhart since April 1990. From 1966 to April 1990, he was
President and Chief Executive Officer of the Grocery Manufacturers of American,
Inc., a non-profit organization of the leading grocery manufacturers in the
United States. Mr. Koch is also a director of McCormick & Co., a food products
company.
Joan V. Stapleton is a director and a Vice President of BCPM. She is also
Vice President of the Chemicals Division, a position she has held since 1983.
She has served in other capacities with the Chemicals Division since 1972,
including assistant controller, manager of business planning/commercial
development, and director of planning and development.
Ronald B. Wiles is a director of BCPM. He is also Controller of the Chemicals
Division, a position he has held since July 1, 1990. Prior to that time, he
held various Group Controller positions for the Chemicals Division.
Lawrence L. Dieker is a Vice President, General Counsel and Secretary of
BCPM. He is also a Vice President and General Counsel of the PIP Division, a
position he has held since January 1995. He was previously Assistant General
Counsel of Borden, a position he held from 1982 to January 1995.
Wayne P. Leonard is a Vice President of BCPM. From 1984 to 1987, he was
Director of Manufacturing, Basic Chemicals Unit of the Chemicals Division.
Prior thereto, he was manager of the vinyl products sector of the Basic
Chemicals Unit of the Chemicals Division. He has served in the chemical
business thirty years and at all such times he has worked at the Geismar
complex.
John L. Russ III is a Vice President of BCPM. From 1986 to 1987, he was
General manager, Thermoplastics Units and Petrochemical Chemicals Division. He
joined Borden in 1982 as director of sales and marketing for the Thermoplastics
Unit of the Chemicals Division. He has served in the PVC resin business in
sales and marketing capacities for over thirty years.
James O. Stevning has been Controller and Principal Accounting Officer of
BCPM since March 1994. He is also Group Controller of the Company, a position
he has held since April 1992. Prior to that he was Assistant Controller of the
Chemicals Division.
Item 11. Executive Compensation
The Partnership and the Operating Partnership have no directors or officers
and rely on BCPM for their management. The directors and officers of BCPM
receive no direct compensation from the Partnership or the Operating
Partnership for services to the Partnership or the Operating Partnership. The
Partnership and the Operating Partnership reimburse Borden and BCPM for all
direct and indirect costs incurred in managing the Partnership and the
Operating Partnership.
The Board of Directors of the General Partner recently approved in principle
the adoption by the General Partner of an employee incentive plan for
management and employees of the General Partner (and employees of Borden
providing support to or performing services for the General Partner). The plan
is
31
<PAGE>
intended to provide incentives to the management and employees of the General
Partner (and such employees of Borden) to enhance the financial performance of
the Partnership or the market value of the Units or both. Rewards will be made
under the plan on the basis of or in relation to services performed, directly
or indirectly, for the benefit of the Partnership and on the basis of the
financial performance of the Partnership or the market value of the Units or
both. Rewards will be made under the plan on the basis of or in relation to
services performed, directly or indirectly, for the benefit of the Partnership
and on the basis of the financial performance of the Partnership or the market
value of the Units or both. The benefits to be provided under the plan may be
in addition to, and not in lieu of, the benefit provided to management and
employees of the General Partner (and such employees of Borden) under existing
plans or employee benefit arrangements. The plan may involve the grant by the
Partnership of Units, restricted Units or options to purchase Units, the
provision by the General Partner of cash bonuses or some combination thereof.
It is expected that all Units under the plan would be made available through
open market purchases. The General Partner will be reimbursed by the
Partnership for all payments made or expenses incurred by the General Partner
under the plan. As currently approved, the maximum amount of additional Units
that could be available under the plan would be 1 1/2% of the outstanding Units
and, if the plan involves payments by the Partnership, the maximum amount
payable by the Partnership during any year would be 1 1/2% of the Available
Cash distributed to Unitholders with respect to such year (together with
authorized but unutilized amounts for any prior years). The final terms of the
plan may be different from the terms indicated herein (including in respect of
maximum amounts of Units or payments).
During 1994 the three independent directors of BCPM received a retainer of
$15,000 per year plus a fee of $1,000 for each BCPM Board meeting attended. The
Board functions in part through its Independent and Audit Committees. The three
non-employee members of each of these committees are paid a meeting fee of $700
for each committee meeting attended. The committee chairman is also paid an
additional $100 for each committee meeting attended in that capacity. During
1994, the Board met 11 times, and the Independent and Audit Committees met
jointly ten times.
Item 12. Security Ownership of Certain Beneficial Owners and Management
To the knowledge of BCPM, no person is the beneficial owner of more than five
percent of the Partnership's Units. As of February 10, 1995 the beneficial
ownership of Common Units by all directors and executive officers of BCPM as a
group was 43,175 Units, which represents less than one percent of the total
Units outstanding.
Item 13. Certain Relationships and Related Transactions
The Partnership is managed by BCPM pursuant to the Partnership Agreement. The
Partnership Agreement provides for reimbursement of certain costs of managing
the Partnership. These costs include compensation and benefits payable to
officers and employees of BCPM (and employees of Borden providing support to or
performing services for BCPM), payroll taxes, general and administrative costs
and legal and professional fees. Note 3 of Notes to Consolidated Financial
Statements of the Partnership contained on page 41 of this Form 10-K Annual
Report contains information regarding relationships and related transactions.
Mr. Daniel M. Galbreath, a director of BCPM, is President of The Galbreath
Company which is the Management and Leasing Agent for the owners of an office
building in Columbus, Ohio which is used by Borden and BCPM as executive and
administrative offices. The Partnership believes that the terms of the current
lease are, and that any extension or renewal thereof will be, on terms no less
favorable to Borden and BCPM than if such premises were leased from any other
independent third party.
32
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
a. The Consolidated Financial Statements, together with the report
thereon of Price Waterhouse LLP dated January 24, 1995 are contained
on pages 38 through 47 of this Form 10-K Annual Report.
2. Financial Statement Schedules
a. The following additional financial data should be read in conjunction
with the Consolidated Financial Statements of the Partnership
contained on pages 38 through 47 of this Form 10-K Annual Report.
Schedules not included with this additional financial data have been
omitted because they are not applicable or the required information is
shown in the Consolidated Financial Statements or Notes thereto.
<TABLE>
<CAPTION>
SEQUENTIAL
ADDITIONAL FINANCIAL DATA PAGE
------------------------- ----------
<S> <C>
Report of Independent Accountants on Financial Statement
Schedules................................................... 48
Property and Equipment (Schedule V).......................... 49
Accumulated Depreciation of Property and Equipment (Schedule
VI)......................................................... 50
</TABLE>
3. Exhibits
<TABLE>
<CAPTION>
<C> <S> <C>
2.1(/6/)(/7/) Asset Transfer Agreement dated as of August 12, 1994
and amended as of January 10, 1995, between the
Operating Partnership and Occidental Chemical
Corporation, and the forms of VCM Supply Agreement and
PVC Tolling Agreement annexed thereto
3.1(/2/) Certificate of Incorporation of BCPM
3.1.1(/2/) Certificate of Amendment to Certificate of
Incorporation of BCPM
3.2(/2/) By-Laws of BCPM
3.3(/1/) Amended and Restated Certificate of Limited
Partnership of the Partnership
3.4(/1/) Amended and Restated Certificate of Limited
Partnership of the Operating Partnership
3.5(/1/) Amended and Restated Agreement of Limited Partnership
of the Partnership dated as of December 15, 1988
3.6(/3/) Amended and Restated Agreement of Limited Partnership
of the Operating Partnership, dated as of November 30,
1987
4.1(/6/) Form of Depositary Receipt for Common Units
10.1(/6/) Second Amended and Restated Deposit Agreement, dated
February 16, 1993 among Borden Chemicals and Plastics
Limited Partnership, Society National Bank, Borden,
Inc. and BCP Management, Inc.
10.2(/3/) Conveyance and Transfer Agreement, dated as of
November 30, 1987, among Borden, BCPM, Borden
Delaware, the Operating Partnership and the
Partnership
10.3(/3/) Note Agreement, dated as of November 20, 1987, among
the Operating Partnership and Metropolitan Life
Insurance Company ("Metropolitan Life"), Metropolitan
Insurance and Annuity Company ("Metropolitan Annuity")
and the Prudential Insurance Company of America
("Prudential")
10.3.1 Prepayment Terms Agreement dated as of December 15,
1994, among the Operating Partnership, Borden,
Metropolitan Life, Metropolitan Annuity and Prudential
10.3.2 Notes Prepayment Agreement dated as of December 15,
1994, between the Operating Partnership and Borden
</TABLE>
- --------
See page 36 for footnote explanations.
33
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
10.4(/3/) Revolving Credit Agreement, dated as of November 20,
1987, between the Operating Partnership and Wachovia
Bank and Trust Company, N.A.
10.5(/3/) Service Agreement, dated as of November 30, 1987,
between Borden and the Operating Partnership
10.6(/3/) Intercompany Agreement, dated as of November 30, 1987,
among Borden, BCPM, the Partnership and the Operating
Partnership
10.7(/1/) Borden and BCPM Covenant Agreement, dated as of
December 15, 1988, among Borden and the Partnership
10.8(/1/) Ethylene Dichloride/Vinyl Chloride Monomer Tolling
Agreement, dated as of July 19, 1988, between the
Operating Partnership and Vulcan Chemicals, a division
of Vulcan Materials Company
10.9(/3/) PVC Purchase Agreement, dated as of November 30, 1987,
between Borden and the Operating Partnership
10.9.1(/1/) Amendment Agreement No. 1 to PVC Purchase Agreement,
dated as of December 15, 1988, between Borden and the
Operating Partnership
10.10(/3/) Ammonia Purchase Agreement, dated as of November 30,
1987, between Borden and the Operating Partnership
10.10.1(/1/) Amendment Agreement No. 1 to Ammonia Purchase
Agreement, dated as of December 15, 1988, between
Borden and the Operating Partnership
10.11(/3/) Urea Purchase Agreement, dated as of November 30, 1987,
between Borden and the Operating Partnership
10.12(/3/) Methanol Purchase Agreement, dated as of November 30,
1987, between Borden and the Operating Partnership
10.12.1(/1/) Amendment Agreement No. 1 to Methanol Purchase
Agreement, dated as of December 15, 1988, between
Borden and the Operating Partnership
10.13(/3/) Formaldehyde Processing Agreement, dated as of November
30, 1987, between Borden and the Operating Partnership
10.13.1(/1/) Amendment Agreement No. 1 to Formaldehyde Processing
Agreement, dated as of December 15, 1988 between Borden
and the Operating Partnership
10.14(/3/) Urea-Formaldehyde Concentrate Processing Agreement,
dated as of November 30, 1987, between Borden and the
Operating Partnership
10.14.1(/1/) Amendment Agreement No. 1 to Urea-Formaldehyde
Concentrate Processing Agreement, dated as of December
15, 1988, between Borden and the Operating Partnership
10.15(/3/) Use of Name and Trademark License Agreement, dated as
of November 30, 1987, among Borden, the Partnership and
the Operating Partnership
10.16(/3/) Patent and Know-How Agreement, dated November 30, 1987,
among Borden, the Partnership and the Operating
Partnership
10.17(/3/) Environmental Indemnity Agreement, dated as of November
30, 1987, among the Partnership, the Operating
Partnership and Borden
10.18(/3/) Lease Agreement, dated as of November 30, 1987, between
the Operating Partnership and Borden
10.19(/2/) Indenture, dated as of June 1, 1962, among Monochem,
Inc., Borden and Uniroyal Chemical Company, Inc. (as
successor to Uniroyal Inc., which was a successor to
United States Rubber Company)
</TABLE>
- --------
See page 36 for footnote explanations.
34
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
10.20(/2/) Amendment to Indenture, dated as of December 30, 1981,
among Monochem, Inc., Borden and Uniroyal Chemical
Company, Inc. (as successor to Uniroyal, Inc.)
10.21(/2/) Restructuring Agreement, dated as of December 9, 1980,
among Borden, Uniroyal Chemical Company, Inc. (as
successor to Uniroyal, Inc.) and Monochem, Inc.
10.22(/2/) Amendment to Restructuring Agreement, dated as of
December 31, 1981, among Borden, Uniroyal Chemical
Company, Inc. (as successor to Uniroyal, Inc.) and
Monochem, Inc.
10.23(/2/) Restated Basic Agreement, dated as of January 1, 1982,
between Borden and Uniroyal Chemical Company, Inc. (as
successor to Uniroyal, Inc.)
10.24(/2/) Restated Operating Agreement, dated as of January 1,
1982, among Borden, Uniroyal Chemical Company, Inc. (as
successor to Uniroyal, Inc.) and Monochem, Inc.
10.25(/2/) Restated Agreement to Amend Operating Agreement, dated as
of January 1, 1983, among Borden, Uniroyal Chemical
Company, Inc. (as successor to Uniroyal, Inc.) and
Monochem, Inc.
10.26(/2/) Operating Agreement for Oxygen and Acetylene Plants,
dated April 1, 1982, between Borden and BASF Wyandotte
Corporation (subsequently named BASF Corporation)
("BASF")
10.27(/2/) Amendment to Operating Agreement for Oxygen and Acetylene
Plants, dated August 22, 1984, between Borden and BASF
10.28(/2/) Second Amendment to Operating Agreement for Oxygen and
Acetylene Plants, dated December 14, 1984, between Borden
and BASF
10.29(/2/) Third Amendment to Operating Agreement for Oxygen and
Acetylene Plants, dated as of October 2, 1985, between
Borden and BASF
10.30(/2/) Fourth Amendment to Operating Agreement, dated August 25,
1987, between Borden and BASF
10.31(/2/) Fifth Amendment to Operating Agreement, dated November
10, 1987, between Borden and BASF
10.32(/1/) Sixth Amendment to Operating Agreement, dated February
11, 1988, between the Operating Partnership and BASF
10.33(/2/) Third Purchase Agreement, dated August 25, 1987, between
Borden and BASF
10.34(/2/) Operating Agreement, dated December 14, 1984 among
Borden, BASF, Liquid Air Corporation ("LAC") and LAI
Properties, Inc. ("LAI")
10.35(/2/) Amendment No. 1 to Operating Agreement, dated October 2,
1985, among Borden, BASF, LAC and LAI
10.36(/1/) Amendment No. 2 to the Operating Agreement, dated
February 11, 1988, among Borden, the Operating
Partnership, BASF, LAC and LAI
10.37(/2/) Second Operating Agreement, dated October 2, 1985, among
Borden, BASF, LAC and LAI
10.38(/1/) Restated Second Operating Agreement, dated February 11,
1988 among Borden, the Operating Partnership, BASF, LAC
and LAI
10.39(/1/) Acetylene Sales Agreement No. 1, dated February 11, 1988,
between the Operating Partnership and BASF
10.40(/1/) Acetylene Sales Agreement No. 2, dated February 11, 1988,
between the Operating Partnership and BASF
</TABLE>
- --------
See page 36 for footnote explanations.
35
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
10.41(/3/) Railroad Car Master Sublease Agreement, dated as of
November 30, 1987, between Borden and the Operating
Partnership, relating to ACF Industries, Incorporated
Master Service Contract
10.42(/3/) Railroad Car Master Sublease Agreement, dated as of
November 30, 1987, between Borden and the Operating
Partnership, relating to Pullman Leasing Company Lease of
Railroad Equipment
10.43(/3/) Railroad Car Master Sublease Agreement, dated as of
November 30, 1987, between Borden and the Operating
Partnership, relating to Union Tank Car Company Service
Agreement
10.44(/3/) Railroad Car Master Sublease Agreement, dated as of
November 30, 1987, between Borden and the Operating
Partnership, relating to General Electric Railroad
Service Corporation Car Leasing Agreement
10.45(/3/) Railroad Car Master Sublease Agreement, dated as of
November 30, 1987, between Borden and the Operating
Partnership, relating to General American Transportation
Corporation Tank Car Service Contract
10.46(/3/) Railroad Car Sublease Agreement, dated as of November 30,
1987, between Borden and the Operating Partnership,
relating to EHF Leasing Corporation Railroad Equipment
Lease
10.47(/3/) Railroad Car Sublease Agreement, dated as of November 30,
1987, between Borden and the Operating Partnership,
relating to Bank of New York Lease of Railroad Equipment
(as amended)
10.48(/2/) Form of Rail Service Agreement between Borden and the
Operating Partnership
10.49(/4/) Form of Letter Agreement with Directors
10.50(/3/) Illiopolis Indemnity Agreement
12 Ratio of Earnings to Fixed Charges
21(/2/) Subsidiary of the Partnership
27 Financial Data Schedules
</TABLE>
- --------
(1) Filed as an exhibit to the joint Registration Statement on Form S-1 and
Form S-3 of the Partnership, Borden, Inc. and Borden Delaware Holdings,
Inc. (File No. 33-25371) and is incorporated herein by reference in this
Form 10-K Annual Report.
(2) Filed as an exhibit to the Partnership's Registration Statement on Form S-1
(File No. 33-17057) and is incorporated herein by reference in this Form
10-K Annual Report.
(3) Filed as an exhibit to the Partnership's Registration Statement on Form S-1
(File No. 33-18938) and is incorporated herein by reference in this Form
10-K Annual Report.
(4) Filed as an exhibit to the Registrant's 1989 Form 10-K Annual Report and is
incorporated herein by reference in this Form 10-K Annual Report.
(5) Filed as an exhibit to the Registrant's 1992 Form 10-K Annual Report and is
incorporated herein by reference in this Form 10-K Annual Report.
(6) Filed as an exhibit to the Partnership's Registration Statement on Form S-3
(File No. 33-55863) and is incorporated herein by reference in this Form
10-K Annual Report.
(7) Exhibit 2.1, which was previously filed (see footnote (6) above), contains
information which has been deleted pursuant to a pending application for
confidential treatment pursuant to Rule 406 of the Securities Act of 1933.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the fourth
quarter 1994.
36
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Borden Chemicals and Plastics
Limited Partnership
By BCP Management, Inc., General
Partner
/s/ David A. Kelly
By___________________________________
David A. Kelly,
Director, Treasurer and Principal
Financial Officer
/s/ James O. Stevning
By: _________________________________
James O. Stevning
Controller and Principal
Accounting Officer
Date: February 23, 1995
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES (WITH BCP MANAGEMENT, INC., GENERAL PARTNER)
INDICATED, ON THE DATE SET FORTH ABOVE.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Joseph M. Saggese Director, Chairman, President and Chief
___________________________________________ Executive Officer
Joseph M. Saggese
/s/ Daniel M. Galbreath Director
___________________________________________
Daniel M. Galbreath
/s/ Edward H. Jennings Director
___________________________________________
Edward H. Jennings
/s/ George W. Koch Director
___________________________________________
George W. Koch
/s/ Joan V. Stapleton Director and Vice President
___________________________________________
Joan V. Stapleton
/s/ Ronald B. Wiles Director
___________________________________________
Ronald B. Wiles
</TABLE>
37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE PARTNERS OF BORDEN CHEMICALS
AND PLASTICS LIMITED PARTNERSHIP
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in partners' capital and of
cash flows present fairly, in all material respects, the financial position of
Borden Chemicals and Plastics Limited Partnership and its subsidiaries at
December 31, 1994 and 1993, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Columbus, Ohio
January 24, 1995
38
<PAGE>
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Net trade sales................................ $514,499 $349,200 $328,343
Net affiliated sales........................... 143,253 84,097 73,460
-------- -------- --------
Total revenues............................. 657,752 433,297 401,803
-------- -------- --------
EXPENSES
Cost of goods sold
Trade........................................ 352,700 321,966 274,505
Affiliated................................... 93,516 75,805 63,477
Marketing, general & administrative expense.... 21,092 18,993 18,118
Interest expense............................... 16,342 16,356 16,340
General Partner incentive...................... 20,616 0 2,146
Other (income) and expense, including minority
interest...................................... 7,081 1,612 132
-------- -------- --------
Total expenses............................. 511,347 434,732 374,718
-------- -------- --------
Net income (loss)................................ 146,405 (1,435) 27,085
Less 1% General Partner interest............... (1,464) 14 (271)
-------- -------- --------
Net income (loss) applicable to Limited Partners'
interest........................................ $144,941 $ (1,421) $ 26,814
======== ======== ========
Net income (loss) per Unit....................... $ 3.94 $ (0.04) $ .73
======== ======== ========
Average number of Units outstanding during the
year............................................ 36,750 36,750 36,750
======== ======== ========
Cash distributions declared per Unit............. $ 3.52 $ .78 $ 1.59
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
39
<PAGE>
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS
Net income (loss).............................. $146,405 $ (1,435) $ 27,085
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................. 44,305 42,946 43,584
(Increase) in receivables.................... (54,374) (11,821) (3,398)
Decrease (increase) in inventories........... 1,126 (5,418) (996)
Increase in payables......................... 6,298 13,698 5,887
Increase (decrease) in incentive distribution
payable..................................... 11,865 0 (1,607)
Other, net................................... 8,583 517 (6,618)
-------- -------- --------
164,208 38,487 63,937
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................... (22,578) (15,041) (10,534)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash distributions paid........................ (76,558) (33,781) (66,856)
-------- -------- --------
Increase (decrease) in cash and equivalents...... 65,072 (10,335) (13,453)
Cash and equivalent at beginning of year......... 9,054 19,389 32,842
-------- -------- --------
Cash and equivalents at end of year.............. $ 74,126 $ 9,054 $ 19,389
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid during the year ................. $ 16,342 $ 16,356 $ 16,340
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
40
<PAGE>
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, 1994 DECEMBER 31, 1993
------ ------------------ -----------------
<S> <C> <C>
Cash and equivalents...................... $ 74,126 $ 9,054
Accounts receivable (less allowance for
doubtful accounts of $627 and $768,
respectively)
Trade................................... 84,330 48,990
Affiliated.............................. 37,301 18,267
Inventories
Finished and in process goods........... 19,591 21,499
Raw materials and supplies.............. 8,540 7,758
Other current assets...................... 2,831 2,182
--------- ---------
Total current assets.................. 226,719 107,750
--------- ---------
Investments in and advances to affiliated
companies................................ 3,772 3,623
Other assets.............................. 29,094 26,956
--------- ---------
32,866 30,579
--------- ---------
Land...................................... 12,051 12,051
Buildings................................. 37,931 35,955
Machinery and equipment................... 523,517 505,236
--------- ---------
573,499 553,242
Less accumulated depreciation........... (290,180) (247,267)
--------- ---------
283,319 305,975
--------- ---------
$ 542,904 $ 444,304
========= =========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
<S> <C> <C>
Accounts and drafts payable............... $ 50,706 $ 44,408
Cash distributions payable................ 60,999 6,682
Current portion of long-term debt......... 30,000 0
Incentive distribution payable to General
Partner.................................. 11,865 0
Accrued interest.......................... 1,845 1,845
Other accrued liabilities................. 14,330 8,515
--------- ---------
Total current liabilities............. 169,745 61,450
--------- ---------
Long-term debt............................ 120,000 150,000
Other liabilities......................... 5,471 854
Minority interest in consolidated
subsidiary............................... 1,953 1,795
--------- ---------
127,424 152,649
--------- ---------
Contingencies (see Note 7)
Partners' capital
Limited Partners........................ 244,443 228,862
General Partner......................... 1,292 1,343
--------- ---------
Total partners' capital............... 245,735 230,205
--------- ---------
$ 542,904 $ 444,304
========= =========
</TABLE>
See notes to consolidated financial statements
41
<PAGE>
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERENCE COMMON GENERAL
UNITHOLDERS UNITHOLDERS PARTNER TOTAL
----------- ----------- ------- ---------
<S> <C> <C> <C> <C>
Balances at December 31, 1991...... $ 235,120 $ 55,446 $ 1,989 $ 292,555
Net income......................... 20,521 6,293 271 27,085
Cash distributions declared........ (44,718) (13,714) (613) (59,045)
--------- -------- ------- ---------
Balances at December 31, 1992...... 210,923 48,025 1,647 260,595
Combination of Preference and
Common units...................... (210,923) 210,923
Net loss........................... (1,421) (14) (1,435)
Cash distributions declared........ (28,665) (290) (28,955)
--------- -------- ------- ---------
Balances at December 31, 1993...... 0 228,862 1,343 230,205
Net income......................... 144,941 1,464 146,405
Cash distributions declared........ (129,360) (1,515) (130,875)
--------- -------- ------- ---------
Balances at December 31, 1994...... $ 0 $244,443 $ 1,292 $ 245,735
========= ======== ======= =========
</TABLE>
See notes to consolidated financial statements.
42
<PAGE>
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT UNIT AND PER UNIT DATA)
1. ORGANIZATION
Borden Chemicals and Plastics Limited Partnership (the Partnership), a
Delaware limited partnership, was formed in 1987 when the Partnership, through
its subsidiary operating partnership, acquired the basic chemicals and
polyvinyl chloride (PVC) resins operations of Borden, Inc. (Borden). The
operations are comprised of highly integrated plants in Geismar, Louisiana,
which produce basic petrochemical products, PVC resins and industrial gases and
a PVC resins plant located in Illiopolis, Illinois. The Partnership conducts
its activities through Borden Chemicals and Plastics Operating Limited
Partnership (the Operating Partnership). The Partnership, as the sole limited
partner, owns a 98.9899% interest and BCP Management, Inc. (BCPM), a Delaware
corporation and wholly-owned subsidiary of Borden, owns a 1.0101% interest as
the sole general partner (General Partner) in the Operating Partnership. The
General Partner's interest in the Operating Partnership is reflected in the
accompanying consolidated financial statements as minority interest.
Borden and its affiliates contributed the basic chemicals and PVC resins
operations to the Partnership in exchange for 28,125,000 Preference Units,
8,625,000 Common Units, the general partner interest in each of the
partnerships, the net proceeds of $150,000 aggregate principal amount of Notes
issued by the Operating Partnership and the assumption by the Operating
Partnership of substantially all liabilities of Borden related to the basic
chemicals and PVC resins operations.
In 1987 Borden and its affiliates sold the Preference Units representing a
75% interest in the partnerships and in 1988 sold the Common Units, as Enhanced
Common Units, representing a 23% interest in the partnerships. Borden retains,
through BCPM's general partner interest, the remaining 2% interest in the
partnerships. With the payments of the 1992 fourth quarter distribution on
February 12, 1993, all differences between the Preference Units and Enhanced
Common Units ceased and all units are now Common Units.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies summarized below are in conformity with
generally accepted accounting principles; however, this will not be the basis
for reporting taxable income to Unitholders.
Principles of Consolidation--The consolidated financial statements include
the accounts of the Partnership and the Operating Partnership after elimination
of interpartnership accounts and transactions. The Partnership's proportionate
ownership of a joint venture that provides utilities to the Geismar complex is
accounted for by the equity method. Utilities provided by the joint venture are
allocated to the joint venture partners at cost. The cost of the Partnership's
proportionate share of utilities is included in cost of goods sold.
Revenues--Sales and related cost of sales are recognized upon shipment of
products. Net trade and net affiliated sales are net of sales discounts and
product returns and allowances.
Cash Equivalents--The Partnership considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
Inventories--Inventories are stated at the lower of cost or market. Cost is
determined using the average cost and first-in, first-out methods.
Property and Equipment--The amount of the purchase price originally allocated
by the Partnership to land, buildings, and machinery and equipment was based
upon their relative fair values. Expenditures made subsequent to the formation
of the Partnership have been capitalized at cost.
43
<PAGE>
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT UNIT AND PER UNIT DATA)
Depreciation is recorded on the straight-line basis by charges to costs and
expenses at rates based on the estimated useful lives of the properties
(average rates for buildings--4%; machinery and equipment--8%).
Major renewals and betterments are capitalized. Maintenance, repairs and
minor renewals totaling $32,144 in 1994, $29,905 in 1993, and $29,302 in 1992
were expensed as incurred. When properties are retired or otherwise disposed
of, the related cost and accumulated depreciation are removed from the
accounts.
Income Taxes--The Partnership is not a separate taxable entity for Federal
and state and local income tax purposes. Accordingly, any taxable income or
loss, which may vary substantially from income or loss reported under generally
accepted accounting principles, should be reported in the tax returns of the
individual partners. Under current tax law the Partnership will be treated as a
partnership until December 31, 1997; thereafter, it will be taxed as a
corporation. Effective January 1, 1993 the Partnership adopted statement of
Financial Accounting Standard (SFAS) No. 109 "Accounting for Income Taxes." The
adoption of this statement did not have a material effect on 1993 results.
3. RELATED PARTY TRANSACTIONS
The Partnership is managed by the General Partner. Under certain agreements,
the General Partner and Borden are entitled to reimbursement of costs incurred
relating to the business activities of the Partnership. The Partnership is
engaged in various transactions with Borden and its affiliates in the ordinary
course of business. Such transactions include, among other things, the sharing
of certain general and administrative costs, sales of products to and purchases
of raw materials from Borden or its affiliates, and usage of rail cars owned or
leased by Borden.
The employees of BCPM (together with employees of Borden, providing support
to or services for BCPM) operate the Partnership and participate in various
Borden benefit plans including pension, retirement savings, and health and life
insurance. Employee benefit plan expenses are determined by Borden's actuary
based on annual employee census data. The Partnership is charged for general
insurance expense, which includes liability and property damage insurance,
based on calculations made by Borden's Risk Management Department. Under its
risk retention program, Borden maintains deductibles of $2,500 and $500 per
occurrence for property and related damages at the Geismar and Illiopolis
facilities, respectively, and deductibles ranging from $1,000 to $3,000 per
event for liability insurance. The Partnership has first dollar liability
insurance coverage from Borden. The cost of Borden's corporate information
services and corporate staff department services is allocated to the
Partnership based on usage of resources such as personnel and data processing
equipment.
The Partnership has no direct liability for post retirement benefits since
the Partnership does not directly employ any of the persons responsible for
managing and operating the Partnership, but instead reimburses Borden (on its
own or BCPM's behalf) for their services. As a result of Borden's adoption of
SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than
Pensions", 1994 and 1993 charges to the Partnership for such services were
actuarially determined. The Partnership expensed the full amount of such
charges but only reimbursed Borden (on its own or BCPM's behalf) for actual
post retirement benefits paid. The difference between cash payments to Borden
(on its own or BCPM's behalf) and post retirement expense is accrued on the
Partnership's books. In 1992 the Partnership was charged and reimbursed Borden
(on its own or BCPM's behalf) for other post retirement benefits on a cash
basis.
Benefit plan and general insurance expenses, and allocation for usage of
resources such as personnel and data processing equipment were $9,991 in 1994,
$9,506 in 1993, $10,319 in 1992. Management believes these
44
<PAGE>
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT UNIT AND PER UNIT DATA)
allocations reasonably reflect the usage of BCPM's and Borden's resources by
the Partnership. Although no specific analysis has been undertaken, if the
Partnership were to directly provide such services and resources at the same
cost as BCPM and Borden, management believes these costs would be indicative of
costs that would be incurred on a stand-alone basis.
The Partnership sells methanol, ammonia, urea and PVC resins to, and
processes formaldehyde and urea-formaldehyde concentrate for, Borden and its
affiliates at prices which approximate market.
The Partnership entered into long-term agreements with Borden which require
Borden to purchase from the Partnership at least 85% of Borden's requirements
for PVC resins, ammonia, urea and methanol and to utilize specified percentages
of the Partnership's capacity to process formaldehyde and urea-formaldehyde
concentrate.
4. DEBT
At December 31, long-term debt consists of the following:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
10.7% Note due 1997..................................... $ 90,000 $ 90,000
11.1% Note due 1999..................................... 60,000 60,000
-------- --------
150,000 150,000
Less current portion.................................... 30,000 0
-------- --------
$120,000 $150,000
======== ========
</TABLE>
On November 30, 1987, the Operating Partnership issued $150,000 aggregate
principal amount of Notes in a private placement. The gross proceeds were
reduced by $1,600 of expenses associated with the borrowing. These expenses
have been deferred and are being amortized over the term of the debt.
The Operating Partnership is obligated to redeem $30,000 of the 10.7% Note
due 1997 in each of 1995 and 1996 and to redeem $30,000 of the 11.1% Note due
1999 in 1998; however, the Operating Partnership intends to refinance these
Notes. See Note 7. Contingencies. The Notes provide that no recourse is
available against the General Partner.
The aggregate fair value of the Partnership's outstanding debt was $152,914
at December 31, 1994 and $183,586 at December 31, 1993, which was calculated
based on current yields for debt with similar characteristics.
The Partnership has a short-term unsecured working capital facility of up to
$20,000 under a revolving credit agreement. There were no significant
borrowings under the revolving credit agreement at December 31, 1994 and 1993,
or during the 1994 and 1993 period. There were also no amounts outstanding at
any month end during 1994 and 1993. A commitment fee of 1/4% per annum is
payable on the unused portion. Borrowings under the revolving credit agreement
bear interest at rates fixed at the time of each borrowing. It provides that no
recourse is available against the General Partner.
5. ALLOCATION OF INCOME AND LOSS
Income and loss of the Partnership is allocated in proportion to the
partners' percentage interests in the Partnership, provided that at least 1% of
the income or loss of the Partnership and Operating Partnership is
45
<PAGE>
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT UNIT AND PER UNIT DATA)
allocated to the General Partner. For income tax purposes, certain items are
specially allocated to account for differences between the tax basis and fair
market value of property contributed to the Partnership by Borden and to
facilitate uniformity of Units. In addition, the Partnership Agreement
generally provides for an allocation of gross income to the Unitholders and the
General Partner to reflect disproportionate cash distributions, on a per Unit
basis.
6. CASH DISTRIBUTIONS
The Partnership makes quarterly distributions to Unitholders and the General
Partner of 100% of its Available Cash. Available Cash each quarter generally
consists of cash receipts less cash disbursements (excluding cash distributions
to Unitholders and the General Partner) and reserves.
Distributions of Available Cash are generally made 98% to the Unitholders and
2% to the General Partner, subject to the payment of an incentive distribution
to the General Partner after a target level of cash distributions to the
Unitholders is achieved for the quarter. The incentive distribution is 20% of
any remaining Available Cash for the quarter (in addition to the General
Partner's 2% regular distribution). Incentive distributions are accounted for
as an expense of the Partnership.
Upon payment on February 12, 1993 of the 1992 fourth quarter distribution,
and effective December 31, 1992, (1) Borden's obligations under certain
agreements to ensure minimum quarterly distributions on the Preference Units
and the Enhanced Common Units were extinguished, (2) the Support Period, during
which the Preference Units and Enhanced Common Units were entitled to minimum
quarterly distributions (or arrears in respect thereof), expired and (3) all
differences between the Preference Units and Enhanced Common Units ceased and
all Units became (and now constitute) a single class of Units.
7. CONTINGENCIES
Proposed Acquisition and Financing
On August 12, 1994, the Operating Partnership entered into an agreement with
Occidental Chemical Corporation to purchase its Addis, Louisiana PVC
manufacturing facility and related assets. The Addis Facility has an annual
proven production capacity of 450 million pounds per year, which will increase
the Operating Partnership's stated annual capacity for PVC resin production by
over 50%. The cash purchase price for the Addis assets is $104,300, subject to
certain customary post closing adjustments. The acquisition is subject to
certain conditions, including approval by the U. S. Federal Trade Commission
(the FTC) and financing of the acquisition.
Concurrent with, and conditioned upon, the closing of the acquisition, the
Partnership intends to offer up to 4.0 million additional Units (excluding an
over-allotment option for 600,000 additional Units). The net proceeds of this
offering will be used to fund a portion of the purchase price of the Addis
Facility.
Concurrent with, and conditioned upon, the closing of the acquisition and the
Units offering, the Operating Partnership intends to offer $175,000 aggregate
principal amount of senior unsecured notes (the Senior Notes). The net proceeds
from this offering will be used to prepay the currently outstanding $150,000
aggregate principal amount of existing notes plus any related premium. The
remaining proceeds will be used to fund a portion of the purchase price of the
Addis Facility. In the event the proceeds of the two offerings available for
payment of the purchase price are insufficient or the Senior Notes offering is
postponed or not consummated, a portion of the purchase price will be paid
through short-term borrowings, cash on hand or a combination thereof to fund
the purchase price of the acquisition not funded by the Units offering.
46
<PAGE>
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(IN THOUSANDS EXCEPT UNIT AND PER UNIT DATA)
Environmental and Legal Proceedings
On October 27, 1994, the U.S. Department of Justice (DOJ), at the request of
the U.S. Environmental Protection Agency (the EPA), filed an action against the
Partnership and BCPM in the U.S. District Court for the Middle District of
Louisiana. The complaint seeks facility-wide corrective action and civil
penalties for alleged violations of the federal Resource, Conservation and
Recovery Act (RCRA), the federal Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA), and the Clean Air Act at the Geismar
complex. If the Partnership is unsuccessful in this proceeding, or otherwise
subject to RCRA permit requirements, it may be subject to three types of costs:
(i) corrective action; (ii) penalties; and (iii) costs needed to obtain a RCRA
permit. Portions of such costs could be subject to the Environmental Indemnity
Agreement (EIA) discussed below.
The Partnership is subject to extensive federal, state and local
environmental laws and regulations which impose limitations on the discharge of
pollutants into the air and water, establish standards for the treatment,
storage, transportation and disposal of solid and hazardous wastes, and impose
obligations to investigate and remediate contamination in certain
circumstances. The Partnership has expended substantial resources, both
financial and managerial, and it anticipates that it will continue to do so in
the future. Failure to comply with the extensive federal, state and local
environmental laws and regulations could result in significant civil or
criminal penalties, and remediation costs.
Under the EIA, Borden has agreed, subject to certain specified limitations,
to indemnify the Partnership in respect of environmental liabilities arising
from facts or circumstances that existed and requirements in effect prior to
November 30, 1987, the date of the initial sale of the Geismar and Illiopolis
plants to the Partnership. The Partnership is responsible for environmental
liabilities arising from facts or circumstances that existed and requirements
that become effective on or after such date. With respect to certain
environmental liabilities that may arise from facts or circumstances that
existed and requirements in effect both prior to and after such date, Borden
and the Partnership will share liabilities on an equitable basis considering
all of the facts and circumstances including, but not limited to, the relative
contribution of each to the matter and the amount of time each has operated the
assets in question (to the extent relevant). No claims can be made under the
EIA after November 30, 2002, and no claim can, with certain exceptions, be made
with respect to the first $500 of liabilities which Borden would otherwise be
responsible for thereunder in any year, but such excluded amounts shall not
exceed $3,500 in the aggregate. Excluded amounts under the EIA have aggregated
approximately $2,200 through December 31, 1994.
In connection with potential environmental matters, a $4,000 provision has
been included in the Partnership's 1994 operating results. Because of various
factors (including the nature of any settlement with appropriate regulatory
authorities or the outcome of any proceeding, actual environmental conditions,
the scope of the application of the EIA and the timing of actions, if any,
required to be taken by the Partnership), the Partnership cannot reasonably
estimate the full range of costs it might incur with respect to the
environmental matters discussed herein. The costs incurred in any quarter or
year could be material to the Partnership's results of operations for such
quarter or year, although, on the basis of the relevant facts and
circumstances, management believes this to be unlikely. However, management
believes that such costs should not have a material adverse effect on the
Partnership's financial position.
In addition, the Partnership is subject to various other legal proceedings
and claims which arise in the ordinary course of business. In the opinion of
the management of the Partnership, based upon the information it presently
possesses, the amount of the ultimate liability for these proceedings and
claims taking into account its insurance coverage, including its risk retention
program and the EIA with Borden, would not materially affect the financial
position or results of operations of the Partnership.
47
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
BCP Management, Inc.
Our audits of the consolidated financial statements of Borden Chemicals and
Plastics Limited Partnership referred to in our report dated January 24, 1995,
appearing on page 38 of this Annual Report on Form 10-K also included an audit
of the Financial Statement Schedules listed in Item 14 (a)(2)(a) of this Annual
Report on Form 10-K. In our opinion, these Financial Statement Schedules
present fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
Price Waterhouse LLP
Columbus, Ohio
January 24, 1995
48
<PAGE>
SCHEDULE V
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
PROPERTY AND EQUIPMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE
AT BALANCE
BEGINNING ADDITIONS RETIREMENTS AT END
CLASSIFICATION OF PERIOD AT COST OR SALES OF PERIOD
- -------------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Land................................ $ 12,051 $ $ $ 12,051
Buildings........................... 35,955 2,026 50 37,931
Machinery and Equipment............. 505,236 20,552 2,271 523,517
-------- ------- ------ --------
$553,242 $22,578 $2,321 $573,499
======== ======= ====== ========
YEAR ENDED DECEMBER 31, 1993
Land................................ $ 11,960 $ 91 $ 12,051
Buildings........................... 36,012 $ 57 35,955
Machinery and Equipment............. 492,593 14,950 2,307 505,236
-------- ------- ------ --------
$540,565 $15,041 $2,364 $553,242
======== ======= ====== ========
YEAR ENDED DECEMBER 31, 1992
Land................................ $ 11,507 $ 499 $ 46 $ 11,960
Buildings........................... 35,701 340 29 36,012
Machinery and Equipment............. 484,653 9,695 1,755 492,593
-------- ------- ------ --------
$531,861 $10,534 $1,830 $540,565
======== ======= ====== ========
</TABLE>
49
<PAGE>
SCHEDULE VI
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
ACCUMULATED DEPRECIATION OF PROPERTY AND EQUIPMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE BALANCE
AT CHARGED TO AT END
BEGINNING COSTS AND RETIREMENTS OF
CLASSIFICATION OF PERIOD EXPENSES OR SALES PERIOD
- -------------- --------- ---------- ----------- --------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Land (1)........................... $ 2,444 $ 453 $ $ 2,897
Buildings.......................... 8,432 1,519 12 9,939
Machinery and Equipment............ 236,391 42,333 1,380 277,344
-------- ------- ------ --------
$247,267 $44,305 $1,392 $290,180
======== ======= ====== ========
YEAR ENDED DECEMBER 31, 1993
Land (1)........................... $ 1,988 $ 456 $ 2,444
Buildings.......................... 7,016 1,430 $ 14 8,432
Machinery and Equipment............ 196,425 41,060 1,094 236,391
-------- ------- ------ --------
$205,429 $42,946 $1,108 $247,267
======== ======= ====== ========
YEAR ENDED DECEMBER 31, 1992
Land (1)........................... $ 1,558 $ 441 $ 11 $ 1,988
Buildings.......................... 5,594 1,428 6 7,016
Machinery and Equipment............ 155,520 41,715 810 196,425
-------- ------- ------ --------
$162,672 $43,584 $ 827 $205,429
======== ======= ====== ========
</TABLE>
- --------
(1) Relates to depreciable improvements to land.
50
<PAGE>
EXHIBIT 10.3.1
FINAL
Prepayment Terms Agreement
--------------------------
PREPAYMENT TERMS AGREEMENT dated as of this 15th day of December, 1994 (this
"Agreement") by and among Borden, Inc. ("Borden"), Borden Chemicals and Plastics
Operating Limited Partnership ("BCOP"), The Prudential Insurance Company of
America ("Prudential"), Metropolitan Life Insurance Company ("MLIC") and
Metropolitan Insurance and Annuity Company ("MIAC" and, together with Prudential
and MLIC, the "Noteholders").
WHEREAS, BCOP has issued and outstanding $60,000,000 in aggregate principal
amount of its promissory notes held by Prudential, $70,000,000 in aggregate
principal amount of its promissory notes held by MLIC and $20,000,000 in
aggregate principal amount of its promissory notes held by MIAC (such promissory
notes collectively, the "Notes") pursuant to the Note Agreement dated as of
November 20, 1987, among BCOP and the Noteholders (the "Note Agreement"); and
WHEREAS, Borden entered into an Undertaking dated as of November 20, 1987 (the
"Undertaking") for the benefit of the Noteholders whereunder, among other
things, Borden agreed in Section 4.1 thereof that in the event of a Change of
-----------
Control of Borden (as defined in the Undertaking), Borden would offer to
purchase the Notes on the terms specified therein, and the parties are desirous
of amending such provisions of the Undertaking; and
WHEREAS, the Note Agreement does not provide for the optional right of
prepayment by BCOP of the Notes or for the purchase by Borden of the Notes and
the parties are desirous of providing such a right of prepayment to BCOP and
such a right of Purchase to Borden; and
WHEREAS, BCOP agreed in Section 9.3 of the Note Agreement to offer to purchase
-----------
the Notes in the event of certain changes of control with respect to Borden
Chemicals and Plastics Limited Partnership ("BCP"), the limited partner in BCOP,
or BCP Management, Inc., the general partner of BCP and BCOP, and the parties
are desirous of amending such provisions of the Note Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt, adequacy and
sufficiency of which is hereby acknowledged by the parties hereto, the parties
hereto hereby agree as follows:
1. Definitions. The following capitalized terms shall have the following
-----------
meanings:
<PAGE>
"Business Day" means any day other than a Saturday, Sunday or other day on
-------------
which commercial banks in New York City are required or authorized to be closed.
"Excess Premium Amount" means, with respect to each Note, the excess, if any,
--------------------- ------ -- ----
of (A) the Make Whole Premium with respect to such Note calculated in accordance
- --
with the Note Agreement as of (i) the date of voluntary prepayment by BCOP of
such Note (in the event that BCOP prepays such Note pursuant to Section 3), (ii)
---------
the date of voluntary purchase by Borden of such Note (in the event that Borden
purchases such Note pursuant to Section 4), (iii) the date of mandatory
---------
prepayment by BCOP of such Note (in the event that BCOP is required to prepay
such Note pursuant to Section 9.3 of the Note Agreement), or (iv) the date that,
-----------
upon the occurrence and continuation of an Event of Default (as defined in the
Note Agreement), such Note becomes due and payable in accordance with the
provisions of Section 11 of the Note Agreement (in the event that such Note
----------
becomes due and payable in accordance with the provisions of Section 11 of the
----------
Note Agreement), as the case may be, over (B) the Make Whole Premium paid by
----
Borden with respect to such Note pursuant to Section 2.
---------
"Make Whole Payment Date" means the earlier of (i) the first Business Day
-----------------------
following a Change of Control of Borden (as defined in Section 4.1 of the
-----------
Undertaking) and (ii) December 28, 1994; provided, however, that if the Make
--------- -------
Whole Payment Date would, but for this proviso, be earlier than December 21,
1994, then the Make Whole Payment Date shall be deemed to be December 21, 1994.
"Make Whole Premium" means, with respect to each Noteholder, the Make Whole
------------------
Premium, as defined in Section 13 of the Note Agreement, for the Notes held by
----------
such Noteholder calculated as of the applicable date of payment or determination
of such premium.
"Permitted Event" means any of the following events: (A) BCOP acquires a
---------------
majority of the outstanding voting shares of capital stock of BCP Management,
Inc. or any other corporation or other entity which at the applicable time is
the general partner of BCOP (the "General Partner") and, immediately after
giving effect to such acquisition, BCOP is able to incur at least $1 of
additional Funded Debt (as defined in the Note Agreement) pursuant to the Note
Agreement; (B) the General Partner is merged with and into BCOP, BCOP is merged
with and into the General Partner or BCOP and the General Partner are
consolidated or merged with and into any other entity so long as, in each such
case, the surviving or successor entity is bound by the Note Agreement and,
immediately after giving effect to such acquisition, the surviving or successor
entity is able to incur
2
<PAGE>
at least $1 of additional Funded Debt (as defined in the Note Agreement)
pursuant to the Note Agreement; or (C) the General Partner is merged with and
into BCP, BCP is merged with and into the General Partner or BCP and the General
Partner are consolidated or merged with and into any other entity (provided that
a Prepayment Event (as defined in Section 9.3 of the Note Agreement) shall be
-----------
deemed to occur at such time that Borden ceases to be the beneficial owner,
directly or indirectly, of a majority of the equity interests in the surviving
or successor entity that Borden received in connection with any transaction
referred to in this clause (C)).
2. Payment of Make Whole Premium. Borden shall, in accordance with the
-----------------------------
provisions of Section 6, pay to each Noteholder on the Make Whole Payment Date
---------
the Make Whole Premium, calculated as of such date, with respect to the Notes
then held by such Noteholder.
3. Right of Prepayment. (a) BCOP shall have the right, exercisable in its
--------------------
discretion at any time after payment by Borden of the Make Whole Premium
pursuant to Section 2 (but not in any event prior to January 3, 1995), to
---------
prepay, in accordance with the provisions of Section 6, all but not less than
---------
all the Notes. Such election shall be made by BCOP by provision to the
Noteholders of at least three Business Days prior written notice of BCOP's
election to prepay the Notes on a date (which shall be a Business Day) selected
by BCOP in such notice.
(b) The prepayment price payable by BCOP to each Noteholder upon exercise of
BCOP's right to prepay the Notes shall be the sum of (A) the aggregate
outstanding principal amount of the Notes held by such Noteholder as of the
prepayment date plus (B) accrued but unpaid interest on the Notes held by such
----
Noteholder as of and including the prepayment date plus (C) the Excess Premium
----
Amount, if any, with respect to the Notes held by such Noteholder.
4. Right of Purchase. (a) Borden shall have the right, exercisable in its
-----------------
discretion at any time after payment by Borden of the Make Whole Premium
pursuant to Section 2 (but not in any event prior to January 3, 1995), to
---------
purchase, in accordance with the provisions of Section 6, all but not less than
---------
all the Notes. Such election shall be made by Borden by provision to the
Noteholders of at least three Business Days prior written notice of Borden's
election to purchase the Notes on a date (which shall be a Business Day)
selected by Borden in such notice.
(b) The purchase price payable by Borden to each Noteholder upon exercise of
Borden's right to purchase the Notes shall be the sum of (A) the aggregate
outstanding principal
3
<PAGE>
amount of the Notes held by such Noteholder as of the purchase date plus (B)
----
accrued but unpaid interest on the Notes held by such Noteholder as of and
including the purchase date plus (C) the Excess Premium Amount, if any, with
----
respect to the Notes held by such Noteholder.
(c) Borden's right to purchase the Notes set forth in this Section 4 shall
---------
terminate and be of no force and effect at such time that Borden ceases to own,
directly or indirectly, a majority of the outstanding capital shares of voting
stock of the general partner of BCOP.
5. Amendment of Agreements and Continuation of Note Obligations. Upon receipt
------------------------------------------------------------
by the Noteholders of the Make Whole Premium pursuant to Section 2:
---------
(i) the provisions of Section 4.1 and Section 4.4 of the Undertaking
----------- -----------
shall be deemed terminated and of no force and effect;
(ii) notwithstanding the provisions of Section 9.3 of the Note
-----------
Agreement or any other provision of the Note Agreement, a Permitted Event
shall not constitute or be deemed to constitute a Prepayment Event (as
defined in Section 9.3 of the Note Agreement);
-----------
(iii) notwithstanding the provisions of Section 9.3 of the Note
-----------
Agreement or any other provision of the Note Agreement, no Make Whole
Premium shall be payable by BCOP in connection with any mandatory
prepayment of the Notes that BCOP is required to effect pursuant to Section
-------
9.3 of the Note Agreement (after giving effect to clause (ii) above), and
---
in lieu thereof, the Excess Premium Amount, if any, with respect to the
Notes to be prepaid shall be payable by BCOP in accordance with the
provisions of Section 9.3 of the Note Agreement;
-----------
(iv) notwithstanding the provisions of Section 9.6 of the Note
-----------
Agreement or any other provision of the Note Agreement, BCOP may prepay the
Notes in accordance with the provisions of Section 3 and Borden may
---------
purchase the Notes in accordance with the provisions of Section 4;
---------
(v) notwithstanding the provisions of Section 11 of the Note
----------
Agreement or any other provision of the Note Agreement, no Make Whole
Premium shall become due and payable by BCOP in connection with any Event
of Default (as defined in Section 11 of the Note Agreement) and, in lieu
----------
thereof, the Excess Premium Amount, if any, with respect to any Notes that
become due and payable pursuant to Section 11 of the Note Agreement shall
----------
become due and payable by BCOP
4
<PAGE>
in accordance with the provisions of Section 11 of the Note Agreement;
----------
(vi) Section 10.1(e) and Section 13 of the Note Agreement shall be
--------------- ----------
automatically amended, without the necessity of taking any further action
or executing or delivering any additional document, as follows:
(A) the following additional proviso shall be added to the end
of Section 10.1(e) of the Note Agreement after the words "Priority Debt
---------------
does not exceed 15% of Consolidated Net Tangible Assets":
"and provided further that on the date the Company or any Restricted
-------- -------
Subsidiary becomes liable with respect to any such additional Funded
Debt and immediately after giving effect thereto and to the concurrent
retirement of any other Indebtedness, the total outstanding principal
amount of all Funded Debt of the Company and its Restricted
Subsidiaries does not exceed 55% of Total Capitalization"; and
(B) the following additional definition shall be added to Section 13
----------
of the Note Agreement after the definition of "10.70% Notes":
"Total Capitalization: as of the time of any determination thereof, the
---------------------
aggregate amount of all Funded Debt of the Company and its Restricted
Subsidiaries and partners' capital (or in the event that the Company is
converted or merged into a corporation, shareholders' equity),
including retained earnings, of the Company determined on a
consolidated basis in accordance with generally accepted accounting
principles. For purposes of calculating Total Capitalization there
shall be deducted from the assets of the Company all assets that would
be treated as intangibles under generally accepted accounting
principles (except that there shall not be deducted from the assets of
the Company any assets that are treated as intangibles under generally
accepted accounting principles and that arise in connection with the
transactions contemplated under the Asset Transfer Agreement dated as
of August 12, 1994 between the Company and Occidental Chemical
Corporation, as amended from time to time)."; and
(vii) the Notes shall continue to be outstanding and payable by BCOP in
accordance with their terms and the terms of the Note Agreement as and to
the extent amended and modified hereby.
5
<PAGE>
6. Payment Instructions; Documents. (a) Unless otherwise agreed to by the
-------------------------------
parties, any amounts payable by Borden or BCOP to each Noteholder pursuant to
this Agreement shall be payable by wire transfer of such amounts in immediately
available funds no later than 12:00 p.m. New York City time on the applicable
prepayment date or payment date to the account or accounts of such Noteholder
specified in the Note Agreement.
(b) Each Noteholder shall, in connection with the transactions contemplated by
this Agreement, provide to Borden or BCOP, as the case may be, such receipts and
acknowledgements of prepayment or purchase as Borden or BCOP may reasonably
request. Each Noteholder shall also, in the event of a prepayment by BCOP of the
Notes pursuant to Section 3 or a purchase by Borden of the Notes pursuant to
---------
Section 4, provide to BCOP or Borden, as the case may be, the original Note held
- ---------
by such Noteholder (or in lieu thereof, an unsecured indemnity reasonably
satisfactory to BCOP or Borden, as the case may be), together with, in the event
of prepayment of the Notes, an instrument of prepayment reasonably satisfactory
to BCOP acknowledging prepayment of such Note and, in the event of purchase of
the Notes, an instrument of assignment reasonably satisfactory to Borden
assigning such Noteholder's right, title and interest in and to such Note to
Borden, free and clear of any lien, claim or encumbrance created by or arising
against such Noteholder and, in each case, representing and warranting that such
Noteholder is the sole beneficial owner of and has good and valid title to such
Note.
7. Representations and Warranties. (a) Borden represents and warrants that it
------------------------------
has the authority to enter into this Agreement and that this Agreement
constitutes a legal, valid and binding obligation of Borden.
(b) BCOP represents and warrants that (i) it has the authority to enter into
this Agreement and that this Agreement constitutes a legal, valid and binding
obligation of BCOP and (ii) there is no Event of Default (as defined in the Note
Agreement) in existence as of the date of this Agreement.
(c) Each Noteholder represents and warrants as to itself that it has the
authority to enter into this Agreement and that this Agreement constitutes a
legal, valid and binding obligation of such Noteholder. Each Noteholder
represents and warrants as to itself that it is the sole beneficial owner of
Notes having an aggregate outstanding principal amount specified in the recitals
to be held by such Noteholder, that it has good and valid title to such Notes
and it has not entered into any agreement (other than this Agreement) to
transfer, sell or pledge the Notes owned by it or any interest or participation
therein.
6
<PAGE>
8. Governing Law. This Agreement and the obligations of the parties under this
-------------
Agreement shall be governed and construed in accordance with the laws of the
State of New York, construed and applied without giving effect to principles of
conflicts of laws.
9. Successors and Assigns. This Agreement will be binding upon and inure to
-----------------------
the benefit of the parties hereto and their successors and assigns. Without
limiting the foregoing, the provisions of this Agreement shall continue to apply
(including with respect to the Notes, the Note Agreement and the Undertaking)
upon and after any sale, transfer, pledge or assignment of the Notes by any
Noteholder or transferee of the Notes.
10. Amendments; Entire Agreement. (a) This Agreement cannot be amended or
-----------------------------
terminated orally, but only by a writing duly executed by or on behalf of the
parties.
(b) This Agreement constitutes an amendment of the provisions of the
Undertaking and the Note Agreement specifically referred to herein and
represents the entire agreement and understanding among the parties hereto with
respect to the subject matter hereof and supersedes any other agreement or
understanding, written or verbal, that the parties may have with respect to the
subject matter hereof. Except as specifically amended hereby, the Undertaking
and the Note Agreement remain in full force and effect.
11. Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed to have been duly given (i) five Business Days after
mailing if mailed by certified or registered mail, return receipt requested,
(ii) one Business Day after delivery to an overnight express carrier, if sent
for overnight delivery with fee prepaid, (iii) upon receipt if sent via
facsimile with receipt confirmed, or (iv) upon receipt if delivered personally,
addressed as follows or to such other address or addresses of which the
respective party shall have notified the other parties:
(a) if to Borden, to:
180 East Broad Street
Columbus, Ohio 43215
Telecopier Number: 614-225-4973
Attention: Mr. David A. Kelly
Vice President and Treasurer
(b) if to BCOP, to:
7
<PAGE>
180 East Broad Street
Columbus, Ohio 43215
Telecopier Number: 614-225-4973
Attention: Mr. David A. Kelly
Principal Financial Officer
(c) if to Prudential, to:
c/o Prudential Capital Group
2 Prudential Plaza
180 North Stetson Avenue
Suite 5600
Chicago, Illinois 60601
Telecopier Number: 312-540-4222
Confirmation Number: 312-540-0931
Attention: Managing Director
(d) if to MLIC, to:
Metropolitan Life Insurance Company
One Madison Avenue
New York, New York 10010
Telecopier Number: 212-578-4454
Attention: Treasurer
With a copy to:
Metropolitan Life Insurance Company
200 Park Avenue
New York, New York 10166
Telecopier Number: 212-692-5784
Attention: Vice President
Corporate Investments
Northeastern Office
(e) if to MIAC, to:
Metropolitan Life Insurance Company
One Madison Avenue
New York, New York 10010
Telecopier Number: 212-578-4454
Attention: Treasurer
With a copy to:
Metropolitan Insurance and Annuity Company
8
<PAGE>
200 Park Avenue
New York, New York 10166
Telecopier Number: 212-692-5784
Attention: Vice President
Corporate Investments
Northeastern Office.
12. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which will be deemed an original instrument, but all of
which together will constitute one and the same agreement, and will become
binding when one or more counterparts have been executed and delivered by each
of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date first above written.
BORDEN, INC.
By:
-------------------------------------
Name:
Title:
BORDEN CHEMICALS AND PLASTICS
OPERATING LIMITED PARTNERSHIP
By: BCP Management, Inc.,
as General Partner
By:
---------------------------------
Name:
Title:
9
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
By:
-----------------------------------
Name:
Title:
METROPOLITAN LIFE INSURANCE COMPANY
By:
-----------------------------------
Name:
Title:
METROPOLITAN INSURANCE AND ANNUITY COMPANY
By:
-----------------------------------
Name:
Title:
10
<PAGE>
EXHIBIT 10.3.2
FINAL
Notes Prepayment Agreement
--------------------------
NOTES PREPAYMENT AGREEMENT dated as of this 15th day of December, 1994 (this
"Agreement") by and between Borden, Inc. ("Borden") and Borden Chemicals and
Plastics Operating Limited Partnership ("BCOP").
WHEREAS, BCOP has issued and outstanding $60,000,000 in aggregate principal
amount of its promissory notes held by The Prudential Insurance Company of
America ("Prudential"), $70,000,000 in aggregate principal amount of its
promissory notes held by Metropolitan Life Insurance Company ("MLIC") and
$20,000,000 in aggregate principal amount of its promissory notes held by
Metropolitan Insurance and Annuity Company ("MIAC" and, together with Prudential
and MLIC, the "Noteholders")(such promissory notes collectively, the "Notes")
pursuant to the Note Agreement dated as of November 20, 1987 (the "Note
Agreement") among BCOP and the Noteholders; and
WHEREAS, Borden entered into an Undertaking dated as of November 20, 1987 (the
"Undertaking") for the benefit of the Noteholders whereunder, among other
things, Borden agreed that in the event of a Change of Control of Borden (as
defined in the Undertaking), Borden would offer to purchase the Notes from the
Noteholders on the terms specified therein; and
WHEREAS, Borden, BCOP and the Noteholders have entered into a Prepayment Terms
Agreement dated as of the date thereof (the "Prepayment Terms Agreement")
pursuant to which, among other things, Borden has agreed to pay a Make Whole
Premium (as defined therein) to the Noteholders; and
WHEREAS, the Prepayment Terms Agreement provides that upon payment by Borden
of such Make Whole Premium, among other things, (i) BCOP shall have the right,
not otherwise provided for in the Note Agreement, to prepay the Notes, (ii) the
obligation of BCOP set forth in the Note Agreement to offer to purchase the
Notes from the Noteholders (with a premium on the Notes) in the event of certain
changes of control of the general or limited partner in BCOP will be modified to
reduce or eliminate the premium on the Notes that might be payable by BCOP,
(iii) the obligation of Borden set forth in the Undertaking to offer to purchase
the Notes from the Noteholders upon a Change of Control of Borden will be
terminated, (iv) BCOP will be subject to a restriction on incurrence of
indebtedness in addition to the restrictions currently imposed on BCOP under the
Note Agreement and (v) Borden shall have the right to purchase the Notes from
the Noteholders; and
WHEREAS, BCOP acknowledges that the Prepayment Terms Agreement, including the
payment by Borden pursuant thereto of
<PAGE>
the Make Whole Premium, will result in certain benefits to BCOP (including the
provision to BCOP of a right to prepay the Notes and the reduction or
elimination of the premium on the Notes that might be payable by BCOP in the
event of certain changes of control of the general or limited partner in BCOP);
and
WHEREAS, the parties wish to set forth their understandings with respect to
the terms and conditions under which BCOP would exercise its right of prepayment
of the Notes and certain related matters;
NOW, THEREFORE, for good and valuable consideration, the receipt, adequacy and
sufficiency of which is hereby acknowledged by the parties hereto, the parties
hereto hereby agree as follows:
1. DEFINITIONS. The following capitalized terms shall have the following
-----------
meanings:
"Bona Fide Offer" means a bona fide offer to purchase the Notes in cash by an
---------------
institutional investor which has the financial means to effect such purchase and
is unaffiliated to the parties or the Investment Bank and is not subject to any
obligation to purchase or offer to purchase the Notes and has not been provided
any inducement to purchase or offer to purchase the Notes. Such offer shall not
contain any material conditions or contingencies not typically contained in
offers from institutional investors to purchase instruments such as the Notes
(other than those related to the provisions of this Agreement or the Prepayment
Terms Agreement).
"Borden Reimbursement Amount" means the amount, if any, equal to (A) the
--------------------------- ----- --
Purchase Premium less (B) 50% of the fees and expenses of the Investment Bank
----
for determining the Purchase Premium less (C) the amount, if any, of any
----
prepayment premium actually paid by BCOP pursuant to Section 3(b)(C) of the
---------------
Prepayment Terms Agreement (in the event BCOP prepays the Notes as contemplated
in Section 2) or the amount, if any, of any prepayment premium that would have
---------
been paid by BCOP pursuant to Section 3(b)(C) of the Prepayment Terms Agreement
---------------
if BCOP had prepaid the Notes on the proposed date of sale of the Notes set
forth in the notice provided by Borden pursuant to Section 3(b) (in the event
------------
BCOP does not prepay the Notes but commits to pay the Borden Reimbursement
Amount pursuant to Section 3(c)). In the event that the amount obtained under
the foregoing formula is a negative number, Borden shall not be required to pay
such amount to BCOP.
"Business Day" means any day other than a Saturday, Sunday or other day on
-------------
which banking institutions are not required to be open in the State of New York.
-2-
<PAGE>
"Investment Bank" means any one of the following investment banks selected by
---------------
BCOP: Morgan Stanley & Co. Incorporated, CS First Boston Corporation, Salomon
Brothers Inc, Bear Stearns & Co. Inc., Goldman Sachs & Co. and Donaldson, Lufkin
& Jenrette Securities Corporation. BCOP shall identify the investment bank
selected by it in the notice provided by it pursuant to Section 2(a) or Section
------------ -------
3(c), as the case may be. In the event that BCOP fails to select an investment
- ----
bank in the applicable notice, the Investment Bank shall be Morgan Stanley & Co.
Incorporated.
"Market Value" means (a) the highest and best Bona Fide Offer to purchase the
------------
Notes received by the Investment Bank within the 10 Business Days preceding the
proposed date of prepayment or sale of the Notes set forth in the notice
provided by BCOP pursuant to Section 2(a) or Borden pursuant to Section 3(b), as
------------ ------------
the case may be (provided that if there are fewer than 10 Business Days from the
date of execution of the engagement letter referred to in Section 4(a) to such
------------
proposed date of prepayment or sale, such 10 Business Day period shall begin on
the day following the date of execution of such engagement letter), or (b) in
the event that the Investment Bank does not obtain a Bona Fide Offer within the
applicable 10 Business Day period under clause (a) above, the sum of the amounts
obtained by discounting (in accordance with accepted financial practice and at a
discount factor (applied on the same periodic basis as that on which interest on
the applicable Note is payable) equal to the Market Yield for such Note) all
remaining scheduled payments of principal and interest with respect to each Note
from their respective scheduled due dates to the proposed date of prepayment or
sale of such Note set forth in the notice provided by BCOP pursuant to Section
-------
2(a) or by Borden pursuant to Section 3(b), as the case may be.
- ---- ------------
"Market Yield" means, with respect to any Note, the yield on such Note
------------
implicit in the purchase price payable for such Note in a cash purchase and sale
of such Note in an arms length transaction between an institutional purchaser of
such Note (which has the financial means to purchase such Note in cash and is
unaffiliated to the parties or the Investment Bank and is not subject to any
obligation to purchase such Note and has not been offered any inducement to
purchase such Note) and an institutional seller of such Note (which is
unaffiliated to the parties or the Investment Bank and is not subject to any
obligation or compulsion to sell such Note and has not been offered any
inducement to sell such Note). In making such determination, the Investment Bank
shall take into account (i) the maturity of such Note (taking into account any
mandatory prepayment requirements with respect thereto), (ii) the interest rate
on such Note, (iii) prevailing interest rates on actively traded U.S. Treasury
securities having a maturity and remaining
-3-
<PAGE>
average life equal to that of such Note (based on the average of such rates over
the 5 Business Days prior to the proposed date of prepayment or sale of the
Notes set forth in the notice provided by BCOP pursuant to Section 2(a) or
------------
Borden pursuant to Section 3(b), as the case may be), (iv) the creditworthiness
------------
of BCOP, (v) the terms and conditions of the Note Agreement, as amended by the
Prepayment Terms Agreement (after giving effect to Section 3(e) hereof) and (vi)
------------
trading levels of comparable credits having securities of similar maturity.
"Purchase Premium" means an amount equal to the excess, if any, of (i) the
---------------- ------ -- --- --
Market Value of the Notes over (ii) the outstanding principal amount of the
----
Notes together with accrued but unpaid interest thereon as of the applicable
date of determination.
2. Prepayment of Notes. (a) In the event that BCOP plans to exercise its right
-------------------
of prepayment of the Notes set forth in Section 3 of the Prepayment Terms
---------
Agreement, BCOP will provide as much advance notice to Borden as is practicable
and in any event shall provide to Borden at least 10 Business Days prior notice.
Such notice shall specify the proposed date of prepayment by BCOP of the Notes
and shall identify the Investment Bank.
(b) Subject to the provisions of Section 3(d), in the event that BCOP
------------
exercises its right to prepay the Notes set forth in the Prepayment Terms
Agreement (including, without limitation, at any time that Borden is the holder
of the Notes), BCOP will be obligated to pay Borden the Borden Reimbursement
Amount, if any, in accordance with Section 4.
---------
3. Sale of Notes. (a) Borden shall not exercise its right to purchase the
-------------
Notes set forth in Section 4 of the Prepayment Terms Agreement until after
---------
February 28. 1995.
(b) In the event that, after February 28, 1995, Borden formulates a good faith
plan to sell the Notes (which plan shall not involve a sale of the Notes to any
affiliate of Borden), and Borden either has purchased the Notes or intends to
purchase the Notes pursuant to such plan, Borden will provide as much advance
notice of such plan to BCOP as is practicable and in any event shall provide to
BCOP at least 15 Business Days prior notice of such sale of the Notes. Such
notice shall specify the proposed date of sale by Borden of the Notes.
(c) BCOP may, by provision of notice to Borden no later than 5 Business Days
after receipt by BCOP of the notice provided by Borden pursuant to paragraph (b)
above, elect to commit to pay Borden the Borden Reimbursement Amount. Such
notice shall identify the Investment Bank. In the event that BCOP fails
-4-
<PAGE>
to make such election within such 5 Business Day period, BCOP will be deemed to
have waived its right to make such election with respect to such proposed sale
of the Notes and, in such event (notwithstanding the provisions of Section 2 and
---------
paragraph (e) below) BCOP shall not exercise its right to prepay the Notes until
the earlier of (i) the expiration of a period of 30 days from the 5th Business
Day after provision by Borden of notice pursuant to paragraph (b) above with
respect to such proposed sale or (ii) the date that Borden abandons its attempts
to effect such proposed sale (and such right of prepayment, if and when
exercised, shall be subject to the provisions of Section 2).
---------
(d) In the event that BCOP makes the election contemplated in paragraph (c)
above, (i) BCOP will be obligated to pay Borden the Borden Reimbursement Amount,
if any, in accordance with Section 4, (ii) Borden will not sell or cause the
---------
sale of the Notes, (iii) Borden's rights set forth in Section 4 of the
---------
Prepayment Terms Agreement shall, without the requirement of taking any further
action or executing or delivering any additional document, terminate and be of
no force and effect and (iv) BCOP may at any time prepay the Notes in accordance
with Section 3 of the Prepayment Terms Agreement and BCOP shall (without
---------
limiting its obligation set forth in clause (i) above but notwithstanding the
provisions of Section 2), in connection with such prepayment, not be required to
---------
pay Borden any Borden Reimbursement Amount.
(e) In the event that BCOP waives or is deemed to have waived the election
contemplated in paragraph (c) above and Borden, having purchased the Notes from
the Noteholders, sells the Notes after having complied with the provisions of
this Section 3 in connection with such sale of the Notes, BCOP's right of
---------
prepayment of the Notes set forth in Section 3 of the Prepayment Terms Agreement
---------
shall, immediately prior to the completion of such sale and without the
requirement of taking any further action or executing or delivering any
additional document, terminate and be of no force and effect. In the event of
any sale by Borden of the Notes, immediately prior to the completion of such
sale and without the requirement of taking any further action or executing or
delivering any additional document, the amendments to Section lO.l(e) and
---------------
Section 13 of the Note Agreement set forth in Section 5(vi) of the Prepayment
- ---------- -------------
Terms Agreement shall with immediate effect terminate and be of no force. The
terms of the Prepayment Terms Agreement (after giving effect to the foregoing
termination of the provisions of Section 5(vi) thereof) shall be binding upon
-------------
any purchasers of the Notes and any subsequent transferees of the Notes. In the
event that any proposed sale by Borden of the Notes is not consummated for any
reason, BCOP's right of prepayment of the Notes set forth in Section 3 of the
---------
Prepayment Terms Agreement and the provisions of this Section 3 shall continue
---------
in force and effect.
-5-
<PAGE>
4. Determination of Borden Reimbursement Amount; Investment Bank's Fees and
------------------------------------------------------------------------
Expenses; Receipts. (a) The parties shall, promptly upon provision by BCOP of
- ------------------
the notice contemplated in Section 2(a) hereof or Section 3(c), negotiate an
------------ ------------
engagement letter with the Investment Bank. Any such engagement letter shall be
subject to approval of both parties. The parties shall instruct the Investment
Bank to determine the Purchase Premium, as provided in the definition thereof.
The Investment Bank shall be required by the parties to provide its
determination of such Purchase Premium (or its determination that no Purchase
Premium would be payable) in writing to BCOP and Borden. The Investment Bank
shall also be required by the parties to provide to the parties such supporting
evidence of the basis of its determination as either of them may reasonably
request. Absent manifest error, the determination of the Investment Bank of the
Purchase Premium shall be binding on the parties. The parties shall on the basis
of such Purchase Price determination, promptly calculate the Borden
Reimbursement Amount. BCOP shall pay Borden the Borden Reimbursement Amount, if
any, no later than 5 Business Days after calculation of the Borden Reimbursement
Amount.
(b) BCOP shall pay the reasonable fees and expenses of any Investment Bank
retained pursuant to this Agreement (subject to the benefit provided to BCOP in
the calculation of the Borden Reimbursement Amount by deduction of 50% of such
fees and expenses from the Purchase Premium).
(c) Borden shall, in connection with the transactions contemplated by this
Agreement, provide to BCOP such receipts and acknowledgements of payment as BCOP
may reasonably request.
5. Representations and Warranties. (a) Borden represents and warrants that it
------------------------------
has the authority to enter into this Agreement and that this Agreement
constitutes a legal, valid and binding obligation of Borden.
(b) BCOP represents and warrants that it has the authority to enter into this
Agreement and that this Agreement constitutes a legal, valid and binding
obligation of BCOP.
6. Governing Law. This Agreement and the obligations of the parties under this
-------------
Agreement shall be governed and construed in accordance with the laws of the
State of New York, construed and applied without giving effect to principles of
conflicts of laws.
7. Successors and Assigns. This Agreement will be binding upon and inure to
-----------------------
the benefit of the parties hereto and their successors and assigns.
-6-
<PAGE>
8. Amendments; Entire Agreement. (a) This Agreement cannot be amended or
----------------------------
terminated orally, but only by a writing duly executed by or on behalf of the
parties.
(b) This Agreement represents the entire agreement and understanding among the
parties hereto with respect to the subject matter hereof and supersedes any
other agreement or understanding, written or verbal, that the parties may have.
To the extent that the terms of this Agreement are inconsistent with the terms
of the Prepayment Terms Agreement, the terms of this Agreement shall be deemed
to amend and supersede the inconsistent terms of the Prepayment Terms Agreement.
9. Notices. All notices and other communications hereunder shall be in writing
-------
and shall be deemed to have been duly given (i) five Business Days after mailing
if mailed by certified or registered mail, return receipt requested, (ii) one
Business Day after delivery to an overnight express carrier, if sent for
overnight delivery with fee prepaid, (iii) upon receipt if sent via facsimile
with receipt confirmed, or (iv) upon receipt if delivered personally, addressed
as follows or to such other address or addresses of which the respective party
shall have notified the other party:
(a) if to Borden, to:
180 East Broad Street
Columbus, Ohio 43215
Telecopier Number: 614-225-4973
Attention: Mr. David A. Kelly
Vice President and Treasurer
(b) if to BCOP, to:
180 East Broad Street
Columbus, Ohio 43215
Telecopier Number: 614-225-4973
Attention: Mr. David A. Kelly
Principal Financial Officer.
10. Counterparts. This Agreement may be executed in one or more counterparts,
------------
each of which will be deemed an original instrument, but all of which together
will constitute one and the same agreement, and will become binding when one or
more counterparts have been executed and delivered by each of the parties
hereto.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and delivered as of the date first above written.
BORDEN, INC.
By:
--------------------------------
Name: David A. Kelly
Title: Vice President
BORDEN CHEMICALS AND PLASTICS
OPERATING LIMITED PARTNERSHIP
By: BCP Management, Inc.,
as General Partner
By:
-------------------------------
Name: David A. Kelly
Title: Principal Financial
Officer
-8-
<PAGE>
EXHIBIT 12
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS EXCEPT RATIO DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1994 1993 1992 1991 1990
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net (loss) income.................... $146,405 $(1,435) $27,085 $51,553 $45,296
Interest expense..................... 16,342 16,356 16,340 16,340 16,340
Appropriate portion ( 1/3) of
rentals............................. 2,495 2,356 3,087 2,887 2,790
-------- ------- ------- ------- -------
$165,242 $17,277 $46,512 $70,780 $64,426
======== ======= ======= ======= =======
Interest Expense..................... $ 16,342 $16,356 $16,340 $16,340 $16,340
Appropriate portion ( 1/3) of
rentals............................. 2,495 2,356 3,087 2,887 2,790
-------- ------- ------- ------- -------
$ 18,837 $18,712 $19,427 $19,227 $19,130
======== ======= ======= ======= =======
Ratio of earnings to fixed charges... 8.8:1 * 2.4:1 3.7:1 3.4:1
======== ======= ======= ======= =======
</TABLE>
- --------
* For the year ended December 31, 1993, fixed charges exceeded earnings by
$1,435.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 74,126
<SECURITIES> 0
<RECEIVABLES> 121,631
<ALLOWANCES> 627
<INVENTORY> 28,131
<CURRENT-ASSETS> 226,719
<PP&E> 573,499
<DEPRECIATION> 290,180
<TOTAL-ASSETS> 542,904
<CURRENT-LIABILITIES> 169,745
<BONDS> 120,000
<COMMON> 0
0
0
<OTHER-SE> 245,735
<TOTAL-LIABILITY-AND-EQUITY> 542,904
<SALES> 657,752
<TOTAL-REVENUES> 657,752
<CGS> 446,216
<TOTAL-COSTS> 467,308
<OTHER-EXPENSES> 27,697
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,342
<INCOME-PRETAX> 146,405
<INCOME-TAX> 0
<INCOME-CONTINUING> 146,405
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 146,405
<EPS-PRIMARY> 3.94
<EPS-DILUTED> 0
</TABLE>
