-----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, DbCDREQMzKSLb7pdL3E9WqJCWoUCotwydUR7HC9lHeQSnM4X72qO1Ho5yms7egJY kZL+03xo5s5msRri5DGGuA== 0001021408-00-001306.txt : 20000331 0001021408-00-001306.hdr.sgml : 20000331 ACCESSION NUMBER: 0001021408-00-001306 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 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-K405 SEC ACT: SEC FILE NUMBER: 001-09699 FILM NUMBER: 584510 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-K405 1 FORM 10-K405 ________________________________________________________________________________ ________________________________________________________________________________ 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, 1999 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 New York Stock Exchange Common Units 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, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by the referenced Part III and this For 10-K or any amendment to this Form 10-K. [x] __________________________________ 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 March 28, 2000, was approximately $162 million. Number of Common Units outstanding as of the close of business on March 28, 2000: 36,750,000. ________________________________________________________________________________ ________________________________________________________________________________ The Exhibit Index is located herein at sequential page 42. 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"). On May 2, 1995, the Company, through its subsidiary operating partnership Borden Chemicals and Plastics Operating Partnership (the "Operating Partnership"), completed the purchase of Occidental Chemical Corporation's ("OxyChem") Addis, Louisiana PVC manufacturing facility and related assets ("Addis Facility"). The Company's three principal product groups 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 1999, PVC Polymers Products, Methanol and Derivatives and Nitrogen Products accounted for 73%, 19% and 8%, respectively, of the Company's revenues. 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 1999, 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 flooring Addis 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
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, 1 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 and 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 80% and 82% of combined capacity in 1999 and 1998, 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 9% of total industry domestic capacity of PVC resins. PVC pricing and margins declined substantially in 1998 due to domestic industry overcapacity closely linked to lower Asian demand. Prices and margins for PVC products demonstrated marked improvement in 1999 as both Asian and domestic market demands increased over prior year levels. The PVC industry in both the United States and Europe has entered a consolidation and rationalization phase, evidenced by the recent merger announcements of OxyChem and Geon, Georgia Gulf and Condea Vista, BASF and Solvay, EVA and BSU Schkopag and Shin-Etso, Shell and Rovin. Production Process. PVC resins are produced through the polymerization of VCM, an ethylene and chlorine intermediate material internally produced by the Company. The Company's production of certain specialty PVC resin grades also involves the consumption of purchased vinyl acetate monomer. The Company purchases vinyl acetate monomer from unrelated third parties. 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 plants 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 2 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 79% and 91% of capacity during 1999 and 1998, 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 1999 and 1998, the plant operated at approximately 63% and 62% 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, and can be burned as fuel in the Company's cogeneration units. 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. Acetylene. Acetylene is primarily used as a feedstock for VCM-A and for other chemical intermediates through year-end 1999. The Company had 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 purchased BASF's interest in the acetylene plant, January, 2000. See Item 7, "Capital Expenditures". During 1999 and 1998, the plant operated at approximately 83% and 89%, respectively, of capacity, with all production being consumed by either the Company or BASF. During 1999, approximately 52% of the total production of the acetylene plant was used internally as a principal feedstock of the Geismar VCM-A plant. 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 (through December 31, 1999) and Air Liquide America Corporation. For a description of 3 the Company's arrangements for the purchase of natural gas, see "Raw Materials". ------------- The Company's principal competitors in the sale of PVC include Shintech, Formosa Plastics, Oxyvinyls and Georgia Gulf. 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. The Company's stated annual capacity is 330 million gallons per year. During 1999 and 1998, the plant operated at approximately 82% and 85%, respectively, of capacity. Supply disruptions in the methanol products industry served to improve methanol pricing during 1997, with contract prices ending the year at $0.58 per gallon. At the end of the first quarter of 1998 as additional production capacity was brought on-line, methanol prices started a decline that continued for the balance of the year and into 1999. However, the last nine months of 1999 saw an increase in demand and the idling of some domestic plants. As a result selling prices increased and by the fourth quarter were approximately $0.38 per gallon. The Company believes its stated annual capacity represents approximately 13% of total domestic capacity. The Company's main competitors in the sale of methanol include Methanex, Terra Industries, Hoechst Celanese and Lyondell. In 1999, Borden Chemicals Inc. ("BCI"), a subsidiary of Borden purchased approximately 45% of the Company's methanol production for its downstream formaldehyde production. Approximately 19% of production was used internally in the production of formaldehyde and approximately 2% was used primarily to satisfy tolling and exchange arrangements. The remaining 34% of volume was sold to third parties (other than BCI). 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 71% of the Company's total cost of producing methanol during 1999. 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 1999 and 1998, the three plants operated at approximately 88% and 98%, 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 4 total. Major competitors of the Company include Georgia Pacific and Neste. During 1999, approximately 73% of the Company's formaldehyde production was purchased by an unaffiliated third party pursuant to a long-term contract expiring in 2002. Such third party consumes formaldehyde in its manufacture of MDI and 1,4 Butanediol (both of which are chemical intermediaries used in a wide variety of applications). The contract requires the Company to supply up to 78% of its annual capacity to the third party to the extent necessary to satisfy that party's formaldehyde requirements. Of the Company's remaining formaldehyde production, 26% was sold to BCI and approximately 1% was utilized by the Company in the production of urea- formaldehyde concentrate for the fertilizer industry. The formaldehyde sold to BCI is primarily consumed in adhesive resins used in the production of plywood and other pressed wood products. As a result, such formaldehyde demand is influenced by construction activity and housing starts. The principal feedstock used in the production of formaldehyde is methanol. The Geismar formaldehyde plants obtain all such feedstock from the adjacent methanol plant. BCI 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 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 1999 and 1998, the Company operated at approximately 87% of capacity for both periods. Selling prices for ammonia decreased in 1999 due to an increase in the worldwide production capacity of ammonia, along with more aggressive pricing by producers in the former Soviet Union. This resulted in downward pressure on ammonia prices during the period of 1997 to the present. Average annual selling prices for ammonia decreased from $166 per ton in 1997 to $121 per ton in 1998 to $113 in 1999. 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 1999, approximately 64% of ammonia production was sold to third parties (other than BCI), approximately 34% of production was used by the Company's adjacent urea plant, and approximately 2% of production was sold to 5 BCI. The Company believes its 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 1999 and 1998, the plant operated at approximately 75% and 73% respectively, of capacity. 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 selling prices significantly declined during 1997 due to increases in production capacity and a decrease in imports of urea into China. Average annual selling prices for urea decreased from $140 per ton in 1997 to $116 per ton in 1998 and $94 per ton in 1999. During 1999, approximately 36% of the Company's urea sales were to third parties and approximately 64% were to BCI. A small portion of the Company's urea production was used internally by the Company in the production of urea- formaldehyde concentrate. The Company believes its 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 1999, the Company purchased over 57.4 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 pipelines. In 1999, natural gas represented 32%, 59% and 71% of total production costs for acetylene, ammonia and methanol, respectively, and 29% of the Company's total production costs. The Company purchases the majority of its 6 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. While natural gas prices decreased 3% in 1997 and 12% in 1998, in 1999 they increased by 7%. 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. 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 and pipeline 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 OxyVinyl. 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". Under its risk retention program, the Company maintains property damage and liability insurance deductibles of $2.5 million, $1.0 million and $1.0 million per occurrence for property and related damages at the Geismar, Illiopolis and Addis facilities, respectively, and deductibles ranging from $0.1 million to $2.0 million per event for liability insurance. In addition the Company is included in Borden's master excess insurance program. Marketing and Sales Marketing activities are conducted by two main groups, PVC marketing and 7 basic chemical marketing. The PVC group is comprised of 16 people, including a Director of Sales, Director of Marketing & Customer Applications, 3 Product Managers, 7 Regional Sales personnel, and 3 Service managers, along with a small office support staff. Similarly, basic chemicals marketing is headed by a Director of Sales and Marketing, 2 Product Managers, and 3 Regional Sales personnel. Both groups are headquartered in Baton Rouge, LA with professional sales personnel geographically positioned throughout the United States. The Company's sales activities are based on frequent customer contact to secure and maintain long-term supply relationships. A substantial portion of the Company's sales are made under contracts with annual renegotiation provisions. The majority of the Company's sales are made in the United States, and a small portion in Canada. The Company has not historically participated in the export market, but retains access to these markets through third party specialists. In 1999 and 1998, 14% and 15%, respectively, of the Company's sales were made to related parties with the remainder being sold to third parties. 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 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 8 ("Processing Agreements") with the Company covering the following products: PVC resins, methanol, ammonia, urea, formaldehyde and urea-formaldehyde concentrate. These agreements were transferred to BCI in 1997 and the agreement to purchase PVC resins was assigned to and renegotiated with a third party in connection with the sale of certain businesses by Borden in 1996 and 1997. The Purchase and Processing Agreements expire in November 2002, subject to termination by BCI 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 not exist. In December 1998, in connection with the renegotiation of Credit Agreement, the Company granted BCI an option to extend the term of its Methanol Purchase Agreement for one additional year (i.e. until November 2003), in exchange for Borden's agreement with the Company's bank group not to exercise any rights of set-off with respect to accounts receivable. The Purchase Agreements require BCI to purchase from the Company and the Company to supply to BCI, subject to certain monthly quantity limits, at least 85% (and at the option of BCI up to 100%) of the quantities of methanol, ammonia and urea required by BCI for use in its plants in the continental United States. Under the Purchase Agreements, the price for 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 BCI). If the Company does not make any sales to any major customers other than BCI, then the price to BCI will be the lowest prevailing price in the relevant geographic area. The Purchase Agreements also provide that the Company has the option to meet competitive third-party offers or let BCI 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 BCI 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, BCI has the option of reducing or terminating its obligation to utilize such processing capacity. Under the Processing Agreements, BCI 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 give the Company the option to meet competitive third party offers covering formaldehyde unless meeting such offer would impose a significant economic penalty on the Company, in which case BCI 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 BCI would have been able to obtain from unaffiliated suppliers, considering the magnitude of BCI's purchases, the long-term nature of such 9 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 BCI 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 BCI. Because the foregoing Purchase and Processing Agreements are requirements contracts, sales of products thereunder are dependent on BCI's requirements for such products. Such requirements could be affected by a variety of factors, including a sale or other disposition by BCI 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 BCI or otherwise, BCI were to sell or otherwise dispose of all or certain of its plants or otherwise reorient its businesses, BCI'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 BCI 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 has agreed not to 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. 10 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 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 Operating Partnership and the General Partner's activities are limited to such management and control. Unitholders do not participate in the management or control of the Company or the Operating Partnership. The General Partner has fiduciary duties to Unitholders, subject to the provisions of the Partnership Agreement. The General Partner is 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 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 in the past, and the Company anticipates continuing changes. 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. 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 plant operations and 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 11 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. The 1990 Amendments to the Clean Air Act (the "1990 Clean Air Act Amendments") require 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 "nonattainment areas" 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 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. Additional capital expenditures may be necessary to comply with these control standards. The 1990 Clean Air Act Amendment further requires "enhanced monitoring" of the emissions from certain places of equipment. Although monitoring systems are already in place at the Geismar, Illiopolis and Addis plants, capital expenditures may be necessary to comply the system to comply with the "enhanced monitoring" requirements. In late 1996 the Illiopolis plant discovered through emission stack testing that the actual emissions from a specific dryer were higher than calculated using emissions factors and engineering estimates. These new emission numbers were reported to the Illiopolis Environmental Protection Agency, and an air pollution control devise known as a baghouse was installed on the unit in 1998 at a cost of $1.3 million. Based on 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 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 Company signed a consent decree (the "Consent Decree") to resolve an enforcement proceeding brought against the Company and BCPM, for alleged violations of the Clean Air Act and other environmental statutes at the Geismar facility. In June 1998, the U.S. District Court for the Middle District of Louisiana accepted the Consent Decree into record, and the proceedings were closed. 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 believes that the Geismar, Illiopolis, and Addis plants are in material compliance with OSHA requirements, including general industry standards, vinyl chloride exposure 12 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 a hazard communication program in place 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 the Resource Conservation and Recovery Act ("RCRA") and comparable state statutes. The Company believes that the Geismar, Illiopolis and Addis plants 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 accordance with the Consent Decree, the Company has applied for a RCRA permit for its valorization of chlorinated residuals ("VCR") unit. In addition, the settlement provides guidelines for future investigation and possible remediation of groundwater contamination. 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 federal grand jury investigation of these shipments in the U.S. District Court in New Jersey was closed in February 1999, when DOJ declined to prosecute the Company or its agents for these shipments. See "Legal Proceedings." Superfund. The Comprehensive Environmental Response Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on classes of persons that are considered to have contributed to the release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and the companies that disposed, or arranged for the disposal of, the hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances and for damages to natural resources. In the ordinary course of the 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 13 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. The Consent Decree signed by DOJ and the Company in March 1998 resolved an enforcement proceeding against the Company and BCPM for alleged violation of CERCLA's reporting 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 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. Areas of groundwater contamination have been identified at the Company's plants. It is the Company's policy, where possible and appropriate, to address and resolve groundwater contamination. The Company believes that environmental indemnities available to it would cover all, or a substantial portion of, known groundwater contamination. The Company does not believe that the known contamination will have a 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. At the Geismar complex, Borden and the Company have complied with the Settlement Agreement with the state of Louisiana and the Company is complying with the Consent Decree with DOJ, for groundwater remediation. See "Legal Proceedings". 14 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, all of 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 $2.8 million in 1999 and $14.5 million in 1998. Capital expenditures for environmental control facilities are expected to total approximately $3.0 million in 2000 (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 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"). See "Legal Proceedings". 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 of the Addis facility from OxyChem in 1995, 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-Other Legal Proceedings". New or different types of claims arising from the Company's various chemical operations may be made in the future. 15 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, 1999 BCPM employed approximately 725 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). During 1998 adverse business conditions across the Company's three product groups considerably reduced revenues and operating margins and caused the Company to incur net losses. The Company's PVC products group's performance improved in 1999, but that improvement could not offset the continued adverse business conditions across the Company's other two product groups and caused the Company to again incur a net loss. Consequently, no cash distributions were declared during both years. The Company made a cash distribution of $3.7 million during the first quarter of 1998 which reflected a distribution declared during the fourth quarter of 1997. It is also highly unlikely that the Company will declare any cash distributions for 2000. Forward-Looking Statements Certain statements in the Form 10-K, in particular, certain statements under "Item 1. Business", "Item 3. Legal proceedings" 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" 16 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 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 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 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. 17 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 1999 Annual Stated Capacity Annual Stated Capacity 10 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) BCP purchased BASF's 50% ownership of the 200 million lbs. of stated capacity effective January 1, 2000. (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 Company and the DOJ signed a Consent Decree to resolve the enforcement action brought by the DOJ against the Company in October 1994. In June 1998, the U.S. District Court for the Middle District of Louisiana accepted the Consent Decree into record, which closed the proceedings. The Consent Decree provided 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 Company. Under certain circumstances, the EPA and the LDEQ may require investigation and remediation beyond the specific terms of the Consent Decree. The Company, however, 18 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 Company has already planned for and is contemplated by the Consent Decree will be required. Remediation costs incurred under the Consent Decree, which is expected to be several million dollars, will continue to be paid by Borden. In April 1996 and November 1997, adjoining landowners filed separate tort actions in state court asserting personal injury and property value diminution as a result of releases of hazardous materials from the Geismar complex. The Company has reached a tentative settlement with the adjoining landowners in the amount of $797.5. 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. 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. 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 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 Company of these other matters, taking into account the Company'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. 19 Item 4. Submission of Matters to a Vote of Security Holders - ------- --------------------------------------------------- No matter was submitted during the fourth quarter of 1999 to a vote of security holders, through the solicitation of proxies or otherwise. 20 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, traded on the New York Stock Exchange on March 28, 2000, were $4.69 and $4.50, respectively. As of December 31, 1999 there were approximately 23,100 holders of record of Common Units. The following table sets forth the 1999 and 1998 quarterly Common Unit data:
1999 Quarters -------------------------------------------------- First Second Third Fourth ------- ------ ------ ------ Cash distributions declared $0.00 $0.00 $0.00 $0.00 Market price range: High 8 9 7/16 7 3/8 6 3/16 Low 4 9/16 6 5/8 3 5/8 3 1/4 1998 Quarters -------------------------------------------------- First Second Third Fourth ------- ------ ------ ------ Cash distribution declared $0.00 $0.00 $0.00 $0.00 Market price range: High 9 1/4 8 3/8 6 3/16 4 7/8 Low 6 9/16 5 9/19 2 5/8 2 11/16
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.
(in thousands except per Unit data, which is net of 1% General Partner interest) 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Net revenues $ 554,183 $535,527 $737,129 $709,203 $739,587 (Loss) Income before extraordinary item (23,991) (40,607) 5,597 4,828 150,926 Net income (loss) (23,991) (40,607) 5,597 4,828 144,014 (Loss) Income per unit before extraordinary item - basic and diluted (0.65) (1.09) 0.15 0.13 4.07 Net (Loss) income per Unit - basic and diluted (0.65) (1.09) 0.15 0.13 3.88 Cash distributions declared per Unit 0.00 0.00 0.83 0.35 4.66 Total assets 480,851 461,696 500,186 525,705 568,50 Long-term debt 263,200 251,800 225,000 200,000 200,00
21 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. The other principal feedstocks are ethylene and chlorine. Prices for these raw materials may change significantly from year to year. Prices for PVC improved somewhat during the first half of 1997, but then declined due to competitive market conditions experienced in the second half of 1997. Published prices for PVC during the fourth quarter of 1997 declined to an average of approximately $0.30 per pound. PVC continued to decline in 1998. General competitive conditions and reduced demand for PVC in the Far East kept downward pressure on selling prices through 1998 with the fourth quarter price in the $0.24 per pound range. Prices for PVC steadily increased each quarter in 1999, with the fourth quarter price approximately $0.36 per pound. Supply disruptions in the methanol products industry served to improve methanol pricing for the Partnership in 1997, with contract prices ending the year at $0.58 per gallon. As additional production capacity was brought on-line in 1998, selling prices faced significant downward pressure during the year with methanol prices declining to $0.30 per gallon by the end of the year. Increased demand, coupled with the idling of some domestic plants caused methanol prices to increase in 1999, with the fourth quarter selling price being approximately $0.38 per gallon. Selling prices for ammonia declined from $201 to $142 per ton, and urea declined from $183 to $106 per ton in 1997 due to an increase in worldwide production capacity 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, forced selling prices downward in 1997. These market conditions continued in both 1998 and 1999 which, along 22 with capacity increases during both years, put continued downward pressure on selling prices during both these years. 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): 1999 1998 1997 ------ ------ ------ PVC Polymers Products $403,652 73% $372,853 69% $486,189 66% Methanol and Derivatives 104,160 19% 111,308 21% 177,475 24% Nitrogen Products 46,371 8% 51,366 10% 73,465 10% -------- --- -------- --- -------- --- Total Revenues 554,183 100% $535,527 100% $737,129 100% ======== === ======== === ======== === 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, 1999 1998 1997 ---- ---- ---- Average price received per unit sold PVC Polymers Products 110 97 117 Methanol and Derivatives 81 83 126 Nitrogen Products 79 92 119 Raw material costs per unit purchased Natural Gas 94 89 105 Ethylene 124 95 136 Chlorine 48 67 137 Production volumes (1) (in millions of pounds) PVC Polymers Products 2,133 2,256 2,447 Methanol and Derivatives 2,376 2,503 2,696 Nitrogen Products 1,104 1,085 1,168 (1) Includes the production of intermediate products. 1999 Compared to 1998 Total Revenues Total revenues for 1999 increased $18.7 million or 3% to $554.2 million from $535.5 million in 1998. This increase was the net result 23 of a $30.8 million increase in revenues from PVC Polymers Products, a $7.1 million decline in Methanol and Derivatives revenues and a $5.0 million decrease in Nitrogen Products revenues. Total revenues for PVC Polymers Products increased 8% as a result of a 21% increase in selling prices, offset by a 10% decrease in sales volumes. Total revenues for Methanol and Derivatives decreased 6% as a result of an 8% increase in selling prices more than offset by a 14% decline in sales volume. Total revenues for Nitrogen Products decreased 10% as a result of a 13% decrease in selling prices and a 4% increase in sales volume. Cost of Goods Sold Total cost of goods sold decreased to $520.6 million in 1999 from $521.1 million in 1998. Expressed as a percentage of total revenues, cost of goods sold decreased in 1999 to 94% compared to 97% in 1998. Gross profit for PVC Polymer Products increased to $44.4 million in 1999 from the $8.4 million recorded in 1998. Sales price increases more than offset increased raw material costs and lower volumes. Gross profit for Methanol and Derivatives in 1999 declined $11.9 million due to a moderate decrease in selling price as well as a decrease in volume and increased natural gas costs. Nitrogen Products gross margins were down $5.0 million compared to 1998, as decreased selling prices and higher natural gas costs were unable to offset an increased in sales volume. Interest Expense Interest expense during 1999 increased $0.5 million to $23.6 million from $23.1 million in 1998 due to an increase in the average outstanding amounts borrowed under the Partnership's credit facility from 1998 to 1999. Incentive Distribution to General Partner There were no incentive distributions to the General Partner declared in 1999. There were also none declared in 1998. Other Expense, Including Minority Interest The 1999 other expenses were $5.2 million. This represents a decrease of $2.4 million when compared to 1998 expense of $7.6 million. A one time charge of $5.8 million to record a deferred tax provision is reflected in 1998. 24 Net Loss The net loss incurred by the Partnership was reduced to $24.0 million in 1999 from $40.6 million in 1998. As discussed above, this improvement is attributable to increased selling prices in PVC and Methanol products more than offsetting increased raw material costs and a decrease in Nitrogen products sales prices. 1998 Compared to 1997 Total Revenues Total revenues for 1998 decreased $201.6 million or 27% to $535.5 million from $737.1 million in 1997. This decrease was the net result of a $113.3 million decrease in revenues from PVC Polymers Products, a $66.2 million decline in Methanol and Derivatives revenues and a $22.1 million decrease in Nitrogen Products revenues. Total revenues for PVC Polymers Products declined 25% as a result of a 18% decrease in selling prices with sales volume accounting for the other 7% decline. Total revenues for Methanol and Derivatives decreased 37% as a result of 32% reduction in selling prices and a 5% decline in sales volume. Total revenues for Nitrogen Products decreased 30% as a result of a 20% decrease in selling prices and a 10% decrease in sales volumes. The softening of the markets for ammonia and urea in 1998 was due to the worldwide changes in demand and pricing described above. Cost of Goods Sold Total cost of goods sold decreased to $521.1 million in 1998 from $682.0 million in 1997. Expressed as a percentage of total revenues, cost of goods sold increased in 1998 to 98% compared to 93% in 1997. Contributing Margin for PVC Polymer Products improved $4 million from 1997 to 1998 with lower raw material prices being able to more than offset decreased selling prices and lower volumes. Contributing Margin for Methanol and Derivatives in 1998 incurred a $39.4 million decline compared to 1997 due to 32% lower selling prices while natural gas costs declined only 15% Nitrogen Products contributing margins remained depressed down $5.3 million compared to 1997 with the lower natural gas cost unable to completely offset the 20% decline in selling prices. Interest Expense Interest expense during 1998 increased $2.2 million to $23.1 million from $20.9 million in 1997 due to an increase in the average outstanding amounts borrowed under the Partnership's credit facility from 1997 to 1998. 25 Incentive Distribution to General Partner There were no incentive distribution to the General Partner declared in 1998. A General Partner incentive of $794 was generated for the second quarter of 1997. Other Expense, Including Minority Interest The 1998 other expenses were $7.6 million due primarily to a $5.8 million one time charge to record a deferred tax provision. Other expenses for 1997 were $3.0 million and also included a one time write-off of the cost of the planned conversion to corporate form which was terminated due to changes in the federal law. Liquidity and Capital Resources Cash Flows from Operations. Cash provided by operations for 1999 totaled $4.0 million, a reduction of $5.9 million as the reduction in the Partnership's net loss was offset by an increase in working capital requirements. Cash provided by operations decreased to $9.9 million for 1998 from $46.9 million for 1997 primarily due to lower net income. Cash Flows from Investing Activities. Capital expenditures totaled $18.3 million and $31.8 million for 1999 and 1998, respectively. These expenditures were primarily for environmental projects, the company's enterprise system and other non-discretionary capital expenditures. Cash Flows from Financing Activities. 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. No cash distribution was made during 1999; a cash distribution of $3.7 million was made during the first quarter of 1998; cash distributions of $30.8 million were made during 1997. These amounts reflect the payment of cash distributions declared for the immediately preceding 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 the Partnership's business, past cash distributions are not necessarily indicative of future cash distributions. 26 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 for two of the Partnership's three product groups caused the Partnership to incur net losses over the past several quarters. Unless business conditions improve, industry overcapacity affecting these product groups is likely to partially offset the improvement in the Partnership's PVC Polymer group. This performance combined with the Partnership's acquisition of BASF's ownership in the Geismar Acetylene plant, and its capital expenditure needs (which are anticipated to be in the range of $4.0 to $5.0 million per quarter) and debt service requirements, along with restrictions in the existing Credit Agreement, the new Credit Agreement and the Indenture as discussed below, make it highly unlikely that the Partnership will declare and make quarterly cash distributions in 2000. The Operating Partnership and several lending institutions are parties to an amended and restated Credit Agreement (the "Credit Agreement"), dated as of December 23, 1998 (maturing December 31, 2000) which provides for a revolving credit facility of $90 million (the "Revolving Credit Facility"). The Operating Partnership's obligations under the facility are secured by its accounts receivable, inventory and a lien against certain fixed assets. As of December 31, 1999, the Operating Partnership had $63.2 million outstanding under the Revolving Credit Facility. Among other things, a change of control of the General Partner, the Partnership or the Operating Partnership are events of default under the existing Credit Agreement. The Operating Partnership expects to enter into a new four-year Credit Agreement with Fleet Capital Corporation ("Fleet"), effective April 1, 2000, which would provide for a revolving credit facility of up to $100 million (the "Year 2000 Revolving Credit Facility") subject to borrowing base limitations. The Operating Partnership's obligations under the facility will be secured by its accounts receivable, inventory and a lien against certain fixed assets. The Year 2000 Revolving Credit Facility would replace the existing facility and all amounts outstanding under the existing facility will be repaid with borrowings under the Year 2000 Revolving Credit Facility. Among other things, a change of control of the General Partner, The Partnership or The Operating Partnership are events of default under the Year 2000 27 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. The Notes include restrictions on the Operating Partnership's ability to make cash distributions, incur additional indebtedness, sell assets, engage in sale/leasebacks and to take certain other actions. Upon a Change in Control, the holders of the Notes may require the Operating Partnership to repurchase their Notes at a purchase price equal to 101% of the aggregate principal amount plus accrued and unpaid interest to the date of repurchase. Strategic Alternatives In December 1998, the Partnership announced the retention of Evercore Partners and Salomon Smith Barney to explore strategic alternatives which included joint ventures, mergers, alliances or the sale of some or all of the Partnership's businesses. During 1999, none of the discussions which took place with interested parties resulted in a transaction which the Partnership deemed in the interest of the unitholders. In November 1999, the Partnership announced that A.D. Little had been retained to assist in developing strategic business plans for its various operations. In January 2000, the Partnership announced its intention to evolve into a focused PVC company and to explore ways to realize maximum value in the near term for its non-PVC businesses. However, the Partnership has not made any decisions that impact its ability to continue to operate the non-PVC businesses. No assurance can be given that these efforts will result in any transaction. Capital Expenditures The Partnership currently believes that the level of annual base capital expenditures over the next two years will be in the range of $18 to $20 million per year. Total capital expenditures for 2000 are anticipated to be approximately $31.2 million with approximately $11.2 million relating to the acquisition of BASF's ownership in the jointly owned acetylene plant. Year 2000 Readiness The Partnership's company-wide Year 2000 Project (Project), to mitigate the effect of year 2000 issues was completed as scheduled, September 1999. The Project phases: (I) Risk Assessment; (II) Detailed Assessment Remediation Planning; (III) Remediation and Resolution, along with a program to determine the Year 2000 effects of third-party suppliers and customers on this business, were successfully completed without any material adverse affect on the Partnership's business results of operations have been experienced as a result of the Year 2000 issue. The cost associated with the project including the conversion of the Partnership's business applications to a Windows NT based system utilizing Microsoft SQL servers and the latest version of J.D. Edwards software is approximately $17.7 million, of which $16.8 million has been 28 expended through December 31, 1999, with $0.9 million to be expended in 2000. Item 7-A Market Risk - -------------------- Interest Rate Risk - The Company's amended facility provides up to $90,000 under a revolving credit agreement with a group of banks. The amended credit facility expires December 31, 2000, at which time all amounts outstanding must be repaid. Interest on borrowings under the revolving credit facility are determined, at the Partnership's option, based on the applicable Eurodollar rate (one, two, three, six, nine or twelve month periods) plus a margin (3.75% and 4.00% at December 1999 and 1998 respectively) or the ABR rate (one, two, three, six, nine, twelve month periods) plus a margin (2.5% and 2.25% at December 31, 1999 and 1998 respectively). The ABR rate is the greater of (a) the prime rate (b) the Base CD rate plus 1.00% or (c) the Federal Funds Effective rate plus .5%. The margins for the Eurodollar rate and the ABR rate are based on the Partnership's public debt rating and the Partnership's consolidated debt to consolidated earnings before income taxes, depreciation and amortization (EBITDA) ratio. An annual commitment fee is payable on the unused portion of the amended facility. At December 31, 1999 and 1998, borrowings under the amended facility were $63,200 and $51,800 and bore interest at 10.41% and 9.00% while the commitment fee on the unused portion of the facility was .5%. The Company is exposed to swings in the Eurodollar on ABR rates. A change of 1.00% in the applicable rates would change the Company's interest cost by $632 and $518 respectively, based on the borrowings at December 31, 1999 and 1998, respectively. The Company expects to enter into a New Credit Agreement that would provide up to $100 million subject to borrowing base limitations under a revolving credit facility with Fleet. This credit facility would expire March 30, 2004, at which time all amounts outstanding would be repaid. Interest on borrowings under the revolving credit facility would be based on the applicable Eurodollar rates (one, two, three, six, nine or twelve month periods) plus a margin (2.25% through September 30, 2000). Subsequent to September 30, 2000, the margin for the Eurodollar rate would be based on the Partnership's consolidated debt to consolidated earnings before income taxes, depreciation, and amortization (EBITDA) ratio. An annual commitment fee of 0.05% would be payable on the unused portion of the facility. Commodity Risk - The Partnership generally does not use derivatives or other financial instruments such as futures contracts to manage commodity price risk. However, at certain times of the year the Partnership will enter into contracts whereby it agrees to purchase a specified quantity of natural gas (the Partnership's principal raw material) at a fixed price. Such contracts are generally not in excess of three months forward, and the Partnership generally limits such forward purchases to 60% of a month's requirements. In addition, the Partnership has entered into a fifteen year supply agreement (commencing in 1997) to provide a long-term supply of ethylene, a raw material, and minimize price volatility. The purchase price for product varies with the supplier's raw material and variable costs, which are market-driven, as well as its fixed processing costs. The Partnership evaluates all such contracts on the basis of whether committed costs are expected to be realized in light of current and expected selling prices when the 29 commodities are consumed in manufacturing products. Foreign Exchange and Equity Risk - The Partnership is not exposed to significant foreign exchange or equity market risk. Forward-Looking Statements Certain statements in this Form 10-K are forward-looking. These can be identified by the use of forward-looking words or phrases such as "believe", "expect", "may" and "potential", among others and include statements regarding the business outlook for the Operating Partnership and its ability to fund its cash needs. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for such forward-looking statements. While these forward-looking statements are based on the Partnership's reasonable current expectations, a variety of risks uncertainties and other factors, including many which are outside the control of the Partnership, could cause the Partnership's actual results to differ materially from the anticipated results or expectations expressed in such forward-looking statements. The risks, uncertainties and other factors that may affect the operations, performance, development and results of the Partnership include changes in the demand for and pricing of its commodity products, changes in industry production capacity, changes in the supply of and costs of its significant raw materials, and changes in applicable environmental, health and safety laws and regulations. Item 8. Financial Statements and Supplementary Data - ----------------------------------------------------- Sequential Index to Financial Statements Page - ----------------------------- ---------- Report of Independent Accountants 48 Consolidated Statements of Operations for the years ended December 31 1999, 1998 and 1997 49 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 50 Consolidated Balance Sheets as of December 31, 1999 and 1998 51 Consolidated Statements of Changes in Partners' Capital for the years ended December 31, 1999, 1998 and 1997 52 Notes to Consolidated Financial Statements 53 30 Selected Quarterly Financial Data (Unaudited) - --------------------------------------------- (in thousands except per Unit data, which is net of 1% General Partner interest)
1999 Quarters ------------------------------------------ First Second Third Fourth --------- --------- --------- --------- Revenues $115,434 $127,206 $153,282 $158,261 Gross Profit 7,545 3,582 5,898 16,587 Net (Loss) (5,691) (8,778) (7,340) (2,182) Net (Loss) per Unit - basic and diluted (0.15) (0.24) (0.20) (0.06) 1998 Quarters ------------------------------------------ First Second Third Fourth --------- --------- --------- --------- Revenues $153,511 $146,312 $119,022 $116,681 Gross Profit 3,715 4,367 2,329 3,038 Net (Loss) (8,324) (7,821) (8,905) (15,558) Net (Loss) per Unit - basic and diluted (0.22) (0.21) (0.24) (0.42)
Item 9. Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------- Financial Disclosure -------------------- None. PART III Item 10. Directors and Executive Officers of the Registrant - -------- -------------------------------------------------- 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 was Chairman, President and Chief Executive Officer of BCPM for the 1999 fiscal year. He retired, effective January 25, 2000, and was succeeded by William H. Carter as Chairman, acting President and Chief Executive Officer. Wayne P. Leonard, as Executive Vice President and Chief Operating Officer of BCPM, reports directly to Mr. Carter, and is responsible 31 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 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. As sole stockholder of BCPM, Borden elects directors of BCPM on an annual basis. Set forth below is certain information concerning the Directors and Executive Officers of BCPM as of December 31, 1999. Their terms of office extend to the next annual meeting of BCMP or until their earlier resignation or replacement.
Served in Age on Present Position and Office Dec. 31, Position Name with General Partner 1999 Since - -------------------- ---------------------------- -------- -------- Joseph M. Saggese Director, Former Chairman, President and Chief Executive Officer 68 1990 William H. Carter Director, Chairman, Acting 46 1995 President and Chief Executive Officer George W. Koch Director 73 1987 Edward H. Jennings Director 62 1989 E. Linn Draper, Jr. Director 57 1996 Ronald P. Starkman Director 45 1998 William F. Stoll, Jr. Director 51 1996 Wayne P. Leonard Executive Vice President, Chief Operating Officer 56 1987 Francis J. Proto Vice President -Chief Financial Officer and Treasurer 56 1999 Marshall D. Owens, Jr. Vice President - Manufacturing 56 1997
Joseph M. Saggese was Chairman of the Board of Directors, President and Chief Executive Officer of BCPM from July 1990 to January 25, 2000. He also served as President and Chief Executive Officer of Borden Chemical, Inc., the successor to a major portion of the former Chemicals Division of Borden from January 1996 to January 1999. George W. Koch has been a director of BCPM since 1987. He has been Of Counsel, retired, in the law firm of Kirkpatrick & Lockhart since January 1992. Prior to that he was a partner of Kirkpatrick & Lockhart 32 since April 1990. Edward H. Jennings has been a director of BCPM since 1989. 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. E. Linn Draper, Jr. has been a director of BCPM since 1996. He is Chairman, President and Chief Executive Officer of American Electric Power Company, Inc. and American Electric Power Service Corporation, positions he has held since 1992. Dr. Draper is also a Director of CellNet Data Systems, Inc. William H. Carter, Chairman, Acting President and Chief Executive Officer, has been a director of BCPM since 1995. He was named Chairman of the Board of Directors, Acting President and Chief Executive Officer in January 2000. 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 also a Director of AEP Industries, Inc. Ronald P. Starkman has been a director of BCPM since 1998. He is Senior Vice President and Treasurer of Borden, Inc., a position he has held since November 1995. Prior to that, he was Senior Managing Director of Claremont Capital Group, Inc. from December 1994 to November 1995. William F. Stoll, Jr. has been a director of BCPM in 1996. He is 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. He is also a Director of AEP Industries, Inc. 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. Francis J. Proto is Chief Financial Officer and Treasurer of BCPM, positions he has held since May, 1999. Prior to that he served in various senior finance and management roles for Borden, Inc. since 1974. 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. Section 16(a) Beneficial Ownership Reporting Compliance -------------------------------------------------------- No Disclosure Required 33 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. 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, 1999 by each of the Chief Executive Officer and the three other executive officers of BCPM whose remuneration exceeded $100,000 (the "Named Executives"). Summary Compensation Table
Long Term Annual Compensation Compensation ------------------------------------------ Awards ------------ Securities Underlying Name and Principal Salary Bonus Options/SARs Position Year ($) ($) (#) - ------------------------------------------------------------------------------------------------- Joseph M. Saggese 1997 $123,677\(b)\ $ 0 6,500 Former Chairman, President And Chief Executive 1998 100,000\(b)\ 0 7,000 Officer 1999 510,000 512,710 14,000 Wayne P. Leonard Executive Vice Pres. 1997 200,666 0 6,000 Chief Operating Officer 1998 227,108 52,272 6,500 1999 242,000 278,285 13,000 Francis J. Proto 1999 137,180 128,864 8,000 Chief Financial Officer and Treasurer Marshall D. Owens, Jr. 1997 142,320 0 3,000 Vice President - 1998 165,285 25,728 4,000 Manufacturing 1999 172,425 160,474 8,000
\(a)\ Represents miscellaneous compensation such as executive perquisites and relocation allowances/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 compensation in excess of the amounts indicated from Borden in consideration for services provided by him to Borden for which the Partnership did not reimburse Borden. Prior to 1999, the Partnership only reimbursed Borden for a portion of the total compensation paid by Borden to Mr. Saggese in consideration for his services as President and Chief Executive Officer of BCPM. Effective January 1, 1999, Mr. Saggese provided services exclusively to the Partnership and, accordingly, the Partnership reimbursed Borden for his entire compensation. Mr. Saggese received aggregate salary from Borden of $496,461 and $476,667 for the years 1998 and 1997, respectively. Additionally for those years, Mr. Saggese received certain bonuses and other compensation in consideration for his services rendered to Borden for which the Partnership did not have any reimbursement obligations. 34 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 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 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 Company and actual cash distributions made by the 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 89,000, 96,500, and 188,000 phantom appreciation rights were made during 1997, 1998, and 1999 respectively. 35 The following table sets forth information concerning individual grants of stock options and free standing unit appreciation rights ("UARs") made during 1999 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 (a) ----------------------------------------------------- -------------------- Number Of Percent Of Securities Total Option Underlying SARs Granted Exercise Or Option/SARs To Employees Base price Expiration Name Granted (#) In Fiscal Year ($/Sh) Date 5%($) 10%($) - ----------------------- ----------- -------------- ----------- ---------- ------- -------- Saggese, J. M. 14,000 7.4 7.8125 20-Apr-06 $44,527 $103,766 Leonard, W. P. 13,500 6.9 7.8125 20-Apr-06 42,936 100,060 Owens, M. D. 8,000 4.3 7.8125 20-Apr-06 25,444 59,295 Proto, F. J. 8,000 4.3 7.8125 20-Apr-06 25,444 59,295
(a) UARs are unit appreciation rights which, (i) in the event the Fair Market Value of one Unit equals or exceeds the Base Price of such UAR at the time of exercise of such UAR, entitles the holder thereof to receive, upon exercise of such UAR, cash in an amount equal to the excess of the Fair Market Value of one Unit on the date of exercise over the exercise price of such UAR and (ii) in the event the Fair Market Value of one Unit is less than the exercise price of such UAR, upon exercise of such UAR, reduces the cash payable due to the exercise of Phantom Units (as defined in note (b) In connection with the exercise of such UAR by an amount equal to the difference between such Fair Market Value and such exercise price; the "Fair Market Value" means the average of the high and low transaction prices of a Unit as reported on the NYSE Composite Transactions on such date. The UAR's vest 50% after two years, with the balance vesting after three years. 36 The following table provides information on UAR exercised during 1999 by the named Executive Officers and the value of their unexercised UAR's and phantom units at December 31, 1999. Aggregated Options/SAR Exercises in Last Fiscal Year ---------------------------------------------------- and Fiscal Year-End Options/SAR Values --------------------------------------
Number of Securities Shares Underlying Unexercised Value of Unexercised Acquired on Value Options/UARs At In-the-Money Options/UARs Exercise Realized Fiscal Year-end (#) At Fiscal Year-End ($) Name (#) ($) Exercisable/(1)/ Unexercisable/(1)/ Exercisable Unexercisable - ----------------------------------------------------------------------------------------------------------------------------------- J. M. Saggese 0 0 10,811 24,526 (2) (2) W. P. Leonard 0 0 17,562 22,755 (2) (2) M. D. Owens, Jr. 0 0 7,390 13,627 (2) (2) F. J. Proto 0 0 0 8,000 (2) (2)
/(1)/ Includes UARs and phantom units. /(2)/ Based on a December 31, 1999 stock price of $4.8125, 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") for salaried employees was amended as of January 1, 1987, to provide benefit credits of 3% of earnings which are less than the Social Security wage base for the year plus 6% of earnings in excess of the wage base. Earnings include annual incentive awards paid currently but exclude any long-term incentive awards. Benefits for service through December 31, 1986 are based on the plan formula then in effect and have been converted to opening balances under the plan. Both opening balances and benefit credits receive interest credits at one-year Treasury bill rates until the participant commences receiving benefit payments. For 1999, the interest rate was 4.536%. Benefits vest after completion of five years of employment for employees hired on or after July 1, 1990. Borden'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 Borden contributions that would be standing to the employee's credit at retirement under Borden'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 not 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) 37 attributable to company contributions (equal to 3.3% of compensation) that would be standing to the employee's credit at retirement had the Borden'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. Borden has supplemental plans which will provide those benefits which are otherwise produced by application of the ERIP formula, but which, under Section 415 or Section 401(a)(17) of the Internal Revenue Code, are not permitted to be paid through a qualified plan and its related trust. The supplemental plan also provides a pension benefit using the ERIP formula based on deferred incentive compensation awards and certain other deferred compensation, which are not considered as part of compensation under the ERIP. The total projected annual benefits payable under the formulas of the ERIP at age 65 without regard to the Section 415 or 401(a)(17) limits and recognizing supplemental pensions as described above, are as follows for the above Named Executive Officers: J. M. Saggese - $354,631, (as of December 31, 1999) W. P. Leonard - $54,687, M. D. Owens, Jr. - $33,744, and F. J. Proto - $12,665. Compensation Committee Interlocks and Insider Participation W. H. Carter, Chairman, Acting President and Chief Executive Officer and W. P. Leonard, Executive Vice President and Chief Operating Officer, participate in deliberations concerning executive officer compensation. During 1999 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 Audit Committee. The three non- employee members of this committee 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 1999, the Board met four times, the Independent Committee met four times, and the Independent and Audit Committees met jointly four times. Employment Contracts, Termination of Employment and Changes-in-Control Arrangements No disclosure required. 38 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 Exchange Act of 1934. Based soley on a Form 13-D and amendments thereto filed with the SEC and delivered to the Partnership (the "Form 13-D), the partnership understands that as of November 22, 1999, the following individuals and entities (collectively, the "Holders") owned approximately 3,671,000 common units or 9.99% of all outstanding units. Name of Beneficial Owner Number of Common Units Percentage of Class - ------------------------ ---------------------- ------------------- Marc H. Kozberg/1/ *351,000 1.0% Bruce E. Hendry/1/ 1,581,300 4.3% Dr. Demetre Nicoloff/1/ *478,900 1.3% G. James Spinner/1/ *328,000 0.9% Robert H. Paymar/1/ *378,000 1.0% Stanley I. Barenbaum/1/ *308,000 0.8% SCA Management Partners, L.L.P./1/ *278,000 2.6% James A. Potter/1/ *344,000 0.9% Summit Capital Appreciation Fund LP/1/ 278,000 0.8% Curtis L. Carlson Foundation/2/ 71,300 0.2% NAFCO Insurance Company Ltd. Of Bermuda/1/ 71,400 0.2% Revocable Trust of Glen D. Nelson/1/ 50,000 0.1% Curtis L. Carlson Octagon Trust/1/ 42,300 0.1% Scott C. Gage/1/ 15,000 (**)0.1% Richard C. Gage/1/ 10,000 (**)0.1% Revocable Trust of Diana Nelson/1/ 5,000 *(**)0.1% Geoffrey C. Gage/1/ 5,000 *(**)0.1% Wendy M. Nelson/1/ 10,000 (**)0.1% Jennifer L. Nelson Trust/1/ 7,500 *(**)0.1% Juliet A. Nelson Trust/1/ 7,000 *(**)0.1% Revocable Trust of Edwin C. Gage/1/ 12,500 (**)0.1% Revocable Trust of Barbara C. Gage/1/ 12,500 (**)0.1% BCU Investments, L.L.C./3/ 972,400 2.6% Nanser J. Kazeminy/3/ #972,400 2.2% (**) represents less than * Included 278,000 Common Units owned by Summit Capital Appreciation Fund LP. # Includes 972,400 Common Units owned by BCU Investments, L.L.C. /1/ According to the Form 13-D, the business address for the members of the Group is Dougherty Summit Securities LLC, 90 South Seventy Street, Suite 4000. /2/ According to the Form 13-D, the business address for these members of the Group is 701 Carlson Parkway, Minneapolis, MN 55459-8215. /3/ According to the Form 13-D, the business address for these members of the Group is c/o BCU Investments, L.L.C., 7803 Glenroy Road, Bloomington, MN, 55459- 8215. 39 Securities Ownership of Management - ---------------------------------- The following table shows for (i) each director, (ii) each Named Executive Officer and (iii) all directors and executive officers as a group, the beneficial ownership of Units as of December 31, 1999. Name of Beneficial Owner Units Percent of Units Held - -------------------------------------- ------ --------------------- Joseph M. Saggese 20,000 * George W. Koch 20,700 * Edward H. Jennings 1,000 * William H. Carter 1,000 * Ronald P. Starkman 6,000 * E. Linn Draper, Jr. 0 * William F. Stoll, Jr. 0 * Wayne P. Leonard 25,000 * Marshall D. Owens, Jr. 30 * Francis J. Proto 0 ------ All directors and executive officers as a group 73,730 * * 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 payable to officers and employees of BCPM, payroll taxes, general and administrative costs and legal and professional fees. Note 3 of Notes in Consolidated Financial Statements of the Partnership contained on pages 47-63 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. Messrs. Carter, and Stoll, Jr., who are directors of BCPM, are also directors of Borden Chemicals, Inc. Mr. Koch is Of Counsel, retired, with 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. 40 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 PriceWaterhouseCoopers LLP dated January 25, 2000 are contained on pages 48 through 63 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 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 41 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 23, 1998, 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 10.10/(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 10.12.2 Option Agreement, dated as of December 23, 1998, between Borden Chemical, Inc. and the Operating Partnership 10.12.3 Amendment to Methanol Purchase Agreement, dated as of January 26, 2000, between Borden Chemical, Inc. and the Operating Partnership 10.13/(7)/ Formaldehyde Processing Agreement, dated as of November 30, 1987, between Borden and the Operating 42 Partnership 10.13.1/(4)/ Amendment Agreement No. 1 to Formaldehyde 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 10.21/(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 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. 10.34/(3)/ Operating Agreement, dated December 14, 1984 among Borden, BASF, Liquid Air Corporation ("LAC") and LAI Properties, Inc. ("LAI") 43 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 Operating Partnership, BASF, LAC and LAI 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 10.50/(7)/ Illiopolis Indemnity Agreement 10.51/(7)/ 1995 Long-Term Incentive Plan 44 __________________ (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 15, 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. 45 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/ Francis J. Proto ------------------------ Francis J. Proto Chief Financial Officer and Treasurer Date: March 26, 2000 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/ William H. Carter Director, Chairman, Acting - ---------------------------- William H. Carter President and Chief Executive Officer ____________________________ Director E. Linn Draper, Jr. ____________________________ Director Edward H. Jennings ____________________________ Director George W. Koch ____________________________ Director Joseph M. Saggese ____________________________ Director Ronald P. Starkman ____________________________ Director William F. Stoll, Jr. 46 REPORT OF INDEPENDENT ACCOUNTANTS TO THE PARTNERS OF BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP In our opinion, the consolidated financial statements listed in the index appearing under Item 14 (a)(i) on page 42 present fairly, in all material respects, the financial position of Borden Chemicals and Plastics Limited Partnership and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. 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 auditing standards generally accepted in the United States, 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. PricewaterhouseCoopers LLP Columbus, Ohio January 25, 2000 47 BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per Unit data)
Year Ended December 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Revenues Net trade sales 473,966 $453,589 $602,907 Net sales to related parties 80,217 81,938 134,222 -------- -------- -------- Total revenues 554,183 535,527 737,129 -------- -------- -------- Expenses Cost of goods sold Trade 437,379 440,191 562,159 Related parties 83,192 80,887 119,825 Marketing, general & administrative expense 28,802 24,341 24,622 Interest expense 23,612 23,084 20,898 General Partner incentive 0 0 794 Tax on gross income 2,673 6,802 0 Equity in loss of affiliate 905 1,683 186 Other expense (income), including minority interest 1,611 (854) 3,048 -------- -------- -------- Total expenses 578,174 576,134 731,532 -------- -------- -------- Net (loss) income (23,991) (40,607) 5,597 Less 1% General Partner interest 240 406 (56) -------- -------- -------- Net (loss) income applicable to Limited Partners' interest $(23,751) $(40,201) $ 5,541 ======== ======== ======== Net (loss) income per Unit - basic and diluted $ (0.65) $ (1.09) $ 0.15 ======== ======== ======== Average number of Units outstanding during the year $ 36,750 36,750 36,750 ======== ======== ======== Cash distributions declared per Unit $ 0.00 $ 0.00 $ 0.83 ======== ======== ========
See notes to consolidated financial statements 48 BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year Ended December 31, ---------------------------------------------- 1999 1998 1997 ---------------------------------------------- Cash Flows from Operations Net (loss) income ($23,991) ($40,607) $ 5,597 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation 36,514 33,369 48,569 Amortization 1,428 804 1,191 Deferred tax on gross margin 840 5,800 Increase (decrease) in cash from changes in certain assets and liabilities: Accounts receivable (20,120) 23,923 596 Inventories (22,981) 14,449 961 Accounts and drafts payable 24,633 (15,118) (4,810) Accrued interest 219 (19) 24 Other, net 4,957 (11,662) (5,120) -------- -------- -------- 1,499 10,939 47,008 -------- -------- -------- Cash Flows From Investing Activities Capital expenditures (18,328) (31,788) (19,426) Proceeds from sale of equipment 3,297 Capital contribution to affiliate (812) (1,064) (102) -------- -------- -------- (15,843) (32,852) (19,528) --------- -------- -------- Cash Flows from Financing Activities Proceeds from long-term borrowings 33,800 53,700 25,000 Repayments of long-term borrowings (22,400) (26,900) Net repayments of short-term borrowings (25,000) Cash distributions paid (3,712) (30,819) --------- -------- -------- 11,400 23,088 (30,819) --------- -------- -------- (Decrease) increase in cash and equivalents ( 2,944) 1,175 (3,339) --------- -------- -------- Cash and equivalents at beginning of period 8,703 7,528 10,867 Cash and equivalents at end of year $ 5,759 $ 8,703 $ 7,528 ========= ======== ======== - --------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Interest paid during the year $ 23,393 $ 23,103 $ 20,874 Gross margin taxes paid during the year $ 1,348 - ---------------------------------------------------------------------------------------
See notes to consolidated financial statements 49 BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS (In thousands)
December 31, December 31, 1999 1998 ------------ ------------ ASSETS Cash and equivalents $ 5,759 $ 8,703 Accounts receivable (less allowance for doubtful accounts of $456 and $672, respectively) Trade 75,794 57,909 Related parties 14,862 12,627 Inventories Finished and in process goods 36,041 21,978 Raw materials and supplies 15,492 6,574 Other current assets 4,443 2,694 ---------- ---------- Total current assets 152,391 110,485 ---------- ---------- Investments in and advances to affiliated companies 8,521 8,442 Other assets 50,679 54,469 ---------- ---------- 59,200 62,911 ---------- ---------- Land 16,308 16,308 Buildings 45,625 45,604 Machinery and equipment 704,252 690,096 ---------- ---------- 766,185 752,008 Less accumulated depreciation (496,925) (463,708) ---------- ---------- $ 269,260 $ 288,300 ---------- ---------- $ 480,851 $ 461,696 ========== ========== LIABILITIES AND PARTNERS' CAPITAL Drafts payable $ 17,059 $ 11,432 Accounts payable 49,458 30,452 Accrued interest 3,409 3,190 Other accrued liabilities 17,084 13,702 ---------- ---------- Total current liabilities 87,010 58,776 Long-term debt 263,200 251,800 Deferred tax on gross income 6,640 5,800 Other liabilities 4,866 1,949 Minority interest in consolidated subsidiary 655 900 ---------- ---------- Total liabilities 362,371 319,225 ---------- ---------- Commitments and contingencies (Note 9) Partners' capital Limited Partners 118,766 142,517 General Partner (286) (46) ---------- ---------- Total partners' capital 118,480 142,471 ---------- ---------- Total liabilities and partners' capital $ 480,851 $ 461,696 ========== ==========
See notes to consolidated financial statements 51 BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (In thousands)
Limited General Partners Partner Total ---------- -------- ---------- 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 Net loss (40,201) (406) (40,607) --------- ------ --------- Balances at December 31, 1998 142,517 (46) 142,471 Net loss (23,751) (240) (23,991) --------- ------ --------- Balance at December 31, 1999 $ 118,766 $ (286) $ 118,480 ========= ====== =========
See notes to consolidated financial statements. 52 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 "Company" or "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 operates a highly integrated plant in Geismar, Louisiana, which produces basic petrochemical products, PVC resins and industrial gases; a PVC resins plant located in Illiopolis, Illinois; and a PVC resins plant in Addis, Louisiana. The Partnership markets its commodity products to the manufacturing, chemical and fertilizer industries primarily in the United States. See Note 10 for a discussion of business segments. 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 $2,000 and $2,000 at December 31, 1999 and 1998, 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 owns 50% of a utility station and of an acetylene plant (Note 9) located at the Geismar complex. Utilities provided and acetylene consumed are allocated to the owners at cost. The Partnership's allocated costs are included in cost of goods sold. 53 The Partnership owns a 51% partner 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 $22,996 and $22,811 at December 31, 1999 and 1998, respectively. Included in other accrued liabilities are accrued sales discounts of $4,380 and $5,505 at December 31, 1999 and 1998, 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 the Addis, Louisiana plant acquired in 1995 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 $34,768 in 1999, $34,766 in 1998 and $38,937 in 1997 were expensed as incurred. When properties are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts. Long-Lived Asset Impairment - When event or changes in circumstances indicate that assets may be impaired, an evaluation is performed in accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," by comparing the estimated future undiscounted cash flows associated with the asset to the asset's carrying amount to determine if a write-down to market value or discounted cash flow is required. Environmental Expenditures - Environmental related expenditures associated with current operations are generally expensed as incurred. Expenditures for the assessment and/or remediation of environmental conditions related to past operations are charged to expense; in this connection, a liability is recognized when assessment or remediation effort is probable and the costs are estimable. See also Note 9 for discussion of the Environmental Indemnity Agreement ("EIA") with Borden. Income Taxes - Income taxes are accounted for under SFAS No. 109, "Accounting for Income Taxes". In accordance with this statement, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases, as measured by the expected 3.5% gross income tax rate that will be in effect in the periods when the deferred tax assets and liabilities are expected to be settled or realized. Long-Term Incentive Plan - Under the Long-Term Incentive Plan (the Plan), certain management personnel and employees are awarded phantom appreciation rights. Phantom appreciation rights provide the grantee the opportunity to earn a cash amount equal to the appreciation from the base 54 price to the fair market value of the Partnership's traded units at the time of exercise. The phantom appreciation rights vest 50% after two years, with the balance vesting after three years. Due to declines in the price of the units there was no compensation expense recognized for the phantom appreciation rights during 1999, 1998 or 1997. The plan provides the independent committee of the Board of Directors of the General Partner the discretion to decrease the base price of the phantom appreciation rights in certain events, including changes in ownership or capitalization. Earnings per Unit - 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. Comprehensive Income -SFAS No. 130 "Reporting Comprehensive Income", establishes standards for reporting of comprehensive income and its components. However, the Partnership has no elements of "other comprehensive income" and, accordingly, net income and comprehensive income are equivalent. Segment Information - Effective for the year ended December 31, 1998, the Partnership adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the basis for the Partnership's operating segments. SFAS No. 131 also requires disclosures about major customers. See Note 10. New Accounting Pronouncements - In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which is effective in 2001 for the Partnership. The statement requires that all derivatives be recorded in the balance sheet as either assets or liabilities and be measured at fair value. The accounting for changes in fair value of a derivative depends on the intended use of the derivative and the resulting designation. The Partnership is in the process of assessing the impact that SFAS No. 133 will have on the Consolidated Financial Statements. The Partnership adopted Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" for its consolidated financial statements for the year ended December 31, 1999. Internal use software is software that is acquired, internally developed or modified solely to meet the entity's needs and for which, during the software's development or modification, a plan does not exist to market the software externally. According to the SOP, costs incurred to develop the software during the application development stage, upgrades and enhancements that provide additional functionality are to be capitalized. The adoption of SOP 98-1 did not have a significant impact on the Partnership's financial position or results of operations. 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 55 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. Reclassifications - Certain amounts in the financial statements and notes thereto have been reclassified to conform to 1999 classifications. 3. Related Party Transactions The Partnership is managed by the General Partner. Under certain agreements, the General Partner and Borden are entitled to reimbursement of costs incurred relating to the business activities of the Partnership. The Partnership is engaged in various transactions with Borden and its affiliates in the ordinary course of business. Such transactions include, among other things, the sharing of certain general and administrative costs, sales of products to and purchases of raw materials from Borden or its related parties, and usage of rail cars owned or leased by Borden. Prior to July 1, 1997 Borden included the Partnership in its general 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. The Partnership reimbursed Borden $1,252 during 1997. Under its risk retention program, Borden maintained deductibles of $2,500, $1,000 and $1,000 per occurrence for property and related damages at the Geismar, Illiopolis and Addis facilities, respectively, and deductibles ranging from $100 to $2,000 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, post employment, 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. Prior to January 1, 1998, the Partnership's employees were covered by a group medical insurance plan administered by Borden. Reimbursements made to Borden by the Partnership during 1997 totaled $1,841. Premiums now are determined independently for and are paid by the Partnership directly to the insurance carrier. 56 Benefit plan and general insurance expenses paid to Borden, and allocation for usage of resources such as personnel and data processing equipment paid to Borden were $5,622 in 1999, $6,072 in 1998, and $7,099 in 1997. 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 are 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 has long-term agreements with Borden which expire in 2002 that require Borden to purchase from the Partnership at least 85% of Borden's requirements for 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 $25,350 and $18,546 for 1999 and 1998, respectively. Included in related party receivables are amounts due from the acquiring entity for these sales of $3,156 and $2,831 at December 31, 1999 and 1998, respectively. All other related party sales and receivables are with Borden. 4. Debt On May 1, 1995, the Operating Partnership issued $200,000 aggregate principal amount of senior unsecured 9.5% notes due 2005. The senior unsecured notes contain a number of financial and other covenants, including limitations on liens and sales of assets. Cash distributions are not permitted unless compliance with certain covenants is maintained. With respect to the senior unsecured notes and the revolving credit facility discussed below, compliance with covenant ratios is expected to require several quarters of sufficiently profitable operations before cash distributions could be resumed. The aggregate fair value of the Partnership's outstanding notes was $186,000 at December 31, 1999 and $160,000 at December 31, 1998 as determined by the market trading price for the notes at those dates. On December 23, 1998, the Operating Partnership amended its December 22, 1997 revolving credit facility to, among other things, wave certain covenant non-compliance and to amend the covenant ratios for December 1998 and through December 2000. The amended credit facility provides for up to $90,000 under a revolving credit agreement with a group of banks. The amended credit facility expires on December 31, 2000, at which time all amounts outstanding must be repaid. Interest on borrowings under the revolving credit facility are determined, at the Operating Partnership's option, by the selected Eurodollar rate plus a margin (3.75% at December 31, 1999) or the ABR rate plus a margin (2.50% at December 31, 1999). The 57 ABR rate is the greater of (a) the prime rate (b) the Base CD rate plus 1.00% or (c) the Federal Funds Effective rate plus .5%. The margins for the Eurodollar rate and the ABR rate are based on the Partnership's public debt rating and the Partnership's consolidated debt to consolidated earnings before income taxes, depreciation and amortization (EBITDA) ratio. An annual commitment fee is payable on the unused portion of the amended facility. At December 31, 1999, and 1998, borrowings under the amended facility were $63,200 and $51,800, respectively, and bore interest at $10.41% and 9.00%, respectively, while the commitment fee on the unused portion of the amended facility was .5%. The borrowings under the revolving credit facility are collateralized by accounts receivable, inventories and proceeds from accounts receivable and inventories. The fair value of these collateralized assets may not be less than $17,000. The revolving credit facility contains certain covenants, including maintenance of certain coverage ratios and other non-financial covenants. In addition, the Partnership is limited with respect to additional indebtedness, liens, declaration and payment of Partnership dividends and distributions, capital expenditures, and cash management. Capitalized interest was $713, $377 and $0 for 1999, 1998 and 1997, respectively. 5. Allocation of Income and Loss Income and loss of the Partnership is allocated in proportion to the partners' percentage interests in the Partnership, provided that at least 1% of the income or loss of the Partnership and Operating Partnership is allocated to the General Partner. For income tax purposes, certain items are specially allocated to account for differences between the tax basis and fair market value of property contributed to the Partnership by Borden and to facilitate uniformity of Units. In addition, the Partnership Agreement generally provides for an allocation of gross income to the Unitholders and the General Partner to reflect disproportionate cash distributions, on a per Unit basis. 6. Cash Distributions The Partnership makes quarterly distributions to Unitholders and the General Partner of 100% of its Available Cash. Available Cash each quarter generally consists of cash receipts less cash disbursements (excluding cash distributions to Unitholders and the General Partner) and reserves. Distributions of Available Cash are generally made 98% to the Unitholders and 2% to the General Partner, subject to the payment of an incentive distribution to the General Partner after a target level of cash distributions to the Unitholders is achieved for the quarter. The incentive distribution is 20% of any remaining Available Cash for the quarter (in addition to the General Partner's 2% regular distribution). Incentive distributions are accounted for as an expense of the Partnership. Cash distributions are limited by the terms of the Partnership's debt agreements - Note 4. 58 7. Tax on Gross Income In August, 1997 legislation was enacted which extends indefinitely the Partnership's ability to be treated as a partnership for federal income tax purposes provided that the Partnership elected to be subject to a 3.5% tax on taxable gross income beginning on January 1, 1998 (the ability to be treated as a partnership had been scheduled to expire on December 31, 1997). The Partnership has made such an election. During fiscal 1999, tax on gross income expense is comprised of current tax expense of $1,833 and deferred tax expense of $840. Respective to 1998 these amounts were $1,002 and $5,800. At December 31, 1999, substantially all of the Partnership's deferred tax liability related to property and equipment. 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 corresponding 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, 1998 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 59 one of its raw materials commencing in 1997 to assure long-term supply and minimize price volatility. The purchase price is based on 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, 1999 of minimum payments required under the agreement is $38,820 with $4,753 per year of minimum payments required through 2008. The payments are amortized over the life of the contract on a straight line basis. Purchases under the agreement totaled $25,528 in 1999, and $19,633 in 1998. The Partnership purchased the unowned balance of its partner's share of certain acetylene production facilities at the Geismar complex on January 1, 2000. The purchase price is $17,176, with $9,000 payable over three years. Environmental and Legal Proceedings 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 a program of groundwater and other remediation at the Geismar facility. In light of Borden's obligation under the EIA to pay for the groundwater remediation program, the settlement will not have a material effect on the Partnership's financial position or results of operations. 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). The Partnership is subject to extensive federal, state and local environmental laws and regulations which impose limitations on the discharge of pollutants into the air and water, establish standards for the treatment, storage, transportation and disposal of solid and hazardous wastes, and impose obligations to investigate and remediate contamination in certain circumstances. The Partnership has expended substantial resources, both financial and managerial, and it anticipates that it will continue to do so in the future. Failure to comply with the extensive federal, state and local environmental laws and regulations could result in significant civil or criminal penalties, and remediation costs. The Partnership is subject to legal proceedings and claims which 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 60 Environmental Indemnity Agreement with Borden would not materially affect the financial position or results of operations of the Partnership. Operating Lease Arrangements The Company leases certain railcars under operating leases which expire over the next fifteen years. Generally, management expects that leases will be renewed or replaced by other leases in the normal course of business. Minimum payments for operating leases having initial or remaining non- cancelable terms in excess of one year are as follows:
Fiscal Year(s) Amount 2000 $10,388 2001 8,973 2002 7,660 2003 6,772 2004 5,139 2005 to termination 8,239 - ---------------------------------------------------------------- Total minimum lease payments $47,170 - ----------------------------------------------------------------
Total rent expense for all operating leases amounted to $9,537 for 1999, $9,403 for 1998 and $10,613 for 1997. During 1999, the Partnership utilized a gain of $2,519 on the sale and leaseback of railcars which has been deferred and is being amortized as a reduction of rental expense. 10. Segment Information The Partnership's internal reporting is organized on the basis of products. Each of the following products is considered to be an operating segment of the business: polyvinyl chloride ("PVC"), vinyl chloride monomer ("VCM"), acetylene, methanol, formaldehyde, ammonia and urea. These operating segments have been aggregated into three reportable segments according to the nature and economic characteristics of the products. The segments are (i) PVC Polymers Products, which consist of PVC resins and feedstocks (VCM and acetylene), (ii) Methanol and Derivatives, which consist of methanol and formaldehyde, and (iii) Nitrogen Products, which consist of ammonia and urea. The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies " (Note 2). Segment data excludes intra-segment revenues and purchases. The Partnership evaluates performance of the segments and allocates resources to them based upon gross margin. Gross margin is net of distribution expense. Total assets consist of certain long-lived assets. Summarized financial information for each of the reportable segments for the years 1999, 1998 and 1997 is provided in the following table. 61
- --------------------------------------------------------------------------------------------------------------- PVC Methanol Polymers And Nitrogen Reconciling Consolidated Products Derivatives Products Items /(a)/ Totals - --------------------------------------------------------------------------------------------------------------- 1999 Revenues $ 403,652 $104,160 $ 46,371 - $ 554,183 Contributing Margin $ 44,445 $ (1,047) $ (9,786) - $ 33,612 Property and equipment, net $ 168,973 $ 23,945 $ 16,655 $ 59,687 $ 269,260 Other Assets $ 25,867 $ 6,327 $ 4,539 $ 13,946 $ 50,679 Depreciation $ 21,029 $ 4,100 $ 2,795 $ 8,590 $ 36,514 - --------------------------------------------------------------------------------------------------------------- 1998 Revenues $ 372,853 $111,308 $ 51,366 - $ 535,527 Contributing Margins $ 8,424 $ 10,839 $ (4,814) - $ 14,449 Property and equipment, net $ 180,639 $ 27,163 $ 18,141 $ 62,357 $ 288,300 Other Assets $ 26,725 $ 6,336 $ 5,151 $ 16,257 $ 54,469 Depreciation $ 19,783 $ 4,359 $ 2,822 $ 6,405 $ 33,369 - --------------------------------------------------------------------------------------------------------------- 1997 Revenues $ 486,189 $177,475 $ 73,465 - $ 737,129 Contributing Margin $ 4,398 $ 50,243 $ 504 - $ 55,145 Property and equipment, net $ 180,099 $ 30,852 $ 18,886 $ 60,363 $ 290,200 Other Assets $ 23,447 $ 5,151 $ 5,193 $ 18,993 $ 52,784 Depreciation $ 23,850 $ 9,600 $ 8,105 $ 7,014 $ 48,569 - ---------------------------------------------------------------------------------------------------------------
(a) Reconciling items relate primarily to common operating assets and the depreciation expense associated with those assets. 62 A reconciliation of the total segment consolidated gross margin to total consolidated income before gross income taxes, for the years ended December 31, 1999, 1998 and 1997 is as follows:
1999 1998 1997 ---- ---- ---- Total Segment Operating Income $ 33,612 $ 14,449 $ 55,145 Marketing, General and Administrative Expense $ (28,802) $ (24,341) $ (24,622) Interest Expense $ (23,612) $ (23,084) $ (20,898) General Partner Incentive - - $ (794) Other Misc. Income/Expense (Net) $ (2,516) $ (829) $ (3,234) Consolidated income/loss before Gross income taxes /(b)/ $ (21,318) $ (33,805) $ 5,597
/(b)/ As 1998 was the first year that the Partnership was subject to gross income taxes, the amounts for 1997 represent net income. Revenues from Borden and affiliates represented $80,217, $81,938 and $134,222 of the Partnership's consolidated revenues for the years ended December 31, 1999, 1998, and 1997, respectively. Borden and its affiliates are customers of all three of the reporting segments. Revenues from domestic customers including Borden and affiliates, represented substantially all of this consolidated revenues for the years ended December 31, 1999, 1998 and 1997, respectively. There were no material amount of foreign revenues. All segment assets are domestic. 63 EX-10.12.2 2 OPTION AGREEMENT DATED 12/23/1998 EXHIBIT 10.12.2 OPTION AGREEMENT ---------------- THIS OPTION AGREEMENT is made and entered into as of the 23/rd/ day of December, 1998 by and between BORDEN CHEMICAL, INC., a Delaware corporation ("BCI") and BORDEN CHEMICALS AND PLASTICS OPERATING LIMITED PARTNERSHIP, a Delaware limited partnership ("BCP"). WITNESSETH: ---------- WHEREAS, BCP and Borden, Inc. entered into a Methanol Purchase Agreement dated November 30, 1987; and WHEREAS, effective January 1, 1996, Borden Inc. assigned to BCI and BCI assumed from Borden, Inc., all of Borden, Inc.'s right, title and interest in and to the Methanol Purchase Agreement; and WHEREAS, BCP wishes to extend to BCI, and BCI wishes to acquire from BCP, the right and option to extend the term of the Methanol Purchase Agreement for one (1) additional year beyond its current November 30, 2002 expiration date. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby mutually acknowledged, BCP and BCI agree as follows: 1. BCI shall have the right and option to extend the term of the Methanol Purchase Agreement for one (1) additional year, commencing November 30, 2002 and ending November 30, 2003. Such right and option may be exercised by BCI by giving written notice of exercise to BCP no less than six (6) months prior to the expiration of the initial term of the Methanol Purchase Agreement. 2. All original terms and conditions of the Methanol Purchase Agreement shall remain and continue in force and effect during the extension period. IN WITNESS WHEREOF, the parties have caused this Option Agreement to be executed by their duly authorized officers as of the day and year first above written. BORDEN CHEMICAL, INC. BORDEN CHEMICALS AND PLASTICS OPERATING LIMITED PARTNERSHIP BY: BCP Management Inc., General Partner By: /s/ Michael Ducey By: /s/ L. L. Dicker ------------------------ ------------------------------- Title: Exec, VP & COO Title: VP & General Counsel -------------------- ---------------------------- EX-10.12.3 3 AMENDMENT TO METHANOL PURCHASE AGREEMENT EXHIBIT 10.12.3 AMENDMENT TO METHANOL PURCHASE AGREEMENT ---------------------------------------- THIS AMENDMENT TO METHANOL PURCHASE AGREEMENT, is made and entered into as of the 26/th/ day of January, 2000 by and between BORDEN CHEMICAL, INC., a Delaware corporation ("BCI") and BORDEN CHEMICALS AND PLASTICS OPERATING LIMITED PARTNERSHIP, a Delaware limited partnership ("BCP"). WITNESSETH: ---------- WHEREAS, BCP and Borden, Inc. entered into a Methanol Purchase Agreement dated November 30, 1987 for a term ending November 30, 2002; and WHEREAS, effective January 1, 1996, Borden, Inc. assigned to BCI, and BCI assumed from Borden, Inc., all of Borden, Inc.'s right, title and interest in and to the Methanol Purchase Agreement; and WHEREAS, pursuant to an Option Agreement entered into as of December 23, 1998, BCI has the right and option to extend the term of the Methanol Purchase Agreement for one (1) additional year ending November 30, 2003; and WHEREAS, BCI is constructing a new formaldehyde plant (the "New Formaldehyde Plant") on land purchased from BCP in Ascension Parish; and WHEREAS, BCP and BCI wish to provide for the delivery of methanol under the Methanol Purchase Agreement to the New Formaldehyde Plant by pipeline. NOW, THEREFORE, BCP and BCI agree that the Methanol Purchase Agreement shall be amended by renumbering the existing text of Paragraph 4, Orders and ---------- Delivery, as subparagraph 4(a) and adding the following text as new - -------- subparagraph 4(b). (b) In the case of deliveries of methanol to the New Formaldehyde Plant, delivery shall be by pipeline. The pipeline shall be paid for and owned by BCI. It shall be installed according to those reasonable design and construction methods specified by BCP, at the approximate location shown on the drawing attached hereto as Exhibit A. BCI shall perform repairs and maintenance to the pipeline from the Point of Transfer identified on Exhibit A Methanol delivered by pipeline shall be measured by a meter which BCI shall install at the New Formaldehyde Plant. BCI will have a mutually agreeable independent contractor calibrate, prove and seal the meter upon its initial installation and placement into service and provide documentation of such calibration to BCP. The meter shall be recalibrated quarterly in accordance with the recommendations of the manufacturer. BCP shall be given reasonable notice of and the right to observe the calibration of the meter. If during calibration any meter is found to be inaccurate by more than one percent (1%), the parties shall agree on an appropriate adjustment to be made to billings for the period from the previous calibration. If the parties are unable to agree upon an appropriate adjustment, the readings for the last half of the period since the prior calibration shall be adjusted by the amount of the inaccuracy. Except as amended above, all other terms of the Methanol Purchase Agreement shall remain and continue in force and effect. IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their duly authorized officers as of the day and year first above written. BORDEN CHEMICAL, INC. BORDEN CHEMICALS AND PLASTICS OPERATING LIMITED PARTNERSHIP BY: BCP Management, Inc., General Partner By: /s/ Michael Ducey By: /s/ Wayne P. Leonard ------------------------- --------------------------- Title: President & CEO Title: Exec V.P. - COO --------------------- ------------------------ 2 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS YEAR DEC-31-1999 DEC-31-1999 OCT-01-1999 JAN-01-1999 DEC-31-1999 DEC-31-1999 5,759 5,759 0 0 90,656 90,656 0 0 51,533 51,533 152,391 152,391 766,185 766,185 496,925 496,925 480,851 480,851 87,010 87,010 200,000 200,000 0 0 0 0 0 0 193,841 193,841 480,851 480,841 158,261 554,183 158,261 554,183 141,674 520,571 141,674 520,571 12,388 33,991 0 0 6,381 23,612 (2,182) (23,991) 0 0 (2,182) (23,991) 0 0 0 0 0 0 (2,182) (23,991) (.06) (.65) (.06) (.65)
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