-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UJxbMTzfGfyCEJyuUEU8/UTKN87ZR8LD6gydSe5YtllRCDiOhMSk6yzJm6xepohO CQr/PYuGeRvjM/IYxuiysQ== 0000950130-98-001573.txt : 19980331 0000950130-98-001573.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950130-98-001573 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BORDEN CHEMICALS & PLASTICS LIMITED PARTNERSHIP /DE/ CENTRAL INDEX KEY: 0000821202 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS, MATERIALS, SYNTH RESINS & NONVULCAN ELASTOMERS [2821] IRS NUMBER: 311269627 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09699 FILM NUMBER: 98578648 BUSINESS ADDRESS: STREET 1: HIGHWAY 73 CITY: GEISMAR STATE: LA ZIP: 70734 BUSINESS PHONE: 5046736121 MAIL ADDRESS: STREET 1: PO BOX 427 STREET 2: 180 EAST BROAD STREET 25TH FLOOR CITY: GERSMAR STATE: LA ZIP: 70734 FORMER COMPANY: FORMER CONFORMED NAME: BORDEN CHEMICALS & PLASTICS LIMITED PARTNERSHIP DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K ---------------------------------------------------------------------- ---------------------------------------------------------------------- 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, 1997 Commission file number: 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) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Depositary Units Representing Common Units New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE __________________________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- -----. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein. [ ] __________________________________ 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 27, 1998 was approximately $289 million. Number of Common Units outstanding as of the close of business on February 27, 1998: 36,750,000. ---------------------------------------------------------------------- ---------------------------------------------------------------------- The Exhibit Index is located herein at sequential page 41. 1 PART I ITEM I. BUSINESS - ---------------- GENERAL Borden Chemicals and Plastics Limited Partnership (the "Company" or "Partnership") is a limited partnership formed in 1987 to acquire, own and operate polyvinyl chloride resins ("PVC"), methanol and other chemical plants located in Geismar, Louisiana, and Illiopolis, Illinois, that were previously owned and operated by Borden, Inc. ("Borden"). The three principal product groups manufactured at these 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 1997, PVC Polymers Products, Methanol and Derivatives and Nitrogen Products accounted for 66%, 24% and 10%, respectively, of the Company's revenues. On May 2, 1995, the Company, through its subsidiary operating partnership (the "Operating Partnership"), completed the purchase of Occidental Chemical Corporation's ("OxyChem") Addis, Louisiana PVC manufacturing facility and related assets ("Addis Facility"). After incremental capacity expansions, the Addis Facility has an annual capacity of 600 million pounds per year, which increased the Company's stated annual capacity for PVC resin production by approximately 62%. The cash purchase price for the Addis Facility was $100.4 million (see "Acquisition"). The Company seeks to increase its productive capacity through selective expansions of its existing facilities and "debottlenecking" of production facilities at its plants. From 1988 to 1997, the Company increased overall capacity of its facilities by 28.3% through various expansions and "debottlenecking" projects. The Company's production complex at Geismar, Louisiana, its plant at Illiopolis, Illinois, and the Addis Facility produce products for the following applications: - -------------------------------------------------------------------------------- PRODUCTS LOCATION PRINCIPAL APPLICATIONS - -------------------------------------------------------------------------------- PVC POLYMERS PRODUCTS PVC Geismar Water distribution pipe, residential Illiopolis siding, wallcoverings, vinyl Addis flooring VCM Geismar Raw material for the Company's PVC operations METHANOL AND DERIVATIVES Methanol Geismar Formaldehyde, MTBE, adhesives and fibers or raw materials for the Company'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 2 The Company's plants generally can be operated at rates in excess of stated capacity to take advantage of market opportunities without undue adverse effects. References to capacity assume normal operating conditions, including downtime and maintenance. The Company's objective is to operate the Geismar, Illiopolis and Addis plants at or near full capacity because of the reduced operating costs per unit of output at full operation. The integrated design of the Company's plants provides it with a high degree of flexibility to shift production volumes according to market conditions efficiently utilize by-product streams. The Company's products are produced through the highly integrated lines described below. PVC POLYMERS PRODUCTS PVC Resins - PVC is the second largest volume plastic material produced in the world. The Company produces general purpose and specialty purpose PVC resins at three plants - one located at the Geismar complex, one at Illiopolis and another at Addis - with stated annual capacities of 575 million, 400 million and 600 million pounds of PVC resins, respectively. The PVC resin plants operated at approximately 90% and 95% of combined capacity in 1997 and 1996, respectively. Although there have been year-to-year fluctuations in product mix, the Company 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. Based on data from the Society of the Plastics Industry, the Company believes its production currently accounts for approximately 10% of total industry domestic capacity of PVC resins. The PVC resin industry experienced strong demand through the first half of 1995. As a result, published prices for PVC resins increased to an average of $0.40 per pound during the third quarter of 1995. Buildup of PVC inventories worldwide by converters resulted in reduced PVC purchases during the second half of 1995. Prices for PVC improved somewhat during the first half of 1996, but then declined due to the competitive market conditions experienced in the second half of 1996. Published prices for PVC during the fourth quarter of 1996 declined to an average of approximately $0.32 per pound. PVC prices repeated this pattern again in 1997, with prices increasing through the second quarter of 1997 but declining in the second half of the year to prices similar to the fourth quarter of 1996. During 1997 and 1996, approximately 3% and 7%, respectively, of the Company's total production of PVC resins was sold to Borden for use in its downstream vinyl conversion operations. The balance was purchased by many customers, none of which accounted for more than 11% of total PVC sales dollars during either year. Unless there is a shortage of PVC resin capacity in the industry, 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 Company. The production by the Company of certain specialty grades of PVC resins also involves the use of certain quantities (approximately 11.2 million pounds in 1997) of vinyl acetate monomer, a raw material not produced by the Company. The Company purchases quantities of vinyl acetate monomer 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 3 exceed the market price of vinyl acetate monomer. All the VCM used by the Company's Geismar PVC resin plant and most of the VCM used by the Company's Illiopolis PVC resin plant is obtained from the Company's two Geismar VCM plants discussed below. Substantially all of the production of these VCM plants is consumed by the Company's PVC resins plants at Geismar and Illiopolis. The Geismar PVC resin plants obtain VCM from the Company's adjacent VCM plants in the Geismar complex and the Illiopolis PVC resin plant obtains VCM from the Company'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 which 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 Company produces VCM by two processes: an ethylene process and an acetylene process. The finished product of both of these 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 Company the flexibility of favoring the process that results in the lower cost at any particular time. Ethylene-Based VCM. Ethylene-based VCM ("VCM-E") is produced by the Company at a 650 million pound stated annual capacity plant at the Geismar complex. The plant operated at approximately 94% and 98% of capacity during 1997 and 1996, respectively. Substantially all of the production of the VCM-E plant is consumed by the Company'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. During 1997 and 1996, the plant operated at approximately 76% and 79% of capacity respectively. All of the VCM-A produced at the Geismar complex is 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 Company 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. 4 Acetylene. Acetylene is primarily used as a feedstock for VCM-A and for other chemical intermediates. The Company 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 Partnership has agreed to purchase BASF's interest in the acetylene plant. See Item 7, "Capital Expenditures". During 1997 and 1996, the plant operated at approximately 90% and 96%, respectively, of capacity, with all production being consumed by either the Company or BASF. During 1997, approximately 59% of the total production of the acetylene plant was used internally as a principal feedstock of the Geismar VCM-A plant. BASF accounted for approximately 41% of the plant's 1997 production, less than its full 50% share of production. Acetylene not required by BASF is available to the Company at cost. 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 Company, BASF and Air Liquide America Corporation pursuant to joint venture arrangements. For a description of the Company's arrangements for the purchase of natural gas, see "Raw Materials". - -------------- As long as a subsidiary of Borden is the general partner of the Company, the acetylene 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 will be encouraged to accept employment with BASF. The Company'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 Company 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. The Company's principal competitors in the sale of PVC include Shintech, Formosa Plastics, OxyChem and Geon. 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. During the fourth quarter of 1995, the Company completed an expansion of its existing methanol plant. This expansion increased the Company's stated annual capacity by 30 million gallons to 330 million gallons per year. During 1997 and 1996, the plant operated at approximately 96% and 92%, respectively, of capacity. Strong demand for methanol in early 1995 resulted from limited growth in the supply of methanol and industry consolidation during the past several years as well as strong demand for MTBE and formaldehyde. Methanol sales prices declined during the first half of 1996 but began improving in the latter part of the year. Industry announcements indicated sales at contract prices of approximately $0.50 per gallon toward the end of 1996. Supply disruptions in the industry served to improve methanol pricing during 1997, with contract prices ending the year at $0.58 per gallon. As supply is 5 normalized and additional production capacity is brought on-line in 1998, selling prices will face significant downward pressure during the year. The Company believes its stated annual capacity represents approximately 14% of total domestic capacity. The Company's main competitors in the sale of methanol include Methanex, Terra Industries, Hoechst Celanese and Lyondell. In 1997, approximately 39% of methanol volume was sold to third parties (other than Borden). Borden accounted for approximately 37% of such production for its downstream formaldehyde production. Approximately 17% of production was used internally in the production of formaldehyde and the remaining approximately 7% 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 1997. 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 72% of the Company's total cost of producing methanol during 1997. Formaldehyde. Formaldehyde is a chemical intermediate used primarily in the production of plywood and other pressed wood products. The Company produces 50%-concentration formaldehyde (which is 50% formaldehyde and 50% water) at three units at the Geismar complex. The formaldehyde plants have annual capacities of 280, 190 and 180 million pounds per year, respectively, for the 50%-concentration formaldehyde. During 1997 and 1996, the three plants operated at approximately 91% and 100%, respectively, of combined capacity. The smaller plant also is 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 generally is influenced by the construction industry and housing starts. Total United States production capacity of 50%-concentration formaldehyde is approximately 7.8 billion pounds, with the formaldehyde units at the Geismar complex representing 650 million pounds, approximately 9%, of such total. Major competitors of the Company include Georgia Pacific and Neste. During 1997, approximately 37% of formaldehyde production was sold to Borden and approximately 4% was utilized by the Company in the production of urea- formaldehyde concentrate for the fertilizer industry. The remaining 59% was purchased by an unaffiliated third party pursuant to a ten-year supply contract signed in 1989. The contract requires the Company 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 such feedstock from the adjacent methanol plant. Borden produces formaldehyde and urea-formaldehyde concentrate at other facilities located in the United States and facilities outside the United States. The Company does not have any interest in such other facilities 6 and, accordingly, Borden may be a competitor of the Company with respect to formaldehyde and urea-formaldehyde concentrate. The Partnership Agreement provides that the Company may not significantly expand the capacity of the Geismar formaldehyde plants without special approval. The Company is intended to be a limited purpose partnership and the Partnership Agreement provides that the General Partner shall have no duty to propose or approve, and in its sole discretion may decline to propose or approve, any such expansion. NITROGEN PRODUCTS Ammonia. Ammonia is a commodity chemical 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 Company produces ammonia at a 400,000 ton stated annual capacity plant located at the Geismar complex. During 1997 and 1996, the Company operated at approximately 95% and 106%, respectively, of capacity. During 1995 and 1996, 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 to increase selling prices for ammonia. However, an increase in the worldwide production capacity of ammonia, along with more aggressive pricing by producers in the former Soviet Union, have put downward pressure on ammonia prices during 1997. Contract prices for ammonia decreased from $225 per ton in December 1996 to $140 per ton in December 1997. 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 1997, approximately 65% of ammonia production was sold to third parties (other than Borden), approximately 31% of production was used by the Company's adjacent urea plant, and approximately 2% of production was sold to Borden. The Company's stated annual capacity represents just under 2% of total North American capacity. The Company's major competitors include PCS, Farmland and Terra Industries. 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 urea-formaldehyde resins used in the wood building products industry. The Company produces granular urea at a 270,000 ton stated annual capacity plant at the Geismar complex. During 1997 and 1996, the plant operated at approximately 75% and 110% respectively, of capacity. 7 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 natural gas. Like ammonia, urea demand has suffered during recent years from reduced United States fertilizer demand. It also has been affected even more severely than ammonia by imports from third world countries because storage and shipping of urea is easier and less costly than is the case with ammonia. Urea prices remained relatively stable in 1996 due to many of the same factors which influenced the price of ammonia. However, increases in production capacity and a decrease in imports of urea into China have caused selling prices to significantly decline during 1997. Contract prices for urea decreased from $185 per ton in December 1996 to $105 per ton in December 1997. During 1997, approximately 42% of the Company's urea sales were to third parties and approximately 58% were to Borden. A small portion of the Company's urea production was used internally by the Company in the production of urea- formaldehyde concentrate. The Company's stated annual capacity represents approximately 3% of total North American capacity. The Company's major competitors include PCS, Unocal and CF Industries. The principal feedstocks used in the production of urea are ammonia and carbon dioxide, which the Company obtains from its adjacent ammonia plant. RAW MATERIALS The principal purchased raw material used in the Company's operations is natural gas. In 1997, the Company purchased over 63.5 million MMBTUs of natural gas for feedstock and as an energy source. Currently, the Company 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 suppliers. In 1997, natural gas represented 83%, 75% and 72% of total production costs for acetylene, ammonia and methanol, respectively, and 24% of the Company's total production costs. The Company purchases the majority of its natural gas under fixed-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. During 1996, the Company experienced unprecendented natural gas costs as the cash price and NYMEX prices, which normally determine the Company's natural gas purchase prices, reached record highs. Market conditions were similar in 1997, and, as a result, the average natural gas cost for the year was only slightly less than the 1996 average. Although the Company has diversified its suppliers and does not currently anticipate any difficulty in obtaining adequate natural gas supplies, there can be no assurance that the Company will in the future be able to purchase adequate supplies of natural gas at acceptable price levels. 8 The Company purchases other raw materials for its operations, principally ethylene and chlorine. Ethylene is currently supplied by pipeline to the Geismar facility by several suppliers. Chlorine is supplied by rail car to the Geismar complex by various suppliers. The major raw material for the Illiopolis PVC plant, VCM, is supplied by rail car from the Geismar facility. In addition, in connection with the production of certain specialty grades of PVC resins, the Company purchases certain quantities of vinyl acetate monomer. See "-PVC Polymers Products-Production Process". The Company purchases its VCM requirements for the Addis Facility under a VCM supply agreement entered into with OxyChem at the closing of the Acquisition. The Company 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 Company's total production costs, and are expected to continue to represent a high percentage of such costs for the Company, the Company'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 the then existing 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 Company's income and cash flow from operations and its ability to service its debt obligations. INSURANCE The Company 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 to its business. The Company 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 Company has, may cover environmental claims against the Company. Insurance, however, generally does not cover penalties or the costs of obtaining permits. See "Legal Proceedings". The Company is included in Borden's master insurance program, which includes property damage and liability insurance. Under its risk retention program, Borden maintains deductibles of $2.5 million, $0.5 million and $0.5 million per occurrence for property and related damages at the Geismar, Illiopolis and Addis facilities, respectively, and deductibles ranging from $0.1 million to $3.0 million per event for liability insurance. MARKETING The Company's PVC resin sales are conducted through a professional staff of seven trained personnel geographically located in seven territories. In addition to the regional sales managers, there are three product managers performing marketing functions. All are employees of Borden. The Company's other products are similarly marketed through a 9 professional field sales organization of two Borden 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 Company's sales activity is based on customer contact on a regular basis to secure and maintain long-term supply relationships. A substantial portion of the Company's sales is made under contracts with annual negotiations relating to specific conditions of sales. 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). The co-generation units are designed to provide a significant portion of the electricity and 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, respectively. The electricity is supplied by the units through a substation owned by Monochem, Inc. ("Monochem"), a corporation of which the Partnership owns 50% of the capital stock. The Company's interest in Monochem is subject to certain rights of first refusal and limitations on 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 Company manages the operations of the water company on a cost-reimbursed basis. The Addis Facility obtains its electricity and water requirements from local public utilities. Natural gas is purchased by pipeline from various intrastate suppliers. PURCHASE AND PROCESSING AGREEMENTS In connection with the formation of the Company in 1987, Borden entered into certain purchase agreements ("Purchase Agreements") and processing agreements ("Processing Agreements") with the Company 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 in the event BCPM ceases to be the general partner of the Company, other than by reason of (i) the withdrawal of BCPM as general partner under circumstances where such withdrawal violates the Partnership Agreement, (ii) removal of BCPM as general partner by the Unitholders under circumstances where cause exists or (iii) any other event except (x) voluntary withdrawal by BCPM as general partner of the Company under circumstances where such withdrawal does not violate the Partnership Agreement and such withdrawal is approved by a Majority Interest or (y) the removal of BCPM as general partner of the Company by action of the Unitholders under circumstances where cause does 10 not exist. The Purchase Agreements require Borden to purchase from the Company and the Company 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 generally will be an amount equal to the monthly weighted average price per unit that the Company charges its lowest- priced major customer (other than Borden). If the Company 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 Company 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. 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 Company a fee for each pound of formaldehyde and urea- formaldehyde concentrate processed equal to the Company'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 Company to meet competitive third party offers covering formaldehyde unless meeting such offer would impose a significant economic penalty on the Company, in which case Borden will be permitted to accept such offer and reduce its obligations under the Processing Agreements by a corresponding amount. The Company believes that the pricing formulas set forth in the Purchase and Processing Agreements have in the past provided 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 Company 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 Company 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 Company 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 11 affected by a variety of factors, including a sale or other disposition by Borden of all or certain of its manufacturing plants to unaffiliated purchasers (in which event such agreements shall not apply to such purchasers unless otherwise agreed to by such purchasers). 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 Company under the Purchase and Processing Agreements could be diminished or eliminated. The Company 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 Company operates is highly competitive. The Company competes with major chemical manufacturers and diversified companies, a number of which have revenues and capital resources exceeding those of the Company. Because of the commodity nature of the Company's products, the Company 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 Company believes that the overall efficiency, integration and optimization of product mix of the facilities at Geismar, Illiopolis, and Addis make the Company well positioned to compete in the markets it serves. Borden has agreed that, so long as BCP Management, Inc. ("BCPM") is the general partner of the Company, 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 by the Unitholders under circumstances where cause exists or (ii) withdraws as general partner under circumstances where such withdrawal violates the existing partnership agreements ("Partnership Agreements"), 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 Company. TRADEMARKS The Company entered into a Use of Name and Trademark License Agreement ("Use of Name and Trademark License Agreement") with Borden pursuant to which the Company 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. MANAGEMENT The General Partner, BCPM, manages and controls the activities of the Company and the Holding Company and the General Partner's activities are limited to such management and control. Neither the Holding Company nor 12 the Unitholders participate in the management or control of the Company. The General Partner has fiduciary duties to Unitholders. Notwithstanding any limitation on obligations or duties, the General Partner will be liable, as general partner, for all the debts of the Company (to the extent not paid by the Company) other than any debt incurred by the Company that is made specifically nonrecourse to the General Partner. The Company does not directly employ any of the persons responsible for managing or operating the business of the Company, but instead relies on the officers of the General Partner and employees of Borden who provide support to or perform services for the General Partner and reimburses Borden (on its own or on the General Partner's behalf) for their services. ENVIRONMENTAL AND SAFETY REGULATIONS General. The Company'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 Company 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 Company 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 Company 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 Company'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 Company anticipates continuing changes. The trend in environmental regulations 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 Company, 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 Company maintains an environmental and industrial safety and health compliance program and conducts internal regulatory audits at its Geismar, Illiopolis and Addis plants. The Company'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, Illiopolis and Addis plants emit air contaminants and are subject to the requirements of 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 Company believes that the Geismar, Illiopolis and Addis plants generally are in material compliance with these requirements. 13 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, Illiopolis and Addis plants. 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 and Addis plants are located in a "nonattainment area" for ozone under the 1990 Clean Air Act Amendments. Additional capital expenditures may be required at the Geismar and Addis plants 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 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, Illiopolis and Addis plants, capital expenditures may be necessary to upgrade the systems to comply with the "enhanced monitoring" requirement. In late 1996 the Illiopolis plant discovered through emission stack testing that the actual emissions from a specific dryer were higher than calculated using emission factors and engineering estimates. These new emission numbers were reported to the Illinois Environmental Protection Agency, and the plant currently anticipates that an air pollution control device known as a baghouse will be installed on the unit in 1998 at a cost of approximately $1.3 million. Based on the information currently available to the Company, the Company does not believe that the capital expenditures that may be required at the Geismar, Illiopolis and Addis plants to comply with the 1990 Clean 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 Company is continuing to evaluate the impact of such amendments on it, there can be no assurance that the actual costs will not exceed the Company's estimates. In March 1998, the United States Department of Justice ("DOJ") and the Partnership reached an agreement in principle to resolve an enforcement proceeding brought against the Company and BCPM, at the request of the Environmental Protection Agency ("EPA"), 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, Illiopolis and Addis plants are subject to the requirements of the federal Occupational Safety and Health Act ("OSHA") and comparable state statutes. The Company 14 believes that the Geismar, Illiopolis, and Addis 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, Illiopolis and Addis 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 Company to organize information about the hazardous materials in the plants and to communicate that information to employees and certain governmental authorities. The Company has prepared a detailed hazard communication program and will continue this program as a part of its industrial safety and health compliance program. The Company is a member of the Community Awareness and Emergency Response ("CAER") program of the Chemical Manufacturers Association, as well as the Association's Responsible Care initiative. At Geismar, membership in such programs includes participation in the Geismar Area Mutual Aid organization, which maintains a community warning system for notification of chemical releases through the local sheriff's department. The Company believes that it generally is in material compliance with EPCRA. Solid and Hazardous Waste. The Geismar, Illiopolis and Addis plants generate hazardous and nonhazardous solid waste and are subject to the requirements of RCRA and comparable state statutes. The Company believes that the Geismar, Illiopolis and Addis 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 likely would result in additional capital expenditures or operating expenses for the Company. In March 1998, the DOJ and the Partnership reached an agreement in principle to resolve an enforcement proceeding against the Company and BCPM for alleged violations of RCRA, and other environmental statutes, at the Geismar facility. As part of the settlement, the Partnership has agreed to apply for a RCRA permit for its valorization of chlorinated residuals ("VCR") unit. See "Legal Proceedings". During the early 1990s, the Company shipped partially depleted mercuric chloride catalyst to the facility of Thor Chemicals S.A. (PTY) Limited ("Thor") 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 Company disagrees with this reversal. 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 15 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 Company'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 Company may be among those responsible under CERCLA or analogous state laws for all or part of the costs of such cleanup. The Geismar, Illiopolis and Addis 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. In March 1998, the DOJ and the Partnership reached an agreement in principle to resolve an enforcement proceeding against the Company 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 Company 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. For example, TSCA requires a company to maintain records of allegations of significant adverse reactions to health or the environment caused by chemicals or chemical processes. The Company believes that it generally is in material compliance with TSCA. Violations of TSCA can result in significant penalties. Water Quality. The Geismar, Illiopolis and Addis plants maintain wastewater discharge permits for their facilities pursuant to the Federal Water Pollution Control Act of 1972 and comparable state laws. Where required, the Company also applied for and received permits to discharge stormwater. The Company believes that the Geismar, Illiopolis and Addis plants generally are in material compliance with the Federal Water Pollution Act of 1972 and comparable state laws. In cases where there are excursions from the permit requirements, the Geismar and Illiopolis plants are taking action to achieve compliance, are working in cooperation with the appropriate agency to achieve compliance or are in good faith pursuing 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, Illiopolis and Addis 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. The Company does not believe that these legislative developments would have a material adverse impact on the Company's operations. It is common for chemical plants from time to time to encounter areas of groundwater contamination during the ordinary course of business. 16 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 Company's plants, it is the Company's policy, where possible and appropriate, to address and resolve these contamination events. The Company believes that environmental indemnities available to it would cover a substantial portion of these known or unknown contamination events. The Company does not believe that the known contamination events will have material adverse impact on the Company's operations. The Company believes that the Geismar, Illiopolis and Addis plants generally are in material compliance with all laws with respect to known groundwater contamination events. At the Geismar complex, Borden and the Company 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 Company'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 $7.4 million in 1997 and $5.9 million in 1996. Capital expenditures for environmental control facilities are expected to total approximately $15.0 million in 1998 (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 Company will not be required as to matters not covered by the environmental indemnity from Borden). BORDEN ENVIRONMENTAL INDEMNITY Under the Environmental Indemnity Agreement, subject to certain conditions, Borden has agreed to indemnify the Company and the Holding Company 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 by Borden of the Geismar and Illiopolis plants to the Company (the "Transfer Date"). The Company 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 Company 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 $0.5 million 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 met the aggregate amount of $3.5 million as of December 31, 1996. 17 ADDIS ENVIRONMENTAL INDEMNITY OxyChem has indemnified the Company for environmental liabilities arising from the manufacture, generation, treatment, storage, handling, processing, disposal, discharge, loss, leak, escape or spillage of any product, waste or substance generated or handled by OxyChem prior to the closing of the Acquisition, any condition resulting therefrom relating to acts, omissions or operations of OxyChem prior to such date, and any duty, obligation or responsibility imposed on OxyChem prior to such date under environmental laws in effect prior to such date to address such condition. However, except with regard to claims arising from OxyChem's disposal of waste at sites other than the Addis Facility, OxyChem has no indemnification obligation if the claim for indemnification is the result of a change in applicable law after the closing of the Acquisition. OxyChem's obligation to indemnify the Company for environmental liabilities is subject to certain limitations. There can be no assurance that the indemnification provided by OxyChem will be sufficient to cover all environmental liabilities existing or arising at the Addis Facility. PRODUCT LIABILITY AND REGULATION As a result of the Company's manufacture, distribution and use of different chemicals, the Company is, and in the future 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. See "Legal Proceedings-General Proceedings". New or different types of claims arising from the Company's various chemical operations may be made in the future. 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 vinyl chloride monomer, 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 vinyl chloride monomer 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 Company. 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 Company in respect of liabilities arising from products (including but not limited to vinyl chloride polymer) shipped prior to November 1987, the Company will be responsible for any subsequent product liabilities. 18 EMPLOYEES The Partnership does not directly employ any of the persons responsible for managing and operating the Partnership, but instead reimburses BCPM for their services. On December 31, 1997 BCPM employed approximately 800 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 dated as of December 15, 1988, as amended (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 quarter as an incentive distribution (in addition to its 2% regular distribution). In August 1997, legislation was enacted which extends indefinitely the Company's treatment as a partnership for federal income tax purposes provided that the Company elects to be subject to a 3.5% tax on taxable gross income beginning on January 1, 1998 (the treatment as a partnership had been scheduled to expire on December 31, 1997). The Company has made such an election. The requirement to pay this tax will reduce the amount of cash available at the end of each quarter for distribution to unitholders. FORWARD-LOOKING STATEMENTS Certain statements in the Form 10-K, including, in particular, certain statements under "Item 1. Business", "Item 3. Legal proceeedings" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation", are forward-looking. These can be identified by the use of forward-looking words or phrases such as "believe", "expect", "anticipate", "should", "plan", "estimate" and "potential" among others. 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 ancticipated results of 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 capacities, changes in the supply of and costs of its significant raw materials, and changes in applicable environmental, health and safety laws and regulations. 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. During the early 1980s, the methanol, ammonia, and urea plants were modernized, which reduced energy consumption and expanded capacity. The urea plant was further modified to produce granular rather than prill product in 1993. The PVC resin facility at Illiopolis became operational in 1962, and was significantly upgraded in 19 the late 1980s. The Addis Facility began operations in 1979. 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. 20 The following table sets forth the approximate annual capacity of each of the principal manufacturing plants at the Geismar complex and the PVC plants at Illiopolis and Addis, all of which are owned by the Company except as noted.
1988 1997 ANNUAL STATED CAPACITY ANNUAL STATED CAPACITY 8 YEAR CAPACITY PLANTS (STATED IN MILLIONS) (STATED IN MILLIONS) PERCENTAGE INCREASE - ------ --------------------- ---------------------- ------------------- Geismar, LA: PVC Polymers Products PVC Resins.................. 400 lbs. 575 lbs. 43.8% Acetylene-based VCM......... 320 lbs. 320 lbs. -- Ethylene-based VCM.......... 550 lbs. 650 lbs. 18.2% Acetylene (1)............... 190 lbs. 200 lbs. 5.3% Methanol and Derivatives Methanol.................... 230 gals. 330 gals. 43.5% Formaldehyde I.............. 210 lbs. 280 lbs. 33.3% Formaldehyde II(2).......... 160 lbs. 180 lbs. 12.5% Formaldehyde III............ -- 190 lbs. N/M Nitrogen Products Ammonia..................... .40 tons .40 tons -- Urea........................ .22 tons .27 tons 22.7% Illiopolis, IL: PVC Resins.................... 350 lbs. 400 lbs. 14.3% Addis, LA: PVC Resins.................... 450 lbs. 600 lbs. 33.3% Total equivalent lbs.(3)........ 5,395 6,923 28.3%
(1) 50% owned by the Company (2) Also capable of producing urea-formaldehyde concentrate at an annual stated capacity of 125 million pounds. (3) Equivalent pounds is based on 6.63 pounds per gallon of methanol. ITEM 3. LEGAL PROCEEDINGS - ------- ----------------- FEDERAL ENVIRONMENTAL ENFORCEMENT PROCEEDING - -------------------------------------------- On March 11, 1998, the Partnership and the DOJ reached an agreement (the "Consent-Decree") in principle to resolve the enforcement action brought by the DOJ against the Operating Partnership, the Partnership and the General Partner in October 1994, and the Declaratory Judgement Action brought by the Partnership against the United States. The complaint sought 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. More specifically, the federal government's primary allegations included claims that (i) the Company's export to South Africa of a partially depleted mercuric chloride catalyst for recycling violated RCRA (see "Export of Partially Depleted Mercuric Chloride Catalyst"); -------------------------------------------------------- (ii) the Company should have applied for a RCRA permit for operation of its VCR unit and related tanks before August 1991; and (iii) the Company should have applied for a RCRA permit for the north trench sump at the Geismar complex because such sump allegedly stored, or disposed of, hazardous waste. The government's allegations included 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. 21 The settlement provides for payment of a civil penalty of $3.6 million and funding of $0.4 million for community based environmental programs, but it does not include any admission of wrongdoing. The terms of the settlement also provide for a specific and detailed program of groundwater and other remediation at the Geismar facility that is consistent with various actions undertaken previously, currently being undertaken, and planned to be undertaken in the future, by the Partnership. Under certain circumstances, the EPA and the LDEQ may require investigation and remediation beyond the specific terms of the agreement. The Partnership, however, believes that the technical information and knowledge regarding the nature of contamination at the site, and the need for remediation, make it unlikely that investigation and remediation beyond that which the Partnership has already planned for and is contemplated by the Consent Decree will be required. The agreement also provides that the Partnership will undertake a Supplemental Environmental Project to decommission its underground injection wells and instead subject the waste to innovative source reduction. The estimated cost of the project to the Partnership is $3.0 million. The Partnership also agreed to apply for a RCRA permit for its VCR unit and related tanks. In 1985, the LDEQ and Borden entered into a settlement agreement ("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"). Borden and the Company implemented the Settlement Agreement, and 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. Borden has paid substantially all the costs to date associated with the Settlement Agreement under the provisions of the Environmental Indemnity Agreement. The Consent Decree that will result from the agreement with the DOJ will establish new guidelines for remediation of groundwater and soil contamination that was identified by the Settlement Agreement; all future remediation of this groundwater and soil contamination will be performed under the terms of the Consent Decree. Remediation costs incurred under the Consent Decree, which are expected to be several million dollars, will continue to be paid by Borden. The terms of the Consent Decree also will settle all federal and state civil issues regarding the export of partially depleted mercuric chloride catalyst. In May 1995, certain adjoining landowners at the Geismar complex filed a motion to intervene in the Geismar Enforcement Proceedings claiming rights under CERCLA and RCRA to protect their property interests. The court granted a limited intervention on November 15, 1995 and the Company is vigorously defending against this intervention. In April 1996 and April 1997, adjoining landowners filed separate tort actions asserting personal injury and property value diminution as a result of releases of hazardous materials from the Geismar complex. The Company plans to vigorously defend against these actions. 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 Company. 22 EXPORT OF PARTIALLY DEPLETED MERCURIC CHLORIDE CATALYST - ------------------------------------------------------- During the early 1990s, the Company shipped partially depleted mercuric chloride catalyst to the facility of Thor Chemicals S.A. (PTY) Limited ("Thor") in Cato Ridge, South Africa for recovery of mercury. In 1993 the LDEQ determined that the partially depleted catalyst was not a hazardous waste, although LDEQ reversed this position in 1994. The Company disagrees with this reversal. The Company did not send mercury-containing sludge to the Thor facility. Thor's operations have included the production of mercuric chloride catalyst and the recovery of mercury from partially depleted catalyst. 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 2,900 drums of partially depleted catalyst at the facility which had been shipped by the 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 Company had not sent there. In February 1995, Thor and three of its management personnel were tried by South Africa for the common law crime of culpable homicide and a number of alleged violations of the Machinery and Occupational Safety Act of 1983 ("MOSA"), because of the deaths of two Thor employees. The prosecution alleged that the deaths were the result of mercury poisoning. In exchange for a plea by Thor that it had violated provisions of MOSA, the prosecution dropped the homicide charges against Thor and all the charges against Thor's management personnel. The court has sentenced Thor to a fine of R13,500, which is equivalent to approximately $2,700. The Partnership is aware that a case instituted in the United Kingdom by the relatives of two deceased Thor employees together with a number of Thor Chemical employees allegedly suffering from mercury poisoning, has been settled by the Thor Chemicals parent company. The settlement involved a payment of R9,4 million (approximately $1.9 million) by the Thor Chemicals parent company to the claimants. The Partnership is further aware that a second group of Thor Chemicals employees has recently instituted action against the Thor Chemicals parent company in the British High Court for damages allegedly arising out of mercury poisoning. A Commission of Inquiry, appointed by the President of South Africa, commenced hearings in February 1996, and published the following terms of reference: (1) to investigate the history and background of the acquisition of mercury catalyst stockpiled by Thor as well as additional mercury-containing sludge on the premises and to report on the further utilization or disposal thereof; (2) to recommend the best practical environmental option to address the problem of mercury-containing catalyst and/or waste currently on Thor's premises; (3) to report the results of the Commission's inquiry to the President of the Republic of South Africa as soon as conveniently possible; (4) to investigate deficiencies in the regulation and enforcement relating to the monitoring and control of mercury processing; and (5) to recommend steps which could contribute to the minimization of risk and to the protection of workers and the environment. The First Phase Report of the Commission of Inquiry was handed to the President of South Africa on March 12, 1997 and was released to the public in late April 1997. The brief of this First Phase of the Report was to investigate the history and background of the acquisition of 23 spent mercury catalyst stockpiled by Thor Chemicals as well as additional mercury containing sludge on the premises and to report on the further utilization or disposal thereof; and to recommend on the best practical environmental option to deal with the problem of mercury dust containing catalyst and/or waste currently present on Thor's premises. The Report places the responsibility for the stockpile of spent mercury catalyst as well as any environmental damage arising out of the operations of the Thor Chemicals plant jointly in the hands of various South African government officials responsible for administration and protection of the environment and Thor Chemicals itself. The Report considers the return of the stockpiled catalyst to the senders of the catalyst but concludes that this would not be a satisfactory option for the disposal of the catalyst. The Commission found that the only viable option is to treat the mercury waste in an environmentally friendly manner by recycling it via incineration or roasting, at the Thor Chemicals plant, once various environmental requirements have been met by this plant. The commission finds that the cost of this incineration should be born by Thor Chemicals. In addition, the Minister of Water Affairs and Forestry has instructed his department's regional office to investigate alleged water pollution at and near the Thor facility. The Government of South Africa has not made any allegations or asserted any claims against the Company. The contract between the Company and Thor provides that title to, risk of loss, and all other incidents of ownership of the partially depleted catalyst would pass from the Company to Thor when the catalyst reached South Africa. The Company does not believe that it is liable for disposing of the approximately 2,900 drums of partially depleted catalyst remaining at the Thor facility. This is confirmed by the findings of the Commission of Inquiry thus far which place no liability on the Partnership. The recommendations of the Commission of Inquiry are, however, not binding on the South African Government. In the event that the Company should be required to dispose of the approximately 2,900 drums at the facility shipped by the Company, the Company estimates that such cost would not be in excess of $4 million. With regard to the environmental condition of the Thor facility, the Commission of Inquiry has not, thus far, placed any liability on the Partnership for any contamination or other conditions at that facility, nor has the Partnership been notified by the South African Government of any such liability. The findings of the Commission of Inquiry are of a non-binding nature and it is impossible to determine what, if any, allegations any party may make during the course of any further sittings of the Commission of Inquiry or generally 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 Company, and the Company would vigorously defend against any such allegations. In connection with a federal grand jury investigation in the U.S. District Court in New Jersey, the Company is providing documents and other information with respect to the partially depleted catalyst matter. The 24 Company 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 Company does not anticipate that it would incur material additional expenditures to continue to manage the partially depleted catalyst as a hazardous waste. 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 EPCRA by failing to report certain relief valve releases, which occurred between February 1987 and July 1989, that the Company believes are exempt from CERCLA and EPCRA reporting. The Company's petition for reconsideration was denied, a penalty hearing has been scheduled, settlement negotiations are ongoing 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 results of operations for the Company. 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 ("EIA"), subject to certain conditions, Borden has agreed to indemnify the Company 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 Company (the "Transfer Date"). The Company 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 Company 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 EIA 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 EIA have aggregated approximately $3.5 million through December 31, 1996. FEDERAL WASTEWATER PERMIT - ------------------------- The Geismar facility has a permit for each of its two wastewater outfalls. As previously reported, the Company challenged conditions in one of these permits. The challenged permit expired and, prior to the expiration, the Company applied for a new permit. The Company has resolved the permit issues, and the administrative matter is now closed. OTHER LEGAL PROCEEDINGS - ----------------------- The Company manufactures, distributes and uses many different chemicals in its business. As a result of its chemical operations the Company is subject to various lawsuits in the ordinary course of business which seek 25 compensation for physical injury, pain and suffering, costs of medical monitoring, property damage and other alleged harm. New or different damage claims arising from the Company's various chemical operations may be made in the future. In addition, the Company is subject to various other legal proceedings and claims which arise in the ordinary course of business. The management of the Company believes, based upon the information it presently possesses, that the realistic range of liability to the Partnership of these other matters, taking into account the Partnership's insurance coverage, including its risk retention program, and the Indemnity Agreement with Borden, would not have a material adverse effect on the financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- --------------------------------------------------- No matter was submitted during the fourth quarter of 1997 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 ------------------- The high and low sales prices for the Common Units on February 27, 1998 were $7 7/8 and 7 13/16 respectively. As of December 31, 1997, there were approximately 37,900 holders of record of Common Units. The following table sets forth the 1996 and 1995 quarterly Common Unit data: 1997 QUARTERS ---------------------------------- First Second Third Fourth ----- ------ ----- ------ Cash distribution declared $ 0.10 $ 0.45 $ 0.18 $ 0.10 Market price range: High 12 1/4 11 5/8 11 15/16 9 15/16 Low 8 1/4 9 3/4 9 7 9/16 1996 QUARTERS -------------------------------- First Second Third Fourth ----- ------ ----- ------ Cash distributions declared $0.10 $0.00 $0.15 $0.10 Market price range: High 16 15 7/8 10 5/8 10 3/8 Low 12 5/8 10 8 9/16 8 1/8 26 ITEM 6. SELECTED FINANCIAL DATA - ------- ----------------------- The following table sets forth selected historical financial information for the Company for each of the five years ended December 31, 1997. 1997 1996 1995 1994 1993 ---- ------ ------ ------- ----- (in thousands except per Unit data, which is net of 1% General Partner interest) Net revenues $737,129 $709,203 $739,587 $657,752 $433,297 Income (loss) before extraordinary item 5,597 4,828 150,926 146,405 (1,435) Net income (loss) 5,597 4,828 144,014 146,405 (1,435) Income (loss) per unit before extra- ordinary item - basic 0.15 0.13 4.07 3.94 (.04) Net income (loss) per Unit - basic 0.15 0.13 3.88 3.94 (.04) Cash distributions declared per Unit 0.83 0.35 4.66 3.52 .78 Total assets 500,186 525,705 568,507 542,904 444,304 Long-term debt 225,000 200,000 200,000 120,000 150,000 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: (1) 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 effect on the Partnership, including, but not limited to, its ability to 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 and industrial industries. The principal raw material feedstock is natural gas, the price of which has been volatile in recent years and at recent historical high levels during the past two years. The other principal feedstocks are ethylene and chlorine. Prices for these raw materials may change significantly from year to year. 27 The Partnership experienced strong demand for its PVC Polymers Products in the first half of 1995, particularly for its rigid and general purpose resins. Increased activity in the construction industry resulted in increased demand for rigid grade resin for end use in pipe and siding production. The automotive industry requirements resulted in increased demand for general purpose resins. However, during this period PVC customers began to build up their PVC inventory in anticipation of rising PVC sales prices. This inventory buildup peaked during the second quarter of 1995, resulting in reduced PVC purchases during the second half of 1995. This led to a sharp decrease in PVC sales prices which continued through the end of 1995. Prices for PVC improved somewhat during the first half of 1996, but then declined due to competitive market conditions experienced in the second half of 1996. Published prices for PVC during the fourth quarter of 1996 declined to an average of approximately $0.32 per pound. PVC prices repeated this trend again in 1997, with prices increasing through the second quarter of 1997 but declining in the second half of the year to prices similar to the fourth quarter of 1996. General competitive conditions and reduced demand for PVC in the Far East will keep downward pressure on selling prices through 1998. In early 1995, due to strength in the construction industry, the Partnership experienced increased 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 experienced continued strong demand for methanol products throughout 1996. Supply disruptions in the industry served to improve methanol pricing during 1997, with contract prices ending the year at $0.58 per gallon. As supply is normalized and additional production capacity is brought on-line in 1998, selling prices will face significant downward pressure during the year. Selling prices for ammonia and urea remained strong in 1995 and 1996 with prices consistent with 1994 levels. Demand for ammonia and urea in India and China, as well as worldwide supply disruptions, caused relatively tight markets during the period. However, in 1997 worldwide production capacity for ammonia and urea increased and China, a significant importer of urea, significantly reduced urea imports. These conditions, along with more aggressive pricing by producers in the former Soviet Union, have forced selling prices downward in 1997. These market conditions are expected to continue in 1998 which, along with scheduled capacity increases during the year, will put continued downward pressure on selling prices during the year. 28 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): 1997 1996 1995 --------- ----------- ------------ PVC Polymers Products $486,189 66% $464,496 65% $449,657 61% Methanol and Derivatives 177,475 24% 145,982 21% 187,126 25% Nitrogen Products 73,465 10% 98,725 14% 102,804 14% -------- ---- ------ ---- ------- --- Total Revenues $737,129 100% $709,203 100% $739,587 100% ======== ==== ======== ==== ======== ==== 29 The following table summarizes indices of relative average selling prices received per unit of product sold per period for the three principal product groups of the Partnership and relative average raw material costs per unit for the principal raw materials (using 1985 = 100 as the base year for all products sold or purchased per period). The price indices in the table reflect changes in the mix and volume of individual products sold as well as changes in selling prices. Year Ended December 31, 1997 1996 1995 ---- ---- ---- Average price received per unit sold PVC Polymers Products 117 111 133 Methanol and Derivatives 126 99 134 Nitrogen Products 119 138 149 Raw material costs per unit purchased Natural Gas 105 109 69 Ethylene 136 151 173 Chlorine 137 99 92 Production volumes (1) (in millions of pounds) PVC Polymers Products 2,447 2,490 2,312 Methanol and Derivatives 2,696 2,663 2,805 Nitrogen Products 1,168 1,397 1,389 (1) Includes the production of intermediate products. 1997 COMPARED TO 1996 Total Revenues Total revenues for 1997 increased $27.9 million or 4% to $737.1 million from $709.2 million in 1996. This increase was the net result of a $21.7 million increase in revenues from PVC Polymers Products, a $31.5 million increase in Methanol and Derivatives revenues and a $25.3 million decrease in Nitrogen Products revenues. Total revenues for PVC Polymers Products increased 5% as a result of a 5% increase in selling prices. Sales volume was essentially unchanged from 1996 to 1997. Total revenues for Methanol and Derivatives increased 22% as a result of a 25% increase in selling prices, partially offset by a 2% decrease in sales volumes. The increase in selling prices was due to the circumstances described above. 30 Total revenues for Nitrogen Products decreased 26% as a result of a 14% decrease in selling prices and a 13% decrease in sales volumes. The softening of the markets for ammonia and urea in 1997 was due to the worldwide changes in demand and pricing described above. Cost of Goods Sold Total cost of goods sold increased 4% to $682.0 million in 1997 from $656.6 million in 1996. Expressed as a percentage of total revenues, cost of goods sold remained at 93% of total revenues from 1996 to 1997. Gross profit for PVC Polymers Products decreased 54% from 1996 to 1997. The increase in selling prices for PVC in 1997 described above were more than offset by increases in the cost of raw materials during the year, particularly vinyl chloride monomer and chlorine. The cost of these raw materials increased 9% and 36%, respectively, from 1996 to 1997. These cost increases were partially offset by a 16% decrease in the cost of ethylene year to year. Gross profit for Methanol and Derivatives increased 184% from 1996 to 1997 primarily due to the increase in selling prices described above. Gross margins for Nitrogen Products decreased 98% primarily due to the decrease in selling prices described above. Interest Expense Interest expense during 1997 decreased $798 to $20.9 million from $21.7 million in 1996 due to a reduction in the average outstanding amounts borrowed under the Partnership's credit facility from 1996 to 1997. Incentive Distribution to General Partner The General Partner incentive of $794 reflects the incentive distribution declared in the second quarter of 1997. No quarterly incentive distributions were declared during 1996. Other Expense, Including Minority Interest Other expense increased $1.3 million from 1996 to 1997, primarily due to the write-off of costs associated with the Partnership's planned conversion to corporate form which was terminated in the third quarter of 1997 due to a change in federal tax law regarding master limited partnerships. 1996 COMPARED TO 1995 Total Revenues Total revenues for 1996 decreased $30.4 million or 4% to $709.2 million from $739.6 million in 1995. This decrease was the net result of a $14.8 million increase in revenues from PVC Polymers Products, offset by decreases in revenues from Methanol and Derivatives of $41.1 million and from Nitrogen Products of $4.1 million. Total revenues for PVC Polymers Products increased 3% as a result of a 23% increase in volume offset by a 16% decrease in selling prices. The 31 volume increase was due to the full year effect in 1996 of the Addis Facility that was purchased May 1, 1995 and to generally strong demand for PVC resins. Industry capacity expansions and continued softness in the export markets more than offset the increased demand for PVC resins, the combination of which caused the significant decrease in selling prices in 1996 for the industry and the Partnership. Total revenues for Methanol and Derivatives decreased 22% as a result of a 3% increase in volume offset by a 25% decrease in selling prices. Methanol selling prices remained stable in 1996, but on average were significantly below 1995 selling prices, which benefited from very high prices in early 1995 as discussed above. Total revenues for Nitrogen Products decreased 4% as a result of a 4% increase in volume offset by an 8% decrease in selling prices. Although selling prices declined from 1995 levels, generally strong market conditions for ammonia and urea continued during 1996. Costs of Goods Sold Total costs of goods sold increased 27% to $656.6 million in 1996 from $516.5 million in 1995. The increase is partially attributable to increased PVC volumes but is substantially due to an aggregate raw material cost increase of approximately 24% comprised of significantly higher natural gas unit costs, slightly higher chlorine costs, and ethylene costs that were lower than the high 1995 unit costs. Unit costs for natural gas increased 58% in 1996, adding approximately $63 million to the Partnership's cost structure. The increase was caused by the severe weather conditions in early 1996 combined with low industry storage levels. This combination created elevated natural gas costs throughout 1996. As a percentage of total revenues, cost of goods sold increased to 93% of revenues in 1996 from 70% in 1995, resulting in greatly reduced gross margins and net income for the Partnership. Interest Expense Interest expense in 1996 increased 14% to $21.7 million due to the debt associated with the acquisition of the Addis Facility. Incentive Distribution to General Partner No incentive distribution to the General Partner was generated in 1996 as no quarterly cash distribution to Unitholders exceeded the Target Distribution. In 1995, each quarter's cash distribution exceeded the Target Distribution. Extraordinary Charge on Early Extinguishment of Debt The Partnership incurred a charge of $6.9 million, or 19 cents per Unit, in 1995 as a result of a prepayment premium on $150 million in debt retired during the year. See Acquisition and Financing and Notes to Consolidated Financial Statements, Note 5. Net Income Net income declined to $4.8 million in 1996 from $144.0 million in 1995. 32 As discussed above, the decline is attributable to increased raw material natural gas costs and reduced selling prices in all three principal product groups of the Partnership. LIQUIDITY AND CAPITAL RESOURCES Cash Flows from Operations. Cash provided by operations increased to $46.9 million for 1997 from $38.5 million for 1996 primarily due to a slight increase in net income and a favorable change in working capital. Cash provided by operations for the year ended December 31, 1996 decreased to $38.5 million from $225.6 million for 1995. The decrease was due to a significant decrease in net income and an unfavorable change in working capital, primarily relating to changes in accounts receivable and accounts payable. Cash Flows from Investing Activities. Capital expenditures totaled $19.4 million and $14.6 million for 1997 and 1996, respectively. These expenditures were primarily for environmental projects and other non-discretionary capital expenditures consisting of a large number of relatively small projects. The Partnership paid $100.4 million for the acquisition of a PVC manufacturing facility in 1995. See Acquisition and Financing. Other capital expenditures during 1995 totaled $27.0 million, $13.6 million for the expansion of facilities and for other discretionary capital projects, and $13.4 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. 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 distributions and net additions to reserves in such quarter. These reserves are retained 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 $30.8 million were made during 1997 compared to $30.5 million in 1996 and $213.1 million in 1995. 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, 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, 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 33 payments, capital expenditures and other accrued items. Acquisition and Financing On May 2, 1995, the Partnership, through the Operating Partnership, completed the purchase of Occidental Chemical Corporation's Addis, Louisiana PVC manufacturing facility and related assets. The cash purchase price for the Addis assets was $100.4 million. On May 1, 1995, the Partnership issued $200 million aggregate principal amount of senior unsecured notes. The net proceeds from this offering were used to prepay $150 million aggregate principal amount of outstanding notes plus a related prepayment premium of $6.9 million reflected as an extraordinary charge in 1995, and accrued interest. The remaining proceeds were used to fund a portion of the purchase price of the Addis Facility. Liquidity The Partnership expects to satisfy its cash requirements, including the requirements of the Addis Facility, through internally generated cash and borrowings. In connection with the acquisition of the Addis Facility, the Partnership entered into a revolving credit facility which provided a line of credit for capital expenditures (including the acquisition), working capital and general partnership purposes. Borrowings under this facility were $25.0 million at December 31, 1996. In December 1997, the Partnership entered into a new $100 million revolving credit facility with generally more favorable terms than the previous facility. The Partnership borrowed $25.0 million under the new facility, the proceeds of which were used to repay the amount outstanding under the existing facility, which was then terminated. The new credit facility expires in December 2002. The new revolving credit agreement along with the senior unsecured notes contain a number of financial and other covenants that management believes are customary in lending transactions of these types, including restrictions on quarterly cash distributions if compliance with certain covenants is not maintained. As discussed in Item 1, "Cash Distributions", the Partnership has elected to be subject to a 3.5% tax on taxable gross income so as to extend indefinitely its treatment as a partnership for federal income tax purposes. The requirement to pay this tax will reduce the amount of cash available at the end of each quarter for distribution to unitholders. 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 $25 to $35 million per year. Total capital expenditures for 1998 are anticipated to be $30 to $35 million. Future capital expenditures would vary substantially if the Partnership is required to undertake corrective action or incur other environment compliance costs in connection with the proceedings discussed under Item 3 "Legal Proceedings." 34 The Partnership has agreed to purchase its joint venture partner's ownership share of the acetylene plant and certain other facilities at the Geismar complex on December 31, 1999. The purchase price is $10,000 payable over three years plus the undepreciated value of the joint venture partner's share of capital spent on the facilities from November 1997 to December 31, 1999, which is estimated to be $7 to $9 million based on current plans. Similar to other business entities, the Partnership will be impacted by the inability of its computer application software programs 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 could fail or create erroneous results when referencing the year 2000. Management is assessing the extent and impact of this issue and is developing an action plan to mitigate the possibility of business interruption or other risks. These actions include the replacement of applications or programs that are unable to properly identify the year 2000. The anticipated costs associated with the implementation of new software applications, including the associated hardware, is approximately $16,200, of which $8,644 is committed at December 31, 1997. Management currently does not anticipate any significant business interruption or other adverse impacts related to the year 2000 issue. Environmental Expenditures Annual environmental capital expenditures for 1995-1997 ranged from $1.4 to $7.4 million. The 1998 budget for environmental capital expenditures is approximately $15.0 million, and is included in the budget of $30 to $35 million discussed above. Annual non-capital environmental expenditures for 1995-1997 ranged from $17.9 to $21.6 million. The 1998 budget for non-capital environmental expenditures is approximately $20 million. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------- ------------------------------------------- Sequential Index to Financial Statements Page - ----------------------------- ---------- Report of Independent Accountants 51 Consolidated Statements of Operations for the years ended December 31 1997, 1996 and 1995 52 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 53 Consolidated Balance Sheets as of December 31, 1997 and 1996 54 Consolidated Statements of Changes in Partners' Capital for the years ended December 31, 1997, 1996 and 1995 55 Notes to Consolidated Financial Statements 56 35 Selected Quarterly Financial Data (Unaudited) - --------------------------------------------- (in thousands except per Unit data, which is net of 1% General Partner interest) 1997 QUARTERS _________________________________________ First Second Third Fourth ------- -------- ------- -------- Revenues $194,682 $189,776 $180,890 $171,781 Gross Profit 6,645 34,146 12,434 1,920 Net Income (loss) (4,407) 21,246 (1,062) (10,180) Net Income (loss) per Unit - basic (0.12) 0.57 (0.03) (0.27) 1996 QUARTERS ________________________________________ First Second Third Fourth ------- -------- ------- -------- Revenues $170,585 $179,227 $182,814 $176,577 Gross Profit 5,766 14,002 17,571 15,304 Net Income loss (6,097) 1,505 5,381 4,039 Net Income (loss) per Unit - basic (0.16) 0.04 0.14 0.11 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING - ------- ----------------------------------------------------------- and Financial Disclosure ------------------------ No Form 8-K was issued by the Company for the two most recent years ended December 31, 1997 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 General Partner) and has no directors or officers. The directors, officers and employees of the General Partner perform management and non-supervisory functions for the Partnership. 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 and Chief Executive Officer of Borden Chemicals, Inc. Wayne P. Leonard, as Executive Vice President and Chief Operating Officer of BCPM, reports directly to Mr. Saggese, and is responsible for the Partnership's marketing and manufacturing operations. Independent Committee - BCPM is required to maintain an Independent Committee of its Board of Directors, which shall be composed of at least 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 from the Independent Committee. Such actions include an 36 expansion of the scope of business of the Partnership, the making of material capital expenditures, the material curtailment of operations of any plant, the material expansion of capacity of any plant, and the amendment of or entry into by the Partnership of any agreement with Borden. The members of the Independent Committee are Edward H. Jennings, George W. Koch, and E. Linn Draper, Jr. Mr. Koch is Of Counsel in Kirkpatrick & Lockhart, a law firm which represents the Partnership and its affiliates, Borden and Borden Chemical, Inc., in connection with environmental, insurance, and other matters. The Partnership believes that the terms of such services are on terms no less favorable to the Partnership and its affiliates than if such services were procured from any other law firm competent to handle the same matters. As sole stockholder of BCPM, Borden elects directors of BCPM on an annual basis. Set forth below is certain information concerning the directors and officers of BCPM. Section 16 of the Securities Exchange Act of 1934 requires directors, certain officers and owners of more than ten percent of a registered class of Company's equity securities to report their holdings and transactions in BCP units. Previously, certain rights payable only in cash were excluded from these reporting requirements; however, that exclusion was rescinded as of August 15, 1996. Following a legal analysis of the BCP Management 1995 Long-Term Incentive Plan, it was determined that the phantom units and Unit Appreciation Rights involved in that Plan should be reported by directors and certain officers. Accordingly, filings for Messrs. Dieker, Draper, Jennings, Koch, Leonard, and Saggese were reported on Form 4 filed in July 1997, later than required under the SEC rules. Filings for Mr. John L. Russ III and Mr. James O. Stevning, formerly the Executive Vice President-Sales and Marketing and Vice President, Chief Financial Officer and Treasurer, respectively, of BCPM also were filed in July 1997, later than required under SEC rules. In addition, an Initial Statement of Beneficial ownership of securities on Form 3 for Mr. Nagel was filed late following his election as Chief Financial Officer. 37 Served in Age on Present Position and Office Dec. 31, Position Name with General Partner 1997 Since ----------------- ----------------------------- ------- --------- Joseph M. Saggese Director, Chairman, President and Chief Executive Officer 66 1990 George W. Koch Director 71 1987 Edward H. Jennings Director 60 1989 E. Linn Draper, Jr. Director 55 1996 William H. Carter Director 44 1995 Clifton S. Robbins Director 39 1996 William F. Stoll,Jr. Director 49 1996 Wayne P. Leonard Executive Vice President, Chief Operating Officer 56 1987 Christopher L. Nagel Vice President, Chief Financial Officer and Treasurer 35 1997 Marshall D. Owens, Jr. Vice President - Manufacturing 54 1997 Lawrence L. Dieker Vice President, Secretary, and General Counsel 59 1987 Joseph M. Saggese has been Chairman of the Board of Directors, President and Chief Executive Officer of BCPM since July 1990. In July 1990, he was named Vice President of Borden and President of the former Chemicals Division of Borden. In January 1996 he was named President and Chief Executive Officer of Borden Chemical, Inc., the successor to a major portion of the former Chemicals Division of Borden. George W. Koch is a director of BCPM. He has been 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. 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 Lancaster Colony, Inc., a manufacturer and marketer of food, automotive and glass products. E. Linn Draper, Jr. is a director of BCPM. He is also Chairman, President and Chief Executive Officer of American Electric Power Company, Inc. and American Electric Power Service Corporation, positions he has held since 1992. From 1987 to 1992, he was Chairman, President and Chief Executive Officer of Gulf States Utility Company. Dr. Draper is currently a director of CellNet Data Systems, Inc. William H. Carter is a director of BCPM. He is also Executive Vice President and Chief Financial Officer of Borden, a position he has held since April 1995. Prior to joining Borden, he was a partner of Price Waterhouse LLP, a position he held since 1986. He is a director of AEP Industries, Inc. Clifton S. Robbins is a director of BCPM. He has been a member of KKR & Co., LLC since 1996 and was a General Partner of Kohlberg Kravis Roberts & Co. since 1995 and has been a General Partner of KKR Associates, L.P. since January 1995 and an Executive with Kohlberg Kravis Roberts & Co. since 1987. He is also a Director of AEP Industries, Inc, IDEX Corporation, 38 Kindercare Learning Centers, Inc., Newsquest Capital, PLC and Act III Cinemas, Inc. William F. Stoll, Jr. is a director of BCPM. He is also Senior Vice President and General Counsel of Borden, Inc., a position he has held since July 1996. Prior to joining Borden, he was Vice President and Deputy General Counsel of Westinghouse Electric Corporation, a position he held since January 1993. From January 1985 to January 1993, he was Deputy General Counsel of Westinghouse Electric Corporation. Wayne P. Leonard has been Executive Vice President of BCPM since 1995 and was named Chief Operating Officer of BCPM in July 1997. During 1993 and 1994, Mr. Leonard served as Vice President of Manufacturing of BCPM. Christopher L. Nagel is Vice President, Chief Financial Officer and Treasurer of BCPM, positions he has held since September 1997. From January 1996 to August 1997 he was Corporate Controller of Borden Foods Corporation. From August 1995 to December 1995 he was Special Project Director for Borden, Inc. Prior thereto, he was a Senior Manager for Price Waterhouse LLP, a position he held since 1993. Marshall D. Owens, Jr. is Vice President of Manufacturing for BCPM, a position he has held since October 1997. Prior thereto, he served as Director of Manufacturing since 1993. Lawrence L. Dieker is Vice President, General Counsel and Secretary of BCPM. He is also a Vice President and General Counsel of Borden Chemical, Inc., a position he has held since January 1996. He was previously Assistant General Counsel of Borden, a position he held from 1982 to January 1996. ITEM 11. EXECUTIVE COMPENSATION - -------- ---------------------- The Partnership has no directors or officers. The directors and officers of BCPM receive no direct compensation from the Partnership for services to the Partnership. The Partnership reimburses BCPM for all direct and indirect costs incurred in managing the Partnership. During 1997 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 1997, the Board met nine times, the Independent Committee met ten times, and the Independent and Audit Committees met jointly four times. The following table sets forth all cash compensation paid and accrued by Borden or BCPM and reimbursed by the Partnership for services rendered during the three years ended December 31, 1997 by each of the Chief Executive Officer and the three other executive officers of BCPM whose remuneration exceeded $100,000 (the "Named Executives"). As indicated in the footnotes to the table, certain of the executive officers included in the table received compensation in excess of the amounts indicated from Borden in consideration for services provided by such individual to Borden for which the Partnership did not reimburse Borden. The Partnership only reimburses Borden for a portion of the total compensation paid by Borden to Joseph M. Saggese in consideration for his services as President and Chief Executive Officer of BCPM, and to Lawrence L. Dieker in consideration for his services as Vice President, Secretary and General Counsel. Had the Partnership been obligated to reimburse Borden for the total compensation paid by Borden to Mr. Dieker, he would have been one of the four most highly compensated executive officers of BCPM (other than the chief executive officer) in addition to Messrs. Leonard, Nagel and Owens, Jr. Summary Compensation Table
Long Term Annual Compensation Compensation Awards ------------------------------------------ ------------------- Securities Other Annual Underlying Salary Bonus Compensation Options/SARs Name of Principal Position Year ($) ($) ($) (a) (#) - ------------------------------------------------------------------------------------------------------------- Joseph M. Saggese 1995 112,002(b) Chairman, President and 1996 127,677(b) 6,500 Chief Executive Officer 1997 123,750(b) 6,500 Wayne P. Leonard 1995 175,253 87,720 912 5,500 Executive Vice President, 2,430(c) Chief Operating Officer 1996 185,711 174,930 8,039 5,500 1997 200,666 0 0 6,000 Christopher L. Nagel 1997 50,000(d) 0 46,680 0 Vice President, Chief Financial Officer and Treasurer Marshall D. Owens, Jr. 1995 130,232 45,971 925 2,000 Vice President - 1,215(c) Manufacturing 1996 136,863 92,740 6,175 2,500 1997 142,320 0 0 3,000
39 (a) Represents miscellaneous compensation such as executive perquisities and relocation allowance/reimbursements. (b) Represents approximate amount of reimbursement paid to Borden by the Partnership in consideration for services provided by Mr. Saggese to the Partnership. Mr. Saggese received aggregate salary from Borden of $495,000, $450,000 and $390,833 for the years 1997, 1996 and 1995, respectively. Additionally Mr. Sagesse received certain bonuses and other compensation in consideration for his services rendered to Borden for which the Partnership did not have any reimbursement obligations. (c) Represents securities of Borden underlying Options/SARs. (d) Mr. Nagel served as an officer and employee of BCPM for a portion of 1997. Had he served in his current capacity for the entire year, his annual compensation would have exceeded $100,000. The Board of Directors of BCPM has approved a long-term incentive plan for management and employees of BCPM (and employees of Borden who provide support to or perform services for BCPM). The plan is intended to provide incentives to the management and employees of BCPM (and such employees of Borden) to enhance the market value of the Units. Under the plan, awards of "phantom" appreciation rights in the Holding Company are made to selected BCPM or Borden officers or employees on the basis of or in relation to services performed, directly or indirectly, for the benefit of the Company. Subject to certain restrictions, such grantees would be entitled to exercise all or any portion of the phantom appreciation rights granted to 40 them. Upon exercise of any such rights, the grantee would be entitled to receive from BCPM or Borden, an amount in cash calculated to award the grantee for any actual appreciation in the market value of the Units in the Holding Company and actual cash distributions made by the Holding Company in respect of the Units. The benefits under the plan may be in addition to, and not in lieu of, the benefits provided to management and employees of BCPM (and such employees of Borden) under existing plans or employee benefit arrangements. BCPM (or Borden, on behalf of BCPM) will be reimbursed by the Company for all payments made or expenses incurred by BCPM (or Borden, on behalf of BCPM) under the plan. Under the plan, an initial grant of approximately 61,500 phantom appreciation rights was made during 1995; additional grants of 83,500 and 89,000 phantom appreciation rights were made during 1996 and 1997, respectively. The following table sets forth information concerning individual grants of stock options and free standing unit appreciation rights ("UARs") made during 1997 to each of the Named Executives. Option/UAR(a) Grants in Last Fiscal Year ----------------------------------------
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term ---------------------------------------------------------- --------------------------- Number of Percent Of Securities Total Option Underlying SARs Granted Exercise Or Cumulative Option/SARs To Employees Base Price Expiration Phantom Name Granted (#) In Fiscal Year ($/Sh) Date 5% ($) 10% ($) Units (b) - --------------------- ------------- ------------- ----------- ---------- ------ ------ ---------- Saggese, Joseph M. 6,500(c) 7.3 10.25 22-Apr-04 $27,123 $63,208 1,107.7 Leonard, Wayne P. 6,000(c) 6.7 10.25 22-Apr-04 25,037 58,346 3,449.8 Owens, Jr. Marshall D. 3,000(c) 3.4 10.25 22-Apr-04 12,518 29,173 1,373.5
(a) UARs are unit appreciation rights which, (i) in the event the Fair Market Value of one Unit equals or exceeds the Base Price of such UAR at the time of exercise of such UAR, entitles the holder thereof to receive, upon exercise of such UAR, cash in an amount equal to the excess of the Fair Market Value of one Unit on the date of exercise over the exercise price of such UAR and (ii) in the event the Fair Market Value of one Unit is less than the exercise price of such UAR, upon exercise of such UAR, reduces the cash payable due to the exercise of Phantom Units (as defined in note (b)) in connection with the exercise of such UAR by an amount equal to the difference between such Fair Market Value and such exercise price; the "Fair Market Value" means the average of the high and low transaction prices of a Unit as reported on the NYSE Composite Transactions on such date. (b) Phantom Units are the right receive, upon exercise thereof, cash in an amount equal to the Fair Market Value of one Unit on the date of exercise. On the date a cash distribution is made by the Partnership to the Unit Holders, a credit of Phantom Units is made to each holder of UARs. The number of Phantom Units credited to each holder's account equals the number determined by dividing (i) the product of (A) the aggregate number of UARs and Phantom Units held in such holder's account immediately prior to such cash distribution multiplied by (B) the amount of the cash distribution per Unit by (ii) the Fair Market Value of a Unit on the date of the cash distribution. Upon an exercise of any UARs, Phantom Units which are derived from such UARs are automatically exercised in connection therewith. (c) The grants vest 50% after two years, with the balance vesting after three years. Fiscal Year-end Option/UAR Values ---------------------------------
Number of Securities Underlying Unexercised Value of Unexercised Options/UARS At In-the-Money Options/UARs Fiscal Year-end (#) At Fiscal Year-End ($) Name Exercisable/Unexercisable Exercisable/Unexercisable - ---- ------------------------- ------------------------- Joseph M. Saggese 0/13,000 * Wayne P. Leonard 2,750/14,250 * Marshall D. Owens, Jr. 1,000/6,500 * * None of the UARs were in-the-money
Pension Plan The executive officers named above are employees of Borden and participate in Borden's pension plans. The Borden Employees Retirement Income Plan ("ERIP") 41 for salaried employees was amended as of January 1, 1987, to provide benefit credits of 3% of earnings which are less than the Social Security wage base for the year plus 6% of earnings in excess of the wage base and an additional 1.5% and 3% respectively for certain older employees. Earnings include annual incentive awards paid currently but exclude any long-term incentive awards. Benefits for service through December 31, 1986 are based on the plan formula then effect and have been converted to opening balances under the plan. Both opening balances and benefit credits receive interest credits at one-year Treasury bill rates until the participant commences receiving benefit payments. For the year 1997, the interest rate was 5.43% The Company's supplemental pension plan provides for a grandfathering of benefits for certain key employees as of January 1, 1983, including certain executive officers, that, generally speaking, provide for the payment of any shortfall if the sum of (a) the pension actually payable on retirement under the ERIP (and any excess of supplemental plans), together with (b) the amount (converted to a pension equivalent) attributable to Company contributions that would be standing to the employee's credit at retirement under the Company's Retirement Savings Plan if the employee had contributed at the maximum permitted rate eligible for Company matching from December 31, 1983 until retirement, does no equal or exceed the sum of (c) the retirement income calculated on the basis of the December 31, 1982, ERIP pension formula (with certain adjustments), and (d) the amount (converted to a pension equivalent) attributable to company contribtuions (equal to 3.3% of compensation) that would be standing to the employee's credit at retirement had the Company's Retirement Savings Plan as in effect on January 1, 1983, been in effect continuously to retirement. The projected pension figure for J.M. Saggese appearing at the end of this section includes the effect of the foregoing grandfathering. The ERIP contains additional transitional provisions for employees who met certain age and service requirements on January 1, 1987. The transitional minimum benefit is a final average pay benefit for service prior to 1988 based on each year's earning plus a career average pay benefit based on each year's earning for year 1988 through 1997 (1% of each year's earnings up to the Social Security wage base plus 1-1/2% of excess). Benefits vest on a graded five-year schedule for employees hired prior to July 1, 1990. Benefits vest after completion of five years of employment for employees hired on or after July 1, 1990. The Company has supplemental plans which will provide those benefits which are otherwise produced by application of the ERIP formula, but which, under Section 415 or Section 401 (a) (17) of the Internal Revenue Code, are not permitted to be paid though a qualified plan and its related trust. The supplemental plan also provides a pension benefit using the ERIP formula based on deferred incentive compensation awards and certain other deferred compensation, which are not considered as part of compensation under the ERIP. The total projected annual benefits payable under the formulas of the ERIP at age 65 without regard to the Section 415 or 401 (a) (17) limits and recognizing supplemental pensions as described above, are as follows for the above named executive officers: Wayne P. Leonard - $50,542, Christopher L. Nagel and - $28,067, Marshall D. Owens, Jr. - $30,609. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Joseph M. Saggese, Chairman, President and Chief Executive Officer and Wayne P. Leonard, Executive Vice President and Chief Operating Officer, participate in compensation decisions affecting executive officers and employees of BCPM. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND - -------- --------------------------------------------------- Management ---------- Since the Partnership is managed by its General Partner and has no Board of Directors, there are no "voting securities" of the Partnership outstanding within the meaning of Item 403(a) of Regulation S-K and Rule 12b-2 under the Securities Exhange Act of 1934. To the knowledge of BCPM, no person is the beneficial owner of more than five percent of the Units. As of December 31, 1997 the beneficial ownership of Units by all directors and officers of BCPM as a group was approximately 22,630 Units, which represents less than one percent of the total Units outstanding. The following table shows for (i) each director, (ii) executive officer named in the Summary Compensation Table and (iii) for all officers and directors as a group, the beneficial ownership of Units as of December 31, 1997.
Name of Beneficial Owner Units Percent of Units Held - ----------------------- ------- --------------------- Joseph M. Saggese 2,000 * George W. Koch 14,100 * Edward H. Jennings 1,000 * Wayne P. Leonard 5,000 * William H. Carter 500 * Marshall D. Owens, Jr. 30 * ------- All directors and executives officers as a group 22,630 * * Represents less than 1% of the outstanding Units
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ---------------------------------------------- The Partnership is managed by BCPM pursuant to the Partnership Agreement. Under the Partnership Agreement BCPM is entitled to reimbursement of certain costs of managing the Partnership. These costs include compensation and benefits 42 payable to officers and employees of BCPM, payroll taxes, general and administrative costs and legal and professional fees. Note 4 of Notes to Consolidated Financial Statements of the Partnership contained on page 55 of this Form 10-K Annual Report contains information regarding relationships and related transactions. As described in Item 1, "Purchasing and Processing Agreements", the Partnership sells various products to Borden Chemical, Inc. under certain purchase agreements and processing agreements. Mssrs. Carter, Robbins and Stoll, Jr., who are directors of BCPM, are also directors of Borden Chemical, Inc. 43 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 20, 1998 are contained on pages 48 through 60 of this Form 10-K Annual Report. 2. Financial Statement Schedules ----------------------------- None required. 3. Exhibits -------- 2.1(1) Asset Transfer Agreement dated as of August 12, 1994 and amended as of January 10, 1995, and March 16, 1995, between the Borden Chemicals and Plastics Operating Limited Partnership (the "Operating Partnership") and Occidental Chemical Corporation ("OxyChem") and the forms of VCM Supply Agreement and PVC Tolling Agreement annexed thereto 3.0(2) Restated Certificate of Incorporation of BCPM 3.2(3) By-laws of BCPM 3.3(4) Amended and Restated Certificate of Limited Partnership of the Partnership 3.4(4) Amended and Restated Certificate of Limited Partnership of the Operating Partnership 3.5(4) Amended and Restated Agreement of Limited Partnership of the Partnership dated as of December 15, 1988 3.6(5) First Amendment to the Amended and Restated Agreement of Limited Partnership of the Partnership dated as of April 9, 1997 3.7(6) Second Amendment to the Amended and Restated Agreement of Limited Partnership of the Partnership dated as of August 14, 1997 3.8(7) Amended and Restated Agreement of Limited Partnership of the Operating Partnership, dated as of November 30, 1987 4.1(8) Form of Depository Receipt for Common Units 4.2(9) Indenture dated as of May 1, 1995 of 9.5% Notes due 2005 between the Operating Partnership and The Chase Manhattan Bank (National Association), as Trustee 44 4.3(5) Rights Agreement between the Partnership and Harris Trust and Savings Bank, as Rights Agent, dated as of April 8, 1997. 4.4(6) First Amendment to Rights Agreement between the Partnership and Harris Trust and Savings Bank, as Rights Agent, dated as of August 14, 1997. 10.1 Revolving Credit Agreement, dated December 19, 1997, between the Operating Partnership and the Chase Manhattan Bank, as Agent and as a lender, and other lenders. 10.5(7) Service Agreement, dated as of November 30, 1987, between Borden and the Operating Partnership 10.6(7) Intercompany Agreement, dated as of November 30, 1987, among Borden, BCPM, the Partnership and the Operating Partnership 10.7(4) Borden and BCPM Covenant Agreement, dated as of December 15, 1988, among Borden and the Partnership 10.9(7) PVC Purchase Agreement, dated as of November 30, 1987, between Borden and the Operating Partnership 10.10(7) Ammonia Purchase Agreement, dated as of November 30, 1987, between Borden and the Operating Partnership 10.10.1(4) Amendment Agreement No. 1 to Ammonia Purchase Agreement, dated as of December 15, 1988, between Borden and the Operating Partnership 10.11(7) Urea Purchase Agreement, dated as of November 30, 1987, between Borden and the Operating Partnership 10.11.1(4) Amendment Agreement No. 1 to Urea Purchase Agreement, dated as of December 15, 1988, between Borden and the Operating Partnership 10.12(7) Methanol Purchase Agreement, dated as of November 30, 1987, between Borden and the Operating Partnership 10.12.1(4) Amendment Agreement No. 1 to Methanol Purchase Agreement, dated as of December 15, 1988, between Borden and the Operating Partnership 10.13(7) Formaldehyde Processing Agreement, dated as of November 30, 1987, between Borden and the Operating Partnership 10.13.1(4) Amendment Agreement No. 1 to Formaldehyde 45 Processing Agreement, dated as of December 15, 1988 between Borden and the Operating Partnership 10.14(7) Urea-Formaldehyde Concentrate Processing Agreement, dated as of November 30, 1987, between Borden and the Operating Partnership 10.14.1(4) Amendment Agreement No. 1 to Urea-Formaldehyde Concentrate Processing Agreement, dated as of December 15, 1988, between Borden and the Operating Partnership 10.15(7) Use of Name and Trademark License Agreement, dated as of November 30, 1987, among Borden, the Partnership and the Operating Partnership 10.16(7) Patent and Know-how Agreement, dated November 30, 1987, among Borden, the Partnership and the Operating Partnership 10.17(7) Environmental Indemnity Agreement, dated as of November 30, 1987, among the Partnership, the Operating Partnership and Borden 10.18(7) Lease Agreement, dated as of November 30, 1987, between the Operating Partnership and Borden 10.19(3) 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) 10.20(3) 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(3) Restructuring Agreement, dated as of December 9, 1980, among Borden, Uniroyal Chemical Company, Inc. (as successor to Uniroyal, Inc.) and Monochem, Inc. 10.22(3) 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(3) Restated Basic Agreement, dated as of January 1, 1982, between Borden and Uniroyal Chemical Company, Inc. (as successor to Uniroyal, Inc.) 10.24(3) Restated Operating Agreement, dated as of 46 January 1, 1982, among Borden, Uniroyal Chemical Company, Inc. (as successor to Uniroyal, Inc.) and Monochem, Inc. 10.25(3) 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(3) Operating Agreement for Oxygen and Acetylene Plants, dated April 1, 1982, between Borden and BASF Wyandotte Corporation (subsequently named BASF Corporation) ("BASF") 10.27(3) Amendment to Operating Agreement for Oxygen and Acetylene Plants, dated August 22, 1984, between Borden and BASF 10.28(3) Second Amendment to Operating Agreement for Oxygen and Acetylene Plants, dated December 14, 1984, between Borden and BASF 10.29(3) Third Amendment to Operating Agreement for Oxygen and Acetylene Plants, dated as of October 2, 1985, between Borden and BASF 10.30(3) Fourth Amendment to Operating Agreement, dated August 25, 1987, between Borden and BASF 10.31(3) Fifth Amendment to Operating Agreement, dated November 10, 1987, between Borden and BASF 10.32(4) Sixth Amendment to Operating Agreement, dated February 11, 1988, between the Operating Partnership and BASF 10.33(3) Third Purchase Agreement, dated August 25, 1987, between Borden and BASF 10.34(3) Operating Agreement, dated December 14, 1984 among Borden, BASF, Liquid Air Corporation ("LAC") and LAI Properties, Inc. ("LAI") 10.35(3) Amendment No. 1 to Operating Agreement, dated October 2, 1985, among Borden, BASF, LAC and LAI 10.36(4) Amendment No. 2 to the Operating Agreement, dated February 11, 1988, among Borden, the Operating Partnership, BASF, LAC and LAI 10.37(3) Second Operating Agreement, dated October 2, 1985, among Borden, BASF, LAC and LAI 10.38(4) Restated Second Operating Agreement, dated February 11, 1988 among Borden, the 47 Operating Partnership, BASF, LAC and LAI 10.39(4) Acetylene Sales Agreement No. 1, dated February 11, 1988, between the Operating Partnership and BASF 10.40(4) Acetylene Sales Agreement No. 2, dated February 11, 1988, between the Operating Partnership and BASF 10.41(7) 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(7) 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(7) 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(7) 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(7) 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(7) 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(7) 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(3) Form of Rail Service Agreement between Borden and the Operating Partnership 10.49(10) Form of Letter Agreement with Directors 48 10.50(7) Illiopolis Indemnity Agreement 10.51(7) 1995 Long-Term Incentive Plan __________________ (1) Filed as an exhibit to Borden Chemicals and Plastics Limited Partnership's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. Confidential treatment has been granted as to certain provisions. (2) Filed as an exhibit to Borden Chemicals and Plastics Limited Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995. (3) 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. (4) 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. (5) Filed as Exhibit 99.4 to the Registrant's Current Report on Form 8-K dated April 8, 1997 (filed April 1997) (File No. 1-9699) and incorporated herein by reference. (6) Filed as Exhibit 99.3 to the Registrant's Current Report on Form 8-K dated August 14, 1997 (filed August 18, 1997) (File No. 1-9699) and incorporated herein by reference. (7) 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. (8) 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. (9) Filed as an exhibit to the Registrant's 1995 Form 10-K Annual Report and is incorporated herein by reference in this Form 10-K Annual Report. (10) 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. (11) Exhibits 10.8, 10.32, 10.36, 10.37 and 10.38, which were previously filed, contain information which has been deleted pursuant to an application for confidential treatment pursuant to Rule 406 of the Securities Act of 1933, with respect to which an order has been granted by the Commission. (b) Reports on Form 8-K ------------------- No reports on Form 8-K were filed by the Registrant during the fourth quarter 1997. 49 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 By /s/ Christopher L. Nagel --------------------------- Christopher L. Nagel Vice President, Chief Financial Officer and Treasurer Date: March 27, 1998 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. Signature TITLE --------- ----- /s/ Joseph M. Saggese Director, Chairman, President - -------------------------- Joseph M. Saggese and Chief Executive Officer /s/ William H. Carter Director - ---------------------------- William H. Carter /s/ E. Linn Draper, Jr. Director - ---------------------------- E. Linn Draper, Jr. /s/ Edward H. Jennings Director - ---------------------------- Edward H. Jennings /s/ George W. Koch Director - --------------------------- George W. Koch /s/ Clifton S. Robbins Director - ---------------------------- Clifton S. Robbins /s/ William F. Stoll, Jr. Director - ---------------------------- William F. Stoll, Jr. 50 REPORT OF INDEPENDENT ACCOUNTANTS TO THE PARTNERS OF BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP In our opinion, the consolidated balance sheets and the related consolidated statements of operations, of changes in partners' capital and of cash flows appearing on pages 52 to 63 present fairly, in all material respects, the financial position of Borden Chemicals and Plastics Limited Partnership and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, 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 20, 1998 51 BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER UNIT DATA) Year Ended December 31, ---------------------------- 1997 1996 1995 -------- -------- -------- REVENUES Net trade sales $602,907 $593,641 $608,070 Net sales to related parties 134,222 115,562 131,517 ------- ------- ------- Total revenues 737,129 709,203 739,587 -------- -------- -------- EXPENSES Cost of goods sold Trade 562,159 549,315 424,492 Related parties 119,825 107,245 92,035 Marketing, general & administrative expense 24,622 24,167 22,127 Interest expense 20,898 21,696 19,066 General Partner incentive 794 29,783 Other expense, including minority interest 3,234 1,952 1,158 -------- -------- -------- Total expenses 731,532 704,375 588,661 -------- -------- -------- INCOME BEFORE EXTRAORDINARY ITEM 5,597 4,828 150,926 Extraordinary charge on early extinguish- ment of debt (6,912) -------- -------- -------- NET INCOME 5,597 4,828 144,014) Less 1% General Partner interest ( 56) ( 48) (1,440) -------- -------- --------- NET INCOME APPLICABLE TO LIMITED PARTNERS' INTEREST $ 5,541 $ 4,780 $142,574 ========= ======== ========= PER UNIT DATA - BASIC, NET OF 1% GENERAL PARTNER INTEREST Income per unit before extra- ordinary item $ 0.15 $ 0.13 $ 4.07 Extraordinary charge per Unit (0.19) -------- Net income per Unit $ 0.15 $ 0.13 $ 3.88 ========= ======== ======== Average number of Units outstanding during the year 36,750 36,750 36,750 ========= ======== ======== Cash distributions declared per Unit $ 0.83 $ 0.35 $ 4.66 ========= ======== ======== See notes to consolidated financial statements 52 BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEAR ENDED DECEMBER 31, ----------------------------------- 1997 1996 1995 ----------------------------------- CASH FLOWS FROM OPERATIONS Net income $ 5,597 $ 4,828 $ 144,014 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary charge on early extinguish- ment of debt 6,912 Depreciation 48,569 49,092 49,198 Increase (decrease) in cash from changes in certain assets and liabilities: Receivables 596 ( 4,065) 30,641 Inventories 961 ( 890) (10,612) Payables (4,810) ( 3,080) 14,186 Incentive distribution payable 0 ( 1,910) ( 9,955) Accrued interest 24 ( 77) 1,417 Other, net (4,031) ( 5,435) ( 213) -------- ------- ------- 46,906 38,463 225,588 -------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Cash paid for acquisition (100,376) Capital expenditures (19,426) ( 14,558) ( 27,085) --------- --------- --------- (19,426) ( 14,558) (127,461) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of long- term debt 25,000 200,000 Net (repayments of) proceeds from short-term borrowings (25,000) ( 15,000) 40,000 Repayment of debt issuance costs ( 9,815) Repayment of long-term debt, including prepayment penalty (156,912) Cash distributions paid (30,819) ( 30,459) (213,105) -------- --------- --------- (30,819) ( 45,459) (139,832) -------------------------------- Decrease in cash and equivalents ( 3,339) ( 21,554) ( 41,705) Cash and equivalents at beginning of year 10,867 32,421 74,126 -------- --------- --------- Cash and equivalents at end of year $ 7,528 $ 10,867 $ 32,421 ======== ========= ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid during the year $20,874 $ 21,773 $ 17,649 ======== ========= ========= See notes to consolidated financial statements 53 BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ ASSETS Cash and equivalents $ 7,528 $ 10,867 Accounts receivable (less allowance for doubtful accounts of $475 and $589, respectively) Trade 72,718 72,908 Related parties 21,741 22,147 Inventories Finished and in process goods 33,686 36,174 Raw materials and supplies 9,315 7,788 Other current assets 4,380 2,579 ---------- --------- Total current assets 149,368 152,463 ---------- --------- Investments in and advances to affiliated companies 7,834 4,366 Other assets 52,784 49,405 ---------- --------- 60,618 53,771 ---------- --------- Land 15,952 14,970 Buildings 45,050 44,597 Machinery and equipment 662,050 644,619 ---------- --------- 723,052 704,186 Less accumulated depreciation ( 432,852) (384,715) ---------- --------- Total assets 290,200 319,471 ---------- --------- $ 500,186 $ 525,705 ========== ========= LIABILITIES AND PARTNERS' CAPITAL Accounts and drafts payable $ 57,002 $ 61,812 Cash distributions payable 3,712 3,712 Short-term borrowing 0 25,000 Accrued interest 3,209 3,185 Other accrued liabilities 21,111 16,516 ---------- --------- Total current liabilities 85,034 110,225 Long-term debt 225,000 200,000 Other liabilities 5,760 5,609 Minority interest in consolidated subsidiary 1,314 1,571 ---------- --------- Total liabilities 317,108 317,405 ---------- --------- Commitments and contingencies (See Note 9) Partners' capital Limited Partners 182,718 207,680 General Partner 360 620 ---------- --------- Total partners' capital 183,078 208,300 ---------- --------- Total liabilities and partners' capital $500,186 $525,705 ========== ========= See notes to consolidated financial statements 54 BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (IN THOUSANDS) LIMITED GENERAL Partners PARTNER TOTAL --------- ------- -------- Balances at December 31, 1994 $ 244,443 $ 1,292 $ 245,735 Net income 142,574 1,440 144,014 Cash distributions declared (171,255) (2,030) (173,285) ---------- ------- --------- Balances at December 31, 1995 215,762 702 216,464 Net income 4,780 48 4,828 Cash distributions declared (12,862) (130) (12,992) ---------- ------- --------- Balances at December 31, 1996 $ 207,680 $ 620 $ 208,300 Net income 5,541 56 5,597 Cash distribution declared (30,503) (316) (30,819) ---------- ------- --------- Balances at December 31, 1997 $ 182,718 $ 360 $ 183,078 ========== ======= ========= See notes to consolidated financial statements. 55 BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP ------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (In thousands except Unit and per Unit data) 1. ORGANIZATION AND BUSINESS Borden Chemicals and Plastics Limited Partnership (the "Partnership") is a Delaware limited partnership which owns a 98.9899% limited partner interest as sole limited partner in Borden Chemicals and Plastics Operating Limited Partnership (the "Operating Partnership"). BCP Management, Inc. ("BCPM"), a wholly-owned subsidiary of Borden, Inc. ("Borden"), owns a 1% interest as the sole general partner in the Partnership and a 1.0101% interest as the sole general partner ("General Partner") in the Operating Partnership, resulting in an aggregate 2% ownership interest in the partnerships. The General Partner's interest in the Operating Partnership is reflected as minority interest in the accompanying consolidated financial statements. The Operating Partnership, acquired and operates the basic chemicals and polyvinyl chloride ("PVC") resins operations of Borden which consist of highly integrated plants in Geismar, Louisiana which produce basic petrochemical products, PVC resins and industrial gases; a PVC resins plant located in Illiopolis, Illinois; and a PVC resins plant in Addis, Louisiana purchased in 1995 (Note 3). The Partnership markets its commodity products to the manufacturing, chemical and fertilizer industries primarily in the United States. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies summarized below are in conformity with generally accepted accounting principles; however, this is not 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. Revenues - Sales and related cost of sales are recognized upon shipment of products. Net trade and net related party 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. Included in cash and equivalents are time deposits of $6,950 and $9,500 at December 31, 1997 and 1996, respectively. Inventories - Inventories are stated at the lower of cost or market. Cost is determined using the average cost and first-in, first-out methods. Investments in and advances to affiliated companies - The Partnership's 50% 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 joint venture partners at cost. The cost of the Partnership's proportionate share of utilities is included in cost of goods sold. 56 The Partnership also owns a 51% interest in another partnership engaged in manufacturing and marketing vinyl esters. Due to the significance of the rights held by the minority partner, the Partnership's interest in this partnership is accounted for using the equity method. Other Assets and Liabilities - Debt issuance costs are capitalized and are amortized over the term of the associated debt or credit agreement. Included in other assets are spare parts totaling $23,400 and $22,436 at December 31, 1997 and 1996, respectively. Included in other accrued liabilities are accrued sales discounts of $8,604 and $7,185 at December 31, 1997 and 1996, respectively. Property and Equipment - The amount of the purchase price originally allocated by the Partnership at its formation 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 except that the purchase price for Addis assets (Note 3) has been allocated to properties based upon their relative fair values. 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 $38,937 in 1997, 37,091 in 1996 and $34,298 in 1995 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 - Prior to December 31, 1997, The Partnership was not a separate taxable entity for federal and state and local income tax purposes. Accordingly, any taxable income or loss, which may have varied substantially from income or loss reported under generally accepted accounting principles, was reflected in the tax returns of the individual partners. In August, 1997 legislation was enacted which extends indefinitely the Partnership's treatment as a partnership for federal income tax purposes provided that the Partnership elects to be subject to a 3.5% tax on taxable gross income beginning on January 1, 1998 (the treatment as a partnership had been scheduled to expire on December 31, 1997). The Partnership has made such an election. The Partnership has not made any provision for deferred income taxes at December 31, 1997 since the tax effect of the difference between the book and tax bases of assets and liabilities affecting the determination of gross income is not considered material to the Partnership's financial statements. New Accounting Pronouncements - Effective for the year ended December 31, 1997, the Partnership adopted the method for computing and presenting income per unit in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". 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. In June 1997, The Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income", and SFAS No.131 57 "Disclosures about Segments of an Enterprise and Related information". SFAS No. 130 establishes standards for reporting of comprehensive income and its components. The Partnership is required to adopt the provisions of SFAS No. 130 for its consolidated financial statements for the three months ending March 31, 1998. SFAS No. 131 requires certain disclosures about segment information in interim and annual financial statements and related information about products and services, geographic areas and major customers. The Partnership must adopt the provisions of SFAS No. 131 for its consolidated financial statements for the year ending December 31, 1998. The adoptions of SFAS No. 130 and SFAS No. 131 will not affect the Partnership's financial position, results of operations or cash flows; changes in the form and content of its disclosures may be required. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures during the reporting period. Actual results could differ from those estimates. 3. ACQUISITION On May 2, 1995, the Partnership, through the Operating Partnership, completed the purchase of Occidental Chemical Corporation's Addis, Louisiana PVC manufacturing facility and related assets. The cash purchase price for the Addis assets was $100,400 and was financed by a new issue of senior unsecured notes (Note 5). The following financial information presents the pro forma effect of the acquisition on the historical results of operations for the year ended December 31, 1995 as if the transactions occurred on January 1, 1995. YEAR ENDED DECEMBER 31, 1995 ----------------- Total revenues $794,393 Income before extraordinary item: Income $155,168 Income per Unit, net of 1% General Partner interest $ 4.18 4. 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 related parties, and usage of rail cars owned or leased by Borden. Prior to July 1, 1997 Borden included the Partnership in its general 58 insurance coverage, including liability and property damage coverage. The Partnership reimbursed Borden for its share of the costs of the general insurance coverage based on calculations made by Borden's Risk Management Department. Under its risk retention program, Borden maintained deductibles of $2,500, $500 and $500 per occurrence for property and related damages at the Geismar, Illiopolis and Addis facilities, respectively, and deductibles ranging from $100 to $3,000 per event for liability insurance. After July 1, 1997 the Partnership participates in general insurance coverage held in name by a Borden affiliate, however the costs of the coverage are specifically apportioned to the Partnership by the insurance carriers and the Partnership pays the premiums for the coverage directly to those carriers. The deductibles for property and liability coverages are similar to those maintained under the previous arrangement with Borden. The employees of BCPM (together with employees providing support to or services for BCPM) operate the Partnership and participate in various Borden benefit plans including pension, retirement savings, postretirement other than pensions and health and life insurance. The Partnership has no direct liability for such 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. Charges to the Partnership for such services are actuarially determined where appropriate. The Partnership expenses the full amount of such charges but only reimburses Borden (on its own or BCPM's behalf) for actual benefits paid. The difference between cash payments to Borden (on its own or BCPM's behalf) and expense is accrued on the Partnership's books. Benefit plan and general insurance expenses, and allocation for usage of resources such as personnel and data processing equipment were $5,902 in 1997, $9,189 in 1996, and $11,628 in 1995. Management believes the allocation methods used are reasonable. Although no specific analysis has been undertaken, if the Partnership were to directly provide such services and resources at the same cost as Borden, management believes the allocations 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. On October 11, 1996, Borden sold its packaging division and as a part of the transaction obtained a 34% ownership interest in the acquiring entity. The packaging division had been a significant purchaser of PVC resins. After the acquisition, sales prices remained substantially the same as sales to Borden. Included in related party sales are sales of PVC to the acquiring entity of $25,431 and $5,688 for 1997 and 1996, respectively. Included in related party receivables are amounts due from acquiring entity for these sales of $4,445 and $4,268 at December 31, 1997 and 1996, respectively. All other related party sales and receivables are with 59 Borden. 5. DEBT On May 1, 1995, the Operating Partnership issued $200,000 aggregate principal amount of senior unsecured 9.5% notes due 2005. The net proceeds from this offering were used to prepay $150,000 aggregate principal amount of previously outstanding notes, plus a related prepayment premium of $6,912 reflected as an extraordinary charge in 1995, and accrued interest. The remaining proceeds were used to fund a portion of the purchase price of the Addis facility. The aggregate fair value of the Partnership's outstanding debt was $212,500 at December 31, 1997 and $204,500 at December 31, 1996 as determined by the market trading price for the notes at those dates. On December 22, 1997 the Operating Partnership obtained a revolving credit facility of up to $100,000 under a revolving credit agreement with a consortium of banks and borrowed $25,000 under this facility to repay the amount outstanding under the existing credit facility, which was then terminated. The new revolving credit facility expires on December 19, 2002, at which time all amounts outstanding must be repaid in full. Borrowings bear interest at rates which are fixed at the time of the borrowing based on the current market rate. A commitment fee tied to the Partnership's public debt rating is payable on the unused portion of the new facility. At December 31, 1997 borrowings under the new facility were $25,000 and bore interest at 6.719% while the commitment fee on the unused portion was 0.25%. The new credit agreement permits certain additional indebtedness outside of the agreement, none of which was utilized as of December 31, 1997. The revolving credit agreement and the senior unsecured notes contain a number of financial and other covenants, including limitations on liens and sales of assets. Cash distributions are generally permitted so long as compliance with certain covenants is maintained. 6. 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 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. 7. 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. 60 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. 8. RIGHTS TO PURCHASE UNITS On April 8, 1997, the General Partner declared a distribution of one common unit purchase right (a "Right") for each outstanding common unit of the Partnership and the number of Rights most closely approximating 1/99th of the number of the units outstanding with respect to the General Partner's interest in the Partnership. The Rights are not exercisable until the earlier to occur of: (i) ten days following a public announcement that a person or affiliated group of persons (an "Acquiring Person") have acquired 15% or more of the outstanding units or (ii) ten days (or such later date as may be determined by the General Partner prior to someone becoming an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender or exchange offer the consummation of which would result in a person or affiliated group of persons acquiring 15% or more of the outstanding units. Until then, The Rights will trade with the units and a Right will be issued with each additional unit issued. The number of Rights outstanding at December 31, 1997 was 37, 121,212. Each Right entitles the holder to purchase from the Partnership one common unit at a price of $21.00, subject to adjustment in certain circumstances. In the event an Acquiring Person acquires a 15% or more interest in the Partnership, each holder of a Right, with the exception of the Acquiring Person, will have the right to receive upon exercise of the Right at the then exercise price of the Right, that number of Units having market value of two times such exercise price. At any time prior to an Acquiring Person becoming such, the General Partner may redeem the Rights in whole, but not in part, for $0.01 per Right. The Rights, which do not have voting rights, generally will expire no later than April 8, 2007. 9. COMMITMENTS AND CONTINGENCIES Purchase Commitments: The Partnership has entered into a fifteen year supply agreement for one of its raw materials commencing in 1997 to assure long-term supply and minimize price volatility. The purchase price for this product is based on its raw material and variable costs, as well as fixed costs that will vary based on economic indices, changes in taxes or regulatory requirements. The aggregate amount at December 31, 1997 of minimum payments required under the agreement is $48,325 with $4,753 per year of minimum payments required for the next five years. Purchases under the agreement totaled $21,753 in 1997. The Partnership has agreed to purchase its joint venture partner's ownership share of certain production facilities at the Geismar complex on 61 December 31, 1999. The purchase price is $10,000 payable over three years plus the undepreciated value of the joint venture partner's share of capital spent on the facilities from November 1997 to December 31, 1999. The Partnership has undertaken actions to replace certain computer applications or programs. The purchase commitment for costs associated with the implementation of new software applications, including the associated hardware, is $8,644 at December 31, 1997. 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 Company 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 each which could be subject to the Environmental Indemnity Agreement ("EIA") discussed below. 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 $150,000, management believes that, assuming the Partnership is unsuccessful, based on information currently available, 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. The Partnership and the DOJ have engaged in settlement discussions but as of yet have not agreed on the terms of any settlement. The matter is scheduled for trial in U.S. District Court on March 9, 1998. 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 62 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. In connection with potential environmental matters, a $4,000 provision was 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. The Partnership is subject to legal proceedings and claims which 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 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. 10. EVENT (UNAUDITED) SUBSEQUENT TO DATE OF INDEPENDENT ACCOUNTANT'S REPORT On March 11, 1998, the Partnership and the DOJ reached an agreement in principle to resolve the enforcement action brought by the DOJ against the Operating Partnership, the Partnership and the General Partner in October 1994, and the Declaratory Judgement Action brought by the Partnership against the United States. The settlement provides for payment of a civil penalty of $3.6 million and funding of $0.4 million for community based environment programs, but it does not include any admission of wrongdoing. The terms of the settlement also provide for a program of groundwater and other remediation at the Geismar facility. The agreement also provides that the Partnership will undertake a Supplemental Environmental Project to decommission its underground injections wells and instead subject the waste to innovative source reduction. The estimated cost of the project is $3.0 million. In light of the provision previously established for this matter and Borden's obligation under the EIA to pay for the remediation program, the settlement will not have a material effect on the Partnership's financial position or results of operations. 63 EX-10.1 2 REVOLVING CREDIT AGREEMENT, DATED DECEMBER 19, 1997 EXHIBIT 10.1 ================================================================================ CREDIT AGREEMENT AMONG BORDEN CHEMICALS AND PLASTICS OPERATING LIMITED PARTNERSHIP THE SEVERAL LENDERS FROM TIME TO TIME PARTIES HERETO AND THE CHASE MANHATTAN BANK, AS ADMINISTRATIVE AGENT DATED AS OF DECEMBER 19, 1997 ================================================================================ Table of Contents ----------------- Page SECTION 1 Definitions............. 1 ----------- SECTION 2 Amount and Terms of Credit ---------------------------- SECTION 2.1 Commitments ............................ 25 SECTION 2.2 Minimum Amount of Each Borrowing; Maximum Number of Borrowings.......... 27 SECTION 2.3 Notice of Borrowing .................... 27 SECTION 2.4 Disbursement of Funds .................. 28 SECTION 2.5 Repayment of Loans; Evidence of Debt ... 30 SECTION 2.6 Conversions and Continuations .......... 30 SECTION 2.7 Pro Rata Borrowings .................... 31 SECTION 2.8 Interest ............................... 32 SECTION 2.9 Interest Periods ....................... 33 SECTION 2.10 Increased Costs, Illegality, etc ....... 34 SECTION 2.11 Compensation ........................... 36 SECTION 2.12 Change of Lending Office ............... 37 SECTION 2.13 Notice of Certain Costs ................ 37 SECTION 3 Letters of Credit ----------------- SECTION 3.1 Letters of Credit ...................... 37 SECTION 3.2 Letter of Credit Requests .............. 38 SECTION 3.3 Letter of Credit Participations ........ 39 SECTION 3.4 Agreement to Repay Letter of Credit Drawings............................... 42 SECTION 3.5 Increased Costs......................... 43 SECTION 3.6 Successor Letter of Credit Issuer ...... 44 SECTION 4 Fees; Commitments ----------------- SECTION 4.1 Fees ................................... 45 SECTION 4.2 Voluntary Reduction of Revolving Credit Commitments............................ 46 SECTION 4.3 Mandatory Termination of Commitments ... 46 i SECTION 5 Payments -------- SECTION 5.1 Voluntary Prepayments .................. 47 SECTION 5.2 Mandatory Prepayments .................. 47 SECTION 5.3 Method and Place of Payment ............ 49 SECTION 5.4 Net Payments ........................... 49 SECTION 5.5 Computations of Interest and Fees....... 53 SECTION 6 Conditions Precedent to Initial Borrowing ----------------------------------------- SECTION 6.1 Agreement............................... 53 SECTION 6.2 Closing Certificate .................... 53 SECTION 6.3 Authorization Proceedings .............. 53 SECTION 6.4 Documents............................... 53 SECTION 6.5 Fees ................................... 54 SECTION 6.6 Existing Credit Agreement .............. 54 SECTION 6.7 Legal Opinions.......................... 54 SECTION 7 Conditions Precedent to All Credit Events ---------------------------------------- SECTION 7.1 No Default; Representations and Warranties............................. 54 SECTION 7.2 Notice of Borrowing; Letter of Credit Request............................... 54 SECTION 8 Representations, Warranties and Agreements ------------------------------------------ SECTION 8.1 Organization ........................... 55 SECTION 8.2 Power and Authority .................... 55 SECTION 8.3 No Violation ........................... 56 SECTION 8.4 Litigation.............................. 56 SECTION 8.5 Margin Regulations ..................... 56 SECTION 8.6 Governmental Approvals ................. 56 SECTION 8.7 Investment Company Act and Public Utility Holding Company Act............ 56 ii SECTION 8.8 True and Complete Disclosure ........... 57 SECTION 8.9 Financial Condition; Financial Statements............................. 57 SECTION 8.10 Tax Returns and Payments ............... 58 SECTION 8.11 Compliance with ERISA .................. 58 SECTION 8.12 Subsidiaries ........................... 59 SECTION 8.13 Patents, etc ........................... 59 SECTION 8.14 Environmental Laws ..................... 59 SECTION 8.15 Properties ............................. 60 SECTION 9 Affirmative Covenants --------------------- SECTION 9.1 Information Covenants .................. 60 SECTION 9.2 Books, Records and Inspections.......... 63 SECTION 9.3 Maintenance of Insurance ............... 63 SECTION 9.4 Payment of Taxes ....................... 63 SECTION 9.5 Existence............................... 64 SECTION 9.6 Compliance with Statutes, Obligations, etc. .................................. 64 SECTION 9.7 ERISA .................................. 64 SECTION 9.8 Good Repair ............................ 65 SECTION 9.9 Transactions with Affiliates ........... 65 SECTION 9.10 Use of Proceeds......................... 66 SECTION 9.11 Changes in Business .................... 66 SECTION 10 Negative Covenants ------------------ SECTION 10.1 Limitation on Indebtedness ............. 66 SECTION 10.2 Limitation on Liens .................... 69 SECTION 10.3 Limitation on Fundamental Changes ...... 70 SECTION 10.4 Limitation on Sale of Assets ........... 71 SECTION 10.5 Limitation on Investments .............. 73 SECTION 10.6 Limitation on Restricted Payments ...... 74 SECTION 10.7 Limitations on Certain Amendments ...... 76 SECTION 10.8 Consolidated Total Debt to Consolidated EBITDA Ratio........................... 76 SECTION 10.9 Consolidated EBITDA Coverage Ratio ..... 76 iii SECTION 11 Events of Default ----------------- SECTION 11.1 Payments ............................... 76 SECTION 11.2 Representations, etc ................... 76 SECTION 11.3 Covenants .............................. 76 SECTION 11.4 Default Under Other Agreements ......... 77 SECTION 11.5 Bankruptcy, etc ........................ 77 SECTION 11.6 ERISA .................................. 78 SECTION 11.7 Judgments .............................. 78 SECTION 11.8 Change of Control ...................... 78 SECTION 12 The Administrative Agent ------------------------ SECTION 12.1 Appointment ............................ 79 SECTION 12.2 Delegation of Duties ................... 80 SECTION 12.3 Exculpatory Provisions ................. 80 SECTION 12.4 Reliance by Administrative Agent ....... 80 SECTION 12.5 Notice of Default ...................... 81 SECTION 12.6 Non-Reliance on Administrative Agent and Other Lenders...................... 81 SECTION 12.7 Indemnification......................... 82 SECTION 12.8 Administrative Agent in Its Individual Capacity............................... 83 SECTION 12.9 Successor Agent ........................ 83 SECTION 13 Miscellaneous ------------- SECTION 13.1 Amendments and Waivers.................... 83 SECTION 13.2 Notices................................... 84 SECTION 13.3 No Waiver; Cumulative Remedies............ 85 SECTION 13.4 Survival of Representations and Warranties 85 SECTION 13.5 Payment of Expenses and Taxes............. 86 SECTION 13.6 Successors and Assigns; Participations and Assignments.......................... 87 SECTION 13.7 Replacements of Lenders under Certain Circumstances............................ 90 SECTION 13.8 Adjustments; Set-off...................... 91 SECTION 13.9 Counterparts.............................. 91 iv SECTION 13.10 Severability.............................. 92 SECTION 13.11 Integration............................... 92 SECTION 13.12 Governing Law............................. 92 SECTION 13.13 Submission to Jurisdiction; Waivers....... 92 SECTION 13.14 Acknowledgments........................... 93 SECTION 13.15 Waivers of Jury Trial..................... 93 SECTION 13.16 Confidentiality........................... 93 SCHEDULES Schedule 1.1 Revolving Credit Commitments and Addresses of Lenders Schedule 10.1 Other Indebtedness EXHIBITS Exhibit A Form of Promissory Note Exhibit B Form of Letter of Credit Request Exhibit C-1 Form of Legal Opinion of Simpson Thacher & Bartlett Exhibit C-2 Form of Legal Opinion of Lawrence L. Dieker Exhibit D Form of Assignment and Acceptance Exhibit E Form of Closing Certificate Exhibit F Form of Confidentiality Agreement v CREDIT AGREEMENT dated as of December 19, 1997, among BORDEN CHEMICALS AND PLASTICS OPERATING LIMITED PARTNERSHIP, a Delaware limited partnership (the "Borrower"), the lending -------- institutions from time to time parties hereto (each a "Lender" ------ and, collectively, the "Lenders"), and THE CHASE MANHATTAN BANK, ------- as Administrative Agent (such term and each other capitalized term used but not defined in this introductory statement having the meaning provided in Section 1). The Borrower has requested the Lenders to extend credit in the form of Revolving Credit Loans at any time and from time to time prior to the Revolving Credit Maturity Date, in an aggregate principal amount at any time outstanding not in excess of $100,000,000 less the sum of (i) the aggregate Letter of Credit Outstandings at such time and (ii) the aggregate principal amount of all Swingline Loans then outstanding. The Borrower has requested the Letter of Credit Issuer to issue Letters of Credit at any time and from time to time prior to the L/C Maturity Date, in an aggregate face amount at any time outstanding not in excess of $30,000,000. The Borrower has requested Chase to extend credit in the form of Swingline Loans at any time and from time to time prior to the Swingline Maturity Date, in an aggregate principal amount at any time outstanding not in excess of $10,000,000. Proceeds of Revolving Credit Loans and Swingline Loans may be used by the Borrower and its Subsidiaries for working capital and for other general corporate purposes. Letters of Credit will be used for general corporate purposes of the Borrower and its Subsidiaries. The parties hereto hereby agree as follows: SECTION 1. Definitions. As used herein, the following terms shall ------------ have the meanings specified in this Section 1 unless the context otherwise requires (it being understood that defined terms in this Agreement shall include in the singular number the plural and in the plural the singular): "ABR" shall mean, for any day, a rate per annum (rounded upwards, if --- necessary, to the next 1/16 of 1%) equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such 2 day plus 1/2 of 1%. Any change in the ABR due to a change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate shall be effective as of the opening of business on the effective day of such change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate, respectively. "ABR Loan" shall mean each Loan bearing interest at the rate provided -------- in Section 2.8(a) and, in any event, shall include all Swingline Loans. "ABR Revolving Credit Loan" shall mean any Revolving Credit Loan ------------------------- bearing interest at a rate determined by reference to the ABR. "Adjusted Total Revolving Credit Commitment" shall mean at any time ------------------------------------------ the Total Revolving Credit Commitment less the aggregate Revolving Credit Commitments of all Defaulting Lenders. "Administrative Agent" shall mean Chase, together with its affiliates, -------------------- as the arranger of the Revolving Credit Commitments and as the administrative agent for the Lenders under this Agreement. "Administrative Agent's Office" shall mean the office of the ----------------------------- Administrative Agent located at 270 Park Avenue, New York, New York 10017, or such other office in New York City as the Administrative Agent may hereafter designate in writing as such to the other parties hereto. "Affiliate" shall mean, with respect to any Person, any other Person --------- directly or indirectly controlling, controlled by, or under direct or indirect common control with such Person. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power (a) to vote 10% or more of the securities having ordinary voting power for the election of directors of such corporation or (b) to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise. "Aggregate Revolving Credit Outstandings" shall have the meaning --------------------------------------- provided in Section 5.2(a). "Agreement" shall mean this Credit Agreement, as the same may be --------- amended, supplemented or otherwise modified from time to time. 3 "Applicable Margin" shall mean, with respect to each Eurodollar Loan ----------------- at any date, the applicable percentage set forth in the table below under the caption "Applicable Margin", based upon the ratings of the Index Debt of the Borrower in effect on such date: Ratings Applicable S&P/Moody's Margin ------------------ ----------- Category 1 BBB/Baa2 or higher 0.500% Category 2 BBB-/Baa3 0.625% Category 3 BB+/Ba1 0.750% Category 4 BB/Ba2 0.875% Category 5 Lower than BB/Ba2 1.250% For purposes of the foregoing, (i) if no rating for the Index Debt of the Borrower shall be available from either of Moody's or S&P, such rating agency shall be deemed to have established a rating for Index Debt of the Borrower in Category 5 unless the absence of a rating from such rating agency is due to circumstances outside the control of the Borrower, in which case such rating agency shall be deemed to have established a rating for Index Debt of the Borrower in the same Category as the rating established by the other such rating agency, (ii) if the ratings established or deemed to have been established by Moody's and S&P for the Borrower shall fall within different Categories, the Applicable Percentage shall be based upon the superior (or numerically lower) Category, unless the ratings differ by more than one Category, in which case, the governing rating shall be the rating next below the higher of the two, and (iii) if any rating established or deemed to have been established by Moody's or S&P shall be changed (other than as a result of a change in the rating system of either Moody's or S&P), such change shall be effective as of the date on which such change is first announced by the rating agency making such change. Each such change in the Applicable Percentage shall apply to all Eurodollar Loans that are outstanding at any time during the period commencing on the effective date of such change and ending on the date immediately preceding the effective date of the next such change. If the rating system of either Moody's or S&P shall change prior to the Revolving Credit Maturity Date, the Borrower and the Lenders shall negotiate in good faith to amend the references to specific ratings in this definition to reflect such changed rating system. 4 "Attributable Indebtedness" in respect of a sale and leaseback ------------------------- arrangement means, as at the time of determination, the present value (discounted at ABR, compounded annually) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such arrangement (including any period for which such lease has been extended). "Authorized Officer" shall mean the Chairman of the Board, the ------------------ President, the Chief Financial Officer, the Treasurer or any other senior officer of the General Partner designated as such in writing to the Administrative Agent by the General Partner. "Available Commitment" shall mean an amount equal to the excess, if -------------------- any, of (a) the amount of the Total Revolving Credit Commitment over (b) the sum of (i) the aggregate principal amount of all Revolving Credit Loans (but not Swingline Loans) then outstanding and (ii) the aggregate Letter of Credit Outstandings at such time. "Bankruptcy Code" shall have the meaning provided in Section 11.5. --------------- "Base CD Rate" shall mean the sum of (a) the product of (i) the Three- ------------ Month Secondary CD Rate and (ii) a fraction, the numerator of which is one and the denominator of which is one minus the C/D Reserve Percentage and (b) the C/D Assessment Rate. "BCPM" shall mean BCP Management, Inc., a Delaware corporation, and ---- its successors. "Board" shall mean the Board of Governors of the Federal Reserve ----- System of the United States (or any successor). "Borden" shall mean Borden, Inc., a New Jersey corporation, and its ------ successors (other than as a result of any transaction described in clause (a) of the definition of "Change in Control", as if Borden, Inc. were deemed for such purposes to be the Borrower). "Borrower" shall have the meaning provided in the preamble to this -------- Agreement. "Borrowing" shall mean and include (a) the incurrence of Swingline --------- Loans from Chase on a given date and (b) the incurrence of one Type of Revolving Credit Loan on a given date (or resulting from conversions on a given date) having, in the case of Eurodollar Loans, the same Interest 5 Period (provided that ABR Loans incurred pursuant to Section 2.10(b) shall be -------- considered part of any related Borrowing of Eurodollar Loans). "Business Day" shall mean (a) for all purposes other than as covered ------------ by clause (b) below, any day excluding Saturday, Sunday and any day that shall be in The City of New York a legal holiday or a day on which banking institutions are authorized by law or other governmental actions to close and (b) with respect to all notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, any day that is a Business Day described in clause (a) and which is also a day for trading by and between banks in Dollar deposits in the relevant interbank Eurodollar market. "Capitalized Lease Obligations" shall mean, as applied to any Person, ----------------------------- all obligations under Capital Leases of such Person or any of its Subsidiaries, in each case taken at the amount thereof accounted for as liabilities in accordance with GAAP. "Capital Lease", as applied to any Person, shall mean any lease of any ------------- property (whether real, personal or mixed) by that Person as lessee that, in conformity with GAAP, is, or is required to be, accounted for as a capital lease on the balance sheet of that Person. "Capital Stock" shall mean any and all shares, interests, rights to ------------- purchase, warrants, options, participations or other equivalents of or interests in (however designated) capital stock, including any preferred stock, and with respect to a partnership, any interest therein (whether general or limited) that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, such partnership; provided that Capital Stock -------- shall not include any debt security that is convertible into or exchangeable for Capital Stock. "C/D Assessment Rate" shall mean for any day as applied to any ABR ------------------- Loan, the annual assessment rate in effect on such day that is payable by a member of the Bank Insurance Fund maintained by the Federal Deposit Insurance Corporation or any successor thereto (the "FDIC") classified as well-capitalized ---- and within supervisory subgroup "B" (or a comparable successor assessment risk classification) within the meaning of 12 C.F.R. (S) 327.4(a) (or any successor provision) to the FDIC for the FDIC's insuring time deposits at offices of such institution in the United States. 6 "C/D Reserve Percentage" shall mean for any day as applied to any ABR ---------------------- Loan, the percentage (expressed as a decimal) that is in effect on such day, as prescribed by the Board, for determining the reserve requirement for a Depositary Institution (as defined in Regulation D of the Board) in respect of new non-personal time deposits in Dollars having a maturity that is 30 days or more. A "Change in Control" occurs when (i) any person or "group" for ----------------- purposes of Section 13(d) of the Exchange Act (a "Group"), other than Permitted Holders, shall beneficially own, directly or indirectly, more than 50% of the total voting power of all classes of Voting Stock of the General Partner, the Holding Company or the Borrower, (ii)(A) the Borrower shall sell, lease, convey or otherwise dispose of all or substantially all the Borrower's assets to any person or Group or (B) the Borrower shall consolidate with or merge into another person or another person shall consolidate with or merge into the Borrower, in case of either of the foregoing, in a transaction in which the outstanding Voting Stock of the Borrower is reclassified or changed into or exchanged for cash, securities or other property, other than, in the case of either of clauses (A) or (B), to, with or into, as applicable, one or more Permitted Holders or a person, more than 50% of the total voting power of all classes of Voting Stock of which, after giving effect to such transaction, is beneficially owned, directly or indirectly, by one or more Permitted Holders or (iii) the Borrower, the Holding Company or the General Partner shall adopt a plan of liquidation or dissolution (unless all or substantially all the Borrower's assets are distributed pursuant to such plan to one or more Permitted Holders). "Chase" shall mean The Chase Manhattan Bank, a New York banking ----- corporation, and any successor thereto by merger, consolidation or otherwise. "Closing Date" shall mean the date on which all conditions precedent ------------ for the initial Borrowing hereunder, as set forth in Section 6, are satisfied. "Code" shall mean the Internal Revenue Code of 1986, as amended from ---- time to time, and the regulations promulgated and rulings issued thereunder. Section references to the Code are to the Code, as in effect at the date of this Agreement, and any subsequent provisions of the Code, amendatory thereof, supplemental thereto or substituted therefor. 7 "Commitment Fee Rate" shall mean, with respect to the Available ------------------- Commitment on any day, the rate set forth in the table below under the caption "Commitment Fee Rate", based upon the ratings of the Index Debt of the Borrower in effect on such date: Ratings Commitment S&P/Moody's Fee Rate ------------------ ----------- Category 1 BBB/Baa2 or higher 0.150% Category 2 BBB-/Baa3 0.200% Category 3 BB+/Ba1 0.250% Category 4 BB/Ba2 0.300% Category 5 Lower than BB/Ba2 0.375% For purposes of the foregoing, (i) if no rating for the Index Debt of the Borrower shall be available from either of Moody's or S&P, such rating agency shall be deemed to have established a rating for Index Debt of the Borrower in Category 5 unless the absence of a rating from such rating agency is due to circumstances outside the control of the Borrower, in which case such rating agency shall be deemed to have established a rating for Index Debt of the Borrower in the same Category as the rating established by the other such rating agency, (ii) if the ratings established or deemed to have been established by Moody's and S&P for the Borrower shall fall within different Categories, the Commitment Fee Rate shall be based upon the superior (or numerically lower) Category, unless the ratings differ by more than one Category, in which case, the governing rating shall be the rating next below the higher of the two, and (iii) if any rating established or deemed to have been established by Moody's or S&P shall be changed (other than as a result of a change in the rating system of either Moody's or S&P), such change shall be effective as of the date on which such change is first announced by the rating agency making such change. If the rating system of either Moody's or S&P shall change prior to the Revolving Credit Maturity Date, the Borrower and the Lenders shall negotiate in good faith to amend the references to specific ratings in this definition to reflect such changed rating system. "Confidential Information" shall have the meaning provided in Section ------------------------ 13.16. "Confidential Information Memorandum" shall mean the Confidential ----------------------------------- Information Memorandum of the Borrower 8 dated November 1997 delivered to the Lenders in connection with this Agreement. "Consolidated EBITDA Coverage Ratio" shall mean the ratio of (a) the ---------------------------------- aggregate amount of EBITDA for the most recent Test Period to (b) Consolidated Interest Expense for such Test Period. "Consolidated Interest Expense" shall mean, for any period, the total ----------------------------- interest expense, net of total interest income, of the Borrower and its consolidated Subsidiaries for such period, including (i) interest expense attributable to Capitalized Lease Obligations, (ii) capitalized interest, (iii) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, and (iv) net costs under Hedging Agreements (including amortization of fees), but excluding amortization of deferred financing costs and any other non-cash items included in interest expense. "Consolidated Net Income" shall mean, for any period, the consolidated ----------------------- net income (or loss) of the Borrower and its consolidated Subsidiaries for such period, excluding extraordinary gains and losses, determined in accordance with GAAP. "Consolidated Net Tangible Assets" shall mean the total assets of the -------------------------------- Borrower and its Subsidiaries appearing on a consolidated balance sheet of the Borrower and its Subsidiaries (prepared in accordance with GAAP) as of the end of the most recent fiscal quarter, after (a) adding thereto all Attributable Indebtedness of the Borrower and its Subsidiaries in respect of any sale and leaseback arrangement not capitalized on such balance sheet, (b) eliminating all intercompany transactions and all amounts properly attributable to minority interests, if any, in the stock and surplus of Subsidiaries and (c) deducting therefrom (without duplicating of deductions): (i) all liabilities of the Borrower and its Subsidiaries other than Indebtedness; (ii) the net book amount of all assets, after deducting any reserves applicable thereto, which would be treated as intangible under GAAP, including such items as goodwill, trademarks, trade names, service marks, brand names, copyrights, patents and licenses, and rights with respect to the foregoing, unamortized debt discount and expense and organization expenses; 9 (iii) any write-up in the book value of any asset on the books of the Borrower or any Subsidiary resulting from a revaluation thereof subsequent to the date of the Note Indenture (other than the write-up of the book value of an asset made in accordance with purchase accounting under GAAP in connection with the purchase of such asset); (iv) all deferred charges (other than prepaid expenses); and (v) all reserves, including, without limitation, reserves for deferred income taxes, liabilities (fixed or contingent), depreciation, obsolescence, depletion, insurance and inventory valuation, which appear or under GAAP are required to appear on such balance sheet. "Consolidated Senior Debt" shall mean, as of any date of ------------------------ determination, Consolidated Total Debt minus all Permitted Subordinated Debt outstanding on such date. "Consolidated Total Debt" shall mean, as of any date of determination, ----------------------- the sum of (a) all Indebtedness of the Borrower and its Subsidiaries for borrowed money outstanding on such date and (b) all Capitalized Lease Obligations of the Borrower and its Subsidiaries outstanding on such date, all calculated on a consolidated basis in accordance with GAAP. "Consolidated Total Debt to Consolidated EBITDA Ratio" shall mean, as ---------------------------------------------------- of any date of determination, the ratio of (a) Consolidated Total Debt as of such date to (b) EBITDA for the most recent Test Period ended on or prior to such date. "Credit Documents" shall mean this Agreement and any promissory notes ---------------- issued by the Borrower hereunder. "Credit Event" shall mean and include the making (but not the ------------ conversion or continuation) of a Loan and the issuance of a Letter of Credit. "Default" shall mean any event, act or condition that with notice or ------- lapse of time, or both, would constitute an Event of Default. "Defaulting Lender" shall mean any Lender with respect to which a ----------------- Lender Default is in effect. 10 "Disqualified Capital Stock" shall mean any Capital Stock that is -------------------------- Redeemable Stock or Exchangeable Stock. "Dollars" and "$" shall mean dollars in lawful currency of the United ------- - States of America. "Drawing" shall have the meaning provided in Section 3.4(b). ------- "EBITDA" for any period shall mean (a) the Consolidated Net Income for ------ such period, plus (b) the sum of the following to the extent deducted in calculating such Consolidated Net Income: (i) income tax expense, (ii) Consolidated Interest Expense, (iii) depreciation expense, (iv) amortization expense, (v) non-recurring charges or losses, (vi) any deductions for minority interest expense, and (vii) all other noncash items reducing Consolidated Net Income, less (c) the sum of all noncash items increasing Consolidated Net Income and all non-recurring gains increasing Consolidated Net Income; provided, -------- however, that if, subsequent to the first day of any Test Period, any Permitted - ------- Acquisition occurs or any sale, transfer or other disposition of any material property, business or assets of the Borrower or any Subsidiary is consummated (excluding sales, transfers and dispositions in the ordinary course of business), then EBITDA for such Test Period shall be determined on a pro forma basis as though such Permitted Acquisition or sale, transfer or disposition, as the case may be, had occurred on the first day of such Test Period, in each case based upon the actual amounts attributable to the assets or Person acquired (in the case of a Permitted Acquisition) or the property, businesses or assets sold, transferred or otherwise disposed of, as the case may be, for the relevant period. "Environmental Claims" shall mean any and all administrative, -------------------- regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigations (other than internal reports prepared by the Borrower or any of its Subsidiaries (a) in the ordinary course of such Person's business or (b) as required in connection with a financing transaction or an acquisition or disposition of real estate) or proceedings relating in any way to any Environmental Law or any permit issued, or any approval given, under any such Environmental Law (hereinafter, "Claims"), ------ including, without limitation, (i) any and all Claims by governmental or regulatory authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to 11 any applicable Environmental Law and (ii) any and all Claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the environment. "Environmental Law" shall mean any applicable Federal, state, foreign ----------------- or local statute, law, rule, regulation, ordinance, code and rule of common law now or hereafter in effect and in each case as amended, and any binding judicial or administrative interpretation thereof, including any binding judicial or administrative order, consent decree or judgment, relating to the environment, human health or safety or Hazardous Materials. "ERISA" shall mean the Employee Retirement Income Security Act of ----- 1974, as amended from time to time. Section references to ERISA are to ERISA as in effect at the date of this Agreement and any subsequent provisions of ERISA amendatory thereof, supplemental thereto or substituted therefor. "ERISA Affiliate" shall mean each person (as defined in Section 3(9) --------------- of ERISA) that together with the Borrower or a Subsidiary would be deemed to be a "single employer" within the meaning of Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. "Eurodollar Loan" shall mean any Revolving Credit Loan bearing --------------- interest at a rate determined by reference to the Eurodollar Rate. "Eurodollar Rate" shall mean, in the case of any Eurodollar Loan, with --------------- respect to each day during each Interest Period pertaining to such Eurodollar Loan, the rate of interest determined on the basis of the rate for deposits in Dollars for a period equal to such Interest Period commencing on the first day of such Interest Period appearing on Page 3750 of the Telerate screen as of 11:00 A.M., London time, two Business Days prior to the beginning of such Interest Period. In the event that such rate does not appear on Page 3750 of the Telerate Service (or otherwise on such service), the "Eurodollar Rate" for the purposes of this paragraph shall be determined by reference to such other publicly available service for displaying eurodollar rates as may be agreed upon by the Administrative Agent and the Borrower or, in the absence of such agreement, the "Eurodollar Rate" for the purposes of this paragraph 12 shall instead be the rate per annum notified to the Administrative Agent by the Reference Lender as the rate at which the Reference Lender is offered Dollar deposits at or about 10:00 A.M., New York time, two Business Days prior to the beginning of such Interest Period, in the interbank eurodollar market where the eurodollar and foreign currency and exchange operations in respect of its Eurodollar Loans are then being conducted for delivery on the first day of such Interest Period for the number of days comprised therein and in an amount comparable to the amount of its Eurodollar Loans, to be outstanding during such Interest Period. "Event of Default" shall have the meaning provided in Section 11. ---------------- "Exchange Act" shall mean the Securities Exchange Act of 1934 as in ------------ effect on the date hereof. "Exchangeable Stock" shall mean any Capital Stock that is exchangeable ------------------ or convertible into another security (other than Capital Stock of the Borrower that is neither Exchangeable Stock nor Redeemable Stock). "Existing Credit Agreement" shall mean the Credit Agreement dated as ------------------------- of May 2, 1995, as amended, among the Borrower, the banks party thereto and Credit Suisse First Boston, as Agent. "Federal Funds Effective Rate" shall mean, for any day, the weighted ---------------------------- average of the per annum rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by it. "Fees" shall mean all amounts payable pursuant to, or referred to in, ---- Section 4.1. "Final Date" shall mean the date on which the Revolving Credit ---------- Commitments shall have terminated, no Loans shall be outstanding and the Letter of Credit Outstandings shall have been reduced to zero. "Fronting Fee" shall have the meaning provided in Section 4.1(c). ------------ 13 "GAAP" shall mean generally accepted accounting principles in the ---- United States of America as in effect from time to time; provided, however, that -------- ------- if there occurs after the date hereof any change in GAAP that affects in any respect the calculation of any covenant contained in Section 10, the Lenders and the Borrower shall negotiate in good faith amendments to the provisions of this Agreement that relate to the calculation of such covenant with the intent of having the respective positions of the Lenders and the Borrower after such change in GAAP conform as nearly as possible to their respective positions as of the date of this Agreement and, until any such amendments have been agreed upon, the covenants in Section 10 shall be calculated as if no such change in GAAP has occurred. "General Partner" shall mean BCPM. --------------- "Governmental Authority" shall mean any nation or government, any ---------------------- state or other political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantee Obligations" shall mean, as to any Per son, any obligation --------------------- of such Person guaranteeing or intended to guarantee any Indebtedness of any other Person (the "primary obligor") in any manner, whether directly or --------------- indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (a) to purchase any such Indebtedness or any property constituting direct or indirect security therefor, (b) to advance or supply funds (i) for the purchase or payment of any such Indebtedness or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such Indebtedness of the ability of the primary obligor to make payment of such Indebtedness or (d) otherwise to assure or hold harmless the owner of such Indebtedness against loss in respect thereof; provided, however, that the -------- ------- term "Guarantee Obligations" shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation shall be deemed to be an amount equal to the stated or determinable amount of the Indebtedness in respect of which such Guarantee Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith. 14 "Hazardous Materials" shall mean (a) any petroleum or petroleum ------------------- products, radioactive materials, friable asbestos, urea formaldehyde foam insulation, transformers or other equipment that contain dielectric fluid containing regulated levels of polychlorinated biphenyls, and radon gas; (b) any chemicals, materials or substances defined as or included in the definition of "hazardous substances", "hazardous waste", "hazardous materials", "extremely hazardous waste", "restricted hazardous waste", "toxic substances", "toxic pollutants", "contaminants", or "pollutants", or words of similar import, under any applicable Environmental Law; and (c) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any Governmental Authority. "Hedge Agreements" shall mean interest rate swap, cap or collar ---------------- agreements, interest rate future or option contracts, currency swap agreements, currency future or option contracts and other similar agreements entered into by the Borrower in order to protect the Borrower or any of its Subsidiaries against fluctuations in interest rates or currency exchange rates. "Holding Company" shall mean Borden Chemicals and Plastics Limited --------------- Partnership, a Delaware limited partnership, and its successors. "Indebtedness" of any Person shall mean (a) all indebtedness of such ------------ Person for borrowed money, (b) the deferred purchase price of assets or services that in accordance with GAAP would be shown on the liability side of the balance sheet of such Person, (c) the face amount of all letters of credit issued for the account of such Person and, without duplication, all drafts drawn thereunder, (d) all Indebtedness of a second Person secured by any Lien on any property owned by such first Person, whether or not such Indebtedness has been assumed, (e) all Capitalized Lease Obligations of such Person, (f) all obligations of such Person under interest rate swap, cap or collar agreements, interest rate future or option contracts, currency swap agreements, currency future or option contracts and other similar agreements and (g) without duplication, all Guarantee Obligations of such Person; provided that -------- Indebtedness shall not include trade payables and accrued expenses, in each case arising in the ordinary course of business. "Index Debt" means the senior, unsecured, long-term, non-credit- ---------- enhanced Indebtedness of the Borrower. 15 "Interest Period" shall mean, with respect to any Eurodollar Loan, the --------------- interest period applicable thereto, as determined pursuant to Section 2.9. "Investment" in any Person means any loan or advance to, any ---------- acquisition of Capital Stock, obligation or other security of, or capital contribution or other investment in, such Person. "KKR" shall mean each of Kohlberg Kravis Roberts & Co., L.P. and KKR --- Associates, L.P. "L/C Maturity Date" shall mean the date that is five Business Days ----------------- prior to the Revolving Credit Maturity Date. "L/C Participant" shall have the meaning provided in Section 3.3(a). --------------- "L/C Participation" shall have the meaning provided in Section 3.3(a). ----------------- "Lender" shall have the meaning provided in the preamble to this ------ Agreement. "Lender Default" shall mean (a) the failure (which has not been cured) -------------- of a Lender to make available its portion of any Borrowing or to fund its portion of any unreimbursed payment under Section 3.3 or (b) a Lender having notified the Administrative Agent and/or the Borrower that it does not intend to comply with the obligations under Section 2.1(a), 2.1(c) or 3.3, in the case of either clause (a) or clause (b) above, as a result of the appointment of a receiver or conservator with respect to such Lender at the direction or request of any regulatory agency or authority. "Letter of Credit" shall mean each letter of credit issued pursuant to ---------------- Section 3.1. "Letter of Credit Commitment" shall mean $30,000,000, as the same may --------------------------- be reduced from time to time pursuant to Section 3.1. "Letter of Credit Exposure" shall mean, with respect to any Lender, ------------------------- such Lender's Revolving Credit Commitment Percentage of the Letter of Credit Outstandings. "Letter of Credit Fee" shall have the meaning provided in Section -------------------- 4.1(b). 16 "Letter of Credit Issuer" shall mean Chase, any of its Affiliates or ----------------------- any successor pursuant to Section 3.6. "Letter of Credit Outstandings" shall mean, at any time, the sum of, ----------------------------- without duplication, (a) the aggregate Stated Amount of all outstanding Letters of Credit and (b) the aggregate amount of all Unpaid Drawings in respect of all Letters of Credit. "Letter of Credit Request" shall have the meaning provided in Section ------------------------ 3.2. "Lien" shall mean any mortgage, pledge, security interest, ---- hypothecation, assignment, lien (statutory or other) or similar encumbrance (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement or any lease in the nature thereof). "Loan" shall mean any Revolving Credit Loan or Swingline Loan. ---- "Mandatory Borrowing" shall have the meaning provided in Section ------------------- 2.1(c). "Margin Stock" shall have the meaning provided in Regulation U. ------------ "Material Adverse Change" shall mean any event, development or ----------------------- circumstance that has had or could reasonably be expected to have a material adverse effect on (a) the business, assets, operations or financial condition of the Borrower and its Subsidiaries taken as a whole, (b) the ability of the Borrower to perform its obligations under this Agreement and the other Credit Documents taken as a whole or (c) the rights of or benefits available to the Lenders under this Agreement and the other Credit Documents taken as a whole. "Material Adverse Effect" shall mean a material adverse effect on (a) ----------------------- the business, assets, operations or financial condition of the Borrower and its Subsidiaries taken as a whole, (b) the ability of the Borrower to perform its obligations under this Agreement and the other Credit Documents taken as a whole or (c) the rights of or benefits available to the Lenders under this Agreement and the other Credit Documents taken as a whole. "Material Subsidiary" shall mean, at any date of determination, any ------------------- Subsidiary of the Borrower (a) whose total assets at the last day of the most recent Test Period 17 for which financial statements are required to have been delivered under Section 9.1 are equal to or greater than 5% of the consolidated total assets of the Borrower and its Subsidiaries at such date or (b) whose gross revenues for such Test Period were equal to or greater than 5% of the consolidated gross revenues of the Borrower and its Subsidiaries for such period, in each case determined in accordance with GAAP. "Minimum Borrowing Amount" shall mean (a) with respect to a Borrowing ------------------------ of Revolving Credit Loans, $5,000,000 and (b) with respect to a Borrowing of Swingline Loans, $100,000. "Moody's" shall mean Moody's Investors Service, Inc. or any successor ------- by merger or consolidation to its business. "9.50% Notes" shall mean the 9.50% Notes Due May 1, 2005 of the ----------- Borrower in an aggregate initial principal amount of $200,000,000. "Non-Defaulting Lender" shall mean and include each Lender other than --------------------- a Defaulting Lender. "Non-Excluded Taxes" shall have the meaning provided in Section ------------------ 5.4(a). "Note Indenture" shall mean the Indenture dated as of May 1, 1995, as -------------- the same may be amended, supplemented or otherwise modified from time to time, between the Borrower and Chase, as trustee, pursuant to which the 9.50% Notes were issued. "Notice of Borrowing" shall have the meaning provided in Section 2.3. ------------------- "Notice of Conversion or Continuation" shall have the meaning provided ------------------------------------ in Section 2.6. "Obligations" shall mean all monetary amounts of every type or ----------- description at any time owing to the Administrative Agent, any Lender or the Letter of Credit Issuer pursuant to the terms of this Agreement or any other Credit Document. "Participant" shall have the meaning provided in Section 13.6(a)(ii). ----------- 18 "PBGC" shall mean the Pension Benefit Guaranty Corporation established ---- pursuant to Section 4002 of ERISA, or any successor thereto. "Permitted Acquisition" shall mean the acquisition, by merger or --------------------- otherwise, by the Borrower or any of its Subsidiaries of assets or capital stock or other equity interests, so long as (a) such acquisition and all transactions related thereto shall be consummated in accordance with applicable law; (b) such acquisition shall, in the case of the acquisition of capital stock or other equity interests by the Borrower or any Subsidiary, result in the issuer of such capital stock or other equity interests becoming a Subsidiary and a direct Subsidiary in the case of such an acquisition by the Borrower (except that acquisitions that do not satisfy the requirements of this clause (b) may be consummated so long as, after giving effect to any such acquisition, the total consideration for all such acquisitions does not exceed 5% of the Borrower's Consolidated Net Tangible Assets); (c) after giving effect to such acquisition, no Default or Event of Default shall have occurred and be continuing; (d) the Borrower shall be in compliance, on a pro forma basis after giving effect to such acquisition (including any Indebtedness assumed or permitted to exist or incurred pursuant to Sections 10.1(a)(ix) and 10.1(a)(x), respectively), with the covenants set forth in Sections 10.8 and 10.9, as such covenants are recomputed as at the last day of the most recently ended Test Period under such Sections as if such acquisition had occurred on the first day of such Test Period; and (e) such acquisition shall be of an entity engaged generally in the same or related industries as the Borrower and its Subsidiaries (except that acquisitions that do not satisfy the requirements of this clause (e) may be consummated so long as, after giving effect to any such acquisition, the total consideration for all such acquisitions does not exceed 10% of the Borrower's Consolidated Net Tangible Assets). "Permitted Holders" means, as of the date of determination, any and ----------------- all of (a) Borden and its Subsidiaries, (b) KKR, its successor and Affiliates and (c)(i) any officer or other member of the management employed by Borden, BCPM, the Borrower or any Subsidiary for the 12-month period prior to the date of determination; (ii) any Persons described in clause (i) who have retired (including as the result of disability) after the initial date of this Agreement from the employment of Borden, BCPM, the Borrower or any Subsidiary in the ordinary course of business; (iii) family members or relatives of the Persons described in clauses (i) and (ii); (iv) any trusts created 19 for the benefit of the Persons described in clause (i), (ii), (iii) or (v); (v) in the event of the incompetence or death of any of the Persons described in clauses (i), (ii) and (iii), such Person's estate, executor, administrator, committee or other personal representative, or beneficiaries, in each case who at any particular date shall beneficially own or have the right to acquire, directly or indirectly, Capital Stock and (vi) any Person, the management of which is controlled by one or more Persons described in clause (i) or (ii). The management of a Person shall be deemed to be controlled by the chief executive officer (or equivalent executive) of such Person. "Permitted Investments" shall mean (a) securities issued or --------------------- unconditionally guaranteed by the United States government or any agency or instrumentality thereof, in each case having maturities of not more than 24 months from the date of acquisition thereof; (b) securities issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof or any political subdivision of any such state or any public instrumentality thereof having maturities of not more than 24 months from the date of acquisition thereof and, at the time of acquisition, having an investment grade rating generally obtainable from either S&P or Moody's (or, if at any time neither S&P nor Moody's shall be rating such obligations, then from another nationally recognized rating service); (c) commercial paper issued by any Lender or any bank holding company owning any Lender; (d) commercial paper maturing no more than 12 months after the date of creation thereof and, at the time of acquisition, having a rating of at least A- 2 or P-2 from either S&P or Moody's (or, if at any time neither S&P nor Moody's shall be rating such obligations, an equivalent rating from another nationally recognized rating service); (e) domestic and eurodollar certificates of deposit or bankers' acceptances maturing no more than two years after the date of acquisition thereof issued by any Lender or any other bank having combined capital and surplus of not less than $250,000,000 in the case of domestic banks and $100,000,000 (or the dollar equivalent thereof) in the case of foreign banks; (f) repurchase agreements with a term of not more than 30 days for underlying securities of the type described in clauses (a), (b) and (e) above entered into with any bank meeting the qualifications specified in clause (e) above or securities dealers of recognized national standing; and (g) shares of investment companies that are registered under the Investment Company Act of 1940 and invest solely in one or more of the types of securities described in clauses (a) through (f) above. 20 "Permitted Liens" shall mean (a) Liens for taxes, assessments or --------------- governmental charges or claims not yet due or which are being contested in good faith and by appropriate proceedings for which appropriate reserves have been established in accordance with GAAP; (b) Liens in respect of property or assets of the Borrower or any of its Subsidiaries imposed by law, such as carriers', warehousemen's and mechanics' Liens and other similar Liens arising in the ordinary course of business, in each case so long as such Liens arise in the ordinary course of business and do not individually or in the aggregate have a Material Adverse Effect; (c) Liens arising from judgments or decrees in circumstances not constituting an Event of Default under Section 11.7; (d) Liens incurred or deposits made in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations incurred in the ordinary course of business; (e) ground leases in respect of real property on which facilities owned or leased by the Borrower or any of its Subsidiaries are located; (f) easements, rights-of-way, restrictions, minor defects or irregularities in title and other similar charges or encumbrances not interfering in any material respect with the business of the Borrower and its Subsidiaries taken as a whole; (g) any interest or title of a lessor or secured by a lessor's interest under any lease permitted by this Agreement; (h) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (i) Liens on goods the purchase price of which is financed by a documentary letter of credit issued for the account of the Borrower or any of its Subsidiaries, provided that such Lien secures only the obligations of the -------- Borrower or such Subsidiaries in respect of such letter of credit to the extent permitted under Section 10.1; and (j) leases or subleases granted to others not interfering in any material respect with the business of the Borrower and its Subsidiaries, taken as a whole. "Permitted Subordinated Indebtedness" shall mean Indebtedness for ----------------------------------- borrowed money of the Borrower which (a) is unsecured, (b) is not guaranteed by any Subsidiary, (c) has terms and conditions (including, without limitation, covenants, events of default, redemption rights and other provisions) customary for publicly issued subordinated debt securities of comparable credit quality at the time of issuance, (d) matures after, and does not require any scheduled repayment of principal prior to, the date that is one year after the Revolving Credit Maturity Date and 21 (e) shall contain or have applicable thereto subordination provisions that the Borrower and the Administrative Agent reasonably agree to be customary for publicly issued subordinated debt securities at the time of issuance. "Person" shall mean any individual, partnership, joint venture, firm, ------ corporation, limited liability company, association, trust or other enterprise or any Governmental Authority. "Plan" shall mean any multiemployer or single-employer plan, as ---- defined in Section 4001 of ERISA and subject to Title IV of ERISA, that is or was within any of the preceding five plan years maintained or contributed to by (or to which there is or was an obligation to contribute or to make payments of) the Borrower, a Subsidiary or an ERISA Affiliate. "Preferred Stock", as applied to the Capital Stock of any Person, --------------- shall mean Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over the Capital Stock of any other class of such Person. "Prime Rate" shall mean the rate of interest per annum publicly ---------- announced from time to time by the Administrative Agent as its reference rate in effect at its principal office in New York City (the Prime Rate not being intended to be the lowest rate of interest charged by Chase in connection with extensions of credit to debtors). "Redeemable Stock" shall mean any Capital Stock that by its terms or ---------------- otherwise is required to be redeemed prior to the first anniversary of the Revolving Credit Maturity Date or is redeemable at the option of the holder thereof (upon the occurrence of any contingency or otherwise) at any time prior to the first anniversary of the Revolving Credit Maturity Date. "Reference Lender" shall mean Chase. ---------------- "Register" shall have the meaning provided in Section 13.6(c). -------- "Regulation D" shall mean Regulation D of the Board as from time to ------------ time in effect and any successor to all or a portion thereof establishing reserve requirements. 22 "Regulation G" shall mean Regulation G of the Board as from time to ------------ time in effect and any successor to all or a portion thereof establishing margin requirements. "Regulation T" shall mean Regulation T of the Board as from time to ------------ time in effect and any successor to all or a portion thereof establishing margin requirements. "Regulation U" shall mean Regulation U of the Board as from time to ------------ time in effect and any successor to all or a portion thereof establishing margin requirements. "Regulation X" shall mean Regulation X of the Board as from time to ------------ time in effect and any successor to all or a portion thereof establishing margin requirements. "Reportable Event" shall mean an event described in Section 4043 of ---------------- ERISA and the regulations thereunder. "Required Lenders" shall mean, at any date, (a) Non-Defaulting Lenders ---------------- having a majority of the Adjusted Total Revolving Credit Commitment at such date or (b) if the Total Revolving Credit Commitment has been terminated or for the purposes of acceleration pursuant to Section 11, the holders (excluding Defaulting Lenders) of a majority of the outstanding principal amount of the Loans and Letter of Credit Exposures (excluding the Loans and Letter of Credit Exposures of Defaulting Lenders) in the aggregate at such date. "Requirement of Law" shall mean, as to any Person, the Certificate of ------------------ Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or assets or to which such Person or any of its property or assets is subject. "Revolving Credit Commitment" shall mean, (a) with respect to each --------------------------- Lender that is a Lender on the date hereof, the amount set forth opposite such Lender's name on Schedule 1.1 as such Lender's "Revolving Credit Commitment" and (b) in the case of any Lender that becomes a Lender after the date hereof, the amount specified as such Lender's "Revolving Credit Commitment" in the Assignment and Acceptance pursuant to which such Lender assumed a portion of the Total Revolving Credit Commitment, in each case as the same may be changed from time to time pursuant to the terms hereof. 23 "Revolving Credit Commitment Percentage" shall mean at any time, for -------------------------------------- each Lender, the percentage obtained by dividing such Lender's Revolving Credit Commitment by the Total Revolving Credit Commitment, provided that at any time -------- when the Total Revolving Credit Commitment shall have been terminated, each Lender's Revolving Credit Commitment Percentage shall be its Revolving Credit Commitment Percentage as in effect immediately prior to such termination. "Revolving Credit Loan" shall have the meaning provided in Section --------------------- 2.1. "Revolving Credit Maturity Date" shall mean December 19, 2002. ------------------------------ "S&P" shall mean Standard & Poor's Ratings Service or any successor by --- merger or consolidation to its business. "SEC" shall mean the Securities and Exchange Commission or any --- successor thereto. "Section 9.1 Financials" shall mean the financial statements ---------------------- delivered, or required to be delivered, pursuant to Section 9.1(a) or (b) together with the accompanying officer's certificate delivered, or required to be delivered, pursuant to Section 9.1(c). "Senior Debt Ratio" shall mean, as of any date of determination, the ----------------- ratio of (a) Consolidated Senior Debt as of the last day of the most recent Test Period ended on or prior to such date to (b) EBITDA for such Test Period. "Stated Amount" of any Letter of Credit shall mean the maximum amount ------------- from time to time available to be drawn thereunder, determined without regard to whether any conditions to drawing could then be met. "Subsidiary" of any Person shall mean and include (a) any corporation ---------- more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person directly or indirectly through Subsidiaries and (b) any partnership, association, joint venture or other entity in which such Person directly or indirectly through Subsidiaries has more than a 50% equity interest at the time. Unless otherwise 24 expressly provided, all references herein to a "Subsidiary" shall mean a Subsidiary of the Borrower. "Subsidiary Guarantor" shall mean any Subsidiary of the Borrower that -------------------- shall have executed and delivered to the Administrative Agent a guarantee agreement, reasonably satisfactory in form and substance to the Administrative Agent, pursuant to which such Subsidiary shall have unconditionally guaranteed the payment by the Borrower as and when due of all principal, interest and other amounts payable by the Borrower under this Agreement. "Swingline Commitment" shall mean $10,000,000. -------------------- "Swingline Loans" shall have the meaning provided in Section 2.1(b). --------------- "Swingline Maturity Date" shall mean, with respect to any Swingline ----------------------- Loan, the date that is five Business Days prior to the Revolving Credit Maturity Date. "Test Period" shall mean, for any determination under this Agreement, ----------- the four consecutive fiscal quarters of the Borrower then last ended. "Three-Month Secondary CD Rate" shall mean, for any day, the secondary ----------------------------- market rate, expressed as a per annum rate, for three-month certificates of deposit reported as being in effect on such day (or, if such day shall not be a Business Day, the next preceding Business Day) by the Board through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day), or, if such rate shall not be so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 A.M., New York time, on such day (or, if such day shall not be a Business Day, on the next preceding Business Day) by the Administrative Agent from three New York City negotiable certificate of deposit dealers of recognized standing selected by it. "Total Revolving Credit Commitment" shall mean the sum of the --------------------------------- Revolving Credit Commitments of all the Lenders. "Transferee" shall have the meaning provided in Section 13.6(e). ---------- 25 "Type" shall mean, as to any Revolving Credit Loan, its nature as an ---- ABR Loan or a Eurodollar Loan. "Unfunded Current Liability" of any Plan shall mean the amount, if -------------------------- any, by which the present value of the accrued benefits under the Plan as of the close of its most recent plan year, determined in accordance with Statement of Financial Accounting Standards No. 87 as in effect on the date hereof, based upon the actuarial assumptions that would be used by the Plan's actuary in a termination of the Plan, exceeds the fair market value of the assets allocable thereto. "Unpaid Drawing" shall have the meaning provided in Section 3.4(a). -------------- "Voting Stock" shall mean, with respect to any Person, shares of such ------------ Person's capital stock having the right to vote for the election of directors of such Person under ordinary circumstances. SECTION 2. Amount and Terms of Credit. --------------------------- 2.1 Commitments. (a) Subject to and upon the terms and conditions ------------ herein set forth, each Lender severally agrees to make a loan or loans (each a "Revolving Credit Loan" and, collectively, the "Revolving Credit Loans") to the - ---------------------- ---------------------- Borrower, which Revolving Credit Loans (i) shall be made at any time and from time to time on and after the Closing Date and prior to the Revolving Credit Maturity Date, (ii) may, at the option of the Borrower, be incurred and maintained as, and/or converted into, ABR Loans or Eurodollar Loans, provided -------- that all Revolving Credit Loans made by each of the Lenders pursuant to the same Borrowing shall, unless otherwise specifically provided herein, consist entirely of Revolving Credit Loans of the same Type, (iii) may be repaid and reborrowed in accordance with the provisions hereof, (iv) shall not exceed for any such Lender at any time outstanding that aggregate principal amount which, when added to the product of (x) such Lender's Revolving Credit Commitment Percentage and (y) the sum of (I) the aggregate Letter of Credit Outstandings at such time and --- (II) the aggregate principal amount of all Swingline Loans then outstanding, equals the Revolving Credit Commitment of such Lender at such time and (v) shall not, after giving effect thereto and to the application of the proceeds thereof, exceed for all Lenders at any time outstanding the aggregate principal amount that, when added to the sum of (x) the Letter of Credit Outstandings at such time and (y) the aggregate principal amount of all Swingline 26 Loans then outstanding, equals the Total Revolving Credit Commitment then in effect. On the Revolving Credit Maturity Date, all Revolving Credit Loans shall be repaid in full. (b) Subject to and upon the terms and conditions herein set forth, Chase in its individual capacity agrees, at any time and from time to time on and after the Closing Date and prior to the Swingline Maturity Date, to make a loan or loans (each a "Swingline Loan" and, collectively, the "Swingline Loans") -------------- --------------- to the Borrower, which Swingline Loans (i) shall be ABR Loans, (ii) shall have the benefit of the provisions of Section 2.1(c), (iii) shall not exceed at any time outstanding the Swingline Commitment, (iv) shall not, after giving effect thereto and to the application of the proceeds thereof, exceed in the aggregate at any time outstanding the principal amount that, when added to the aggregate principal amount of all Revolving Credit Loans then outstanding and all Letter of Credit Outstandings at such time, equals the Total Revolving Credit Commitment then in effect and (v) may be repaid and reborrowed in accordance with the provisions hereof. Each Swingline Loan shall be repaid in full on the earlier of the Swingline Maturity Date and the first date after such Swingline Loan is made that is the 15th or last day of a calendar month and is at least two Business Days after such Swingline Loan is made; provided that on each date -------- that a Borrowing of Revolving Credit Loans is made, the Borrower shall repay all Swingline Loans then outstanding. Chase shall not make any Swingline Loan after receiving a written notice from the Borrower or any Lender stating that a Default or Event of Default exists and is continuing until such time as Chase shall have received written notice of (i) rescission of all such notices from the party or parties originally delivering such notice or (ii) the waiver of such Default or Event of Default in accordance with the provisions of Section 13.1. (c) On any Business Day, Chase may, in its sole discretion, give notice to the Lenders that all then-outstanding Swingline Loans shall be funded with a Borrowing of Revolving Credit Loans, in which case a Borrowing of Revolving Credit Loans constituting ABR Loans (each such Borrowing, a "Mandatory --------- Borrowing") shall be made on the immediately succeeding Business Day by all - --------- Lenders pro rata based on each Lender's Revolving Credit Commitment Percentage, --- ---- and the proceeds thereof shall be applied directly to Chase to repay Chase for such outstanding Swingline Loans. Each Lender hereby irrevocably agrees to make such Revolving Credit Loans upon one Business Day's notice pursuant to each Mandatory Borrowing in the amount and in the manner specified in the preceding sentence and on the date specified to it in writing by Chase notwithstanding 27 (i) that the amount of the Mandatory Borrowing may not comply with the minimum amount for each Borrowing specified in Section 2.2, (ii) whether any conditions specified in Section 7 are then satisfied, (iii) whether a Default or an Event of Default has occurred and is continuing, (iv) the date of such Mandatory Borrowing or (v) any reduction in the Total Revolving Credit Commitment after any such Swingline Loans were made. In the event that, in the sole judgment of Chase, any Mandatory Borrowing cannot for any reason be made on the date otherwise required above (including, without limitation, as a result of the commencement of a proceeding under the Bankruptcy Code in respect of the Borrower), each Lender hereby agrees that it shall forthwith purchase from Chase (without recourse or warranty) such participation of the outstanding Swingline Loans as shall be necessary to cause the Lenders to share in such Swingline Loans ratably based upon their respective Revolving Credit Commitment Percentages, provided that all principal and interest payable on such Swingline -------- Loans shall be for the account of Chase until the date the respective participation is purchased and, to the extent attributable to the purchased participation, shall be payable to the Lender purchasing same from and after such date of purchase. 2.2 Minimum Amount of Each Borrowing; Maximum Number of Borrowings. --------------------------------------------------------------- The aggregate principal amount of each Borrowing of Revolving Credit Loans shall be in a multiple of $1,000,000 and Swingline Loans shall be in a multiple of $100,000, and no Borrowing of Loans shall be less than the Minimum Borrowing Amount with respect thereto (except that Mandatory Borrowings shall be made in the amounts required by Section 2.1(c)). More than one Borrowing may be incurred on any date, provided that at no time shall there be outstanding more -------- than 8 Borrowings of Eurodollar Loans under this Agreement. 2.3 Notice of Borrowing. (a) Whenever the Borrower desires to incur -------------------- Revolving Credit Loans hereunder (other than Mandatory Borrowings or borrowings to repay Unpaid Drawings), it shall give the Administrative Agent at the Administrative Agent's Office (i) prior to 12:00 Noon (New York time) at least three Business Days' prior written notice (or telephonic notice promptly confirmed in writing) of each Borrowing of Eurodollar Loans and (ii) prior to 12:00 Noon (New York time) at least one Business Day's prior written notice (or telephonic notice promptly confirmed in writing) of each Borrowing of ABR Loans. Each such notice (a "Notice of Borrowing"), except as otherwise expressly ------------------- provided in Section 2.10, shall be irrevocable and shall specify (i) the aggregate principal amount of the Revolving Credit Loans to be made pursuant to such Borrowing, (ii) the 28 date of Borrowing (which shall be a Business Day) and (iii) whether the respective Borrowing shall consist of ABR Loans or Eurodollar Loans and, if Eurodollar Loans, the Interest Period to be initially applicable thereto. The Administrative Agent shall promptly give each Lender written notice (or telephonic notice promptly confirmed in writing) of each proposed Borrowing of Revolving Credit Loans, of such Lender's proportionate share thereof and of the other matters covered by the related Notice of Borrowing. (b) Whenever the Borrower desires to incur Swingline Loans hereunder, it shall give the Administrative Agent written notice (or telephonic notice promptly confirmed in writing) of each Borrowing of Swingline Loans prior to 1:00 P.M. (New York time) on the date of such Borrowing. Each such notice shall be irrevocable and shall specify (i) the aggregate principal amount of the Swingline Loans to be made pursuant to such Borrowing and (ii) the date of Borrowing (which shall be a Business Day). The Administrative Agent shall promptly give Chase written notice (or telephonic notice promptly confirmed in writing) of each proposed Borrowing of Swingline Loans and of the other matters covered by the related Notice of Borrowing. (c) Mandatory Borrowings shall be made upon the notice specified in Section 2.1(c), with the Borrower irrevocably agreeing, by its incurrence of any Swingline Loan, to the making of Mandatory Borrowings as set forth in such Section. (d) Borrowings to reimburse Unpaid Drawings shall be made upon the notice specified in Section 3.4(c). (e) Without in any way limiting the obligation of the Borrower to confirm in writing any notice it may give hereunder by telephone, the Administrative Agent may act prior to receipt of written confirmation without liability upon the basis of such telephonic notice believed by the Administrative Agent in good faith to be from an Authorized Officer of the Borrower. In each such case the Borrower hereby waives the right to dispute the Administrative Agent's record of the terms of any such telephonic notice. 2.4 Disbursement of Funds. (a) No later than 12:00 Noon (New York ---------------------- time) on the date specified in each Notice of Borrowing (including Mandatory Borrowings), each Lender will make available its pro rata portion, if any, of --- ---- each Borrowing requested to be made on such date in the manner provided below, provided that all Swingline Loans shall be made available in the full amount - -------- thereof by Chase 29 no later than 2:00 P.M. (New York time) on the date requested. (b) Each Lender shall make available all amounts it is to fund under any Borrowing in Dollars and immediately available funds to the Administrative Agent at the Administrative Agent's Office and the Administrative Agent will (except in the case of Mandatory Borrowings and Borrowings to repay Unpaid Drawings) make available to the Borrower by depositing to the Borrower's account at the Administrative Agent's Office the aggregate of the amounts so made available in Dollars and the type of funds received. Unless the Administrative Agent shall have been notified by any Lender prior to the date of any such Borrowing that such Lender does not intend to make available to the Administrative Agent its portion of the Borrowing or Borrowings to be made on such date, the Administrative Agent may assume that such Lender has made such amount available to the Administrative Agent on such date of Borrowing, and the Administrative Agent, in reliance upon such assumption, may (in its sole discretion and without any obligation to do so) make available to the Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Administrative Agent by such Lender and the Administrative Agent has made available same to the Borrower, the Administrative Agent shall be entitled to recover such corresponding amount from such Lender. If such Lender does not pay such corresponding amount forthwith upon the Administrative Agent's demand therefor, the Administrative Agent shall promptly notify the Borrower, and the Borrower shall immediately pay such corresponding amount to the Administrative Agent. The Administrative Agent shall also be entitled to recover from such Lender or the Borrower, as the case may be, interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Administrative Agent to the Borrower to the date such corresponding amount is recovered by the Administrative Agent, at a rate per annum equal to (i) if paid by such Lender, the Federal Funds Effective Rate or (ii) if paid by the Borrower, the then-applicable rate of interest, calculated in accordance with Section 2.8, for the respective Loans. (c) Nothing in this Section 2.4 shall be deemed to relieve any Lender from its obligation to fulfill its commitments hereunder or to prejudice any rights that the Borrower may have against any Lender as a result of any default by such Lender hereunder (it being understood, however, that no Lender shall be responsible for the failure of any other Lender to fulfill its commitments hereunder). 30 2.5 Repayment of Loans; Evidence of Debt. (a) The Borrower shall ------------------------------------- repay to the Administrative Agent, for the benefit of the Lenders, on the Revolving Credit Maturity Date, the then-unpaid Revolving Credit Loans. The Borrower shall repay to the Administrative Agent, for the account of Chase, on the Swingline Maturity Date, the then-unpaid Swingline Loans. The Borrower also shall repay Swingline Loans as required by Section 2.1(b). (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to the appropriate lending office of such Lender resulting from each Loan made by such lending office of such Lender from time to time, including the amounts of principal and interest payable and paid to such lending office of such Lender from time to time under this Agreement. (c) The Administrative Agent shall maintain the Register pursuant to Section 13.6, and a subaccount for each Lender, in which Register and subaccounts (taken together) shall be recorded (i) the amount of each Loan made hereunder, whether such Loan is a Revolving Credit Loan or a Swingline Loan, the Type of each Loan made and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender or Chase hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder from the Borrower and each Lender's share thereof. (d) The entries made in the Register and accounts and subaccounts maintained pursuant to paragraphs (b) and (c) of this Section 2.5 shall, to the extent permitted by applicable law, be prima facie evidence of the existence and amounts of the obligations of the Borrower therein recorded; provided, however, -------- ------- that the failure of any Lender or the Administrative Agent to maintain such account, such Register or such subaccount, as applicable, or any error therein, shall not in any manner affect the obligation of the Borrower to repay (with applicable interest) the Loans made to the Borrower by such Lender in accordance with the terms of this Agreement. 2.6 Conversions and Continuations. (a) The Borrower shall have the ------------------------------ option on any Business Day to convert all or a portion equal to at least the Minimum Borrowing Amount of the outstanding principal amount of Revolving Credit Loans of one Type into a Borrowing or Borrowings of another Type or to continue the outstanding principal amount of any Eurodollar Loans as Eurodollar 31 Loans for an additional Interest Period, provided that (i) no partial conversion -------- of Eurodollar Loans shall reduce the outstanding principal amount of Eurodollar Loans made pursuant to a single Borrowing to less than the Minimum Borrowing Amount, (ii) ABR Loans may not be converted into Eurodollar Loans if a Default or Event of Default is in existence on the date of the conversion and the Administrative Agent has or the Required Lenders have determined in its or their sole discretion not to permit such conversion, (iii) Eurodollar Loans may not be continued as Eurodollar Loans for an additional Interest Period if a Default or Event of Default is in existence on the date of the proposed continuation and the Administrative Agent has or the Required Lenders have determined in its or their sole discretion not to permit such continuation and (iv) Borrowings resulting from conversions pursuant to this Section 2.6 shall be limited in number as provided in Section 2.2. Each such conversion or continuation shall be effected by the Borrower by giving the Administrative Agent at the Administrative Agent's Office prior to 12:00 Noon (New York time) at least three Business Days' (or one Business Day's notice in the case of a conversion into ABR Loans) prior written notice (or telephonic notice promptly confirmed in writing) (each a "Notice of Conversion or Continuation") specifying the ------------------------------------ Revolving Credit Loans to be so converted or continued, the Type of Revolving Credit Loans to be converted or continued into and, if such Revolving Credit Loans are to be converted into or continued as Eurodollar Loans, the Interest Period to be initially applicable thereto. The Administrative Agent shall give each Lender notice as promptly as practicable of any such proposed conversion or continuation. (b) If any Default or Event of Default is in existence at the time of any proposed continuation of any Eurodollar Loans and the Administrative Agent has or the Required Lenders have determined in its or their sole discretion not to permit such continuation, such Eurodollar Loans shall be automatically converted on the last day of the current Interest Period into ABR Loans. If upon the expiration of any Interest Period in respect of Eurodollar Loans, the Borrower has failed to elect a new Interest Period to be applicable thereto as provided in paragraph (a) above, the Borrower shall be deemed to have elected to convert such Borrowing of Eurodollar Loans into a Borrowing of ABR Loans effective as of the expiration date of such current Interest Period. 2.7 Pro Rata Borrowings. Each Borrowing of Revolving Credit Loans -------------------- under this Agreement shall be granted by the Lenders pro rata on the basis of --- ---- their then- 32 applicable Revolving Credit Commitments. It is understood that no Lender shall be responsible for any default by any other Lender in its obligation to make Loans hereunder and that each Lender shall be obligated to make the Loans provided to be made by it hereunder, regardless of the failure of any other Lender to fulfill its commitments hereunder. 2.8 Interest. (a) The unpaid principal amount of each ABR Loan --------- shall bear interest from the date of the Borrowing thereof until maturity (whether by acceleration or otherwise) at a rate per annum that shall at all times be the ABR in effect from time to time. (b) The unpaid principal amount of each Eurodollar Loan shall bear interest from the date of the Borrowing thereof until maturity thereof (whether by acceleration or otherwise) at a rate per annum that shall at all times be the Applicable Margin in effect from time to time plus the relevant Eurodollar Rate. (c) If all or a portion of (i) the principal amount of any Loan or (ii) any interest payable thereon shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum that is (x) in the case of overdue principal, the rate that would otherwise be applicable thereto plus 2% or (y) in the case of ---- any overdue interest, to the extent permitted by applicable law, ABR plus 2% ---- from and including the date of such non-payment to but excluding the date on which such amount is paid in full (after as well as before judgment). (d) Interest on each Loan shall accrue from and including the date of any Borrowing to but excluding the date of any repayment thereof and shall be payable (i) in respect of each ABR Loan, quarterly in arrears on the last day of each March, June, September and December, (ii) in respect of each Eurodollar Loan, on the last day of each Interest Period applicable thereto and, in the case of an Interest Period in excess of three months, on each date occurring at three-month intervals after the first day of such Interest Period, and (iii) in respect of each Loan (except, in the case of prepayments, any ABR Loan), on any prepayment (on the amount prepaid), at maturity (whether by acceleration or otherwise) and, after such maturity, on demand. (e) All computations of interest hereunder shall be made in accordance with Section 5.5. 33 (f) The Administrative Agent, upon determining the interest rate for any Borrowing of Eurodollar Loans, shall promptly notify the Borrower and the Lenders thereof. Each such determination shall, absent clearly demonstrable error, be final and conclusive and binding on all parties hereto. 2.9 Interest Periods. At the time the Borrower gives a Notice of ----------------- Borrowing or Notice of Conversion or Continuation in respect of the making of, or conversion into or continuation as, a Borrowing of Eurodollar Loans (in the case of the initial Interest Period applicable thereto) or prior to 10:00 A.M. (New York time) on the third Business Day prior to the expiration of an Interest Period applicable to a Borrowing of Eurodollar Loans, the Borrower shall have the right to elect by giving the Administrative Agent written notice (or telephonic notice promptly confirmed in writing) the Interest Period applicable to such Borrowing, which Interest Period shall, at the option of the Borrower, be a one, two, three, six or (if available to all the Lenders making such Loans as determined by such Lenders in good faith based on prevailing market conditions) a nine or twelve month period. Notwithstanding anything to the contrary contained above: (a) the initial Interest Period for any Borrowing of Eurodollar Loans shall commence on the date of such Borrowing (including the date of any conversion from a Borrowing of ABR Loans) and each Interest Period occurring thereafter in respect of such Borrowing shall commence on the day on which the next preceding Interest Period expires; (b) if any Interest Period relating to a Borrowing of Eurodollar Loans begins on the last Business Day of a calendar month or begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period, such Interest Period shall end on the last Business Day of the calendar month at the end of such Interest Period; (c) if any Interest Period would otherwise expire on a day that is not a Business Day, such Interest Period shall expire on the next succeeding Business Day, provided that if any Interest Period in respect of -------- a Eurodollar Loan would otherwise expire on a day that is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; and 34 (d) the Borrower shall not be entitled to elect any Interest Period in respect of any Eurodollar Loan if such Interest Period would extend beyond the Revolving Credit Maturity Date. 2.10 Increased Costs, Illegality, etc. (a) In the event that (x) in --------------------------------- the case of clause (i) below, the Administrative Agent or (y) in the case of clauses (ii) and (iii) below, any Lender shall have reasonably determined (which determination shall, absent clearly demonstrable error, be final and conclusive and binding upon all parties hereto): (i) on any date for determining the Eurodollar Rate for any Interest Period that, by reason of any changes arising on or after the Closing Date affecting the interbank Eurodollar market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in the definition of Eurodollar Rate; or (ii at any time, that such Lender shall incur in creased costs or reductions in the amounts received or receivable hereunder with respect to any Eurodollar Loans (other than any such increase or reduction attributable to taxes) because of (x) any change since the date hereof in any applicable law, governmental rule, regulation, guideline or order (or in the interpretation or administration thereof and including the introduction of any new law or governmental rule, regulation, guideline or order), such as, for example, but not limited to, a change in official reserve requirements, and/or (y) other circumstances affecting the interbank Eurodollar market or the position of such Lender in such market; or (ii at any time, that the making or continuance of any Eurodollar Loan has become unlawful by compliance by such Lender in good faith with any law, governmental rule, regulation, guideline or order (or would conflict with any such governmental rule, regulation, guideline or order not having the force of law even though the failure to comply therewith would not be unlawful), or has become impracticable as a result of a contingency occurring after the date hereof that materially and adversely affects the interbank Eurodollar market; then, and in any such event, such Lender (or the Administrative Agent, in the case of clause (i) above) shall within a reasonable time thereafter give notice (if by 35 telephone confirmed in writing) to the Borrower and to the Administrative Agent of such determination (which notice the Administrative Agent shall promptly transmit to each of the other Lenders). Thereafter (x) in the case of clause (i) above, Eurodollar Loans shall no longer be available until such time as the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice by the Administrative Agent no longer exist (which notice the Administrative Agent agrees to give at such time when such circumstances no longer exist), and any Notice of Borrowing or Notice of Conversion given by the Borrower with respect to Eurodollar Loans that have not yet been incurred shall be deemed rescinded by the Borrower, (y) in the case of clause (ii) above, the Borrower shall pay to such Lender, promptly after receipt of written demand therefor, such additional amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Lender in its reasonable discretion shall determine) as shall be required to compensate such Lender for such increased costs or reductions in amounts receivable hereunder (it being agreed that a written notice as to the additional amounts owed to such Lender, showing in reasonable detail the basis for the calculation thereof, submitted to the Borrower by such Lender shall, absent clearly demonstrable error, be final and conclusive and binding upon all parties hereto) and (z) in the case of clause (iii) above, the Borrower shall take one of the actions specified in Section 2.10(b) as promptly as possible and, in any event, within the time period required by law. (b) At any time that any Eurodollar Loan is affected by the circumstances described in Section 2.10(a)(ii) or (iii), the Borrower may (and in the case of a Eurodollar Loan affected pursuant to Section 2.10(a)(iii) shall) either (i) if the affected Eurodollar Loan is then being made pursuant to a Borrowing, cancel said Borrowing by giving the Administrative Agent telephonic notice (confirmed promptly in writing) thereof on the same date that the Borrower was notified by a Lender pursuant to Section 2.10(a)(ii) or (iii) or (ii) if the affected Eurodollar Loan is then outstanding, upon at least three Business Days' notice to the Administrative Agent, require the affected Lender to convert each such Eurodollar Loan into an ABR Loan, provided that if more -------- than one Lender is affected at any time, then all affected Lenders must be treated in the same manner pursuant to this Section 2.10(b). (c) If, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental 36 authority, the National Association of Insurance Commissioners, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by a Lender or its parent with any request or directive made or adopted after the date hereof regarding capital adequacy (whether or not having the force of law) of any such authority, association, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's or its parent's capital or assets as a consequence of such Lender's commitments or obligations hereunder to a level below that which such Lender or its parent could have achieved but for such adoption, effectiveness, change or compliance (taking into consideration such Lender's or its parent's policies with respect to capital adequacy), then from time to time, promptly after demand by such Lender (with a copy to the Administrative Agent), the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender or its parent for such reduction, it being understood and agreed, however, that a Lender shall not be entitled to such compensation as a result of such Lender's compliance with, or pursuant to any request or directive to comply with, any such law, rule or regulation as in effect on the date hereof. Each Lender, upon determining in good faith that any additional amounts will be payable pursuant to this Section 2.10(c), will give prompt written notice thereof to the Borrower, which notice shall set forth in reasonable detail the basis of the calculation of such additional amounts, although the failure to give any such notice shall not, subject to Section 2.13, release or diminish any of the Borrower's obligations to pay additional amounts pursuant to this Section 2.10(c) upon receipt of such notice. 2.11 Compensation. If (a) any payment of principal of any Eurodollar ------------- Loan is made by the Borrower to or for the account of a Lender other than on the last day of the Interest Period for such Eurodollar Loan as a result of a payment or conversion pursuant to Section 2.5, 2.6, 2.10, 5.1, 5.2 or 13.7, as a result of acceleration of the maturity of the Loans pursuant to Section 11 or for any other reason, (b) any Borrowing of Eurodollar Loans is not made as a result of a withdrawn Notice of Borrowing, (c) any ABR Loan is not converted into a Eurodollar Loan as a result of a withdrawn Notice of Conversion or Continuation, (d) any Eurodollar Loan is not continued as a Eurodollar Loan as a result of a withdrawn Notice of Conversion or Continuation or (e) any prepayment of principal of any Eurodollar Loan is not made as a result of a withdrawn notice of prepayment pursuant to Section 5.1 or 5.2, the Borrower shall, after receipt of a written request by such Lender (which request shall set forth in reasonable detail the basis for 37 requesting such amount), pay to the Administrative Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, costs or expenses that such Lender may reasonably incur as a result of such payment, failure to convert, failure to continue or failure to prepay, including, without limitation, any loss, cost or expense (excluding loss of anticipated profits) actually incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Eurodollar Loan. 2.12 Change of Lending Office. Each Lender agrees that, upon the ------------------------- occurrence of any event giving rise to the operation of Section 2.10(a)(ii), 2.10(a)(iii), 2.10(b), 3.5 or 5.4 with respect to such Lender, it will, if requested by the Borrower, use reasonable efforts (subject to overall policy considerations of such Lender) to designate another lending office for any Loans affected by such event, provided that such designation is made on such terms -------- that such Lender and its lending office suffer no economic, legal or regulatory disadvantage, with the object of avoiding the consequence of the event giving rise to the operation of any such Section. Nothing in this Section 2.12 shall affect or postpone any of the obligations of the Borrower or the right of any Lender provided in Section 2.10, 3.5 or 5.4. 2.13 Notice of Certain Costs. Notwithstanding anything in this ------------------------ Agreement to the contrary, to the extent any notice required by Section 2.10, 2.11, 3.5 or 5.4 is given by any Lender more than 180 days after such Lender has knowledge (or should have had knowledge) of the occurrence of the event giving rise to the additional cost, reduction in amounts, loss, tax or other additional amounts described in such Sections, such Lender shall not be entitled to compensation under Section 2.10, 2.11, 3.5 or 5.4, as the case may be, for any such amounts incurred or accruing prior to the giving of such notice to the Borrower. SECTION 3. Letters of Credit. ------------------ 3.1 Letters of Credit. (a) Subject to and upon the terms and ------------------ conditions herein set forth, the Borrower, at any time and from time to time on or after the Closing Date and prior to the L/C Maturity Date, may request that the Letter of Credit Issuer issue, for the account of the Borrower, a standby letter of credit or letters of credit in such form as may be approved by the Letter of Credit Issuer in its reasonable discretion. 38 (b) Notwithstanding the foregoing, (i) no Letter of Credit shall be issued the Stated Amount of which, when added to the Letter of Credit Outstandings at such time, would exceed the Letter of Credit Commitment then in effect; (ii) no Letter of Credit shall be issued the Stated Amount of which, when added to the sum of (x) the Letter of Credit Outstandings at such time and (y) the aggregate principal of all Revolving Credit Loans and Swingline Loans then outstanding, would exceed the Total Revolving Credit Commitment then in effect; (iii) each Letter of Credit shall have an expiry date occurring no later than one year after the date of issuance thereof, unless otherwise agreed upon by the Administrative Agent and the Letter of Credit Issuer, provided that in no -------- event shall such expiry date occur later than the L/C Maturity Date; (iv) each Letter of Credit shall be denominated in Dollars; and (v) no Letter of Credit shall be issued by the Letter of Credit Issuer after it has received a written notice from the Borrower or any Lender stating that a Default or Event of Default has occurred and is continuing until such time as the Letter of Credit Issuer shall have received a written notice of (x) rescission of such notice from the party or parties originally delivering such notice or (y) the waiver of such Default or Event of Default in accordance with the provisions of Section 13.1. (c) Upon at least one Business Day's prior written notice (or telephonic notice promptly confirmed in writing) to the Administrative Agent and the Letter of Credit Issuer (which notice the Administrative Agent shall promptly transmit to each of the Lenders), the Borrower shall have the right, on any day, permanently to terminate or reduce the Letter of Credit Commitment in whole or in part, provided that, after giving effect to such termination or -------- reduction, the Letter of Credit Outstandings shall not exceed the Letter of Credit Commitment. 3.2 Letter of Credit Requests. (a) Whenever the Borrower desires -------------------------- that a Letter of Credit be issued for its account, it shall give the Administrative Agent and the Letter of Credit Issuer at least five (or such lesser number as may be agreed upon by the Administrative Agent and the Letter of Credit Issuer) Business Days' written notice thereof. Each notice shall be executed by the Borrower and shall be in the form of Exhibit B (each a "Letter ------ of Credit Request"). The Administrative Agent shall promptly transmit copies of - ----------------- each Letter of Credit Request to each Lender. (b) The making of each Letter of Credit Request shall be deemed to be a representation and warranty by the Borrower that the Letter of Credit may be issued in 39 accordance with, and will not violate the requirements of, Section 3.1(b). 3.3 Letter of Credit Participations. (a) Im mediately upon the -------------------------------- issuance by the Letter of Credit Issuer of any Letter of Credit, the Letter of Credit Issuer shall be deemed to have sold and transferred to each other Lender (each such other Lender, in its capacity under this Section 3.3, an "L/C --- Participant"), and each such L/C Participant shall be deemed irrevocably and - ----------- unconditionally to have purchased and received from the Letter of Credit Issuer, without recourse or warranty, an undivided interest and participation (each an "L/C Participation"), to the extent of such L/C Participant's Revolving Credit - ------------------ Commitment Percentage, in such Letter of Credit, each substitute letter of credit, each drawing made thereunder and the obligations of the Borrower under this Agreement with respect thereto, and any security therefor or guaranty pertaining thereto (although Letter of Credit Fees will be paid directly to the Administrative Agent for the ratable account of the L/C Participants as provided in Section 4.1(b) and the L/C Participants shall have no right to receive any portion of any Fronting Fees). (b) In determining whether to pay under any Letter of Credit, the Letter of Credit Issuer shall have no obligation relative to the L/C Participants other than to confirm that any documents required to be delivered under such Letter of Credit have been delivered and that they appear to comply on their face with the requirements of such Letter of Credit. Any action taken or omitted to be taken by the Letter of Credit Issuer under or in connection with any Letter of Credit issued by it, if taken or omitted in the absence of gross negligence or willful misconduct, shall not create for the Letter of Credit Issuer any resulting liability. (c) In the event that the Letter of Credit Issuer makes any payment under any Letter of Credit issued by it and the Borrower shall not have repaid such amount in full to the Letter of Credit Issuer pursuant to Section 3.4(a), the Letter of Credit Issuer shall promptly notify the Administrative Agent and each L/C Participant of such failure, and each L/C Participant shall promptly and unconditionally pay to the Administrative Agent, for the account of the Letter of Credit Issuer, the amount of such L/C Participant's Revolving Credit Commitment Percentage of such unreimbursed payment in Dollars and in same day funds; provided, however, that no L/C Participant shall be obligated to pay to -------- ------- the Administrative Agent for the account of the Letter of Credit Issuer its Revolving Credit Commitment Percentage of such unreimbursed amount arising from any wrongful payment made by the Letter of Credit Issuer under a Letter of Credit as a result of acts or omissions constituting willful misconduct or gross negligence on the part of the Letter of Credit Issuer. If the Letter of Credit Issuer so notifies, prior to 11:00 A.M. (New York time) on any Business Day, any L/C Participant required to fund a payment under a Letter of Credit, such L/C Participant shall make available to the Administrative Agent for the account of the Letter of Credit Issuer such L/C Participant's Revolving Credit 40 Commitment Percentage of the amount of such payment on such Business Day in same day funds. If and to the extent such L/C Participant shall not have so made its Revolving Credit Commitment Percentage of the amount of such payment available to the Administrative Agent for the account of the Letter of Credit Issuer, such L/C Participant agrees to pay to the Administrative Agent for the account of the Letter of Credit Issuer, forthwith on demand, such amount, together with interest thereon for each day from such date until the date such amount is paid to the Administrative Agent for the account of the Letter of Credit Issuer at the Federal Funds Effective Rate. The failure of any L/C Participant to make available to the Administrative Agent for the account of the Letter of Credit Issuer its Revolving Credit Commitment Percentage of any payment under any Letter of Credit shall not relieve any other L/C Participant of its obligation hereunder to make available to the Administrative Agent for the account of the Letter of Credit Issuer its Revolving Credit Commitment Percentage of any payment under such Letter of Credit on the date required, as specified above, but no L/C Participant shall be responsible for the failure of any other L/C Participant to make available to the Administrative Agent such other L/C Participant's Revolving Credit Commitment Percentage of any such payment. (d) Whenever the Letter of Credit Issuer receives a payment in respect of an unpaid reimbursement obligation as to which the Administrative Agent has received for the account of the Letter of Credit Issuer any payments from the L/C Participants pursuant to paragraph (c) above, the Letter of Credit Issuer shall pay to the Administrative Agent and the Administrative Agent shall promptly pay to each L/C Participant that has paid its Revolving Credit Commitment Percentage of such reimbursement obligation, in Dollars and in same day funds, an amount equal to such L/C Participant's share (based upon the proportionate aggregate amount originally funded by such L/C Participant to the aggregate amount funded by all L/C Participants) of the principal amount of such reimbursement obligation and interest thereon 41 accruing after the purchase of the respective L/C Participations. (e) The obligations of the L/C Participants to make payments to the Administrative Agent for the account of the Letter of Credit Issuer with respect to Letters of Credit shall be irrevocable and not subject to counterclaim, set- off or other defense or any other qualification or exception whatsoever and shall be made in accordance with the terms and conditions of this Agreement under all circumstances, including, without limitation, any of the following circumstances: (i) any lack of validity or enforceability of this Agreement or any of the other Credit Documents; (ii) the existence of any claim, set-off, defense or other right that the Borrower may have at any time against a beneficiary named in a Letter of Credit, any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), the Administrative Agent, the Letter of Credit Issuer, any Lender or other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transaction between the Borrower and the beneficiary named in any such Letter of Credit); (iii) any draft, certificate or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Credit Documents; or (v) the occurrence of any Default or Event of Default; provided, however, that no L/C Participant shall be obligated to pay to the - -------- ------- Administrative Agent for the account of the Letter of Credit Issuer its Revolving Credit Commitment Percentage of any unreimbursed amount arising from any wrongful payment made by the Letter of Credit Issuer under a Letter of Credit as a result of acts or omissions constituting willful misconduct or gross negligence on the part of the Letter of Credit Issuer. 42 3.4 Agreement to Repay Letter of Credit Drawings. (a) The Borrower --------------------------------------------- hereby agrees to reimburse the Letter of Credit Issuer, by making payment to the Administrative Agent in Dollars in immediately available funds at the Administrative Agent's Office, for any payment or disbursement made by the Letter of Credit Issuer under any Letter of Credit (each such amount so paid until reimbursed, an "Unpaid Drawing") immediately after, and in any event on -------------- the date of, such payment, with interest on the amount so paid or disbursed by the Letter of Credit Issuer, to the extent not reimbursed prior to 5:00 P.M. (New York time) on the date of such payment or disbursement, from and including the date paid or disbursed to but excluding the date the Letter of Credit Issuer is reimbursed therefor, at a rate per annum that shall at all times be the ABR as in effect from time to time, provided that, notwithstanding anything -------- contained in this Agreement to the contrary, (i) unless the Borrower shall have notified the Administrative Agent and the Letter of Credit Issuer prior to 10:00 A.M. on the date of such drawing that the Borrower intends to reimburse the Letter of Credit Issuer for the amount of such drawing with funds other than the proceeds of Loans, the Borrower shall be deemed to have given a Notice of Borrowing to the Administrative Agent requesting that the Lenders make Revolving Credit Loans (which shall initially be ABR Loans) on the date on which such drawing is honored in an amount equal to the amount of such drawing and (ii) each Lender shall, on such date, make Revolving Credit Loans in an amount equal to such Lender's pro rata portion of such Borrowing in accordance with the provisions of Section 2.4. (b) The Borrower's obligations under this Section 3.4 to reimburse the Letter of Credit Issuer with respect to Unpaid Drawings (including, in each case, interest thereon) shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment that the Borrower or any other Person may have or have had against the Letter of Credit Issuer, the Administrative Agent or any Lender (including in its capacity as an L/C Participant), including, without limitation, any defense based upon the failure of any drawing under a Letter of Credit (each a "Drawing") to ------- conform to the terms of the Letter of Credit or any non-application or misapplication by the beneficiary of the proceeds of such Drawing, provided that -------- the Borrower shall not be obligated to reimburse the Letter of Credit Issuer for any wrongful payment made by the Letter of Credit Issuer under the Letter of Credit issued by it as a result of acts or omissions constituting willful misconduct or gross negligence on the part of the Letter of Credit Issuer. 43 (c) Each payment by the Letter of Credit Issuer under any Letter of Credit shall constitute a request by the Borrower for an ABR Revolving Credit Loan in the amount of the Unpaid Drawing in respect of such Letter of Credit. The Letter of Credit Issuer shall notify the Borrower and the Administrative Agent, by 10:00 A.M. (New York time) on any Business Day on which the Letter of Credit Issuer intends to honor a drawing under a Letter of Credit, of (i) the Letter of Credit Issuer's intention to honor such drawing and (ii) the amount of such drawing. Unless otherwise instructed by the Borrower by 10:30 A.M. (New York time) on such Business Day, the Administrative Agent shall promptly notify each Lender of such drawing and the amount of its Revolving Credit Loan to be made in respect thereof, and each Lender shall be irrevocably obligated to make an ABR Revolving Credit Loan to the Borrower in the amount of its Revolving Credit Commitment Percentage of the applicable Unpaid Drawing by 12:00 noon (New York time) on such Business Day by making the amount of such Revolving Credit Loan available to the Administrative Agent at the Administrative Agent's Office. Such Revolving Credit Loans shall be made without regard to the Minimum Borrowing Amount. The Administrative Agent shall use the proceeds of such Revolving Credit Loans solely for purpose of reimbursing the Letter of Credit Issuer for the related Unpaid Drawing. 3.5 Increased Costs. If after the date hereof, the adoption of any ---------------- applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or actual com pliance by the Letter of Credit Issuer or any L/C Participant with any request or directive made or adopted after the date hereof (whether or not having the force of law), by any such authority, central bank or comparable agency shall either (a) impose, modify or make applicable any reserve, deposit, capital adequacy or similar requirement against letters of credit issued by the Letter of Credit Issuer, or any L/C Participant's L/C Participation therein, or (b) impose on the Letter of Credit Issuer or any L/C Participant any other conditions affecting its obligations under this Agreement in respect of Letters of Credit or L/C Participations therein or any Letter of Credit or such L/C Participant's L/C Participation therein; and the result of any of the foregoing is to increase the cost to the Letter of Credit Issuer or such L/C Participant of issuing, maintaining or participating in any Letter of Credit, or to reduce the amount of any sum received or receivable by the Letter of Credit Issuer or such L/C Participant hereunder (other than any such increase or 44 reduction attributable to taxes) in respect of Letters of Credit or L/C Participations therein, then, promptly after receipt of written demand to the Borrower by the Letter of Credit Issuer or such L/C Participant, as the case may be (a copy of which notice shall be sent by the Letter of Credit Issuer or such L/C Participant to the Administrative Agent), the Borrower shall pay to the Letter of Credit Issuer or such L/C Participant such additional amount or amounts as will compensate the Letter of Credit Issuer or such L/C Participant for such increased cost or reduction, it being understood and agreed, however, that the Letter of Credit Issuer or a L/C Participant shall not be entitled to such compensation as a result of such Person's compliance with, or pursuant to any request or directive to comply with, any such law, rule or regulation as in effect on the date hereof. A certificate submitted to the Borrower by the Letter of Credit Issuer or a L/C Participant, as the case may be (a copy of which certificate shall be sent by the Letter of Credit Issuer or such L/C Participant to the Administrative Agent), setting forth in reasonable detail the basis for the determination of such additional amount or amounts necessary to compensate the Letter of Credit Issuer or such L/C Participant as aforesaid shall be conclusive and binding on the Borrower absent clearly demonstrable error. 3.6 Successor Letter of Credit Issuer. The Letter of Credit Issuer ---------------------------------- may resign as Letter of Credit Issuer upon 60 days' prior written notice to the Administrative Agent, the Lenders and the Borrower. If the Letter of Credit Issuer shall resign as Letter of Credit Issuer under this Agreement, then the Borrower shall appoint from among the Lenders a successor issuer of Letters of Credit, whereupon such successor issuer shall succeed to the rights, powers and duties of the Letter of Credit Issuer, and the term "Letter of Credit Issuer" shall mean such successor issuer effective upon such appointment. At the time such resignation shall become effective, the Borrower shall pay to the resigning Letter of Credit Issuer all accrued and unpaid fees pursuant to Sections 4.1(c) and (d). The acceptance of any appointment as the Letter of Credit Issuer hereunder by a successor Lender shall be evidenced by an agreement entered into by such successor, in a form satisfactory to the Borrower and the Administrative Agent and, from and after the effective date of such agreement, such successor Lender shall have all the rights and obligations of the previous Letter of Credit Issuer under this Agreement. After the resignation of the Letter of Credit Issuer hereunder, the resigning Letter of Credit Issuer shall remain a party hereto and shall continue to have all the rights and obligations of a Letter of Credit Issuer under this Agreement with respect to Letters of 45 Credit issued by it prior to such resignation, but shall not be required to issue additional Letters of Credit. After any retiring Letter of Credit Issuer's resignation as Letter of Credit Issuer, the provisions of this Agreement relating to the Letter of Credit Issuer shall inure to its benefit as to any actions taken or omitted to be taken by it (a) while it was Letter of Credit Issuer under this Agreement or (b) at any time with respect to Letters of Credit issued by such Letter of Credit Issuer. SECTION 4. Fees; Commitments. ------------------ 4.1 Fees. (a) The Borrower agrees to pay to the Administrative ----- Agent, for the account of each Lender (pro rata according to their respective Revolving Credit Commitments), a commitment fee for each day from and including the Closing Date to but excluding the Final Date. Such commitment fee shall be payable in arrears (x) on December 31, 1997 (for the period ended on such day), (y) on the last day of each March, June, September and December (for the three- month period (or portion thereof) ended on the such day for which no payment has been received pursuant to clause (ii)(x) above) and (z) on the Final Date (for the period ended on such date for which no payment has been received pursuant to clause (ii)(y) above), and shall be computed for each day during such period at a rate per annum equal to the Commitment Fee Rate in effect on such day on the Available Commitments in effect on such day. Notwithstanding the foregoing, the Borrower shall not be obligated to pay any amounts to any Defaulting Lender pursuant to this Section 4.1. (b) The Borrower agrees to pay to the Administrative Agent for the account of the Lenders pro rata on the basis of their respective Letter of --- ---- Credit Exposure, a fee in respect of each Letter of Credit (the "Letter of --------- Credit Fee"), for the period from and including the date of issuance of such - ---------- Letter of Credit to but not including the termination date of such Letter of Credit computed at the per annum rate for each day equal to the Applicable Margin on the average daily Stated Amount of such Letter of Credit. Such Letter of Credit Fees shall be due and payable quarterly in arrears on the last day of each March, June, September and December and on the date upon which the Total Revolving Credit Commitment terminates and the Letter of Credit Outstandings shall have been reduced to zero. (c) The Borrower agrees to pay to the Administrative Agent for the account of the Letter of Credit Issuer a fee in respect of each Letter of Credit issued by 46 it (the "Fronting Fee"), for the period from and including the date of ------------ issuance of such Letter of Credit to but not including the termination date of such Letter of Credit, computed at the rate for each day equal to 0.125% per annum on the average daily Stated Amount of such Letter of Credit. Such Fronting Fees shall be due and payable quarterly in arrears on the last day of each March, June, September and December and on the date upon which the Total Revolving Credit Commitment terminates and the Letter of Credit Outstandings shall have been reduced to zero. (d) The Borrower agrees to pay directly to the Letter of Credit Issuer upon each issuance of, drawing under, and/or amendment of, a Letter of Credit issued by it such amount as the Letter of Credit Issuer and the Borrower shall have agreed upon for issuances of, drawings under or amendments of, letters of credit issued by it. (e) The Borrower agrees to pay to the Administrative Agent, on the Closing Date, the fees in the amounts and on the dates previously agreed to in writing by the Borrower and the Administrative Agent. The Administrative Agent agrees to pay to each Lender, for its own account on the Closing Date, the fees in the amounts and on the dates previously agreed to in writing by the Administrative Agent and such Lender. 4.2 Voluntary Reduction of Revolving Credit Commitments. Upon at ---------------------------------------------------- least one Business Day's prior written notice (or telephonic notice promptly confirmed in writing) to the Administrative Agent at the Administrative Agent's Office (which notice the Administrative Agent shall promptly transmit to each of the Lenders), the Borrower shall have the right, without premium or penalty, on any day, permanently to terminate or reduce the Revolving Credit Commitments in whole or in part, provided that (a) any such reduction shall apply -------- proportionately and permanently to reduce the Revolving Credit Commitment of each of the Lenders, (b) any partial reduction pursuant to this Section 4.2 shall be in the amount of at least $1,000,000 and (c) after giving effect to such termination or reduction and to any prepayments of the Loans made on the date thereof in accordance with this Agreement, the sum of (i) the aggregate outstanding principal amount of the Revolving Credit Loans and the Swingline Loans and (ii) the Letter of Credit Outstandings shall not exceed the Total Revolving Credit Commitment. 4.3 Mandatory Termination of Commitments. (a) The Total Revolving ------------------------------------- Credit Commitment shall terminate 47 at 5:00 P.M. (New York time) on the Revolving Credit Maturity Date. (b) The Swingline Commitment shall terminate at 5:00 P.M. (New York time) on the Swingline Maturity Date. SECTION 5. Payments. --------- 5.1 Voluntary Prepayments. The Borrower shall have the right to ---------------------- prepay Revolving Credit Loans and Swingline Loans, without premium or penalty, in whole or in part from time to time on the following terms and conditions: (a) the Borrower shall give the Administrative Agent at the Administrative Agent's Office written notice (or telephonic notice promptly confirmed in writing) of its intent to make such prepayment, the amount of such prepayment and (in the case of Eurodollar Loans) the specific Borrowing(s) pursuant to which made, which notice shall be given by the Borrower no later than (i) in the case of Revolving Credit Loans, 10:00 A.M. (New York time) one Business Day prior to, or (ii) in the case of Swingline Loans, 10:00 A.M. (New York time) on, the date of such prepayment and shall promptly be transmitted by the Administrative Agent to each of the Lenders or Chase, as the case may be; (b) each partial prepayment of any Borrowing of Revolving Credit Loans shall be in a multiple of $100,000 and in an aggregate principal amount of at least $1,000,000 and each partial prepayment of Swingline Loans shall be in a multiple of $100,000 and in an aggregate principal amount of at least $100,000, provided -------- that no partial prepayment of Eurodollar Loans made pursuant to a single Borrowing shall reduce the outstanding Eurodollar Loans made pursuant to such Borrowing to an amount less than the Minimum Borrowing Amount for Eurodollar Loans; and (c) any prepayment of Eurodollar Loans pursuant to this Section 5.1 on any day other than the last day of an Interest Period applicable thereto shall be subject to compliance by the Borrower with the applicable provisions of Section 2.11. At the Borrower's election in connection with any prepayment pursuant to this Section 5.1, such prepayment shall not be applied to any Revolving Credit Loan of a Defaulting Lender. 5.2 Mandatory Prepayments. (a) Aggregate Revolving Credit ---------------------- -------------------------- Outstandings. If on any date the sum of the outstanding principal amount of the - ------------- Revolving Credit Loans and Swingline Loans and the aggregate amount of Letter of Credit Outstandings (all the foregoing, collectively, the "Aggregate Revolving ------------------- Credit Outstandings") exceeds the Total Revolving Credit Commitment as then in - ------------------- effect, the Borrower shall forthwith repay on such date the principal amount of 48 Swingline Loans and, after all Swingline Loans have been paid in full, Revolving Credit Loans, in an amount equal to such excess. If, after giving effect to the prepayment of all outstanding Swingline Loans and Revolving Credit Loans, the Aggregate Revolving Credit Outstandings exceed the Total Revolving Credit Commitment then in effect, the Borrower shall pay to the Administrative Agent an amount in cash equal to such excess and the Administrative Agent shall hold such payment for the benefit of the Lenders as security for the obligations of the Borrower hereunder (including, without limitation, obligations in respect of Letter of Credit Outstandings) pursuant to a cash collateral agreement to be entered into in form and substance satisfactory to the Administrative Agent (which shall permit certain investments in Permitted Investments satisfactory to the Administrative Agent, until the proceeds are applied to the secured obligations). (b) Application to Revolving Credit Loans. With respect to each -------------------------------------- prepayment of Revolving Credit Loans required by Section 5.2(a), the Borrower may designate the Types of Loans that are to be prepaid and the specific Borrowing(s) pursuant to which made, provided that (i) if any prepayment of -------- Eurodollar Loans made pursuant to a single Borrowing shall reduce the outstanding Revolving Credit Loans made pursuant to such Borrowing to an amount less than the Minimum Borrowing Amount for Eurodollar Loans, such Borrowing shall immediately be converted into ABR Loans; (ii) each prepayment of any Loans made pursuant to a Borrowing shall be applied pro rata among such Loans; and --- ---- (iii) notwithstanding the provisions of the preceding clause (ii), no prepayment made pursuant to Section 5.2(a) of Revolving Credit Loans shall be applied to the Revolving Credit Loans of any Defaulting Lender. In the absence of a designation by the Borrower as described in the preceding sentence, the Administrative Agent shall, subject to the above, make such designation in its reasonable discretion with a view, but no obligation, to minimize breakage costs owing under Section 2.11. (c) Eurodollar Interest Periods. In lieu of making any payment ---------------------------- pursuant to this Section 5.2 in respect of any Eurodollar Loan other than on the last day of the Interest Period therefor, so long as no Default or Event of Default shall have occurred and be continuing, the Borrower at its option may deposit with the Administrative Agent an amount equal to the amount of the Eurodollar Loan to be prepaid and such Eurodollar Loan shall be repaid on the last day of the Interest Period therefor in the required amount. Such deposit shall be held by the Administrative Agent in a corporate time deposit account established on terms 49 reasonably satisfactory to the Administrative Agent, earning interest at the then-customary rate for accounts of such type. Such deposit shall constitute cash collateral for the Obligations, provided that the Borrower may at any -------- time direct that such deposit be applied to make the applicable payment required pursuant to this Section 5.2. 5.3 Method and Place of Payment. (a) Except as otherwise ---------------------------- specifically provided herein, all payments under this Agreement shall be made, without set-off, counterclaim or deduction of any kind, to the Administrative Agent for the ratable account of the Lenders entitled thereto, the Letter of Credit Issuer or Chase, as the case may be, not later than 12:00 Noon (New York time) on the date when due and shall be made in immediately available funds and in lawful money of the United States of America at the Administrative Agent's Office, it being understood that written or facsimile notice by the Borrower to the Administrative Agent to make a payment from the funds in the Borrower's account at the Administrative Agent's Office shall constitute the making of such payment to the extent of such funds held in such account. The Administrative Agent will thereafter cause to be distributed on the same day (if payment was actually received by the Administrative Agent prior to 2:00 P.M. (New York time) on such day) like funds relating to the payment of principal or interest or Fees ratably to the Lenders entitled thereto. (b) Any payments under this Agreement that are made later than 2:30 P.M. (New York time) shall be deemed to have been made on the next succeeding Business Day. Whenever any payment to be made hereunder shall be stated to be due on a day that is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest shall be payable during such extension at the applicable rate in effect immediately prior to such extension. 5.4 Net Payments. (a) All payments made by the Borrower under this ------------- Agreement shall be made free and clear of, and without deduction or withholding for or on account of, any current or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding (i) net income taxes and franchise taxes (imposed in lieu of net income taxes) imposed on the Administrative Agent or any Lender and (ii) any taxes imposed on the Administrative Agent or any Lender as a result of a current or former connection between the Administrative Agent or such Lender and the jurisdiction of the Governmental 50 Authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from the Administrative Agent or such Lender having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement). If any such non-excluded taxes, levies, imposts, duties, charges, fees, deductions or withholdings ("Non-Excluded Taxes") are required to be withheld from any amounts ------------------ payable to the Administrative Agent or any Lender hereunder, the amounts so payable to the Administrative Agent or such Lender shall be increased to the extent necessary to yield to the Administrative Agent or such Lender (after payment of all Non-Excluded Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement; provided, -------- however, that the Borrower shall not be required to increase any such amounts - ------- payable to any Lender that is not organized under the laws of the United States of America or a state thereof if such Lender fails to comply with the requirements of paragraph (b) of this Section 5.4. Whenever any Non-Excluded Taxes are payable by the Borrower, as promptly as possible thereafter the Borrower shall send to the Administrative Agent for its own account or for the account of such Lender, as the case may be, a certified copy of an original official receipt received by the Borrower showing payment thereof. If the Borrower fails to pay any Non-Excluded Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, the Borrower shall indemnify the Administrative Agent and the Lenders for any incremental taxes, interest, costs or penalties that may become payable by the Administrative Agent or any Lender as a result of any such failure. The agreements in this Section 5.4(a) shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. (b) Each Lender that is not incorporated or organized under the laws of the United States of America or a state thereof (a "Non-U.S. Lender") shall: --------------- (i) deliver to the Borrower and the Administrative Agent two copies of either United States Internal Revenue Service Form 1001 or Form 4224 or, in the case of Non-U.S. Lender claiming exemption from U.S. Federal withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of "portfolio interest", a Form W-8, or any subsequent versions thereof or successors thereto (and, if such Non-U.S. Lender delivers a Form W-8, a certificate representing that such Non-U.S. Lender is not a bank 51 for purposes of Section 881(c) of the Code, is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of the Borrower and is not a controlled foreign corporation related to the Borrower (within the meaning of Section 864(d)(4) of the Code)), properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or reduced rate of, U.S. Federal withholding tax on payments by the Borrower under this Agreement; (ii) deliver to the Borrower and the Administrative Agent two further copies of any such form or certification on or before the date that any such form or certification expires or becomes obsolete and after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrower; and (iii) obtain such extensions of time for filing and complete such forms or certifications as may reasonably be requested by the Borrower or the Administrative Agent; unless in any such case any change in treaty, law or regulation has occurred prior to the date on which any such delivery would otherwise be required that renders any such form inapplicable or would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender so advises the Borrower and the Administrative Agent. Each Person that shall become a Participant pursuant to Section 13.6 or a Lender pursuant to Section 13.6 shall, upon the effectiveness of the related transfer, be required to provide all the forms and statements required pursuant to this Section 5.4(b), provided that in the case of a Participant such Participant shall furnish all such required forms and statements to the Lender from which the related participation shall have been purchased. (c) The Borrower shall not be required to indemnify any Non-U.S. Lender, or to pay any additional amounts to any Non-U.S. Lender, in respect of U.S. Federal withholding tax pursuant to paragraph (a) above to the extent that (i) the obligation to withhold amounts with respect to U.S. Federal withholding tax existed on the date such Non-U.S. Lender became a party to this Agreement (or, in the case of a Non-U.S. Participant, on the date such Participant became a Participant hereunder); provided, however, that this clause (i) shall not -------- ------- apply to the extent that (x) the indemnity payments or additional amounts any Lender (or Participant) would be entitled to receive 52 (without regard to this clause (i)) do not exceed the indemnity payment or additional amounts that the person making the assignment, participation or transfer to such Lender (or Participant) would have been entitled to receive in the absence of such assignment, participation or transfer, or (y) such assignment, participation or transfer had been requested by the Borrower, (ii) the obligation to pay such additional amounts would not have arisen but for a failure by such Non-U.S. Lender or Non-U.S. Participant to comply with the provisions of paragraph (b) above or (iii) any of the representations or certifications made by a Non-U.S. Lender or Non-U.S. Participant pursuant to paragraph (b) above are incorrect at the time a payment hereunder is made, other than by reason of any change in treaty, law or regulation having effect after the date such representations or certifications were made. (d) If the Borrower determines in good faith that a reasonable basis exists for contesting any taxes for which indemnification has been demanded hereunder, the relevant Lender or the Administrative Agent, as applicable, shall cooperate with the Borrower in challenging such taxes at the Borrower's expense if so requested by the Borrower. If any Lender or the Administrative Agent, as applicable, receives a refund of a tax for which a payment has been made by the Borrower pursuant to this Agreement, which refund in the good faith judgment of such Lender or Administrative Agent, as the case may be, is attributable to such payment made by the Borrower, then the Lender or the Administrative Agent, as the case may be, shall reimburse the Borrower for such amount as the Lender or Administrative Agent, as the case may be, determines to be the proportion of the refund as will leave it, after such reimbursement, in no better or worse position than it would have been in if the payment had not been required. A Lender or Administrative Agent shall claim any refund that it determines is available to it, unless it concludes in its reasonable discretion that it would be adversely affected by making such a claim. Neither the Lender nor the Administrative Agent shall be obliged to disclose any information regarding its tax affairs or computations to the Borrower in connection with this paragraph (d) or any other provision of this Section 5.4. (e) Each Lender represents and agrees that, on the date hereof and at all times during the term of this Agreement, it is not and will not be a conduit entity participating in a conduit financing arrangement (as defined in Section 7701(1) of the Code and the regulations thereunder) with respect to the Borrowings hereunder unless the Borrower has consented to such arrangement prior thereto. 53 5.5 Computations of Interest and Fees. (a) Interest on Eurodollar ---------------------------------- Loans and, except as provided in the next succeeding sentence, ABR Loans shall be calculated on the basis of a 360-day year for the actual days elapsed. Interest on ABR Loans in respect of which the rate of interest is calculated on the basis of the Prime Rate and interest on overdue interest shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed. (b) Fees and Letter of Credit Outstandings shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed. SECTION 6. Conditions Precedent to Initial Borrowing. The initial ------------------------------------------ Borrowing under this Agreement is subject to the satisfaction of the following conditions precedent: 6.1 Agreement. The Administrative Agent shall have received this ---------- Agreement, executed and delivered by a duly authorized officer of the General Partner, on behalf of the Borrower, and of each Lender. 6.2 Closing Certificate. The Administrative Agent shall have -------------------- received a certificate of the General Partner, dated the Closing Date, substantially in the form of Exhibit E, with appropriate insertions, executed by the President or any Vice President and the Secretary or any Assistant Secretary of the General Partner, and attaching the documents referred to in Sections 6.3 and 6.4. 6.3 Authorization Proceedings. The Administrative Agent shall have -------------------------- received a copy of (a) the resolutions, in form and substance satisfactory to the Administrative Agent, of the Board of Directors of the General Partner (or a duly authorized committee thereof) authorizing the execution, delivery and performance by the Borrower of the Credit Documents and the extension of credit contemplated hereunder and (b) any other resolutions or authorizations necessary to authorize the execution, delivery and performance by the Borrower of the Credit Documents. 6.4 Documents. The Administrative Agent shall have received true and ---------- complete copies of (a) the agreement of limited partnership, as amended, of the Borrower and (b) the certificate of incorporation and by-laws of the General Partner. 54 6.5 Fees. The Administrative Agent shall have received the fees ----- referred to in Section 4.1(e) to be received on the Closing Date. 6.6 Existing Credit Agreement. All loans outstanding under, and all -------------------------- other amounts due in respect of, the Existing Credit Agreement shall have been repaid in full; the commitments under the Existing Credit Agreement shall have been permanently terminated; all obligations under the Existing Credit Agreement shall have been discharged; and the Administrative Agent shall have received reasonably satisfactory evidence of such repayment, termination and discharge. 6.7 Legal Opinions. The Administrative Agent shall have received, --------------- with a counterpart for each Lender, the executed legal opinions of (a) Simpson Thacher & Bartlett, special New York counsel to the Borrower, substantially in the form of Exhibit C-1, and (b) Lawrence L. Dieker, counsel to the Borrower, substantially in the form of Exhibit C-2, and the Borrower hereby instructs such counsel to deliver such legal opinions. SECTION 7. Conditions Precedent to All Credit Events. The agreement ------------------------------------------ of each Lender to make any Loan requested to be made by it on any date (including, without limitation, its initial Loan, but excluding Mandatory Borrowings) and the obligation of the Letter of Credit Issuer to issue Letters of Credit on any date is subject to the satisfaction of the following conditions precedent: 7.1 No Default; Representations and Warranties. At the time of each ------------------------------------------- Credit Event and also after giving effect thereto (a) there shall exist no Default or Event of Default and (b) all representations and warranties made by the Borrower contained herein or in the other Credit Documents shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of such Credit Event (except where such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall have been true and correct in all material respects as of such earlier date). 7.2 Notice of Borrowing; Letter of Credit Request. (a) Prior to the ---------------------------------------------- making of each Revolving Credit Loan (other than any Revolving Credit Loan made pursuant to Section 3.4(a)) and each Swingline Loan, the Administrative Agent shall have received a Notice of Borrowing (whether in 55 writing or by telephone) meeting the requirements of Section 2.3. (b) Prior to the issuance of each Letter of Credit, the Administrative Agent and the Letter of Credit Issuer shall have received a Letter of Credit Request meeting the requirements of Section 3.2(a). representation and warranty by the Borrower to each of the Lenders that all the applicable conditions specified above exist as of that time. SECTION 8. Representations, Warranties and Agree ments. In order to -------------------------------------------- induce the Lenders to enter into this Agreement, to make the Loans and issue or participate in Letters of Credit as provided for herein, the Borrower makes the following representations and warranties to, and agreements with, the Lenders, all of which shall survive the execution and delivery of this Agreement and the making of the Loans and the issuance of the Letters of Credit: 8.1 Organization. The Borrower and each Subsidiary (a) is a duly ------------- organized and validly existing limited partnership (in the case of the Borrower) or corporation or other entity (in the case of each Subsidiary) in each case in good standing under the laws of the jurisdiction of its organization and has the partnership, corporate or other organizational power and authority to own its property and assets and to transact the business in which it is engaged and (b) has duly qualified and is authorized to do business and is in good standing in all jurisdictions where it is required to be so qualified, except where the failure to be so qualified could not reasonably be expected to result in a Material Adverse Effect. 8.2 Power and Authority. The Borrower has the power and authority to -------------------- execute, deliver and carry out the terms and provisions of the Credit Documents and each of the Borrower and the General Partner has taken all necessary action to authorize the execution, delivery and performance by the Borrower of the Credit Documents. The Borrower has duly executed and delivered each Credit Document and each such Credit Document constitutes the legal, valid and binding obligation of the Borrower enforceable in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and subject to general principles of equity. 56 8.3 No Violation. Neither the execution, deliv ery and performance ------------- by the Borrower of the Credit Documents nor compliance with the terms and provisions thereof will (a) contravene any applicable provision of any material law, statute, rule, regulation, order, writ, injunction or decree of any court or governmental instrumentality, (b) result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of the Borrower or any of the Subsidiaries pursuant to, the terms of any material indenture (including the Note Indenture), loan agreement, lease agreement, mortgage, deed of trust, agreement or other material instrument to which the Borrower or any of its Subsidiaries is a party or by which it or any of its property or assets is bound or (c) violate any provision of the agreement of limited partnership of the Borrower or the certificate of incorporation or By-Laws of the General Partner or any of the Borrower's Subsidiaries. 8.4 Litigation. Except as set forth in the Borrower's audited ----------- financial statements for the fiscal year ended December 31, 1996, there are no actions, suits or proceedings (including, without limitation, Environmental Claims) pending or, to the knowledge of the Borrower, threatened with respect to the Borrower or any of its Subsidiaries that could reasonably be expected to result in a Material Adverse Effect. 8.5 Margin Regulations. Neither the making of any Loan hereunder nor ------------------- the use of the proceeds thereof will violate the provisions of Regulation G, T, U or X of the Board. 8.6 Governmental Approvals. No order, consent, approval, license, ----------------------- authorization, or validation of, or fil ing, recording or registration with, or exemption by, any Governmental Authority is required to authorize or is required in connection with (a) the execution, delivery and performance of any Credit Document or (b) the legality, validity, binding effect or enforceability of any Credit Document, except any of the foregoing the failure to obtain or make could not reasonably be expected to have a Material Adverse Effect. 8.7 Investment Company Act and Public Utility Holding Company Act. -------------------------------------------------------------- The Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. The Borrower is not a "holding company" 57 as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935, as amended. 8.8 True and Complete Disclosure. (a) All factual information and ----------------------------- data (taken as a whole) heretofore or contemporaneously furnished by the Borrower, any of its Subsidiaries or any of their respective authorized representatives in writing to the Administrative Agent and/or any Lender on or before the Closing Date (including, without limitation, (i) the Confidential Information Memorandum and (ii) all information contained in the Credit Documents) for purposes of or in connection with this Agreement or any transaction contemplated herein was true and complete in all material respects on the date as of which such information or data is dated or certified and was not incomplete by omitting to state any material fact necessary to make such information and data (taken as a whole) not misleading at such time in light of the circumstances under which such information or data was furnished, it being understood and agreed that for purposes of this Section 8.8(a), such factual information and data shall not include projections and pro forma financial information. (b) The projections and pro forma financial information contained in the information and data referred to in paragraph (a) above were based on good faith estimates and assumptions believed by such Persons to be reasonable at the time made, it being recognized by the Lenders that such projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such projections may differ from the projected results. 8.9 Financial Condition; Financial Statements. (a) The consolidated ------------------------------------------ balance sheet of the Borrower and its Subsidiaries at December 31, 1996, and the related consolidated statements of operations, cash flows and changes in partners' capital for the fiscal year ended as of such date, which statements have been audited by Price Waterhouse LLP, independent certified public accountants, who delivered an unqualified opinion with respect thereto, and (b) the unaudited consolidated balance sheet of the Borrower and its Subsidiaries at September 30, 1997, and the related consolidated statements of operations, cash flows and changes in partners' capital for the respective fiscal quarters and portions of the fiscal year ended as of such dates, in each case present fairly in all material respects the consolidated financial position of the Borrower and its Subsidiaries at the respective dates of said statements and the results of operations for the respective periods covered 58 thereby. All such financial statements have been prepared in accordance with GAAP consistently applied except to the extent provided in the notes to said financial statements and, in the case of said financial statements referred to in clause (b), subject to normal year-end audit adjustments. There has been no Material Adverse Change since December 31, 1996, other than solely as a result of changes in general economic conditions. 8.10 Tax Returns and Payments. Each of the Borrower and its ------------------------- Subsidiaries has filed all federal income tax returns and all other material tax returns, domestic and foreign, required to be filed by it and has paid all material taxes and assessments payable by it that have become due, other than those not yet delinquent or contested in good faith. The Borrower and each of its Subsidiaries have paid, or have provided adequate reserves (in the good faith judgment of the management of the Borrower) in accordance with GAAP for the payment of, all material federal, state and foreign income taxes applicable for all prior fiscal years and for the current fiscal year to the Closing Date. 8.11 Compliance with ERISA. Each Plan is in compliance with ERISA, ---------------------- the Code and any applicable Requirement of Law; no Reportable Event has occurred (or is reasonably likely to occur) with respect to any Plan; no Plan is insolvent or in reorganization (or is reasonably likely to be insolvent or in reorganization), and no written notice of any such insolvency or reorganization has been given to the Borrower, any Subsidiary or any ERISA Affiliate; no Plan (other than a multiemployer plan) has an accumulated or waived funding deficiency (or is reasonably likely to have such a deficiency); neither the Borrower nor any Subsidiary nor any ERISA Affiliate has incurred (or is reasonably likely expected to incur) any liability to or on account of a Plan pursuant to Section 409, 502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201 or 4204 of ERISA or Section 4971 or 4975 of the Code or has been notified in writing that it will incur any liability under any of the foregoing Sections with respect to any Plan; no proceedings have been instituted (or are reasonably likely to be instituted) to terminate or to reorganize any Plan or to appoint a trustee to administer any Plan, and no written notice of any such proceedings has been given to the Borrower, any Subsidiary or any ERISA Affiliate; and no lien imposed under the Code or ERISA on the assets of the Borrower or any Subsidiary or any ERISA Affiliate exists (or is reasonably likely to exist) nor has the Borrower, any Subsidiary or any ERISA Affiliate been notified in writing that such a lien will be imposed on the assets of the 59 Borrower, any Subsidiary or any ERISA Affiliate on account of any Plan, except ------ to the extent that a breach of any of the foregoing representations, warranties or agreements in this Section 8.11 would not result, individually or in the aggregate, in an amount of liability that would be reasonably likely to have a Material Adverse Effect or relates to any matter disclosed in the financial statements of the Borrower contained in the Confidential Information Memorandum. No Plan (other than a multiemployer plan) has an Unfunded Current Liability that would, individually or when taken together with any other liabilities referenced in this Section 8.11, be reasonably likely to have a Material Adverse Effect. With respect to Plans that are multiemployer plans (as defined in Section 3(37) of ERISA), the representations and warranties in this Section 8.11, other than any made with respect to (a) liability under Section 4201 or 4204 of ERISA or (b) liability for termination or reorganization of such Plans under ERISA, are made to the best knowledge of the Borrower. 8.12 Subsidiaries. BCF Finance Corporation is the only Subsidiary ------------- of the Borrower as of the Closing Date. 8.13 Patents, etc. The Borrower and each of its Subsidiaries have ------------- obtained all patents, trademarks, servicemarks, trade names, copyrights, licenses and other rights, free from burdensome restrictions, that are necessary for the operation of their respective businesses as currently conducted and as proposed to be conducted, except where the failure to obtain any such rights could not reasonably be expected to have a Material Adverse Effect. 8.14 Environmental Laws. (a) Other than instances of noncompliance ------------------- that could not reasonably be expected to have a Material Adverse Effect: (i) the Borrower and each of its Subsidiaries are in compliance with all Environmental Laws in all jurisdictions in which the Borrower and each of its Subsidiaries are currently doing business (including, without limitation, having obtained all material permits required under Environmental Laws) and (ii) the Borrower will comply and cause each of its Subsidiaries to comply with all such Environmental Laws (including, without limitation, all permits required under Environmental Laws). (b) Neither the Borrower nor any of its Subsidiaries has treated, stored, transported or disposed of Hazardous Materials at or from any currently or formerly owned Real Estate (as defined in Section 9.1(e)) or facility relating to its business in a manner that could reasonably be expected to have a Material Adverse Effect. 60 8.15 Properties. The Borrower and each of its Subsidiaries have good ----------- title to or leasehold interest in all properties that are necessary for the operation of their respective businesses as currently conducted and as proposed to be conducted, free and clear of all Liens (other than any Liens permitted by this Agreement) and except where the failure to have such good title could not reasonably be expected to have a Material Adverse Effect. SECTION 9. Affirmative Covenants. The Borrower hereby covenants and ---------------------- agrees that on the Closing Date and thereafter, for so long as this Agreement is in effect and until the Revolving Credit Commitments, the Swingline Commitment and each Letter of Credit have terminated and the Loans and Unpaid Drawings, together with interest, Fees and all other Obligations incurred hereunder, are paid in full: 9.1 Information Covenants. The Borrower will furnish to each Lender ---------------------- and the Administrative Agent: (a) Annual Financial Statements. As soon as available and in any ---------------------------- event within 95 days after the close of each fiscal year of the Borrower, the consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such fiscal year and the related consolidated statements of operations, cash flows and changes in partners' capital for such fiscal year, setting forth comparative consolidated figures for the preceding fiscal year, and certified by independent certified public accountants of recognized national standing whose opinion shall not be qualified as to the scope of audit or as to the status of the Borrower or any of its Subsidiaries as a going concern, together in any event with a certificate of such accounting firm stating that in the course of its regular audit of the business of the Borrower and its Subsidiaries, which audit was conducted in accordance with generally accepted auditing standards, such accounting firm has obtained no knowledge of any Default or Event of Default relating to Sections 10.8 and 10.9 that has occurred and is continuing or, if in the opinion of such accounting firm such a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof. (b) Quarterly Financial Statements. As soon as available and in any ------------------------------- event within 50 days after the close of each of the first three fiscal quarters of each fiscal year of the Borrower, the consolidated balance sheet of the Borrower and its Subsidiaries as 61 at the end of such quarterly period and the related consolidated statements of operations, cash flows and changes in partners' capital for such quarterly accounting period and for the elapsed portion of the fiscal year ended with the last day of such quarterly period, and the related consolidated statement of cash flows for the elapsed portion of the fiscal year ended with the last day of such quarterly period, and setting forth comparative consolidated figures for the related periods in the prior fiscal year or, in the case of such consolidated balance sheet, for the last day of the prior fiscal year, all of which shall be certified by an Authorized Officer, subject to changes resulting from audit and normal year-end audit adjustments. (c) Officer's Certificates. At the time of the delivery of the ----------------------- financial statements provided for in Sections 9.1(a) and (b), a certificate of an Authorized Officer to the effect that no Default or Event of Default exists or, if any Default or Event of Default does exist, specifying the nature and extent thereof, which certificate shall set forth the calculations required to establish whether the Borrower and its Subsidiaries were in compliance with the provisions of (i) Sections 10.8 and 10.9 as at the end of such fiscal year or period, as the case may be, and (ii) Section 10.6 with respect to all Restricted Payments made since the date of the most recent certificate delivered pursuant to this paragraph (or, in the case of the first such certificate, since the date of this Agreement). (d) Notice of Default or Litigation. Promptly after an Authorized -------------------------------- Officer obtains knowledge thereof, notice of (i) the occurrence of any event that constitutes a Default or Event of Default, which notice shall specify the nature thereof, the period of existence thereof and what action the Borrower proposes to take with respect thereto, and (ii) any litigation or governmental proceeding pending against the Borrower or any of its Subsidiaries that could reasonably be expected to result in a Material Adverse Effect. (e) Environmental Matters. The Borrower will promptly advise the ---------------------- Lenders in writing after obtaining knowledge of any one or more of the following environmental matters, unless such environmental 62 matters would not, individually or when aggregated with all other such matters, be reasonably expected to result in a Material Adverse Effect: (i) Any pending or threatened Environmental Claim against the Borrower or any of its Subsidiaries or any Real Estate (as defined below); (ii) Any condition or occurrence on any Real Estate that (x) results in noncompliance by the Borrower or any of its Subsidiaries with any applicable Environmental Law or (y) could reasonably be anticipated to form the basis of an Environmental Claim against the Borrower or any of its Subsidiaries or any Real Estate; (iii) Any condition or occurrence on any Real Estate that could reasonably be anticipated to cause such Real Estate to be subject to any re strictions on the ownership, occupancy, use or transferability of such Real Estate under any Environmental Law; and (iv) The taking of any removal or remedial action in response to the actual or alleged presence of any Hazardous Material on any Real Estate. All such notices shall describe in reasonable detail the nature of the claim, investigation, condition, occurrence or removal or remedial action and the Borrower's response thereto. The term "Real Estate" shall mean ----------- land, buildings and improvements owned or leased by the Borrower or any of its Subsidiaries, but excluding all operating fixtures and equipment, whether or not incorporated into improvements. (f) Other Information. Promptly upon filing thereof, copies of any ------------------ filings on Form 10-K, 10-Q or 8-K or registration statements with, and reports to, the SEC by the Borrower or any of its Subsidiaries (other than amendments to any registration statement (to the extent such registration statement, in the form it becomes effective, is delivered to the Lenders), exhibits to any registration statement and any registration statements on Form S-8) and copies of all financial statements, proxy statements, notices and reports that the Borrower or any of its Subsidiaries shall send to the holders of any publicly issued debt of the Borrower and/or any of its Subsidiaries 63 (including the 9.50% Notes) in their capacity as such holders (in each case to the extent not theretofore delivered to the Lenders pursuant to this Agreement) and, with reasonable promptness, such other information (financial or otherwise) as the Administrative Agent on its own behalf or on behalf of any Lender may reasonably request in writing from time to time. 9.2 Books, Records and Inspections. The Borrower will, and will ------------------------------- cause each of its Subsidiaries to, permit officers and designated representatives of the Administrative Agent or the Required Lenders to visit and inspect any of the properties or assets of the Borrower and any such Subsidiary in whomsoever's possession to the extent that it is within the Borrower's or such Subsidiary's control to permit such inspection, and to examine the books of account of the Borrower and any such Subsidiary and discuss the affairs, finances and accounts of the Borrower and of any such Subsidiary with, and be advised as to the same by, its and their officers and independent accountants, all at such reasonable times and intervals and to such reasonable extent as the Administrative Agent or the Required Lenders may desire. 9.3 Maintenance of Insurance. The Borrower will, and will cause each ------------------------- of its Material Subsidiaries to, at all times maintain in full force and effect, with insurance companies that the Borrower believes (in the good faith judgment of the management of the Borrower) are financially sound and responsible at the time the relevant coverage is placed or renewed, insurance in at least such amounts and against at least such risks (and with such risk retentions) as are usually insured against in the same general area by companies engaged in the same or a similar business; and will furnish to the Lenders, upon written request from the Administrative Agent, information presented in reasonable detail as to the insurance so carried. 9.4 Payment of Taxes. The Borrower will pay and discharge, and will ----------------- cause each of its Subsidiaries to pay and discharge, all material taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which material penalties attach thereto, and all lawful material claims that, if unpaid, could reasonably be expected to become a material Lien upon any properties of the Borrower or any of its Subsidiaries, provided that neither the -------- Borrower nor any of its Subsidiaries shall be required to pay any such tax, assessment, charge, levy or claim that is being contested in good faith and by proper proceedings if it has maintained 64 adequate reserves (in the good faith judgment of the management of the Borrower) with respect thereto in accordance with GAAP. 9.5 Existence. The Borrower will do, and will cause each Material ---------- Subsidiary to do, or cause to be done, all things necessary to preserve and keep in full force and effect its existence, rights and authority, except to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect; provided, however, that the Borrower and its -------- ------- Subsidiaries may consummate any transaction permitted under Section 10.3 or 10.4. 9.6 Compliance with Statutes, Obligations, etc. The Borrower will, ------------------------------------------- and will cause each Subsidiary to, comply with all applicable laws, rules, regulations and orders, except to the extent the failure to do so could not reasonably be expected to have a Material Adverse Effect. 9.7 ERISA. Promptly after the Borrower or any Subsidiary or any ------ ERISA Affiliate knows or has reason to know of the occurrence of any of the following events that, individually or in the aggregate (including in the aggregate such events previously disclosed or exempt from disclosure hereunder, to the extent the liability therefor remains outstanding), would be reasonably likely to have a Material Adverse Effect, the Borrower will deliver to each of the Lenders a certificate of an Authorized Officer or any other senior officer of the Borrower setting forth details as to such occurrence and the action, if any, that the Borrower, such Subsidiary or such ERISA Affiliate is required or proposes to take, together with any notices (required, proposed or otherwise) given to or filed with or by the Borrower, such Subsidiary, such ERISA Affiliate, the PBGC, a Plan participant (other than notices relating to an individual participant's benefits) or the Plan administrator with respect thereto: that a Reportable Event has occurred; that an accumulated funding deficiency has been incurred or an application is to be made to the Secretary of the Treasury for a waiver or modification of the minimum funding standard (including any required installment payments) or an extension of any amortization period under Section 412 of the Code with respect to a Plan; that a Plan having an Unfunded Current Liability has been or is to be terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA (including the giving of written notice thereof); that a Plan has an Unfunded Current Liability that has or will result in a lien under ERISA or the Code; that proceedings will be or have been instituted to terminate a Plan having an Unfunded Current Liability (including the 65 giving of written notice thereof); that a proceeding has been instituted against the Borrower, a Subsidiary or an ERISA Affiliate pursuant to Section 515 of ERISA to collect a delinquent contribution to a Plan; that the PBGC has notified the Borrower, any Subsidiary or any ERISA Affiliate of its intention to appoint a trustee to administer any Plan; that the Borrower, any Subsidiary or any ERISA Affiliate has failed to make a required installment or other payment pursuant to Section 412 of the Code with respect to a Plan; or that the Borrower, any Subsidiary or any ERISA Affiliate has incurred or will incur (or has been notified in writing that it will incur) any liability (including any contingent or secondary liability) to or on account of a Plan pursuant to Section 409, 502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201 or 4204 of ERISA or Section 4971 or 4975 of the Code. 9.8 Good Repair. The Borrower will, and will cause each of its ------------ Subsidiaries to, ensure that its properties and equipment used or useful in its business in whomsoever's possession they may be to the extent that it is within the Borrower's or such Subsidiary's control to cause same, are kept in good repair, working order and condition, normal wear and tear excepted, and that from time to time there are made in such properties and equipment all needful and proper repairs, renewals, replacements, extensions, additions, betterments and improvements thereto, to the extent and in the manner customary for companies in similar businesses and consistent with third party leases, except in each case to the extent the failure to do so could not be reasonably expected to have a Material Adverse Effect. 9.9 Transactions with Affiliates. The Borrower will conduct, and ----------------------------- cause each of its Subsidiaries to conduct, all transactions with any of its Affiliates on terms that are substantially as favorable to the Borrower or such Subsidiary as it would obtain in a comparable arm's-length transaction with a Person that is not an Affiliate, provided that the foregoing restrictions shall -------- not apply to (a) the payment of customary annual fees to KKR and its Affiliates for management, consulting and financial services rendered to the Borrower and its Subsidiaries, and investment banking fees paid to KKR and its Affiliates for services rendered to the Borrower and its Subsidiaries in connection with divestitures, acquisitions, financings and other transactions, (b) customary fees paid to members of the Board of Directors of the Borrower and its Subsidiaries, (c) transactions permitted by Section 10.6 and (d) arrangements with Borden and its Subsidiaries relating to the provision of administrative, legal and management services to the Borrower in accordance with past practice. 66 9.10 Use of Proceeds. The Borrower will use the Letters of Credit ---------------- and the proceeds of all Loans for the purposes set forth in the introductory statement to this Agreement. 9.11 Changes in Business. The Borrower and its Subsidiaries taken as -------------------- a whole will not fundamentally and substantively alter the character of their business taken as a whole from the business conducted by the Borrower and its Subsidiaries taken as a whole on the date hereof and other business activities incidental or related to any of the foregoing. SECTION 10. Negative Covenants. The Borrower hereby covenants and ------------------- agrees that on the Closing Date and thereafter, for so long as this Agreement is in effect and until the Revolving Credit Commitments, the Swingline Commitment and each Letter of Credit have terminated and the Loans and Unpaid Drawings, together with interest, Fees and all other Obligations incurred hereunder, are paid in full: 10.1 Limitation on Indebtedness; Preferred and Redeemable Interests. --------------------------------------------------------------- (a) The Borrower will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Indebtedness, except: (i) Indebtedness arising under the Credit Documents; (ii) Indebtedness of (i) the Borrower to any Subsidiary of the Borrower and (ii) Indebtedness of any Subsidiary to the Borrower or any other Subsidiary of the Borrower; (iii) Indebtedness in respect of any bankers' acceptance, letter of credit, warehouse receipt or similar facilities entered into in the ordinary course of business; (iv) except as provided in clauses (ix) and (x) below, Guarantee Obligations incurred by the Borrower or any Subsidiary Guarantor in respect of Indebtedness of the Subsidiaries that is permitted to be incurred under this Agreement; (v) Guarantee Obligations incurred in the ordinary course of business in respect of obligations of suppliers, customers, franchisees, lessors and licensees; 67 (vi) (A) Indebtedness (including Indebtedness arising under Capital Leases) incurred within 270 days of the acquisition, construction or improvement of fixed or capital assets to finance the acquisition, construction or improvement of such fixed or capital assets and (B) Indebtedness arising under Capital Leases, other than Capital Leases in effect on the date hereof and Capital Leases entered into pursuant to subclause (A) above, provided that the aggregate amount of Indebtedness -------- incurred pursuant to this subclause (B) that is attributable to Capital Leases resulting from sale and leaseback transactions shall be deemed to have been incurred pursuant to clause (xii) below for purposes of determining compliance with such clause (xii), and (C) any refinancing, refunding, renewal or extension of any Indebtedness specified in subclause (A) or (B) above, provided that the principal amount thereof is not -------- increased above the principal amount thereof outstanding immediately prior to such refinancing, refunding, renewal or extension; (vii) the 9.50% Notes and other Indebtedness outstanding on the date hereof and listed on Schedule 10.1 and any refinancing, refunding, renewal or extension thereof, provided that (A) the principal amount thereof is not -------- increased above the principal amount thereof outstanding immediately prior to such refinancing, refunding, renewal or extension, except to the extent otherwise permitted hereunder, and (B) the direct and contingent obligors with respect to such Indebtedness are not changed; (viii) Indebtedness in respect of Hedge Agreements; (ix) (A) Indebtedness of a Person or attaching to assets of a Person that, in either case, becomes a Subsidiary, or Indebtedness attaching to assets that are acquired by the Borrower or any Subsidiary, in each case after the Closing Date as the result of a Permitted Acquisition, provided -------- that (w) such Indebtedness existed at the time such Person became a Subsidiary or at the time such assets were acquired and, in each case, was not created in anticipation thereof, (x) such Indebtedness is not guaranteed in any respect by the Borrower or any Subsidiary (other than any Person acquired (the "acquired Person") as a result of such Permitted --------------- Acquisition or any Subsidiary created solely for the purpose of consummating such Permitted Acquisition), and (y) if the pro forma Senior Debt Ratio recomputed as at the last day of the most recently ended Test Period as if such Permitted 68 Acquisition had occurred on the first day of such Test Period is not less than 3.25 to 1.0, then the aggregate amount of such Indebtedness and all Indebtedness incurred under clause (x) below, when taken together, does not exceed $100,000,000 in the aggregate at any time outstanding, and (B) any refinancing, refunding, renewal or extension of any Indebtedness specified in subclause (A) above, provided that, except to the extent otherwise -------- permitted hereunder, (I) the principal amount of any such Indebtedness is not increased above the principal amount thereof outstanding immediately prior to such refinancing, refunding, renewal or extension and (II) the direct and contingent obligors with respect to such Indebtedness are not changed; (x) (A) Indebtedness of the Borrower or any Subsidiary incurred to finance a Permitted Acquisition, provided that (x) such Indebtedness is not -------- guaranteed in any respect by any Subsidiary (other than any acquired Person or any Subsidiary created solely for the purpose of consummating such Permitted Acquisition) or, in the case of Indebtedness of any Subsidiary, by the Borrower, and (y) if the pro forma Senior Debt Ratio recomputed as at the last day of the most recently ended Test Period as if such Permitted Acquisition had occurred on the first day of such Test Period is not less than 3.25 to 1.0, then the aggregate amount of such Indebtedness and all Indebtedness incurred under clause (ix) above, when taken together, does not exceed $100,000,000 in the aggregate at any time outstanding, and (B) any refinancing, refunding, renewal or extension of any Indebtedness specified in subclause (A) above, provided that (I) the principal amount of -------- any such Indebtedness is not increased above the principal amount thereof outstanding immediately prior to such refinancing, refunding, renewal or extension and (II) the direct and contingent obligors with respect to such Indebtedness are not changed, except to the extent otherwise permitted hereunder; (xi) Permitted Subordinated Indebtedness; and (xii) additional Indebtedness in an aggregate principal amount at any time outstanding not exceeding the greater of (A) the excess, if any, of $100,000,000 over the aggregate principal amount of Indebtedness then outstanding under clauses (ix) and (x) above or (B) $30,000,000. (b) The Borrower will not permit any of its Subsidiaries (other than any Subsidiary Guarantors) to 69 create, incur, assume or suffer to exist any Indebtedness (regardless of whether such Indebtedness would otherwise be permitted under paragraph (a) of this Section 10.1), except (i) Indebtedness of Subsidiaries (other than any Subsidiary Guarantors) permitted under clauses (ii), (iii), (v), (vii), (viii), (ix) and (x) of paragraph (a) of this Section 10.1, (ii) Indebtedness of Subsidiaries (other than any Subsidiary Guarantors) permitted under clause (vi) of paragraph (a) of this Section 10.1 in an aggregate principal amount not exceeding $15,000,000 at any time outstanding and (iii) Indebtedness of Subsidiaries (other than any Subsidiary Guarantors) otherwise permitted under paragraph (a) of this Section 10.1 in an aggregate principal amount not exceeding $5,000,000 at any time outstanding. (c) The Borrower will not, and will not permit any of its Subsidiaries to, create, issue or suffer to exist any Preferred Stock or any Redeemable Stock, except (i) Preferred Stock issued by the Borrower, (ii) Redeemable Stock issued by the Borrower or a Subsidiary that is treated as Indebtedness of the Borrower or such Subsidiary, as the case may be, for purposes of determining compliance with paragraphs (a) and (b) of this Section 10.1 and (iii) any such Preferred Stock or Redeemable Stock issued by a Subsidiary that is owned by the Borrower. 10.2 Limitation on Liens. The Borrower will not, and will not permit -------------------- any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any property or assets of any kind (real or personal, tangible or intangible) of the Borrower or any Subsidiary, whether now owned or hereafter acquired, except: (a) Liens arising under the Credit Documents; (b) Permitted Liens; (c) Liens securing Indebtedness permitted pursuant to Section 10.1(a)(vi), provided that such Liens attach at all times only to the -------- assets so financed; (d) Liens existing on the date hereof; (e) Liens existing on the assets of any Person that becomes a Subsidiary, or existing on assets acquired, pursuant to a Permitted Acquisition to the extent the Liens on such assets secure Indebtedness permitted by Section 10.1(a)(ix), provided that such Liens attach at all -------- times only to the same assets that such Liens attached to, and secure only the same 70 Indebtedness that such Liens secured, immediately prior to such Permitted Acquisition; (f) (i) Liens placed upon the capital stock of any Subsidiary acquired pursuant to a Permitted Acquisition to secure Indebtedness of the Borrower or any other Subsidiary incurred pursuant to Section 10.1(a)(x) in connection with such Permitted Acquisition, (ii) Liens placed upon the assets of such Subsidiary to secure a guarantee by such Subsidiary of any such Indebtedness of the Borrower or any other Subsidiary and (iii) Liens placed upon the capital stock or assets of any Subsidiary to secure Indebtedness of such Subsidiary incurred pursuant to Section 10.1(a)(x) in connection with any Permitted Acquisition; (g) the replacement, extension or renewal of any Lien permitted by clauses (a) through (f) above upon or in the same assets theretofore subject to such Lien or the replacement, extension or renewal (without increase in the amount or change in any direct or contingent obligor) of the Indebtedness secured thereby; and (h) additional Liens so long as the aggregate principal amount of the obligations so secured does not exceed $25,000,000 at any time outstanding. 10.3 Limitation on Fundamental Changes. Except as expressly ---------------------------------- permitted by Section 10.4 or 10.5, the Borrower will not, and will not permit any of its Subsidiaries to, enter into any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer or otherwise dispose of, all or substantially all its business units, assets or other properties, except that: (a) any Subsidiary of the Borrower or any other Person may be merged or consolidated with or into the Borrower, provided that (i) the Borrower -------- shall be the continuing or surviving entity or the Person formed by or surviving any such merger or consolidation (if other than the Borrower) shall be a limited partnership organized or existing under the laws of the United States, any state thereof, the District of Columbia or any territory thereof (the Borrower or such Person, as the case may be, being herein referred to as the "Successor Borrower"), (ii) the Successor Borrower (if ------------------ other than the Borrower) shall expressly assume all the obligations of the Borrower under this Agreement and the other Credit Documents pursuant to a supplement hereto or thereto in form reasonably satisfactory to 71 the Administrative Agent, (iii) no Default or Event of Default would result from the consummation of such merger or consolidation, (iv) the Successor Borrower shall be in compliance, on a pro forma basis after giving effect to such merger or consolidation, with the covenants set forth in Sections 10.8 and 10.9 as such covenants are recomputed as at the last day of the most recently ended Test Period under such Section as if such merger or consolidation had occurred on the first day of such Test Period, and (v) the Borrower shall have delivered to the Administrative Agent an officer's certificate and an opinion of counsel, each stating that such merger or consolidation comply with this Agreement, provided further that if the ---------------- foregoing are satisfied, the Successor Borrower (if other than the Borrower) will succeed to, and be substituted for, the Borrower under this Agreement; (b) any Subsidiary of the Borrower or any other Person may be merged or consolidated with or into any one or more Subsidiaries of the Borrower, provided that (i) no Default or Event of Default would result from the -------- consummation of such merger or consolidation, (ii) the Borrower shall be in compliance, on a pro forma basis after giving effect to such merger or consolidation, with the covenants set forth in Sections 10.8 and 10.9, as such covenants are recomputed as at the last day of the most recently ended Test Period under such Section as if such merger or consolidation had occurred on the first day of such Test Period, and (iii) the Borrower shall have delivered to the Administrative Agent an Officers' Certificate stating that such merger or consolidation comply with this Agreement; and (c) any Subsidiary may sell, lease, transfer or otherwise dispose of any or all of its assets (upon voluntary liquidation or otherwise) to the Borrower, or any other Subsidiary of the Borrower. 10.4 Limitation on Sale of Assets. The Borrower will not, and will ----------------------------- not permit any of its Subsidiaries to, (i) convey, sell, lease, assign, transfer or otherwise dispose of any of its property, business or assets (including, without limitation, receivables and leasehold interests), whether now owned or hereafter acquired (other than any such sale, transfer, assignment or other disposition resulting from any casualty or condemnation of any assets of the Borrower or its Subsidiaries) or (ii) sell 72 any shares owned by it of any Subsidiary's capital stock to any Person other than the Borrower, except that: (a) the Borrower and its Subsidiaries may sell, transfer or otherwise dispose of used or surplus equipment, vehicles, inventory and other assets in the ordinary course of business; (b) the Borrower and its Subsidiaries may sell, transfer or otherwise dispose of other assets for fair value, provided that (i) after giving -------- effect to such sale, transfer or disposition, the aggregate amount of all such sales, transfers and disposals by the Borrower and its Subsidiaries taken as a whole pursuant to this clause (b) during the term of this Agreement (excluding sales, transfers and dispositions that are to be disregarded pursuant to the proviso appearing at the end of this clause (b)) shall not in the aggregate exceed an amount equal to 10% of the consolidated total assets of the Borrower and its Subsidiaries as of the end of the most recent Test Period for which financial statements have been delivered pursuant to Section 9.1, (ii) with respect to any such sale, transfer or disposition (or series of related sales, transfers or dispositions) in an aggregate amount in excess of $10,000,000, the Borrower shall be in compliance, on a pro forma basis after giving effect to such sale, transfer or disposition, with the covenants set forth in Sections 10.8 and 10.9 as such covenants are recomputed as at the last day of the most recently ended Test Period under such Sections as if such sale, transfer or disposition had occurred on the first day of such Test Period, and (iii) after giving effect to any such sale, transfer or disposition, no Default or Event of Default shall have occurred and be continuing; provided -------- further that the Borrower and its Subsidiaries may sell, transfer or ------- otherwise dispose of assets in excess of the amount otherwise permitted by clause (i) above if prior to consummation of such sale, transfer or disposition the Borrower shall certify to the Administrative Agent that the net cash proceeds from such sale, transfer or disposition will be applied within 180 days after the date of such sale, transfer or disposition to acquire assets (or to make improvements to existing assets) to be used in the business of the Borrower and its Subsidiaries and, provided that such net cash proceeds are so applied, such sale, transfer or disposition shall be disregarded for purposes of determining compliance with clause (i) above; 73 (c) the Borrower and its Subsidiaries may make sales of assets to the Borrower or to any Subsidiary; (d) any Subsidiary may effect any transaction permitted by Section 10.3; and (e) in addition to selling or transferring accounts receivable pursuant to the other provisions hereof, the Borrower and its Subsidiaries may sell or discount without recourse accounts receivable arising in the ordinary course of business in connection with the compromise or collection thereof. 10.5 Limitation on Investments. The Borrower will not, and will not -------------------------- permit any of its Subsidiaries to, make any advance, loan, extensions of credit or capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of or any assets of, or make any other investment in, any Person, except: (a) extensions of trade credit and asset purchases in the ordinary course of business; (b) Permitted Investments; (c) loans and advances to officers, directors and employees of the Borrower or any of its Subsidiaries (i) to finance the purchase of limited partnership interests of the Borrower and (ii) for additional purposes not contemplated by subclause (i) above in an aggregate principal amount at any time outstanding with respect to this clause (ii) not exceeding $1,000,000; (d) investments existing on the date hereof and any extensions, renewals or reinvestments thereof, so long as the aggregate amount of all investments pursuant to this clause (d) is not increased at any time above the amount of such investments existing on the date hereof; (e) investments in Hedge Agreements permitted by Section 10.1(a)(viii); (f) investments received in connection with the bankruptcy or reorganization of suppliers or customers and in settlement of delinquent obligations of, and other disputes with, customers arising in the ordinary course of business; 74 (g) investments to the extent that payment for such investments is made solely with limited partnership interests in the Borrower; (h) investments constituting non-cash proceeds of sales, transfers and other dispositions of assets to the extent permitted by Section 10.4; (i) investments constituting Permitted Acquisitions; (j) investments in Subsidiary Guarantors; and (k) additional investments in an aggregate amount at the time of such investment not in excess of $25,000,000. 10.6 Limitation on Restricted Payments. (a) The Borrower will not ---------------------------------- directly or indirectly, (i) declare or pay any partnership distributions or dividends (other than partnership distributions or dividends payable solely in its Capital Stock or rights, warrants or options to purchase its Capital Stock) or return any capital to its partners or stockholders or make any other distribution, payment or delivery of property or cash to its partners or stockholders as such, or (ii) redeem, retire, purchase or otherwise acquire, directly or indirectly, for consideration, any partnership interests or shares of any class of its Capital Stock or the Capital Stock of any direct or indirect parent of the Borrower now or hereafter outstanding (or any warrants for or options or stock appreciation rights in respect of any of such partnership interests or shares), or (iii) permit any of its Subsidiaries to purchase or otherwise acquire for consideration (other than in connection with an investment permitted by Section 10.5) any partnership interests or shares of any class of the Capital Stock of the Borrower, now or hereafter outstanding (or any options or warrants or stock appreciation rights issued by such Person with respect to its Capital Stock), or (iv) repay, prepay, redeem, retire, defease, purchase or otherwise acquire, directly or indirectly, for consideration (other than scheduled repayments as and when due and not otherwise prohibited by applicable subordination provisions) any Permitted Subordinated Indebtedness (or permit any of its Subsidiaries to do any of the foregoing), or (v) set aside any funds for any of the foregoing purposes (all of 75 the foregoing "Restricted Payments") unless, at the time of such Restricted ------------------- Payment and after giving effect thereto: (A) no Default or Event of Default shall have occurred and be continuing; (B) so long as such restrictions remain in the Note Indenture, (i) the Consolidated EBITDA Coverage Ratio (as such term is defined in the Note Indenture) exceeds 3.0 to 1.0 and (ii) Consolidated Total Debt (as such term is defined in the Note Indenture) does not exceed 60% of Consolidated Net Tangible Assets (as such term is defined in the Note Indenture) on a pro forma basis as of the end of the most recently completed fiscal quarter ending at least 45 days prior to the date on which such Restricted Payment is made; and (C) from and after such time as the restrictions set forth in clause (B) above are no longer in the Note Indenture, the Consolidated EBITDA Coverage Ratio (as defined herein) exceeds 2.75 to 1.0. (b) The provisions of this Section shall not prohibit: (i) any purchase, redemption, repurchase, defeasance, other acquisition or retirement (a "purchase or redemption") of Capital Stock or Permitted Subordinated Indebtedness of the Borrower made by exchange for, or out of the proceeds of the substantially concurrent sale (other than to a Subsidiary) of, Capital Stock of the Borrower (other than Disqualified Capital Stock); (ii) any purchase or redemption of Permitted Subordinated Indebtedness of the Borrower made by exchange of, or out of the proceeds of the substantially concurrent sale (other than to a Subsidiary) of, Permitted Subordinated Indebtedness of the Borrower; and (iii) partnership distributions or dividends paid within 60 days after the date of declaration thereof if at such date of declaration such partnership distribution dividend would have complied with this provision; provided, however, that at the time of payment of such partnership -------- ------- distribution dividend, no further Default or Event of Default shall have occurred and be continuing (or would result therefrom); provided further, ---------------- however, that such partnership distribution dividend shall be included ------- (when paid, but not 76 declared) in the calculation of the amount of Restricted Payments. 10.7 Limitations on Certain Amendments. The Borrower will not waive, ---------------------------------- amend, modify, terminate or release the Note Indenture or any indenture or other agreement or instrument governing or evidencing any Permitted Subordinated Indebtedness, to the extent that any such waiver, amendment, supplement, modification, termination or release would be adverse to the Lenders in any material respect. 10.8 Consolidated Total Debt to Consolidated EBITDA Ratio. The ----------------------------------------------------- Borrower will not permit the Consolidated Total Debt to Consolidated EBITDA Ratio on the last day of any fiscal quarter of the Borrower to exceed 4.00 to 1.00. 10.9 Consolidated EBITDA Coverage Ratio. The Borrower will not ----------------------------------- permit the Consolidated EBITDA Coverage Ratio to be less than 2.50 to 1.00 for any Test Period. SECTION 11. Events of Default. Upon the occurrence of any of the ------------------ following specified events (each an "Event of Default"): ---------------- 11.1 Payments. The Borrower shall (a) default in the payment when --------- due of any principal of the Loans or (b) default, and such default shall continue for five or more days, in the payment when due of any interest on the Loans or any Fees or any Unpaid Drawings or of any other amounts owing hereunder or under any other Credit Document; or 11.2 Representations, etc. Any representation, warranty or statement --------------------- made or deemed made by the Borrower herein or in any certificate delivered or required to be delivered pursuant hereto shall prove to be untrue in any material respect on the date as of which made or deemed made; or 11.3 Covenants. The Borrower shall (a) default in the due ---------- performance or observance by it of any term, covenant or agreement contained in Section 9.1(d) or Section 10 or (b) default in the due performance or observance by it of any term, covenant or agreement (other than those referred to in Section 11.1 or 11.2 or clause (a) of this Section 11.3) contained in this Agreement and such default shall continue unremedied for a period of at least 30 days after receipt of written notice by the Borrower from the Administrative Agent or the Required Lenders; or 77 11.4 Default Under Other Agreements. (a) The Borrower or any of its ------------------------------- Subsidiaries shall (i) default in any payment with respect to any Indebtedness (other than the Obligations) in excess of $20,000,000 in the aggregate, for the Borrower and such Subsidiaries, beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created or (ii) default in the observance or performance of any agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or (except in the case of Indebtedness consisting of any Hedge Agreement) any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause, any such Indebtedness to become due prior to its stated maturity; or (b) without limiting the provisions of clause (a) above, any such Indebtedness (other than Indebtedness consisting of any Hedge Agreement) shall be declared to be due and payable, or required to be prepaid other than by a regularly scheduled required prepayment or as a mandatory prepayment, prior to the stated maturity thereof; or 11.5 Bankruptcy, etc. The Borrower or any Subsidiary shall commence ---------------- a voluntary case concerning itself under Title 11 of the United States Code entitled "Bankruptcy," as now or hereafter in effect, or any successor thereto (the "Bankruptcy Code"); or an involuntary case is commenced against the --------------- Borrower or any Subsidiary and the petition is not controverted within 10 days after commencement of the case; or an involuntary case is commenced against the Borrower or any Subsidiary and the petition is not dismissed within 60 days after commencement of the case; or a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of the Borrower or any Subsidiary; or the Borrower or any Subsidiary commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Borrower or any Subsidiary; or there is commenced against the Borrower or any Subsidiary any such proceeding that remains undismissed for a period of 60 days; or the Borrower or any Subsidiary is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Borrower or any Subsidiary suffers any appointment of any custodian or the like for it or any substantial part of its property to continue undischarged or unstayed for a period of 60 days; or the 78 Borrower or any Subsidiary makes a general assignment for the benefit of creditors; or any corporate action is taken by the Borrower or any Subsidiary for the purpose of effecting any of the foregoing; or 11.6 ERISA. (a) Any Plan shall fail to satisfy the minimum funding ------ standard required for any plan year or part thereof or a waiver of such standard or extension of any amortization period is sought or granted under Section 412 of the Code; any Plan is or shall have been terminated or is the subject of termination proceedings under ERISA (including the giving of written notice thereof); an event shall have occurred or a condition shall exist in either case entitling the PBGC to terminate any Plan or to appoint a trustee to administer any Plan (including the giving of written notice thereof); any Plan shall have an accumulated funding deficiency (whether or not waived); the Borrower or any Subsidiary or any ERISA Affiliate has incurred or is likely to incur a liability to or on account of a Plan under Section 409, 502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201 or 4204 of ERISA or Section 4971 or 4975 of the Code (including the giving of written notice thereof); (b) there could result from any event or events set forth in clause (a) of this Section 11.6 the imposition of a lien, the granting of a security interest, or a liability, or the reasonable likelihood of incurring a lien, security interest or liability; and (c) such lien, security interest or liability will or would be reasonably likely to have a Material Adverse Effect; or 11.7 Judgments. One or more judgments or decrees shall be entered ---------- against the Borrower or any of its Subsidiaries involving a liability of $20,000,000 or more in the aggregate for all such judgments and decrees for the Borrower and its Subsidiaries (to the extent not paid or fully covered by insurance provided by a carrier not disputing coverage) and any such judgments or decrees shall not have been satisfied, vacated, discharged or stayed or bonded pending appeal within 60 days from the entry thereof; or 11.8 Change of Control. A Change of Control shall occur; ------------------ then, and in any such event, and at any time thereafter, if any Event of Default shall then be continuing, the Administrative Agent shall, upon the written request of the Required Lenders, by written notice to the Borrower, take any or all of the following actions, without prejudice to the rights of the Administrative Agent or any Lender to enforce its claims against the Borrower, except as otherwise 79 specifically provided for in this Agreement (provided that, if an Event of -------- Default specified in Section 11.5 shall occur with respect to the Borrower, the result that would occur upon the giving of written notice by the Administrative Agent as specified in clauses (i), (ii) and (iv) below shall occur automatically without the giving of any such notice): (i) declare the Total Revolving Credit Commitment terminated, whereupon the Revolving Credit Commitment and Swingline Commitment, if any, of each Lender or Chase, as the case may be, shall forthwith terminate immediately and any Fees theretofore accrued shall forthwith become due and payable without any other notice of any kind; (ii) declare the principal of and any accrued interest in respect of all Loans and all Obligations owing hereunder to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; (iii) terminate any Letter of Credit that may be terminated in accordance with its terms; and/or (iv) direct the Borrower to pay (and the Borrower agrees that upon receipt of such notice, or upon the occurrence of an Event of Default specified in Section 11.5 with respect to the Borrower, it will pay) to the Administrative Agent at the Administrative Agent's Office such additional amounts of cash, to be held as security for the Borrower's reimbursement obligations for Drawings that may subsequently occur thereunder, equal to the aggregate Stated Amount of all Letters of Credit issued and then outstanding. SECTION 12. The Administrative Agent. ------------------------- 12.1 Appointment. Each Lender hereby irrevocably designates and ------------ appoints the Administrative Agent as the agent of such Lender under this Agreement, and each such Lender irrevocably authorizes the Administrative Agent, in such capacity, to take such action on its behalf under the provisions of this Agreement and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent by the terms of this Agreement, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or otherwise exist against the Administrative Agent. 80 12.2 Delegation of Duties. The Administrative Agent may execute any --------------------- of its duties under this Agreement by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys in-fact selected by it with reasonable care. 12.3 Exculpatory Provisions. Neither the Administrative Agent nor ----------------------- any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be (a) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Credit Document (except for its or such Person's own gross negligence or willful misconduct) or (b) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Borrower or any officer thereof contained in this Agreement or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Agreement or any other Credit Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Credit Document or for any failure of the Borrower to perform its obligations hereunder or thereunder. The Administrative Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Credit Document, or to inspect the properties, books or records of the Borrower. 12.4 Reliance by Administrative Agent. The Administrative Agent --------------------------------- shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent may deem and treat the Lender specified in the Register with respect to any amount owing hereunder as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Administrative Agent. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement unless it shall first receive such advice or concurrence of the Required Lenders 81 as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement in accordance with a request of the Required Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Loans. 12.5 Notice of Default. The Administrative Agent shall not be deemed ------------------ to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent has received notice from a Lender or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give notice thereof to the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders, provided that unless and until the -------- Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders (except to the extent that this Agreement requires that such action be taken only with the approval of the Required Lenders or each of the Lenders, as applicable). 12.6 Non-Reliance on Administrative Agent and Other Lenders. Each ------------------------------------------------------- Lender expressly acknowledges that neither the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Administrative Agent hereinafter taken, including any review of the affairs of the Borrower, shall be deemed to constitute any representation or warranty by the Administrative Agent to any Lender. Each Lender represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent or any other 82 Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrower and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Credit Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrower. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, assets, operations, properties, financial condition, prospects or creditworthiness of the Borrower that may come into the possession of the Administrative Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates. 12.7 Indemnification. The Lenders agree to indemnify the ---------------- Administrative Agent in its capacity as such (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably according to their respective portions of the Total Revolving Credit Commitment in effect on the date on which indemnification is sought (or, if indemnification is sought after the date upon which the Revolving Credit Commitments shall have terminated and the Loans shall have been paid in full, ratably in accordance with their respective portions of the Total Revolving Credit Commitment in effect immediately prior to such date), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever that may at any time (including, without limitation, at any time following the payment of the Loans) be imposed on, incurred by or asserted against the Administrative Agent in any way relating to or arising out of, the Revolving Credit Commitments, this Agreement, any of the other Credit Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Administrative Agent under or in connection with any of the foregoing, provided -------- that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Administrative Agent's gross negligence or willful misconduct. The agreements in this Section 12.7 shall survive the payment of the Loans and all other amounts payable hereunder. 83 12.8 Administrative Agent in Its Individual Capacity. The ------------------------------------------------ Administrative Agent and its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower as though the Administrative Agent were not the Administrative Agent hereunder. With respect to the Loans made by it, the Administrative Agent shall have the same rights and powers under this Agreement as any Lender and may exercise the same as though it were not the Administrative Agent, and the terms "Lender" and "Lenders" shall include the Administrative Agent in its individual capacity. 12.9 Successor Agent. The Administrative Agent may resign as ---------------- Administrative Agent upon 20 days' prior written notice to the Lenders and the Borrower. If the Administrative Agent shall resign as Administrative Agent under this Agreement, then the Required Lenders shall appoint from among the Lenders a successor agent for the Lenders, which successor agent shall be approved by the Borrower (which approval shall not be unreasonably withheld), whereupon such successor agent shall succeed to the rights, powers and duties of the Administrative Agent, and the term "Administrative Agent" shall mean such successor agent effective upon such appointment and approval, and the former Administrative Agent's rights, powers and duties as Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Agreement or any holders of the Loans. After any retiring Administrative Agent's resignation as Administrative Agent, the provisions of this Section 12 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. SECTION 13. Miscellaneous. -------------- 13.1 Amendments and Waivers. Neither this Agreement nor any other ----------------------- Credit Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this Section 13.1. The Required Lenders may, or, with the written consent of the Required Lenders, the Administrative Agent may, from time to time, (a) enter into with the Borrower written amendments, supplements or modifications hereto and to the other Credit Documents for the purpose of adding any provisions to this Agreement or the other Credit Documents or changing in any manner the rights of the Lenders or of the Borrower hereunder or thereunder or (b) waive, on such terms and conditions as the Required Lenders or the 84 Administrative Agent, as the case may be, may specify in such instrument, any of the requirements of this Agreement or the other Credit Documents or any Default or Event of Default and its consequences; provided, however, that no such waiver -------- ------- and no such amendment, supplement or modification shall directly (i) forgive any portion of any Loan or extend the final scheduled maturity date of any Loan or reduce the stated rate, or forgive any portion, or extend the date for the payment, of any interest or fee payable hereunder (other than as a result of waiving the applicability of any post-default increase in interest rates) or extend the final expiration date of any Lender's Revolving Credit Commitment or extend the final expiration date of any Letter of Credit beyond the L/C Maturity Date or increase the aggregate amount of the Revolving Credit Commitment of any Lender, in each case without the written consent of each Lender directly and adversely affected thereby, or (ii) amend, modify or waive any provision of this Section 13.1 or reduce the percentages specified in the definition of the term "Required Lenders", or consent to the assignment or transfer by the Borrower of its rights and obligations under any Credit Document (except as permitted pursuant to Section 10.3), in each case without the written consent of each Lender directly and adversely affected thereby, or (iii) amend, modify or waive any provision of Section 12 without the written consent of the then-current Administrative Agent, or (iv) amend, modify or waive any provision of Section 3 without the written consent of the Letter of Credit Issuer, or (v) amend, modify or waive any provisions hereof relating to Swingline Loans without the written consent of Chase. Any such waiver and any such amendment, supplement or modification shall apply equally to each of the affected Lenders and shall be binding upon the Borrower, such Lenders, the Administrative Agent and all future holders of the affected Loans. In the case of any waiver, the Borrower, the Lenders and the Administrative Agent shall be restored to their former positions and rights hereunder and under the other Credit Documents, and any Default or Event of Default waived shall be deemed to be cured and not continuing, it being understood that no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon. 13.2 Notices. All notices, requests and demands to or upon the -------- respective parties hereto to be effective shall be in writing (including by facsimile transmission), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered, or three days after being deposited in the mail, postage prepaid, or, in the case of telecopy notice, when received, addressed as follows in the case of the Borrower and the 85 Administrative Agent, and as set forth on Schedule 1.1 in the case of the other parties hereto, or to such other address as may be hereafter notified by the respective parties hereto: The Borrower: Borden Chemicals and Plastics Operating Limited Partnership Highways 73 and 30 Geismaer, LA 70734 Attention: Chris Nagel Fax: (504) 673-0672 The Administrative Agent: The Chase Manhattan Bank c/o Loan and Agency Services Group One Chase Manhattan Plaza, Eighth Floor New York, NY 10081 Attention: Sandra Miklave Fax: (212) 552-5658 with a copy to: The Chase Manhattan Bank 707 Travis Street Houston, TX 77002 Attention: David Mills Fax: (713) 216-6387 provided that any notice, request or demand to or upon the Administrative Agent - -------- or the Lenders pursuant to Sections 2.3, 2.6, 2.9, 4.2 and 5.1 shall not be effective until received. 13.3 No Waiver; Cumulative Remedies. No failure to exercise and no ------------------------------- delay in exercising, on the part of the Administrative Agent or any Lender, any right, remedy, power or privilege hereunder or under the other Credit Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 13.4 Survival of Representations and Warranties. All representations ------------------------------------------- and warranties made hereunder and in any document, certificate or statement delivered pursuant hereto 86 or in connection herewith shall survive the execution and delivery of this Agreement and the making of the Loans hereunder. 13.5 Payment of Expenses and Taxes. The Borrower agrees (a) to pay ------------------------------ or reimburse the Administrative Agent for all its reasonable out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement and the other Credit Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees, disbursements and other charges of counsel to the Administrative Agent, (b) to pay or reimburse each Lender and the Administrative Agent for all its reasonable and documented costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the other Credit Documents and any such other documents, including, without limitation, the reasonable fees, disbursements and other charges of counsel to each Lender and of counsel to the Administrative Agent, (c) to pay, indemnify, and hold harmless each Lender and the Administrative Agent from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other similar taxes, if any, that may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the other Credit Documents and any such other documents, and (d) to pay, indemnify, and hold harmless each Lender and the Administrative Agent and their respective directors, officers, employees, trustees and agents from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever, including, without limitation, reasonable and documented fees, disbursements and other charges of counsel, with respect to the execution, delivery, enforcement, performance and administration of this Agreement, the other Credit Documents and any such other documents, including, without limitation, any of the foregoing relating to the violation of, noncompliance with or liability under, any Environmental Law applicable to the operations of the Borrower, any of its Subsidiaries or any of the Properties (all the foregoing in this clause (d), collectively, the "indemnified liabilities"), provided that the Borrower shall ----------------------- -------- have no obligation hereunder to the Administrative Agent or any 87 Lender nor any of their respective directors, officers, employees and agents with respect to indemnified liabilities arising from (i) the gross negligence or willful misconduct of the party to be indemnified or (ii) disputes among the Administrative Agent, the Lenders and/or their transferees. The agreements in this Section 13.5 shall survive repayment of the Loans and all other amounts payable hereunder. 13.6 Successors and Assigns; Participations and Assignments. (a) (i) ------------------------------------------------------- This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lenders, the Administrative Agent and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of each Lender. (ii) Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time sell to one or more banks or other entities ("Participants") participating interests in any Loan owing to such ------------ Lender, any Revolving Credit Commitment of such Lender or any other interest of such Lender hereunder and under the other Credit Documents (including to loan derivative counterparties in respect of swaps or similar arrangements having the practical or economic effect thereof). In the event of any such sale by a Lender of a participating interest to a Participant, such Lender's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Loan for all purposes under this Agreement and the other Credit Documents, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and the other Credit Documents. In no event shall any Participant under any such participation have any right to approve any amendment or waiver of any provision of any Credit Document, or any consent to any departure by the Borrower therefrom, except to the extent that such amendment, waiver or consent would directly forgive any principal of any Loan or reduce the stated rate, or forgive any portion, or postpone the date for the payment, of any interest or fee payable hereunder (other than as a result of waiving the applicability of any post-default increase in interest rates), or increase the aggregate amount of the Revolving Credit Commitment of any Lender or postpone the date of the final scheduled maturity of any Loan, in each case to the extent subject to such participation. The Borrower agrees that if amounts outstanding under this Agreement are due or unpaid, or shall 88 have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall, to the maximum extent permitted by applicable law, be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement, provided that, in purchasing such participating -------- interest, such Participant shall be deemed to have agreed to share with the Lenders the proceeds thereof as provided in Section 13.8 as fully as if it were a Lender hereunder. The Borrower also agrees that each Participant shall be entitled to the benefits of Sections 2.10 and 2.11 with respect to its participation in the Revolving Credit Commitments and the Loans outstanding from time to time as if it were a Lender, provided that no Participant shall be -------- entitled to receive any greater amount pursuant to any such Section than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such transfer occurred. (iii) Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time and from time to time assign to any Lender or any Affiliate (with the consent of the Borrower if any increased costs would result therefrom) thereof or, with the consent of the Borrower and the Administrative Agent (which in each case shall not be unreasonably withheld, it being understood that, without limitation, the Borrower shall have the right to withhold its consent to any assignment if, in order for such assignment to comply with applicable law, the Borrower would be required to obtain the consent of, or make any filing or registration with, any Governmental Authority), to an additional bank or fund that is regularly engaged in making, purchasing or investing in loans or securities or financial institution (an "Assignee") all or any part of its rights and obligations under -------- this Agreement and the other Credit Documents pursuant to an Assignment and Acceptance, substantially in the form of Exhibit D, executed by such Assignee, such assigning Lender (and, in the case of an Assignee that is not then a Lender or an Affiliate thereof, by the Borrower and the Administrative Agent) and delivered to the Administrative Agent for its acceptance and recording in the Register, provided that, except in the case of an assignment of all of a -------- Lender's interests under this Agreement, unless otherwise agreed to by the Borrower and the Administrative Agent, no such assignment to an Assignee (other than any Lender or any Affiliate thereof) shall be in an aggregate principal amount of less than $5,000,000. Upon such execution, delivery, acceptance and recording, from and 89 after the effective date determined pursuant to such Assignment and Acceptance, (x) the Assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder with a Revolving Credit Commitment as set forth therein and (y) the assigning Lender thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such assigning Lender shall cease to be a party hereto). Notwithstanding any provision of this Agreement to the contrary, the consent of the Borrower shall not be required for any assignment that occurs at any time when any of the events described in Section 11.5 shall have occurred and be continuing with respect to the Borrower. (b) Nothing herein shall prohibit any Lender from pledging or assigning all or any portion of its Loans to any Federal Reserve Bank in accordance with applicable law. In order to facilitate such pledge or assignment, the Borrower hereby agrees that, upon request of any Lender at any time and from time to time after the Borrower has made its initial borrowing hereunder, the Borrower shall provide to such Lender, at the Borrower's own expense, a promissory note, substantially in the form of Exhibit A, evidencing the Revolving Credit Loans owing to such Lender. (c) The Administrative Agent, on behalf of the Borrower, shall maintain at the address of the Administrative Agent referred to in Section 13.2 a copy of each Assignment and Acceptance delivered to it and a register (the "Register") for the recordation of the names and addresses of the Lenders and - --------- the Revolving Credit Commitment of, and principal amount of the Loans owing to, each Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Administrative Agent and the Lenders shall treat each Person whose name is recorded in the Register as the owner of a Loan or other obligation hereunder as the owner thereof for all purposes of this Agreement and the other Credit Documents, notwithstanding any notice to the contrary. Any assignment of any Loan or other obligation hereunder shall be effective only upon appropriate entries with respect thereto being made in the Register. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. 90 (d) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an Assignee (and, in the case of an Assignee that is not then a Lender or an Affiliate thereof, by the Borrower and the Administrative Agent) together with payment to the Administrative Agent of a registration and processing fee of $3,500, the Administrative Agent shall (i) promptly accept such Assignment and Acceptance and (ii) on the effective date determined pursuant thereto record the information contained therein in the Register and give notice of such acceptance and recordation to the Lenders and the Borrower. (e) Subject to Section 13.16, the Borrower authorizes each Lender to disclose to any Participant or Assignee (each, a "Transferee") and any ---------- prospective Transferee any and all financial information in such Lender's possession concerning the Borrower and its Affiliates that has been delivered to such Lender by or on behalf of the Borrower pursuant to this Agreement or which has been delivered to such Lender by or on behalf of the Borrower in connection with such Lender's credit evaluation of the Borrower and its Affiliates prior to becoming a party to this Agreement, provided that neither the Administrative -------- Agent nor any Lender shall provide to any Transferee or prospective Transferee any of the Confidential Information unless such Person shall have previously executed a Confidentiality Agreement in the form of Exhibit F. 13.7 Replacements of Lenders under Certain Circumstances. The ---------------------------------------------------- Borrower shall be permitted to replace any Lender that (a) requests reimbursement for amounts owing pursuant to Section 2.10, 2.12, 3.5 or 5.4, (b) is affected in the manner described in Section 2.10(a)(iii) and as a result thereof any of the actions described in such Section is required to be taken or (c) becomes a Defaulting Lender, with a replacement bank or other financial institution, provided that (i) such replacement does not conflict with any -------- Requirement of Law, (ii) no Event of Default shall have occurred and be continuing at the time of such replacement, (iii) the Borrower shall repay (or the replacement bank or institution shall purchase, at par) all Loans and other amounts (other than any disputed amounts), pursuant to Section 2.10, 2.11, 2.12, 3.5 or 5.4, as the case may be, owing to such replaced Lender prior to the date of replacement, (iv) the replacement bank or institution, if not already a Lender, and the terms and conditions of such replacement, shall be reasonably satisfactory to the Administrative Agent, (v) the replaced Lender shall be obligated to make such replacement in accordance with the provisions of Section 13.6 (provided that the Borrower shall be obligated to pay the registration and processing fee 91 referred to therein) and (vi) any such replacement shall not be deemed to be a waiver of any rights that the Borrower, the Administrative Agent or any other Lender shall have against the replaced Lender. 13.8 Adjustments; Set-off. (a) If any Lender (a "benefitted --------------------- ---------- Lender") shall at any time receive any payment of all or part of its Loans, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in Section 11.5, or otherwise), in a greater proportion than any such payment to or collateral received by any other Lender, if any, in respect of such other Lender's Loans, or interest thereon, such benefitted Lender shall purchase for cash from the other Lenders a participating interest in such portion of each such other Lender's Loan, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such benefitted Lender to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders; provided, however, that if all or any portion of such excess payment or benefits - -------- ------- is thereafter recovered from such benefitted Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. (b) After the occurrence and during the continuance of an Event of Default, in addition to any rights and remedies of the Lenders provided by law, each Lender shall have the right, without prior notice to the Borrower, any such notice being expressly waived by the Borrower to the extent permitted by applicable law, upon any amount becoming due and payable by the Borrower hereunder (whether at the stated maturity, by acceleration or otherwise) to set- off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender or any branch or agency thereof to or for the credit or the account of the Borrower. Each Lender agrees promptly to notify the Borrower and the Administrative Agent after any such set-off and application made by such Lender, provided that the failure to give such notice shall not -------- affect the validity of such set-off and application. 13.9 Counterparts. This Agreement may be executed by one or more of ------------- the parties to this Agreement on any number of separate counterparts (including by facsimile 92 transmission), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Agreement signed by all the parties shall be lodged with the Borrower and the Administrative Agent. 13.10 Severability. Any provision of this Agreement that is ------------- prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 13.11 Integration. This Agreement and the other Credit Documents ------------ represent the agreement of the Borrower, the Administrative Agent and the Lenders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Administrative Agent or any Lender relative to subject matter hereof not expressly set forth or referred to herein or in the other Credit Documents. 13.12 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS -------------- OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 13.13 Submission to Jurisdiction; Waivers. The Borrower hereby ------------------------------------ irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Credit Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the courts of the State of New York, the courts of the United States of America for the Southern District of New York and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; 93 (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Borrower at its address set forth in Section 13.2 or at such other address of which the Administrative Agent shall have been notified pursuant thereto; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section 13.13 any special, exemplary, punitive or consequential damages. 13.14 Acknowledgments. The Borrower hereby acknowledges that: ---------------- (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Credit Documents; (b) neither the Administrative Agent nor any Lender has any fiduciary relationship with or duty to the Borrower arising out of or in connection with this Agreement or any of the other Credit Documents, and the relationship between Administrative Agent and Lenders, on one hand, and the Borrower, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and (c) no joint venture is created hereby or by the other Credit Documents or otherwise exists by virtue of the transactions contemplated hereby among the Lenders or among the Borrower and the Lenders. 13.15 WAIVERS OF JURY TRIAL. THE BORROWER, THE ADMINISTRATIVE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. 13.16 Confidentiality. The Administrative Agent and each Lender ---------------- shall hold all non-public information furnished by or on behalf of the Borrower in connection with such Lender's evaluation of whether to become a Lender 94 hereunder or obtained by such Lender or the Administrative Agent pursuant to the requirements of this Agreement ("Confidential Information"), in accordance with ------------------------ its customary procedure for handling confidential information of this nature and (in the case of a Lender that is a bank) in accordance with safe and sound banking practices and in any event may make disclosure as required or requested by any governmental agency or representative thereof or pursuant to legal process or to such Lender's or the Administrative Agent's attorneys, professional advisors or independent auditors or Affiliates, provided that -------- unless specifically prohibited by applicable law or court order, each Lender and the Administrative Agent shall notify the Borrower of any request by any governmental agency or representative thereof (other than any such request in connection with an examination of the financial condition of such Lender by such governmental agency) for disclosure of any such non-public information prior to disclosure of such information, and provided further that in no event shall any ---------------- Lender or the Administrative Agent be obligated or required to return any materials furnished by the Borrower or any Subsidiary of the Borrower. Each Lender and the Administrative Agent agrees that it will not provide to prospective Transferees or to prospective direct or indirect contractual counterparties in swap agreements to be entered into in connection with Loans made hereunder any of the Confidential Information unless such Person shall have previously executed a Confidentiality Agreement in the form of Exhibit F. IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Agreement to be duly executed and delivered as of the date first above written. BORDEN CHEMICALS AND PLASTICS OPERATING LIMITED PARTNERSHIP, by BCP MANAGEMENT, INC., as General Partner, by ---------------------- Name: Title: 95 THE CHASE MANHATTAN BANK, as Administrative Agent and as a Lender, by ---------------------- Name: Title: HIBERNIA NATIONAL BANK, by ----------------------- Name: Title: PNC BANK, OHIO, NATIONAL ASSOCIATION, by ---------------- Name: Title: THE HUNTINGTON NATIONAL BANK, by ------------------- Name: Title: NATIONSBANK, N.A., by --------------------- Name: Title: BANK ONE, NA, by --------------------- Name: Title: 96 WACHOVIA BANK, N.A, by ------------------ Name: Title: STAR BANK, N.A., by ----------------------- Name: Title: EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 7,528 0 94,459 0 43,001 149,368 723,052 432,852 500,186 85,034 200,000 0 0 0 183,078 500,186 737,129 737,129 681,984 681,984 28,650 0 20,898 5,597 0 5,597 0 0 0 5,597 0.15 0.15
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