-----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, PyNHqf3ovaVREX7EO3zPBrgRhGabS8OPWuT4q3GuLNvkZ1v2pJ4Tpwe/Tn7q+k7F ZzxeUrRkpZaz6OaPVrxy9Q== 0000950130-98-005263.txt : 19981106 0000950130-98-005263.hdr.sgml : 19981106 ACCESSION NUMBER: 0000950130-98-005263 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981105 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-Q SEC ACT: SEC FILE NUMBER: 001-09699 FILM NUMBER: 98738334 BUSINESS ADDRESS: STREET 1: HIGHWAY 73 CITY: GEISMAR STATE: LA ZIP: 70734 BUSINESS PHONE: 6142254482 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-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 COMMISSION FILE NO. 1-9699 BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP DELAWARE 31-1269627 (STATE OF ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) HIGHWAY 73, GEISMAR, LOUISIANA 70734 614-225-4482 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (REGISTRANT'S TELEPHONE NUMBER) ---------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ----. ---------- Number of Common Units outstanding as of the close of business on November 6, 1998: 36,750,000. =============================================================================== 1 BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER UNIT DATA)
THREE MONTHS ENDED ------------------------------- SEPTEMBER 30, SEPTEMBER 30, 1998 1997 ------- -------- REVENUES Net trade sales.............................................. $100,247 $147,140 Net sales to related parties................................. 18,775 33,750 -------- -------- Total revenues......................................... 119,022 180,890 -------- -------- EXPENSES Cost of goods sold Trade.................................................. 98,038 138,508 Related parties........................................ 18,655 29,948 Marketing, general & administrative expense.................. 6,466 6,067 Interest expense............................................. 5,981 5,217 General Partner incentive.................................... 0 0 Other (income) expense, including minority interest............................................... (1,213) 2,212 -------- -------- Total expenses.................................... 127,927 181,952 -------- -------- Net (loss)................................................... (8,905) (1,062) Less 1% General Partner interest........................ 89 10 -------- -------- Net (loss) applicable to Limited Partners' interest............................................... $ (8,816) ($1,052) ======== ======== PER UNIT DATA-BASIC, NET OF 1% GENERAL PARTNER INTEREST Net (loss) per Unit.......................................... $(0.24) $(0.03) ======== ======== Average number of Units outstanding during the period........ 36,750 36,750 ======== ======== Cash distribution declared per Unit.......................... $0.00 $0.18 ======== ========
2 BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER UNIT DATA)
NINE MONTHS ENDED ------------------------------ SEPTEMBER 30, SEPTEMBER 30, 1998 1997 -------- -------- REVENUES Net trade sales........................................ $354,500 $462,615 Net sales to related parties........................... 64,346 102,733 -------- -------- Total revenues...................................... 418,846 565,348 -------- -------- EXPENSES Cost of goods sold Trade............................................ 346,447 422,376 Related parties.................................. 63,487 89,747 Marketing, general & administrative expense............ 18,835 17,846 Interest expense....................................... 16,373 15,710 General Partner incentive.............................. 0 794 Other (income) expense, including minority interest......................................... (1,247) 3,098 -------- -------- Total expenses.............................. 443,895 549,571 -------- -------- Net (loss) income...................................... (25,049) 15,777 Less 1% General Partner interest.................. 250 (158) -------- -------- Net (loss) income applicable to Limited Partners' interest......................................... $(24,799) $ 15,619 ======== ======== PER UNIT DATA-BASIC, NET OF 1% GENERAL PARTNER INTEREST Net (loss) income per Unit............................. $(0.67) $0.42 ======== ======== Average number of Units outstanding during the period.. 36,750 36,750 ======== ======== Cash distribution declared per Unit.................... $0.00 $0.73 ======== ========
3 BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
NINE MONTHS ENDED ----------------------------------- SEPTEMBER 30, SEPTEMBER 30, 1998 1997 ------------------ -------------- CASH FLOWS FROM OPERATIONS Net (loss) income................................ $ (25,049) $ 15,777 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation................................... 24,297 37,462 Decrease (increase) in receivables............. 20,206 (13,751) Decrease in inventories........................ 12,926 2,223 (Decrease) in payables......................... (20,858) (9,259 (Increase) in accrued interest................. 4,604 4,748 Other, net.................................... (7,132) (82) --------- -------- 8,994 37,118 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures........................... (26,217) (8,918) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings....................... 53,700 0 Cash distributions paid........................ (3,712) (24,137) --------- -------- 49,988 (24,137) -------- Increase in cash and equivalents................. 32,765 4,063 Cash and equivalents at beginning of period...... 7,528 10,867 --------- -------- Cash and equivalents at end of period............ $ 40,293 $ 14,930 ========= ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid during the period.................. $ 12,146 $ 10,962 ========= ========
4 BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS)
ASSETS SEPTEMBER 30, 1998 DECEMBER 31, 1997 ------ ------------------- ------------------ Cash and equivalents..................................... $ 40,293 $ 7,528 Accounts receivable (less allowance for doubtful accounts of $1,225 and $475, respectively) Trade.................................................. 60,004 72,718 Related parties........................................ 14,249 21,741 Inventories Finished and in process goods.......................... 23,095 33,686 Raw materials and supplies............................. 6,980 9,315 Other current assets..................................... 5,487 4,380 --------- --------- Total current assets................................... 150,108 149,368 --------- --------- Investments in and advances to affiliated companies...... 7,767 7,834 Other assets............................................. 54,193 52,784 --------- --------- 61,960 60,618 --------- --------- Plant, property and equipment Land................................................... 15,952 15,952 Buildings.............................................. 45,050 45,050 Machinery and equipment................................ 688,266 662,050 --------- --------- 749,268 723,052 Less accumulated depreciation............................ (457,148) (432,852) --------- --------- Net plant, property and equipment...................... 292,120 290,200 --------- --------- Total assets......................................... $ 504,188 $ 500,186 ========= ========= LIABILITIES AND PARTNERS' CAPITAL - --------------------------------- Accounts and drafts payable.............................. $ 36,144 $ 57,002 Cash distributions payable............................... 0 3,712 Accrued interest......................................... 7,813 3,209 Other accrued liabilities................................ 20,543 21,111 --------- --------- Total current liabilities.............................. 64,500 85,034 Long-term debt........................................... 278,700 225,000 Other liabilities........................................ 1,901 5,760 Minority interest in consolidated subsidiary............. 1,058 1,314 --------- --------- Total liabilities...................................... 346,159 317,108 --------- --------- Partners' capital Limited Partners....................................... 157,919 182,718 General Partner........................................ 110 360 --------- --------- Total partners' capital............................. 158,029 183,078 --------- --------- Total liabilities and partners' capital.............. $ 504,188 $ 500,186 ========= =========
5 BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (UNAUDITED) (IN THOUSANDS)
LIMITED GENERAL PARTNERS PARTNER TOTAL -------- -------- ----- Balance at December 31, 1996........................... $207,680 $ 620 $208,300 Net income.......................................... 15,619 158 15,777 Cash distributions declared......................... (26,828) ( 279) (27,107) -------- ------ -------- Balance at September 30, 1997.......................... $196,471 $ 499 $196,970 ======== ====== ======== Balance at December 31, 1997........................... $182,718 $ 360 $183,078 Net loss............................................ (24,799) (250) (25,049) Cash distributions declared......................... 0 0 0 -------- ------ -------- Balance at September 30, 1998.......................... $157,919 $ 110 $158,029 ======== ====== ========
6 BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS EXCEPT UNIT AND PER UNIT DATA) 1. INTERIM FINANCIAL STATEMENTS The accompanying unaudited interim consolidated condensed financial statements of Borden Chemicals and Plastics Limited Partnership (the "Partnership") contain all adjustments, consisting only of normal recurring adjustments, which in the opinion of BCP Management, Inc. (the "General Partner") are necessary for a fair statement of the results for the interim periods. Results for the interim periods are not necessarily indicative of the results for the full year. Basic income per unit is computed by dividing net income, after subtracting the General Partner's 1% interest, by the weighted average number of units outstanding. Currently, there are no potentially dilutive securities; accordingly, basic income per unit and diluted income per unit are equivalent. Effective for the quarter ended March 31, 1998, the Partnership adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". There were no items of other comprehensive income for the nine months ended September 30, 1998 and 1997, respectively. In April 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". This statement requires the capitalization of certain costs incurred to develop internal use software. The Partnership is required to adopt the provisions of SOP 98-1 beginning January 1, 1999 but has elected to adopt the provisions of the statement for internal use software developed or acquired during 1998. In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". This statement 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 adoption of this statement will not affect the Partnership's financial position, results of operations or cash flows; changes in the form and content of its financial statement disclosures may be required. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement requires all derivative instruments to be recognized in the balance sheet as either assets or liabilities and measured at fair value. The Partnership must adopt the provisions of SFAS No. 133 for the year ending December 31, 2000. The adoption of the statement is not expected to have a material effect on the Partnership's financial position. 2. ENVIRONMENTAL AND LEGAL PROCEEDINGS On April 8, 1998, the Partnership and the United States Department of Justice ("DOJ") signed a Consent Decree (the "Consent Decree") to resolve the enforcement action brought by the DOJ against Borden Chemicals and Plastics Operating Limited Partnership (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 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 facility, as well as corrective action at that facility. The Consent Decree 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 Consent Decree also provides for a specific and detailed program of groundwater investigation 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 Environmental 7 Protection Agency ("EPA") and the Louisiana Department of Environmental Quality (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 Consent Decree 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, Inc. ("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 Partnership 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 an Environmental Indemnity Agreement among Borden, the Partnership and the Operating Partnership (the " EIA"). The Consent Decree establishes 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, are expected to be paid by Borden. The terms of the Consent Decree also settle all federal and state civil issues regarding the export of partially depleted mercuric chloride catalyst. On June 11, 1998, the terms of the Consent Decree were accepted into record and the proceedings were closed. Payment of the civil penalty was made on July 9, 1998. In light of the $4.0 million provision previously established for potential environmental liabilities and Borden's obligation under the EIA to pay for the remediation program, the terms of the Consent Decree are not expected to have a material effect on the Partnership's financial position or results of operations. All other obligations required under the Consent Decree to date have been fulfilled. The Partnership is subject to extensive federal, state and local environmental laws and regulations which impose limitations on the discharge of pollutants into the air and water, establish standards for the treatment, storage, transportation and disposal of solid and hazardous wastes, and impose obligations to investigate and remediate contamination in certain circumstances. The Partnership has expended substantial resources, both financial and managerial, and it anticipates that it will continue to do so in the future. Failure to comply with the extensive federal, state and local environmental laws and regulations could result in significant civil or criminal penalties, and remediation costs. Under the EIA, Borden has agreed, subject to certain specified limitations, to indemnify the Partnership in respect of environmental liabilities arising from facts or circumstances that existed and requirements in effect prior to November 30, 1987, the date of the initial sale of the Geismar and Illiopolis plants to the Partnership. The Partnership is responsible for environmental liabilities arising from facts or circumstances that existed and requirements that become effective on or after such date. With respect to certain environmental liabilities that may arise from facts or circumstances that existed and requirements in effect both prior to and after such date, Borden and the Partnership will share liabilities on an equitable basis considering all of the facts and circumstances including, but not limited to, the relative contribution of each to the matter and the amount of time each has operated the assets in question (to the extent relevant). No claims can be made under the EIA after November 30, 2002, and no claims 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 EIA aggregated approximately $3.5 million as of March 31, 1997. The Partnership is subject to other environmental and legal proceedings and claims which arise in the ordinary course of business. In the opinion of the General Partner, the amount of the ultimate liability, taking into account the Partnership's risk retention program and EIA with Borden, would not materially affect the financial position or results of operations of the Partnership. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS - -------------- RESULTS OF OPERATIONS QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1997 Revenues Total revenues during the third quarter of 1998 decreased $61.9 million or 34.2% to $119.0 million from $180.9 million in the third quarter of 1997. This decrease was the result of a $36.6 million decrease in PVC Polymers Products revenues, a $18.6 million decrease in Methanol and Derivatives revenues and a $6.7 million decrease in Nitrogen Products revenues. Total revenues for PVC Polymers Products decreased $36.6 million as a result of a 20.9% decrease in selling prices, and a 11% decrease in sales volumes. Excess supply of PVC in the market, exacerbated by on-going lower demand levels in many countries in the Far East region, has continued to put downward pressure on selling prices and intensified competitive market conditions. Total revenues for Methanol and Derivatives decreased $18.6 million as a result of a 41.3% decrease in selling prices, and a 6.8% decrease in sales volumes. Normalization of supply in the market in 1998, after continued disruptions in 1997, has created excess supply conditions which put severe downward pressure on selling prices. Total revenues for Nitrogen Products decreased $6.7 million as a result of a 8.7% decrease in sales prices and 29% reduction in volume. Increases in production supply in 1997 and a decrease in imports of urea into China have put downward pressure on selling prices and volumes. Cost of Goods Sold Total cost of goods sold decreased $51.8 million to $116.7 million in the current period from $168.5 million in the year-ago period. The decrease was a combination of lower sales volumes and decreases in all major raw materials lead by a significant decline in the costs of chlorine. Expressed as a percentage of total revenues, cost of goods sold increased to 98.1% of total revenues in the third quarter of 1998 from 93.1% in the third quarter of 1997, due to the significant decrease in selling prices discussed above. Gross margins for all three product groups declined a total of $10.1 million as a result of the decreased selling prices and volumes discussed above. Incentive Distribution to General Partner There was no incentive distribution to the General Partner generated during the third quarter of 1998 and the third quarter of 1997. Net Income (Loss) Net loss for the third quarter of 1998 was $8.9 million compared to $1.1 million loss for the third quarter of 1997. As discussed above, the primary reason for the decline in operating performance was significantly lower selling prices across all three major product groups, partially offset by declining raw material costs. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 Revenues Total revenues for the first nine months of 1998 decreased $146.5 million or 25.9% to $418.8 million from $565.3 million for the comparable period a year ago. Total revenues for PVC Polymers Products decreased $88.8 million as a result of a 15.1% decrease in selling prices and a 9.9% decrease in sales volumes. Total revenues for Methanol and Derivatives decreased $43.6 million as a result of a 30.7% decrease in selling prices on slightly lower volumes. 9 Total revenues for Nitrogen Products decreased $14.1 million as a result of a 19.7% decrease in selling prices combined with a 12.5% decrease in sales volumes. Cost of Goods Sold Total cost of goods sold decreased $102.2 million to $409.9 million for the first nine months of 1998 from $512.1 million in the year-ago period. The decrease was primarily due to declines in the costs of major raw materials period to period, including natural gas, ethylene, chlorine and purchased VCM, as well as a decrease in sales volumes. Expressed as a percentage of total revenues, cost of goods sold increased to 97.8% of total revenues for the nine months of 1998 from 90.6% in the same period of 1997, due to the significant decrease in selling prices discussed above. Gross margins for all three product groups declined a total of $44.3 million as a result of the decreased selling prices and lower volumes as discussed above. Incentive Distribution to General Partner There was no incentive distribution to the General Partner generated during the first three quarters of 1998 as there were no cash distributions declared to the Unitholders during these periods. An incentive distribution to the General Partner of $0.8 million was generated during the second quarter of 1997 as a result of cash distributions to Unitholders exceeding the Target Distribution. Net Income (Loss) Net loss for the first nine months of 1998 was $25.0 million compared to net income of $15.8 million for the same period of 1997. As discussed above, the primary reason for the decline in operating performance was significantly lower selling prices across all three major product groups, partially offset by declining raw material costs. LIQUIDITY AND CAPITAL RESOURCES Cash Flows from Operations. The Partnership generated $9.0 million of cash for operations during the first nine months of 1998 compared to generating cash from operations of $37.1 million in the first nine months of 1997. Cash flows from operations declined period to period due to significantly lower earnings, which were partially offset by a favorable change in working capital, specifically accounts receivable and inventories. Cash Flows from Investing Activities. Capital expenditures for the first nine months of 1998 increased significantly to $26.2 million compared to $8.9 million for the same period a year ago. The increase in capital expenditures reflects spending on environmental compliance projects and implementation of year 2000 compatible computer software and infrastructure. Cash Flow from Financing Activities. During the first nine months of 1998, the Partnership borrowed $53.7 million to fund operations and capital expenditures. See further discussion in "Liquidity". Pursuant to its Amended and Restated Agreement of Limited Partnership, the Partnership is required to make quarterly distributions to Unitholders and the General Partner of 100% of its Available Cash, if any. Available Cash means generally, with respect to any quarter, the sum of all cash receipts of the Partnership plus net reductions to reserves established in prior quarters, less all of its cash disbursements and net additions to reserves in such quarter. The General Partner may establish such reserves, as it deems necessary or appropriate in its reasonable discretion, to provide for the proper conduct of the business of the Partnership or the Operating Partnership and to stabilize distributions of cash to Unitholders and the General Partner and such other reserves as are necessary to comply with the terms of any agreement or obligation of the Partnership. A cash distribution of $3.7 million was made during the first quarter of 1998; cash distributions of $3.7 million also were made during each of the first and second quarters of 1997. These amounts reflect the payment of cash distributions declared for the immediately preceeding quarters. Cash distributions with respect to interim periods are not necessarily indicative of cash distributions with respect to a full year. Moreover, due to the cyclical nature of 10 the Partnership's business, past cash distributions are not necessarily indicative of future cash distributions. The General Partner determined that no cash distributions would be declared for the first three quarters of 1998. The cyclical nature of the Partnership's business as well as various seasonality factors have a significant impact on its results of operations and, therefore, on its ability to make cash distributions on a quarterly basis. In addition, the amount of Available Cash constituting Cash from Operations for any period does not necessarily correlate directly with net income for such period because various items and transactions affect net income but do not affect Available Cash constituting Cash from Operations, while changes in working capital items (including receivables, inventories, accounts payable and other items) generally do not affect net income but do affect such Available Cash. Moreover, as provided for in the Partnership Agreements with respect to the Partnership and the Operating Partnership, certain reserves may be established which affect Available Cash constituting Cash from Operations but do not affect cash balances in financial statements. Such reserves have generally been used to set cash aside for debt service, capital expenditures and other accrued items. Liquidity Adverse business conditions across the Partnership's three product groups have considerably reduced its sales revenues and operating margins and caused the Partnership to incur net losses over the past several quarters. Unless business conditions broadly improve, industry overcapacity affecting all of the Partnership's product groups is likely to cause narrow operating margins to persist throughout the remainder of the year, even if raw material prices continue to decline. These narrow operating margins, combined with the Partnership's capital expenditure needs (which are anticipated to be in the range of $3 to $5 million per quarter) and debt service requirements, along with restrictions in the Credit Agreement and Indenture as discussed below, make it highly unlikely that the Partnership will resume making quarterly cash distributions in 1999. The Operating Partnership and several lending institutions are parties to a Credit Agreement (the "Credit Agreement"), dated as of December 19, 1997 which provides for a revolving credit facility of $100 million (the "Revolving Credit Facility"). As of September 30, 1998, the Operating Partnership had $78.7 million outstanding under the Revolving Credit Facility. On May 1, 1995, the Operating Partnership issued $200 million aggregate principal amount of 9.5% Notes due 2005 (the "Notes") pursuant to an Indenture dated as of May 1, 1995 (the "Indenture"). The Notes are senior unsecured obligations of the Operating Partnership. Historically, the Operating Partnership has funded working capital requirements, capital expenditures and other cash requirements primarily through cash flow from operations and borrowings under the Credit Agreement. The General Partner believes that, absent a default under the Credit Agreement (the possibility of which is discussed below), operating cash flows and the additional borrowing capacity under the Credit Agreement will be sufficient to fund the Operating Partnership's cash needs. The Credit Agreement contains financial covenants with which the Operating Partnership must comply in order to prevent a default. A default under the Credit Agreement could have serious adverse consequences on the Operating Partnership, including the inability to continue to borrow under the Revolving Credit Facility, which in turn would have serious adverse consequences on the Partnership. Financial covenant compliance under the Credit Agreement is measured quarterly. The Operating Partnership was not in compliance with the financial covenants of the Credit Agreement at the end of the second quarter of 1998. Effective June 30, 1998, the Credit Agreement was amended (the "Amendment") to provide for a waiver of the non-compliance with the financial covenants for the second quarter of 1998. The Amendment also provides for revised financial covenants for the third and fourth quarters of 1998 and the first quarter of 1999. Given current business conditions, particularly the instability of selling prices and the unpredictability of natural gas costs, no assurance can be given that the Operating Partnership will be in compliance with the amended financial covenants at the end of the third quarter of 1998 or any quarter thereafter. If the Operating Partnership were able to obtain additional waivers or amended covenants for any such noncompliance, it is likely that such waivers or 11 amended covenants would require additional borrowing costs, collateralizing outstanding borrowings, or other changes to the Credit Agreement. In addition, under the Credit Agreement and the Indenture, the Operating Partnership is generally prevented from making cash distributions to the Partnership unless it maintains certain financial ratios specified therein. Due to recent quarterly losses, the Operating Partnership did not maintain such financial ratios at the end of the second quarter. As such, the Operating Partnership is prevented from making quarterly cash distributions to the Partnership for the quarter ended September 30, 1998. Given the current outlook, it is unlikely that the Operating Partnership will be in compliance with these ratios for the next several quarters as well, and will be precluded from making cash distributions to the Partnership during this period. In the absence of quarterly cash distributions from the Operating Partnership, the Partnership will be unable to make quarterly cash distributions to Unitholders and to the General Partner. In addition, because such financial ratios are measured over a trailing four quarter period, it is expected to take several quarters of profitable operating results by the Operating Partnership to permit the resumption of quarterly distributions to the Partnership and therefore the resumption of quarterly distributions by the Partnership to Unitholders and the General Partner. However, no assurance can be given regarding the resumption of such cash distributions. Capital Expenditures Similar to other business entities, the Partnership will be impacted by the inability of its computer application software programs, as well as certain date-sensitive devices, to properly identify the year 2000 due to a commonly used programming convention of using only two digits to identify a year. Unless modified or replaced, these programs and devices could fail or create erroneous results when referencing the year 2000. Management is assessing the extent and impact of this issue for both financial and non-financial systems and has developed an action plan to mitigate the possibility of business interruption or other risks. Management believes that the most significant year 2000 business risk to the Partnership relates to the current financial system applications. Accordingly, an enterprise-wide implementation of year 2000 compliant software has been initiated. The anticipated cost associated with this enterprise-wide implementation is approximately $16.2 million. Date-sensitive devices in non-financial applications are currently being identified and modified or replaced. Management currently does not anticipate any significant business interruption or other adverse impacts related to the year 2000 issue. Forward-Looking Statements Certain statements in this Form 10-Q are forward-looking. These can be identified by the use of forward-looking words or phrases such as "believe", "expect", "may", and "potential" among others and include statements regarding the business outlook for the Operating Partnership and its ability to fund its cash needs. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for such forward-looking statements. While these forward-looking statements are based on the Partnership's reasonable current expectations, a variety of risks, uncertainties and other factors, including many which are outside the control of the Partnership, could cause the Partnership's actual results to differ materially from the anticipated results or expectations expressed in such forward-looking statements. The risks, uncertainties and other factors that may affect the operations, performance, development and results of the Partnership include changes in the demand for and pricing of its commodity products, changes in industry production capacities, changes in the supply of and costs of its significant raw materials, and changes in applicable environmental, health and safety laws and regulations. 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- There is incorporated by reference herein the information regarding legal proceeding in Item 3 of Part 1 of the Partnership's 1997 Annual Report on Form 10-K and Note 2 to the consolidated financial statements in Part 1 hereof. 13 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP By BCP Management, Inc., its General Partner By: /s/ Ronald B. Wiles --------------------------------------- Ronald B. Wiles Vice President, Chief Financial Officer and Treasurer Principal Accounting Officer October 29, 1998 14 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 9-MOS DEC-31-1998 DEC-31-1998 JUN-01-1998 JAN-01-1998 SEP-30-1998 SEP-30-1998 40,293 40,293 0 0 74,253 74,253 1,225 1,225 30,075 30,075 150,108 150,108 749,268 749,268 457,148 457,148 504,188 504,188 64,500 64,500 278,700 278,700 0 0 0 0 0 0 158,029 158,029 504,188 504,188 119,022 418,846 119,022 418,846 116,693 409,934 116,693 409,934 5,253 17,588 0 0 5,981 16,373 (8,905) (25,049) 0 0 (8,905) (25,049) 0 0 0 0 0 0 (8,905) (25,049) (.24) (.67) (.24) (.67)
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