<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
-
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 614-225-4482
(Address of principal executive offices) (Registrant's telephone number)
--------------
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 .
--- ---
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Number of Common Units outstanding as of the close of business on
November 12, 1999: 36,750,000.
================================================================================
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BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per Unit data)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
September 30, September 30,
1999 1998
-------- ---------
<S> <C> <C>
Revenues
Net trade sales.................................................. $129,893 $ 100,247
Net sales to related parties..................................... 23,389 18,775
-------- ---------
Total revenues............................................. 153,282 119,022
-------- ---------
Expenses
Cost of goods sold
Trade...................................................... 124,035 98,038
Related parties............................................ 23,349 18,655
Marketing, general & administrative expense...................... 6,895 6,466
Interest expense................................................. 5,573 5,981
Tax on gross margin.............................................. 565 644
Equity in loss of affiliate...................................... 157 493
Other expense (income), including minority interest.............. 48 (2,350)
-------- ---------
Total expenses........................................ 160,622 127,927
-------- ---------
Net loss......................................................... (7,340) (8,905)
Less 1% General Partner interest............................ 73 89
-------- ---------
Net loss applicable to Limited Partners'
interest................................................... $(7,267) ($8,816)
======== =========
Per Unit data-basic, net of 1% General Partner interest
Net loss per Unit................................................ $ (0.20) $ (0.24)
======== =========
Average number of Units outstanding during the period............ 36,750 36,750
Cash distributions declared per Unit............................. $ 0.00 $ 0.00
======== =========
</TABLE>
See Notes to Consolidated Financial Statements
2
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BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per Unit data)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------------
September 30, September 30,
1999 1998
-------- --------
<S> <C> <C>
Revenues
Net trade sales................................................. $337,966 $354,500
Net sales to related parties.................................... 57,956 64,346
-------- --------
Total revenues............................................ 395,922 418,846
-------- --------
Expenses
Cost of goods sold
Trade..................................................... 318,554 346,447
Related parties........................................... 60,343 63,487
Marketing, general & administrative expense..................... 19,076 18,835
Interest expense................................................ 17,231 16,373
Tax on gross margin............................................ 1,298 833
Equity in loss of affiliate..................................... 540 588
Other expense (income), including minority interest............. 689 (2,668)
-------- --------
Total expenses....................................... 417,731 443,895
-------- --------
Net loss........................................................ (21,809) (25,049)
Less 1% General Partner interest........................... 218 250
-------- --------
Net loss applicable to Limited Partners'
interest.................................................. $(21,591) ($24,799)
======== ========
Per Unit data-basic, net of 1% General Partner interest
Net loss per Unit............................................... $ (0.59) $ (0.67)
======== ========
Average number of Units outstanding during the period........... 36,750 36,750
======== ========
Cash distributions declared per Unit............................ $ 0.00 $ 0.00
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
3
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BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------------
September 30, September 30,
1999 1998
-------- --------
<S> <C> <C>
Cash Flows From Operations
Net loss.......................................................... $(21,809) $(25,049)
Adjustments to reconcile net loss income to net cash
provided by operating activities:
Depreciation................................................. 27,214 24,297
Increase (decrease) in cash from
changes in certain assets and liabilities:
Receivables, net.......................................... (16,724) 20,206
Inventories............................................... (3,835) 12,926
Payables.................................................. 13,879 (20,858)
Accrued Interest.......................................... 4,742 4,604
Other, net................................................ (708) (7,132)
------- ------
2,759 8,994
------- ------
Cash Flows Used In Investing Activities
Capital expenditures......................................... (11,154) (26,217)
------- ------
Cash Flows Used In Financing Activities
Proceeds from borrowings..................................... 6,600 53,700
Cash distributions paid...................................... 0 (3,712)
------- ------
6,600 49,988
------- ------
(Decrease) increase in cash and equivalents....................... ( 1,795) 32,765
Cash and equivalents at beginning of period....................... 8,703 7,528
------- ------
Cash and equivalents at end of period............................. $6,908 $40,293
======= =======
Supplemental Disclosures of Cash Flow Information
Interest paid during the period, net of capitalization............ $12,489 $12,146
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
4
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BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
ASSETS September 30, 1999 December 31, 1998
------ ------------------ -----------------
<S> <C> <C>
Cash and equivalents.............................................. $ 6,908 $ 8,703
Accounts receivable (less allowance for doubtful accounts
of $489 and $672, respectively)
Trade........................................................ 71,486 57,909
Related parties.............................................. 15,774 12,627
Inventories
Finished and in process goods................................ 25,921 21,978
Raw materials and supplies................................... 6,466 6,574
Other current assets.............................................. 5,381 2,694
--------- --------
Total current assets......................................... 131,936 110,485
--------- --------
Investments in and advances to affiliated companies............... 7,649 8,442
Other assets...................................................... 53,208 54,469
--------- --------
60,857 62,911
--------- --------
Plant, property and equipment
Land......................................................... 16,308 16,308
Buildings.................................................... 45,625 45,604
Machinery and equipment...................................... 700,856 690,096
--------- --------
762,789 752,008
Less accumulated depreciation................................ (490,624) (463,708)
--------- --------
Net plant, property and equipment............................ 272,165 288,300
--------- --------
Total assets.............................................. $ 464,958 $461,696
========= ========
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Accounts and drafts payable....................................... $ 55,763 $ 41,884
Accrued interest.................................................. 7,932 3,190
Other accrued liabilities......................................... 13,745 13,702
--------- --------
Total current liabilities.................................... 77,440 58,776
Long-term debt.................................................... 258,400 251,800
Deferred tax on gross margin...................................... 5,800 5,800
Other liabilities................................................. 1,979 1,949
Minority interest in consolidated subsidiary...................... 677 900
--------- --------
Total liabilities............................................ 344,296 319,225
--------- --------
Partners' capital
Limited Partners............................................. 120,926 142,517
General Partner.............................................. (264) (46)
--------- --------
Total partners' capital................................. 120,662 142,471
--------- --------
Total liabilities and partners' capital................... $ 464,958 $461,696
========= ========
</TABLE>
See Notes to Consolidated Financial Statements
5
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BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Limited General
Partners Partner Total
-------- -------- ---------
<S> <C> <C> <C>
Balance at December 31, 1997....................... $ 182,718 $ 360 $ 183,078
Net loss........................................ (24,799) (250) ( 25,049)
Cash distributions declared..................... 0 0 0
--------- -------- ---------
Balance at September 30, 1998...................... $ 157,919 $ 110 $ 158,029
========= ======== =========
Balance at December 31, 1998....................... $ 142,517 $ (46) $ 142,471
Net loss........................................ (21,591) (218) ( 21,809)
Cash distributions declared..................... 0 0 0
--------- -------- ---------
Balance at September 30, 1999...................... $ 120,926 $ (264) $ 120,662
========= ======== =========
</TABLE>
See Notes to Consolidated Financial Statements
6
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BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except Unit and per Unit data)
1. Interim Financial Statements
The accompanying unaudited interim consolidated condensed financial statements
of Borden Chemicals and Plastics Limited Partnership (the "Partnership") contain
all adjustments, consisting only of normal recurring adjustments, which in the
opinion of BCP Management, Inc. (the "General Partner") are necessary for a fair
statement of the results for the interim periods. Results for the interim
periods are not necessarily indicative of the results for the full year.
Basic income per unit is computed by dividing net income, after subtracting the
General Partner's 1% interest, by the weighted average number of units
outstanding. Currently, there are no potentially dilutive securities;
accordingly, basic income per unit and diluted income per unit are equivalent.
Effective for the quarter ended March 31, 1998, the Partnership adopted
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". There were no items of other comprehensive income for the
nine months ended September 30, 1999 and 1998, respectively.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
effective in 2001 for the Partnership. The statement requires that all
derivatives be recorded in the balance sheet as either assets or liabilities and
be measured at fair value. The accounting for changes in fair value of a
derivative depends on the intended use of derivative and the resulting
designation. The Partnership is in the process of assessing the impact that SFAS
No. 133 will have on the consolidated financial statements.
2. Environmental and Legal Proceedings
Under an Environmental Indemnity Agreement (the "EIA") with Borden Inc.
("Borden"), 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
$3,500 through December 31, 1996.
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.
The Partnership is subject to legal proceedings and claims which may arise in
the ordinary course of business. In the opinion of the management of the
Partnership, the amount of the ultimate liability, taking into account its
insurance
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coverage, including its risk retention program and Environmental Indemnity
Agreement with Borden would not materially affect the financial position or
results of operations of the Partnership.
3. Segment Information
The Partnership's internal reporting is organized on the basis of its products.
Each of the following products is considered to be an operating segment of the
business: polyvinyl chloride ("PVC"), vinyl chloride monomer ("VCM"), acetylene,
methanol, formaldehyde, ammonia and urea. These operating segments have been
aggregated into three reportable segments according to the nature and economic
characteristics of the products, production processes and other similarities.
The segments are (i) PVC Polymers Products, which consist of PVC resins and
feedstocks (VCM and acetylene), (ii) Methanol and Derivatives, which consist of
methanol and formaldehyde, and (iii) Nitrogen Products, which consist of ammonia
and urea.
The Partnership evaluates performance of the segments and allocates resources to
them based upon contributing margin, which is gross margin net of distribution
expense.
Financial information for each of the reportable segments for the third quarter
and first nine months of 1999 and 1998 is provided in the following table.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PVC Methanol
Polymers and Nitrogen Consolidated
Products Derivatives Products Totals
- ----------------------------------------------------------------------------------------------------------
Third Quarter
- ------------
<S> <C> <C> <C> <C>
1999
Revenues $ 111,474 $ 30,825 $ 10,983 $ 153,282
Contributing Margin 10,628 300 (5,030) 5,898
1998
Revenues $ 82,224 $ 25,753 $ 11,045 $ 119,022
Contributing Margin (418) 1,668 1,080 2,330
First Nine Months
- ------------------
1999
Revenues $ 289,710 $ 73,178 $ 33,034 $ 395,922
Contributing Margin 29,059 (1,920) (10,114) 17,025
1998
Revenues $ 290,114 $ 88,484 $ 40,248 $ 418,846
Contributing Margin 953 9,698 (1,739) 8,912
- ----------------------------------------------------------------------------------------------------------
</TABLE>
8
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A reconciliation of the total segment consolidated contributing margin to the
total consolidated loss before tax on gross income taxes, for the quarter and
nine months ended September 30, 1999 and 1998 as follows:
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total segment contributing margin $ 5,898 $ 2,330 $ 17,025 $ 8,912
Marketing, general and
Administrative expense (6,895) (6,466) (19,076) (18,835)
Interest expense (5,573) (5,981) (17,231) (16,373)
Other misc. (expense) income, net (205) 1,856 (1,229) 2,080
Consolidated loss before
tax on gross income $(6,775) $(8,261) $(20,511) $(24,216)
</TABLE>
9
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
Results of Operations
Quarter Ended September 30, 1999 Compared to Quarter Ended September 30, 1998
Revenues
Total revenues during the third quarter of 1999 increased $34.3 million or 29%
to $153.3 million from $119.0 million in the third quarter of 1998. This
increase was the result of a $29.3 million increase in PVC Polymers Products
revenues, a $5.1 million increase in Methanol and Derivatives revenues and a
$0.1 million decrease in Nitrogen Products revenues.
Total revenues for PVC Polymers Products increased $29.3 million as a result of
a 32% increase in selling prices, and a 3% increase in sales volumes. Selling
prices and volume increases are the result of increased demand in the
marketplace.
Total revenues for Methanol and Derivatives increased $5.1 million as a result
of a 14% and 5% increase in selling prices and sales volumes, respectively.
These results are due to an increase in demand coupled with a number of domestic
plants being idle during the current period.
Total revenues for Nitrogen Products decreased $0.1 million as a result of a 18%
decrease in sales prices, which was offset by a 21% increase in volume. Nitrogen
Products pricing continue to be adversely affected by worldwide overcapacity.
The increase in volume is due to three of our major customers experiencing
outages in the third quarter of 1998 that did not occur this year.
Cost of Goods Sold
Total cost of goods sold increased $30.7 million to $147.4 million in the
current period from $116.7 million in the year ago period. The increase was due
to increased sales volumes along with increases in all major raw materials.
Expressed as a percent of revenue, cost of goods sold was 96% in the current
period versus 98% in the prior year.
PVC Polymers Products contributing margin improved upon prior year's
profitability to a profit of $10.6 million. This is a result of both an increase
in selling prices, and a higher yielding product mix.
Contributing margin of Methanol and Derivatives decreased $1.4 million from the
same period a year ago. Increased natural gas costs
were partially offset by a 16% increase in selling prices.
Nitrogen Products generated a $5.0 million loss in third quarter of 1999,
compared to a positive $1.1 contributing margin for the third quarter of 1998.
Natural gas price increases and selling prices that decreased 18% were not able
to be offset by a 20% volume increase when compared to the same period last
year.
NetLoss
Net loss for the third quarter of 1999 was $7.3 million compared to $8.8 million
loss for the third quarter of 1998. As discussed above, the primary reasons for
the $1.5 million increase from prior year was the results of increased volume
and selling prices from PVC products being able to offset declines in Methanol
and Nitrogen products.
10
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Results of Operations
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Revenues
Total revenues for the first nine months of 1999 decreased $22.9 million or 5%
to $395.9 million from $418.8 million in the first nine months of 1998.
Total revenues for PVC Polymers Products decreased $0.4 million as a result of a
4% increase in selling prices offset by a corresponding 4% decrease in sales
volumes. Excess supply of PVC in the first quarter of 1999 and the planned plant
changeover to higher yielding PVC Polymer products caused sales volume to
decline while sales prices advanced versus the like prior year period.
Total revenues for Methanol and Derivatives decreased $15.3 million as a result
of both a 9% decrease in selling prices and sales volume. Excess capacity and
customer turnarounds adversely affected both selling price and sales volumes,
respectively.
Total revenues for Nitrogen Products decreased $7.2 million as a result of a 19%
decrease in selling prices partially offset with a 2% increase in sales volumes.
Additional world wide capacity contributed to the downward pressure on selling
prices for Nitrogen products.
Cost of Goods Sold
Total cost of good sold decreased 8% to $378.9 million in the first nine months
of 1999 from $409.9 million in the first nine months of 1998, due to the
decrease in sales volumes and composite raw material costs. During the first
nine months of 1999, the cost of natural gas, the Partnership's largest raw
material, decreased 2.2% when compared to the same period in 1998. Costs of
other major material such as ethylene, and vinyl chloride monomer increased
while chlorine decreased for the like period. Expressed as a percentage of
revenue, cost of goods sold was 96% and 98% of sales revenue in the first nine
months of 1999 and the first nine months of 1998, respectively.
Contributing margins for PVC Polymers Products increased to $29.1 million due to
increased selling prices, an upgrade in product mix, offset by a decrease in
sales volume.
Contributing margins for Methanol and Derivatives were negative, $1.9 million,
as declines in selling prices and volume were offset by a decrease in natural
gas costs.
Contributing margins for Nitrogen Products, a loss of $10.1 million during the
first nine months of 1999 compared unfavorably to the like nine month period of
1998, a loss of $1.8 million, due to selling price and volume declines
previously noted, partially offset by a decrease in natural gas costs.
Net Loss
Net loss was $21.8 million for the first nine months of 1999 compared to a net
loss of $25.0 million for the first nine months of 1998. As discussed above, the
primary reasons for the improvement is the operating performance of the PVC
Polymers Product segment.
Liquidity and Capital Resources
Cash Flows from Operations. Cash provided by operations for the first nine
months of 1999 totaled $2.8 million, a decrease of $6.2 million versus prior
year, primarily due to a decrease in net loss being more than offset by an
unfavorable change in working capital.
Cash Flows from Investing Activities. First nine months capital expenditures
totaled $11.2 million and $26.2 million for 1999 and 1998, respectively. The
1998 amount related primarily to environmental projects and other discretionary
capital expenditures.
11
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Cash Flow from Financing Activities. Pursuant to its Partnership Agreement, the
Partnership is required to make quarterly distributions to Unitholders and the
General Partner of 100% of its Available Cash, if any. 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 such reserves, as it deems necessary or
appropriate in its reasonable discretion, to provide for the proper conduct of
the business of the Partnership or the Operating Partnership and to stabilize
distributions of cash to Unitholders and the General Partner and such other
reserves as are necessary to comply with the terms of any agreement or
obligation of the Partnership.
A cash distribution of $3.7 million was paid during the first nine months of
1998. This amount relates to the cash distribution declared for the first
quarter of 1998. 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.
The cyclical nature of the Partnership's business as well as various seasonality
factors have a significant impact on its results of operations and, therefore,
on its ability to make cash distributions on a quarterly basis. 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 but do 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 debt service, capital expenditures and other accrued items.
Liquidity
Adverse business conditions across two of the Partnership's three product groups
have considerably reduced its sales revenues and operating margins and caused
the Partnership to incur net losses over the past several quarters. Unless
business conditions broadly improve, industry overcapacity affecting the
Methanol and Derivatives, and Nitrogen product groups is likely to cause narrow
operating margins to persist throughout the remainder of the year, even if
selling prices continue to improve. These narrow operating margins, combined
with the Partnership's capital expenditure needs (which are anticipated to be in
the range of $3 to $6 million per quarter) and debt service requirements, along
with restrictions in the Credit Agreement and Indenture as discussed below, make
it unlikely that the Partnership will resume making quarterly cash distributions
for the remainder of 1999 and into the year 2000.
The Operating Partnership and several lending institutions are parties to an
amended and restated Credit Agreement (the "Credit Agreement"), dated as of
December 23, 1998 which provides for a revolving credit facility of up to $90
million (the "Revolving Credit Facility"). The new two-year agreement waived the
Operating Partnership's non-compliance with its financial covenants at the end
of the third quarter 1998, and reset coverage ratio covenants through December
31, 2000. The Operating Partnership's obligations under the facility are secured
by the Geismar Plant Facility. As of September 30, 1999, the Operating
Partnership had $58.4 million outstanding under the Revolving Credit Facility. A
change of control of the General Partner, the Partnership or the Operating
Partnership is an event of default under the Credit Agreement. The partnership's
covenant on capital spending under the Credit Agreement is furthered discussed
in the "Capital Expenditures" section.
On May 1, 1995, the Operating Partnership issued $200 million aggregate
principal amount of 9.5% Notes due 2005 (the "Notes") pursuant to an Indenture
dated as of May 1, 1995 (the "Indenture"). The Notes are senior unsecured
obligations of the Operating Partnership.
The Notes include restrictions on the Operating Partnership's ability to make
cash distributions, incur additional indebtedness, sell assets, engage in
sale/leasebacks and to take certain other actions. Upon a Change in Control, the
holders of the Notes may require the Operating Partnership to repurchase their
Notes at a price equal to 101% of the aggregate principal amount plus accrued
and unpaid interest to the date of repurchase.
The Partnership has been working with financial advisors, since December 1998,
to assist it in exploring strategic alternatives, including joint ventures,
mergers or alliances, or the sale of some or all of the business. While these
12
<PAGE>
efforts are still on-going, to date they have not resulted in any transaction
and there can be no assurances that they will result in a transaction. The
Partnership also has retained a consulting firm to assist in a review of
operational and cost reduction initiatives to improve competitiveness and reduce
costs.
Capital Expenditures
The Partnership has agreed to purchase its partner's 50% share of the Acetylene
Plant at the Geismar complex on December 31, 1999. The purchase price is
approximately $17 million, $8.0 million payable at closing with the remainder
payable in equal monthly installments over three years. Certain covenants under
the Credit Agreement however, restrict the amount of annual capital expenditures
which may be made by the Partnership. Proceeding with the agreement with respect
to the Acetylene Plant on the agreed time schedule would cause the Partnership
to exceed the restrictions on capital expenditures under the Credit Agreement.
Accordingly, the Partnership is pursuing with its 50% partner in the Acetylene
Plant a modification of the timing for making Acetylene Plant payments. The
Operating Partnership may also seek a waiver of the relevant covenants in the
Credit Agreement. A failure to obtain either a modification of the schedule for
making Acetylene Plant payments or a Credit Agreement waiver would cause the
Partnership to be in default on or after December 31, 1999 under the agreement
with its partner in the Acetylene Plant, the Operating Partnership to be in
default under the Credit Agreement or a combination of the two. A default under
either of these agreements could have a material adverse effect on the liquidity
and financial condition of the Partnership and the Operating Partnership.
Other than this acquisition, the Partnership currently believes that the level
of annual base capital expenditures over the next two years will be in the range
of $15 to $20 million per year. Total capital expenditures for 1999 are
anticipated to be approximately $15 million with a large portion relating to a
new software system which will improve the computer systems infrastructure and
assist the Partnership in preparing for the year 2000.
Year 2000
Similar to other business entities, the Partnership will be impacted by the
inability of its computer application software programs, as well as certain
date-sensitive devices, to properly identify the year 2000 due to a commonly
used programming convention of using only two digits to identify a year. Unless
modified or replaced these programs and devices could fail or create erroneous
results when referencing the year 2000.
The Partnership's company-wide Year 2000 Project (the "Project") to mitigate the
effects year 2000 issues is proceeding on schedule. All facets of the business
have been divided into two primary categories and a Y2K Manager has been
assigned to each. Category 1 is the Enterprise Resource Planning ("ERP") or
Business Systems functions which encompasses Business Applications (software),
End-User (PC's), Technical Infrastructure (hardware), and Communications.
Category 2 consists of those applications which support our Manufacturing, lab,
and R&D functions.
The Project has three phases: (I) Risk Assessment
(II) Detailed Assessment Remediation Planning
(III)Remediation and Resolution
As of October 31, 1998 the Partnership completed Phase I having developed
detailed inventories of related equipment and resources and assigned a relative
risk to each application based on the potential impact to the business and the
specific effects of a material Year 2000 failure. Material failures are those
which would negatively impact the safety of individuals, property, or
environment or the Partnership's ability to conduct business in a normal
fashion.
Phase II consists of the development of a detailed plan for remediation of all
those applications identified in the initial inventory and the assignment of
specific responsibilities for implementing the required changes. The Category 1
Phase II plan was completed in November 1998.
Management believes that the most significant Year 2000 business risk to the
Partnership relates to the current financial system applications. Accordingly,
an enterprise-wide implementation of Year 2000 compliant software and hardware
was initiated. The anticipated cost associated with the enterprise-wide
implementation is approximately $17.7 million, of which $15.2 million has been
expended through September 30, 1999. In early 1998 the Partnership began
converting its business applications over to a Windows NT based system utilizing
Microsoft SQL Servers and the latest version of Year 2000 compliant J.D. Edwards
software. This conversion continued into 1999 and is operational as of October
1, 1999.
The Category 2 Phase II plan including detailed test plans was completed during
December 1998. Estimated cost associated with the remediation of our
manufacturing, lab, and R&D equipment/systems is approximately $1 million. The
plan consists of repair, replacement, upgrades, and workarounds based on the
ability of the hardware and software to respond to a specified battery of Year
2000 date testing and the relative impact to the business as specified above.
Phase III was completed on June 30, 1999.
The Partnership has also initiated a program to determine the effects of
third-party suppliers and customers on the
13
<PAGE>
business with respect to Year 2000 issues. Over 2000 suppliers were mailed a
self-assessment questionnaire with the intent of identification and, to the
extent possible, timely resolution of potential Year 2000 issues. Additionally
approximately 150 of the 2000+ suppliers have been identified as critical
vendors. Each has been contacted directly to determine the status of their Year
2000 compliance effort and the need, if any to develop a contingency plan.
Inventories, alternate suppliers and forms of transportation, production and
maintenance schedules, etc. are all contingency considerations as noted below.
The company also contacted each of its major customers to assess their Y2K
readiness and to identify any customer contingency plan issues which might have
a direct impact on the business before, during, and after the rollover.
While it is expected that the Partnership will be able to resolve any
significant issues identified in this process, the Partnership has limited or no
control over the actions of third-party suppliers and/or customers. As such we
can provide no assurance that these suppliers will resolve their Year 2000
issues before the occurrence of a disruption to the business of the Partnership
or any of its customers. Material failure on the part of one of these third
parties could have an adverse affect on the Partnership's business and results
of operations.
During all three phases of the Project, management has considered the need to
develop contingency plans for any of the applications which could have a
critical impact on the business. The major focus on contingency planning was
expended in the second and third quarters of 1999. The Partnership continues to
fully explore contingency requirements with its major suppliers and customers
and their possible resolutions are in its detailed plan. Based on the
Partnership's current plans and efforts to date, the Partnership does not
anticipate that Year 2000 issues will have any material effects on its results
of operations.
The estimates and conclusions herein contain forward-looking statements and are
based on the Partnership's best estimates of future events based on the
information available at this time. However, there can be no guarantee that
these results will be achieved and actual results could differ from the plan.
Specific factors that might cause differences from our estimates include, but
are not limited to, availability of resources, the ability to identify and
correct all potential Year 2000 inconsistencies, the ability of suppliers to
correct Year 2000 issues in a timely manner, and unanticipated problems
identified in our ongoing Year 2000 project quality assurance review.
Item 3 Market Risk
- -------------------
Interest Rate Risk -- The Credit Agreement provides for a revolving credit
facility of up to $90 million. The revolving credit facility expires on December
31, 2000, at which time all amounts outstanding must be repaid. Interest on
borrowings under the revolving credit facility are determined, at the Operating
Partnership's option, based on the applicable Eurodollar rate (one, two, three,
six, nine or twelve month periods) plus a margin, (9.13% at September30, 1999)
or ABT Rate plus a margin (10.75% at September 30, 1999). The ABR rate is the
greater of (a) the prime rate (b) the Base CD rate plus 1.00% or (c) the Federal
Funds Effective rate plus .5%. At September 30, 1999 borrowings under the
revolving credit facility were $58.4 million and bore interest at 9.81%.
The Partnership is exposed to swings in the Eurodollar or ABR rates. A change of
1.00% in the applicable rate would change the Partnership's interest cost by
$584,000 based on the borrowings at September 30, 1999.
Commodity Risk -- The Partnership generally does not use derivatives or other
financial instruments such as futures contracts to manage commodity market risk.
However, at certain times of the year the Partnership will enter into contracts
whereby it agrees to purchase a specified quantity of natural gas (the
Partnership's principal raw material) at a fixed price. Such contracts are
generally not in excess of three months forward, and the Partnership generally
limits such forward purchases to 60% of a month's requirements. In addition, the
Partnership has entered into a fifteen year supply agreement (commencing in
1997) to provide a long-term supply of ethylene, a raw material, and minimize
price volatility. The purchase price for the product varies with the supplier's
raw material and co-product credits costs which are market-driven, as well as
its fixed costs. The Partnership evaluates all such contracts on the basis of
whether committed costs are expected to be realized in light of current and
expected selling prices when the commodities are consumed in manufactured
products.
Foreign Exchange and Equity Risk - The Partnership is not exposed to significant
foreign exchange or equity market risk.
14
<PAGE>
Forward-Looking Statements
Certain statements in this section are forward-looking. These can be identified
by the use of forward-looking words or phrases such as"believe", "expect", "may"
and"potential", among others and include statements regarding the business
outlook for the Operating Partnership and its ability to fund its cash needs.
The Private Securities Litigation Reform Act of 1995 provides a"safe harbor" for
such forward-looking statements. While these forward-looking statements are
based on the Partnership's reasonable current expectations, a variety of risks
uncertainties and other factors, including many which are outside the control of
the Partnership, could cause the Partnership's actual results to differ
materially from the anticipated results or expectations expressed in such
forward-looking statements. The risks, uncertainties and other factors that may
affect the operations, performance, development and results of the Partnership
include changes in the demand for and pricing of its commodity products, changes
in industry production capacity, changes in the supply of and costs of its
significant raw materials, and changes in applicable environmental, health and
safety laws and regulations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
There is incorporated by reference herein the information regarding legal
proceeding in Item 3 of Part 1 of the Partnership's Annual Report on Form 10-K
(File No. 1-9699) for the year ended December 31, 1998, and Note 2 to the
consolidated financial statements in Part 1 hereof.
15
<PAGE>
SIGNATURE
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.,
its General Partner
By:
-----------------------------------
Francis J. Proto
Chief Financial Officer and Treasurer
Principal Accounting Officer
November 12, 1999
16
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<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 6,908 6,908
<SECURITIES> 0 0
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<PP&E> 762,789 762,789
<DEPRECIATION> 490,624 490,624
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0 0
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<INTEREST-EXPENSE> 5,573 17,231
<INCOME-PRETAX> (7,340) (21,809)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (7,340) (21,809)
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